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Civil Action

No. 11-cv-6968-JCJ

DECLARATION OF IRV ACKELSBERG, ESQUIRE, IN SUPPORT OF AMICUS CURIAE BRIEF OF COMMUNITY LEGAL SERVICES, INC., PENNSYLVANIA LEGAL AID NETWORK AND HOUSING ALLIANCE OF PENNSYLVANIA Introduction 1. I am a licensed Pennsylvania attorney since September, 1976, and a member in good standing of the bars of the United States District Court for the Eastern District of Pennsylvania; the Third Circuit; and the United States Supreme Court. I am a partner in the Philadelphia law firm, Langer Grogan & Diver, PC. 2. I received my B.A. from Haverford College in 1972 and my J.D., magna cum laude, from Rutgers University-Camden School of Law in 1976. 3. Since 1978, I have specialized in consumer law. I practiced for 30 years with Community Legal Services (CLS) (1976-2006), the civil legal aid program serving Philadelphia, where I managed the North Philadelphia office and led the program’s consumer law work. My practice at CLS was concentrated mostly in the area of consumer debt, unfair and deceptive practices, bankruptcy and mortgage foreclosure. At CLS, I had a diverse practice which included individual case representation, class action litigation, appeals, legislative and regulatory advocacy and drafting, and extensive lecturing, teaching and writing. 4. Much of my work at CLS during the last ten years of my tenure was concentrated in addressing the explosion of subprime mortgage lending that first appeared on a large scale, around 1996, and grew exponentially until the financial collapse of 2008. This work included a focus both on the front-end of mortgage origination practices and the back-end of mortgage servicing and foreclosure practices. My work in this area was multi-faceted. I had an extensive litigation docket which included, for example, the first decision interpreting the previously untested Home Ownership Equity Protection Act, Newton v. United Companies Financial, Inc., 24 F. Supp. 2d 444 (E.D. Pa. 1998) and the Pennsylvania Superior Court decision that established the existence of equitable defenses to a foreclosure action brought to enforce a

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predatory mortgage transaction, Green Tree Consumer Discount Co. v. Newton, 909 A.2d 811 (Pa. Super. 2006). On two occasions, in 2001 and 2007, I was invited by the Banking Committee of the United States Senate to testify in hearings regarding predatory mortgage lending. In 2006 I testified as an expert in an investigation of mortgage broker fraud conducted by the Federal Reserve Board. Among the organizations that invited me to lecture on various aspects of the mortgage industry have been: the Federal Reserve Bank of Philadelphia, the Pennsylvania Housing Finance Agency, the NAACP, and the Pennsylvania Bar Institute. I also advised the Rendell Administration’s Banking Department on predatory lending issues, including conducting trainings for staff and serving on an official Advisory Committee that assisted the Department in reorganizing itself to be more responsive to abuses in the marketplace and in developing new mortgage lending rules. 5. Particularly applicable to the instant legal matter in which my opinion has been sought, my work has led me to develop expertise on a number of issues relating to the mortgage industry, including: (a) the mortgage financing system called “securitization” and the fragmentation of ownership resulting from this system; (b) the unique role of mortgage servicers in managing all aspects of a securitized mortgage; (c) the private mortgage recording system called the Mortgage Electronic Registration System, or “MERS”, that the industry participants in mortgage securitization created and how MERS operates; (d) the Pennsylvania foreclosure process; and (e) a homeowner’s right under the federal Truth in Lending Act to notice regarding the identity of the actual owner of a mortgage on his/her house. 6. I am the author of the recently published treatise on Pennsylvania foreclosure law entitled, Residential Mortgage Foreclosure: Pennsylvania Law and Practice (Bisel Co. 2012). See 7. I have received several awards recognizing my professional achievements. I was the 2005 recipient of the National Consumer Law Center’s Vern Countryman Award, awarded annually to a consumer lawyer, in recognition of “excellence and dedication in the practice of consumer law on behalf of low-income consumers.” See  The Countryman Award is the most prestigious award in my field. In 2001, I was awarded the Andrew Hamilton Award by the Public Interest Section of the Philadelphia Bar Association for my lifetime contribution to public interest law in Philadelphia. 8. matter. Opinion 9. In preparing this report, I reviewed the following documents: I am receiving no compensation for the study and testimony I am providing in this


