Florida Twelfth Judicial Circuit Magistrate Bailey issued a Recommended Order in HSBC Bank USA, National Association, et al. v. Marra, No. 2008 CA 000630 NC (Aug. 14, 2013) that makes you want to give up.  Not because of the judge, but  because of what she documents in what is in all likelihood a run of the mill foreclosure in Florida.

Somewhat amazingly, the defendant was unrepresented but was able to get the Court to focus on various inconsistencies in the court filings and implausible assertions made by the Plaintiff, particularly those relating to whether the plaintiff owned and held the note and mortgage as it alleged in the complaint.

It would require about as many words to summarize the opinion as are in it, so I refer you to the link above if you want to see it in all of its glory. Let me leave you with the Court’s conclusion:

After taking into consideration the above-cited information from the [Pooling and Servicing Agreement], it appears that the transfers that have been variously asserted by the Plaintiff in several Motions and/or documents attached to those Motions as conferring standing upon it could  not possibly have occurred as the Plaintiff represents. Further, the Magistrate cannot  conceive of any manner in which the Plaintiff could possibly create additional  documentation in an effort to manufacture standing in this action. (5)

Said less politely, the Plaintiff appear to have lied to the Court or at least been unbelievably negligent in preparing its papers.  The Court also had these things to say about the Plaintiff’s filings:

  • the procedural history recounted by the Plaintiff in its Motion is inaccurate. (4)
  • it is not even likely that GreenPoint was the “owner and holder” of Marra’s loan documents at the time this case was filed in 2008, as was alleged in the original Complaint. (4)

As a law professor, I teach students about the importance of procedure to the functioning and legitimacy of our system of adjudication.  Reading cases like this, replete with a factual summary of obfuscation and possibly outright lies, I wonder what the lesson is that we should take away from the foreclosure epidemic.

One lesson is that you can say anything you want in court and you are unlikely to be punished even if you are caught.  If that is the lesson we are left with, just shoot me now.

An alternative lesson is that we should severely punish those who treat the courthouse as no better than a white-collar fight cage where trained mercenaries lord it over ill-prepared amateurs, with no holds barred. If that is the one we take, lower your gun, roll up your sleeves and start thinking about what a well-functioning judicial system would look like for unrepresented parties in civil suits, such as homeowners in foreclosure and consumers facing debt collectors.

[HT April Charney]


I will be speaking at NYU Law next week on

The Future of Fannie and Freddie

Friday, September 20, 2013
9:00 am – 5:00pm
Reception to follow

Greenberg Lounge, NYU School of Law
40 Washington Square South
New York, NY 10012

Jointly sponsored by:
The Classical Liberal Institute & NYU Journal of Law & Business


This conference will bring together leaders in law, finance, and economics to explore the challenges to investment in Fannie Mae and Freddie Mac, and the future possibilities for these government-sponsored entities (GSEs).  Panels will focus on the reorganization of Fannie and Freddie, as well as the recent litigation surrounding the Treasury’s decision to “wind down” these GSEs.  Panelists will explore the legal issues at stake in the wind down, including the administrative law and Takings Clause arguments raised against the Treasury and Federal Housing Finance Agency.  Panelists will also look at economic policy and future prospects for Fannie and Freddie in light of legislation proposed in the House and the Senate.

Conference Panels:

  • The Reorganization of Fannie Mae and Freddie Mac
  • Fannie Mae, Freddie Mac, and Administrative Law
  • Conservatorship and the Takings Clause
  • The Future of Fannie and Freddie

Confirmed Participants:

  • Professor Barry Adler (NYU)
  • Professor Adam Badawi (Washington University)
  • Professor Anthony Casey (Chicago)
  • Charles Cooper (Cooper & Kirk PLLC)
  • Professor Richard Epstein (NYU)
  • Randall Guynn (Davis Polk & Wardwell LLP)
  • Professor Todd Henderson (Chicago)
  • Professor Troy Paredes (former SEC Commissioner)
  • Professor David Reiss (Brooklyn)
  • Professor Lawrence White (NYU Stern)


Brad and I posted Goliath Versus Goliath in High-Stakes MBS Litigation on SSRN (and BePress).  The abstract reads,

The loan-origination and mortgage-securitization practices between 2000 and 2007 created the housing and mortgage-backed securities bubble that precipitated the 2008 economic crisis and ensuing recession. The mess that the loan-origination and mortgage-securitization practices caused is now playing out in courts around the world. MBS investors are suing banks, MBS sponsors and underwriters for misrepresenting the quality of loans purportedly held in MBS pools and failing to properly transfer loan documents and mortgages to the pools, as required by the MBS pooling and servicing agreements. State and federal prosecutors have also filed claims against banks, underwriters and sponsors for the roles they played in creating defective MBS and for misrepresenting the quality of the assets purportedly held in MBS pools. This commentary focuses on the state of this upstream litigation. It reviews claims of several complaints and discusses some decisions on motions for summary judgment in several of the cases. The commentary is not a comprehensive review of all the activity in this area, but it does provide an overview of the issues at stake in this litigation. The litigation in this area is still relatively new, but with hundreds of billions of dollars at stake, it will likely last for years to come and should reshape the MBS landscape.


