December 4, 2013
Michigan Court Finds Plaintiff’s Claim that Foreclosure Proceedings Violated Mich. Comp. Laws §§ 600.3204(1) and (3) Unpersuasive
The court in deciding Anderson v. Bank of Am., N.A., 2013 U.S. Dist. LEXIS 152765 (E.D. Mich. Oct. 24, 2013) dismissed plaintiff’s claims that foreclosure violated Michigan state law.
Plaintiff sought a declaratory judgment that foreclosure proceedings violated Mich. Comp. Laws §§ 600.3204(1) and (3). The basis of plaintiff’s claim was a challenge to the assignment of the mortgage from MERS to defendant. Plaintiff alleged that this assignment was invalid. Ultimately, the court found this argument has no merit.
Plaintiff contended that defendant did not have standing to foreclose on the property because the assignment of the mortgage from MERS to defendant was invalid. Plaintiff argued that TBW was no longer in business at the time MERS assigned the mortgage to the defendant. Therefore, as the plaintiff reasoned, the assignment was invalid. Additionally, plaintiff complained that the assignment was “robo-signed” and that it was insufficient to create a record chain of title.
The court concluded that the plaintiff was wrong. The court noted that the Michigan Supreme Court had made clear that, under Michigan law, a mortgage granted to MERS as nominee for lender and lender’s successors and assigns was a valid and assignable mortgage.
The court in deciding Cameron v. Acceptance Capital Mortg. Corp., 2013 U.S. Dist. LEXIS 151134 (W.D. Wash. 2013) denied the plaintiff’s motion for preliminary injunction.
Nearly all of plaintiffs’ claims turn on a single question: whether, under Washington law, Flagstar had legal authority to appoint NWTS as successor trustee. Plaintiffs first asserted that Flagstar could not have become a beneficiary with the power to appoint a successor trustee. Plaintiff reasoned that under Washington state law, MERS was an unlawful initial beneficiary and thus lacked the power to assign its interest to Flagstar.
In their reply brief plaintiffs raised an additional claim alleging that even if Flagstar held the note, it had sold it to Fannie Mae before appointing NWTS as successor trustee, thus it shed its authority to make this appointment when it did so. Ultimately, the Court finds both arguments unpersuasive.
First, the court found that this case is distinguishable from the cited Washington state case law, as Flagstar derived its authority to enforce the note from its position as the note holder, not from its position as assigned beneficiary. The court found plaintiffs’ second allegation, were raised improperly only upon reply, was similarly unconvincing as it rests on a misunderstanding of the law.
California Court Dismisses Plaintiff’s Action Alleging Violations of RESPA, HOEPA, UCL & Negligent Misrepresentation
The court in deciding Monreal v. Deutsche Bank Nat’l Trust Co., 2013 U.S. Dist. LEXIS 151731 (S.D. Cal. Oct. 22, 2013) granted the defendants’ motion to dismiss plaintiff’s claims arising under federal law with prejudice, and declined to exercise supplemental jurisdiction over the plaintiff’s remaining state-law claims. Therefore, the remaining state-law claims are dismissed without prejudice.
Plaintiff alleged four causes of action against Deutsche Bank, GMAC, ETS, and MERS, including: (1) violation of the UCL; (2) negligent misrepresentation; (3) violation of RESPA; and (4) violation of HOEPA. In total plaintiff alleged two claims arising under federal law, RESPA and HOEPA, and two claims arising under state law, negligent misrepresentation and violation of the UCL.
In deciding the matter at hand, the court decided that their subject matter jurisdiction was premised on federal question jurisdiction over the claims arising under federal law, and supplemental jurisdiction over the pendent state-law claims.
Accordingly, because the court found that plaintiff failed to state a viable cause of action under either RESPA or HOEPA, the court dismissed the federal causes of action with prejudice, and declined to exercise supplemental jurisdiction over the remaining state-law claims.
As a result, the Court did not address the merits of the plaintiffs’ state-law causes of action.
