Author Archives: David Reiss

$2.7 Million Punitive Damages for Wrongful Foreclosure Action

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Many argue (see here, for instance) that wrongful foreclosures aren’t such a big deal. A recent case, Dollens v. Wells Fargo Bank, N.A., No. CV 2011-05295 (N.M. 2d Jud. Dist. Aug. 27, 2013)  highlights just how bad it can be for the homeowner who has to defend against one.

Dollens, the borrower, died in a workplace accident but had purchased a mortgage accidental death insurance policy through Wells Fargo, the lender (although the policy was actually underwritten by Minnesota Life Insurance Company). Notwithstanding the existence of the policy, Wells Fargo kept trying to foreclose, even five months after the insurance proceeds paid off the mortgage.  Some lowlights:

  • “Apparently, ignoring its ability to to make a death benefit claim is typical of how Wells Fargo deals with such situations. . . . This is a systemic failure on the part of Wells Fargo.” (4)
  • “There is no doubt that Wells Fargo’s conduct was intended to take advantage of a lack  of knowledge, ability, experience or capacity of decedent’s family members, and tended to or did deceive.” (5)
  • “Wells Fargo charged the Estate for lawn care of the property” even though the “property did not have a lawn.” (6)

The court found that the”evidence of Wells Fargo’s misconduct is staggering.” (6) The court also found that “Wells Fargo used its computer-driven systems as an excuse for its ‘mistakes.’ However, the evidence established that this misconduct was systematic and not the result of an isolated error.. . . The evidence in this case established that the type of conduct exhibited by Wells Fargo in this case has happened repeatedly across the country.” (7) As a result of these findings, the Court awarded over $2.7 million in punitive damages.

Mary McCarthy famously said that “[b]ureaucracy, the rule of no one, has become the modern form of despotism.” We generally think of this in terms of government actors, but it applies just as well to large financial institutions that implement “computer-driven systems” that seemingly cannot be overwritten by a human being who might exercise common sense and common decency.

Given that this type of problem seems to affect all of the major loan servicers, I must reiterate, thank goodness for the CFPB.

 

[HT April Charney]

Glaski Full of It?

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I had blogged about Glaski v. Bank of America, No. F064556 (7/31/13, Cal. 5th App. Dist.) soon after it was decided, arguing that it did not bode well for REMICs that did not comply with the rules governing REMICS that are contained in the Internal Revenue Code. The case is highly controversial. Indeed, the mere question of whether it should be a published opinion or not has been highly contested, with the trustee now asking that the case be depublished. The request for depublication is effectively a brief to the California Supreme Court that argues that Glaski was wrongly decided.

Because of its significance, there has been a lot of discussion about the case in the blogosphere. Here is Roger Bernhardt‘s (Golden Gate Law School) take on it, posted to the DIRT listserv and elsewhere:

If some lenders are reacting with shock and horror to this decision, that is probably only because they reacted too giddily to Gomes v Countrywide Home Loans, Inc. (2011) 192 CA4th 1149 (reported at 34 CEB RPLR 66 (Mar. 2011)) and similar decisions that they took to mean that their nonjudicial foreclosures were completely immune from judicial review. Because I think that Glaski simply holds that some borrower foreclosure challenges may warrant factual investigation (rather than outright dismissal at the pleading stage), I do not find this decision that earth-shaking.

Two of this plaintiff’s major contentions were in fact entirely rejected at the demurrer level:

-That the foreclosure was fraudulent because the statutory notices looked robosigned (“forged”); and

-That the loan documents were not truly transferred into the loan pool.

Only the borrower’s wrongful foreclosure count survived into the next round. If the bank can show that the documents were handled in proper fashion, it should be able to dispose of this last issue on summary judgment.

