June 10, 2013
FHA Whitewash
While preparing for my talk tomorrow on The FHA and Housing Affordability, I was reviewing some of the recent literature on the FHA. I came across a recent HUD working paper with some interesting data about recent FHA crises but also with a disturbing spin on the FHA’s history. The FHA Single-Family Insurance Program: Performing a Needed Role in the Housing Finance Market states that in its early years “race was not explicitly regarded as a factor in FHA’s mortgage insurance operations.” (9) This is flat out wrong and has been known to be flat out wrong at least since Kenneth Jackson published Crabgrass Frontier in 1987. Jackson clearly demonstrated that race was “explicitly regarded as a factor in FHA’s mortgage insurance operations.”
Jackson writes that the FHA’s Underwriting Manual from those early years stated that “[i]f a neighborhood is to retain stability, it is necessary that properties shall be continued to be occupied by the same social and racial classes” and recommended that owners employ restrictive covenants to exclude African Americans (and some other groups). (208) The working paper has other extraordinary statements that minimize the FHA’s central role in promoting segregation during the mid-20th Century. For instance, it states that the FHA’s “early policy may have inadvertently promoted redlining practices.” (18) There was nothing “inadvertent” about it.
I typically find that federal government reports make great efforts to be factually accurate, so this paper is a great exception. One might think that the authors deserve some leeway in their interpretation, but Jackson’s history has only been confirmed by later research, such as last year’s Do Presidents Control Bureaucracy? The Federal Housing Administration During the Truman-Eisenhower Era which was published in Political Science Quarterly. It makes much the same point as Crabgrass Frontier. I would be curious to hear the authors’ response to my assessment, but I really can’t see how they can deny it.
“Those who cannot remember the past are condemned to repeat it.” (Santayana)
June 10, 2013 | Permalink | No Comments
June 7, 2013
Mass. Appeals Court Applies Eaton Retroactively
The intermediate appeals court of Massachusetts applied Eaton retroactively in Lyons v. MERS et al., 11-P-560 (June 5, 2013) notwithstanding the Mass. Supreme Court’s holding that Eaton would only apply prospectively. Eaton held that “a mortgagee may foreclose under a power of sale only if it either holds the note or is acting under the direction or as the agent of the note holder.” (1)
The intermediate appeals court found that it would be inequitable to do otherwise: “Not only was the present case on appeal when Eaton was decided, the Lyonses actually brought their action before Eaton had even been decided in the trial court. Because the Lyonses are in an identical situation to the plaintiffs in Eaton, not a ‘somewhat similar[]’ position,” the court held “that the rule of Eaton is applicable to the Lyonses’ case, and reverse[d] the judgment” of the trial court. (1, citations omitted)
June 7, 2013 | Permalink | No Comments
Mass. Trial Court Upholds MERS Foreclosure
Judge Cutler granted MERS and Countrywide’s motion to dismiss plaintiff Lyons challenge to the validity of a foreclosure deed arising from a foreclosure sale conducted by MERS in Lyons v. MERS et al. Misc. 09 416377 (Jan. 4, 2011). The court held that “the Plaintiffs expressly granted the Mortgage to MERS (as nominee for the Lender), with the power of sale. As a result of this grant, MERS needed no assignment” from Countrywide.” (3) The court found that “such an arrangement is entirely consistent with the express terms of the Mortgage, as well as with Massachusetts law.” (3) The court found it intolerable to reach a result where “the logic of a denial of MERS’s foreclosure right as mortgagee would lead to anomalous and perhaps inequitable results, to wit, if MERS cannot foreclose though named as mortgagee, then either [the lender] can foreclose though not named as mortgagee or no one can foreclose, outcomes not reasonably or demonstrably intended by the parties.” (3) Not sure that those are the only possibilities (for instance, MERS could assign the mortgage to its beneficial owner), but there you have it.
