May 31, 2013
NY Appellate Court Rules Modification Not Enforceable in Foreclosure
The Appellate Division ruled in Wells Fargo Bank, N.A. v. Meyers, 2013 Slip Op. 03085 (2d Dep’t), that a failure to negotiate a loan modification in good faith, which is required under NY foreclosure law, does not support the unilateral imposition of a mortgage modification.
The uncontested facts in this case read like one of the well-publicized Alice-in-Wonderland tales of homeowners trying to negotiate a modification with a Red-Queen-like loan servicer:
- Wells Fargo alleges that it is the holder of the note and mortgage but later says that Freddie Mac is
- Wells Fargo tells the homeowners to default in order to get into the loan modification program and then forecloses, although the Wells Fargo representative states that they “had no idea” why the foreclosure had been initiated. (4)
- Wells Fargo repeatedly loses documents sent by the homeowners
- Wells Fargo changes the terms of its modification offer because of a “miscalculation” (4)
The Court upholds the finding that Wells Fargo did not negotiate in good faith. One can only imagine how homeowners feel dealing with such a bureaucratic counter-party: is it grossly incompetent or slyly malevolent?
The Appellate Division notes that the statute at issue provides, “Both the plaintiff and defendant shall negotiate in good faith to reach a mutually agreeable resolution, including a loan modification, if possible” (8, quoting CPLR 3408[f]). This provision contains no remedies, however, for the failure to do so. The Court then identifies a variety of sanctions that have been employed against mortgagees/servicers pursuant to this statute. These include
- barring them from “collecting interest, legal fee, and expenses” (10)
- imposing exemplary damages
- staying the foreclosure
- imposing a monetary sanction
The Court also noted that it determined in another case that cancelling the mortgage and note was too severe a sanction, one that was not authorized by law. The Court found that the remedy in this case, imposing a modification, was also inappropriate. The court stated that to do so would be to rewrite a contract that had voluntarily been entered into in violation of the Contracts Clause of the United States Constitution. The court also states that such a unilateral action “is without any source for its authority” and appears inconsistent with CPLR 3408 itself. (12) It is is unclear to me whether the Court is reading the Contracts Clause properly, but I agree that the trial court’s remedy seems extreme on these facts.
(Hat tip Wilson Freyermuth)
May 31, 2013 | Permalink | No Comments
May 30, 2013
Standard & Poor Puffery
The Department of Justice filed its opposition to S&P’s Motion to Dismiss the federal government’s FIRREA lawsuit. At this stage of the litigation, it appears as if the key issue is whether S&P’s alleged misrepresentations about its business practices are actionable false statements or are mere “puffery” as S&P’s lawyers describe them in their brief (passim). Let’s put aside the fact that describing your professional standards, principles and guidelines as “puffery” seems like a very bad long-term strategy (imagine the line of questioning at a Congressional hearing about S&P’s role as a Nationally Recognized Statistical Rating Organization).
But putting that cringer aside, S&P does raise a legitimate legal issue which relies heavily on Boca Raton Firefighters and Police Pension Fund v. Bahash, 12-1776-cv (2d Cir. Dec. 20, 2012). In that case, the Court of Appeals for the Second Circuit affirmed the trial court’s dismissal of the plaintiffs-investors’ claims because S&P’s statements regarding the “integrity and credibility and the objectivity of” its ratings were “the type of mere ‘puffery’ that we have previously held to be not actionable.” (6)
DoJ responds that “S&P rests its “’puffery’ defense primarily on [Boca] an unpublished, out-of-circuit opinion addressing securities fraud claims by S&P shareholders.” (opposition brief at 7). These are not substantive critiques of the Boca opinion, of course, so the 9th Circuit could well find the reasoning compelling.
But DoJ further argues that “the focus of the action here is the effect of S&P’s statements not on S&P shareholders [as in Boca], but on investors in the RMBS and CDOs S&P rated. This is a crucial difference.” (Id.)
