June 7, 2013
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
Massachusetts’s District Court Finds That Non-Party Mortgagors Lack Standing to Challenge Assignment Between Third Parties
In Aliberti v. GMAC Mortgage, LLC, 779 F.Supp.2d 242 (D.Mass.2011), the court granted the defendant’s motion to dismiss the plaintiff’s claims. The plaintiff sought to stay GMAC’s foreclosure proceeding by challenging the assignment of the mortgage from MERS to GMAC. Plaintiff filed a three-count compliant that alleged, fraud, violations of Massachusetts’s foreclosure procedural law, and challenged the validity of the assignment.
Plaintiff alleged that the GMAC’s signatory who authorized the assignment was a “well known robo signer” and therefore the plaintiff had reason to believe that the signature on the assignment of the Mortgage was not genuine. The court rejected this argument, noting that an assignment is presumptively valid and the plaintiff failed to plead facts sufficient to challenge its presumptive validity. Further since the assignment satisfied the requirements of Massachusetts law they are deemed valid.
Next the plaintiff alleged that the assignment was invalid because MERS was never actually the mortgagee. Although, the mortgage stated that MERS was the mortgagee it also stated that “MERS is a separate corporation acting solely as a nominee for the lender and lender’s successors and assigns,” plaintiff alleged that MERS could not be both the agent as the nominee and the principal as the mortgagee to the same property right. Plaintiffs further claim GMAC could not demonstrate valid assignment of the promissory note, and that, because it could not establish valid assignment of both the mortgage and the promissory note, it had no right to foreclose on the property.
In addressing whether the assignment was valid, the court sided with the GMAC’s argument that the plaintiffs, as mortgagors, had no standing to challenge the validity of a mortgage assignment between the mortgagee and a third party. The court relied on the holding in Livonia Property Holdings, LLC. V. 12840-12978 Farmington Road Holdings, LLC., 717 F.Supp 2d 727, 735 (E.D. Mich. 2010). On similar facts, the court in Livonia, held that a borrower, as a non-party to the assignment documents it was challenging, lacked standing to challenge them.
Lastly, plaintiffs contented that GMAC’s refusal to negotiate loan modification was in violation of Massachusetts’s law. The court also rejected the contention that GMAC’s failure to negotiate constituted a violation. Under Massachusetts’s case law, absent an explicit provision in the mortgage contract, there is no duty to negotiate for loan modification once a mortgagor defaults.
June 6, 2013 | Permalink | No Comments
June 5, 2013
The Mortgage Interest Deduction: A Taxing Expenditure
The Congressional Budget Office has issued a report, The Distribution of Major Tax Expenditures in the Individual Income Tax System, which evaluates the mortgage interest deduction and the state and local tax deduction among other tax expenditures. It finds (consistent with all previous findings) that they accrue disproportionately — grossly so — to the wealthy. The mortgage interest deduction has a budgetary effect of $70 billion and the state and local tax deduction has a budgetary effect of $77 billion. (6, Table 1) (to be clear, budgetary effect is not the same as lost revenue; read the report for an explanation of the difference)
Itemized deductions such as these “provide the largest benefits — in both absolute dollars and relative to income — to the highest-income taxpayers. Those tax expenditures benefit only the roughly one-third of taxpayers who itemize their deductions, and lower-income taxpayers are much less likely than higher-income taxpayers to do so.” (17) The CBO “estimates that the top quintile will receive almost three-quarters of the benefit of the deduction in 2013, including 15 percent accruing to the top percentile.” (18)
I and many, many others have argued that this is not a good state of affairs but the real estate industry are very well organized around this issue. Real estate brokers are particularly focused on this because a reduction in these deductions would likely lead to a significant and permanent reduction in their income. Smaller deductions would make owning a home less financially attractive and thereby push down prices. Brokers typically get paid by a percentage commission of the sales price. So they would suffer not just during a transition period (as sellers in the transition period would) but for all time.
So there is no reason to believe that we will see reform around these regressive tax expenditures in the near future, but it should always be kept on the table as part of a tax reform package, particularly if it is implemented in some incremental way (for example, capping the value of the deductions individually or as part of a basket of deductions).
June 5, 2013 | Permalink | No Comments
Massachusetts District Court Rejects Homeowner-Plaintiff’s Challenge of the Validity of MERS’s Assignment in a Foreclosure Proceeding
In Kiah v. Aurora Loan Services, LLC, No. 10-40161-FDA, 2011 WL 841282 (D.Mass. Mar.4, 2011), the plaintiff-homeowner alleged that discrepancies in the assignment process prevented the foreclosing party [Aurora Loan Services, LLC] from having statutory power to initiate such proceedings. The plaintiff, on several grounds, challenged Aurora’s standing to bring such an action.
The plaintiff contended that MERS did not have the power to assign the mortgage to Aurora and that Aurora therefore cannot foreclose on the plaintiff’s property because it is not the mortgagee. The plaintiff did not, however, dispute Aurora’s possession of the note or challenge Aurora’s substantive right to enforce the note.
The question of mortgage ownership arose out of bankruptcy of the loan originator. The plaintiff argued that originator filed for bankruptcy and was dissolved before the mortgage was assigned to Aurora, that MERS could not act on behalf of a non-existent entity, and therefore MERS did not have the legal power to transfer the plaintiff’s mortgage to Aurora. The plaintiff argued that the assignment of the mortgage and the mortgage itself were therefore void as a result.
In deciding whether the mortgage and assignment were void the court focused on the assignment of the note and rejected the plaintiff’s contentions because he did not challenge the validity of the assignment of the note to Aurora. By law in Massachusetts, the transfer of the note automatically transfers an equitable interest in the underlying mortgage, even without a formal assignment. Thus, an equitable right in the mortgage was transferred to Aurora along with the note.
The plaintiff’s claim that the assignment was fraudulent was also without merit. The plaintiff alleged that Aurora cannot be the mortgagee if another entity owns the debt and that the assignment of the mortgage to Aurora is therefore fraudulent. The Court found that Aurora was acting in their capacity as a servicer and as such could act on behalf of Fannie Mae, the owner of the debt. Thus, as Fannie Mae’s agent, Aurora has the right to both collect debt and foreclose on the mortgage.
The plaintiff also alleged that the assignment was invalid as it was backdated and that MERS lacked the authority to have the mortgage assigned. Plaintiff asserted that the “backdating of the document was part of a scheme and conspiracy of fraudulent conveyance.” Plaintiff argued that the assignment was ineffective because MERS’s signing officer lacked the signatory authority at the time of the assignment to Aurora. The court found both of these contentions without merit. First, the signing officer had signatory authority on the date of assignment given to him by MERS’ “Corporate Resolution” that predated the assignment. Second, the Court found that even if the signing officer lacked the authority to assign the mortgage, this would not invalidate the assignment under Massachusetts law.
Plaintiff further contended that an assignment of a mortgage is invalid unless the note is transferred with it. As such Plaintiff alleged that MERS could not have assigned the mortgage because it did not have physical possession of, or a beneficial interest in, the note, and therefore the assignment is void. The Court found that even if MERS was not in possession of or a beneficial interest in the note, this claim fails because MERS was holding the mortgage in trust for Aurora. The assignment of mortgage, therefore, would still be valid.
June 5, 2013 | Permalink | No Comments
