April 6, 2013
Utah State Court Holds that MERS Maintains Its Rights Under the Deed of Trust Despite the Sale and Securitization of the Underlying Note
In Commonwealth Property Advocates v. Mortgage Electronic Registration System, 263 P.3d 397, (2011), the Court of Appeals of Utah affirmed a Utah district court’s order dismissing the plaintiff’s complaint. In the case at hand, a home buyer executed a promissory note in favor of her lending bank for $417,000. The note was secured under the terms of a deed of trust describing property in Utah as collateral for the debt. The deed of trust identified MERS as the “nominee for Lender and Lender’s successors and assigns” and as the “beneficiary under this Security Instrument.” Moreover, MERS had the right “to exercise any or all of Lender’s interests, 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 the Security Instrument.” The lender assigned its servicing rights to Citi. It was alleged that the lender promptly sold the debt represented by the note to Fannie Mae, which led to the securitization of the home buyer’s debt. On December 6, 2009, MERS assigned its “beneficial interest” to Citi. The home buyer defaulted on the note, and on approximately December 8, 2009, the successor trustee to the deed of trust recorded a notice of default and election to sell. On December 31, 2009, a quitclaim deed was recorded by which the home buyer transferred her interest in the Utah property to Commonwealth Property Advocates (CPA).
The plaintiff argues that securitization of the note “nullified MERS’s and Citi’s rights under the terms of the Deed of Trust.” The plaintiff goes on to say that Utah Code § 57-1-35 provides that the deed of trust, and all of the rights associated with it, were transferred with the note to the investors when the note was securitized, “thereby stripping MERS and Citi of any rights carved out in the terms of the deed of trust.”
The court, however, disagreed with the plaintiff’s argument and interpretation of Utah Code § 57-1-35. The court reasoned that the “plain language of this statute simply describes the long-applied principle in [this] jurisdiction that when a debt is transferred, the underlying security continues to secure the debt.” The court further interpreted Utah Code § 57-1-35 as ensuring the basic presumption that “a transfer of an obligation secured by a mortgage also transfers the mortgage unless the parties to the transfer agree otherwise.” Moreover, the “plain language of the statute does nothing to prevent MERS from acting as nominee for Lender and Lender’s successors and assigns when it is permitted by the Deed of Trust.” The deed of trust explicitly gave MERS the right to foreclose on behalf of “Lender and Lender’s successors and assigns.” The statute does not prohibit parties from contracting for these arrangements, and nowhere in the documents themselves is MERS explicitly prohibited from then assigning its beneficial interests under the note to Citi. Thus, MERS and Citi maintained their rights as provided under the deed of trust despite the securitization process.
April 6, 2013 | Permalink | No Comments
April 5, 2013
Massachusetts Bankruptcy Court Holds that Mortgagee has Standing to Request Relief from Stay Because Homeowner Lacked Equity in his Property
In In re Lopez, 446 B.R. 12 (Bankr. D. Mass. 2011), the court granted Mortgagee’s Motion for Relief .
On October 28, 2004, Henry Lopez—the Debtor—executed a note in the amount of $360,000 to Shelter Mortgage Company, LLC. To secure that obligation, Lopez also granted a mortgage to MERS as nominee for Shelter. MERS subsequently assigned the Mortgage to Aurora Loan Services, LLC, and recorded it in the Registry on April 13, 2008.
Lopez filed a skeletal Chapter 13 petition on January 17, 2009. On September 3, 2010, Aurora filed a Motion for relief from stay asserting that Lopez was three post-petition payments in arrears, the promissory note was in default, the Property was not necessary for an effective reorganization, and Lopez lacked equity in the Property. Lopez argued that a Chapter 13 debtor’s home is necessary for an effective reorganization. He also asserted that Aurora could not seek relief from stay solely based on missed or reduced payments during the modification process.
For Aurora to have standing to bring a Motion for Relief, Aurora had to be “a party in interest.” In Massachusetts, a Mortgagee with a power of sale is a party in interest. Here, Aurora presented documents illustrating that MERS, as nominee for Shelter, was the original Mortgagee who assigned the Mortgage to Aurora. Thus, Aurora established a colorable claim to the Property as Mortgagee.