Will Judge Carter agree?
May 30, 2013 | Permalink | No Comments
May 29, 2013
Risky Business Model for Homeowners?
The Mortgage Bankers Association issued a report, Up-Front Risk Sharing: Ensuring Private Capital Delivers for Consumers, intended to increase the role of the private sector in the portion of the mortgage market currently dominated by Fannie Mae and Freddie Mac. The MBA argues that to “entice private capital into the mortgage market, FHFA should require the GSEs to offer risk sharing options to lenders at the “point of sale.” (1) The report notes that about “60 percent of new mortgage originations today are sold to the GSEs. This dynamic means that the GSEs’ credit pricing has effectively determined the cost of and access to credit for a wide majority of all new loans.” (5) The GSEs’ credit pricing is thus not set by the market. The report continues, the GSEs
are now charging more than twice as much in guarantee fees as they did a few years ago, at the same time their acquisition profile shows they are taking on very little credit risk, even compared to pre-bubble credit standards. For example, average credit scores for GSE mortgage purchases prior to the crisis were about 720; today they are 760. Similarly, the weighted average LTV of loans outside of the HARP program are in the high 60% range, several percentage points lower than in the early 2000s. With this combination of high fees and ultra conservative underwriting, it is not surprising that the GSEs are seeing large, indeed record, profits — their revenues are up and their costs are down, not through their execution, but through government fiat and a privileged market position. (2)
Without quibbling with some of these characterizations, I would note that I have long taken the position that the private sector should bear more of the risk of credit loss in the residential mortgage market. As a result, I welcome proposals for them to do so. This particular proposal also reduces the role of the GSEs which, while just a partial reduction, is another welcome development. So, this proposal appears to be good for the mortgage industry (particularly private mortgage insurers). It is also good for taxpayers because the private sector would be taking on credit risk from the federal government.
The question that remains is whether this is the right solution for homeowners. The MBA says that this proposal will increase access to credit. It would be helpful if the industry could model this claim. The lending industry has its own cycle of credit loosening and tightening, so it would make sense to understand how such a cycle would impact homeowners if we moved toward such a system and moved away from the Fannie/Freddie duopoly.
May 29, 2013 | Permalink | No Comments
May 28, 2013
Reiss on Housing Affordability
I will be speaking on the FHA and Housing Affordability on June 11th at the AALS Workshop on Poverty, Immigration and Property will be held June 10-12 in San Diego.
The workshop brings together three communities of scholars: poverty, immigration and property to address historical issues and recent developments in the intersection of these topics. The topics covered in this innovative workshop include plenary sessions on What Lies at the Intersection of Poverty, Property, and Immigration; After SB 1070: Exclusion, Inclusion, and Immigrants; Reconsidering State v. Shack; and Transnational Perspectives on Poverty, Immigration, and Property. A range of concurrent panels will be established based on proposed topics and a call for papers and presentations.
I will be posting a version of my paper later this summer.
May 28, 2013 | Permalink | No Comments
May 24, 2013
Reiss on the Ethics of Subprime Lending
Fordham Law School is sponsoring an event on The Mortgage Crisis – Five Years Later on June 3rd. I will be speaking about the ethics of subprime lending on the second panel. The speakers are
Panel 1: The Mortgage Crisis: It Ain’t Over ‘Til It’s Over (1 CLE Credit)
Elizabeth M. Lynch, MFY Legal Services
Adam Cohen, NY State Attorney General’s Office
Edward Kramer, Wolters Kluwers
Harvey Levine, Served on OCC/FRB Independent Foreclosure Review
Jessica Yang, Policy Director, NYU Furman Center
Panel 2: The Ethics of Sub-Prime Lending (1 CLE Ethics Credit)
Bruce Green, Louis Stein Professor, Director (Stein Center), Fordham Law School
Aditi Bagchi, Associate Professor of Law, Fordham Law School
Josh Zinner, Co-Director, NEDAP
David Reiss, Brooklyn Law School
Interview with 2013 Friend of the Consumer Honoree
Gretchen Morgenson, Assistant Business and Financial Editor and Columnist, NY Times
May 24, 2013 | Permalink | No Comments
May 23, 2013
Wyoming Supreme Court Upholds Assignment to MERS in Bankruptcy
Professor Wilson Freyermuth posted this summary of the Wyoming Supreme Court’s opinion In re Gifford, 2013 WY 54 (Wyo. Sup. Ct. May 8, 2013) to the DIRT listserv and has given us permission to cross-post it here:
Synopsis: Wyoming Supreme Court properly recognizes that a mortgage assignment to MERS is not invalid merely because it does not identify MERS as a an agent or representative of the note holder and does not describe the nature of the assignee’s agency or representative capacity.
