November 19, 2013
Northern District of California Court Dismisses Plaintiff’s Claims for Lack of Subject Matter Jurisdiction
The court in deciding Murphy v. Bank of N.Y. Mellon, 2013 U.S. Dist. LEXIS 155923, 2013 WL 5883675 (N.D. Cal. Oct. 29, 2013) dismissed the plaintiff’s action without prejudice.
The plaintiff in this case brought this action against defendants [Bank of New York Mellon and MERS] for (1) violations of 18 U.S.C. § 1001; (2) violations of 18 U.S.C. § 1341; (3) violations of the Fair Debt Collection Practices Act (“FDCPA”); (4) violations of California’s Business and Professions Code Section 17200; (5) slander of title; (6) cancellation of void instruments; (7) quiet title; and (8) wrongful foreclosure. Compl., ECF No. 1.
The plaintiff’s complaint revolved around the main theory that the defendants lacked the authority to execute any foreclosure proceedings. After considering the plaintiff’s arguments, the court first concluded that the plaintiff’s action must be dismissed for lack of subject matter jurisdiction. Second, the court found that the federal claims in the operative complaint failed as a matter of law.
November 19, 2013 | Permalink | No Comments
3 Housing Riddles For De Blasio
I wrote an op ed for Law360,com that was posted today. While it is behind a paywall on Law360, it reads in full as follows:
3 Housing Riddles For De Blasio
As Mayor-Elect Bill de Blasio is making the transition from campaigning to governing New York City, it is worth contemplating some of the fundamental riddles that perplex those who spend their time thinking about the city’s housing policy. I address three of the most perplexing below.
The Riddle of Mandatory But Not Sufficient
The housing policy centerpiece of the de Blasio campaign is to require developers to build some affordable housing units when they build on lots that have been upzoned, a policy known as mandatory inclusionary zoning. The campaign website states that this policy will create 50,000 new units of housing.
Let’s put aside the fact that this number appears to be very aggressive given the lack of significant upzonings on the horizon (see second riddle below). Just because the city mandates that affordable housing be part of any new construction, it cannot mandate that developers build any housing at all if the deal does not make economic sense for them.
The de Blasio administration will need to carefully calibrate the mandatory inclusionary zoning rules to ensure that builders are sufficiently incentivized to build in the first place. This may limit the amount of affordable housing that can be mandated as part of that new construction.
One key aspect of this policy is whether the mandatory affordable housing will be required to be on-site or if the developer can build it off-site. If it is the former, it will help achieve the progressive goal of increasing socio-economic diversity in a city that is rapidly losing it.
But each unit of on-site housing would likely be more expensive to construct than off-site affordable units. And the opposite is true if the mandatory affordable units are allowed to be off-site; they will be likely cheaper to construct and thus more housing could be built. But it would not work toward increasing socio-economic diversity in the city.
And thus, the riddle of mandatory but not sufficient poses two challenges to the administration. Can it incentivize the creation of a meaningful number of units? And should it favor socio-economic diversity or the maximum production of affordable units? No easy answers here.
The Riddle of Now Versus Later
Can you increase the supply of housing to address the needs of a growing population while also downzoning large swaths of the city to respond to the preferences of the city’s current residents?
The Michael Bloomberg administration wanted to have this both ways, but that can’t work. The Bloomberg administration had planned on an increase in population of roughly another million people by 2030 while at the same time downzoning a large swath of the city (and, to be fair, upzoning some other portions).
This downzoning made current residents happy as it kept big, modern, out-of-context buildings from popping up near their homes. But it also limited the opportunities for increasing the housing stock, particularly near transit hubs. This is the basis of the second riddle — what is seen as bad by current residents may be good for future residents.
It is a fundamental economic truth that if more and more people are flocking to New York City, housing costs will rise unless supply increases. But for city residents, there is a paradox. New Yorkers see gleaming towers rise in their neighborhoods along with the rents for their nearby apartments. There are two explanations for this paradox.