December 3, 2013
S&P issued a brief, The Largest U.S. Banks Should Be Able To Withstand The Ramifications Of Legal Issues, that quantifies the exposure that big banks have from litigation arising from the Subprime Crisis:
Since 2009, the largest U.S. banks (Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo) together have paid or set aside more than $45 billion for mortgage representation and warranty (rep and warranty) issues and have incurred roughly $50 billion in combined legal expenses . . . This does not include another roughly $30 billion of expenses and mortgage payment relief to consumers to settle mortgage servicing issues. We estimate that the largest banks may need to pay out an additional $55 billion to $105 billion to settle mortgage-related issues, some of which is already accounted for in these reserves. (2)
S&P believes “that the largest banks have, in aggregate, about a $155 billion buffer, which includes a capital cushion, representation and warranty reserves, and our estimate of legal reserves, to absorb losses from a range of additional mortgage-related and other legal exposures.” (2) As far as their ratings go, S&P has already incorporated “heightened legal issues into our ratings, and we currently don’t expect legal settlements to result in negative rating actions for U.S. banks.” (2) But it warns, “an immediate and unexpected significant legal expense could result in the weakening of a bank’s business model through the loss of key clients and employees, as well as the weakening of its capital position.” (2) S&P also acknowledges that there are some not yet quantifiable risks out there, such as DoJ’s FIRREA suits.
As the endgame of the financial crisis begins to take shape and financial institutions are held accountable for their actions, one is left wondering about a group who is left relatively unscathed: financial institution employees who received mega bonuses for involving these banks in these bad deals. As we think about the inevitable next crisis, we should ask if there is a way to hold those individuals accountable too.
Washington District Court Dismisses Consumer Protection Case Against MERS and Bank of America as Plaintiff-Homeowners Failed to Allege Enough Facts to Support their Claims
The federal district court of Washington in Montgomery v. Soma Fin. Corp., 2013 WL 5775637 (W.D.Wash. 2013) dismissed several consumer protection claims against MERS and Bank of America because the Plaintiffs-homeowners failed to allege sufficient facts to support their claims.
On September 5, 2006, the Plaintiffs, Dennis and Brenda Montgomery, entered a home mortgage for $2.28 million with MERS as the mortgage trustee and SOMA Financial as the lender beneficiary. The loan was eventually sold to Countrywide Home Loans, Inc., and was subsequently taken over by Bank of America through its merger with Countrywide. On June 26, 2009, the Plaintiffs filed for Chapter 7 bankruptcy. On April 4, 2013, the Montgomerys sold their property to co-Plaintiff Michael Flynn. At some point prior to 2013, the lender initiated foreclosure proceedings against the Montgomerys.
On February 27, 2013 the Plaintiffs sued SOMA Financial and Bank of America, as the successor to Countrywide (collectively, “Defendants”), claiming violations of the Consumer Protection Act (“CPA”) with respect to loan servicing, loan modification, foreclosure processing, and loan origination, violation of the False Claims Act (“FCA”), violation of the Financial Institutions Reform Recovery and Enforcement Act (“FIRREA”), violation of the Racketeer Corrupt and Influenced Organizations Act (“RICO”), and tortious infliction of emotional distress. On May 1, 2013, the Defendants filed a motion to dismiss the Plaintiff’s complaint for failure to state a claim on which relief can be granted. On October 24, 2013, the Western District Court of Washington granted Defendant’s motion and dismissed Plaintiff’s complaint.
The District Court assessed each of the Plaintiff’s claims.
For the CPA claim, the Plaintiff’s made several allegations including that the “defendants (a) represented to the Montgomerys that their loan documents were lost and could not be given to them, and that those representations were false; (b) presented an inapplicable loan modification program they claimed would only remove interest and penalties, which was false because the Montgomerys were entitled to a full reduction of all principal and interest “because of systemic frauds involved in their Loan”; (c) failed to perform proper loan modification underwriting based on applicable loan modification programs; (d) failed to provide adequate staffing, training to staff, or processes for loan modification programs; (e) allowed the Montgomerys to stay in trial modifications for excessive periods of time; (f) failed to respond to inquiries from the Montgomerys; (g) provided “false or misleading information” while referring their loan to foreclosure or initiating foreclosure during the loan modification process; (h) represented that loss mitigation programs would provide relief from foreclosure, which was a misrepresentation, and failed to provide information regarding loss mitigation services, including loan modifications of full principal and interest; (i) advised that the Montgomerys must be at least 60 days delinquent in loan payments to qualify for a loan modification, which was false; and (j) represented that loan modification applications would be handled promptly, but delayed the loan modification for over three years.” Plaintiffs further alleged that they adequately pled unfair or deceptive acts with respect to the loan modification by alleging that Defendants made material misrepresentations during the loan origination and foreclosure proceedings.
In response, Defendants alleged that Plaintiffs failed to state “an unfair or deceptive act or practice, an impact on public interest, or injury to business or property.” The Court found Defendant’s response persuasive and further found that Plaintiff’s allegations were identical to the allegations outlined in another case called United States v. Bank of America Corp., a District of Columbia case. The Court here noted that it could not distinguish the facts of this case from the Bank of America, or to which defendants the allegations apply, which supported Defendant’s argument that Plaintiffs had failed to allege sufficient facts to prove their claims.
