Author Archives: David Reiss

Another Federal Judge Can’t Take It Anymore

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Magistrate Judge Brown (EDNY) issued a memorandum and order in Pandit v. Saxon Mortgage Services, Inc., CV 11-3935 (June 5, 2013) that reflects, to my mind, judicial frustration with mortgage industry companies.  This frustration arises, no doubt, from the many frequent of shockingly bad behavior by such companies.

Pandit concerned a mortgage that the plaintiffs had attempted to modify through the Home Affordable Modification Program (HAMP). HAMP has been derided as an “ineffectual” response (one of many) that arose in the aftermath of the financial crisis. (1) The plaintiffs allege that Saxon deceived them throughout their participation in HAMP and seek to form a class of similar victims.

Defendant moved to limit discovery to the named plaintiffs’ claims only or, in the alternative, to “the existence and scope of a putative class.” (2) The court stated that

[i]t is ironic, then, that a defendant accused of “routinely ask[ing] homeowners to resubmit financial information on pretextual grounds; mislead[ing] homeowners over the phone; and ignor[ing] completed loan modifications in what is fairly read to be a series of steps designed to string along loan modification applicants,” , now seeks to establish procedural hurdles that may fairly be read to string along the adjudication of plaintiffs’ legal action. The proposed path appears neither just nor fair. (13, citation omitted)

With that the Court denied defendant’s motion and granted plaintiff “leave to proceed with discovery related to their claims and certification of the class.” (2)

While this is, of course, just a procedural win for plaintiffs, the judge noted that the “parties are at liberty to engage in fulsome discovery . . ..” (14) Defendant, one would assume, is not looking forward to “excessive, extravagant, overdone, immoderate, inordinate” discovery and are not looking forward to appearing before a judge who issues such an order.

 

[HT Scott Mollen, NYLJ]

Federal Judge Declares War on Wells Fargo

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Never saw this before:

And so, Wells Fargo wins on a technicality.  The Court never addresses the merits of this case and expresses no opinion thereon. Still, it is appropriate to point out that, were Henning to prove his case on the merits, the conduct of Wells Fargo would be shown to be nothing short of outrageous.  On the other hand, perhaps if Wells Fargo addressed the merits, its conduct would be vindicated by fair-minded American jurors.  A quick visit to Wells Fargo’s website confirms that it vigorously promotes itself as consumer friendly, Loans and Programs, page within Home Lending, wellsfargo.com, https://www.wellsfargo.com/mortgage/loan-programs/ (last visited September 17, 2013); a far cry from the hard-nosed win-at-any-cost stance it has adopted here.

The technical (and now obsolete) preemption defense upon which Wells Fargo relies is an affirmative defense which can be waived.  See, e.g., Tompkins v. United Healthcare of New England, 203 F.3d 90, 97 (1st Cir. 2000).  The disconnect between Wells Fargo’s publicly advertised face and its actual litigation conduct here could not be more extreme.  These facts lead this Court to inquire whether Wells Fargo wishes to address Henning’s claims on the merits.  After all, it may be that Wells Fargo has done nothing wrong.

ACCORDINGLY, it is ORDERED that Wells Fargo, within 30 days of the date of this order, shall submit a corporate resolution bearing the signature of its president and a majority of its board of directors that it stands behind the conduct of its skilled attorneys and wishes to avail itself of the technical preemption defense to defeat Henning’s claim.

Should it do so, judgment will enter for Wells Fargo. If no such resolution is filed, the Court will deem the preemption defense waived and both Wells Fargo and Henning will have the opportunity to address the merits (i.e., what really happened) at a trial before an American jury. (36-37)

So ends District Judge Young’s (D. Mass.) opinion in Henning v. Wachovia Mortgage, F.S.B., n/k/a Wells Fargo Bank, N.A., No. 11-11428 (Sept. 17, 2013). Henning brought suit against his lender, which sought to have it dismissed, arguing in large part that the state law claims are preempted by the federal Home Owners’ Loan Act.

