June 26, 2013
Massachusetts Bankruptcy Court Grants Assignee Bank’s Motion For Relief, Denies Debtor’s Assignment Challenges and Home Affordable Modification Program Claim
Aurora, as an assignee of a Chapter 13 debtor’s mortgage, moved for relief from stay to exercise its rights in property, and debtor objected to assignee’s standing and on the ground that his post petition payment default was the result of an improper refusal to modify his mortgage under the government’s Home Affordable Modification Program (HAMP). After considering arguments, the court decided In re Lopez, 446 B.R. 12, 18–19 (Bkrptcy.D.Mass.2011) by granting Aurora’s motion for relief.
The Debtor raised a plethora of questions regarding Aurora’s standing to prosecute the motion for relief. First, he contended that an assignment of the mortgage, without the note, was void. Next, the Debtor argued that MERS, as nominee, could not assign the mortgage because it was merely a title holding entity. Further, he noted that the assignment could not assign the note because MERS never held it.
The Debtor also found fault with the note, complaining that the endorsements were undated, thus concealed the date of the transactions. He further questioned whether the signatory of two of the endorsements could have been an authorized officer as the final endorsement is in blank, the Debtor asserted that the current holder of the note was unknown, making it unclear who authorized MERS to assign the mortgage.
Further, the Debtor attacked the validity of the assignment on the basis that Aurora had not proven that the signatory was sufficiently authorized to execute the assignment.
With respect to HAMP eligibility, the Debtor argued that the monthly payment used to determine borrower eligibility included a monthly payment of principal regardless of whether the expense was included in the Debtor’s current mortgage payment. Furthermore, he contended that Aurora mischaracterized the interest rate as adjustable rather than fixed. As such, the provisions regarding rate resets relied on by Aurora are inapplicable.
In determining whether a creditor has a colorable claim to property of the estate, the court found that Aurora has established a colorable claim to the Property as Mortgagee.
First, the Debtor asserted that the assignment of the mortgage, without the note, was void, but under Massachusetts law, “where a mortgage and the obligation secured thereby are held by different persons, the mortgage is regarded as an incident to the obligation, and, therefore, held in trust for the benefit of the owner of the obligation.” Accordingly, even though MERS never had possession of the Note, it was legally holding the Mortgage in trust for the Note holder.
Second, the Debtor contended that MERS, due to its status as a nominee, could not assign the Mortgage to Aurora. The court rejected this argument as it misapprehended the meaning of “nominee.” Though MERS never held the Note, it could, by virtue of its nominee status, transfer the Mortgage on behalf of the Note holder.
The remainder of the Debtor’s arguments involved challenges to the assignment authorization. Specifically, whether the signatory was authorized to execute the assignment; whether MERS was authorized to assign the mortgage; whether the officers endorsing the note had authorization to do so; whether, given the absence of transaction dates, the endorsements were placed on the note only recently; and the fact that the final endorsement on the note is blank, rendering it a bearer instrument negotiable by transfer of possession alone.
The Court found that the Debtor did not affirmatively state that there were any defects in Aurora’s chain of title; rather he merely suggested that an evidentiary hearing is necessary to be sure. This, the court noted, was not the standard.
Having determined that Aurora is a party in interest, the court considered whether relief from stay was warranted. The court found that the Debtor had not articulated any theory through which he could have asserted standing to obtain the relief he sought.
June 26, 2013 | Permalink | No Comments
Massachusetts Trial Court Grants Defendant Bank’s Motion For Summary Judgment in Service Member Civil Relief Act Case
The Plaintiff in Randle v. GMAC, No. 09 MISC 408202 GHP filed a complaint seeking, among other things, a declaration that defendant GMAC Mortgage did not hold any claim secured by a mortgage recorded with the County Registry, and lacked standing to bring an action against the plaintiff pursuant to the Service Members Civil Relief Act.
