June 4, 2013
Effect of Qualified Mortgages on Credit Availability: Little to None
The Congressional Research Service has issued a somewhat opaque report, The Ability-to-Repay Rule: Possible Effects of the Qualified Mortgage Definition on Credit Availability and Other Selected Issues, that summarizes the Ability-to-Repay Rule. More importantly, it offers a bit of an evaluation of the impact of the new regulatory regime for mortgages on the availability of credit.
According to the CFPB, “close to 100% of the 2011 mortgage market would have been in compliance with the” Ability-to-Repay Rule. (9) The CFPB thus believes that the rule will “have a minimal effect on access to credit.” (9) The report reviews two alternative estimates, one by CoreLogic and another by Amherst Securities, that offer a less optimistic forecast.
CoreLogic uses 2010 data for its analysis. The CRS appears to agree with me that the CoreLogic report is misleading, but it does report that CoreLogic believes that nearly half of all mortgages will not meet the Qualified Mortgage rules once temporary compliance options for the rule expire. I do not credit the CoreLogic report and would discount its findings for the reasons that I have given previously and for the additional reasons contained in the CRS report.
Amherst takes a look at jumbo mortgages in 2012 and finds that a significant portion of them would not comply with the rule. I have not seen the Amherst report, so I can only respond to what I read about it in the CRS report. The bottom line appears that about eight percent of jumbos are likely not to comply with the rule. Given that jumbos make up about 10% of the mortgage market (at least according to CoreLogic), we are talking about one percent of the total residential mortgage market. Many of those non-complying mortgages do not comply because of limitations on debt-to-income ratio. Thus, it would appear that the affected borrowers could get mortgages for smaller amounts that would comply with the rule.
I think it is safe to say that based on what we know now, the rule will have an extremely modest effect on credit availability.
June 4, 2013 | Permalink | No Comments
Rhode Island Superior Court: Homeowners Lack Standing to Challenge MERS Assignment
In Scarcello v. Mortgage Electronic Registration Systems, Inc., et al, C.A. No. KC 2011-0548 (R.I. Super. June 26, 2012), the court granted defendant MERS’s motion to dismiss plaintiffs’ complaint challenging assignee Aurora’s standing to foreclose and seeking an order to quiet title on the property. Plaintiff homeowners executed a note and mortgage for the property to MERS as nominee for Homecomings Financial Network, Inc., which were later assigned by MERS to Aurora Loan Services, Inc. After plaintiffs defaulted, Aurora foreclosed and subsequently sold the property. Plaintiff homeowners alleged that Aurora, as assignee, lacked standing to foreclose and sell the property. The court found the facts of Scarcello similar to those in Kriegel v. Mortgage Electronic Registration Systems, No. PC 2010-7099, 2011 WL 4947398 (R.I. Super. Oct. 13, 2011) stating “it is well established that ‘homeowners lack standing to challenge the propriety of mortgage assignments and the effect those assignments, if any, could have on the underlying obligation.'” Since plaintiff homeowners are not a party to the assignment, they lack standing to challenge the assignment’s validity. Plaintiffs further alleged that the assignment was unenforceable without a power of attorney for the signing party, but the court held that this was not required as MERS’s power to assign the mortgage stems from its designation as mortgagee and nominee of Homecomings, as clearly stated in the mortgage instrument. Plaintiffs failed to state a plausible claim for relief, and as such, the court dismissed plaintiffs’ complaint.
June 4, 2013 | Permalink | No Comments
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
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