June 12, 2014
Ohio Court Finds that Dismissal of Plaintiff’s Foreclosure Complaint did not Deprive it of Jurisdiction Over Defendants and Their TILA Claims
The court in deciding Wells Fargo Bank, N.A. v. Wick, 2013-Ohio-5422 (Ohio Ct. App., Cuyahoga County, 2013) found that the trial court’s dismissal of plaintiff’s foreclosure complaint did not deprive it of jurisdiction over defendants and their TILA claims, as these claims were separate and independent of the foreclosure complaint.
The Wicks claimed that the trial court erred in dismissing all of their counterclaims, cross-claims, and third-party claims when it dismissed Wells Fargo’s foreclosure complaint for failure to invoke the court’s jurisdiction. In ruling on the Wicks’ motion for reconsideration, however, this court determined that, with the exception of the TILA claims, the trial court’s dismissal of the Wicks’ claims was without prejudice and, therefore, as it related to those non-TILA claims, the trial court’s dismissal was not a final, appealable order.
On appeal, this court determined in considering the merits of the case, that a proper and validly asserted counterclaim is not extinguished by a plaintiff’s voluntary dismissal of its claims when the court has jurisdiction to proceed on the counterclaim. This court found, therefore, that where the court has jurisdiction over the parties and over the controversy, the borrowers’ counterclaim that does not arise from the note or mortgage can remain pending for independent adjudication.
Similarly, this court found that the trial court’s conclusion in this case that it lacked jurisdiction over the foreclosure claim because the bank lacked standing did not extinguished the Wicks’ proper and validly asserted claims.
I had blogged about a competition to generate ideas to lower the cost of affordable housing, the Minnesota Challenge to Lower the Cost of Affordable Housing. I was pretty excited about this challenge and was happy to see that a winner has been chosen: the University of Minnesota’s Center for Urban and Regional Affairs (CURA).
CURA’s winning proposal is here. Basically, they
June 11, 2014
The court in deciding HSBC Bank USA v Sage, 112 A.D.3d 1126 (N.Y. App. Div. 3d Dep’t 2013) affirmed the lower court’s decision dismissing the defendant’s lack of standing claim.
HSBC Bank USA commenced this foreclosure action alleging that defendant Gregory Sage defaulted on a note secured by a mortgage on his real property. After joinder of issue and an extended period of time during which settlement conferences took place, plaintiff moved for summary judgment striking the answer and appointment of a referee. Defendant cross-moved for, among other things, leave to amend his answer to allege that plaintiff lacked standing to bring the action. Supreme Court granted plaintiff’s motion and denied the cross motion. After considering the arguments, this court affirmed the lower court’s decision.
This court found that the plaintiff had established that the custodian of the trust had physical possession of the note and mortgage prior to the commencement of the action and that, as trustee, the plaintiff was responsible for carrying out the terms of the trust. Contrary to the defendant’s claim, the affidavit from an assistant vice-president of the mortgage servicing company was adequately based on a review of the books and records of the company maintained in the ordinary course of business, and the lack of personal knowledge as to the creation of the documents was not fatal.
Accordingly, the court found that the plaintiff met its initial burden on the motion for summary judgment and the burden then shifted to defendant to come forward with competent and admissible evidence demonstrating the existence of a defense that properly could raise an issue of fact as to his default. Defendant, as this court noted, did not do this, thus the case was properly dismissed.
The court in deciding Mitchell v. Deutsche Bank Nat’l Trust Co., 2013 U.S. Dist. (N.D. Ga., 2013) found no plain error in the lower court’s conclusion to dismiss the plaintiffs’ claims.
Plaintiffs Reginald and Jamela Mitchell filed a complaint against Deutsche Bank and MERS, the complaint alleged federal violations of the Truth-in-Lending Act (“TILA”), the Real Estate Settlement and Procedures Act (“RESPA”), and the Homeownership Equity Protection Act (“HOEPA”).
The Complaint also asserted the following state law claims: (1) fraud; (2) wrongful foreclosure; (3) quiet title; (4) slander of title; (5) infliction of emotional distress and (6) unfair business practices.
The crux of the plaintiffs’ claims under the federal statutes was that the defendants failed to provide them with the required disclosures, thereby allowing plaintiffs to rescind their mortgage transaction and seek damages. The lower court concluded that the Plaintiffs’ claims arising under TILA, HOEPA and RESPA were barred by the statute of limitations. The lower court recommended that the plaintiffs’ complaint be dismissed as the plaintiffs failed to state any federal or state law claim upon which relief could be granted. The plaintiff then appealed.
Upon review of the lower court’s decision, this court found no plain error in the lower court’s findings and recommendation that the defendants’ motion to dismiss plaintiffs’ claims be granted.
Law360 quoted me in Fannie, Freddie Look Unstoppable In Transfer Tax Fight (behind a paywall). It reads in part,
Class actions against Fannie Mae and Freddie Mac over hundreds of millions of dollars in unpaid transfer taxes in states and cities around the country continue to pile up, but experts say any attempt to challenge the housing giants’ exempt status is likely futile as court after court rules in their favor.
The Eighth Circuit on Friday joined the Third, Fourth, Sixth and Seventh circuits in ruling that Fannie Mae and Freddie Mac are exempt from local transfer taxes when it ruled in favor of the government-sponsored enterprises, or GSEs, after reviewing a suit brought by Swift County, Minnesota.
Swift County, as with a multitude of counties, municipalities and states before it, sought to dispute Fannie and Freddie’s claim that while they must pay property taxes, they are exempt from additional taxes on transfers of assets. But in what some experts say has come to seem like an inevitable answer, the Eighth Circuit found in favor of Fannie and Freddie.
