ANSON STEVENS-BOLLEN
L ike many aspiring homeowners in the mid- 2000s, Joseph and Mary Romero took out a risky loan to buy their modest Chimayó residence nearly eight years ago.
Joseph Romero told the lender that the music and clothing shop he owned in Española brought him and his wife a maximum monthly salary of $5,600 before taxes. But he didn't need to provide documentation of this income because the kind of loan they applied for didn't require verification of the couple's monthly or yearly earnings.
In reality, the Romeros earned less than $13,000 in combined income in 2005—one year before they took out the "No Income, No Asset" (NINA) loan from Equity One Inc., a national real estate investment trust. It wasn't long before they went into default, and the bank declared foreclosure on their home. By the spring of 2008, the Romeros had failed to make mortgage payments for eight months, leading the Bank of New York Mellon Corporation, which now claimed to be the trustee of their loan, to file for foreclosure on their home.
But earlier this month, the New Mexico Supreme Court reversed the foreclosure in a unanimous decision that attorneys say could have vast implications for many mortgage borrowers across the state facing similar situations.
"I think this is a watershed for homeowners in New Mexico," says Daniel Yohalem, who represents the Romeros and argued in front of the state Supreme Court on their behalf in September 2012.
Nearly two years in the making, the high court ruling in Bank of New York v. Romero invalidates Equity One's loan to the Romeros because it violates the state's Home Loan Protection Act. The act, passed by the state Legislature in 2004 and amended in 2009, requires creditors "to make a reasonable and good-faith effort to determine a borrower's ability to repay" a home loan, according to the ruling. In other words, lending money to a homeowner without getting proper documentation that he can afford to pay it off is considered a big no-no.
"Borrowers are certainly not blameless if they try to refinance their homes through loans they cannot afford," the court decision reads. "But they do not have a mortgage lender's expertise."
Statutory reform was needed, the court notes, due to a bad combination of unsophisticated borrowers and the unscrupulous lenders seeking profits from making loans despite whether homeowners could realistically repay them.
Banks were approving these kind of risky loans to people who couldn't afford them for a reason. During the early and mid-2000s, the nation experienced a financial boom in part because so-called subprime low-quality mortgages were issued to borrowers like the Romeros and almost always got bundled with higher-quality mortgages into large pools called "securities." When bundled together, the credit rating of the mortgagebacked securities often looked misleadingly good to investors.
Mortgage-backed securities, which depended in part on payments from people like the Romeros to keep their value, were then sold to investors.
Then things really went off the rails.
The value of homes continued to spike, demanding more loans for homeowners. Mortgages were also passed around to bigger banks in what Yohalem calls "a game of hot potato."
The perceived value of the mortgages began to supersede the likelihood of whether borrowers would repay the debt.
"They didn't care whether people could pay them back because they were going to sell them," Yohalem says.
By 2008, it became clear that many of the subprime mortgages were worthless. Banks that claimed they had the proper standing started filing foreclosures to seize properties with unpaid mortgages. But in many cases, the banks didn't actually have standing, and here's where the Bank of New York v. Romero decision comes back into play.
When the Romeros took out their mortgage from Equity One, it was subsequently sold to bigger banks, eventually ending up with the Bank of New York.
Mortgages are traditionally filed with the local county clerk, but during the housing boom, lenders started tracking them electronically instead through the Mortgage Electronic Registration System. The large number of mortgages that went into bundled securities, as well as the speed by which they changed hands, often left the loan documents—the actual promissory notes—lost in the process.
In the Romeros' case, the Bank of New York's attorneys presented two copies of the note on their home in court showing where it had traveled: One had an endorsement, or signature, from Equity One and another to JPMorgan Chase. Notably missing was any endorsement of the note to the Bank of New York.
Bank of New York v. Romero ruling emphasizes that the Bank of New York's possession of a note endorsed to a different bank, JPMorgan Chase, does not give the bank authority to foreclosure on the property "just as finding a lost check payable to a particular party does not allow the finder to cash it." In other words, the Bank of New York must "demonstrate the chain of transfers whereby they became holder of the mortgage and the note before they can have legitimate standing" to foreclose on the house, says Fred Rowe, another attorney who worked on the case behalf of the Romeros.
It's unclear whether the case will be appealed to a higher court, but that may be unlikely given the convoluted nature of which entity could make such an action.
While the Bank of New York served as the trustee of the Romeros' mortgage, a different company, Ocwen Financial Corporation, became tasked with collecting the Romeros' mortgage payments midway through the process. Calls to Ocwen for this story went unreturned.
As for the Romeros, they can continue living in their Chimayó home unless someone comes forward with their original promissory note. If nobody does that, the Romeros can file for a quiet title action, which, if successful, would put their home completely in their hands. Editor's Note: Daniel Yohalem is representing SFR in a public records lawsuit against Gov. Susana Martinez. SFR started covering this story in the fall of 2012, one year before Yohalem provided legal representation to the newspaper. SupremeCourtDecision - SC33,224 by Joey Peters
