June 26, 2014
The court in deciding Gray v. MERSCORP, Inc., 2013 U.S. Dist. (N.D. Ala., 2013) rejected the split the note theory put forward by Gray.
This matter arose out of a note and mortgage executed in March 2007 by plaintiffs Clayburn Kyle Gray and Carrie Ann Gray, defendant Quicken Loans, Inc., and defendant MERS.
Plaintiffs’ resulting suit primarily consisted of two allegations: (1) that the defendant Quicken wrongfully and deceptively caused the plaintiffs’ entire ten-acre property to be encompassed by the mortgage and (2) that the defendant OneWest, to whom the mortgage was subsequently assigned by defendant MERS, was incapable of foreclosing on the mortgaged property, due to “a separation of the note and mortgage in this cause.”
Defendants filed a motion to dismiss, this was subsequently granted. The court noted that Alabama courts, have roundly rejected the “split the note” theory, thus rendering it ineffective and inapplicable in the present case.
The court in deciding Sturdivant v. BAC Home Loan Servicing, LP, 2013 Ala. Civ. App. (Ala. Civ. App., 2013) reversed the lower court’s ruling that granted summary judgment to a foreclosing entity with respect to its complaint in ejectment against a mortgagor under Ala. Code § 6-6-280(b).
The court’s decision was based on the fact that the foreclosing entity presented no evidence that it was either the assignee of the mortgage or the holder of the note at the time it foreclosed, it failed to present a prima facie case that it had the authority to foreclose and, thus, had valid title to or the right to possess the property–one of the elements of its claim in ejectment.
June 25, 2014
Standard & Poor’s posted New Players In The RMBS Market Could Present Unique Representations And Warranties Risks. It opens, S&P
believes that new entrants into the residential mortgage-backed securitization (RMBS) market that make loan-level representations and warranties (R&Ws) may present additional risks not present with more established market players. Many of these new entrants not only lack historical loan performance data, but have not yet established track records for remedying any R&W breaches. This can call into question their ability or willingness to repurchase under R&W provisions. In light of this, mitigating factors may exist that could alleviate the risk of a potential R&W breach. (1)
This all sounds pretty serious, but I am not so sure that it is.
S&P explains its concerns further:
We believe it is important for investors and other market participants to evaluate the quality and depth of various factors that mitigate the risk of R&W breaches occurring in U.S. RMBS transactions, including those that would be remedied by new entities with limited histories and the risk that comes with their willingness or ability to do so. Specifically, we believe the quality and scale of third-party due diligence, the depth of operational reviews, and a transaction’s overall expected losses, are critical for assessing the risk of a breach and if a new entity would be remedying it. We consider all of these aspects in our assessment of the credit characteristics of loans that are securitized in U.S. RMBS deals. (1)
One assumes that every party to every transaction would consider the counterparty risk — the risk that the other side of a deal won’t or can’t make good on its obligations. Regular readers of this blog also know that many well-known companies have attempted to avoid their responsibilities pursuant to reps and warranties clauses. So, when S&P states that “the quality and scale of third-party due diligence, the depth of operational reviews, and a transaction’s overall expected losses, are critical for assessing the risk of a breach and if a new entity would be remedying it,” one wonders why this is more true for new players than it is for existing ones.
Further undercutting itself, this report notes that “post-2008 issuers have been addressing many of these potential R&W risks, including newer players. The level of third-party due diligence in recently issued U.S. RMBS for example has been more comprehensive from a historical (pre-2008) perspective in terms of the number of loans reviewed and the scope of the reviews.” (1)
So I am left wondering what S&P is trying to achieve with this report. Are they really worried about new entrants to the market? Are they signalling that they will take a tough stance on lowering due diligence standards as the market heats up? Are they favoring the big players in the market over the upstarts? I don’t think that this analysis stands up on its own legs, so I am guessing that there is something else going on. If anyone has a inkling as to what it is, please share it with the rest of us.
California Court Denies Claims that Deficiencies Rendered any Security Interest in the Deed of Trust Invalid
The court in deciding Sollenne v. United States Bank Nat’l Ass’n, 2013 U.S. Dist. (S.D. Cal., 2013) ultimately found that the plaintiffs’ claims premised upon the securitization of the loan and violations of the PSA were to be dismissed. The court also found that the plaintiffs could not require the defendants to take any actions to prove their authority unless such factual allegations are presented.
