February 26, 2013
D.C. District Court Rules Bank Has Standing in Foreclosure Case
In McCarter v. Bank of New York, 873 F. Supp. 2d 246 (D.D.C. 2012), Plaintiff Homeowner was issued a mortgage loan of $270,000 which was reduced to a Deed of Trust and Promissory Note. Plaintiff then applied for a loan modification, which was later denied and Defendant Bank foreclosed on Plaintiff’s property. Plaintiff sought an injunction preventing the Bank from “attempting to take any action to take possession of the property….”
The Plaintiff brought 20 causes of action in addition to her request for injunctive and declaratory relief, and damages. The Defendants argued that Plaintiff’s claims were “’conclusory,’ ‘unclear,’ and ‘insufficiently pled'” and Plaintiff also failed to provide Defendants notice of the claims being raised against them. An example of one of Plaintiff’s conclusory allegations was that “BANA sold her a ‘deceptive loan product’ and unlawfully foreclosed on her property.”
The Court said that Plaintiff failed to state a claim upon which relief could be granted, and “failed to allege facts that would allow the court to draw the reasonable inference that the defendants are liable for any of the misconduct alleged.” The Court also found Plaintiffs allegations were merely conclusory statements and were not “sufficient to raise a right to relief above the speculative level.” The Court agreed with Defendants and granted their Motions to Dismiss.
February 26, 2013 | Permalink | No Comments
D.C. District Court Holds Bank Has Right to Record Deed and Deeds of Trust Previously Unrecorded Due to Clerical Error Not Cured By Original Property Owner
In Wells Fargo Bank, N.A. v. Wrenn, CIV.A. 08-165 (CKK), 2009 WL 1705692 (D.D.C. June 18, 2009), Wrenn purchased property from Stevens, and Wrenn simultaneously entered into a home mortgage loan transaction, pursuant to which she executed two Promissory Notes and two Deeds of Trust. Wells Fargo was the servicer and legal holder of the notes, HSBC the assignee of the notes, and MERS the legal holder of the Deeds of Trust for the benefit of Wells Fargo. There was a clerical error and the Deed from Stevens to Wrenn and the Deeds of Trust were never recorded. Plaintiffs were unable to obtain Stevens’ signature on the necessary recordation forms, and have been unable to record the Deed or Deeds of Trust.
Plaintiffs’ complaint seeks an order to compel Stevens to re-execute the Deed for the proper recordation. Stevens was served with a copy of the complaint, but he failed to timely respond. Plaintiffs wanted to move for entry of default, but could not because Stevens was engage in active military service. Counsel was appointed on behalf of Stevens which eventually revealed that Stevens had ceased his military service. Plaintiffs then filed a Motion for Default Judgment against Stevens and the Court found that “Stevens conveyed the subject property to Wrenn, and that Plaintiffs have the right to record the Deed and the Deeds of Trust. Additionally, Stevens’ failure to timely respond to the complaint resulted in a default judgment entered against him.
February 26, 2013 | Permalink | No Comments
New Direction for Federal Housing Policy? Finally!
The Bipartisan Policy Center has released Housing America’s Future: New Directions for National Policy. The Wall Street Journal reported (behind a paywall) that the report represents a “behind-the-scenes effort to jumpt-start the debate over Fannie’s and Freddie’s future . . ..” My preliminary thoughts on it:
- The report’s first key policy objective is exactly right: “The private sector must play a far greater role in bearing
credit risk.” (8) I have taken this position for years. There is no reason that a large share of the credit risk should not be underwritten and borne by the private sector. That is, after all, what they are supposed to do in free market. This is not to say that the federal government has no role. But the current state of affairs — with the government supporting more than 90 percent of home loans — is a recipe for the next housing disaster. - The government’s role should be limited to supporting the mortgage market for low- and moderate-income households and to playing the role of lender/insurer of last resort when the mortgage market dries up.
- The report is again exactly right when it says that Fannie and Freddie should be wound down and replaced with a wholly-owned government entity that will not suffer from the dual mandate of fulfilling a public mission and maximizing profits for its shareholders.
- The report favors a policy of assisting all very low-income households with their housing expenses. This is a great and radical step. But any such policy should take into account the Glaeser and Gyourko’s research that indicates that local land use policy can be at odds with federal housing policy in order to make sure that federal monies are used effectively.
I do not agree with the report in all respects. Some examples:
- The report characterizes the FHA as having only one “traditional mission of primarily serving first-time homebuyers.” (8) This characterization repeats the conventional wisdom but the conventional wisdom reads the history of the FHA incorrectly. I will be posting an article on the history of the FHA later this year that will hopefully set the record straight. The FHA certainly needs reform, but we should start with all of the relevant facts before jumping in.
- The report asserts that housing counseling is effective (9) but the empirical evidence is not so clear. Any policy that devotes significant resources to counseling should be built on a solid basis of empirical support.
Notwithstanding these criticisms, the report is a great first step toward developing a federal housing policy for the 21st Century. More on the report anon.
February 26, 2013 | Permalink | No Comments
February 25, 2013
Regulating the Distribution of Home Equity
Ian Ayres and Joshua Mitts have posted Three Proposals for Regulating the Distribution of Home Equity which brings welcomed attention to the systemic risk implications of consumer protection regimes. In particular, they argue that the proposed Qualfied Residential Mortgage “rules do not effectively address the systemic consequences of mortgage terms which in aggregate can exacerbate market volatility.” (4) They also argue that the new and proposed regulations governing residential mortgages are too static and that they have too many bright line rules that could needlessly reduce variation and innovation for mortgage products.