Bank of America appeared to not prevail on demurrer on this issue because the record did include two deed of trust assignments that had been recorded outside the Real Estate Mortgage Investment Conduit (REMIC) period and did not include any evidence showing that the loan was put into the securitization pool within the proper REMIC period. The court’s ruling that a transfer into a trust that is made too late may constitute a void rather than voidable transfer (to not jeopardize the tax-exempt status of the other assets in the trust) seems like a sane conclusion. That ruling does no harm to securitization pools that were created with proper attention to the necessary timetables. (It probably also has only slight effect on loans that were improperly securitized, other than to require that a different procedure be followed for their foreclosure.)

In this case, the fact that two assignments of a deed of trust were recorded after trust closure proves almost nothing about when the loans themselves were actually transferred into the trust pool, it having been a common practice back then not to record assignments until some other development made recording appropriate. I suspect that it was only the combination of seeing two “belatedly” recorded assignments and also seeing no indication of any timely made document deposits into the trust pool that led to court to say that the borrower had sufficiently alleged an invalid (i.e., void) attempted transfer into the trust. Because that seemed to be a factual possibility, on remand, the court logically should ask whether the pool trustee was the rightful party to conduct the foreclosure of the deed of trust, or whether that should have been done by someone else.

While courts may not want to find their dockets cluttered with frivolous attacks on valid foreclosures, they are probably equally averse to allowing potentially meritorious challenges to wrongful foreclosures to be rejected out of hand.

Mortgage Reform Schooling on 30 Year Term

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S&P has posted U.S. Mortgage Finance Reform Efforts and the Potential Credit Implications to school us on the current state of affairs in Congress. It provides a useful lesson on three major mortgage reform bills introduced in Congress this year.  They are the Housing Finance Reform and Taxpayer Protection Act of 2013 (Corker-Warner); Protecting American Taxpayers and Homeowners ACT of 2013 (PATH); and the FHA Solvency Act.

Given the current mood in D.C., S&P somewhat optimistically states that there “seems to be a bipartisan commitment to encourage private capital support for the U.S. housing market while winding down Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) that hold dominant positions in the mortgage market.” (1) S&P uses this report as an opportunity to “comment on the potential credit implications of these mortgage finance reform efforts on several market sectors.” (1)

In this post, I focus on, and criticize, S&P’s analysis of the appropriate role of the 30 year fixed-rate mortgage. S&P states that

The 30-year fixed-rate mortgage has contributed significantly to housing affordability in the U.S. And while some market players have looked at current rates on jumbo mortgages (those that exceed conforming-loan limits) and suggested that the private market could support mortgage interest rates below 5%, we think this view is distorted. Jumbo mortgage rates carrying the lowest interest rates, for the most part, are limited to a narrow set of borrowers who have FICO credit scores above 750 and equity of roughly 30% in their homes. We don’t believe that these same rates would be available to average prime borrowers, such as those with credit scores of 725 and 25% equity in a property. (3)

While I think that S&P is probably right about the limited usefulness of comparing current jumbo loans to a broad swath of conforming loans, I see no support in their analysis for the assertion that the “30-year fixed-rate mortgage has contributed significantly to housing affordability in the U.S.” First, a 30-year FRM typically carries a higher interest rate than an ARM of any length. Second, a typical American household only stays in a home for about seven years. Thus, a 30-year FRM provides an expensive insurance policy against increases in interest rates that most Americans do not end up needing.

While we may end up providing governmental support for the 30-year FRM because of its longstanding popularity, S&P’s mortgage reform school should be based on facts, not fancy.

A HELOC of a Securitization

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S&P posted A Look At U.S. Second-Lien And HELOC Transactions Post-Crisis.  In 2008, they announced that “would halt rating new U.S. RMBS closed-end second-lien transactions because loan performance had deteriorated significantly.  [They] haven’t rated any U.S. RMBS second-lien (both second-lien HCLTV [high-combined loan-to-value] and closed-end second-lien) or HELOC [home equity line of credit] transactions since 2007.” (1) They also note that notwithstanding the fact that such securitizations had ended, “HELOC loans continue to be originated, with banks generally keeping these types of loans on their books.” (1)

The report provides a some interesting data on those securitizations.  Let me share one highlight, a table of lifetime loss projections of RMBS with different collateral types. For the 2007/2008 vintage, they performed as follows.