Plaintiffs alleged three causes of action: 1) quiet title; 2) declaratory relief to determine the validity of the deed of trust on the date the note was assigned and to determine if any defendant has authority to foreclose; and 3) injunctive relief to stop further collection activity, including the sale of the property. Plaintiffs’ desired remedies also included a request for an order compelling the defendants to transfer or release legal title and any alleged encumbrances, and possession of the property to plaintiffs.
Plaintiffs also alleged that the procedures in the pooling and services agreement (PSA) for the trust had not been followed. They alleged that the note and the mortgage, the debt or obligation evidenced by the note and deed of trust were not properly assigned and transferred from CMG (the originator) to USBNA (the trustee of the Trust) in accordance with the PSA. Plaintiffs claimed the PSA was violated by a failure to complete the assignment before the closing date, and a failure to provide a complete and unbroken chain of transfers and assignments. Plaintiffs claimed that no perfected chain of title exists transferring the mortgage loan from CMG to the Trust.
In the alternative, Plaintiffs claimed that Nationstar alleged to be the holder and owner of the note and beneficiary of the deed of trust, but that the note identified the originator as the holder, and there is no perfected chain of title between CMG and Nationstar. Plaintiffs claimed that no documents or records have been produced to demonstrate the note or deed of trust was properly transferred prior to the closing date, and that any documents transferring it after the closing date are void under the PSA.
Plaintiffs listed the following deficiencies which they contended render invalid any security interest in the deed of trust: 1) the separation of title, ownership and interest in the note and deed of trust; 2) the lack of assignments to or from the intervening entities when the loan was sold; 3) the failure to assign and transfer the beneficial interest in the DOT to Defendants in accordance with the PSA; 4) the failure to endorse, assign, and transfer the note to USBNA in accordance with the PSA and California law; 5) that there were no assignments of beneficiary or endorsements of the note to each intervening entity; and 6) Defendants violated terms of the PSA.
Ultimately, the court determined that the plaintiffs’ claims premised upon the securitization of the loan and violations of the PSA were to be dismissed. The court also found that the plaintiffs could not require the defendants to take any actions to prove their authority unless such factual allegations were presented.
The court in deciding Morton v. Bank of Am., N.A., 2013 U.S. Dist. (W.D. Mich., 2013) ultimately concluded that the moving defendants are entitled to judgment on all plaintiff’s claims as a matter of law.
Plaintiff asserted that none of the defendants had standing to foreclose on the mortgage. He also alleged that defendants were liable for violations of the Truth In Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). Defendants Bank of America, MERS, and Crain had moved for judgment on the pleadings, but supported their motion with documents beyond the pleadings. Therefore, this court elected to treat the motion as one for summary judgment under Rule 56.
Plaintiff’s complaint identifies two federal claims, in addition to claims arising under Michigan law. The complaint mentions the Truth in Lending Act (TILA), 15 U.S.C. §§ 1601-1667f. Plaintiff also purports to assert a claim under the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. §§ 2601-2617. The court determined that neither the TILA claim nor the RESPA claim had merit. Plaintiff also asserted three purported state-law claims, which the court deemed to be both redundant and lacking merit. Accordingly, the court recommended that the entry of a summary judgment in favor of the defendants.
June 24, 2014
The Maine Supreme Judicial Court issued an opinion, U.S. Bank, N.A. v. David Sawyer et al., 2014 ME 81 (June 24, 2014), that makes you question the sanity of the servicing industry and the efficacy of the rule of law. If you are a reader of this blog, you know this story.
This particular version of the story is taken from the unrebutted testimony of the homeowners, David and Debra Sawyer. They received a loan modification, which was later raised to a level above the predelinquency level; the servicers (which changed from time to time) then demanded various documents which were provided numerous times over the course of four court-ordered mediations; the servicers made numerous promises about modifications that they did not keep; the dysfunction goes on and on.
The trial court ultimately dismissed the foreclosure proceeding with prejudice. Like other jurisdictions, Maine requires that parties to a foreclosure “make a good faith effort to mediate all issues.” (6, quoting 14 M.R.S. section 6321-A(12) (2013); M.R. Civ. P. 93(j)). Given this factual record, the Supreme Judicial Court found that the trial court “did not abuse its discretion in imposing” that sanction. (6-7) The sanction is obviously severe and creates a windfall for the borrowers. But the Supreme Judicial Court noted that U.S. Bank’s “repeated failures to cooperate and participate meaningfully in the mediation process” meant that the borrowers accrued “significant additional fees, interest, costs, and a reduction in the net value of the borrower’s [sic] equity in the property.” (8)
The Supreme Judicial Court concludes that if “banks and servicers intend to do business in Maine and use our courts to foreclose on delinquent borrowers, they must respect and follow our rules and procedures . . .” (9) So, a state supreme court metes out justice in an individual case and sends a warning that failure to abide by the law exposes “a litigant to significant sanctions, including the prospect of dismissal with prejudice.” (9)
But I am left with a bad taste in my mouth — can the rule of law exist where such behavior by private parties is so prevalent? How can servicers with names like J.P. Morgan Chase and U.S. Bank be this incompetent? What are the incentives within those firms that result in such behavior? Have the recent settlements and regulatory enforcement actions done enough to make such cases anomalies instead of all-too-frequent occurrences? U.S. Bank conceded in court that these borrowers have “been through hell.” (9, n. 5) The question is, have we reached the other side?