Judge Young does not make clear the basis for his authority to require such a resolution from Wells Fargo. I am guessing that we will see a motion for reconsideration pretty soon.

[HT April Charney]

Deane Finds Us East of Eden

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Last week, I discussed a NYLJ article about the “Show Me The Note” argument in New York. The article discussed a recent case, Bank of N.Y. Mellon v. Deane, 2013 Slip Op. 23244 (Sup. Ct. Kings Country July 11, 2013). Brad and I have earlier noted that “many scholars and leaders of the bar are befuddled by courts’ failure to do a comprehensive analysis under the UCC as part of their reasoning in mortgage enforcement cases . . ..”  As if to prove us wrong, Judge Battaglia has taken on the UCC in Deane even while acknowledging that “quotation of the Code, or even its citation, has virtually disappeared from the caselaw on this part of negotiable instruments law, at least where addressed in mortgage foreclosure actions.” (5) Judge Battaglia also notes how NY mortgage enforcement caselaw diverges from the contemporary UCC caselaw.

Judge Battaglia framed the issue of standing as follows:

As recently summarized by the Second Department:”In order to commence a foreclosure action, the plaintiff must have a legal or equitable interest in the subject mortgage…A plaintiff has standing where it is both the holder or assignee of the subject mortgage and the holder or assignee of the underlying note prior to commencement of the action with the filing of the complaint…Either a written assignment of the underlying note or the physical delivery of the note prior to the commencement of the foreclosure action is sufficient to transfer the obligation, and the mortgage passes with the debt as an inseparable incident.” (GRP Loan, LLC v. Taylor, 95 AD3d at 1173 [internal quotation marks and citations omitted] [emphasis added].) (2)

He continued, “the cursory treatment of the standing question in the memorandum of law evidences a misunderstanding of the general law of negotiable instruments in its equation of the status as “holder” to mere possession of the instrument. The core of the law of negotiable instruments is found in Article 3 of the Uniform Commercial Code . . ..” (3) He finds that the plaintiff has not established that it is a holder or a nonholder in possession who has the rights of a holder. He states that

To allow an assignee to sue without possession of the note, therefore, would be inconsistent with Revised Article 3, and put New York out-of-step with the 49 states that have adopted the revision, including, in particular, a conception of “transfer” as “deliver[y] by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument” (see Revised UCC §3-203 [1].) That misstep, however, if such it is, has apparently already been taken. (7)

Doing its best to reconcile the the mortgage enforcement and UCC caselaw, Judge Battaglia concludes that

in the usual case, a plaintiff has “standing” to prosecute a mortgage foreclosure action where, at the time the action is commenced: (1) the plaintiff is the holder of the note (see NYUCC §1-201 [20]); or (2) the plaintiff has possession of the note by delivery (see NYUCC §1-201[14]), from a person entitled to enforce it, for the purpose of giving the plaintiff the right to enforce it; or (3) the plaintiff has been assigned the note, by a person entitled to enforce it, for the purpose of giving the plaintiff the right to collect the debt evidenced by the note, and the plaintiff tenders the note at the time of any judgment. (8)

New York’s law in this area is not satisfying and it looks to me like courts need to make a concerted effort to synthesize UCC law with foreclosure law.  Otherwise, mortgage litigants are left to wander like Cain in the land of Nod, east of Eden, not knowing what law governs their disputes.

American Dream/American Nightmare

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I will be presenting “How Low Is Too Low? The Federal Housing Administration and the Low Down Payment Mortgage” at the 2013 Meeting of the Canadian Law and Economics Association next week in Toronto. I just came back from an interesting conference at the Cleveland Fed where I was on a panel devoted to the FHA. The other two panelists presented some disturbing findings about default rates for FHA mortgages.

