October 15, 2013
Georgia District Court Holds Foreclosure May Be Wrongful Where Security Deed and Note Are “Split”
In Morgan v. Ocwen Loan Servicing, LLC, No. 1:10-cv-3555-AT (N.D.Ga. July 7, 2011), homeowner obtained a residential mortgage loan memorialized by two documents: a promissory note and a security deed. The original grantee of the promissory note was Guaranteed Rate. The original grantee of the security deed was MERS “as nominee” for Guaranteed Rate and its successors and assigns. Guaranteed Rate later transferred the note to Taylor, Bean & Whitaker. Subsequently, MERS executed a purported assignment of the security deed to Ocwen.
The court rejected the argument that the security deed is void because of the fact that MERS was named as the grantee-as-nominee in the security deed rather than Guarantee Rate, the actual lender and payee on the note. It reasoned that the argument is is unsupported by Georgia law as separation of the note and security deed creates a question of what entity would have the authority to foreclose, but does not render either instrument void.
In addressing the question of wrongful foreclosure, the court held it need not reach the question of whether an agent for the holder of the debt can carry out a power of sale foreclosure under Georgia law, as Ocwen did not advertise the foreclosure as agent for any disclosed principal.
October 15, 2013 | Permalink | No Comments
Missouri Court of Appeals Holds that MERS Does not have Authority to Assign without Holding Note
In Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 621 (MO Ct. of App., E. D., Mar. 3, 2009), the court held that MERS did not have the authority to assign its interest because it did not hold the promissory note. BNC Mortgage Inc. (BNC) was the lender and payee of the promissory note. In the deed of trust, Millsap, Singer & Dunn, P.C. was the trustee. The deed of trust, however, did not name BNC as the beneficiary, but instead names MERS, solely as BNC’s nominee. The promissory note does not make any reference to MERS. The note and the deed of trust both require payments to be made to the lender, not MERS. MERS, as nominee for BNC, later assigned the deed of trust to Ocwen. The assignment of the deed of trust also contained language that this assignment also transferred any and all notes described in the deed of trust.
The court reasoned that because the note becomes unsecured in the event that the note and the deed of trust are split, there was no evidence in the record or the pleadings that MERS held the promissory note or that BNC gave MERS the authority to transfer the promissory note. Therefore, MERS could not transfer the promissory note and the language in the assignment of the deed of trust purporting to transfer the promissory note is ineffective. MERS never held the promissory note, thus its assignment of the deed of trust to Ocwen separate from the note had no force. As Ocwen holds neither the promissory note, nor the deed of trust, Ocwen lacks a legally cognizable interest and lacks standing to seek relief from the trial court.
October 15, 2013 | Permalink | No Comments
California District Court Holds that Deed of Trust Authorizes MERS to Take Certain Actions
In Wadha v. Aurora Loan Services, CIV. NO. S-11-1784 KJM KJN (Dist. Ct., E.D. California. Feb 8, 2013), homeowners filed claims for wrongful foreclosure alleging that Aurora Loan Services was never assigned the beneficial interest in the deed of trust and that any assignment that MERS and Aurora claimed occurred was not required as required by the California Civil Code. The court upheld the prior court’s finding that the deed of trust lists MERS as the beneficiary, acting as nominee for the lender, and gives MERS the authority to take certain actions, including instituting foreclosure proceedings.
October 15, 2013 | Permalink | No Comments
California Superior Court Upholds Language in Deed of Trust
In Obst v. Fannie Mae, No. 171619 (Shasta Cty. Super. Ct. July 11, 2011), the court denied the homeowner’s claim and upheld the language in the Deed of Trust. The original lender was Mortgageit, Inc. with MERS listed as the beneficiary in the deed of trust. The Deed of Trust states that MERS was authorized to exercise any or all of the lender’s interests with respect to the property. The Deed of Trust was then assigned to One West Bank and recorded. Homeowner contends that the assignment is void because there is no proof that that the party acting as authorized signatory was an authorized signatory of MERS.
The deed of trust stated: “Borrower understands and agrees that MERS holds only legal title to the interests granted by Borrower in this Security Instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender’s successors and assigns) has the right: to exercise any or all of those interests, including but not limited to, the right to foreclose and sell the Property…” Relying on a similar case, the court concluded that the deed of trust granted MERS the authority to initiate a foreclosure and contains no suggestion that the lender or its successors and assigns must provide further assurances that MERS is authorized to proceed with a foreclosure at the time it is initiated. Therefore, the court dismissed the complaints.
October 15, 2013 | Permalink | No Comments
October 14, 2013
A HELOC of a Securitization
S&P posted A Look At U.S. Second-Lien And HELOC Transactions Post-Crisis. In 2008, they announced that “would halt rating new U.S. RMBS closed-end second-lien transactions because loan performance had deteriorated significantly. [They] haven’t rated any U.S. RMBS second-lien (both second-lien HCLTV [high-combined loan-to-value] and closed-end second-lien) or HELOC [home equity line of credit] transactions since 2007.” (1) They also note that notwithstanding the fact that such securitizations had ended, “HELOC loans continue to be originated, with banks generally keeping these types of loans on their books.” (1)
The report provides a some interesting data on those securitizations. Let me share one highlight, a table of lifetime loss projections of RMBS with different collateral types. For the 2007/2008 vintage, they performed as follows.
