Author Archives: David Reiss

Don’t Abandon Hope

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According to Dante, Hell’s entrance has a sign that reads, “Abandon all hope, ye who enter here.”  As communities face the foreclosure crisis and see their population shrink, they need to come up with a plan to deal with this new reality. I have previously wrote about Housing Abandonment and NYC’s Response and am pretty confident that abandoning hope, and just letting the cards fall where they may is the worst path for a community to take.

I was quoted in a story in Joliet, Illinois’ Herald-Sun, Joliet Grapples with Empty Building Syndrome, that reads in part:

David Reiss, a law professor who teaches community development, property and real estate courses at Brooklyn Law School in New York, agrees. He has written about and studied empty residential spaces, but he’s also watched firsthand how New York state got aggressive about empty residential buildings in the 1980s by acquiring them and selling them to private or nonprofit developers.

“It just paid off in spades,” he said.

Reiss said demolishing empty buildings that can’t be used is better than having “derelict, hulking structures in the middle of the community,” he said. “Better to have open space than crumbling structures. You don’t want these ghosts or boogeymen to haunt a community.”

It doesn’t make sense to throw money into something that won’t pay off, he said.

“So I certainly think a community led by its mayor and city council really wants to have an intelligent plan,” he said. “It’s important to have momentum.”

The worst thing to do is to ignore the problem or not see it, he warned.

“You really need the civil leaders to believe in the community and plan for its rebirth,” he said. “If you don’t have that, you’re kind of on a life raft at sea.”

Reiss on Mortgage Scams

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I was quoted in a story on HSH.com, 4 Ways to Prevent Mortgage-Relief Scams, that reads

Millions of American homeowners are still underwater, attempting either a refinance or a loan modification to help make their mortgages more affordable and their homes more valuable.

But far too many homeowners don’t properly investigate the supposed source for their mortgage relief and wind up scammed by fake mortgage-relief companies.

Mortgage-relief scams became a burgeoning trend in the aftermath of the Great Recession as massive home price declines wiped out home equity leaving millions of homeowners underwater — owing more on their mortgages than their properties are worth.

With so many homeowners facing financial distress, mortgage-relief scammers have stepped up their efforts to try and separate vulnerable homeowners from their money.

Definition

According to the U.S. Federal Trade Commission, “Mortgage relief scammers falsely claim that, for a fee (typically hundreds or thousands of dollars paid up-front), they will negotiate with consumers’ mortgage lenders or servicers to obtain a loan modification or other relief to avoid delinquency or foreclosure. Many of them pretend to be affiliated with the government or government housing assistance programs. Some falsely claim to be offering legal services or ‘audits’ of consumers’ loan paperwork to help them negotiate a resolution with their lenders. Unfortunately, these operations often fail to obtain the relief they promise, and they sometimes fail to take even minimal steps to help consumers.”

Jeremy Heck, a consumer law attorney in Columbus, Ohio says there are two major types of mortgage-relief scammers that advertise heavily via the Internet and mail.

“There are mortgage brokers that attempt to refinance a consumer’s residential real estate for what amounts to extraordinarily high fees,” he explains. “There are other companies that advertise to modify a consumer’s mortgage and claim they can achieve a much lower interest rate. Both of these types of companies advertise in a way that implies they are related to or are part of a governmental organization.”

Here are four tips to help prevent mortgage-relief scams:

Do not pay any money up front

Heck notes that some loan-modification companies charge high fees of between $2,500 and $5,000. “But at the end of the day, they provide absolutely no benefit,” he says. If you are talking to a mortgage-relief company that promises they can reduce your home loan, ask for testimonials and references from satisfied clients — and never put any money down until you see some results.

Don’t assume you are safe from foreclosure

If you’ve been receiving mortgage delinquency notices from your mortgage lender, you may be closer to foreclosure than you might think. At that point, it’s much better to work directly with your bank or lender than a mortgage-relief company. “Many times a consumer will believe they are protected from foreclosure having retained a loan modification company, but in reality, there is no protection and a foreclosure is usually imminent,” says Heck.

Ask a lot of questions

If you do decide to hire a mortgage-relief company, start asking questions, and don’t agree to anything until you get those questions answered.

“When trying to identify a scam, mortgage or otherwise, I always recommend sticking to the basics,” advises David Reiss, professor of law at the Brooklyn Law School. “Does the person have a call back number? Does the organization have a website? Will they put their promises in writing soon after meeting you? Will they show you the documents that they want you to sign soon after you agree to their terms? Very often these basic questions will review a scam for what it is.”

