July 24, 2013
Fairholme or Foul? Investor Complaint Over Fannie and Freddie Preferred
I recently reviewed the complaint filed by former Solicitor General Olson in Perry Capital LLC v. Lew and today I review the complaint in a similar lawsuit, Fairholme Funds, Inc. v. United States, filed July 9, 2013. Fairholme filed another lawsuit the next day, Fairholme Funds, Inc. et al. v. FHFA et al., which I will review tomorrow. Whereas the Perry case alleged violations of the Administrative Procedures Act and the Housing and Economic Recovery Act of 2008 (HERA), the July 9th Fairholme case alleges that the United States must pay just compensations pursuant to the Fifth Amendment of the US Constitution for taking the plaintiffs’ property, by gutting Fannie Mae and Freddie Mac preferred shares of all of their worth.
As with the Perry case, the Fairholme complaint turns on whether an amendment to the government’s preferred stock documents which gave to the government all of Fannie and Freddie’s profits created a new security in violation of HERA. In particular, the complaint alleges that by “changing the dividend on its Government Stock in this manner, FHFA actually created, and Treasury purchased, an entirely new security.” (5) This, it appears to me, is a highly contested claim.
Evoking a famous Supreme Court case, the complaint also states that just “as the Federal Government cannot seize the assets of corporations (for example, the nation’s steel mills) for a public purpose without paying just compensation, so too it cannot seize the shares of stock in corporations to accomplish the same end.” (23) This implicit comparison to the Youngstown Steel case does not work as far as I am concerned. In Youngstown Steel, the Supreme Court struck down President Truman’s exercise of his inherent authority to seize steel mills in order to support the Korean War mobilization. Here, we have the federal government already knee deep in the affected companies. Fannie and Freddie are government-sponsored enterprises; were placed in conservatorship; and have the federal government as their majority shareholders.
While the issues here are complex, my first read of the complaint is that the plaintiffs have a tough row to hoe even though the federal government may have upended preferred shareholders’ settled expectations.
July 24, 2013 | Permalink | No Comments
July 23, 2013
U.S. District Court for Hawaii Rules in Favor of MERS in Non-Judicial Foreclosure Proceeding, Validating its Right to Transfer, Foreclose, and Sell Property as the Lender’s Nominee
In Pascual v. Aurora Loan Services, No. 10–00759 JMS–KSC, 2012 WL 2355531, at 1-18 (D. Haw. June 18, 2012), the court explained the role of MERS in mortgage transfers and granted Defendant Aurora Loan Services’s motion to dismiss the Plaintiff Pascual’s claim that the non-judicial foreclosure executed by Defendant was void as a result of MERS’s invalid assignment of the mortgage.
Under the language of the mortgage, MERS held the power of sale of the subject property and “the right to foreclose and sell the property and to take action required of the Lender.” The mortgage also notified the Plaintiffs that the “Note [could] be sold without prior notice.” MERS, acting as a nominee for the lender, Lehman Brothers, assigned the mortgage to the Defendant after Lehman Brothers filed for voluntary Chapter 11 bankruptcy. Shortly after the assignment, the Plaintiffs defaulted on their loan. Defendants subsequently filed a Notice of Mortgagee’s Intention to Foreclosure Under Power of Sale. It held a public auction, and as the highest bidder, recorded a Mortgagee’s Affidavit of Foreclosure Sale under Power of Sale.
Under HRS §677-5, the “mortgagee, mortgagee’s successor in interest, or any person authorized by the power to act,” can foreclose under power of sale upon breach of a condition in the mortgage. Plaintiffs argued that because MERS did not match the description of one these parties, it did not have authority to assign the mortgage to the Defendant, thereby making the transfer invalid. In response, the Court denied the Plaintiff’s assertions and explained the role of MERS, citing Cervantes v. Countrywide Home Loans, 656 F. 3d 1034 (9th Cir. 2011). It described MERS as a “private electronic database that tracks the transfer of the beneficial interest in home loans as well as any changes in loan servicers.” It further stated that “at the origination of the loan, MERS is designated in the deed of trust as a nominee for the lender and the lender’s ‘successor’s and assigns,’ and as the deed’s ‘beneficiary’ which holds legal title to the security interest conveyed.” The court elaborated that under Cervantes, “claims attacking the MERS recording system as fraud fail, given that mortgages generally disclose MERS’[s] role as acting ‘solely as nominee for Lender and Lender’s successors and assigns,’” and that “MERS has the right to foreclose and sell the property.”
