March 20, 2013
Washington District Court Held that MERS was Properly a Beneficiary
In Vawter v. Quality Loan Service Corp. of Washington, 707 F.Supp.2d 1115 (W.D. Wash. Apr. 22, 2010), the court dismissed the homeowner’s claim on the basis that MERS was properly a beneficiary and entitled to effect sale of defaulted‐upon property. The homeowners applied for a loan to refinance their home. This culminated in the execution of an adjustable-rate note in the amount of $328,000 with Paul Financial, LLC. The note was secured by a deed of trust, which listed Paul Financial as the lender, MERS as the beneficiary, “acting solely as a nominee for Lender and Lender’s successors and assigns,” and First American Title Insurance Company as the trustee. The note was transferred from Paul Financial to Chase. The homeowners were notified that Homecomings Financial would begin servicing their loan. They were then told by Homecomings Financial that Washington Mutual Bank, which was subsequently acquired in part by Chase, would take over the servicing of their loan. The homeowners argued that when Chase obtained possession of the note they knew he was the “purported holder” and could not “properly ascertain its real role in connection with their mortgage loan.” The parties to the Deed of Trust also changed over time. MERS assigned its beneficial interest under the Deed of Trust to Chase. The homeowners acknowledged that MERS was listed on the Deed of Trust as holding the beneficial interest, but contested whether MERS was actually entitled to serve as the beneficiary, asserting that “[t]he entirety of MERS’ representations about its role and authority to act is false.” The court dismissed these claims and found that MERS was properly a beneficiary given the language in the note.
Moreover, the court looked at the Deed of Trust Act (“DTA”). In Washington, the DTA defines a dead of trust as a form of three-party mortgage. In 1965, the Washington legislature enacted the DTA which involving not only a lender and a borrower, but also a neutral third party called a trustee. Under the definition in the DTA, the court found that the homeowners failed to plead a viable claim under the DTA and Washington law. They stated that the cause of action, though styled in the complaint as a claim for wrongful foreclosure, is properly construed as a claim for wrongful institution of non-judicial foreclosure proceedings since the trustee’s sale was discontinued.
March 20, 2013 | Permalink | No Comments
Wisconsin Appellate Court Hold that Note and Mortgage are Both Transferred when Assignment is Made
In Countrywide Home Loan Servicing, LP v. Rohlf, No. 2009‐AP‐2330, 2010 WL 4630328 (Wis. App. Nov. 17, 2010), the court distinguished the decision of Landmark v. Kesler and held that the note and the mortgage are both transferred when assignment is made. The homeowners appealed from judgments of foreclosure on their homestead in Winnebago County and property they owned in Green Lake County. They argued that Countrywide Home Loans Servicing LP did not establish that it was the holder of the note and mortgage on the Oshkosh home. The court found that because the mortgage designates MERS as the mortgagee and nominee of American Sterling Bank, the lender, MERS was allowed to act as American Sterling Bank and assign the mortgage to Countrywide. In addition, the court held that the note and mortgage are to be construed together even if the note and mortgage are sold one or more times because the assignment of mortgage transfers both the note and mortgage. Since the homeowners presented no evidence to refute the assignment of both the note and mortgage to Countrywide and also failed to establish that MERS designation as nominee for American Sterling Bank did not include authority to assign the note, the court found that Countrywide had standing to foreclose.
March 20, 2013 | Permalink | No Comments
A Bransten Trio Join Judicial Chorus on Misrepresentation
Justice Bransten, a judge in the Commercial Division of the N.Y. S. Supreme (trial) Court, issued three similar decisions last week denying motions to dismiss lawsuits by Allstate over its purchase of hundreds of millions of dollars of MBS. The net result is that various Deutsche Bank, BoA’s Merrill Lynch and Morgan Stanley entities must continue to face allegations of fraud relating to those purchases.
In the Deutsche Bank case, the court rejected “the notion that defendants are immunized from liability because the Offering Materials generally disclosed that the representations were based on information provided by the originators.” (22)
The court also found that “defendants can be held liable for promoting the securities based upon the high ratings from the credit rating agencies, if, as alleged, thy knew the ratings were based on false information provided to the agencies.” (22) Finally, the court found that “Defendants’ occasional disclaimers cannot be invoked to excuse the wholesale abandonment of underwriting standards and practices.” (24-25)
Justice Bransten joins a growing chorus of judges who reject the notion that vague disclosures can protect parties who engage in rampant misrepresentation. One wonders how this body of law will impact the behavior of Wall Street firms during the next boom.
March 20, 2013 | Permalink | No Comments
March 19, 2013
Reiss on CFPB’s New Escrow Rules
The CFPB Journal interviewed me here about the new five year escrow requirement for Higher-Priced Mortgage Loans (HPMLs):
According to David Reiss, professor of law at Brooklyn Law School, the text of the Dodd-Frank Act itself requires the five-year escrow period be implemented.
Specifically, the CFPB’s rule implements sections 1461 and 1462 of the Dodd Frank Act, which amends the requirements for maintaining escrow accounts in connection with higher-priced mortgage loans.