The Arizona court in deciding the case of Sparlin v. BAC Home Loans Servicing, CA-CV-2010-0173 (Ct. Ap. AzDiv. 2, 2011), had to consider arguments based on the theory of ‘show me the note.’ Sparlin had appealed the lower court decision to grant summary judgment to MERS. Upon reconsideration, the court affirmed the lower court decision and granted summary judgment.

In arguing their ‘show me the note’ claim, the borrowers alleged that MERS was required to actually prove that it was in possession of the original promissory note in order to execute a substitution of trustee appointing Recon-Trust as the substitute trustee and executing an assignment to BAC Home Loans Servicing. These were the documents that allowed the trustee to initiate foreclosure.

The court, in affirming the lower court’s dismissal, found that MERS, as the beneficiary on the deed of trust, had the right to enforce the security instrument. Additionally, the court found that under Arizona law, it was not required of MERS to be the note holder.


The Arizona court in Maxa v. Countrywide Loans, Inc., 2010 WL 2836958 (D. Ariz. 2010) affirmed a lower court decision that possession of the note was not needed for a party to initiate a non-judicial foreclosure. The court also affirmed that MERS had the authority under the deed of trust to commence foreclosure.

The court in reaching their decision rejected the plaintiff‘s claim that the defendants lacked the right to enforce the note; therein making the foreclosure was invalid. The court noted that a trustee’s sale was not an action to enforce the note, but rather it was an exercise of the power of sale upon default.

The court explicitly held that Arizona law bestowed power of sale on the trustee upon default or breach of the contract secured by the trust deed without reference to enforcing or producing a note or other negotiable instrument.

The court in reaching their decision also found that the plaintiff not only gave the power of sale to the trustee, but also agreed to empower MERS, as the lender’s nominee, to exercise the right to foreclose. Lastly, the court directly rejected the plaintiff’s claims of fraudulent misrepresentation based upon the notion that MERS was not a valid beneficiary.


I was quoted by MainStreet.com in Top 5 Myths About Home Buying Today.  It reads in part,


The fact is, buying a home today is absolutely, totally different from buying one in 2003. And right there is why so many myths swirl around a process that, in many ways, is utterly novel from what it has been. What was true isn’t anymore.

* * *

Myth 3: Fixed rate mortgages are the only way to go.

Not true, said David Reiss, a professor at Brooklyn Law School who specializes in real estate. He elaborated: “The necessity of getting a 30-year fixed rate mortgage is one of the biggest myths about homebuying. The average American household stays in their home for about seven years. Typically, 30-year fixed rate mortgages have higher interest rates than adjustable rate mortgages (ARMs). Homebuyers should take a hard look at their plans for the new home.”

Only 6.5% of applications for mortgages in a recent period were for ARMs, according to the Mortgage Bankers Association. A typical ARM went out at 3.21% interest, versus 4.69% for a typical 30 year fixed rate. That adds up to a difference worth tens of thousands of dollars over, say, a seven year probable life of the loan.

Do the math.



As I had noted previously,

the long awaited Proposed Rule that addresses the definition of Qualified Residential Mortgages has finally been released, with comments due by October 30th. The Proposed Rule’s preferred definition of a QRM is the same as a Qualified Mortgage. There is going to be a lot of comments on this proposed rule because it indicates that a QRM will not require a down payment. This is a far cry from the 20 percent down payment required by the previous proposed rule (the 20011 Proposed Rule).

The Proposed Rule notes that in “developing the definition of a QRM in the original proposal,” the six agencies [OCC, FRS, FDIC, FHFA, SEC and HUD] responsible for it “articulated several goals and principles.” (250)

First, the agencies stated that QRMs should be of very high credit quality, given that Congress exempted QRMs completely from the credit risk retention requirements.

Second, the agencies recognized that setting fixed underwriting rules to define a QRM could exclude many mortgages to creditworthy borrowers. In this regard, the agencies recognized that a trade-off exists between the lower implementation and regulatory costs of providing fixed and simple eligibility requirements and the lower probability of default attendant to requirements that incorporate detailed and compensating underwriting factors.

* * *

Fourth, the agencies sought to implement standards that would be transparent and verifiable to participants in the market.” (250)

After reviewing the comments to the 2011 Proposed Rule, the agencies concluded that “a QRM definition that aligns with the definition of a QM meets the statutory goals and directive of section 15G of the Exchange Act to limit credit risk, preserves access to affordable credit, and facilitates compliance.” (256)

I was somewhat disturbed, however, by the following passage. The agencies are

concerned about the prospect of imposing further constraints on mortgage credit availability at this time, especially as such constraints might disproportionately affect groups that have historically been disadvantaged in the mortgage market, such as lower-income, minority, or first-time homebuyers. (263)

While it is important to make residential credit broadly available, the agencies will be doing borrowers no favors if their loans are not sustainable and they end up in default or foreclosure. The agencies should come up with a metric that balances responsible underwriting with access to credit and apply that metric to the definition of a QRM.

Quercia et al. have developed one such metric, which they refer to as a “benefit ratio.” The benefit ratio compares “the percent reduction in the number of defaults to the percent reduction in the number of borrowers who would have access to QRM mortgages.” (20) A metric of this sort would go a long way to ensuring that there is transparency for homeowners as to the likelihood that they can not only get a mortgage but also pay it off and keep their homes.