Lopez asserted that the Mortgage Assignment without the note was a nullity. 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.” Even though MERS never had possession of the Note, it legally held the Mortgage in trust for the Note holder. Lopez also contended that MERS, as nominee of Shelter, could not assign the Mortgage to Aurora. But even though MERS never held the Note, it had nominee status and thus could transfer the Mortgage on behalf of the Note holder.
In determining whether relief from stay was warranted, Aurora had to show that their interest in Lopez’s Property was not adequately protected pursuant to 11 U.S.C. § 362(d)(1), or show Lopez’s lack of equity in the Property pursuant to 11 U.S.C. § 362(d)(2). Because Lopez’s total indebtedness was $389,615.16. The court held that his property value did not exceed his indebtedness. Thus, Lopez lacked equity in the Property.
Lopez also claimed that as a Chapter 13 debtor, there was an irrebuttable presumption that his home was necessary for an effective reorganization even though there is no equity in the Property. The court held that even if there was an irrebuttable presumption, it would still grant relief from stay because of Lopez’s post-petition arrears and the declining value of the Property in comparison to the increasing claims. Lopez then claimed that he had arrears because he was wrongly denied a modification under the Home Affordable Modification Program (HAMP). HAMP is supposed to help homeowners avoid foreclosure by obtaining loan modifications that reduce their monthly mortgage payments to sustainable levels. Borrowers seeking modifications under HAMP must satisfy a variety of eligibility requirements. Here, Lopez had not stated any theory through which he could assert standing to obtain the relief he sought. Thus, the court granted Aurora’s Motion for Relief.
April 5, 2013 | Permalink | No Comments
Reiss on Mortgage Insurance Probe, Again
American Banker also ran a story on the settlement, Lenders Likely Next Target in CFPB Reinsurance Kickback Probe (paywall) that includes an interview with me:
WASHINGTON – The Consumer Financial Protection Bureau’s enforcement actions against four large mortgage insurers are likely just the start of efforts against an alleged widespread mortgage insurance kickback scheme that involves several lenders.
The agency ordered the firms to stop reinsurance deals with mortgage lenders that were purportedly made in return for getting a larger slice of the mortgage insurance pie. It also said the insurance companies must pay a total of $15.4 million in civil money penalties and undergo additional CFPB monitoring.
Yet the paltry size of the fines – combined with additional investigations and ongoing litigation involving borrowers, insurers and big banks alleged to have participated – suggest more enforcement activity is still on the way, including against lenders that were said to have received the reinsurance business. The scheme is estimated by some to have involved as much as $6 billion in kickbacks.
“In the context of the massive amount of mortgage fraud that occurred in this industry, a $15 million penalty seems pretty small,” said David Reiss, a professor at Brooklyn Law School. “But given that further enforcement against the large financial institutions that demanded the kickbacks is possibly still on the horizon, the jury is out on whether this will be an effective set of enforcement actions.”
April 5, 2013 | Permalink | No Comments
The 11th Circuit Court in Georgia Holds that Homeowners’ Claim of Wrongful Foreclosure Must be Dismissed Because there Has Not Been an Actual Foreclosure Sale on the Property Yet
In Jenkins v. McCalla Raymer, LLC, 492 F. App’x 968 (11th Cir. 2012), the court dismissed homeowners’ second amended complaint for failure to state a claim.
Wendy Jenkins and Eleanor Spratlin Crawford appealed from the District Court’s order dismissing their second amended complaint for failure to state a claim. Appellants were Georgia homeowners who brought a class action suit against McCalla Raymer, LLC and other various defendants alleging, among other things, wrongful foreclosure. On appeal, Appellants allege that: 1) the magistrate judge erred in failing to sua sponte recuse himself, and 2) the District Court erred in dismissing the appellants’ wrongful foreclosure claim.
