March 2, 2013
Arkansas District Court Holds MERS’s Note Assignment Valid and Gives Purchaser Standing to Appoint Agent to Initiate Foreclosure
In Peace v. MERS, 2010 WL 2384263 (E.D. Ark. June 11, 2010), the court held that MERS’ assignment to Note purchaser was valid and properly gave purchaser standing to appoint an agent to initiate a non-judicial foreclosure. The promissory note provides that in return for a loan received from American Home Mortgage, Peace will pay the principal sum of $56,000.00. The mortgage names Defendant MERS as mortgagee, solely as the nominee for AHM, and grants MERS and its successors and assigns the power to sell the property. MERS later assigned the mortgage to BAC Home Loan Servicing. Therefore, since BAC was the holder of the note and mortgage, and ReconTrust was acting as agent of BAC and not on behalf of MERS, BAC had standing to initiate a non-judicial foreclosure.
March 2, 2013 | Permalink | No Comments
Arkansas Supreme Court Holds that MERS is Not a Beneficiary and Not a Necessary Party in Foreclosure Proceedings
In MERS, Inc. v. SouthWest Homes of Ark., Inc., , 301 S.W.3d 1 (Ark. 2009), the court held that MERS was at most the mere agent of the lender Pulaski Mortgage Company, Inc., and thus held no property interest and was not a necessary party in foreclosure proceedings. The borrowers entered into a deed of trust on a one-acre lot in Benton County to secure a promissory note. The lender on that deed of trust was Pulaski Mortgage, the trustee was James C. East, and the borrowers were the Lindseys. MERS was listed on the deed of trust as the “Beneficiary” acting “solely as nominee for Lender,” and “Lender’s successors and assigns.” The second page of the deed of trust states “the Borrower understands and agrees that MERS holds only legal title to the interests granted by the Borrower and further that MERS as nominee of the Lender has the right to exercise all rights of the Lender including foreclosure.” The deed of trust was recorded. The borrowers later granted the subject mortgage on the same property to Southwest Homes of Arkansas, Inc. to secure a second promissory note. The court emphasized the fact that Arkansas was a recording state and noted that all the required parties to a deed of trust under Arkansas law are present, the borrower in the Lindseys, the lender in Pulaski Mortgage, and the trustee in James C. East. Under a deed of trust in Arkansas, title is conveyed to the trustee and here, MERS was neither a trustee nor a beneficiary. Moreover, no payments on the underlying debt were ever made to MERS. MERS did not service the loan in any way. It did not oversee payments, delinquency of payments, or administration of the loan in any way. The court thus held that it was at most an agent to the lender, but had no further rights to standing.
March 2, 2013 | Permalink | No Comments
Circuit Court of Arkansas Holds that MERS has Standing to Foreclose because Ownership of Note is not Required to have Standing
In MERS, Inc. v. Stephanie Gabler, et al., (Circuit Court of Garland County # 2004-17-II), the court held MERS had standing to seek relief for its Writ of Assistance and is proper party to foreclose the mortgage because it was the mortgagee of record and holder of the promissory note. The borrowers claimed that MERS did not have standing because MERS was not the owner of the note but the court found that ownership of the note is not required to have standing.
March 2, 2013 | Permalink | No Comments
Kansas Court of Appeals Holds that Severance of Mortgage and Note Cured by Subsequent Assignment of Mortgage from MERS to Bank
In U.S. Bank v. Howie, 280 P.3d 225 (Kan. App., 2012), the court held that U.S. Bank had standing to foreclose because there was an agency relationship between MERS and U.S. Bank. It also upheld that severance can be cured by MERS’s subsequent assignments. Therefore, it falls under the agency relationship exception of unenforceability when the mortgage is not held by the same entity that holds the promissory note. The homeowner, James Howie executed a promissory note to U.S. Bank and executed a mortgage on real property they owned in Ottawa. Under the terms of the mortgage, the Howies were named as the borrower, U.S. Bank as the lender, and MERS was named as the mortgagee “acting solely as a nominee for Lender and the Lender’s successors and assigns.” The mortgage stated: “Borrower understands and agrees that MERS holds only legal title to the interests granted by Borrower in this [Mortgage], but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender’s successors and assigns) has the right: to exercise any or all of those 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 this [Mortgage.]:” When the note entered into default following James’ death, MERS assigned the mortgage to U.S. Bank, which subsequently filed an action to foreclose the mortgage. The lower court held that even if there was no agency relationship between MERS and U.S. Bank such that the note and the mortgage were severed, any severance was cured by MERS’s subsequent assignment of the mortgage to U.S. Bank. The Appellate court agreed but also found that according to the plain language of the Mortgage, MERS was acting as an agent of U.S. Bank at all relevant times.
March 2, 2013 | Permalink | No Comments
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