The two panelists were

Edward J. Pinto, Resident Fellow, American Enterprise Institute, How the FHA Hurts Working-Class Families

Joseph Tracy, Executive Vice President and Senior Advisor to the President, Federal Reserve Bank of New York, Interpreting the Recent Developments in Housing Markets

Pinto’s summary is as follows:

The Federal Housing Administration’s mission is to be a targeted provider of mortgage credit for low- and moderate-income Americans and first-time home buyers, leading to homeownership success and neighborhood stability. But is the FHA achieving this mission? This paper reports on a comprehensive study that shows the FHA is engaging in practices resulting in a high proportion of low- and moderate-income families losing their homes. Based on an analysis of the FHA’s FY 2009 and 2010 books of business, the FHA’s lending practices are inconsistent with its mission. The findings indicate: An estimated 40 percent of the FHA’s business consists of loans with either one or two subprime attributes—a FICO score below 660 or a debt ratio greater than or equal to 50 percent (based on loans insured during FY 2012). The FHA’s underwriting policies encourage low- and moderate-income families with low credit scores or high debt burdens to make risky financing decisions—combining a low credit score and/or a high debt ratio with a 30-year loan term and a low down payment. A substantial portion of these loans has an expected failure rate exceeding 10 percent. Across the country, 9,000 zip codes with a median family income below the metro area median have projected foreclosure rates equal to or greater than 10 percent. These zips have an average projected foreclosure rate of 15 percent and account for 44 percent of all FHA loans in the low- and moderate-income zips.

Tracy reported that rates of defaults by households rather than by mortgages gave a truer picture of the FHA’s success because many FHA borrowers would refinance into another FHA loan. Thus, to study defaults by mortgages covers up the real rate of default.

I believe that their studies were preliminary and have not gone through peer review, but both of them reported extraordinary default rates for certain types of FHA mortgages.

Pinto and his empirical work are very controversial so I cannot endorse his findings. But I can say that if he got it only somewhat right about predictable and ridiculously high default rates for some categories of borrowers, the FHA must immediately defend the underwriting of such loans or change its practices. It would be criminal to have predictable default rates in excess of 20% for any population. Such a rate transforms the American Dream of homeownership into an American Nightmare of foreclosure far, far too often.

Reiss on Fannie/Freddie Loan Limits

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Law360 quoted me in Time May Not Be Right To Limit Fannie, Freddie Loans (behind a paywall).  It reads in part,

The Federal Housing Finance Agency has proposed lowering the maximum size of the loans Fannie Mae and Freddie Mac can purchase as part of an effort to attract more private-sector lending, but some experts warn that other market factors including rising interest rates will keep private lenders from filling the gap.

The FHFA announced earlier this month that it planned to reduce the maximum size of home mortgage loans eligible for backing by the government-sponsored enterprises. The move is part of the agency’s strategic plan of slowly backing away from the mortgage market and encouraging private capital to take its place. But some real estate attorneys and practitioners say private lenders need more than customers to convince them to take the plunge.

Many other environmental factors affect private lenders’ decisions about whether to enter the residential mortgage market, said Bob Bostrom, a shareholder of Greenberg Traurig LLP and former counsel to Freddie Mac.

Reducing the number of loans eligible for Fannie and Freddie backing and raising guarantee fees — another recent tactic — sound good in theory, but they don’t change the fact that the interest rate for a 30-year fixed-rate mortgage rose a full percentage point over the past several months and the housing market dipped correspondingly, Bostrom said.

“The housing recovery is extraordinarily fragile right now,” he said.

The steps the FHFA is taking to reduce the GSEs’ size and scope will work only when there’s a private sector ready to step in, experts say. Until then, these measures can only push the housing market backward, they warn.

* * *

Not everyone is convinced of this dark forecast, however. David Reiss, a Brooklyn Law School professor and real estate finance scholar, told Law360 on Thursday that he’s not convinced the FHFA’s moves will have a negative effect.

Although the pullback should be gradual, it must be done, because the government can’t continue to hold up the mortgage market indefinitely, he said.

Reiss says current market factors actually favor weaning borrowers off Fannie and Freddie, noting that private capital in the sector has increased — particularly in the market for jumbo loans — and that the overall housing market has stabilized.