Watch for common “red flags”

Becky Walzak, senior partner of Looking Glass Group, a mortgage services firm in Deerfield Beach, Fla., says diligence is the key. She says to stay away from mortgage-relief companies that want all of your individual information such as social security number, credit card information, etc., over the phone, and who offer no written documentation of their strategies and track record.

“If they do offer references, call and ask specific questions such as when they helped, how they helped, how did you find out about them,” she says.

Being ripped off by a mortgage-relief scam when you’re fighting to save your home is a financial disaster that may take years to undo. Proceed cautiously with mortgage-relief companies, and don’t hire anyone without the proper due diligence. You may wish to hire a real estate attorney to help you review documents and contracts for you.

Bernhardt on Dangerous Assignments

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Roger Bernhardt gave me permission to repost this analysis, which has appeared on Dirt and elsewhere:

Heritage Pac. Fin. v Monroy

The same appellate panel that delivered a terrifying punch to the residential lending industry a few months ago in Jolley v Chase Home Fin., LLC (2013) 213 CA4th 872, reported at 36 CEB RPLR 46 (Mar. 2013) (which is now official, since the supreme court declined to review it), has now given another branch of that industry an equally frightening setback in Heritage Pac. Fin., LLC v Monroy (2013) 215 CA4th 972. More fully described on p 84 of this issue, the case concerned a financial institution (Heritage) whose business model involved buying up defaulted junior mortgages that had already been rendered worthless by senior foreclosures, and then attempting to collect whatever it could from the former mortgagors, even when-as in this case-those mortgages were purchase money loans, and therefore uncollectible because of CCP §580b’s one-action rule.

After acquiring Ms. Monroy’s mortgage and sending three demand letters to her, Heritage discovered that she had apparently falsified her income on her original loan application and had wrongly represented the purchase as an arm’s-length transaction when, in fact, she was buying the house from her son. Emboldened by these discoveries, Heritage wrote Monroy again and also filed a complaint against her for fraud. She responded by cross-complaining that Heritage was violating the California and federal Fair Debt Collection Practices Acts.

After a lot of procedural skirmishing, the trial court sustained Monroy’s demurrer to Heritage’s complaint and granted summary judgment to her on her cross-complaint, awarding her $1 in damages but also $90,000 in attorney fees and costs. All of this was affirmed on appeal.

The published and lengthy appellate decision, although sometimes surprising in its reasoning, gives a good deal of guidance to practitioners-especially those who represent creditors and their collection arms or cohorts-as to the many dangers lurking in attempts to collect residential debt obligations too energetically.

Careless Handling of Assignments

The main reason that Heritage lost, and the ground that undermined and defeated all of its other theories, was that it was not a proper holder of whatever fraud claims Monroy’s original lender (WMC) had against her, because it could not show that those claims had been truly assigned to it by WMC. Even if this were a real liar’s loan (i.e., when the borrower had truly, and voluntarily, lied in her loan application), the original lender might well have had a cause of action for fraud, but not the successor holder of the mortgage, to whom no such lies had been told. Heritage’s standing was as an assignee, not as a victim.

Heritage had alleged that WMC had also assigned its cause of action for fraud to it, but both the trial court and the court of appeal ruled that its pleading on that issue was insufficient to withstand Monroy’s demurrer. Its allegations that WMC had intended to and had in fact “sold the loans and assigned any and all rights … including [the] fraud claim” action to it were too conclusory to be sufficient. The sale agreement between WMC and Heritage transferring “all right, title and interest in the loan” was no better at demonstrating assignment of a cause of action for fraud. Nor was the endorsement on the note (not quoted in the opinion) apparently any clearer. Heritage had tried to plead its way around the courts’ ungenerous reading of the transfer documents by making reference to custom and practice, as well as to language in Monroy’s loan application (which said that both the lender and its assigns would be relying on her truthfulness), but those considerations were also held to fail to cure the pleading deficiencies. Even a declaration from an officer of WMC that when it sold loans it also “assigned all of its legal rights in tort as well as contract … including the right to recover against a borrower for fraud” was not enough to rehabilitate Heritage’s incomplete complaint. Finally, the principle underlying CC §1084-that an assignment of a right generally also transfers all other rights incident to it-was held not to connect claims based on fraud in an earlier loan application with claims based on nonpayment of the later assigned promissory note that resulted from the loan application. Therefore, the most that could be said was that Heritage, as an assignee of WMC’s claims against Monroy on her note, was not the assignee of its cause of action for fraud allegedly committed by her in obtaining the funds that she owed under the note; those claims apparently still lay with WMC.

