August 1, 2013
A REMIC Unraveling?
An unpublished opinion, Glaski v. Bank of America, No. F064556 (7/31/13, Cal. 5th App. Dist.), presents one possible future for REMICs that failed to comply with the strict rules set for them by Congress and the IRS. Glaski, a homeowner, argues that the trial court erred by dismissing his case challenging the nonjudicial foreclosure of the deed of trust secured by his home. For my purposes, I am interested in the Court’s consideration of “whether a post-closing date transfer into a [REMIC] securitized trust is the type of defect that would render the transfer void.” (20) I am going to quote the opinion at length because the reasoning is somewhat complex:
The allegation that the WaMu Securitized Trust was formed under New York law supports the conclusion that New York law governs the operation of the trust. New York Estates, Powers & Trusts Law section 7-2.4, provides: “If the trust is expressed in an instrument creating the estate of the trustee, every sale, conveyance or other act of the trustee in contravention of the trust, except as authorized by this article and by any other provision of law, is void.”
Because the WaMu Securitized Trust was created by the pooling and servicing agreement and that agreement establishes a closing date after which the trust may no longer accept loans, this statutory provision provides a legal basis for concluding that the trustee’s attempt to accept a loan after the closing date would be void as an act in contravention of the trust document.
We are aware that some courts have considered the role of New York law and rejected the post-closing date theory on the grounds that the New York statute is not interpreted literally, but treats acts in contravention of the trust instrument as merely voidable.
Despite the foregoing cases, we will join those courts that have read the New York statute literally. We recognize that a literal reading and application of the statute may not always be appropriate because, in some contexts, a literal reading might defeat the statutory purpose by harming, rather than protecting, the beneficiaries of the trust. In this case, however, we believe applying the statute to void the attempted transfer is justified because it protects the beneficiaries of the WaMu Securitized Trust from the potential adverse tax consequence of the trust losing its status as a REMIC trust under the Internal Revenue Code. Because the literal interpretation furthers the statutory purpose, we join the position stated by a New York court approximately two months ago: “Under New York Trust Law, every sale, conveyance or other act of the trustee in contravention of the trust is void. EPTL § 7-2.4. Therefore, the acceptance of the note and mortgage by the trustee after the date the trust closed, would be void.” [quoting Erobobo] Relying on Erobobo, a bankruptcy court recently concluded “that under New York law, assignment of the Saldivars’ Note after the start up day is void ab initio. As such, none of the Saldivars’ claims will be dismissed for lack of standing.”(quoting Saldivar)
We conclude that Glaski’s factual allegations regarding post-closing date attempts to transfer his deed of trust into the WaMu Securitized Trust are sufficient to state a basis for concluding the attempted transfers were void. As a result, Glaski has a stated cognizable claim for wrongful foreclosure under the theory that the entity invoking the power of sale (i.e., Bank of America in its capacity as trustee for the WaMu Securitized Trust) was not the holder of the Glaski deed of trust. (20-22, citations and footnotes omitted)
We are now seeing a trend that started with Erobobo and continued with Saldivar: courts are finally addressing the REMIC attributes of the mortgage-backed securities at issue in downstream cases. I am not sure that the reasoning of those three cases will hold up on appeal, but it is interesting to see judges add another level of understanding to foreclosures in the age of of the mortgage-backed security.
[Hat tip April Charney]
UPDATE: I just heard (August 8, 2013) from Richard L. Antognini, Glaski’s appellate lawyer, that the court has decided to publish this opinion. As he notes, “It now can be cited to other California and federal courts, and it is binding authority, until another court of appeal disagrees or the California Supreme Court decides to review it.”
August 1, 2013 | Permalink | No Comments
Nevada Supreme Court Holds a Bank’s Mere Possession of the Note and Deed of Trust is not Sufficient to Create an “Enforceable Interest”
In Leyva v. Nat’l Default Servicing Corp., 255 P.3d 1275 (Nev. 2011) the court found in favor of Leyva that mere possession of the mortgage note does not create an “enforceable interest in the property subject of the mediation.” The court reversed the district court’s order and remanded the matter with instructions to determine sanctions for Wells Fargo in accordance with the ruling in Pasillas v. HSBC Bank USA, 255 P.3d 1281(2011) (here).