First, the supply of new housing may be increasing without keeping pace with rising demand. Historically, New York City has not had many new units of housing built each year, maybe 20,000 units or so in a good year. This modest increase in supply has been overwhelmed by the increase in population of a million people in the last 20 or so years. This disparity goes a long way to explain the high rents and the miniscule vacancy rates that are seen throughout the city.
Second, new housing in one community (Williamsburg, for example) may be causing or be part of a wave of local gentrification in the existing housing stock. So, even if the new housing is having a tendency to decrease housing costs in the city overall because it increases the supply, it can also be pushing rents higher in the communities in which it is situated.
Increasing the supply of housing has to be a key component of providing “safe affordable homes for all New Yorkers,” as de Blasio calls for on his campaign website. This has to mean zoning significantly more land for high-rise residential construction as well as incentivizing the construction of affordable housing units in that new construction.
At the same time, de Blasio must attend to the concerns of those negatively impacted by the new construction. Hence, the riddle of now versus later.
The Riddle of the Few Versus the Many
The de Blasio campaign website calls for “tighter standards that ensure subsidies meet the needs of lower-income families and are distributed equitably throughout the five boroughs.” Distributing affordable housing subsidies equitably throughout the city is important, but there is another equity issue — should the city heavily subsidize affordable housing for a small portion of those who are eligible or should it distribute resources more broadly and thinly among everyone who is eligible?
Fewer than 8 percent of low- and middle-income households receive a direct or indirect subsidy for an apartment (excluding public housing) while more than 20 percent live below the poverty line of $23,283 annually for a family of four.
Should the city’s limited resources be used to create a relatively small number of new affordable units or should some of them be used in ways that benefit a broader swath of low- and moderate-income New Yorkers, albeit more modestly?
Certain policies can address the needs of many, many more low- and moderate-income households than does heavily subsidized new construction that houses perhaps a few thousand low- and moderate-income households each year.
Examples of such policies include tax credits for low- and moderate-income households that put money in their pockets and increased enforcement directed against landlords who try to illegally drive their tenants out of rent-regulated units. On the other hand, without an affordable apartment, staying in NYC can just be untenable no matter what additional benefits the government may be able to provide through more broadly available programs.
Thus, the third riddle is — do you give a lot of help to a few or do you give a little help to the many? It’s like choosing between the rock and the hard place for policymakers and New Yorkers alike.
Mayor-Elect de Blasio and his team will have to struggle with these riddles, and more. The only thing that is clear is that there are no right answers and no easy answers when it comes to housing policy in New York City.
—By David Reiss, Brooklyn Law School
David Reiss is a professor of law at Brooklyn Law School. He concentrates on real estate finance and community development and writes about housing policy.
November 19, 2013 | Permalink | No Comments
November 18, 2013
Fannie and Freddie in Play?
Bill Ackman’s Pershing Square Capital Management LP has joined Bruce Berkowitz’s Fairholme Capital Management LLC in seeking to privatize Fannie Mae and Freddie Mac. News reports indicate that Pershing Square owns about ten percent of the common shares of each company. While it is unclear to me how they could parlay their holdings into control of the two companies, they are certainly changing the conversation about them. It is worth taking a closer look at the Fairholme proposal, which is pretty detailed. The proposal, according to Fairholme,
- Brings approximately $52 billion of private capital to support credit risk on more than $1 trillion of new mortgages without market disruption;
- Demonstrates reform is possible, even without a Federal guarantee, by having investors commit to bear risk now;
- Allows for the liquidation of Fannie and Freddie, ending their Federal charters and special status, without losing the value of operating assets critical to the mortgage market;
- Reduces systemic risk by separating new underwriting from the legacy investment books of Fannie and Freddie;
- Preserves Government options for affordable housing initiatives and counter-cyclical liquidity – but using tools other than Fannie and Freddie; and
- Ends the unsustainable Federal conservatorship. (Press Release, 1)
Fairholme states that “The centerpiece of the proposal is the establishment of two new, State-regulated private insurance companies to purchase, recapitalize, and operate the insurance businesses of Fannie and Freddie.” (Press Release, 1)
Fairholme predominantly owns preferred shares and Pershing predominantly owns common shares, so we are certain to see different visions for the capital structure of the two companies once Pershing presents a more concrete proposal. But it is clear that the conversation about Fannie and Freddie is shifting and that the federal government is facing some pressure to at least respond to these proposals.