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a. The Complaint (Doc. 1); b. The Court’s Memorandum and Order filed October 19, 2012 (Doc. 22); c. Defendants’ Motion to Dismiss Plaintiffs’ Claims to Quite Title and Memorandum of Law (Doc. No. 32); d. Plaintiff’s Memorandum in Response to Defendants’ Motion (Doc. 36); and e. Defendants’ Reply (Doc. 38). 10. Based on my training and experience and my analysis of these materials, I have reached the following conclusions: a. Pennsylvania homeowners, whose homes are subject to mortgages in which the named mortgagee, according to the public mortgage records, is the Mortgage Electronic Registration System (or, “MERS”), “as a nominee” for some named lender, have an interest at stake in this matter, namely, the interest in knowing who actually owns that mortgage. b. That interest is entirely consistent with the relief being sought by the Plaintiff in this case. I can imagine no circumstance in which the disposition of this action would, in any practical manner, impair or impede the ability of the homeowners to protect that interest. c. Not only is the relief being sought by Plaintiff consistent with the interests of homeowners, it is also consistent with federal housing policy protecting the right of homeowners to know the identity of their mortgagees. Basis for Opinion Residential Mortgage-Backed Securitization, in General 11. The original paradigm of residential mortgage lending on a mass scale was the mortgage originated by a local bank or savings and loan association that used the savings of its depositors as the capital to make the loan. The loans would sit on the books of the bank as an asset and the bank would collect payments on the loan on its own behalf. This market paradigm disappeared decades ago. 12. In the modern mortgage market, mortgages are traded as investment commodities in a secondary market known as the Residential Mortgage-Backed Securities (“RMBS”) market. 3

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The generic process of turning income flows into marketable securities is called “securitization.” RMBS first became a successful method for capitalizing the mortgage market through securitizations that were arranged and backed by government or the government-sponsored agencies (Fannie Mae and Freddie Mac). These are known as “agency” securitizations. In the 90’s, Wall Street devised competing “private label” versions of a RMBS. 13. Because of the dominant role of securitization,1 mortgages are now rarely held as assets by the entities originating the loans, and those entities that are collecting payments and otherwise managing the mortgage accounts are doing so as servicing agents for different legal holders of the loan, not on their own behalf. In a typical RBMS transaction, mortgages are purchased from an originating lender, pooled with other mortgages, and packaged by a large investment bank that divides the pooled income streams into fractional shares that are sold to investors as mortgage-backed securities. As a result of various legal requirements and bankruptcy-insulation strategies, an individual mortgage obligation being put into the pool of mortgages backing a particular securitization deal will, by necessity, go through multiple transfers of ownership. 14. In a typical RMBS transaction, an individual loan is made by an Originator, and then sold to a Sponsor or Seller. The Sponsor can be an affiliate of the Originator, or can be an independent aggregator of loans, or both. The Sponsor then sells a pool of loans to a Depositor. Again, the Depositor can be a subsidiary of the Sponsor, or an unaffiliated business partner. At some point, the pool of mortgages will then be transferred to a “Special Purpose Vehicle” (SPV, also called a “Single Purpose Entity”), an entity that has no other assets or liabilities. The reason for the transfer of the mortgage pool to this intermediate pass-through entity is to create a legally recognized “true sale” that removes the remote possibility that the mortgages might be brought back into a bankruptcy estate in the event the Originator or Sponsor were bankrupt.2 The SPV itself or a subsequent transferee of the SPV will function as the Issuer, issuing the securities

About 60% of all outstanding mortgages, 75% of all outstanding first-lien mortgages and over 90% of mortgages produced in the years immediately preceding the 2008 collapse were securitized. See Hearing: Problems in Mortgage Servicing From Modification to Foreclosure, U. S. Senate Committee on Banking, Housing, and Urban Affairs, Nov. 16, 2010 (testimony of Assoc. Prof. Adam J. Levitan, citing industry data) available at b685-c1bf-4eea-941d-cf9d5173873a&Witness_ID=2ada1da6-e7cc-4eca-99a4-03584d3748af.


By virtue of changes in 2002 to the Statement of Financial Accounting Standards, the use of intermediate SPV’s became an accounting requirement, to ensure that the mortgages could be excluded from the balance sheets of the Originator or Sponsor. 4