In 2007, Leyva received a recorded a quitclaim deed and without expressly assuming the mortgage note, he began making monthly mortgage payments on the Las Vegas property. After 25 months, Leyva defaulted on the mortgage. Both he and the original mortgagor elected to participate in the Foreclosure Mediation Program. At the mediation, Wells Fargo produced the original deed and mortgage note which both named MortgageIT, Inc. as the lender along with a notarized statement that they were in possession of the note and deed. No resolution was made at the mediation. Leyva filed a petition for judicial review in district court claiming that Wells Fargo mediated in bad faith by not providing written assignments of the deed of trust and mortgage note at the mediation session as required by Nevada Revised Statutes (“NRS”) 107.086(4) and Foreclosure Mediation Rule (“FMR”) 5(6). The district court ruled against Leyva and ordered that a letter of certification be entered because Wells Fargo provided the “essential” documents and operated in good faith.
The Supreme Court reversed. First, the court held that both Nevada’s Foreclosure Mediation Program according to NRS 107.086(3) and FMR 5 allow the “grantor or person who holds the title of record” to mediate. Leyva held a valid, recorded quitclaim deed and properly elected to mediate.
Second, the court found that strict compliance with NRS 107.086 (4) and FMR 5(6) is required for a foreclosure mediation to proceed. Mere possession of the note is not sufficient to continue foreclosure mediation proceedings. Wells Fargo did not provide proof of a proper endorsement in its name or proof of transfer of the note in accordance with NRS 111.205(1) and Article 3 of the UCC. The court’s ruling built upon its prior holding in Pasillas. In that case, the court held that when a party fails to 1) provide the required documents or 2) attend the mediation in person or, fails to have authority to modify the loan or access to such a person then the district court should impose appropriate sanctions. Wells Fargo failed to provide the required documents because strict compliance is required. The court reversed the district court decision and remanded the matter to determine sanctions for Wells Fargo in accordance with Pasillas.
August 1, 2013 | Permalink | No Comments
Nevada Supreme Court Holds Sanctions are Proper in Foreclosure Mediation when Bank Fails to Provide Either Documents Required by Statute or an Adequate Representative
In Pasillas v. HSBC Bank USA, 255 P.3d 1281 (Nev. 2011), the court held sanctions are appropriate when a bank 1) fails to provide documents required by statute at a mediation session or 2) fails to send a representative with the proper authority to a mediation session as required by Nevada Revised Statutes 107.086(4) and (5) (“NRS”) and Foreclosure Mediation Regulations 5(7)(a) (“FMR”). The court reversed the district court’s order and remanded the matter to determine sanctions.
In 2006, Pasillas purchased a loan from American Brokers Conduit. The note and deed of trust were later allegedly assigned to HSBC. After defaulting, Pasillas opted for mediation. HSBC provided a mortgage note with two pages missing and an incomplete assignment of the mortgage note and deed of trust to HSBC at the initial mediation meeting. After two meetings there was no resolution and the bank representative at the session admitted that he needed to receive additional approval before agreeing to a final resolution. Pasillas subsequently filed a petition for judicial review and sanctions in the district court. The district court found in favor of HSBC and ordered a certification, allowing the foreclosure to proceed.
On appeal, the Supreme Court reversed and remanded for sanctions. The court interpreted the statutory phrase “shall bring to the mediation” as a mandatory requirement. “We conclude that NRS 107.086(4) and (5) and FMR 5(7)(a) clearly and unambiguously mandate that the beneficiary of the deed of trust or its representative (1) attend the mediation, (2) mediate in good faith, (3) provide the required documents, and (4) have a person present with authority to modify the loan or access to such a person.”
In violation of the requirements set forth in NRS 107.086(4) and (5) and FMR 5 7(a), HSBC failed to provide a complete mortgage note, a deed of trust, or any written assignments of the deed of trust or mortgage note and sent someone to the mediation without the authority to modify the loan. The court determined a violation of any of these four statutory requirements is subject to sanctions and prevents the foreclosure from proceeding. The court reversed and remanded the case to determine proper sanctions in consideration of the following factors: whether the violations were intention, the amount of prejudice to the non-violating party, and the violating party’s willingness to mitigate any harm by continuing meaningful negotiation.
August 1, 2013 | Permalink | No Comments
Arkansas Court Rules That MERS Did Not Violate the State’s Statutory Foreclosure Act
The court in Coley et al v. Accredited Home Lenders Inc et al (E.D. Ark. 2011) dismissed the homeowner-plaintiff’s claims against MERS pursuant to Federal Rules of Civil Procedure 12(b)(6). In granting MERS’ motion to dismiss the court considered, then rejected the plaintiff’s contentions.
First, the plaintiff alleged that the defendants failed to comply with the notice requirements of 12 U.S.C. 1701x(c)(5), a provision of National Housing Act that requires private lenders servicing non-federally insured home loans to advise borrowers of any home ownership counseling that they of the US Department of Housing and Urban Development may offer. The court however, reasoned that regardless of whether the defendants were in compliance with the act or not, the act does not create a private right of action.