Second-lien HCLTV: 45%
Closed-end second lien: 58%
HELOC: 42%
Subprime: 49%
Alt-A: 29.25%
Negative Amortization: 43.25%
Prime: 10%
With a bit of understatement, they conclude that “[c]losed-end second-lien transactions may be limited going forward because of limited investor and issuer appetite, given past performance and uneven home price appreciation.” (5) They note that HELOCs are not included in the definition of Qualified Mortgages or Qualified Residential Mortgages [QRM] “so the issuer would most likely have to retain a stake in the deal, increasing issuance costs.” (6)
This seems like a good a good result, if you ask me. Here is a product that performed miserably (with losses of greater than 40%!!!) as a securitization. If the new QRM rules reduce these securitization but banks continue to originate them for their own portfolio, perhaps Dodd-Frank is doing its job in the mortgage markets. Of course, we want to ensure that there is sufficient sustainable credit for HELOCs, but it is good to see that portfolio lenders are stepping in where they see a market that RMBS issuers has exited.
October 14, 2013 | Permalink | No Comments
October 11, 2013
Fightin’ Words on Consumer Complaints
Deloitte has issued a report, CFPB’s Consumer Complaint Database: Analysis Reveals Valuable Insights, that provides valuable — but superficial insights — into the CFPB’s massive database of consumer complaints.
Deloitte’s main insights are
- Troubled mortgages are behind the majority of the complaints – a growing trend
- Customer misunderstanding may create more complaints than financial institution error
- Affluent, established neighborhoods were more likely sources of complaints
- Complaint resolution times have improved (2)
As to the second insight — customer misunderstanding may create more complaints than financial institution error — Deloitte notes that
Financial institutions have a number of options for resolving consumer complaints. They can close a complaint in favor of the consumer by offering monetary or non-monetary relief, or they can close the complaint not in favor of the consumer, perhaps providing only an explanation. The percentage of complaints closed in favor of consumers declined during the analysis period, falling from 30.9 percent in June 2012 to 18.0 percent in April 2013,6 a trend that was reflected in the monthly complaint [resolutions] for all products. (4)
The report continues, “In spite of fewer complaints closed with relief, consumers have been disputing fewer resolutions. In aggregate, the percentage of resolutions that were disputed fell from a peak of 27.9 percent in January 2012 to 18.6 percent in January 2013.” (5) Deloitte finds that “the data suggests that many complaints may be the result of customer misunderstanding or frustration rather than actual mistakes or operational errors by financial institutions.” (5)
This conclusion seems like a big leap from the data that Deloitte has presented. I can imagine many alternative explanations for the decrease in disputes other than customer misunderstanding. For instance,
- the consumer does not see a reasonable likelihood of a favorable resolution and abandons the complaint
- the financial institution can point to a written policy that supports its position even if the consumer complaint had a valid basis, given the actions of the institution’s employees in a particular case
- in the case of a mortgage complaint, the consumer is moving toward a favorable or unfavorable resolution of the issue with the financial institution on another track (e.g., HAMP, judicial foreclosure)
To be clear, I am not saying that customer misunderstanding plays an insignificant role in customer complaints. Nor am I saying that the reasons I propose are the real reasons that that complaints do not proceed further. I am only saying that Deloitte has not presented sufficient evidence to support its claim that “customer misunderstanding may create more complaints than financial institution error.” Given that these are fightin’ words in the context of consumer protection, I would think that Deloitte would choose its words more carefully.
October 11, 2013 | Permalink | No Comments
October 10, 2013
Pandora’s Credit Box
By David Reiss
Jim Parrott and Mark Zandi posted Opening the Credit Box, a call for “[e[asing mortgage lending standards.” (2) Parrott has had high level positions in the Obama Administration and Zandi, Moody’s Analytics’ chief economist, was mentioned as a possible Director for the FHFA. Given the importance of these two authors to debates about the housing market, I think it is worth evaluating their views carefully. I have to say, they are somewhat worrisome.
They favor easing “mortgage lending standards so that more creditworthy borrowers can obtain the loans needed to purchase homes” in order to support “the current recovery,” but also to support “the economy’s long-term health.” (2) This is wrongheaded, as far as I am concerned. Mortgage underwriting standards should not be set to support the economy. They should be set to balance the availability of credit with the likelihood of default. If we want to support the economy through the housing sector, we can do so through various tax credits or direct subsidies. But starting down the path of employing underwriting standards to do anything other than evaluate credit risk will quickly lay the foundation for the next housing bubble.
The paper contained a number of similarly disturbing cart-leading-the-horse statements. For instance, they write that for “the housing recovery to maintain its momentum, first-time and trade-up homebuyers must fill the void left by investors.” (2) Again, the goal of of encouraging new entrants in the market should not be to drive demand in the short-term. Rather, it should be done in order to allow creditworthy potential homeowners to have the opportunity to purchase a home on sustainable terms.
The authors take pains to step back from the extreme version of their position. For instance, they write, “To be clear, the objective is not, and should not be,a return to the recklessly loose standards of the bubble years, but to strike a sensible balance between risk management and access to credit. Today’s market has overcorrected and it is hurting the nation’s recovery.” (2) But given the arguments that they have made, I find this coda to be too little too late.
I also found disturbing their analysis of put-back risk (whereby Fannie and Freddie can make loan originators buy back loans that violate various representations and warranties). Their analysis portrays originators as victims of unfairly tightened standards. The fact is, however, that originators had a long run of pushing off junk mortgages onto Fannie and Freddie. The industry will certainly need to figure out a new normal for put-backs and reps and warranties. It seems a bit premature, however, to say that Fannie and Freddie should just loosen up just as it is settling suits with these same originators for billions of dollars.
We should work toward housing market that balances access to homeownership with mortgages that households are likely to be able to afford in the long term. Once that relatively undistorted market finds its baseline, we can talk about tweaks to it. But jumping in today with policies intended to fill a void left by speculative investors seems like a recipe for disaster. In the Greek myth, Pandora opens up the box and lets loose all of the evils of humanity. I worry that rashly opening up the credit box will do the same for the housing market, once again.
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October 10, 2013 | Permalink | No Comments