28 U.S.C. § 455(a) requires a judge to recuse himself in any proceeding in which his impartiality might reasonably be questioned. The test is whether an “objective, disinterested, lay observer . . . would entertain a significant doubt about the judge’s impartiality.” McWhorter v. City of Birmingham, 906 F.2d 674, 678 (11th Cir. 1990). And pursuant to 28 U.S.C. § 455(b)(1), a judge is required to recuse himself only where the judge has an actual bias or prejudice against a litigant. Here, Appellants suggest that the magistrate judge should have recused himself because of his participation in two seminars on residential mortgage regulation. In Appellants’ opinion, the recusal was required because the magistrate judge was presumably giving his judicial perspective on claims similar to the instant case. The court stated, however, that when a judge has spoken or written on a particular area of law, he does not automatically need to recuse himself unless specific remarks indicate that he harbors a bias towards or against a litigant or legal claim. The court then held that the magistrate judge was not required to recuse himself because Appellants did not provide information regarding the substance of the magistrate judge’s comments or topics discussed during the seminar. Thus, the court could not conclude that an objective observer would “entertain a significant doubt about the magistrate judge’s impartiality.”
Appellants’ also claimed that the non-judicial foreclosure proceedings were improperly commenced because certain defendants did not have the power to initiate the foreclosure proceedings—the security deeds were not properly assigned to the foreclosing parties. The court noted, however, that although there were no Georgia cases with law directly on point, other non-judicial foreclosure states have held that a homeowner cannot seek damages in a wrongful foreclosure action unless there has been an actual foreclosure sale. Because the Appellants failed to cite any authority indicating that Georgia courts would rule differently, the court concluded that Georgia law required a plaintiff seeking damages for wrongful foreclosure to establish that the property at issue was actually sold at foreclosure. Because Appellants failed to allege that their properties were foreclosed on, they did not state a claim for wrongful foreclosure. Thus, Appellants’ claim of wrongful foreclosure was properly dismissed.
Reiss on Mortgage Insurance Probe
Law360 interviewed me in Lenders Face Hefty Fines in CFPB Mortgage Insurance Probe (paywall) about the recent $15 million settlement with four mortgage insurers. It reads in part:
The Consumer Financial Protection Bureau’s $15.4 million settlement Thursday with four mortgage insurers is just the first to come out of a probe into an alleged scheme to pay kickbacks to banks in exchange for business, and lenders caught up in the agency’s net are likely to get hit even harder, experts say.
In announcing the settlement, the CFPB made clear that it was looking closely at lenders and their role in the alleged kickback scheme, which the bureau said began in the 1990s. Implied in the CFPB’s statements is that the lenders were at the center of the enterprise, and that could mean that both bank and nonbank lenders could face a far stiffer penalty than the mortgage insurance firms paid, said Brooklyn Law School professor David Reiss.
“In the context of the overall markets that we’re talking about, $15 million is not even a rounding error. If this is for real, it’s going to have to be a larger settlement with the financial institutions that demanded the bribe,” he said.
April 5, 2013 | Permalink | No Comments
April 4, 2013
Stand-Offish
Judge Swain (SDNY) issued a Memorandum Opinion and Order in Rajamin v. Deutsche Bank National Trust Co. in which she followed “the weight of caselaw throughout the country” to effectively hold that “a non-party to a [Pooling and Servicing Agreement lacks standing to assert non-compliance with the PSA as a claim or defense unless the non-party is an intended (not merely incidental) third party beneficiary of the PSA.” (6) The Opinion cites a number of cases to that effect.
KeAupuni Akina, Brad Borden and I will be posting a draft of an article on the “Show Me The Note!” foreclosure defense soon. There is a real thicket of cases addressing the extent to which homeowners can raise real and evidentiary problems with the loan documents. The general rule seems to be that courts do not find these problems to be germane to the homeowner’s foreclosure, eviction or bankruptcy proceeding. There are exceptions, however, such as the Eaton v. Fannie Mae case which held that the Show Me The Note defense would apply prospectively in Massachusetts. But more often than not, courts stick closely to the language of their jurisdiction’s foreclosure statute which tend not to touch upon many issues that arise from the complexities of the securitization process through which these mortgages have traveled.
April 4, 2013 | Permalink | No Comments