Readers may find a lot of this reasoning rather fishy, but displeasure with a judicial rule doesn’t entitle the bar to ignore it. The judges may have viewed Heritage Financial as the kind of character who gives the whole industry a bad name, but their holding set forth a rule of law that everyone else must also take into account. Under this new principle of construction, the most generous language imaginable in a blanket assignment or endorsement will not necessarily transfer all other rights-and those untransferred may be the particular ones that the transferee may find it needs most.

Sometimes, an imperfect transfer can be redeemed by a simple expedient, such as getting another transfer document executed or having the original holder join in the existing proceeding. But more costs are often incurred, even if one is only required to start all over, e.g., the right person is no longer available or will not agree (except for a price) to take the extra steps required, or some deadline has since passed. In some fussier judicial foreclosure jurisdictions, successor lenders who initiated their foreclosures before they had properly crossed all the “t’s” of their previous secondary market transactions were forced to go back to square one and redo every step, rather than being allowed to simply amend their previous work product to correct the slips.

So, if your client is a potential transferee of any right, you had better employ every conceivable noun, verb, and adjective in the transfer documents that you generate to make sure that no obscure or trivial little interest is left behind, even if that ends up making the documents 50 pages rather than 5 pages long.

That strategy may not be necessary if your client is the assignor instead, since an incomplete transfer may be in her best interests, thereby leaving her with some rights that might be valuable or available for a later windfall sale or enforcement. On the other hand, as her lawyer, you might worry whether any reps or warranties she is making in the documents will later require her to put in further (expensive) efforts or pay indemnities when it is discovered that only 99 percent rather than 100 percent was transferred.

If you represent the obligor underlying the assigned transfer, your client is likely not only to be uninvolved in the transfer, but to not even know of it-there aren’t any significant attornment doctrines in mortgage law, so there is probably little precaution to consider at that stage. Maybe your client can even hope that he can successfully claim some kind of third party beneficiary rights enabling him to capitalize on the other side’s mistakes. “Show me the note” may not be entirely dead.

Other Consequences

The failure to effectively transfer the fraud cause of action was only the beginning, not the end, of the story in this case. While Heritage might yet be able to prevail on a fraud claim if it corrects the assignment issue, not having done so when it first asserted its claims against Monroy made it liable to her for violating the federal Fair Debt Collection Practices Act (which apparently would not have been the case if it had taken a proper assignment).

Mortgage foreclosure proceedings are often-although not always-not regarded as debt collection activities, since they seek to enforce a security interest instead, but post-foreclosure proceedings are clearly different, since the property has been sold and only money remains at issue. Since Heritage was attempting to collect money rather than to realize upon now worthless security, it was acting as a debt collector. If Heritage had no right to collect any money from Monroy-because the cause of action on her mortgage note was barred by the antideficiency rules and the cause of action for fraud had not properly been assigned to it-then its wrongful attempts to recover could violate the debt collection acts.

Do such statutes apply to Heritage? Was this residential mortgage a personal, family, or household obligation, since Monroy had claimed in her loan application that she was intending to live in the house (although that may have been another lie)? Was Heritage’s complaint exempt because it was a legal document (a complaint) rather than a communication, if it was based on a false claim (because of CCP §580b and the rules regarding assignments)? Was the claim exempt because it was a tort claim, which many cases have held do not fall under the debt collection statutes, or was it still covered because the alleged fraud arose out a consumer transaction? The court’s treatment of these issues was as inhospitable to Heritage as its treatment of the assignment issue (and perhaps as dubious), but the lessons to be drawn and the avoidance procedures to follow are not as apparent. Debt collection is dangerous activity and courts are not motivated to be very forgiving. So don’t make mistakes. (How is that for helpful advice?)

 

Heritage Pac. Fin., LLC v Monroy (2013) 215 CA4th 972

Assignee of a promissory note sued Borrower for fraud based on alleged misrepresentations made in Borrower’s loan application. Borrower cross-complained against Assignee, alleging violation of the Fair Debt Collection Practices Act (FDCPA) (15 USC §§1692-1692p). The trial court sustained without leave to amend a demurrer against the complaint on the grounds that it failed to state a cause of action for fraud based on assignment. The trial court granted Borrower’s motion for summary adjudication on the FDCPA claim. Assignee appealed.

