March 2, 2013
Kansas Court of Appeals Holds that Secondary Market Investor Bank has Standing to Foreclose Even Without Mortgage Assignment
In Metlife Home Loans v. Hansen, 286 P.3d 1150 (Kan. App. 2012), the court held that a mortgage assignment is not necessary to the right of a secondary market investor to foreclose in Kansas and that even if an assignment were necessary, the separation of the note and mortgage does not impair the right to foreclose if the two documents end up in the same hands. MetLife Home Loans claimed to be the holder of both the promissory note and the corresponding mortgage on property owned by the homeowners. The note was in default and Metlife sought to foreclose on the property to collect on the Note. The Mortgage named Sunflower Mortgage as the “Lender.” It also referenced the Note signed between the homeowners and Sunflower. The Mortgage defined MERS as the mortgagee and stated that MERS was acting “solely as nominee” for Sunflower and Sunflower’s successors and assigns. The Note and the Mortgage came under MetLife’s common holding through a series of nonparallel endorsements or assignments. The court acknowledged that the only evidence regarding the existence of an agency relationship between MERS and MetLife in this case is the language of the Mortgage itself, but was sufficient to show an agency relationship that would allow it to fall under the exception of unenforceability when it is not held by the same entity that holds the promissory note. Moreover, the court asserted that Kansas law favors keeping the mortgage and the right of the enforcement of the obligation it secures in the hands of the same person or entity. With regards to Metlife’s standing, the court found that as a downstream assignee of the Note, it also retained a beneficial interest in the Mortgage. Therefore, even if the language of MERS’s assignment of the Mortgage to MetLife were somehow faulty, the result would be the same as far as MetLife’s standing to foreclose is concerned because MetLife did not need that assignment in order to vest it with a beneficial interest in the Mortgage.
March 2, 2013 | Permalink | No Comments
March 1, 2013
Rakoff Rules Again for an Investor Against a Securitizer
Judge Rakoff explains his denial of the defendants’ (various Bear Stearns, JPMorgan and WAMU entities) motion to dismiss the suit. The suit alleges that the defendants “made fraudulent representations regarding the riskiness of he securitizations and the underlying loans” upon which the plaintiffs (Dexia and FSA entities) relied to their detriment. (5)
A judge does not typically do much fact-finding in a denial of a motion to dismiss, but there are still some interesting bits:
- “a reasonable fact-finder could conclude that” disclosures about exceptions to underwriting guidelines “suggested to a reasonable investor not the systematic deviation from established underwriting standards alleged by plaintiffs, but rather a low level of occasionally non-compliant loans in the loan pools that could be subject o repurchase.” (11-12) This is important. It means that disclosures must be relatively specific as to the level of risk that the investor will face by deviations from stated underwriting objectives.
- Judge Rakoff also reiterates that underwriters and others involved in securitizations must at least believe themselves the representations that they make. (15) The fact that the investors are sophisticated does not matter: “even a sophisticated party may reply on the representations of another where the facts misrepresented were ‘peculiarly within the Defendants’ knowledge.'” (19, quoting Allied Irish Banks, PL.C. v. Bank of Am., N.A., No. 03-Civ. 3748, 2006 WL 278138 (S.D.N.Y. Feb. 2, 2006))
- “Judge Rakoff did make one tentative finding of fact: “the confidential witness statements incorporated into the Amended Complaint, combined with the documentary sources, support a strong inference that the defendants knew that the mortgages included within the loan pools were not of the quality represented in the offering documents.” (17)
The cases arising from the financial crisis stand for the important (but hopefully uncontroversial) principle that material lies and omissions can be fraudulent even among sophisticated parties. This might make the most sense in Latin: caveat emptor for sure, but there has to be some bona fides.
(Hat tip to Peter Liem)
March 1, 2013 | Permalink | No Comments
February 28, 2013
More on Housing America’s Future
I blogged about some of the big themes in the Bipartisan Policy Center’s Housing America’s Future report. Today, I take a closer look at their position on housing finance in particular:
The report states that “it is highly unlikely that private financial institutions would be willing to assume both interest rate and credit risk, making long-term, fixed-rate financing considerably less available than it is today or only available at higher mortgage rates.” (42) This statement is far from uncontroversial. First, the jumbo private label-market had originated 30 year fixed rate mortgages. There is at least some tolerance for a product in which the private sector bears both credit and interest rate risk. Second, the fixation on the 30 year fixed mortgage product is counter-productive. The typical American household moves every seven years. In an invisible way, pushing people into 30 year fixed mortgages can harm them. Think, for instance, of a young couple moving into a one bedroom condominium unit. The odds that they will be there for 30 years without ever even refinancing to get a lower interest rate or to access the equity they built up is miniscule. But that couple will be paying an interest rate premium to have their interest rate fixed for that whole thirty years. That couple would likely be better served by a 5/1 or 7/1 ARM which would balance a low interest rate in the near term with the risk that they stay longer than expected and pay a higher interest rate in the long term.
The reports fixation on put-back risk (46) is a canard. There is no need to regulate in this area. Now that private parties are aware that it is a serious issue, they will negotiate accordingly.
The report’s concern with “uncertainty related to pending regulations and implementation of new rules” also seems misguided. (47) The housing finance system just went through a near death experience. Of course there is some uncertainty as we plan to take it off of life support.
