June 25, 2014
California Court Denies Claims that Deficiencies Rendered any Security Interest in the Deed of Trust Invalid
The court in deciding Sollenne v. United States Bank Nat’l Ass’n, 2013 U.S. Dist. (S.D. Cal., 2013) ultimately found that the plaintiffs’ claims premised upon the securitization of the loan and violations of the PSA were to be dismissed. The court also found that the plaintiffs could not require the defendants to take any actions to prove their authority unless such factual allegations are presented.
Plaintiffs alleged three causes of action: 1) quiet title; 2) declaratory relief to determine the validity of the deed of trust on the date the note was assigned and to determine if any defendant has authority to foreclose; and 3) injunctive relief to stop further collection activity, including the sale of the property. Plaintiffs’ desired remedies also included a request for an order compelling the defendants to transfer or release legal title and any alleged encumbrances, and possession of the property to plaintiffs.
Plaintiffs also alleged that the procedures in the pooling and services agreement (PSA) for the trust had not been followed. They alleged that the note and the mortgage, the debt or obligation evidenced by the note and deed of trust were not properly assigned and transferred from CMG (the originator) to USBNA (the trustee of the Trust) in accordance with the PSA. Plaintiffs claimed the PSA was violated by a failure to complete the assignment before the closing date, and a failure to provide a complete and unbroken chain of transfers and assignments. Plaintiffs claimed that no perfected chain of title exists transferring the mortgage loan from CMG to the Trust.
In the alternative, Plaintiffs claimed that Nationstar alleged to be the holder and owner of the note and beneficiary of the deed of trust, but that the note identified the originator as the holder, and there is no perfected chain of title between CMG and Nationstar. Plaintiffs claimed that no documents or records have been produced to demonstrate the note or deed of trust was properly transferred prior to the closing date, and that any documents transferring it after the closing date are void under the PSA.
Plaintiffs listed the following deficiencies which they contended render invalid any security interest in the deed of trust: 1) the separation of title, ownership and interest in the note and deed of trust; 2) the lack of assignments to or from the intervening entities when the loan was sold; 3) the failure to assign and transfer the beneficial interest in the DOT to Defendants in accordance with the PSA; 4) the failure to endorse, assign, and transfer the note to USBNA in accordance with the PSA and California law; 5) that there were no assignments of beneficiary or endorsements of the note to each intervening entity; and 6) Defendants violated terms of the PSA.
Ultimately, the court determined that the plaintiffs’ claims premised upon the securitization of the loan and violations of the PSA were to be dismissed. The court also found that the plaintiffs could not require the defendants to take any actions to prove their authority unless such factual allegations were presented.
June 25, 2014 | Permalink | No Comments
June 24, 2014
Borrowers Have “Been Through Hell”
The Maine Supreme Judicial Court issued an opinion, U.S. Bank, N.A. v. David Sawyer et al., 2014 ME 81 (June 24, 2014), that makes you question the sanity of the servicing industry and the efficacy of the rule of law. If you are a reader of this blog, you know this story.
This particular version of the story is taken from the unrebutted testimony of the homeowners, David and Debra Sawyer. They received a loan modification, which was later raised to a level above the predelinquency level; the servicers (which changed from time to time) then demanded various documents which were provided numerous times over the course of four court-ordered mediations; the servicers made numerous promises about modifications that they did not keep; the dysfunction goes on and on.
The trial court ultimately dismissed the foreclosure proceeding with prejudice. Like other jurisdictions, Maine requires that parties to a foreclosure “make a good faith effort to mediate all issues.” (6, quoting 14 M.R.S. section 6321-A(12) (2013); M.R. Civ. P. 93(j)). Given this factual record, the Supreme Judicial Court found that the trial court “did not abuse its discretion in imposing” that sanction. (6-7) The sanction is obviously severe and creates a windfall for the borrowers. But the Supreme Judicial Court noted that U.S. Bank’s “repeated failures to cooperate and participate meaningfully in the mediation process” meant that the borrowers accrued “significant additional fees, interest, costs, and a reduction in the net value of the borrower’s [sic] equity in the property.” (8)
The Supreme Judicial Court concludes that if “banks and servicers intend to do business in Maine and use our courts to foreclose on delinquent borrowers, they must respect and follow our rules and procedures . . .” (9) So, a state supreme court metes out justice in an individual case and sends a warning that failure to abide by the law exposes “a litigant to significant sanctions, including the prospect of dismissal with prejudice.” (9)
But I am left with a bad taste in my mouth — can the rule of law exist where such behavior by private parties is so prevalent? How can servicers with names like J.P. Morgan Chase and U.S. Bank be this incompetent? What are the incentives within those firms that result in such behavior? Have the recent settlements and regulatory enforcement actions done enough to make such cases anomalies instead of all-too-frequent occurrences? U.S. Bank conceded in court that these borrowers have “been through hell.” (9, n. 5) The question is, have we reached the other side?