Summary judgment was sought by the defendant and granted. It was undisputed that GMAC was the current holder of the mortgage, and therefore there were only two issues and one sub-issue left in contention.
The first issue was whether the plaintiff’s claimed right to challenge the standing of GMAC to have filed the Service Members Case required a judgment in the previous case, declaring the foreclosure invalid; and whether the plaintiff was entitled to the ninety-day right to cure set out in state law.
In deciding the judgment from the Service Member case, the court considered the plaintiff’s argument that due to the chronology of the assignments of the mortgage, and the recording with the registry, relative to the filing and prosecution of the Service Member’s case by GMAC, and also due to evident discrepancy in the date the judgment in the Service Member case was entered on the docket, the foreclosure sale by GMAC cannot be valid and cannot be effective to pass a title.
The court rejected this line of argument and found that such an argument ignored the long established limited scope of Service Members proceedings in Massachusetts. The court noted that a foreclosure is not invalid because title passed on a date prior to the issuance of the judgment in a Service Members case, which has a limited scope and purpose does not permit litigation of broader issues involving the relationship between the borrower and the lender.
Next, the court considered the standing of the mortgagee. The plaintiff claimed a right to challenge the standing of GMAC to have filed the Service Members case. GMAC argued that the standing of a mortgagee to commence a Service Member action was not a live issue in determining the validity of a foreclosure when the mortgage was the record holder of the subject mortgage at the time of the foreclosure. The court agreed with GMAC’s argument.
Lastly, the plaintiff argued that GMAC was unable to foreclose because it did not provide the plaintiff with a 90-day the notice and opportunity to cure a default, as mandated by state law. However, upon review of the designated state law, the court found that the plaintiff was not entitled to such notice, because the specified state law did not apply “to such mortgages whose statutory condition had been voided prior to May 1, 2008.”
June 26, 2013 | Permalink | No Comments
June 25, 2013
National Mortgage Settlement: Not Too Compliant
- Bank failed to offer loan modification/loss mitigation opportunity.
- Bank failed to provide single point of contact.
- Bank failed to make a determination on the borrower’s loan modification no later than 30 days after receiving the complete application.
- Bank foreclosed while a loan modification/loss mitigation was pending.
- Single point of contact failed to carry out responsibilities of working with borrower on loan modification/loss mitigation activities.
- Bank failed to notify borrower of any known deficiency in initial submission of information no later than 5 days of receipt.
- Bank failed to communicate with borrower’s authorized representatives.
- Bank failed to keep the same single point of contact assigned until all the borrower’s needs were met.
- Bank failed to provide one or more direct means of communication with the single point of contact.
- Bank failed to acknowledge receipt of first lien loan modification application within 3 business days. (8)
I assume that the servicers are not willfully flouting the settlement because of the negative publicity they would receive for doing so as well as the millions of dollars of fines that they could thereby accrue. So these complaints must reflect some kind of systemic incompetence. Servicers must either continue to be dramatically under-resourced to handle their work or they are bloated bureaucracies that cannot consistently disseminate key information internally or externally. Taking just the most extreme example, it is shocking (if true) that in 2013 banks are still foreclosing while loan modifications are pending with homeowners.
The Monitor, Joseph A. Smith, Jr., concludes, “It is clear to me that the servicers have additional work to do both in their efforts to fully comply with the NMS and to regain their customers’ trust. There continue to be issues with the loan modification process, single point of contact, and customer records.” (9) Amen to that.
June 25, 2013 | Permalink | No Comments
June 24, 2013
Investor HERA-sy
As I have previously noted, Fannie and Freddie investors have filed a complaint, Washington Federal et al. v. U.S.A., No. 1:13-cv-00385-MMS (June 10, 2013), alleging that the federal government “expropriated [Fannie and Freddie’s] common and preferred shareholders’ rights and the value of their equity in the Companies without due process, and without just compensations, thereby constituting an impermissible exaction and/or taking in violation of the Fifth Amendment to the Constitution.” (8)
Personally, I think that there is a lot of nonsense in the complaint, both in terms of its factual description of the events that led up to the placement of Fannie and Freddie in conservatorship as well as its interpretation of those events. But I did find its analysis interesting as to whether the government complied with HERA’s requirements for placing the two companies in conservatorship. Not compelling, just interesting.
