Plum man files suit over home foreclosure
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The millions of mortgages that were bundled into giant investment pools and traded like stocks shouldn't be subject to foreclosure, according to an unusual lawsuit filed Wednesday.
That's because when banks chose to turn mortgages into investment products, they gave up the right to take the house, attorney Luke Lucas argues.
His lawsuit in U.S. District Court focuses on one Plum man's mortgage. But if its theory were accepted by courts, it would have huge implications for the entire mortgage market.
Mr. Lucas sued on behalf of Jayson Schott, 34, who in 2004 got a $97,500 adjustable rate mortgage from America's Wholesale Lender. The rate went up, and he went into default.
Bank of America, which bought America's Wholesale Lender, filed for foreclosure in 2008. But according to the complaint, the loan had long since ceased to be a mortgage.
That's because shortly after its inception, it was "securitized" -- combined with thousands of other loans into an investment vehicle called a Real Estate Mortgage Investment Conduit, or REMIC. That was done, according to the complaint, in order to make it a tax-exempt product that investors from all over the world could buy into -- like a stock.
That longstanding process became more prevalent last decade.
Because mortgages and stocks are separate under U.S. law, Mr. Lucas said, the loans ceased to be secured to the house. So the foreclosure, which has been stayed, was invalid.
"You can't make oranges out of orange juice, and once the note is securitized, it is orange juice," Mr. Lucas said in an interview.
Mr. Lucas said he has filed several dozen similar lawsuits nationally, although this is the first in Western Pennsylvania. If his contention were broadly approved by courts, it could undermine efforts to foreclose on thousands of mortgages, although he acknowledged that it would "take a brave judiciary" to do that.
The lawsuit alleges violations of multiple federal laws. It seeks cancellation of Mr. Schott's debt, repayment of interest paid times three and damages including punitive damages.
The lawsuit names Bank of America, several of its subsidiaries and the Bank of New York Mellon as defendants. BNY Mellon became the trustee for the REMIC, it said.
Both banks declined comment.
First Published October 20, 2011 12:00 am