HT April Charney
June 24, 2014 | Permalink | No Comments
June 23, 2014
Kroll: Non-Banks A Non-Systemic Risk
Kroll Bond Rating Agency released a Commentary on Capital Requirements for Non-Bank Mortgage Companies. I may be missing something, but this just seems to be a love letter to the securitization industry. The Commentary opens,
Federal and state regulators are currently considering the imposition of capital requirements and other prudential rules on various classes of non-bank financial institutions, including insurers and mortgage servicers. This report examines some of the issues involving non-bank financial companies with a focus on non-bank loan mortgage originators and/or servicers (“seller/servicers”) in the context of the evolving discussion among regulators and researchers toward developing “appropriate” regulation and supervision like that traditionally applied to insured depository institutions (IDIs).
We believe that regulatory efforts to impose capital requirements on non-bank financial institutions such as mortgage loan seller/servicers need to consider the following factors:
• First, most non-bank financial companies operating in the mortgage space have significantly higher levels of tangible capital and lower risk-weighted assets than do IDIs, especially when considering that much of the asset base of a seller/servicer is collateralized and that the mortgages which they service typically are owned by third parties, in most cases institutional investors. The chief sources of risk for seller/servicers are operational and legal, not credit or market risk.
• Second, the recent call by state and federal regulators for capital requirements for non-bank mortgage companies somewhat ignores the real point of the 2007-2009 financial crisis, namely the vulnerability of IDIs and non-banks which perform bank-like functions to a sudden decline in investor confidence and a related drop in market liquidity.
• Third, since non-banks in the US are already dependent upon the commercial banking system for short-term funding and are effectively prohibited from capitalizing their asset and maturity transformation activities in the short-term debt capital markets (e.g., commercial paper), it is unclear why capital requirements for non-banks are appropriate.
We believe that large non-bank companies and particularly seller/servicers in the mortgage sector do not require formal capital requirements and other types of prudential regulation. In our view, the real issue behind the 2007-2009 financial crisis involved securities fraud and the resulting withdrawal of investor liquidity behind various classes of securities issued by off balance sheet vehicles, not a lack of capital in either IDIs or non-bank firms. (1, footnotes omitted)
First of all, it is not clear to me why Kroll is conflating mortgage originators with seller/servicers in this analysis. I think that Kroll is right that seller/servicers predominantly face operational risk, and whatever credit risk they might face (unless they own mortgages that they service) is quite low. But mortgage originators are a different story completely. If they fund themselves from the short-term commercial paper market they are subject to runs much like an uninsured bank would be. See generally Gary Gorton, Slapped by the Invisible Hand (2009). One would expect that regulators would prescribe different capital levels for different types of non-banks — and could conceivably exempt some seller/servicers completely.
Second, Kroll writes that the financial crisis was caused by “the vulnerability of IDIs and non-banks which perform bank-like functions to a sudden decline in investor confidence and a related drop in market liquidity.” But capital requirements go directly to investor confidence in individual firms as well as in an entire sector.
Third, Kroll’s analysis is heavily dependent on describing the troubles of IDIs. Yes, big banks were at the heart of the problems of the financial crisis, but that does not mean that non-banks should get a free pass on regulation, one that will allow them to grow to be the 800 pound gorillas of the next crisis.