June 7, 2013 | Permalink | No Comments
Rhode Island Superior Court Finds in Favor of MERS, Upholding Foreclosure by Deutsche
In O’Brien v. Mortgage Electronic Registration Systems KC 2009-1695 (R.I. Sup. June 4, 2012) the court found in favor of the defendants, MERS and Deutsche Bank. The court held that Rhode Island law allows for the assignment of a mortgage where a homeowner has executed a mortgage with explicit language providing the right to assign the mortgage and allows for the separation of a mortgage from a note.
O’Brien brought this action to quiet title to his property challenging the foreclosure sale by Deutsche Bank. On January 3, 2007, O’Brien executed a promissory note in favor of New Century Mortgage Corporation and he also executed a mortgage on the property naming MERS as the nominee providing that “if necessary to comply with law or custom, MERS has the right: to exercise any or all of those interest, including but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument.” Six days after executing the mortgage a corrective mortgage was executed to include metes and bounds which had been excluded from the initial mortgage. One year and two months later MERS assigned the mortgage to Deutsche Bank. O’Brien defaulted on the mortgage in the summer of 2009 and Deutsche foreclosed on the property.
The court relied upon Payette v. Mortgage Electronic Registration Systems in finding that the mortgage sale was valid because O’Brien bound himself to the language of the execution with MERS which stated in clear and unambiguous language that MERS held the right to “release.” Rhode Island law does not require a recording of power of attorney for MERS to act on the behalf of a company as its nominee. O’Brien then argued that New Century’s bankruptcy terminated its nominee relationship with MERS but this argument failed since the mortgage was executed with MERS well before New Century became bankrupt.
The court rejected O’Brien’s argument that the mortgage to Deutsche was void because only the defective mortgage was transferred. The court found that mortgages lacking formal requisites are considered agreements to give a mortgage and effective as between parties though not binding as to third parties. Relying upon Kriegel v. Mortgage Electronic Registration Systems, when MERS assigned the mortgage to Deutsche, all of the legal rights which MERS held by the agreement, including the power to sell after O’Brien’s default, were transferred to Deutsche. Therefore, the deeds defectiveness was irrelevant because the agreement was binding between the original parties and MERS transferred its entire interest to Deutsche, including the right to sell.
The court did not find a conflict with the U.S. Supreme Court’s ruling in Carpenter v. Longan determining that a mortgage and note are inseparable under Colorado law because the Rhode Island statute §34-11-24 indicates that the assignment of a mortgage will be followed by “the note and debt thereby secured.” Therefore MERS, recognized under Rhode Island law as the nominee of the current note holder, assigned both the mortgage and the note and debt to Deutsche. As the note and mortgage holder, Deutsche had the right to foreclose. Furthermore, Rhode Island has long respected that homeowners as non-parties to a contract cannot challenge the “propriety of mortgage assignments and the effect those assignments could have, if any, on the underlying obligation.”
The court found in favor of the defendants, the foreclosure was valid.
June 7, 2013 | Permalink | No Comments
Rhode Island Superior Court Finds MERS has Standing and Assignment to Deutsche Bank Post-Foreclosure was Unchallengeable by Property Owners
In Deutsche Bank v. Falconer (R.I. Sup. May 1, 2012) three actions were consolidated into one opinion. Deutsche prevailed on its possession of property claim in the Sixth Division District Court and Falconer appealed the decision and also filed a separate claim to quiet title. All claims are consolidated here since they hinge upon whether MERS had standing to foreclose and assign its interest to Deutsche post-foreclosure.
In June 2007, the falconers obtained a $252,000 note with Fremont Investment and a mortgage designating MERS, “solely as nominee for Lender and Lender’s successors and assigns,” as the mortgagee with the “statutory power of sale.” In 2009, MERS provided notice of foreclosure to the Falconers and publicized a foreclosure sale for twelve consecutive weeks and at the sale MERS prevailed as the highest bidder. After the foreclosure sale, MERS assigned all of its title in the property to Deutsche Bank.