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backed by the pools of mortgages. Investors purchase the securities, providing the capital that works its way back down the transfer chain to the Sponsor.3 15. The individual mortgages comprising a securitized mortgage pool function as collateral in two ways. They are collateral for the individual borrower’s promise to repay the debt, and they are also collateral for the investor’s right to receive the income stream represented by its RMBS investment. For the investor, however, its collateral is not a specific mortgage or group of mortgages, but rather a fractional interest in the mortgage pool as a whole.4 Legal ownership over the pool of mortgages is placed in a named Trustee, ordinarily a large commercial bank. It is the Trustee who is nominal legal owner of the mortgage pool and the legal representative of the investors. Formally, the investors are the creditors of the trust, not the owners of the mortgages within the trust. 16. While the Trustee has nominal legal title to the mortgage loans in the pool, the Trustee’s role is, by design, entirely passive.5 The final and most important character in a securitization transaction is the Servicer. It is the Servicer that actively manages the individual mortgage accounts for the Trustee. This activity includes not only billing and collection responsibilities, but also sole responsibility over the initiation and settlement of foreclosure cases. If asked, most homeowners would identify their “lender” as being the mortgage servicing company that currently bills them every month, or perhaps the entity that first made the loan to them. Chances are neither company is their “lender” now, if by “lender” one means the entity that currently holds beneficial ownership rights in the mortgage obligation. The original lender undoubtedly sold the loan soon after making it; the current holder is a commercial bank trustee For a similar description of the cast of characters in a securitization transaction, see Luminent Mortg. Capital, Inc. v. Merrill Lynch & Co., 2009 WL 2590087 (E.D.Pa. August 20, 2009); MBNA Ins. Corp. v. Royal Indem. Co., 519 F.Supp.2d 455 (D.Del. 2007), aff’d 321 Fed. Appx. 146 (3d Cir. 2009).
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More specifically, investors hold certificates in a particular slice, or “tranche”, of the securitized trust. These tranches are organized into an ascending order of protection from loss and descending order of yield and risk. The “senior” certificate-holders are those whose investments have the highest grade and the lowest yield. They are followed by “mezzanine,” “junior” and “residual” certificate-holders. This passivity is a requirement imposed by the special tax treatment accorded to Real Estate Mortgage Investment Conduits, or “REMIC’s.” See Levitin Testimony, supra note [33], at 9 (contrasting duties of securitization trustee to that of a common law trustee with fiduciary duties); Adam J. Levitan and Tara Twomey, “Mortgage Servicing,” Yale J. Reg. 1, 32 (2011) (explaining how an RMBS is designed to ensure that taxation on the income from the mortgages is imposed only on the securities holders, not the SPV, and that the use of the REMIC structure is the most common method of avoiding double-level taxation). 5


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they have never heard of; and the mortgage company billing them is actually the servicer for the trustee. How Mortgages are Transferred and the Different Treatment of MERS and non-MERS Mortgages 17. Every mortgage obligation consists of two components: a promissory note that defines the terms of an obligation to repay a loan, and a mortgage conveyance that secures that repayment obligation. Most of the terms of the obligation—e.g., the interest rate and the amount and number of monthly payments—are contained in the note rather than the mortgage. Most modern mortgage forms expressly incorporate the separately and contemporaneously executed promissory note by reference, but do not expressly state those particular terms. Because mortgages are recorded and notes are not, a public record about a mortgage transactions consists mainly of the date of the transaction, the names of the parties involved—the lender and the property owner—and the original principal amount of the mortgage obligation, while the remaining terms remain private. 18. Because notes and mortgages are governed by two different bodies of law, the transfer of a single mortgage obligation has traditionally involved compliance with the separate rules for transferring the note and the mortgage component of the obligation. Notes are transferred in accordance with the “negotiation” requirements established by Article 3 of the Uniform Commercial Code, involving a proper endorsement and physical delivery of the note.6 Mortgage liens, on the other hand, are transferred through compliance with the rules governing the conveyance of interests in real estate. In Pennsylvania, that process involves the execution,

Under the law of negotiable instruments, once the lender accepts an executed note from the borrower—a note “maker” or “issuer” under the language of the UCC, see 13 Pa. C.S. § 3103 (definition of “maker” as “a person who signs or is identified in a note as a person undertaking to pay”)—the legal obligation to repay the loan merges into the physical note itself. 13 Pa. C.S. § 3310(b) (“if a note . . . is taken for an obligation, the obligation is suspended to the same extent the obligation would be discharged if an amount of money equal to the amount of the instrument were taken”). The contractual duty to repay the loan is thus transformed into a form of commercial paper that can be exchanged for value. The issuer’s note is “negotiable” by virtue of its being subject to transfer by the original lender to some other “holder.” Once negotiated, the borrower’s repayment obligation is owed not to the original lender, but to a subsequent “holder” of the instrument. 13 Pa. C.S. § 3201(a) (“Negotiation” means “a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder.”); Manor Bldg. Corp. v. Manor Complex Associates, Ltd., 435 Pa. Super. 246,252, 645 A.2d 843, 846 (1994); Official Comment to § 3201(“A person can become holder of an instrument when the instrument is issued to that person, or the status of holder can arise as the result of an event that occurs after issuance. “Negotiation” is the term used in Article 3 to describe this post-issuance event.”) 6

