Author Archives: David Reiss

Robo-Signing Complaints Must Sing A Different Toone

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The Court of Appeals for the 10th Circuit took a hard look at a complaint alleging robo-signing misbehavior relating to a promissory note and its various endorsements in Toone v. Wells Fargo Bank, N.A. et al., (Mar. 8, 2013, No. 11-4188).  The court noted that

Ordinarily, we accept the well-pleaded factual allegations of the complaint as true for purposes of resolving a motion under Rule 12(b)(6). But there are exceptions to this rule. Courts are permitted to review “documents referred to in the complaint if the documents are central to the plaintiff’s claim and the parties do not dispute the documents’ authenticity.” The Note falls squarely within this exception: We may consider it in evaluating the plausibility of the Toones’ claims because it is mentioned in the complaint, it is central to their claims, and its authenticity is not disputed. (7, citations omitted)

The Court found that

The face of the Note contradicts the Toones’ allegations. The first endorsement states that Accubanc is Premier’s “agent and attorney in fact,” Aplt. App., Vol. II at 209 (capitalization omitted), and the Toones present no argument why the endorsement would be invalid when signed by Premier’s agent. Likewise, the other endorsements look regular on their face. Of course, the endorsements may be forged or otherwise fraudulent. But the complaint alleges no facts from which one could infer such misconduct. It does not explain what “robo-signing” is or why it renders the endorsements fraudulent, let alone include factual content indicating that it occurred in this case.(8)

The 10th Circuit now joins many other courts in finding that “bald allegations of “robo-signing” do not suffice under the Rule 8(a)(2) standard set by Iqbal.” (8)

Judiciary’s Take on the Subprime Zeitgeist

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The 2nd Circuit’s opinion in FHFA v. UBS Americas Inc. et al. (April 5, 2013, No. 12-3207-cv) offers an interesting window into how at least some members of the judiciary understand the Subprime Crisis. On its face, the case was about some technical issues of procedure — whether the case was untimely and whether the FHFA lacked standing.  The Court’s reasoning, however, delved into some deep issues.

In discussing the timeliness issue, the Court concluded that given the statute’s plain language and the particular provision as a whole, “a reasonable reader could only understand” it to resolve the issue in favor of the FHFA. (17) Then, seemingly gratuitously, the Court delved into the legislative history of the statute.  But this legislative history seemed to be drawn as much from the Court’s understanding of recent events as from the record.  It wrote

Congress obviously realized that it would take time for this new agency to mobilize and to consider whether it wished to bring any claims and, if so, where and how to do so. Congress enacted HERA’s extender statute to give FHFA the time to investigate and develop potential claims on behalf of the GSEs — and thus it provided for a period of at least three years from the commencement of a conservatorship to bring suit.

Of course, the collapse of the mortgage-backed securities market was a major cause of the GSEs’ financial predicament, and it must have been evident to Congress when it was enacting HERA that FHFA would have to consider potential claims under the federal securities and state Blue Sky laws. It would have made no sense for Congress to have carved out securities claims from the ambit of the extender statute, as doing so would have undermined Congress’s intent to restore Fannie Mae and Freddie Mac to financial stability. (17-18)

I agree with the Court on the substance, but I found it interesting that certain things about the legislative history were “obvious,” certain facts “must have been evident” and alternative interpretations would make “no sense.”  I am not sure if I could go that far.

This version of legislative history does, however, reflect a view that Congress intended the Executive Branch to take extraordinary measures to hold financial institutions accountable for their role in the financial crisis.

Are Baby Steps Enough for Fannie and Freddie?

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S&P issued a research report, The Implementation Of The FHFA’s Plan For Fannie Mae And Freddie Mac Still Has A Long Way To Go. The report addresses a number of recent events that will impact any reform program for the two Government-Sponsored Enterprises.  S&P strike an optimistic note in the opening lines:  “The U.S. government continues to gradually make progress on the reform of the” two Enterprises.” (1)  It is unclear to me that we are actually making any progress at all. S&P seem to acknowledge as much a few paragraphs later: “Fannie and Freddie are perhaps more entrenched in the housing market today than ever before. Including Ginnie Mae, the government-related housing entities have combined to purchase or guarantee more than 90% of mortgages underwritten in the U.S. since the housing crisis, up from about 50% before the crisis.” (1)

S&P notes that Fannie and Freddie’s financial health is improving as they “are now generating earnings, which reduces the urgency to try to minimize taxpayer costs.” (1)  Their underlying loans are also performing much better:  “At Freddie, loans originated after 2008 account for 63% of its single-family guarantee portfolio and have a seriously delinquent rate of 0.39%, versus 9.56% for loans originated from 2005–2008. At Fannie, loans originated after 2008 account for 66% of its single-family guarantee portfolio and have a seriously delinquent rate of 0.35%, versus 9.92% for loans originated from 2005–2008.” (2)

S&P takes heart that change is afoot because of “the new key aspect of the FHFA’s plan to build a secondary market infrastructure is the proposed creation of a joint venture (JV) between Fannie and Freddie. This JV would have a CEO and chairman that are independent from Fannie and Freddie, and its physical location would also be separate. The GSEs would initially own, operate, and fund this unit, but the JV also would be able to eventually act as a common securitization platform for the entire market, instead of a proprietary platform. Furthermore, the ownership structure would be one that is easily sold or that policymakers can use in housing finance reform once Fannie and Freddie have less of a role in the market.” (2-3)

S&P characterizes the federal government’s approach as “taking baby steps.” (4) I would characterize it as just so much muddling about.

Be Careful What You Contract For . . .

