August 28, 2013
Rebuilding After Sandy
My Property Law Colloquium this semester will address topics relating to climate change, resiliency and sustainability with a particular focus on how those issues affect post-Sandy New York City. I co-teach this class (which is also open to graduate students in urban planning and related programs at the Pratt Institute) with Brad Lander. Brad is a NYC Councilmember, but more importantly for this class, he was the director of the Pratt Center for Community Development before being elected to the Council.
I will be blogging about the issues addressed in the class intermittently, particularly since hurricane season is back. I recently discussed NYC’s hurricane preparedness with the Christian Science Monitor in ‘Above Normal’ Hurricane Season Coming. Is New York Ready for Another Sandy?. The likelihood of another Sandy-level event is extremely low in the near term (because of Sandy’s perfect storm conditions: a full moon, high tide and bad luck as to where the storm hit land) but certainly those of us on the East Coast are right to feel wary.
The City and the federal government have been working to address short and long term issues relating to Sandy-like storms and they have issued a number of reports on this issue over the last few months. Most recently, the federal government’s Hurricane Sandy Rebuilding Task Force has issued its Hurricane Sandy Rebuilding Strategy (link to full report at bottom of the press release).
I was struck by how many of the Task Force’s recommendations were straight real estate and real estate finance issues, including
- Prioritizing the engagement of vulnerable populations on issues of risk and resilience. [remember how public housing and adult home residents were particularly hard hit by Sandy]
- Helping disaster victims to be able to stay in their homes by allowing homeowners to quickly make emergency repairs. Preventing responsible homeowners from being forced out of their homes due to short term financial hardship while recovering from disaster by creating nationally-consistent mortgage policies. [remember the images of people having to live in the shells of their homes after they were gutted to address mold and other damage]
- Making housing units – both individual and multi-family – more sustainable and resilient through smart recovery steps including elevating above flood risk and increased energy efficiency [remember the images of safe raised homes next to destroyed ground-level homes]. (13-14)
I’ll follow up on these issues over the course of the semester, but for now let’s just hope that those perfect storm conditions don’t reappear for a long time.
August 28, 2013 | Permalink | No Comments
U.S. District Court for the Eastern District of New York Rules That a Party Perfects its Security Interests in Disputed Loans by Taking Possession of the Notes as Opposed to Recording the Mortgage Assignments, Pursuant to UCC Article 9
In Provident Bank v. Community Home Mortgage Corp., 498 F.Supp.2d 558, 558 (E.D.N.Y. 2007) the U.S. District Court for the Eastern District of New York ruled in favor of intervenor-plaintiff NetBank, granting its cross motion for summary judgment against intervenor-plaintiff, Southwest Securities Bank (herein described as Southwest) in a dispute regarding conflicting recorded mortgage assignments for nine loans. The court stated that “where parties assert competing interests in mortgage assignments,” under Article 9, “possession of the note perfects the assignee’s security interest regardless of whether any mortgage securing the note has been properly recorded.” It concluded that NetBank perfected its interest in eight of the nine disputed loans and took possession of them before Southwest, giving it a superior interest in those loans.
Confusion over who possessed the loans started when Defendant Community, a mortgage banker, entered into agreements with two banks, Southwest and RBMG (NetBank’s successor in interest), to fund a portion of its mortgage loans. Community entered Mortgage Purchase Agreements with both banks and engaged in a scheme known as “double booking,” where it “obtained duplicate funding for one loan from two different lenders and retained the entire value of the loan.” Essentially, “Community created two original notes and mortgages for each of the disputed loans.” Because of Community’s fraud “only one of the lenders would be paid in full,” and each bank claimed a priority interest in the nine loans that Community sold to it. Southwest recorded its assignments of the mortgages before RBMG for five of the loans, but RBMG received the original notes and assignments for eight of the loans before Southwest.
In determining which of the loans belonged to Southwest or NetBank and which of the mortgages were valid, the court had to decide “whether Article 9 or state real property law governs the security interests in mortgages.” Under Article 9, a party perfects it security interest in a note by taking possession of it. Alternatively, under “race-notice statutes in state real property law,” a party perfects its security interest in a mortgage by recording the assignment. Southwest argued that the court should follow New York’s race-notice statute, whereas RBMG argued that Article 9 should govern.
Before reaching its decision, the court examined the New York Real Property Law Section 291, which states that a “bona fide purchaser for value, without notice of a junior mortgage, who records his assignment is entitled to priority over a prior unrecorded mortgage of which his assignor has full knowledge.” It explained that previous decisions applying the statute did not address instances where the “first party to record a mortgage assignment [had] a prior interest over another party who first takes possession of the note securing the mortgage.” The court stated that in this case, the question depended on the “supremacy of perfecting the security interest in the note [as opposed to previous cases which regarded] perfecting the security interest in the mortgage.”
According to the statute’s language and precedent decisions regarding the same issue, Southwest would have a priority interest in five of the loans that it recorded before RMGA. Instead, the court applied Article 3 and Article 9 of the UCC in reaching its conclusions. It stated that “NetBank perfected its security interest in the loans and Southwest,” did not. The court agreed with previous cases in the Circuit which held that, “perfection of a security interest in the note (by taking possession under Article 9) should carry over to the mortgage incidental to it.” It explained that in New York, assignment of a note creates a security interest in the note, but a party perfects its security interest in the note by possessing it. From this reasoning, the court determined Southwest was not the first party to perfect its security interest in the loans, as it merely recorded its mortgage assignments but never possessed them. Therefore, the court denied Southwest’s motion for summary judgment requesting possession over the disputed loans.