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acknowledgment and recording of an instrument called an Assignment of Mortgage. Through this process, the identity of the current mortgagee remains a matter of public record. 19. However, as a result of the mortgage industry’s establishment of MERS, this system of public notice was fundamentally altered with respect to an enormous portion of the mortgage market.7 This can best be explained by way of an example. In the case of a non-MERS mortgage that is transferred into a securitized trust, there will be of record two instruments: (a) the original mortgage between the property owner and the lender and (b) an Assignment of Mortgage that names as the assignee the commercial bank serving as trustee for the securitization trust and the name of the specific trust.8 On the other hand, in the case of a mortgage that is put into the MERS system, there will be only one instrument of record, that being an original mortgage which names as the mortgagee MERS “acting as nominee” of the original lender. When the actual obligation is transferred into the trust, no Assignment of Mortgage is executed and recorded. Instead, the name of the current owner of the mortgage is supposedly noted in the private records of MERS that are accessible by MERS members but not the owner of the property subject to the mortgage. 20. Even in the case of a MERS mortgage, however, the concealment of the identity of the mortgagee will end in the event a foreclosure action is filed. Just prior to foreclosure, the servicer generally files an instrument purporting to be an Assignment of Mortgage, with MERS as the assignor and the securitization trustee as the assignee. There are several reasons why servicers believe they have to do this in order to foreclose on a delinquent mortgage. Under Pa. Rule of Civil Procedure 2002, all civil actions must be filed in the name of the real party in interest. MERS is a registration system, not an entity that holds any beneficial rights in the registered mortgages themselves, so MERS could not properly be a foreclosure plaintiff. Rule 1147(a)(1) further provides, more specifically, that foreclosure plaintiffs must allege the parties to and dates of the mortgage and any assignments and a statement of the place where the mortgage and the assignments are recorded. As a result of these two rules, the usual practice in

According to the separate Declaration of Joan Decker, the Philadelphia Records Commissioner, 129,932 mortgages in the City of Philadelphia alone have been lodged in the name of MERS as mortgagee.


Where the securities issued by the trust are publicly traded, much information about the trust will also be publicly filed. In such a case, most of the applicable securitization documents should be registered with the Securities and Exchange Commission and available on its website, The SEC site uses a search engine named “EDGAR,” an acronym for “the Electronic Data Gathering, Analysis, and Retrieval” system. EDGAR can be accessed by selecting “Search for Company Filings” on the site. These documents include a Prospectus Supplement and a Pooling and Servicing Agreement which will identify, among other things, all the various parties to the securitization transaction. 7

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the case of MERS mortgage is for the servicer, or the law firm filing the foreclosure action for the servicer, to record a pre-complaint Assignment of Mortgage.9 21. The result of these foreclosure-related practices is that homeowners with MERS mortgages who are in foreclosure will be notified of the identity of the actual owner of their mortgage, but homeowners who are not in foreclosure will be unable to determine, from the official county property records, who owns their mortgage. Homeowners’ Interest and Right to Learn the Identity of their Mortgagee 22. A property owner has an interest in knowing the identity of an entity that holds an interest in his or her property. In the event the owner wants to pay off or refinance that mortgage, he/she needs to pay and make a demand for satisfaction from the proper party. Thus, when a lender sells and transfers a mortgage sometime after making a loan to a homeowner, the homeowner has an interest in knowing the identity of the transferee. 23. This interest in knowing the identity of the current mortgagee is not, as suggested by Defendants in their Reply Brief (at 13), a matter of “idle speculation.” On the contrary, it is an interest recognized and enforced by federal law. Mortgage servicers are obligated under the Truth in Lending Act (TILA) to identify the beneficial owner of the mortgage upon a mortgagor’s written request, see 15 U.S.C. § 1641(f)(2), and any failure to do so subjects them to a TILA action for $4,000 in statutory damages and attorney’s fees. 15 U.S.C. § 1640(a). More recent amendments to TILA have supplemented this duty of servicing agents to disclose the identity of their principals by creating an enforceable duty of a mortgage assignee to disclose its acquisition directly to the homeowner at the time of the assignment. The Helping Families Save Their Homes Act of 200910 amended TILA to require notification to a mortgagor whenever a mortgage is transferred. See 15 U.S.C. §1641(g)(1). The assignee—not the servicer—now must