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Second-lien  HCLTV:  45%

Closed-end second lien:  58%

HELOC:  42%

Subprime:  49%

Alt-A:  29.25%

Negative Amortization:  43.25%

Prime:  10%

With a bit of understatement, they conclude that “[c]losed-end second-lien transactions may be limited going forward because of limited investor and issuer appetite, given past performance and uneven home price appreciation.” (5) They note that HELOCs are not included in the definition of Qualified Mortgages or Qualified Residential Mortgages [QRM] “so the issuer would most likely have to retain a stake in the deal, increasing issuance costs.” (6)

This seems like a good a good result, if you ask me. Here is a product that performed miserably (with losses of greater than 40%!!!) as a securitization. If the new QRM rules reduce these securitization but banks continue to originate them for their own portfolio, perhaps Dodd-Frank is doing its job in the mortgage markets. Of course, we want to ensure that there is sufficient sustainable credit for HELOCs, but it is good to see that portfolio lenders are stepping in where they see a market that RMBS issuers has exited.

Fightin’ Words on Consumer Complaints

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Deloitte has issued a report, CFPB’s Consumer Complaint Database: Analysis Reveals Valuable Insights, that provides valuable — but superficial insights — into the CFPB’s massive database of consumer complaints.

Deloitte’s main insights are

  • Troubled mortgages are behind the majority of the complaints – a growing trend
  • Customer misunderstanding may create more complaints than financial institution error
  • Affluent, established neighborhoods were more likely sources of complaints
  • Complaint resolution times have improved (2)

As to the second insight — customer misunderstanding may create more complaints than financial institution error — Deloitte notes that

Financial institutions have a number of options for resolving consumer complaints. They can close a complaint in favor of the consumer by offering monetary or non-monetary relief, or they can close the complaint not in favor of the consumer, perhaps providing only an explanation. The percentage of complaints closed in favor of consumers declined during the analysis period, falling from 30.9 percent in June 2012 to 18.0 percent in April 2013,6 a trend that was reflected in the monthly complaint [resolutions] for all products. (4)

The report continues, “In spite of fewer complaints closed with relief, consumers have been disputing fewer resolutions. In aggregate, the percentage of resolutions that were disputed fell from a peak of 27.9 percent in January 2012 to 18.6 percent in January 2013.” (5) Deloitte finds that “the data suggests that many complaints may be the result of customer misunderstanding or frustration rather than actual mistakes or operational errors by financial institutions.” (5)

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This conclusion seems like a big leap from the data that Deloitte has presented. I can imagine many alternative explanations for the decrease in disputes other than customer misunderstanding. For instance,

  • the consumer does not see a reasonable likelihood of a favorable resolution and abandons the complaint
  • the financial institution can point to a written policy that supports its position even if the consumer complaint had a valid basis, given the actions of the institution’s employees in a particular case
  • in the case of a mortgage complaint, the consumer is moving toward a favorable or unfavorable resolution of the issue with the financial institution on another track (e.g., HAMP, judicial foreclosure)

To be clear, I am not saying that customer misunderstanding plays an insignificant role in customer complaints.  Nor am I saying that the reasons I propose are the real reasons that that complaints do not proceed further. I am only saying that Deloitte has not presented sufficient evidence to support its claim that “customer misunderstanding may create more complaints than financial institution error.” Given that these are fightin’ words in the context of consumer protection, I would think that Deloitte would choose its words more carefully.

 

 

Pandora’s Credit Box

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Jim Parrott and Mark Zandi posted Opening the Credit Box, a call for “[e[asing mortgage lending standards.” (2) Parrott has had high level positions in the Obama Administration and Zandi, Moody’s Analytics’ chief economist, was mentioned as a possible Director for the FHFA. Given the importance of these two authors to debates about the housing market, I think it is worth evaluating their views carefully. I have to say, they are somewhat worrisome.

