September 3, 2013
Fannie and Freddie’s Unreported Billions of Losses
The Federal Housing Finance Agency’s Inspector General has warned FHFA Acting Director DeMarco that the FHFA has allowed Fannie and Freddie to defer acknowledgment of billions of dollars of losses relating to seriously delinquent singe-family residential mortgage loans for far too long.
The Office of the IG recommends that estimates of these losses be reported immediately, on an ongoing basis. There are all sorts of obvious good reasons to do this, including the fact that “[c]lassification of loans according to risk characteristics is a critical factor considered by financial regulators to evaluate a financial institution’s safety and soundness” and that it accords with Generally Accepted Accounting Principles. (1)
Fannie and Freddie’s recent reports of billions of dollars of profits have caused a scrum to form around the two companies, as investors in preferred shares seek to get a slice of those profits through a series of lawsuits (here, here, here and here for example), as low-income advocates seek to fund the Housing Trust Fund through a lawsuit (here) and as some politicians forget the risks that these two companies present to the American taxpayer and seek to reanimate the two companies.
In a perfect world, we would ask what kind of residential housing finance infrastructure we want to implement for the next fifty years or so and what should happen to Fannie and Freddie should have little to nothing to do with their current profits or losses. But the political reality is that it does. With that as a given, we should at least have an honest assessment of their balance sheets. But the FHFA is keeping us in the dark. It needs to turn the lights on so that we can understand the true magnitude of these unreported losses so that the debate about Fannie and Freddie can be held with as much accurate information as possible.
September 3, 2013 | Permalink | No Comments
U.S. District Court for the District of Arizona Found the Mere Use of MERS Nid Not Constitute Common Law Fraud
The U.S. District Court for the District of Arizona, in Cervantes v. Countrywide Home Loans, Inc., et al., No. 09-cv-00517 (D.Ariz. 2009), dismissed all state and federal claims brought by all three of the borrowers. The borrowers filed a complaint against MERS as well as a group of other defendants
After considering the borrowers’ arguments, the court found the mere use of MERS did not constitute common law fraud on the borrowers. The court found that the plaintiffs had failed to allege what effect, if any, listing the MERS system as a ‘sham’ beneficiary on the deed of trust had upon their obligations as borrowers.
Subsequently, the United States Court of Appeals for the Ninth Circuit affirmed the trial court’s judgment in favor of MERS. Accordingly, the Court held that a borrower lacked the basis to challenge the standing of an entity such as MERS. Further, the court, however, drew attention to a legal reference that such a borrower still had legal recourse by bringing an action to have the trustee’s sale set aside.
September 3, 2013 | Permalink | No Comments
If QRM = QM, then FICO+CLTV > DTI ?@#?!?
The long awaited Proposed Rule that addresses the definition of Qualified Residential Mortgages has finally been released, with comments due by October 30th. The Proposed Rule’s preferred definition of a QRM is the same as a Qualified Mortgage. There is going to be a lot of comments on this proposed rule because it indicates that a QRM will not require a down payment. This is a far cry from the 20 percent down payment required by the previous proposed rule (the 20011 Proposed Rule).
There is a lot to digest in the Proposed Rule. For today’s post, I will limit myself to a staff report from the SEC, Qualified Residential Mortgage: Background Data Analysis on Credit Risk Retention, that was issued a couple of days ago about the more restrictive definition of QRM contained in the 2011 Proposed Rule. The report’s main findings included
- Historical loans meeting the 2011 proposed QRM definition have significantly lower SDQ [serious delinquency] rates than historical loans meeting the QM definition, but applying this definition results in significantly lower loan volume than QM.
- FICO and combined loan-to-value (CLTV) are strong determinants of historical loan performance, while the effect of debt-to-income (DTI) is much lower.
- Adding FICO or CLTV restrictions to the QM definition reduces SDQ rates faster than the loss of loan volume: max ratios achieved at 760 FICO and 55% CLTV. (2)
Certainly, some readers’ eyes have glazed over by now, but this is important stuff and it embodies an important debate about underwriting. Is it better to have an easy to understand heuristic like a down payment requirement? Or is it better to have a sophisticated approach to underwriting which looks at the layering of risks like credit score, loan to value ratio, debt to income ratio and other factors?
The first approach is hard to game by homeowners, lenders and politicians seeking to be “pro-homeowner.” But it can result in less than the optimal amount of credit being made available to potential homeowners because it may exclude those homeowners who do not present an unreasonable risk of default but who do not have the resources to put together a significant down payment.
The second approach is easier to game by lenders looking to increase market share and politicians who put pressure on regulated financial institutions to expand access to credit. But it can come closer to providing the optimal amount of credit, balancing the risk of default against the opportunity to become a homeowner.
It would be interesting if the final definition of QRM were able to encompass both of these approaches somehow, so that we can see how they perform against each other.
August 30, 2013 | Permalink | No Comments
August 29, 2013
Homeowner Can Challenge Mortgage Assignment
Judge Kennelly has ruled that a homeowner can challenge a mortgage assignment under Illinois law in Elesh v. MERS et al., No. 12 C 10355 (N.D. Ill. Aug. 16, 2013). The Court stated that
Defendants argue that Elesh is not a party to the assignment and thus lacks standing to challenge it. Only one of the cases upon which defendants rely, however, is an Illinois case, and that case makes it clear that this supposed “rule” has exceptions. See Bank of America Nat’l Ass’n v. Bassman FBT, LLC, No. 2-11-0729, 2012 IL App (2d) 110729, 981 N.E.2d 1, 6-11 (2012). The basic requirements of standing are that the plaintiff suffered an injury to a legally cognizable interest and is asserting his own legal rights rather than those of a third party. See id. at 6. Elesh unquestionably meets the first requirement; the recorded assignment constitutes a cloud on his title, and Deutsche Bank recently relied on the assignment to prosecute a foreclosure action against him. Elesh also has a viable argument that in challenging the validity of the assignment, he is asserting his own rights and not someone else’s rights. For example, given Deutsche Bank’s apparent lack of possession of the original note, Elesh is put at risk of multiple liability as long as Deutsche Bank claims to hold the mortgage. See id. at 7-8 (citing cases indicating that an obligor has an interest in ensuring that he will not have to pay the same claim twice). In any event, Illinois law, to the extent there is much of it on this point, appears to recognize an obligor’s right to attack an assignment as void or invalid under certain circumstances. (3)
This is a pretty significant case, at least in Illinois, as it provides homeowners with a way to defend against a foreclosure action that does not rely upon whether the loan is in default or not. The Court takes seriously the possibility that the homeowner could otherwise be liable for the same debt twice. Commentators and courts have downplayed that risk, so it is notable that this Court has taken this position. Time will tell if other courts do so as well.
[HT April Charney]
August 29, 2013 | Permalink | No Comments
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 30, 2013
Alabama Court Holds That MERS’ Assignment to Current Servicer of the Mortgage Loan was Valid
By Ebube Okoli
The Alabama court in Mortensen v. MERS et al, S.D. Ala. No. CV10-234-S (2010) after considering both arguments, granted summary judgment to MERS as well as all defendants.
The court found that the borrower, from his own volition, knowingly and willingly gave a mortgage interest in the property to MERS. The court also found that the mortgage in this case expressly stated that MERS was the mortgagee under the security instrument.
Accordingly, the court held that the MERS’ assignment to the current servicer of the mortgage loan was valid and assigned all MERS’ interest in the mortgage to the servicer.
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August 30, 2013 | Permalink | No Comments