“We’re past the immediate crisis,” he said. “There’s nothing going on right now that makes me think a downward adjustment in conforming loan limits won’t be met by an increase in capital from private lenders,” Reiss said.

Show Me The Note, NY Style

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Steiner, Goldstein & Sohn published a short article in the New York Law Journal, Clearing The Confusion:  Misplaced Notes and Allonges (Sept. 18, 2012) (behind a paywall). While intended to address commercial real estate finance, it relies on an interesting residential real estate finance case, Bank of N.Y. Mellon v. Deane, 2013 Slip Op. 23244 (Sup. Ct. Kings Country July 11, 2013). The authors write that

Mortgage assignments, when properly drafted, assign both the mortgage and the note. Assuming the chain of mortgage assignments is intact, lenders can gain comfort knowing that under New York case law they have standing to enforce the full amount of the debt evidenced by these assignments. Nevertheless, defendants in foreclosure proceedings often challenge the lenders’ standing to enforce the note, demanding that lenders demonstrate physical possession of the note to initiate a foreclosure despite the fact that physical possession is not required by the law.

They conclude:

New York courts in the cases described herein consistently follow well-established precedent permitting standing in a foreclosure action without the plaintiff having physical possession of the original notes. New York case law makes clear that physical possession of all notes in a chain of loan assignments and refinancings is unnecessary for standing in a foreclosure action and that proper execution of a [Consolidated Extension and Modification Agreement] is sufficient to confer standing when missing notes have been consolidated. Likewise, inclusion of an allonge or other endorsement for every note transfer is not required under New York law for standing in a foreclosure action when the note has been assigned by other means, such as through a properly drafted assignment of mortgage.

The article’s discussion of Deane is most interesting:

the court found physical possession of the note to be determinative regardless of whether a written assignment was executed. The court criticized the approach followed by case law in New York, stating that allowing an assignee to have standing without possession of the note “would be inconsistent with Revised Article 3, and put New York out-of-step with the 49 states that have adopted the revision[.]” Notably, however, New York has opted not to adopt those proposed revisions to Article 3. The court continued, “that misstep, however, if such it is, has apparently already been taken. The case law quoted and cited above clearly speaks, in the disjunctive, of standing obtained by ‘assignment’ or ‘physical delivery’ of the note[.]”

I will return to Deane in a later post.

Moody Misrepresentation

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Judge Daniels (SDNY) granted Moody’s motion for summary judgment in In re Moody’s Corporation Securities Litigation, No. 07 Civ. 8375 (Aug. 23, 2013). This is a big win for Moody’s, but I did find the following passage striking in its tone:

Moody’s own emphasis on the importance of its independence weakens its case for summary judgment on the issue of materiality. Moody’s 2005 and 2006 Annual Reports, as well as their Forms 10-K from the same timeframe, are replete with pronouncements of Moody’s independence and integrity.  For example, Moody’s stated in its 2005 Annual Report that it “is committed to reinforcing among all relevant stakeholders a sense of trust in the accuracy, independence and reliability of Moody’s products and services . . ..’ Likewise, in its Code of Professional Conduct dated June 2005, Moody’s stated that it “will use care and professional judgment to maintain both the substance and appearance of independence and integrity”, and that the ratings it issues “will not be affected by the existence of, or potential for, a business relationship between Moody’s (or its affiliates) and the Issuer (or its affiliates) or any other party . . ..” In light of the great lengths to which Moody’s has gone to tout its independence and integrity, it is inconsistent for Moody’s to simultaneously argue that a reasonable investor would not find such statements to be material. Moody’s thus fails to demonstrate that no reasonable jury could find the alleged misrepresentation at issue to be material. (13, citations omitted)

We are starting to see judges hold rating agencies to the standards they set for themselves (here, for example), although we have not yet seen a court hold one of them liable for violating them.  That may yet come as more of these cases wend their way through the courts.