As the complaint notes, the federal government had a number of grounds for appointing a conservator. It takes the position that none of those grounds were met. This seems facially wrong.
One of the grounds is whether Fannie or Freddie “incurred, or became likely to incur, losses that would deplete substantially all of its capital with no reasonable prospect of becoming adequately capitalized.” (31) The complaint alleges that the two companies had not incurred such losses at the time that they were placed in conservatorship. (38-39) But it does not even argue that the two companies never “became likely to incur” such losses prior to their placement in conservatorship. Seems hard, particularly with the benefit of hindsight, to take the position that they were not “likely” to incur such losses. And if the plaintiffs can’t make that case, they lose.
June 24, 2013 | Permalink | No Comments
Michigan Supreme Court Rules MERS’s Foreclosure Valid
The Michigan Court of Appeals considered two cases involving MERS-related foreclosures, Residential Funding Co., LLC v. Saurman and Bank of New York v. Messner, 292 Mich. App. 321 (April 21, 2011) deciding whether MERS is an entity permitted to foreclose by advertisement or if it must go through a judicial foreclosure. The Court of Appeals held that MERS doesn’t meet the statute’s requirements to foreclose by advertisement, however, the Michigan Supreme Court reversed the decision, holding that MERS had standing to foreclose.
In both cases the original lender was Homecoming Financial, LLC, with the mortgages providing rights to foreclose upon default. MERS was named as the mortgagee and nominee for the lender. After default, MERS began foreclosure by advertisement on both properties, purchasing the properties at their respective sales, and quit-claiming title to the plaintiffs, Residential Funding and Bank of NY. Upon eviction, the homeowners questioned MERS’s authority but were denied by the district court. The circuit courts affirmed the district court’s decision, and the Michigan Court of Appeals considered whether MERS, as mortgagee but not note-holder, can foreclose non-judicially by advertisement.
The Court of Appeals discussed implications of the MERS system, which allows entities to transfer loans without having to record the transactions, since the mortgagee, MERS, is never changed despite the change of ownership among other entities. The statute in question, MCL § 600.3204(1)(d), states that a party may foreclose by advertisement if: “the party foreclosing the mortgage is either the owner of the indebtedness or of an interest in the indebtedness secured by the mortgage or the servicing agent of the mortgage.” Since MERS is not the servicing agent or the owner of the debt, the Court of Appeals held MERS lacked authority to foreclose by advertisement under the statute. The court further explained “in order for a party to own an interest in the indebtedness, it must have a legal share, title, or right in the note,” and that an interest in the mortgage is not enough, as these are two separate instruments with different rights. The mortgage provides an interest in the property, while the note documents a debt to be repaid. Since the statute requires that the foreclosing party must own an interest in the indebtedness, the court held that MERS cannot act on behalf of Homecoming as agent or nominee to advertise the foreclosure. The decision of the Circuit Court enforcing the eviction was reversed, granting defendant-homeowners’ summary judgment.
Judge Wilder dissented, believing MERS to have an ownership interest in the loan by way of the language in the mortgage giving MERS explicit rights to foreclose upon default. As mortgagee, MERS owned a “contractual interest” in the indebtedness, with the ability to take any action required by it, including its right to foreclose if the debt is not paid. The purpose of the mortgage is to create a security interest “specifically linked to the debt” to ensure payment. Since the mortgage gives MERS the right to “take any action required of it,” MERS has “a greater interest than just an interest in the property as security for the note,” giving MERS the right to act on behalf of Homecomings.