The court of appeal affirmed. The trial court properly sustained the demurrer. The transfer of the promissory note provided Assignee with contract rights; it did not carry with it a transfer of the lender’s tort rights. Fraud rights are not, as a matter of law, incidental to the transfer of a promissory note. The complaint did not allege that the assignment transferred the ancillary right of a tort claim, nor did the attached documents support any claim of such an assignment. The transfer of the promissory note did not show a clear intent to assign the assignor’s fraud claim.

The allegations also did not show an assignment of the tort claims based on custom and practice. Alleging general custom and practice did not expand the assignment agreement to include ancillary rights not specified. The assignment was silent regarding any tort claim and nothing suggested that it included any rights other than those incidental to the contract rights.

The trial court properly granted Borrower’s motion for summary adjudication on the FDCPA claim. Assignee violated the FDCPA when it stated in a letter to Borrower that it had the right to sue her for any misinformation in her loan application.

Sloppy Servicers

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I have blogged about the Alice In Wonderland-like and Dickensian situations faced by defaulting homeowners, but now the CFPB has offered a broader look at the problems that borrowers confront when facing foreclosure. The CFPB’s Supervisory Highlights Summer 2013 profiles some of the problems in the loss mitigation field, including

  • Inconsistent borrower solicitation and communication;
  • Inconsistent loss mitigation underwriting;
  • Inconsistent waivers of certain fees or interest charges;
  • Long application review periods;
  • Missing denial notices;
  • Incomplete and disorganized servicing files;
  • Incomplete written policies and procedures; and
  • Lack of quality assurance on underwriting decisions. (14)

The CFPB also noted some serious violations in the transfer of loans between servicers: “For example, examiners found noncompliance with the requirements of the Real Estate Settlement Procedures Act (RESPA) to provide disclosures to consumers about transfers of the servicing of their loans.” (12)

They also found problems processing default-related fees: “Examiners identified a servicer that charged consumers default-related fees without adequately documenting the reasons for and amounts of the fees. Examiners also identified situations where servicers mistakenly charged borrowers default-related fees that investors were supposed to pay under investor agreements.” (13-14)

Now, obviously, not all servicers had all of these problems, but the CFPB’s findings are consistent with what many courts have described anecdotally in their opinions.  Time will tell whether the CFPB will be able to get servicers to devote the necessary resources to reduce these types of problems to more acceptable levels.

 

The Future of Affordable Housing in NYC

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Yesterday, NYU’s Furman Center started a great series, #NYChousing: 10 Issues for NYC’s Next Mayor:

Over each of the next 10 days, #NYChousing will release an issue brief that presents a housing policy question that will confront the next mayor of NYC. The #NYChousing briefs do not provide policy recommendations, but instead provide the background facts, point out potential trade-offs, and pose questions to be considered in order for the candidates and the public to make informed decisions about competing policy proposals.

The first two issues are:

1. HOUSING BUDGET:  Should the next mayor commit to build or rehabilitate more units of affordable housing than the Bloomberg Administration has financed?

2. PERMANENT AFFORDABILITY:  Should the next mayor require developers to permanently maintain the affordability of units developed with public subsidies?

There are Twitter chats about both of these issues, with eight more to come. Tomorrow’s topic is

3. MANDATORY INCLUSIONARY ZONING: Should the next mayor adopt a mandatory inclusionary zoning program that requires developers to build or preserve affordable housing whenever they build market-rate housing?

The Center provides the following guidance for its Twitter chat:

 Throughout the #NYChousing series, the Furman Center will host a series of Twitter chats to discuss each of these policy questions. Each one-hour Twitter chat will start at 11:00am ET and will focus on that day’s policy question. We encourage and welcome your participation.

What’s a Twitter chat? It’s an interactive Twitter conversation spanning a specific period of time. The Furman Center (@FurmanCenterNYU) will pose a handful questions about that day’s #NYChousing policy question. Participants will follow the conversation and tag their responses with the hashtag #NYChousing.

How do you participate? If there’s a question you want to answer or a point you want to make, simply chime in with your insight, a link to a blog post you’ve written-whatever you’d like to add to the conversation. There’s no pressure to follow along for the entire hour or to answer every single question. Be sure to include the hashtag–#NYChousing-in your response.