Finally, Kroll writes,
One of the most widely held views espoused by US regulators is that non-bank financial firms caused the subprime crisis. A better way to state the reality is that the non-bank firms were involved in subprime mortgage origination and sales because the largest commercial banks and their partners such as Fannie Mae and Freddie Mac had a monopoly position in the prime mortgage space. Large banks and the GSEs made the whole subprime market work by being willing to buy the senior tranches of subprime deals. (7)
I am not sure how to best characterize that argument, but it is of the ilk of “The Devil made me do it” or “Everyone else was doing it” or “I was just a small fry — much bigger companies than mine were doing it.” This is really not an argument against regulation — if anything it is a call for regulation. If appropriate incentives do not align without regulation, then that is just when the government should step in.
June 23, 2014 | Permalink | No Comments
June 20, 2014
Rent Regulation and Housing Affordability
NYU’s Furman Center issued a fact brief, Profile of Rent-Stabilized Units and Tenants in New York City, that provides context for the deliberations of the Rent Guidelines Board as it considers a rent freeze for NYC apartments subject to rent stabilization.
Rent regulated (rent stabilized and rent controlled) apartments clearly serve households that have lower incomes than households in market rate apartments. Median household income (fifty percent are below and fifty percent are above this number) is $37,600 for rent regulated and $52,260 for market rate households.Thus, market rate households have median incomes that are nearly 40% higher than rent regulated ones.
The median rent is $1,155 for rent regulated and $1,510 for market rate households.Thus, median rents are about 30% higher for market rate tenants.
Despite these differences, the number of households that are rent burdened (where rent is greater than 30% of income) is similar for the two groups: 58% for rent regulated and about 56% for market rate households. (4, Table D)
The Furman Center brief provides a useful context in which to consider NYC’s rental housing stock as well as the households that live in it. Given the nature of NYC households, however, I would have wished for a more finely detailed presentation of household incomes and rents.
NYC’s distribution of income is skewed toward the extremes — more low-income and high-income households and therefore fewer middle-income ones than the rest of the nation. Given this, it would have been helpful to have seen the range and distribution of incomes and rents, perhaps by deciles. The Furman Center brief indicates that updated data will be available next year, so that may provide an opportunity to give a more granular sense of dynamics of the NYC rental market.
Mayor de Blasio’s housing plan outlines his commitment to preserving affordable housing. One element of that commitment is to preserve rent regulated housing. Understanding that market sector and the households it serves is essential to meeting that commitment.
June 20, 2014 | Permalink | No Comments
June 19, 2014
Hawaii Court Holds that Debtor had Standing to Enforce Note and Mortgage Under Haw. Rev. Stat. § 490:3-301(ii) Even Though it was a Non-Holder
The court in deciding 1250 Oceanside Partners v. Katcher, 2013 Bankr. (D. Haw. 2013) recommended that the district court enter a decree of foreclosure in favor of the debtor.
The debtor in possession of 1250 Oceanside Partners sought to enforce a promissory note and foreclose a mortgage made by defendants, the Katchers. Oceanside sought summary judgment, the Katchers argued that the court lacked jurisdiction, that Oceanside was not entitled to foreclose, and that if it was entitled to foreclose, it was not entitled to a deficiency judgment.
The court found that there was no dispute as to any material fact and that Oceanside was entitled to foreclose on the property, but it was not entitled to a deficiency judgment against the Katchers at this stage in the litigation.
The court held that the debtor had standing to enforce the note and mortgage under Haw. Rev. Stat. § 490:3-301(ii) even though it was a non-holder, as it was in possession of the note and had the rights of a holder. The court also found that the mortgagors’ defenses to foreclosure were based entirely on debtor’s failure to develop a project as the purchase contract required, but the terms of the purchase contract provided that the mortgagors’ claims against debtor would be decided separately from debtor’s foreclosure claims. Moreover, the debtor’s claim for a deficiency judgment related to monetary damages or costs and thus, was subject to arbitration under the agreement.
June 19, 2014 | Permalink | No Comments
Investors Unite for High GSE-Fees
Investors Unite, a “coalition of private investors . . . committed to the preservation of shareholder rights for those invested in” Fannie Mae and Freddie Mac sent a letter to FHFA Director Watt pushing for higher guarantee fees (g-fees). The technical issue of how high g-fees should be set actually contains important policy implications, as I had blogged about earlier.