Facts: Betty Gifford borrowed $438,400 from the Jackson State Bank & Trust (JSB) to finance the purchase of a home in Pinedale, WY, signing a note and mortgage. Shortly after closing, JSB assigned the note to Countrywide (now Bank of America) and the mortgage to MERS. The assignment to MERS (which was recorded) did not describe MERS as an agent or acting in a representative capacity.
In April 2009, Gifford defaulted on the note. In October 2009, MERS assigned the mortgage to BAC Home Loans Servicing (BAC), which was servicing the loan for Bank of America. BAC recorded the assignment, which also did not describe BAC as an agent or as acting in any representative capacity. In December 2009, Gifford filed a Chapter 7 bankruptcy petition. In November 2010, the Chapter 7 trustee brought an adversary proceeding against BAC to avoid the mortgage, arguing that the mortgage was invalid because it failed to comply with the requirements of Sections 34-2-122 and 34-2-123 of the Wyoming Statutes, which provide:
In all instruments conveying real estate, or interests therein, in which the grantee is described as trustee, agent, or as in any other representative capacity, the instruments of conveyance shall also define the trust or other agreement under which the grantee is acting…. [O]therwise the description of a grantee in any representative capacity in each instrument of conveyance shall be considered and held to be a description of the grantee, only, and shall not be notice of any trust, agency or other representative capacity of the grantee who shall be held as vested with the power to convey, transfer, encumber or release the affected title. Whenever the grantee shall execute and deliver a conveyance, transfer, encumbrance or release of the property in a representative capacity, it shall not thereafter be questioned by anyone claiming as a beneficiary under the trust or agency or by anyone claiming by, through or under any undisclosed beneficiary…. [Wyo. Stat. Ann. § 34-2-122]
Any instrument which complies with this act shall be effective regardless of when it was executed or recorded. All instruments of conveyance to, or transfer, encumbrance or release of, lands or any interest therein within the state of Wyoming, which name a grantee in a representative capacity, or name a trust as grantee, and which fail to provide the information required by W.S. 34–2–122, shall cease to be notice of any trust or representative capacity of the grantee and shall be considered and held to be a description of the grantee only, who shall be held to have individually, the full power to convey, transfer, encumber or release the affected title and no conveyance, transfer, encumbrance or release shall thereafter be questioned by anyone claiming with respect to the affected property, as a beneficiary or by anyone claiming by, through, or under an undisclosed beneficiary[.] … [Wyo. Stat. Ann. § 34-2-123]
The trustee argued that because the recorded assignments of the mortgage did not identify with specificity the terms of the agency relationship between the holder of the note and the assignees, the recorded assignments did not comply with the statutes and thus rendered the mortgage unenforceable. The bankruptcy court certified the question of the mortgage’s validity to the Wyoming Supreme Court, which unanimously agreed that the mortgage was valid despite the fact that the assignments did not identify MERS or BAC as acting in a representative capacity.