Instead, the court granted NetBank’s motion for summary judgment, pursuant to Article 9, as it possessed eight of the disputed loans before Southwest. It also held that under UCC Article 3, NetBank qualified as a holder in due course (defined as a holder of a negotiable instrument who takes it for value, in good faith, and without notice that it is overdue or has been dishonored) in regards to seven of the loans, entitling it to those loans independent of its possession under Article 9.
August 28, 2013 | Permalink | No Comments
August 27, 2013
Whither The Housing Trust Fund?
As part of my review of the litigation surrounding the newly-profitable Fannie And Freddie (here, here, here and here), I turn to the complaint filed by “extremely low income tenants in desperate need of affordable housing” and the National Low Income Housing Coalition and the Right to the City Alliance, Samuels et al. v. FHFA et al., No. 1:13-cv-22399 (Jul. 9, 2009).
As the complaint notes, Congress created the Housing Trust Fund as part of the Housing and Economic Recovery Act of 2008 (HERA). The Housing Trust Fund was to be funded by contributions by Fannie and Freddie that were based on their annual purchases. Those contributions could amount to hundreds of millions of dollars a year.
But here was the rub: the Director of the FHFA could suspend those contributions if the Director finds that they
(1) are contributing, or would contribute, to the financial instability of [Fannie or Freddie];
(2) are causing, or would cause, the [Fannie or Freddie] to be classified as undercapitalized; or
(3) are preventing, or would prevent, [Fannie or Freddie] from successfully completing a capital restoration plan under section 4622 of this title. (14, quoting 12 U.S.C. section 4567(b))
And that is just what happened in 2008: the FHFA put them into conservatorship because of fears of their impending insolvency and their mounting losses. With the housing recovery, Fannie and Freddie have returned to profitability — massive profitability. But the federal government has redirected those profits to the Treasury, which had provided many billions of dollars to the two companies during the early years of the crisis without funding the Housing Trust Fund.
The plaintiffs allege that despite “the record profits of the Enterprises and despite the statutory requirement that any suspension of payments be temporary, the Federal Defendants have failed and refused to review these findings and/or discontinue their suspension of the statutorily required payments by Fannie Mae and Freddie Mac into the Housing Trust Fund.” (17) The plaintiffs allege that this is “arbitrary and capricious in light of the changed and current financial condition of the Enterprise. The required statutory contribution is a small percentage of the Enterprise’s profits and thus would not contribute to the financial instability” of the two companies or to the other two bases for suspending the contributions pursuant to section 4567(b). (18, citations omitted) In sum, “the level of capitalization is solely a function of the policy decisions of the conservator not the cost of contributions to the Housing Trust Fund.” (22)
The big challenge that the plaintiffs face, as far as I can tell, is how they can convince the Court that the two companies are financially stable when they are still so deeply in debt to the federal government, notwithstanding the billions of dollars of profits that they two companies have remitted so far to the Treasury.
August 27, 2013 | Permalink | No Comments
Court of Civil Appeals of Alabama, in Favor of Borrower, Vacates and Dismisses Judgment
The court in Nelson v. Federal National Mortgage Association, 97 So.3d 770 (2012) the Court granted Fannie Mae’s summary judgment as to its ejectment action against the borrower because the Court found that Fannie Mae received valid title to the property from MERS subsequent to the foreclosure sale conducted by MERS. However, on appeal, court of civil appeals of Alabama vacated the lower court’s judgment and dismissed the appeal.
The court of civil appeals reversed a decision by the lower court holding that under the state’s law MERS had the power and authority to conduct the foreclosure sale in its own name and the special warranty deed from MERS to Fannie Mae was valid and gave Fannie Mae superior legal title to the property. On appeal this was reversed.
Likewise, the lower court also originally held that an assignment of mortgage from MERS to the servicer was unnecessary for MERS to proceed with the foreclosure on behalf of the servicer. Accordingly the court of civil appeals also vacated this.
August 27, 2013 | Permalink | No Comments
Alabama Court Rules That Demonstration of Note Ownership is Not Needed
The court in Farkas v. SunTrust Mortgage, Inc, et al., 447 F. App’x 972 (11th Cir. 2011) found that Alabama is a non-judicial foreclosure state and that the party seeking foreclosure was not required to demonstrate ownership of the promissory note before taking action on the corresponding mortgage. This action involved MERS as the foreclosing mortgagee.
The debtor claimed that Article 3 of the Uniform Commercial Code (UCC) required that the party seeking foreclosure had to prove an interest in the note. However, the court reasoned that the UCC was not relevant to non-judicial foreclosure proceedings.
August 27, 2013 | Permalink | No Comments
August 26, 2013
Hawaiin Court Rejects Plaintiff’s Allegations of Fraud Against MERS and Grants Summary Judgement
The court in Sakugawa v. MERS et al, D. Hawaii, 1:10-cv-00028 (Feb. 25, 2011) granted summary judgment in favor of MERS. Thus rejecting the plaintiff’s accusations for fraud and claims of state law violations regarding loan origination.
The court also found that MERS was not involved in the loan origination process and was not in contact with the plaintiff regarding the transaction. Thus the court found that there was no basis to find that MERS committed any fraudulent, unfair or deceptive acts regarding the loan consummation.
The Court found that MERS was the correct mortgagee under the security instrument, thus the mortgage permitted MERS to foreclose and sell the property.
August 26, 2013 | Permalink | No Comments
Don’t Abandon Hope
According to Dante, Hell’s entrance has a sign that reads, “Abandon all hope, ye who enter here.
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.”
August 26, 2013 | Permalink | No Comments