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Justice Ramos of the Commercial Division of the New York State Supreme Court NY County) issued an opinion in Assured Guar. Corp. v. EMC Mtge., LLC, 2013 NY Slip Op. 50519(U) (April 4, 2013).  Assured, a monoline insurer, “alleges that Bear Stearns grossly misrepresented the risk of the underlying pooled loans” that Bear Stearns had used as collateral in RMBS deals that it had underwritten. (1) Assured alleged that loan warranties in nearly 90 percent of the loans in one of the pools at issue had been breached.  The court noted that more than half of the loans in that pool had either “defaulted or are seriously delinquent.” (2) Bear Stearns’ successor-in-interest refused to repurchase the breaching loans.

The Court found that the deal documents make “clear that the parties intended to limit Assured’s remedies for breach of the representations and warranties relating to the quality and characteristics of the pooled loans to the Repurchase Protocol . . .” and the Court indeed so limited Assured’s remedies. (4) Justice Ramos relied on the opinion by Judge Rakoff (SDNY) in Assured Guar. Mun. v. Flagstar Bank, that reached a similar result.

One wonders how monoline insurers will seek to change deal documents going forward.  Will they be so willing to treat representations and warranties as mere risk allocation devices between the parties?  As risk allocation devices, the reps and warranties typically make only limited remedies available.  Or will they demand that they be treated as something more — perhaps as actual representations and warranties about the underlying transaction and upon whose shoulders broader remedies could be hung?

6th Circuit Upholds Foreclosure by Lender Under Michigan Law

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The 6th Circuit upheld a foreclosure under Michigan law in Conlin v. MERS et al., (Case No. 12-2021, April 10, 2013).  Plaintiff Conlin sought to have the foreclosure sale of his property “set aside based on alleged defects in the assignment of the mortgage on the property from Defendant Mortgage Electronic Registration Systems to Defendant U.S. Bank.” (2) The Court noted that “Michigan courts have held that once the statutory redemption period lapses [as had occurred in this case], they can only entertain the setting aside of a foreclosure sale where the mortgagor has made ‘a clear showing of fraud, or irregularity.'” (5, citation omitted) Furthermore, the fraud “‘must relate to the foreclosure procedure itself.'” (6, citation omitted)

Conlin claimed that the assignment from MERS to U.S. Bank “was forged or ‘robo-signed.'” (7)  He also claimed that “MERS had no capacity to assign the Mortgage to U.S. Bank.” (7) The Court noted that third parties typically do not have standing to challenge an assignment unless the challenge would render “the assignment absolutely invalid or ineffective, or void.'” (7, citation omitted) The Court determined that the Michigan Supreme Court held that ‘”defects or irregularities in a foreclosure proceeding result in a foreclosure that is voidable, not void ab initio‘” and that borrowers must be prejudiced by lender’s failure to comply with the foreclosure statute’s requirements. (8, citation omitted)

The court concluded:

Even were the assignment from MERS to U.S. Bank invalid, thereby creating a defect in the foreclosure process under § 600.3204(1)(d), Plaintiff has not shown that he was prejudiced. He has not shown that he will be subject to liability from anyone other than U.S. Bank; he has not shown that he would have been in any better position to keep the property absent the defect; and he has not shown that he has been prejudiced in any other way. Additionally, he has also failed to make the clear showing of fraud in the foreclosure process required to challenge the foreclosure after the expiration of the six-month redemption period. (9)

On Fairy Tales for the Subprime Era

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Practicum has posted my short article, The Emperor’s New Loans: A Cautionary Tale from the Subprime Era, today. It begins

A body of folk tales from the subprime mortgage era is now being written. Some are in PowerPoint. Some are in video format. Some appear in the guise of a non-fiction account.  After all, isn’t The Big Short just Jack the Giant Slayer—with the little guys not only ending up with the gold, but also with the big guys dead on the ground? And some stories, like the one below, are just plain old fairy tales.

You might ask why a complex financial crisis needs such folk tales. And I would tell you that they are necessary because they help us to identify the essence of the crisis. They can also make the significance of the crisis clear to non-experts. And they can help shape government responses to the last crisis in order to avert potential future crises. Luckily, noted storyteller Philip Pullman offers us some guidance on finding the essence of a story.

The rest of the article can be found here.

Careful When Putting Shoe on Other Foot

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Nestor Davidson has posted a very useful article to SSRN, New Formalism in the Aftermath of the Housing Crisis.  The article notes that as “borrower advocates have responded to [the] surge in mortgage distress, they have found success raising a series of largely procedural defenses to foreclosure and mortgage-related claims asserted in bankruptcy.” (391)

Davidson points out that this “renewed formalization in the mortgage distress system is a curious turn in the jurisprudence” because from “the earliest history of mortgage law, lenders have had a tendency to invoke the hard edges of law’s formal clarity, while borrowers have often resorted to equity to obtain a measure of substantive fairness in the face of such strictures.” (392)

What I particularly like about this article is that it takes the broad view on downstream (homeowner foreclosure and bankruptcy) litigation.  Instead of painting a pointillistic portrait of all of this “mortgage distress” litigation (a standing case here, a chain-of-assignment case there), Davidson identifies a pattern of formalistic defenses being raised by homeowners and puts it into historical context.

Davidson warns of the potential unintended consequences of this development: “The borrower push to emphasize formalism in mortgage practice, however understandable, may thus give primacy to the set of judicial tools least amenable to claims of individual substantive justice.” (430)

I don’t think that I agree that this new formalism will bite homeowners in the end.  As Davidson himself acknowledges, “formalism need not be equivalent on both sides  . . ..” (430) But I do agree with his conclusion:

For those concerned about the long-term structural balance between procedural regularity and substantive fairness embodied in the traditional realms of law and equity, the brittleness that the new formalism may be ushering in is worth considering and, perhaps, cause for redoubling efforts to find structural solutions to a crisis that even now continues. (440)