I refer to these as “purported” assignments because there is substantial doubt about the legal character of such instruments. Since MERS holds no beneficial interest in the mortgage, it is not clear what such an “assignment” from MERS could mean under Pennsylvania conveyancing law. There are no Pennsylvania cases specifically discussing how a mortgagee of record that holds no beneficial interest in the real estate, and is, instead a “nominee” for a lender or the lender’s assigns, can convey an interest in property. Oother state supreme courts have suggested that putting the mortgage into the name of MERS while the note is separately transferred to a new beneficial owner may render the mortgage unenforceable in a foreclosure action. See, e.g., Landmark Nat. Bank v. Kessler, 216 P.3d 158 (Kan. 2009). The legal significance of such “assignments” appear even more questionable when, as has often been happening, a lawyer from the foreclosure firm executes the mortgage as a so-called officer of MERS, meaning that counsel for the so-called “assignee” is executing the supposed conveyance on behalf of the “assignor.” Act of May 20, 2009, Pub. L. 111-22. 8


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notify the homeowner in writing within 30 days of the transfer of: its name, address and telephone number, the date of the transfer and the location of any recorded assignment.11 24. Under these provisions of federal law, if a homeowner with a MERS mortgage were to submit a written request to his/her servicer, the servicer would be required to disclose the name of the actual beneficial owner of the mortgage, presumably, a commercial bank serving a trustee of a specific securitization trust. If, in the case of an intended foreclosure, MERS were to “assign” the mortgage by filing an Assignment of Mortgage to the beneficial owner, that act would trigger a duty on the part of MERS to make the required disclosure to the homeowner. 25. With regard to homeowners who are not in foreclosure, and whose mortgages are not assigned by their current owners, they will remain ignorant of the identity of their mortgagee, unless they specifically request that information from their servicer. It is that group of homeowners who stand to benefit from this litigation, because, if MERS is required to file assignments pertaining to the original transfer of the mortgage to the current owner (presumably, a securitization trustee), they presumably will be provided notice pursuant to 15 U.S.C. § 1641(g)(1). No Homeowner Interest Can Be Impaired or Impeded by this Action 26. A disposition of this action will have one of two results, either requiring or not requiring MERS to execute and record assignments to the actual beneficial owners of Pennsylvania mortgages. While the former case would provide a real benefit to many owners of properties subject to MERS mortgages, in neither case would the interests of such owners be impaired or impeded in any way. 27. If Defendants are successful in defending the action and MERS is not required to execute and record assignments in favor of the actual mortgagees, then homeowners with MERS mortgages will be in the same position they are now, i.e., entitled to demand the identity of their mortagees by placing a written demand on their servicer pursuant to 15 U.S.C. § 1641(f)(2); and entitled to receive notice of any future assignments pursuant to 11 U.S.C. § 1641(g)(1). 28. If, on the other hand, Plaintiff is successful and obtains an order requiring MERS to execute and record assignments, then the owners of such properties will obtain notice when MERS complies with its obligations under 15 U.S.C. § 1641(g)(1). As explained above, the only Pennsylvania homeowners who do not know the identity of their actual mortgagee are those (a)

15 U.S.C. §1641(g)(1)(C) and (E). The rule also applies to transfers occurring as the result of a merger, acquisition or reorganization, 12 C.F.R. § 226.39(a)(1), but does not apply to temporary, intermediate holders of the mortgage. 12 C.F.R. § 226.39(c)(1). The rule applies to all transfers occurring on or after the enactment date, May 20, 2009. 9

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whose mortgages were put in the name of MERS as “nominee” for a lender; (b) who have not affirmatively asked their servicer for the identity of the actual mortgagee, and (c) who have not been defendants in a foreclosure action. Property owners in this group stand to benefit by Plaintiff’s action, but if Plaintiff loses, they will be in no worse legal position than they are now. 29. Requiring homeowners to appear as parties in this case would not bring before the Court any relevant interest that is not being currently represented. While the Plaintiff’s interest is largely a monetary one, based on the recording fees that MERS has failed to pay, Plaintiff’s interest is also that of the statutorily endowed caretaker of the public mortgage records. Her exercise of her duty to enforce the mortgage industry’s obligation to record mortgages is completely consistent with the interest of property owners in knowing who holds mortgages against them. Such an interest is being furthered by this action, not impaired nor impeded.

Dated: March 4, 2013

/s/ Irv Ackelsberg