Tim Pagliara, the Executive Director of Investors Unite, writes,
g-fees were historically determined by the GSEs and FHFA does not have a mandate as conservator to run the GSEs as not-for-profit entities. We urge you to adhere to a set of principles that takes into account the critical purpose of setting appropriate guarantee fees while respecting the rights of all economic stakeholders, including the GSE’s shareholders. Ideally, after undoing the 2012 sweep, when setting guarantees fees, FHFA should also take into full consideration that:
1. Fannie Mae and Freddie Mac have profit-making purposes onto which public mandates are layered, and they should charge guarantee fees that earn an appropriate market-based return on the capital employed, whether taxpayer capital or private capital. This is an absolutely critical factor “other than expected losses, unexpected losses and G&A fees” that should be considered when determining g-fees.
2. Increasing guarantee fees will provide more cash flow with which the GSEs can build capital and be restored to “safe and solvent condition.” Maximizing returns is not only consistent with, but arguably required by, the conservatorship.
3. FHFA as conservator has legal duties to the direct economic stakeholders – including all shareholders – that must be respected alongside the interests of other parties.
4. Earning an appropriate return on capital is entirely consistent with the conservatorship and affordable housing mandates. There is no conflict here between the GSEs building capital and setting aside funds for affordable housing. Indeed, it is only when the GSEs have earned their way back to a “safe and solvent condition” that they can sustainably meet their public affordable-housing mandates. After the GSEs have adequate capital, the suspension of those mandates can be reversed, i.e. the affordable housing support can be turned back on.
5. Keeping guarantee fees low to support the housing market in general, including homeowners and homebuyers that are well off and do not need help, is not as important as charging higher guarantee fees (a) to build a capital base to protect against future credit losses, and (b) to redistribute a portion of earnings to targeted constituencies that particularly need financial support.
6. Guarantee fee rates should be tied to sound underwriting standards. If FHFA directs the GSEs to relax underwriting standards, it is essential that guarantee fees be adjusted upwards to account for the greater credit risk assumed in doing so.
Ultimately, g-fees profits should be allowed to stay within the housing market and should be set at levels that help ensure safety and soundness of the GSEs, that protect long-term health of the housing market, and that respect the rights of all economic stakeholders-including the GSE’s shareholders. (1-2, emphasis added)
This letter goes to the heart of the g-fee debate and the GSE litigation, as far as I am concerned. The g-fee level will determine whether Fannie and Freddie shares have any value at all. A low g-fee means no profits and no value. A high g-fee means profits and shareholder value. I agree with Pagliara that g-fees should reflect “sound underwriting.” The FHFA should therefore clearly outline the goals that the g-fee is intended to achieve. I may disagree with Pagliara as to what those goals should be, but sound underwriting is key to any vision of a sustainable housing finance market.
June 19, 2014 | Permalink | No Comments
Michigan Court Rejects TILA and RESPA Claims in Granting Summary Judgment
By Ebube Okoli
The court in deciding Morton v. Bank of Am., N.A., 2013 U.S. Dist. (W.D. Mich., 2013) ultimately concluded that the moving defendants are entitled to judgment on all plaintiff’s claims as a matter of law.
Plaintiff asserted that none of the defendants had standing to foreclose on the mortgage. He also alleged that defendants were liable for violations of the Truth In Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA). Defendants Bank of America, MERS, and Crain had moved for judgment on the pleadings, but supported their motion with documents beyond the pleadings. Therefore, this court elected to treat the motion as one for summary judgment under Rule 56.
Plaintiff’s complaint identifies two federal claims, in addition to claims arising under Michigan law. The complaint mentions the Truth in Lending Act (TILA), 15 U.S.C. §§ 1601-1667f. Plaintiff also purports to assert a claim under the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. §§ 2601-2617. The court determined that neither the TILA claim nor the RESPA claim had merit. Plaintiff also asserted three purported state-law claims, which the court deemed to be both redundant and lacking merit. Accordingly, the court recommended that the entry of a summary judgment in favor of the defendants.
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June 25, 2014 | Permalink | No Comments