Foreclosure was proper: The court found that MERS had standing for the foreclosure because of the clear language of the mortgage, Rhode Island statute §34-11-24, as well as jurisprudence from Rhode Island. Relying on Bucci ( WL 3328373, 2009), the court found that the language of the original mortgage provided that MERS was the mortgagee and the nominee for the lender and therefore could exercise all rights to the property, including its sale. Furthermore, §34-11-24 specifically provides that the assignment of a mortgage will be followed by the assignment of the note and any debt secured. Therefore, MERS must have the power of sale given that MERS has the power to assign the mortgage as well as the note under §34-11-24. MERS had standing to foreclose.
Transfer to Deutsche was proper: The court rejects the Falconer’s argument that since MERS was the holder of only the mortgage they could not assign any interest to Deutsche. Rather the court relies on Bucci ( WL 3328373, 2009) and Payette for support that MERS was mortgagee as well as nominee to the lender and could transfer both the mortgage and the note. The court also relies upon the “gravel rule” which cuts off a debtor’s right to cure an assignment at the foreclosure sale. Therefore, even if the assignment were invalid Falconers did not have a valid action to rescind the foreclosure because “a foreclosure conducted by statutory power of sale shall forever be a perpetual bar against the mortgagor.” The assignment to Deutsche fulfilled the two statutory requirements of §34-11-24 because it was in the form entitled “Assignment of Mortgage” and was duly executed.
Furthermore the court determined that the sale to Deutsche had no effect on property title because it occurred after the foreclosure and Deutsche therefore holds all rights which were previous held by MERS, post-foreclosure. The court finds it is a well-established principle that at a foreclosure sale the purchaser obtains a title free and clear of all interests that were junior to the lien that was foreclosed and any presumptions should be in favor of the legal title holder, Deutsche in this case. The transfer to Deutsche was proper.
As to the quiet title action, judgment is in favor of defendants and both of Falconer’s District Court Appeals are dismissed and remanded for a decision consistent with that determined by the court.
June 7, 2013 | Permalink | No Comments
Bank of New York Deemed Indispensable Party to Homeowner’s Foreclosure Challenge in Rhode Island
In Rosano v. Mortgage Electronic Registration Systems, Inc., et al., C.A. No. PC 2010-0310 (R.I. Super. June 19, 2012), the court held that defendant MERS had authority to assign plaintiff homeowner’s mortgage and deemed the foreclosure sale by assignee Bank of New York proper, dismissing plaintiff’s complaint to quiet title. The court further held that plaintiff’s failure to name Bank of New York as a defendant to the action rendered the complaint defective.
Plaintiff’s complaint failed to state a cause for relief beyond a speculative level, as plaintiff’s allegations were merely conclusory assertions. The court noted that plaintiff overlooked precedent confirming the validity of MERS’s assignments where mortgagee’s statutory power is clearly stated in the mortgage instrument. MERS, as mortgagee and nominee of the original lender, takes the place of the original lender and may assign its statutory power to another entity, who will then take the place of MERS with the same statutory right to foreclose. Plaintiff later alleged that the assignments were unauthorized, but the court held that no power of attorney was required since MERS was designated as mortgagee and nominee. Furthermore, plaintiff lacked standing to challenge the validity of the assignments, as plaintiff homeowner is not a party to any assignment. The court held that even if plaintiff had standing to challenge whether the assignments were authorized, plaintiff failed to plead such allegations in his complaint and cannot assert them in argument now.
However, the major flaw in plaintiff’s complaint was his failure to include Bank of New York as a party defendant; the court found Bank of New York to be an indispensable party to the action as the current record owner of the property. MERS assigned the mortgage to Sutton, who then assigned it to Bank of New York, who commenced foreclosure proceedings and sale upon plaintiff’s default. Bank of New York was the highest bidder at the foreclosure sale, and thereafter timely recorded its ownership interest in the property. Although there is no formal criteria for determining whether a party is indispensable to an action, the court used the Supreme Court’s formula from Doreck v. Roderiques, 120 R.I. 175, 180, 385 A.2d 1062, 1065 (1978), holding that proceeding without Bank of New York as a party would severely prejudice and impact Bank of New York as current owner of the property, rendering plaintiff’s complaint fatally defective.