Plaintiffs Residential Funding and Bank of NY appealed the decision and the case was considered by the Michigan Supreme Court in late 2011, ultimately reversing the Court of Appeals order. 807 N.W.2d 412, rev’d 805 N.W.2d 183 (Mich. 2011). The Supreme Court agreed with the dissenting opinion from the Court of Appeals, holding that the foreclosure was valid. MERS has an ownership interest in the indebtedness, and therefore the right to foreclose because MERS’s “contractual obligations as mortgagee were dependent upon whether the mortgagor met the obligation to pay the indebtedness which the mortgage secured.” Though this does not give MERS an ownership interest in the note, the court held that the note and mortgage do not need to be held by the same entity in order to foreclose under Michigan law.
June 24, 2013 | Permalink | No Comments
June 21, 2013
Fannie and Freddie Myth-Statement
Fannie Mae and Freddie Mac’s investors have sued the federal government in Washington Federal v. United States, No. 1:13-00385 (June 10, 2013), for how it bailed out the two companies and thereby the nation’s housing market at the expense of the two companies’ shareholders. Plaintiffs claim that they have been damaged to the tune of $41 billion.
The complaint contains one of my favorite myths about the two companies. It states that its regulator “directed that, to support the economy, the Companies purchase subprime and other risky securities.” (1) Its evidence for this assertion is that in 2007 the two companies’ “lending standards were adjusted to allow them to purchase more subprime securities” and “Congress and regulators encourage” the companies to “buy subprime and other risky securities — products that did not meet either Company’s own prior lending standards.”(1-2) The misleading nature of these statements is two-fold. First, Fannie and Freddie had been investing in non-prime securities before 2007; and (2) being ‘allowed’ or ‘encouraged’ to invest is not the same as being ‘directed’ to invest. This points to a fundamental myth about Fannie and Freddie — being allowed to do risky things is the same as being made to do so.
This myth has come up in discussions about their affordable housing goals as well. When Congress increased these goals, the two companies would buy risky products not because they had to, but because they wanted to keep overall growing market share. To the extent the goals were expressed as a proportion of their total portfolio, the companies could reduce the purchase of risky loan products by risking the overall size of their portfolios. But no one ever considers this to be a legitimate option — of course growth is more important than managing credit risk!
More on this complaint anon.
June 21, 2013 | Permalink | No Comments
Massachusetts District Court Interprets Ibanez Narrowly in Deciding That Plaintiff-Homeowner Lacked Standing to Challenge Bank’s Standing to Foreclose
This action arose out of an attempted foreclosure by defendant Aurora Loan Services on plaintiff David Kiah’s property. Based on the recent holding from U.S. Bank National Ass’n v. Ibanez, 458 Mass. 637, 941 N.E.2d 40 (2011), Kiah sought a declaratory judgment to make the “mortgage on record legally null and void.” The Massachusetts District Court in deciding Kiah v. Aurora Loan Services, LLC, No. 10-40161-FDA, 2011 WL 841282 (D.Mass. Mar.4, 2011) considered the Massachusetts Supreme Court’s holding from Ibanez, along with the plaintiff-homeowners’ arguments, and concluded that granting the defendant’s dismissal was proper.
The court found that the plaintiff’s claims were merit-less, as he challenged neither the note nor the note’s assignment to Aurora. As expressed in Ibanez “By law, the transfer of the note automatically transfers an equitable interest in the underlying mortgage, even without a formal assignment.” An equitable right to the mortgage was thus transferred to Aurora along with the note.
The court noted that the Ibanez holding did not require a reconsideration of the lower court’s judgment. In Ibanez the Massachusetts Supreme Court held that a foreclosure sale made by a party who holds the note but not the mortgage is void as a matter of law. In that case, the note holder provided no evidence of assignment prior to foreclosure. However here, there was a facially valid assignment of the mortgage from MERS to Aurora prior to the foreclosure sale. To the extent the assignment was defective, the court interpreted Ibanez required, at most, that a confirmatory assignment be executed and recorded.
June 21, 2013 | Permalink | No Comments