Analysis: The Court, in an opinion by Justice Hill, held first that the Wyoming statutes, by their express terms, applied only to instruments in which the grantee was specifically described as a trustee, agent, or representative. Because the mortgage assignments did not specifically describe MERS or BAC as acting in an agency or representative capacity — even though they were in fact acting in such a capacity — the Court held that the statutes were inapplicable.
Furthermore, the Court held that the statutes were “notice statutes” that were not intended to apply to the situation presented in the case:
By their plain terms and stated legislative purpose, Sections 122 and 123 do not invalidate or render unenforceable a mortgage simply because the recorded assignment of that mortgage fails to include the statutorily mandated description of the principal/agent relationship. Rather, the statutes operate to protect a third party who deals with the agent. Thus, if the agent transfers the property to a third party, the third party is protected against a claim by the agent’s principal challenging the agent’s authority to make the transfer.
Because there was no transfer by MERS or BAC to a third party, and no challenge by an undisclosed principal to the actions of MERS or BAC, “this case presents no conflicting claims by a principal and an agent from which a third party needs protection, and the statutes therefore do not apply.”
Reporter’s Comment: The decision is obviously correct and sensible, and it is refreshing to see the court properly articulate the idea that like any notice statute (like a recording statute), the statute has to be understood in the context of whether the plaintiff belongs to the class of persons intended to be protected by the statute.
This concept is not something that the Wyoming Supreme Court has always properly appreciated. For example, in Countrywide Home Loans, Inc. v. First Nat’l Bank of Steamboat Springs, 144 P.3d 1224 (Wyo. 2006), a refinancing lender attempted to claim the priority of the paid-off mortgage under equitable subrogation in order to claim priority over the claim of an intervening junior lienholder. The Court improperly rejected the equitable subrogation claim, suggesting that the integrity of the state’s recording statute required a conclusion that the refinancing lender had constructive notice of the junior lien and thus took its refinancing mortgage subject to the rights of that lienholder. The court missed the boat in so concluding; the recording statute exists to protect the interests of subsequent purchasers and mortgagees without notice; the existing junior lienholder knew that it was in a subordinate position to the original mortgage and cannot be said to have been a reliance creditor without notice vis-à-vis the refinancing lender. Thus, the purpose of the statute was not served by using it to deprive the refinancing lender of its expected priority.
May 23, 2013 | Permalink | No Comments
June 3, 2013
NY Federal Magistrate Issues Declaratory Ruling That Note Transfer Is Effective
By David Reiss
Magistrate Judge Gold issued an opinion in Robinson v. H & R Block Bank, 12-Civ-4196 (EDNY, May 29, 2013). Professor Dale Whitman posted a commentary about it on the Dirt listserv and he has given us permission to cross-post it here.
Synopsis: Transfer of note and mortgage were effective, despite defects in allonge and mortgage assignment.
This brief opinion by a federal magistrate neatly disposes of a couple of attacks on a secondary market sale of a mortgage. In 2005 Robinson obtained a mortgage loan from Option One. In 2006 he also obtained a second mortgage loan from the same lender. In 2007, he and Option One agreed to consolidate the two loans into a single loan, and Robinson signed a new note and mortgage for the combined balance.
Option One then sold the loan to H & R Block Bank, delivering the note to Block, but it made two errors in doing so. The first was that the endorsement of the note (which was a “special” endorsement to Block) was placed on an allonge, but the allonge was merely placed behind the note in the file, and was not physically affixed (by stapling) to the note until Block did so in 2013.
However, under the New York version of UCC Article 3, “An indorsement must be written by or on behalf of the holder and on the instrument or on a paper so firmly affixed thereto as to become a part thereof.” UCC 3-202(2). Hence, the endorsement on the allonge was not effective as of the date the note was delivered, and in effect the note was unendorsed.
Second, although Option One recorded an assignment of the mortgage to Block in 2008, it mistakenly referred to the original 2005 mortgage rather than the consolidated mortgage of 2007. This error was discovered in 2012, and a “correction assignment” was then recorded with a reference to the correct mortgage.