False Claims Act and FIRREA
The Court found that Plaintiffs failed to offer facts to oppose Defendants’ dismissal arguments against their FIRREA and False Claims Act claims and therefore granted Defendants’ motion to dismiss those claims.
For their RICO claim, Plaintiffs alleged that Defendant’s carried out acts as an enterprise to obtain improper relief and hide Bank of America’s illegal conduct as the lender and underwriter through the misuse of the bankruptcy system. However, the Court found that Plaintiff failed to allege sufficient facts to show Bank of America’s “predicate acts” to establish the RICO claim. Further, the Court found that Plaintiff improperly alleged wire and bankruptcy fraud under the RICO claim, rather than under the relevant statute. The Court therefore dismissed this claim.
Tortious Infliction of Emotional Distress
Finally, the Court assessed Plaintiff’s tort claim. Here, Plaintiffs argued that Defendants engaged in conduct that was solely driven by greed and disregarded the interests of Plaintiffs, and other borrowers and investors that ultimately led to numerous lawsuits and the recent recession. Here, the Court again noted that Plaintiffs made conclusory allegations that mirrored the Bank of America case described in the CPA claim. As Plaintiffs failed to allege sufficient facts to meet this claim, the Court granted Defendant’s motion and dismissed this claim and Plaintiff’s complaint.
December 2, 2013
S&P has posted How Will Mortgage Loan Originators, Borrowers, And RMBS Securitization Trusts Fare Under The New Ability-To-Repay Rules? This research report finds that
- The ATR [Ability to Repay] and QM [Qualified Mortgages] standards under TILA [the Truth in Lending Act] will require loan originators to make a reasonable, good faith determination of a borrower’s ability to repay a loan using reliable, third-party written records.
- If violated, originators and assignees can face liabilities and litigation brought on by borrowers during foreclosure proceedings and even outside of foreclosure proceedings. However, they can be protected from some of these liabilities if a loan meets the QM standards.
- Depending on the loan’s status, increased loss expectations resulting from additional assignee liability, longer liquidation timelines resulting from borrower defenses in foreclosure proceedings, and additional loan modification experience can affect securitization trust performance.
- Sensitivity testing using the damages outlined in the rule suggests that additional loss experience will generally be mild for prime jumbo backed securitizations even under conservative assumptions for litigation risks. Trusts backed by loans with higher credit risk, lower balances, and originated by unfamiliar or below-average originators will be at risk of higher losses than prior to the rule.
- We expect that while the rule will prevent underwriting standards from loosening towards the more risky mortgages originated during the 2006 and 2007 financial crisis, it may also limit credit access to borrowers and make it more difficult to obtain a mortgage loan. (1)
I think that only the last two points are really newsworthy, particularly the last one. Whether the credit markets tighten too much from the new rules is the $64,000 question.
S&P appears to be arguing that the rules will constrain good credit too much. Time will tell if that is the case, as lenders fill the QM sector and the non-QM sector. The non-QM sector provides, for example, interest-only mortgages. There was a lot of bad lending involving interest-only mortgages, so it will be interesting to see what that market sector looks like as it matures over the next few years.
December 1, 2013
The court in deciding Morlock, L.L.C. v. JPMorgan Chase Bank, N.A., 2013 U.S. Dist. LEXIS 153386 (S.D. Tex. Oct. 25, 2013) ultimately dismissed plaintiff’s bifurcation theory based complaint.
Plaintiff alleged that the deed of trust had been “executed and delivered . . . to secure MERS” and that it “was allegedly assigned to defendant Chase by MERS.” Plaintiff further alleged, the deed of trust and assignment, although appearing valid on its face, was invalid and of no force or effect because, MERS was not the holder of the original note that was secured by the deed of trust.
Accordingly, the plaintiff argued, the assignment by MERS was not valid and defendant Chase was not the owner and holder of the note. Therefore, Chase had no right or authority to post the property for a trustee’s Sale.
Chase alleged that the plaintiff’s argument against the validity of the assignment came from the theory that the ‘bifurcation’ of the note and deed of trust renders the deed of trust invalid. Chase argued that Texas courts have rejected the “bifurcation theory” and that plaintiff had therefore failed to state a claim.
The court ultimately granted Chase’s Rule 12(b)(6) motion to dismiss and dismissed the action with prejudice.