Next, the plaintiff alleged that the defendants violated the state Statutory Foreclosure Act concerning non-judicial foreclosures, and they sought to enjoin the defendants from proceeding with the foreclosure sale. They also sought an order declaring the mortgage’s notice of default and intention to sell, the limited power of attorney, and the corporate assignment of mortgage to be fatally defective and invalid. The court however rejected this contention.
Third, the plaintiffs argued that even if the assignment was valid, the subsequent notice of default and intention to sell was invalid because it was prepared and filed by the Law Offices of Shapiro & Kirsch more than two weeks before HSBC executed a limited power of attorney giving Shapiro & Kirsch the power to act on its behalf. The court rejected this argument, as they noted that whether the notice of default was valid was moot because the non-judicial foreclosure described in the notice was cancelled. Thus, Shapiro & Kirsch would be required by law to file a new notice of default and intention to sell before a sale could take place.
August 1, 2013 | Permalink | No Comments
July 31, 2013
Court Holds That MERS Assignment, in Isolation, Could Not Prove Ownership
The court deciding In Re Wilhelm (Case No. 06-51747) was faced with the issue of when actual notes prove that the note’s chain of ownership is unclear. In reaching their decision the court found that in such a situation, the MERS assignment could not, on its own, prove ownership of the note.
The court in this case stated that the MERS assignment was legitimate when taken as a whole, along with proper transfer of the note. The court further went on to note “in hundreds of stay relief motions, including many post-Sheridan, creditors are providing adequate documentation and explanation to meet the requisite standing requirements.”
July 31, 2013 | Permalink | No Comments
Financial Literacy Literacy
Personally, I was disappointed by the CFPB’s Financial Literacy Annual Report. It seems to me that the Bureau’s Division of Consumer Education and Engagement is thinking too small in setting forth its research agenda. For its financial education evaluation project,
The Bureau is conducting a quantitative evaluation of two existing financial coaching programs. Financial coaching generally involves one-on-one sessions with clients to increase clients’ awareness of their financial decisions and to provide support for clients to reach financial goals mutually set by the coach and client. (46)
Seems to me that there are some fundamental questions about financial literacy that need to be studied before small, resource-intensive projects like financial coaching are. I have blogged about these issues before, but the bottom line is that there is no solid empirical evidence that financial education achieves good results in general. So why study particular initiatives?
I would like to see the Bureau engage in a broad survey of financial literacy first and then develop a research agenda that reflects the big issues, including
- do improved disclosures improve outcomes for consumers?
- do consumers have the basic math skills to take advantage of disclosures?
- what useful metrics exist for measuring the impact of financial literacy initiatives?
These are just a few big questions that I would want to answer before I looked at particular programs.
The Bureau should start from the premise that we have little reason to believe that financial education works. Let’s build up a body of knowledge from there. If we assume that it works, as the Bureau’s current research agenda implies, then that assumption can lead us on a wild goose chase as we study program, after initiative, after project, looking for that golden-egg laying goose.
July 31, 2013 | Permalink | No Comments
August 2, 2013
Borden and Reiss on Show Me The Note!
By David Reiss
Brad and I were e-interviewed by the Knowledge Effect, a Thomson Reuters blog on our recent article (co-authored with KeAupuni Akina), Show Me The Note!. The interview is below:
Westlaw Journals: Your commentary is about the success of the “show me the note” defense to stop or delay a foreclosure. Can you explain what the “show me the note” defense means during foreclosure proceedings?
Bradley T. Borden and David J. Reiss:“Show me the note” can mean different things in different jurisdictions. But the bottom line is that the homeowner is typically telling the court that the foreclosure should not proceed unless and until the foreclosing party can prove that it in fact owns or holds (or is the agent of the owner or holder of) the mortgage note that is secured by the mortgage that is being foreclosed upon.
WJ: What is the difference between a mortgage and a deed of trust, and does this have any bearing on the foreclosure defense?
BTB and DJR:The two documents are very similar in many ways – they both provide a security interest in real property. The mortgage is the simpler of the two, involving just two parties. The two parties are the mortgagor (the borrower) and the mortgagee (the lender). The borrower uses its interest in real property to secure a loan made to it by the lender. If the borrower fails to repay the loan or otherwise violates the terms of the loan transaction, the mortgagee can foreclose upon the real property. The mortgagee forecloses through a judicial proceeding.