Later in 2012 Robinson filed an action against Option One and Block, claiming fraud in the mortgage transfer. The court correctly observes that there is no evidence whatever of fraud in any literal sense, but treats the plaintiff’s claim as on attacking the validity of the transfer. Even so, it concludes that the errors were harmless and that Block has the right to foreclose the mortgage.
With respect to the unattached allonge, the court observes that
Any alleged defect concerning the allonge, however, would be immaterial, because an assignment may be made under New York law by physical delivery and not only by written indorsement. … [S]ee also In re Idicula, 484 B.R. 284, 288 (Bankr.S.D.N.Y.2013) (“An assignment of the note and mortgage can be effectuated by a written instrument or by physical delivery of the instrument from assignor to assignee.”).
On this point the court is plainly correct. Under the current version of the Article 3 (New York has not adopted it, but it’s the relevant version for most DIRT readers), one can become a “holder” only by taking delivery of an endorsed note. However, a person with possession of a negotiable note, but without an endorsement, can be a “nonholder with the rights of a holder” under UCC 3-301(2). The 2011 PEB report on mortgage notes explains it this way:
[This can] occur if the delivery of the note to that person constitutes a “transfer” (as that term is defined in UCC Section 3-203, because transfer of a note “vests in the transferee any right of the transferor to enforce the instrument.” Thus, if a holder (who, as seen above, is a person entitled to enforce a note) transfers the note to another person, that other person (the transferee) obtains from the holder the right to enforce the note even if the transferee does not become the holder.
What’s more, “the transferee has a specifically enforceable right to the unqualified indorsement of the transferor.” See UCC § 3-203(c). Thus, since the note in this case was indisputably delivered, the absence of a valid endorsement really doesn’t matter.
The second error, the mortgage assignment with a reference to the wrong mortgage, was equally unimportant. First, it was corrected by a refiling. But even that was unnecessary for purposes of transferring the right to foreclose the mortgage. The reason is the ancient rule that “the mortgage follows the note.” Thus, whoever, has the right to enforce the note (Block, in this case) has the right to foreclose the mortgage as well — whether they have a mortgage assignment or not. As the court says,
Neither is it required that mortgage assignments are recorded, or that they even be in writing, as long as the mortgage and note are actually delivered. In re Feinberg, 442 B.R. 215, 223 (Bankr.S.D.N.Y. 2010) (noting that the holder’s “possession of the note and mortgage attests to their delivery and is sufficient evidence of a valid mortgage assignment”).
The reference to “possession of the mortgage” is a bit peculiar; there is no legal principle that suggests that possession of the actual mortgage document has any legal relevance at all. It is possession of the note that is of critical importance, assuming that the note is negotiable (and it’s clear that this court is making that assumption).
This is a doctrine that is widely misunderstood. Many people have the incorrect belief that somehow, having a recorded chain of mortgage assignments is essential to the right to foreclose the mortgage. Not so, except in perhaps a dozen states where assignments are necessary to carry out nonjudicial foreclosures. (New York, of course, has no nonjudicial foreclosure, and no requirement for assignments at all.)
This is not to suggest that recording a mortgage assignment isn’t a good idea. It can accomplish two significant things for the assignee: (1) It will prevent the assignor from fraudulently releasing or satisfying the mortgage in the public records, allowing the borrower to sell the property free and clear to a bona fide purchaser; and (2) it will ensure that the assignee is entitled to notice of any litigation that might be filed affecting the real estate, such as an eminent domain action or a code enforcement proceeding. But it isn’t necessary to foreclose.
The bottom line: two common errors, often raised by foreclosure defense counsel, are simply red herrings: a failure to endorse the note, and a failure to record an assignment of the mortgage. On the other hand, failure to deliver the note would have been a huge problem for the Bank in this case — but fortunately, the note was indeed delivered.
(HT Mike Siris)
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June 3, 2013 | Permalink | No Comments