“CFPB has indicated that it is trying to have a coordinated roll out of new mortgage regulations and this is part of that roll out,” Reiss says. “Creditors will benefit from the float on the aggregate escrow accounts—a small amount for each individual homeowner but potentially a meaningful amount for creditors, particularly if interest rates rise to their historic average or higher in coming years.”
Per the rule, a creditor may not cancel escrow accounts required under the rule except with the termination of the loan or the receipt of a consumer’s request to cancel the escrow account no sooner than five years after it was established, whichever happens first. The CFPB’s rule also states that the creditor may not cancel the escrow account unless the unpaid principal balance is less than 80 percent of the property’s original value and the consumer is not delinquent or in default on the loan at the time of the request.
One key aspect of the rule involves the exempting small creditors who operate primarily in rural or underserved areas. According to the CFPB, to qualify for the exemption, a creditor must:
- Make more than half of its first-lien mortgages on properties located in counties that are designated either “rural” or “underserved” by the CFPB
- Have had assets of less than $2 billion at the end of the preceding calendar year
- Have originated, together with its affiliates, 500 or fewer covered, first-lien transactions during the preceding calendar year
- Together with its affiliates, not maintain escrows for property taxes or insurance for any mortgage it or its affiliate currently services, except when the escrow account was established for a first-lien, higher-priced mortgage loan between April 1, 2010 and before June 1, 2013
- Escrow accounts established after consummation as an accommodation to assist distressed consumers in avoiding default or foreclosure
One outcome of the escrow requirement as it pertains to creditors is the marginal cost of maintaining escrows for five years instead of one. “To some extent, creditors may be able to pass along the increased cost of the longer escrow term to homeowners,” Reiss says. “This is a rule that is probably good for homeowners and creditors in the aggregate.”
March 19, 2013 | Permalink | No Comments
U.S. District Court in Oregon Dismisses Borrower’s Claims Against Defendant Financial Institutions and Holds MERS Valid Beneficiary Under Deed of Trust
In Beyer v. Bank of America, 800 F.Supp.2d 1157 (2011), the U.S. District Court for the District of Oregon dismissed a borrower’s complaint against defendant financial institutions in its entirety and held MERS was a valid beneficiary under a deed of trust.
In June 2006, Beyer (“Borrower”) executed a note and deed of trust. The deed of trust named MERS as the beneficiary and Fidelity National Title Insurance (“Fidelity”) as the trustee.
In December 2009, MERS assigned its beneficial interest in the deed of trust to Deutsche Bank National Trust Company (“Deutsche Bank”). The deed of trust and the assignment were both duly recorded.
Thereafter, Borrower filed suit to prevent foreclosure and moved for a temporary restraining order (“TRO”)(the case did not describe the events surrounding the foreclosure other than those specified above). Defendant financial institutions moved to dismiss the complaint for failure to state a claim. The Court denied Borrower’s motion for a TRO and granted defendants’ motion dismissing the complaint in its entirety.
Borrower asserted four claims in the complaint, and the Court addressed them in turn:
First, Borrower argued defendants could not proceed with foreclosure without first presenting the promissory note. The Court dismissed this claim because under Oregon Law, defendants were not required to present the note as part of the foreclosure process. The statute requires only presentation of the deed of trust in a nonjudicial foreclosure, such as the one in this case.
Second, Borrower argued the deed of trust was null and void because it had been separated from the note, and therefore, Deutsche Bank (assignee of the beneficial interest in the deed of trust) was not entitled to foreclose. The Court dismissed this claim because the Oregon Supreme Court has expressly permitted foreclosure where the deed of trust and note had been separated and later rejoined.
Third, Borrower argued defendants committed fraud by naming MERS as the beneficiary because under Oregon Law, MERS is not a beneficiary. If Borrower’s claim were true, then MERS could not have validly assigned the deed of trust to Deutsche Bank.
The statute defines “beneficiary” as “the person named or otherwise designated in a [deed of trust] as the person for whose benefit a [deed of trust] is given.” One line of cases interpreting this statute holds that because MERS was named as the beneficiary, MERS is the beneficiary under Oregon Law. Another line of cases holds that while MERS is named as the beneficiary, the benefit of the deed of trust actually goes to the lender. The Court, however, does not address this issue because MERS was both named as the beneficiary and designated as the person receiving the benefit of the deed of trust.
Under Oregon Law, the purpose of a deed of trust is to secure performance of an obligation owed to the beneficiary, so the benefit of a deed of trust is that the obligation is fulfilled. Here, the deed of trust secured payment of the note, making the benefit of the deed of trust payment of the note. Under Oregon Law, the “beneficiary” is the person for whose benefit the deed of trust is given. Therefore, the beneficiary of the deed of trust is the person who has the right to payment of the note. Borrower argued that the obligation (payment of the note) was owed to the lender, not MERS, and therefore, the lender was the proper beneficiary.