June 7, 2013 | Permalink | No Comments
June 6, 2013
REMIC Armageddon on the Horizon?
Brad Borden and I have warned that an unanticipated tax consequence of the sloppy mortgage origination practices that characterized the boom is that MBS pools may fail to qualify as REMICs. This would have massively negative tax consequences for MBS investors and should trigger lawsuits against the professionals who structured these transactions. Courts deciding upstream and downstream cases have not focused on this issue because it is typically not relevant to the dispute between the parties.
Seems that is changing. Bankruptcy Judge Isgur (S.D. Tex.) issued an opinion in In re: Saldivar, Case No. 11-1-0689 (June 5, 2013)) which found, for the purposes of a motion to dismiss, that “under New York law, assignment of the Saldivars’ Note after the start up day [of the REMIC] is void ab initio. As such, none of the Saldivars’ claims” challenging the validity of the assignment of their mortgage to the REMIC trust “will be dismissed for lack of standing.” (8)
If this case holds up on appeal, it will have a massive impact on many purported REMICs which had sloppy practices for transferring mortgages to the trusts. That is a big “if,” as the case relies upon Erobobo for its take on the relevant NY law. Erobobo, a NY trial court opinion, itself reached a controversial result and is hardly the last word on NY trust law. The Court also acknowledges that additional evidence may be proffered relating to a subsequent ratification of the conveyance of the mortgage, but for the purposes of a motion to dismiss, the homeowners have met their burden.
For those few REMIC geeks out there, it is worth quoting from the opinion at length (everyone else can stop reading now):
The Notice of Default indicates that the original creditor is Deutsche Bank, as Trustee for Long Beach Mortgage Loan Trust 2004-6. The Trust is a New York common law trust created through a Pooling and Servicing Agreement (the “PSA”). Under the PSA, loans were purportedly pooled into a trust and converted into mortgage-backed securities. The PSA provides a closing date for the Trust of October 25, 2004. As set forth below, this was the date on which all assets were required to be deposited into the Trust. The PSA provides that New York law governs the acquisition of mortgage assets for the Trust.
The Trust was formed as a REMIC trust. Under the REMIC provisions of the Internal Revenue Code (“IRC”) the closing date of the Trust is also the startup day for the Trust. The closing date/startup day is significant because all assets of the Trust were to be transferred to the Trust on or before the closing date to ensure that the Trust received its REMIC status. The IRC provides in pertinent part that:
“Except as provided in section 860G(d)(2), ‘if any amount is contributed to a REMIC after the startup day, there is hereby imposed a tax for the taxable year of the REMIC in which the contribution is received equal to 100 percent of the amount of such contribution.”
26 U.S.C. § 860G(d)(1).
A trust’s ability to transact is restricted to the actions authorized by its trust documents. The Saldivars allege that here, the Trust documents permit only one specific method of transfer to the Trust, set forth in § 2.01 of the PSA. Section 2.01 requires the Depositor to provide the Trustee with the original Mortgage Note, endorsed in blank or endorsed with the following: “Pay to the order of Deutsche Bank, as Trustee under the applicable agreement, without recourse.” All prior and intervening endorsements must show a complete chain of endorsement from the originator to the Trustee.
Under New York Estates Powers and Trusts Law § 7-2.1(c), property must be registered in the name of the trustee for a particular trust in order for transfer to the trustee to be effective. Trust property cannot be held with incomplete endorsements and assignments that do not indicate that the property is held in trust by a trustee for a specific beneficiary trust.
The Saldivars allege that the Note was not transferred to the Trust until 2011, resulting in an invalid assignment of the Note to the Trust. The Saldivars allege that this defect means that Deutsche Bank and Chase are not valid Note Holders.
(2-4, footnotes and citations omitted) The Court agreed, at least while “accepting all well-pleaded facts as true.” (5)
(HT April Charney)
June 6, 2013 | Permalink | No Comments