I will be giving my own two cents as this chat progresses.

Judge Rakoff Is All FIRREA-ed Up

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Law360 quoted me in a story, Rakoff Gives DOJ License To Be Bold In Bank Crackdown (behind a paywall), that reads in part,

U.S. District Judge Jed S. Rakoff’s expansive Monday opinion backing the federal government’s $1 billion mortgage fraud suit against Bank of America Corp. leaves the U.S. Department of Justice wide latitude to use its favorite financial fraud tools in cases linked to the recent financial crisis.

Judge Rakoff’s opinion expanded his May decision allowing the Justice Department’s October suit against Bank of America over lending practices during the housing bubble and financial crisis to move forward under the Financial Institutions Reform Recovery Enforcement Act, while also explaining why portions of its case using the False Claims Act failed.

The ruling, which accepted the government’s broad view of which federally insured financial institutions can be sued under FIRREA and on what grounds, gives the government further ammunition to bring such cases in the future, said Brooklyn Law School professor David Reiss.

“The federal government has taken an expansive view of this phrase, and Judge Rakoff agrees that it can be read broadly in certain circumstances, such as when the affected federally insured financial institution is the alleged wrongdoer itself,” he said.

* * *

[T]he Second Circuit will look closely at other appellate rulings related to interpreting congressional intent, as well as any rulings dealing specifically with FIRREA should an appeal come its way, as many observers expect.

However, it is likely to look closely at Judge Rakoff’s opinion when rendering an ultimate decision, which is why he considered those issues, Reiss said.

“Judge Rakoff stated that this result clearly flowed from the plain language of FIRREA, so the defendants may have a hard time on appeal,” he said.

NJF and UCC and Contract Law, Oh My!

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Parsing how a court should approach a particular deed of trust foreclosure case can put you to sleep faster than crossing the poppy fields next to the yellow brick road.  Does the Non-Judicial Foreclosure (NJF) statute govern? Does the state’s Uniform Commercial Code (UCC) govern? Does the contract terms of the deed of trust itself govern? Or, more likely, do all three govern? And, if so, how do they interact with each other?

Brad Borden and I have recently noted that while

“show me the note” does come up in federal cases, federal courts defer to the applicable state law in reaching their results.  [T]he courts’ holdings tend to flow from a careful reading of the relevant state foreclosure statute, so a particular state’s law can have a big effect on the outcome.  We would note 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, but judges make the law, not scholars and members of the bar.  See Report of The Permanent Editorial Board for The Uniform Commercial Code Application of The Uniform Commercial Code to Selected Issues Relating to Mortgage Notes at 1 (Nov. 14, 2011).

Zadrozny v. Bank of New York Mellon, No. 11-16597 (June 28, 2013), a recent 9th Circuit case demonstrates the problem of an incomplete analysis in an Arizona non-judicial foreclosure case.  The Court notes that

The PEB [Permanent Editorial Board] Report [] clarifies:

the UCC does not resolve all issues in this field. Most particularly, the enforcement of real estate mortgages by foreclosure is primarily the province of a state’s real property law (although determinations made pursuant to the UCC are typically relevant under that law).

Given the PEB Report’s recognition that state law is typically controlling on foreclosure issues, the Zadroznys are unable to allege a cause of action premised on the PEB Report . . ..(14-15, citation omitted)

This is confusing in a few ways.  First, the UCC is state law, adopted with variants by all of the states’ legislatures.  What the PEB is calling for is for courts to apply state UCC law as appropriate.

Second, state foreclosure law does not “control” foreclosure issues in some inchoate and expansive way. It governs it to the extent that it governs it and not one bit more. So if state UCC law governs one facet of a foreclosure case, it is not trumped by the states’ foreclosure law. Or if the terms of the deed of trust were to govern, it would not be trumped by the foreclosure law either (so long as it did not violate it).

Finally, it is just plain weird to say that the Zadroznys would have a “cause of action premised on the PEB report.” How would that work?!?  The PEB report is merely an interpretation of general UCC principles. The Court should be asking how the Arizona UCC applies to this case.

I am not saying that the Court reached the wrong result under Arizona law in this regard, but the Court’s incomplete analysis offers no clarity to litigants, no more than the Wizard of Oz offered real solutions to his supplicants’ pleas. But judges decide the cases, not me and not you . . ..