November 18, 2013 | Permalink | No Comments
Maine Supreme Judicial Court Holds that a NonHolder in Possession of a Mortgage Can Initiate a Foreclosure Action
The state Supreme Judicial Court of Maine in Wells Fargo Bank, N.A. v. Burek, 2013 WL 5760946 (2013) held that Wells Fargo properly initiated a foreclosure action against two homeowners, even though the court found that Wells Fargo was not the actual mortgage holder under Maine real estate law.
In the case, the Plaintiffs Kenneth and Shelley Burek entered a mortgage for $324,000 with Union Federal Bank of Indianapolis (“UFBI”) in 2004. UFBI initially sold the mortgage to Fannie Mae (this sale was not recorded) and then subsequently sold the mortgage to MERS in 2005. MERS eventually sold the mortgage to the Defendant, Wells Fargo Bank, in 2009. The Defendant executed a loan modification with the Plaintiffs in 2009 that lowered their interest rate and extended the original loan term to help them avoid foreclosure. However, Wells Fargo initiated a foreclosure action against the Plaintiffs in 2010 in Maine Superior Court after they defaulted on the mortgage.
At trial, the Plaintiff’s challenged the Defendant’s status as the mortgage holder with the right to enforce the foreclosure. The Bureks alleged that the Defendant was not the holder because the specific document designating Wells Fargo as the mortgage holder (the allonge), was not attached to the “assigning document” (sale agreement), as required under Maine’s real estate law.
While the Defendant presented evidence at trial that it was the mortgage holder, including the promissory note and loan modification agreement between both parties and the entire mortgage file that had both the allonge and the agreement, the court held that the Defendant failed to prove that it was the mortgage holder under the relevant real estate law. However, the court found that the Defendant was a “nonholder in possession” and was still entitled to enforce the foreclosure. The trial court ordered a foreclosure judgment for the Defendant in the amount of $308, 211.21.
The Plaintiffs filed a motion to amend the judgment on the grounds that 1) the unrecorded mortgage sale to Fannie Mae to undermine the chain of title from UFBI to Wells Fargo and that 2) the Defendant did not have the right to foreclose as a nonholder in possession.
The trial court denied the motions and the Plaintiff’s appealed. The Supreme Judicial Court of Maine affirmed the trial court’s judgment. The Supreme Judicial Court affirmed the judgment because the Plaintiff’s failed to raise the chain of title issue during the trial, and did not show that the Defendant acted in bad faith in “withholding” the unrecorded Fannie Mae assignment since it was in Wells Fargo’s file that was admitted into evidence. The court also found that the Defendant was properly considered a nonholder in possession under the relevant statutes and was therefore entitled to initiate the foreclosure.
November 18, 2013 | Permalink | No Comments
November 16, 2013
A Review of “Reckless Endangerment”
The 2008 Financial Crisis and subsequent fall of Lehman has been a recent point of fascination. HBO released its acclaimed “Too Big to Fail”; Kevin Spacey starred in “Margin Call”; even Michael Douglas’ “Wall Street” saw a revamp with a sequel starring Shia LaBoeuf. In the academic sphere, the crisis has certainly been susceptible to hindsight bias but has also been analyzed from many different angles and approaches. In “Reckless Endangerment,” esteemed journalist Gretchen Morgenson teams up with Joshua Rosner to tell the little-known story of Fannie Mae and its large role in the subprime mortgage crisis. By using its special government backing, Fannie Mae, a private company, dominated the mortgage market and became the nation’s second-largest debt issuer.