The Court disagreed, however, because the deed of trust expressly named MERS as the beneficiary, and the Court concluded that MERS was entitled to receive payment of the note, thereby making MERS a proper beneficiary. In essence, the deed of trust granted MERS the right to exercise all rights and interests of the lender “if necessary to comply with law or custom.” This includes the right to receive payment of the note. The deed of trust repeatedly referred to MERS as the beneficiary, and this would not comply with Oregon Law unless MERS had the right to receive payment of the note. Therefore, the Court rejected Borrower’s arguments and dismissed this claim because MERS was a proper beneficiary of the deed of trust.
The Court also noted that this holding is consistent with public policy because it makes no change to the Borrower’s rights or obligations. It only changes the party to whom those obligations are owed. Moreover, this conclusion best carries out the intent of the parties, who clearly intended for MERS to be the beneficiary.
Finally, Borrower argued defendants committed fraud by authorizing non-employees to execute transfer documents. The Court dismissed this claim because Borrower failed to put forth any reason why defendants could not authorize these parties to act as their agents in executing these transactions. The mere fact that the signatories were not “regular employees” is not enough to establish a claim for fraud.
March 19, 2013 | Permalink | No Comments
Florida Appellate Court Reverses Summary Judgment in Favor of Bank in Foreclosure Action Because of Issues of Fact as to Whether Bank Had Standing to Foreclose
In BAC Funding Consortium Inc. ISAOA/ATIMA v. Jean-Jacques, 28 So.3d 936 (2010), the Second District Court of Appeal of Florida (“Court”) reversed the trial court’s entry of summary judgment in favor of a bank in a foreclosure action because a genuine issues of material fact existed as to whether the bank had standing to foreclose.
In December 2007, US Bank National Association (“US Bank”) filed a complaint seeking to foreclose a mortgage and reestablish a lost note. US Bank attached a copy of the mortgage to the complaint, but the mortgage identified Fremont Investment and Loan (“Fremont”) as the lender, and MERS as the mortgagee.
Instead of answering the complaint, BAC Funding Consortium Inc. (“BAC”) moved to dismiss on the grounds that US Bank lacked standing to foreclose because US Bank failed to show it actually held the note or mortgage in question.
In its response, US Bank attached a purported assignment of mortgage. However, the assignment was neither executed nor notarized, and the space for the name of the assignee was blank. Further, US Bank did not provide anything in its response to authenticate the assignment or otherwise render it admissible into evidence.
US Bank then voluntarily dismissed its action to reestablish the lost note, but moved for summary judgment on the foreclosure issue. With its motion, US Bank filed the original note and mortgage, but neither document identified US Bank as the holder. US Bank did not file the original purported assignment or any other document establishing its right to foreclose.
Despite the foregoing, the trial court granted US Bank’s motion for summary judgment. BAC appealed, arguing that summary judgment was improper because US Bank never established it had standing to foreclose.
The Court reversed and remanded because US Bank failed to carry its burden entitling it to summary judgment. Specifically, there were genuine issues of material fact as to whether US Bank had standing. The exhibits attached to the complaint conflicted with US Bank’s assertions, the note did not identify US Bank as the lender or holder, and US Bank did not provide an assignment or other evidence establishing it as the holder.
US Bank argued that it was not required to file an assignment of the note or mortgage or otherwise prove that it validly held them in order to be entitled to summary judgment. The Court disagreed for two reasons. First, although BAC did not answer the complaint, US Bank was still required to show that no genuine issue of material fact could be raised if an answer were filed. Here, the record reveals US Bank failed to meet this requirement. Second, regardless of whether BAC answers the complaint, US Bank was required to establish through admissible evidence that it had standing to foreclose before it would be entitled to summary judgment. Here, the incomplete, unsigned and unauthenticated assignment was not admissible evidence, and US Bank provided no other evidence of its standing.
As a result, the Court held the trial court’s entry summary judgment was inappropriate and reversed and remanded for further proceedings.
March 19, 2013 | Permalink | No Comments
March 18, 2013
Reiss on Future of the FHFA
Law360 wrote a story (here, behind a paywall) on the Obama Administration’s plans for the Federal Housing Finance Agency. It reads in part
Although the Obama administration has dealt aggressively with congressional Republicans in some areas, it’s unlikely to make a recess appointment before the U.S. Supreme Court rules on the NLRB case, or chooses not to take it.
“The notion of a recess appointment is even harder to fathom,” said Brooklyn Law School professor David Reiss.
Still, despite those challenges, there are whispers that DeMarco could be replaced within the next few weeks. The names of some potential replacements, including Rep. Mel Watt, D-N.C., have been publicly floated.
A second part of DeMarco’s job is to help figure out just what to do with Fannie and Freddie, and how to bring more private money into the mortgage market.
Currently, Fannie and Freddie own or guarantee around 75 percent of all residential mortgages. Combined with the mortgages owned by the FHFA and the U.S. Department of Veterans Affairs, more than 90 percent of mortgages have some sort of federal backing.
DeMarco in October laid out a five-year plan for winding down Fannie and Freddie, including a common securitization platform for the two companies.
The Obama administration may well be on board with those plans and DeMarco provides convenient cover, Reiss said.
“It’s hard to imagine that Ed DeMarco is taking big positions like that without the administration’s at least tacit approval,” he said.
March 18, 2013 | Permalink | No Comments