Applying the holding to the present case, the court concluded that the mortgage expressly notified the Plaintiffs of MERS’s role as the “nominee for the ‘Lender and Lender’s successors and assigns,’” which had the power of sale of the subject property without giving notice to the Borrower. For these reasons, the court concluded that the transfer from MERS to the Defendant was valid. As a result, it dismissed the Plaintiff’s claim for a violation of HRS § 667-5.
The Court also dismissed Plaintiff’s motion to amend their claim. Contrary to Plaintiff’s assertions, it concluded that there was not a statutory requirement for the Defendants to provide affirmative evidence that its assignment of the subject property was valid. It also denied Plaintiff’s claim that Lehman Brothers’ entrance into Chapter 11 bankruptcy proceedings precluded it from validly transferring the mortgage to the Defendant.
July 23, 2013 | Permalink | No Comments
July 22, 2013
Texas Appellate Court Rules that Foreclosure can be Initiated Without Specific Endorsement in the Note and Before the Formal Transfer of the Deed
In Robeson v. MERS (Tex. App. 2012) WL 42965, No. 02-10-00227-CV the court affirmed the lower court’s ruling finding that Robeson was given adequate time for discovery, MidFirst had authority to send default notices prior to the assignment date of the deed of trust, and MidFirst gave sufficient foreclosure notice. The court held that Robeson did not produce even a “scintilla of probative evidence that raises[d] a genuine issue of material fact” and therefore the lower court’s ruling in favor or MERS was proper.
In late 2007, Robeson executed a loan with Alethes. The note bore endorsements from Alethes to GMAC Bank, from GMAC bank to GMAC Mortgage, as well as a blank endorsement from GMAC Mortgage. The debt to Alethes was secured in a deed of trust with MERS as the nominee for Alethes. In 2008 and 2009, GMAC Mortgage and MidFirst provided Robeson with notice of the default on his loan. In February 2009, MERS assigned its interest as nominee to MidFirst.
The court held that in accordance with the Texas Business and Commercial Code and case law, MidFirst was the owner of the note by possession alone and did not need to show that the original note contained a special endorsement to it from GMAC. As MERS members, GMAC and MidFirst may freely transfer interests between themselves without property deeds. The court noted that mortgages generally follow the note they secure and prior cases have recognized effective transfers when the assignment was executed up to two years after effective ownership changed. Two vice presidents of MidFirst swore in their affidavits that the note and deed of trust came under MidFirst’s ownership in 2008. Since the February 2009 assignment gave both the lender and the beneficiary the right to invoke the power of sale, there was no factual inconsistency between MidFirst’s claim that it began to exercise power over the note in 2008 and the February 2009 assignment.
As to whether notice was proper, the court found that Midfirst and MERS provided ample evidence that Robeson was given notice pursuant to § 51.002(b) and (d) and § 51.0025(2).
July 22, 2013 | Permalink | No Comments
Dirty REMICs, Revisited
Brad and I have posted, Dirty REMICs, Revisited (also on BePress). The abstract reads:
We review the differences between two visions for the residential mortgage markets, one driven by the goal of efficiency and the other driven by the goals of efficiency and consumer protection. Both visions advocate for structural reform, but one advocates for industry-led change and the other advocates for input from a wider array of stakeholders. Broader input is not only important to ensure that a broad range of interests are represented but also to ensure the long-term legitimacy of the new system. This is a response to Joshua Stein, Dirt Lawyers Versus Wall Street: A Different View, Probate and Property (2013 Forthcoming), which in turn is a response to Bradley T. Borden & David J. Reiss, Dirt Lawyers and Dirty REMICs, Probate and Property 12 (May/June 2013).