At the heart of the story is James Johnson, Fannie Mae’s chief executive in the 1990s. Morgenson, in some sense “pierces the corporate veil” by exposing the faces behind the corporation. Humanizing the corporation, in such a manner, only serves to prove that the Financial Crisis was not one created in the abstract, but one created by people in a whirlwind of greed.
Morgenson argues and narrates how Johnson persuaded Congress to maintain Fannie Mae’s implicit government backing and fought off any governmental regulation. She traces the relationships he forges to further the interests of Fannie Mae. Notably, she mentions Georgia’s Fair Lending Act and its failed attempt at curbing predatory lending and how Johnson contributed to its demise. The tale would be incomplete with honorable appearances by players like CountryWide Financial, National Finance Corporation, NovaStar, KB Home and the infamous REMIC transaction.
As an introduction to understanding the subprime mortgage crisis, “Reckless Endangerment” is an entertaining read. Morgenson successfully makes an otherwise dry story of self-interested corporate interests, into a riveting tale filled with drama fueled by the unique personalities of the men sitting behind the scenes. Still, Morgenson’s agenda is very apparent creating an underlying tone of skepticism at Washington’s attempts to promote homeownership as the ultimate achievement of the American Dream.
November 16, 2013 | Permalink | No Comments
Michigan Court Finds MERS Had Capacity to Assign Mortgage, and Bank of New York Mellon Had Capacity to Accept MERS’s Assignment of the Mortgage
The court in Maslowski v. Mortgage Elec. Registration Sys., 2013 U.S. Dist. LEXIS 155970, 2013 WL 5876608 (W.D. Mich. Oct. 31, 2013) found that dismissal under Fed. R. Civ. P. 12(b)(6) is appropriate.
The plaintiff in this case [Maslowski] challenged a foreclosure and foreclosure sale. Essentially, the plaintiff claimed that the foreclosure proceedings were invalid because defendant MERS lacked capacity to assign the mortgage, and defendant Bank of New York Mellon lacked capacity to accept MERS’s assignment of mortgage.
The court rejected the plaintiff’s reasoning and noted that once the redemption period has expired, a plaintiff must meet a high standard for a federal court to invalidate or set aside a mortgage foreclosure by advertisement in Michigan. In particular, a plaintiff must show both fraud related to the foreclosure process itself and that he or she was prejudiced by the defendant’s failure to comply with the foreclosure statute’s requirements. The Court agreed with the lower court and found that the plaintiff had made no allegations or showing of prejudice, and that therefore, dismissal under Fed. R. Civ. P. 12(b)(6) is appropriate.
November 16, 2013 | Permalink | No Comments
Georgia Court Affirms That The Holder of a Deed to Secure Debt is Authorized to Exercise the Power of Sale in Accordance With the Terms of the Deed
The court in deciding Sanford v. Bank of Am., N.A., 2013 U.S. Dist. LEXIS 156084, 2013 WL 5899238 (N.D. Ga. Oct. 31, 2013), found that each of the plaintiff’s arguments lacked merit and subsequently granted defendant’s motion to dismiss.
Plaintiff’s claim for wrongful foreclosure against BANA was based on three theories: (1) invalid assignment of the security deed; (2) improper notice under O.C.G.A. § 44-14-162.2; and (3) BANA’s lack of authority to foreclose as a non-secured creditor.
The court rejected plaintiff’s second and third arguments based on previous case law. The court cited a previous holding, noting that “the holder of a deed to secure debt is authorized to exercise the power of sale in accordance with the terms of the deed even if it does not also hold the note or otherwise have any beneficial interest in the debt obligation underlying the deed.”
Furthermore, the court noted that the notice requirement is satisfied if the notice identifies the individual or entity with full authority to negotiate, amend, and modify the terms of the mortgage, regardless of whether that entity is a secured creditor, note holder, deed holder, or none of the above.
November 16, 2013 | Permalink | No Comments