They favor easing “mortgage lending standards so that more creditworthy borrowers can obtain the loans needed to purchase homes” in order to support “the current recovery,” but also to support “the economy’s long-term health.” (2) This is wrongheaded, as far as I am concerned.  Mortgage underwriting standards should not be set to support the economy. They should be set to balance the availability of credit with the likelihood of default. If we want to support the economy through the housing sector, we can do so through various tax credits or direct subsidies. But starting down the path of employing underwriting standards to do anything other than evaluate credit risk will quickly lay the foundation for the next housing bubble.

The paper contained a number of similarly disturbing cart-leading-the-horse statements. For instance, they write that for “the housing recovery to maintain its momentum, first-time and trade-up homebuyers must fill the void left by investors.” (2) Again, the goal of of encouraging new entrants in the market should not be to drive demand in the short-term. Rather, it should be done in order to allow creditworthy potential homeowners to have the opportunity to purchase a home on sustainable terms.

The authors take pains to step back from the extreme version of their position.  For instance, they write, “To be clear, the objective is not, and should not be,a return to the recklessly loose standards of the bubble years, but to strike a sensible balance between risk management and access to credit. Today’s market has overcorrected and it is hurting the nation’s recovery.” (2) But given the arguments that they have made, I find this coda to be too little too late.

I also found disturbing their analysis of put-back risk (whereby Fannie and Freddie can make loan originators buy back loans that violate various representations and warranties). Their analysis portrays originators as victims of unfairly tightened standards. The fact is, however, that originators had a long run of pushing off junk mortgages onto Fannie and Freddie. The industry will certainly need to figure out a new normal for put-backs and reps and warranties. It seems a bit premature, however, to say that Fannie and Freddie should just loosen up just as it is settling suits with these same originators for billions of dollars.

We should work toward housing market that balances access to homeownership with mortgages that households are likely to be able to afford in the long term. Once that relatively undistorted market finds its baseline, we can talk about tweaks to it. But jumping in today with policies intended to fill a void left by speculative investors seems like a recipe for disaster. In the Greek myth, Pandora opens up the box and lets loose all of the evils of humanity. I worry that rashly opening up the credit box will do the same for the housing market, once again.

Enforcing The Mortgage Note

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Elizabeth Renuart has posted Uneasy Intersections: The Right to Foreclose and the UCC to SSRN. This is a subject that Brad and I have touched on a bit in the context of the Show Me The Note! defense, but Renuart has done a magisterial fifty state review of how state foreclosure laws interact with the Uniform Commercial Code which has been adopted in all 50 states (NY has an older version it on the books for now). The case law in this area is incredibly confused and confusing.  The article helps to chart a path to navigate the intersection between these two areas of law.

Renuart provides a taxonomy of the caselaw, dividing it into three categories:

1.  The UCC States: “courts in these states explicitly join the right to foreclose on a mortgage that secures the negotiable note with the” UCC. (44)

2.  The Foreclosure-Statute-Definition States: “the courts focus on relevant words in the state’s foreclosure statute, such as ‘mortgagee’ where mortgages are used, ‘beneficiary’ where deeds of trust are used, ‘holder’, or ‘owner.’ Next, they determine if that state’s legislature intended that these designations refer to the note holder or the one with the right to act on behalf of the note holder. These courts may or may not reference the UCC in their decisions but the result generally is consistent with” the UCC. (45)

3.  The UCC- Does-Not-Apply States: “courts in these states reason that the state’s foreclosure scheme is comprehensive, inclusive of the prerequisites to foreclose, or does not define the secured party as the one entitled to repayment on the secured monetary obligation. As a result, the UCC does not apply in any way to identify the party who possesses the right to foreclose. To date, these decisions have arisen exclusively in nonjudicial foreclosure states.” (47)

She concludes that the “methodology utilized in Category 1 and 2 states properly harmonizes the relevant UCC rules with state foreclosure law. Category 3 states dismiss the UCC’s role outright. It is these decisions that muddy the law and create inconsistent outcomes from state to state.” (47-48)

It is no exaggeration to say that the discussions about this topic in the blogosphere are virtually incoherent, so this article may provide guidance for those who are looking for it.