July 22, 2013 | Permalink | No Comments
Washington Court Holds That the Language of the Security Instrument Gave MERS Both the Authority to Foreclose and Assign the Deed of Trust
The court Salmon v. Bank of America, MERS et al., No. 10-446 (D. Wash. May 25, 2011) dismissed claims against Bank of America and MERS. The plaintiffs argued that MERS was a “ghost-beneficiary” and as such could not be the beneficiary of a deed of trust under Washington law, as it did not have an interest in the note. The court rejected this argument, and noted that the beneficiary of a deed of trust is not required to be the note holder
The court, in their holding, noted that MERS had both the authority to foreclose and the authority to assign the deed of trust, based on the language of the security instrument.
July 22, 2013 | Permalink | No Comments
July 21, 2013
Utah Court Holds That Under Utah Law, MERS Was Not Required to Identify the Note-Holder in Order to Permit the Trustee to Proceed With Foreclosure
The plaintiff in Nielsen v. Aegis Wholesale Corporation, MERS et al., No. 10-606 (D. Utah May 4, 2011) argued that MERS divided the deed of trust as well as the promissory note. The court, in reaching their decision and rejecting the plaintiff’s argument, noted that “the court adopted the defendant’s argument that plaintiff had latched onto a failed theory—that a note and trust deed can be ‘split’ and rendered null and void.” The court subsequently dismissed the plaintiff’s claims against MERS with prejudice.
The court further went on to state that, “by law, each successor to the note also received the benefit of the security, and by contract, MERS was appointed as the nominee beneficiary under the First Deed of Trust. Contrary to the plaintiff’s argument, MERS had established its rights with respect to foreclosure on the security and MERS had, at all relevant times been, entitled to act as beneficiary under the First Deed of Trust.”
The court further noted that under Utah law, MERS was not required to identify the note holder in order to permit the trustee to proceed with foreclosure.
July 21, 2013 | Permalink | No Comments
Shadowed by the Shadow Inventory
By David Reiss
My former colleague at Seton Hall, Linda Fisher, has posted Shadowed by the Shadow Inventory: A Newark, New Jersey Case Study of Stalled Foreclosures & Their Consequences on SSRN. The paper presents the findings of a small, but interesting empirical study. The study “tests the extent to which bank stalling has contributed to foreclosure delays and property vacancies in” one neighborhood in Newark, New Jersey. (6) Fisher states that this “is the first study to trace the disposition of each property in the sample through both public and private sources, allowing highly accurate conclusions to be drawn.” (6)
Fisher reaches “a similar conclusion to the previous studies with respect to stalling: without legal excuse or ongoing workout efforts, banks frequently cease prosecuting foreclosures.” (7) Fisher also finds that the stalled foreclosures in her study “do not strongly correlate with property vacancies.”(7) Fisher claims that her findings “are generalizable to similar urban areas in judicial foreclosure states,” but I would like to have seen more support for that claim in the paper. (45)
As a side note, I found her description of foreclosure in New Jersey interesting:
The New Jersey foreclosure system provides a representative example of a judicial foreclosure regime, albeit one with heightened procedural protections for borrowers enacted into the state’s Fair Foreclosure Act. For instance, lenders must file a notice of intention to foreclose containing information about, inter alia, the lender, servicer and amount required to cure, before filing a foreclosure complaint in court. Once borrowers are served with process, they may file a contesting answer and litigate the matter, as with any civil case. Because ninety-‐four percent of New Jersey foreclosures in a typical year are not contested, the process is largely administrative and handled through a statewide Office of Foreclosure. Court personnel scrutinize bank evidence in support of default judgments. Borrowers may file late answers, and are responsible only for curing arrears and paying foreclosure fees up until the time of judgment. (14-15, emphasis added, citations omitted)
Because this blog has as one of its main focuses downstream litigation judicial opinions, it is important to remember how few cases actually reach a court room, let alone result in a written opinion by a judge.
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July 23, 2013 | Permalink | No Comments