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Editor: David Reiss
Brooklyn Law School

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July 6, 2015

Possession of Note Confers Standing to Foreclose

By David Reiss

Jupiter.Aurora.HST.UV

Dale Whitman posted this discussion of Aurora Loan Services, LLC v. Taylor, 2015 WL 3616293 (N.Y. Ct. App., June 11, 2015) on the DIRT listserv:

There is nothing even slightly surprising about this decision, except that it sweeps away a lot of confused and irrelevant language found in decisions of the Appellate Division over the years. The court held simply holds (like nearly all courts that have considered the issue in recent years) that standing to foreclose a mortgage is conferred by having possession of the promissory note. Neither possession of the mortgage itself nor any assignment of the mortgage is necessary. “[T]he note was transferred to [the servicer] before the commencement of the foreclosure action — that is what matters.” And once a note is transferred, … “the mortgage passes as an incident to the note.” Here, there was a mortgage assignment, the validity of which the borrower attacked, but the attack made no difference; “The validity of the August 2009 assignment of the mortgage is irrelevant to [the servicer’s] standing.”

The opinion in Aurora makes it clear that prior Appellate Division statements are simply incorrect and confused when they suggest that standing would be conferred by an assignment of the mortgage without delivery of the note. See, e.g., GRP Loan LLC v. Taylor 95 A.D.3d at 1174, 945 N.Y.S.2d 336; Deutsche Bank Trust Co. v. Codio, 94 A.D.3d 1040, 1041, 943 N.Y.S.2d 545 [2d Dept 2012].) For an excellent analysis of why these decisions are wrong, see Bank of New York Mellon v. Deane, 970 N.Y.S.2d 427  (N.Y. Sup. Ct. 2013).

The Aurora decision implicitly rejects such cases as Erobobo, which suppose that the failure to comply with a Pooling and Servicing Agreement would somehow prevent the servicer from foreclosing. In the present case, the loan was securitized in 2006, but the note was delivered to the servicer on May 20, 2010, only four days before filing the foreclosure action. This presented no problem at all the court. If the servicer had possession at the time of the filing of the case (as it did), it had standing. (I must concede, however, that the rejection is only implicit, since the Erobobo theory was not argued in Aurora.)

If there is a weakness in the Aurora decision, it is its failure to determine whether the note was negotiable, and (assuming it was) to analyze the application UCC Article 3’s “person entitled to enforce” language. But this is not much of a criticism, since it is very likely that under New York law, the right to enforce would be transferred by delivery of the note to the servicer even if the note were nonnegotiable.

It has taken the Court of Appeals a long time to get around to cleaning up this area of the law, but its work is exactly on target.

July 6, 2015 | Permalink | No Comments

Monday’s Adjudication Roundup

By Shea Cunningham

July 6, 2015 | Permalink | No Comments

July 3, 2015

JFK on Independence Day

By David Reiss

JFK profile

Here is an excerpt from Some Elements of the American Character, Independence Day Oration by John Fitzgerald Kennedy, Candidate for Congress from the 11th Congressional District, July 4, 1946:

The American character has been not only religious, idealistic, and patriotic, but because of these it has been essentially individual.

The right of the individual against the State has ever been one of our most cherished political principles.

The American Constitution has set down for all men to see the essentially Christian and American principle that there are certain rights held by every man which no government and no majority, however powerful, can deny.

Conceived in Grecian thought, strengthened by Christian morality, and stamped indelibly into American political philosophy, the right of the individual against the State is the keystone of our Constitution. Each man is free.

He is free in thought.

He is free in expression.

He is free in worship.

To us, who have been reared in the American tradition, these rights have become part of our very being. They have become so much a part of our being that most of us are prone to feel that they are rights universally recognized and universally exercised. But the sad fact is that this is not true. They were dearly won for us only a few short centuries ago and they were dearly preserved for us in the days just past. And there are large sections of the world today where these rights are denied as a matter of philosophy and as a matter of government.

We cannot assume that the struggle is ended. It is never-ending.

Eternal vigilance is the price of liberty. It was the price yesterday. It is the price today, and it will ever be the price.

The characteristics of the American people have ever been a deep sense of religion, a deep sense of idealism, a deep sense of patriotism, and a deep sense of individualism.

Let us not blink the fact that the days which lie ahead of us are bitter ones.

May God grant that, at some distant date, on this day, and on this platform, the orator may be able to say that these are still the great qualities of the American character and that they have prevailed.

July 3, 2015 | Permalink | No Comments

Happy Fourth of July!