“The federal statutes that set forth the charters of Fannie and Freddie are pretty clear that the two companies have a variety of regulatory privileges that other companies don’t,” David Reiss, a professor at Brooklyn Law School, said. “One of the privileges is an exemption from nearly all state and local taxation.”
The legal onslaught against the GSEs began in 2012 after U.S. District Judge Victoria A. Roberts ruled in March that they should not be considered federal agencies. In a suit filed by Oakland County, Michigan, over millions in unpaid transfer taxes, Judge Roberts rejected the charter exemption argument and, citing a 1988 U.S. Supreme Court ruling in U.S. v. Wells Fargo, found that “all taxation” refers only to direct taxes and not excise taxes like those imposed on asset transfers.
Counties, municipalities and states across the country were emboldened by the decision. Putative class actions soon followed in West Virginia, Illinois, Minnesota, Florida, Rhode Island, Georgia and elsewhere as plaintiffs rushed to see if they could elicit a similar ruling and recoup millions of dollars allegedly lost thanks to the inability to tax Fannie and Freddie’s mortgage foreclosure operations.
But Judge Roberts’ decision was later overturned by the Sixth Circuit, as were other similar orders, though many district judges found in favor of Fannie and Freddie from the start.
* * *
Many cases remain in the lower courts as well, but experts say the outcomes will likely echo those that played out in the Third, Fourth Sixth, Seventh and Eighth circuits, because the defendants’ chartered exemption defense appears waterproof.
“I find the circuit court decisions unsurprising and consistent with the letter and spirit of the law,” Reiss said. “I am guessing that other federal courts will follow this trend.”
June 10, 2014
Milan Markovic has posted Subprime Scriveners to SSRN. The abstract reads,
Although mortgage-backed securities (“MBS”) and other financial products that nearly caused the collapse of the global financial system could not have been issued without attorneys, the legal profession’s role in the financial crisis has received relatively little scrutiny.
This Article focuses on lawyers’ preparation of MBS offering documents that misrepresented the lending practices of mortgage loan originators. While attorneys may not have known that many MBS would become toxic, they lacked incentives to inquire into the shoddy lending practices of prominent originators such as Washington Mutual Bank (“WaMu”) when they and their clients were reaping considerable profits from MBS offerings.
The subprime era illustrates that attorneys are unreliable gatekeepers of the financial markets because they will not necessarily acquire sufficient information to assess the legality of the transactions they are facilitating. The Article concludes by proposing that the Securities and Exchange Commission impose heightened investigative duties on attorneys who work on public offerings of securities.
The article addresses an important aspect of an important subject – which professionals could and should be held responsible for the rampant misrepresentation found throughout the MBS industry in the early 2000s. The prevailing wisdom is that no one can be held responsible, because no one did anything that made him or her personally culpable. Markovic argues that lawyers can and should be held responsible for the misrepresentations found in MBS offering documents. While I buy his argument that lawyers have been unreliable gatekeepers, I am not sure that I fully agree with diagnosis of the problem.
The large financial institutions that issued MBS presumably understood the implications of incorporating questionable representations from loan originators into MBS offering documents. They also would have been able to consult with their in-house counsel about the risks of securitizing poor quality mortgages. It is not self-evident that ethical rules should compel attorneys to investigate what sophisticated clients advised by in-house counsel do not believe needs investigating. (45)
In fact, sophisticated parties often use reps and warranties to allocate risk. For instance, a provision could require that an originating lender buy back mortgages that failed to comply with reps and warranties. This is not a situation where any of the parties would expect anyone to investigate the “representations from the loan originators.” Rather, the parties assumed (rightly or wrongly) that the originator would stand behind the representation if and when it was proved to be false. And, indeed, solvent originators have had to do so.
As I do not fully agree with Markovic’s diagnosis of the problem, that leads me to have concerns with his proposed solution as well. But the article raises important questions that we have not yet answered even though the events leading to the financial crisis are nearly a decade behind us.
June 9, 2014
The FHFA has issued a Request for Input about Fannie Mae and Freddie Mac Guarantee Fees. The Request both provides a good explanation of g-fees and poses important questions about their appropriate role in the functioning of the housing finance system. The Request opens,
On December 9, 2013, the Federal Housing Finance Agency (FHFA) announced proposed increases to guarantee fees (g-fees) that Fannie Mae and Freddie Mac (the Enterprises) charge lenders. The Enterprises receive these fees in return for providing a credit guarantee to ensure the timely payment of principal and interest to investors in Mortgage Backed Securities (MBS) if the borrower fails to pay. The MBS, in turn, are backed by mortgages that lenders sell to the Enterprises.
The proposed changes included an across-the-board 10 basis point increase, an adjustment of up-front fees charged to borrowers in different risk categories and elimination of the 25 basis point Adverse Market Charge for all but four states. On January 8, 2014, Director Melvin L. Watt suspended implementation of these changes pending further review. (1)
The Request asks for responses to 12 questions. The most important, as far as I am concerned, is the first: “Are there factors other than those described in section III – expected losses, unexpected losses, and general and administrative expenses that FHFA and the Enterprises should consider in setting g-fees? What goals should FHFA further in setting g-fees?” (7)
Setting the g-fee has far-reaching consequences not just for the financial health of the two companies, but also for the health of the overall housing market and the mortgage industry. It will also have predictable effects on the litigation over the conservatorships of the two companies. For instance, a high g-fee will make the two companies appear to be more valuable than a low one. The size of the g-fee may also impact the scope of federal affordable housing initiatives.
While this Request for Input is pretty technical (particularly the parts of it that I didn’t blog about), it touches on some of the most fundamental aspects of our system of housing finance. As such, it invites responses from more than just industry insiders. Input is due by August 4th.