The Arizona Supreme Court convened in Tucson Thursday to hear arguments in a case that could impact thousands of Arizona homeowners mired in the foreclosure process.
The state's highest court is considering whether it's a violation of law when lenders fail to record a deed transfer before moving forward with a foreclosure sale. The court will rule later.
Lenders argue that if the court decides in favor of Tucson homeowner Julia Vasquez, it could stall the foreclosure process, chilling investors looking to scoop up distressed properties and crippling the already hobbled real estate market.
But those who side with Vasquez, including Arizona Attorney General Tom Horne, say banks are violating the law if they don't record the deed assignment before scheduling a home for auction. They say the banks are also making it harder for struggling homeowners to get loan modifications.
Beverly Parker, the attorney with Southern Arizona Legal Aid who is representing Vasquez, argued that a clear recording process ensures a clean chain of title so homeowners facing foreclosure know who owns their debt.
But only a few moments into Parker's argument that Deutsche Bank National Trust Co. violated state law when it filed a foreclosure notice on Vasquez's home, the justices started asking pointed questions.
Justice W. Scott Bales pointed out that the foreclosure notice identified Deutsche Bank as the beneficiary on the loan.
"What additional information would your client have received if there had also been a separate recording of an assignment of the deed of trust to Deutsche Bank?" Bales asked.
"We would have known who actually held the note and who had the right to enforce the deed of trust," Parker said.
During the housing boom, lenders like Saxon Mortgage Inc., the company that originated Vasquez's loan, would transfer homeowners' debts to companies like Deutsche Bank, which bundled the mortgages and sold them to investors as mortgage-backed securities. As homeowners defaulted on those loans, the assets became toxic, fueling the housing and economic meltdown.
Despite Parker's contention, the lenders argue that there is no such recording requirement, that the "mortgage follows the note" and a beneficiary can foreclose even if the deed assignment hasn't been recorded. Further, if the Supreme Court sides with Vasquez, that decision could call into question trustee sales that have already taken place or are currently in the works.
"Tens of thousands of trustee's sales have occurred in the absence of recorded assignments," the Arizona Bankers Association and the Greater Phoenix Chamber of Commerce argued in court documents prepared for the justices. "A ruling by this court accepting Vasquez's proposed rule would place the legal status of those trustee's sales in doubt."
Vasquez refinanced her home in September 2005 with an adjustable-rate balloon note payable to Saxon Mortgage. Later that same month, the note was assigned to Deutsche Bank National Trust Co. as a trustee for Saxon Asset Securities Trust.
At the time of the transfer, Saxon didn't record the deed assignment to Deutsche Bank, court documents say. Vasquez later defaulted on her mortgage, and on Sept. 12, 2008 a notice of foreclosure sale was recorded.
Then, in October, the deed assignment was transferred to Deutsche Bank with an effective date of Aug. 11. That assignment was recorded Nov. 7, 2008, three years after the note was transferred to Deutsche Bank.
To keep from losing her home, on Oct. 31, 2008, Vasquez filed for Chapter 13 bankruptcy protection, which allows individuals to reorganize their debts. Because Arizona has a nonjudicial foreclosure process - meaning note holders can foreclose on a home without a court hearing - a bankruptcy filing is a way to stop the sale and examine the foreclosure process.
The issue addressed by the Arizona Supreme Court Thursday stemmed from that bankruptcy case.
At the hearing, Robert Mandel, the attorney representing the lenders, said if the Arizona Legislature had wanted to include a recording requirement, there were several places within the law they could have inserted it.
Justice A. John Pelander then pointed out that Arizona law does say that any document evidencing the sale or other transfer of real estate is supposed to be recorded within 60 days. "How does that not apply here?" he asked.
Mandel acknowledged that the law does apply and it actually would protect Deutsche Bank if another beneficiary claimed ownership of the note and Saxon had neglected to record Deutsche's interest.
But the absence of a recorded transfer still doesn't make filing a foreclosure notice against a homeowner illegal, he said.
Those who back Vasquez say that Arizona's recording statutes do require the transfer of the deed assignment before going ahead with a nonjudicial foreclosure.
"We're saying that it's important particularly in this day and age with so many transfers between mortgages for the trustor to know who the lender is," Assistant Attorney General Carolyn Matthews said at the hearing.
But Chief Justice Rebecca White Berch questioned whether it was the court's responsibility to require those deed transfers be recorded if it's not already written into Arizona law.
Matthews replied that the court could reach the conclusion that recording is required within existing law.
The lack of such information has added to homeowners' confusion about who owns the debt on their mortgage, she said.
"There's so much confusion, that opens the door to fraud," Matthews said.
"Tens of thousands of trustee's sales have occurred in the absence of recorded assignments. A ruling by this court accepting Vasquez's proposed rule would place the legal status of those trustee's sales in doubt."
Arizona Bankers Association and the Greater Phoenix Chamber of Commerce, in court documents prepared for the justices
Contact reporter Dale Quinn at firstname.lastname@example.org or 573-4197.