The report’s position that any “government support for the housing finance system should be explicit and appropriately priced to reflect actual risk” is right on, but the devil will be in the details. (48) How can we set up a system in which political interference won’t distort the pricing of risk? The government does not have a good track record in this regard.
More anon . . .
February 28, 2013 | Permalink | No Comments
Utah District Court Holds that MERS Is Authorized to Begin Non-Judicial Foreclosure Despite the Lender’s Sale of the Loan
In King v. American Mortgage Network, Inc., No. 1:09 CV 162 DAK, 2010 WL 3516475 (D. Utah Sept. 2, 2010), the United States District Court of Utah held that MERS and Chase Home Finance (“Chase”) were authorized to begin non-judicial foreclosure of the plaintiff’s property. In November 2007, Plaintiff received a loan to purchase a property in Utah. Pursuant to the loan, the plaintiff signed a promissory note and a deed of trust. MERS was designated as the beneficiary of the deed of trust and as nominee for the lender and the lender’s assigns. The deed of trust gave MERS authority to foreclose. The lender sold the note to a third party, the Federal National Mortgage Association (“Fannie Mae”), in February 2008. Shortly thereafter, the servicing rights under the note and deed of trust were transferred to Chase. Plaintiff then defaulted under the terms of the loan.
Plaintiff argued that Chase and MERS did not have authority to begin foreclosure of the deed of trust on the plaintiff’s property because the note and deed of trust “split” when the note was sold by the lender. The court disagreed with the plaintiff and stated that there is “no disconnection between the note and mortgage” when MERS is acting as nominee for a lender. While Fannie Mae now owns the note, Chase is the authorized loan servicer on behalf of Fannie Mae. Moreover, MERS is the nominal beneficiary under the deed of trust as agent for Fannie Mae and its “successors and assigns,” which includes Chase. The court concluded that Chase and MERS were “clearly authorized to act on behalf of the holder of the Note, Fannie Mae, to begin foreclosure of the Property.” Thus, the court dismissed the plaintiff’s claims against the defendants.
February 28, 2013 | Permalink | No Comments
Utah District Court Holds that MERS Has the Authority to Initiate Non-Judicial Foreclosure and to Assign Interest to Another Party
In Schmitt v. Stearns Lending, Inc., No. 2:11 CV 00381 DS, 2011 WL 3861609 (D. Utah Aug. 31, 2011), the United States District Court of Utah held that MERS has the authority to initiate non-judicial foreclosure on a property and to assign its interest to another party. In the case at hand, Plaintiff defaulted under the terms of a deed of trust and note securing the repayment of a loan obtained to purchase a home located in Utah. Non-judicial foreclosure proceedings ensued. The mortgage was previously securitized. Plaintiff argued that the securitization process divested Defendants’ interest in the subject property because the plaintiff’s deed of trust and note were separated during the process. The plaintiff also put forth a more general claim that Defendants lacked authority to foreclose on the subject property.
The court rejected the plaintiff’s claims and found that Defendants’ had interest in the property and had the authority to foreclose on it. The court stated that securitization did not divest Defendants’ interest in the subject property; rather, the court held that “the mortgage follows the note” throughout the securitization process. In addition, the court found that Plaintiff “agreed in the Trust Deed that MERS was the beneficiary and that MERS and its successors and assigns had the authority to foreclose on the subject property in the event of default by Plaintiff.” This language, according to the court, gives MERS authority to foreclose on property and assign interest on behalf of a lender. For the above reasons, the court granted Defendants’ motion to dismiss Plaintiff’s claims.
February 28, 2013 | Permalink | No Comments
February 27, 2013
Rakoff Rules for Monoline Insurer Against Securitizer
Judge Rakoff ruled for Assured Guaranty against Flagstar and awarded Assured more than $90 million. The 103 page order is a pretty compelling read as it is a careful review of a battle of the experts and has lots of details about the loans in two Flagstar securitizations. Some interesting bits:
- the third-party due diligence providers, the Clayton Group and the Bohan Group, “were only expected to flag issues if something in the loan files appeared ‘ridiculous.’” (18)
- the court found that many of the loans had “blatant” defects. (75)
Ultimately, the court found “that the loans underlying the Trusts here at issue pervasively breached Flagstar’s contractual representations and warranties.” (91) The court’s findings may have unexpected relevance to other burning issues coming out of the financial crisis, such as whether these securitizations complied with the REMIC rules.
February 27, 2013 | Permalink | No Comments
Michigan Supreme Court Stayed Trial Court Proceedings in Order for the Court in Residential Funding Co. v. Saurman to Decide Whether MERS may commence a Foreclosure-by-Advertisement as Mortgagee of Record
In PB Reit, Inc. v. Debabneh, 801 N.W.2d 380 (Mich. 2011), the Michigan Supreme Court stayed trial court proceedings including attempts to enforce the order of eviction.
Concurring Judge Markman stated that the Court of Appeals holding in Residential Funding Co., LLC v. Saurman, 292 Mich. App. 321, 807 N.W.2d 412 (2011)—that MERS could not foreclose on homeowners property as mortgagee of record—could create “chaos in the housing market.” The court concluded that they would wait for the appeal of Residential Funding Co. to be decided before determining the outcome of this case.
February 27, 2013 | Permalink | No Comments