By Shea Cunningham

“Where liberty dwells, there is my country.” — Benjamin Franklin

July 3, 2015 | Permalink | No Comments

July 2, 2015

The Importance of Understanding G-Fees

By David Reiss

United_States_Capitol_west_front_edit2

The Federal Housing Finance Agency has released Fannie Mae and Freddie Mac Single-Family Guarantee Fees in 2014. Ok, ok, this is some really technical stuff. But it gives us a lot of important information about what goes into the cost of a home mortgage.

The executive summary opens, “The Housing and Economic Recovery Act of 2008 (HERA) requires the Federal Housing Finance Agency (FHFA) to submit reports to Congress annually on the guarantee fees charged by Fannie Mae and Freddie Mac (the Enterprises).” (2, footnotes omitted) The report finds that “the average level of guarantee fees charged has increased since 2009. The guarantee fees are currently two-and-a-half times their previous level; from 2009 to 2014, average fees increased from 22 basis points to 58 basis points. From 2013 to 2014, average fees increased from 51 basis points to 58 basis points.” (2, footnote omitted)

For all of you non-experts out there, a basis point is 1/100th of a percentage point. So a guarantee fee (or g-fee in the lingo) of 58 basis points increases the interest rate paid by more than half a percentage point (for instance, from 4.5% to 5.08%).  So homeowners should want to understand why g-fees have more than doubled since 2009.

The report breaks down how g-fees gradually increased in response to Congressional and FHFA requirements, some of which are not tied to housing finance goals at all. For instance, Congress added ten basis points to fund an extension of a tax cut.

Many have argued that g-fees should be kept as low as possible in order to help out the housing market. I do not take that position, in large part because cheap credit does not necessarily lower the cost of housing; sellers may just be able to raise the price of their homes in a cheap credit environment. I also believe that the housing market and the mortgage market need to achieve some sort of equilibrium and unnaturally low g-fees will distort such an equilibrium.

The price of the g-fee should reflect the real costs of the g-fee. For instance, it should cover the cost of losses that result from borrower default. It should not be used to fund programs unrelated to housing. G-fees that are unnaturally high distort the housing finance market and make homeowners subsidize other constituencies. Federal housing finance policy tends to get screwed up if it veers too much from its fundamentals, so we should not ask too much of the g-fee.

Fannie and Freddie have been in limbo ever since they entered conservatorship in 2008. The longer they are in that limbo, the more likely it is that Congress will use them to do all sorts of things that do not relate to maintaining a liquid housing finance market. This study outlines how the g-fee has morphed over time and is a wake-up call to homeowners and policy makers alike to set Fannie and Freddie on a healthy course for the long term, starting with that obscure and technical g-fee.

July 2, 2015 | Permalink | No Comments

Thursday’s Advocacy & Think Tank Round-up

By Serenna McCloud

  • Enterprise Community Partners, in response to New York State Attorney General’s announcement that $75 million of the moneys received by New York in settlement with Bank of America (BOA) and and Citi will be used to fund affordable housing efforts, has released reports analyzing the consumer relief obligations of Citi ($2.5 billion) and BOA ($7 billion)
  • Harvard’s Joint Center for Housing Studies, State of the Nation’s Housing Webcast moderated by NPR reporter Jim Zarroli.
  • New analysis, Inequality isn’t just about money; it’s also about where you live from the Urban Institute reveals how inequality manifests on the neighborhood level within metro areas, such as Dallas which the study found had a high degree of neighborhood inequality.

July 2, 2015 | Permalink | No Comments

July 1, 2015

The Road to Rent-To-Own

By David Reiss

Rent To Own Sign

TheStreet.com quoted me in Rent-to-Own Homes Can Be a Risky Option for Buyers. It opens,

Instead of shelling out thousands of dollars to rent a home each month, some landlords give their tenants the option to buy the home while they are leasing it — using the rent they’ve paid as a credit toward their mortgage downpayment.

But while rent-to-own options appear like a winning proposition for potential homeowners who have not been able to save up enough money for a down payment or lack a good credit score, these deals can be fraught with many setbacks.

Each state is governed by different laws, and some of them protect homeowners in case they fall behind on payments, said David Reiss, a law professor at Brooklyn Law School. This is a crucial point that needs to be addressed with a lawyer before the contract is signed, because a consumer could end up “losing everything” that he had paid toward the house if he loses his job, Reiss added.

“Rent-to-own transactions can be very complicated and there are fewer consumer protections available, so interested buyers should beware,” he said. “There are a lot of shady operators out there.”

July 1, 2015 | Permalink | No Comments