HT April Charney
June 23, 2014
Kroll Bond Rating Agency released a Commentary on Capital Requirements for Non-Bank Mortgage Companies. I may be missing something, but this just seems to be a love letter to the securitization industry. The Commentary opens,
Federal and state regulators are currently considering the imposition of capital requirements and other prudential rules on various classes of non-bank financial institutions, including insurers and mortgage servicers. This report examines some of the issues involving non-bank financial companies with a focus on non-bank loan mortgage originators and/or servicers (“seller/servicers”) in the context of the evolving discussion among regulators and researchers toward developing “appropriate” regulation and supervision like that traditionally applied to insured depository institutions (IDIs).
We believe that regulatory efforts to impose capital requirements on non-bank financial institutions such as mortgage loan seller/servicers need to consider the following factors:
• First, most non-bank financial companies operating in the mortgage space have significantly higher levels of tangible capital and lower risk-weighted assets than do IDIs, especially when considering that much of the asset base of a seller/servicer is collateralized and that the mortgages which they service typically are owned by third parties, in most cases institutional investors. The chief sources of risk for seller/servicers are operational and legal, not credit or market risk.
• Second, the recent call by state and federal regulators for capital requirements for non-bank mortgage companies somewhat ignores the real point of the 2007-2009 financial crisis, namely the vulnerability of IDIs and non-banks which perform bank-like functions to a sudden decline in investor confidence and a related drop in market liquidity.
• Third, since non-banks in the US are already dependent upon the commercial banking system for short-term funding and are effectively prohibited from capitalizing their asset and maturity transformation activities in the short-term debt capital markets (e.g., commercial paper), it is unclear why capital requirements for non-banks are appropriate.
We believe that large non-bank companies and particularly seller/servicers in the mortgage sector do not require formal capital requirements and other types of prudential regulation. In our view, the real issue behind the 2007-2009 financial crisis involved securities fraud and the resulting withdrawal of investor liquidity behind various classes of securities issued by off balance sheet vehicles, not a lack of capital in either IDIs or non-bank firms. (1, footnotes omitted)
First of all, it is not clear to me why Kroll is conflating mortgage originators with seller/servicers in this analysis. I think that Kroll is right that seller/servicers predominantly face operational risk, and whatever credit risk they might face (unless they own mortgages that they service) is quite low. But mortgage originators are a different story completely. If they fund themselves from the short-term commercial paper market they are subject to runs much like an uninsured bank would be. See generally Gary Gorton, Slapped by the Invisible Hand (2009). One would expect that regulators would prescribe different capital levels for different types of non-banks — and could conceivably exempt some seller/servicers completely.
Second, Kroll writes that the financial crisis was caused by “the vulnerability of IDIs and non-banks which perform bank-like functions to a sudden decline in investor confidence and a related drop in market liquidity.” But capital requirements go directly to investor confidence in individual firms as well as in an entire sector.
Third, Kroll’s analysis is heavily dependent on describing the troubles of IDIs. Yes, big banks were at the heart of the problems of the financial crisis, but that does not mean that non-banks should get a free pass on regulation, one that will allow them to grow to be the 800 pound gorillas of the next crisis.
Finally, Kroll writes,
One of the most widely held views espoused by US regulators is that non-bank financial firms caused the subprime crisis. A better way to state the reality is that the non-bank firms were involved in subprime mortgage origination and sales because the largest commercial banks and their partners such as Fannie Mae and Freddie Mac had a monopoly position in the prime mortgage space. Large banks and the GSEs made the whole subprime market work by being willing to buy the senior tranches of subprime deals. (7)
I am not sure how to best characterize that argument, but it is of the ilk of “The Devil made me do it” or “Everyone else was doing it” or “I was just a small fry — much bigger companies than mine were doing it.” This is really not an argument against regulation — if anything it is a call for regulation. If appropriate incentives do not align without regulation, then that is just when the government should step in.