The deed of trust adds another party to a secured loan transaction. Here, the borrower delivers a deed of trust to a trustee which states that the borrower’s real property is held as security for the loan made by the lender to the borrower. The trustee of a deed of trust has the very limited role of following the provisions of the deed of trust. Most importantly, it can foreclose on the deed of trust on behalf of the beneficiary of the deed of trust, the lender, if the terms of the loan transaction have been violated. Because of the addition of this third party, foreclosure can (but need not) take place in a non-judicial proceeding. The thinking is that the trustee will ensure that there will be some basic procedural protections in place for the foreclosure, obviating the need for judicial oversight. The big advantage of the deed of trust is the ability to foreclose quickly and cheaply by means of a non-judicial proceeding.
WJ: How do assignments of mortgages contribute to the confusion about what entity has the right to foreclose?
BTB and DJR: Let us count the ways! On our blog, REFinblog.com, we track the litigation that arises from the foreclosure epidemic. The absence of all of the relevant assignments in a transaction can play out one way in a judicial foreclosure (in mortgage-only jurisdictions), another way in a non-judicial foreclosure (in jurisdictions that allow for deeds of trust) and another way in a bankruptcy proceeding. It plays out differently in different states. It can play out one way if the mortgagee brings the suit, in another way if the servicer brings the suit and another if MERS (the Mortgage Electronic Recording System) brings the suit. It can play out differently if the note is negotiable or if it is non-negotiable. So to answer your question precisely, assignments of mortgages don’t contribute to the confusion – they are the confusion!
WJ: What is the difference between a judicial and non-judicial foreclosure? Is the “show me the note” defense more successful in states that use a non-judicial foreclosure proceeding or judicial proceeding? What contrasts exists between the cases highlighted in your analysis?
BTB and DJR: Keep in mind that states typically fall into two categories: those that only allow judicial foreclosures and those that allow either judicial or non-judicial foreclosures. In a judicial foreclosure, foreclosure actions are brought in court. A judicial foreclosure can be brought where the security interest is a mortgage or deed of trust. A non-judicial foreclosure does not – shocker! — involve a court proceeding. Instead it is conducted using the power of sale contained in the deed of trust. With the power of sale, the mortgaged property is sold at a public auction.
If we were to generalize, the rule is that state supreme courts do not require the foreclosing party to “show the note” in a non-judicial foreclosure (with Massachusetts one exception). In addition, the general rule in a judicial foreclosure is that the foreclosing party must “show the note,” although it need not be the actual mortgage note holder, but merely one who has been assigned an interest in the mortgage note by the mortgage note holder.
We think the most interesting contrast is between the more typical Hogan v. Washington Mutual Bank, 277 P.3d 781 (Ariz. 2012), and the more cutting edge Eaton v. Federal National Mortgage Association, 969 N.E.2d 1118 (Mass. 2012). Hogan strictly construes the state foreclosure law, but leads to some odd results, including the possibility that a borrower can be liable in competing foreclosure proceedings arising from just one deed of trust. Eaton pushes the language of the statute a bit, but seems to ensure that borrowers are protected from inequitable results in foreclosure proceedings. For a more in depth analysis, we would recommend a recent law review article by Dale Whitman and Drew Milner in the most recent issue of the Arkansas Law Review, Foreclosing on Nothing: The Curious Problem of the Deed of Trust Foreclosure Without Entitlement to Enforce the Note.
WJ: How does state law influence the success of the defense? Are there any federal laws applicable to the “show me the note” defense?
BTB and DJR: While “show me the note” does come up in federal cases, federal courts defer to the applicable state law in reaching their results. As our article demonstrates, the courts’ holdings tend to flow from a careful reading of the relevant state foreclosure statute, so a particular state’s law can have a big effect on the outcome. We would note that many scholars and leaders of the bar are befuddled by courts’ failure to do a comprehensive analysis under the UCC as part of their reasoning in mortgage enforcement cases, but judges make the law, not scholars and members of the bar. See Report of The Permanent Editorial Board for The Uniform Commercial Code Application of The Uniform Commercial Code to Selected Issues Relating to Mortgage Notes at 1 (Nov. 14, 2011).
WJ: What are the main points you want to emphasize for homeowners and their attorneys challenging a foreclosure action?
BTB and DJR: The main point is – the law matters and the jurisdiction matters. Whether you are a homeowner trying to stave off foreclosure or a real estate finance lawyer structuring a securitization, you should expect that courts will enforce statutes as they are written in an adversarial proceeding. What works in one jurisdiction may not work in another because the laws of the jurisdictions may vary. Plan accordingly.
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August 2, 2013 | Permalink | No Comments