The authors apply cap and trade to the residential mortgage market in a novel way — one that is is worthy of exploration. They propose that the government sell mortgage lenders licenses to originate a range of low downpayment mortgages, with the total number capped so as not to pose a systemic risk to the mortgage market.
This is not to say that the paper is flawless. I find the modeling of the mortgage market overly simplistic. For instance, its discussion of circuit breaker gaps (an empty range “of equity levels that can absorb small decreases in prices by keeping homeowners above the range in positive equity”) assumes that LTV ratios at origination will somehow be carried over even when a mortgage is seasoned. (14) That would not be the case.
Its proposal to require that debt-to-income ratios be increased from the 5 years in the proposed regulation to the life of the loan does not seem to take into account the fact that it would kill just about the entire market for ARMs. (32) Given that many ARM products (5/1s ,7/1s, 10/1s) are legitimate and important products, this proposal seems off. (32)
Finally, there is something a bit “turtles all the way down” about the cap and trade proposal. (see 34) The proposal does not let us know how regulators would come up with the optimal (from a systemic risk perspective) distribution of licenses. Until we know how to answer that question, it will be hard to determine the value of this proposal.
February 25, 2013 | Permalink | No Comments
Michigan Court of Appeals Holds that Bank has Standing to Foreclose on Mortgaged Property Because the Bank was Validly Assigned Property Owners’ Mortgage and thus was the Record Holder of the Mortgage
In Hargrow v. Wells Fargo Bank N.A., 491 F. App’x 534 (6th Cir. 2012), the United States Court of Appeals in Michigan held that Wells Fargo Bank had standing to foreclose upon the mortgaged property.
Mary and M.L. Hargrow bought property and borrowed $164,000 from MHA Financial Service. The Hargrows then executed a loan document listing MHA Financial as the lender, and signed a separate mortgage security instrument as security for the Note. The mortgage also identified MERS as the nominee for MHA Financial and the mortgagee. As per the security instrument, MERS was given the power of sale among other rights. MERS assigned the mortgage to Wells Fargo and recorded the assignment on September 4, 2009. On September 2009, Wells Fargo initiated statutory foreclosure proceedings against the Hargrows by advertising a notice of intent to foreclose. The Hargrows alleged that Wells Fargo did not have standing to foreclose on their home.
The Hargrows first argued that Wells Fargo could not foreclose by advertisement because a mortgagee who does not also own the underlying debt is not an owner of the indebtedness or of an interest in the indebtedness or the mortgage servicing agent, as required under § 600.3204(1)(d). The court noted, however, that in Residential Funding Co. v. Saurman, 490 Mich. 909, 805 N.W.2d 183 (Mich. 2011), the court held that “an entity has standing to foreclose upon properties for which it is the record holder of the mortgage, even if it does not own the underlying debt.” Here, MERS was the record holder of the mortgage and thus had the right to foreclose by advertisement. Since that interest was validly assigned to Wells Fargo, Wells Fargo was the record holder of the mortgage and also had the right to foreclose by advertisement.
Next, the Hargrows claimed that the assignment of the mortgage from MERS to Wells Fargo was invalid because a mortgage cannot be assigned without a corresponding assignment of the interest in the underlying debt. The court stated that if a property owner grants MERS the power to assign the mortgage, the assignment of the mortgage to the foreclosing bank was valid. Here, MERS was the original mortgagee of the Hargrows’ mortgage. Further, the Hargrows granted MERS the power to assign the mortgage and to initiate foreclosure proceedings. Once the mortgage was assigned to Wells Fargo, they were the record holder of the mortgage and also had the power to foreclose. Since the chain of title was properly recorded, Wells Fargo was the owner of an interest in the indebtedness and had the power to foreclose by advertisement.
Finally, the Hargrows argued that the required record chain of tile must include a record of who owns the underlying Note. The court held, however, that § 600.3204(3) clearly required only a record chain of title for the mortgage, not the underlying debt. Under Michigan law, it is unlawful for the holder of the mortgage to be different from the holder of the debt. Thus, the Hargrows failed to present a case or compelling reason to justify reading the statute more broadly than its plain terms.
February 25, 2013 | Permalink | No Comments
Massachusetts District Court Holds that MERS, as Mortgagee and Nominee for Lender, has Authority to Assign Mortgage
The court in Rosa v. Mortg. Elec. Sys., Inc., 821 F. Supp. 2d 423 (D. Mass. 2011) held that the assignee bank had standing to foreclose on the homeowners. The homeowners argued that the bank did not have standing because MERS lacked authority to assign the mortgage. They made several arguments as to why MERS lacked authority, including (1) the original noteholder did not authorize the assignment; (2) MERS could only act as nominee for the original noteholder, who dissolved in 2008; and (3) MERS did not hold the note at the time of assignment, and thus could not assign what it did not hold.
First, the court looked at MERS’s authority to assign the mortgage. The court rejected the homeowner’s argument, stating, “[s]ince Massachusetts law does not require a signatory to prove authority to execute a mortgage assignment, a mortgagee need not prove authorization from the note holder to assign a mortgage.” The court then held that the assignment by MERS to the assignee bank was valid because MERS was a mortgagee under the terms of the mortgage agreement.
Next, the court determined that the original noteholder’s dissolution had no effect on MERS’s authority to assign. The court held, “[the original noteholder’s] dissolution [did not] terminate MERS’ nominee relationship with a successor purchaser or assignee of the Note or affect MERS'[s] status as mortgagee. . . . As mortgagee, MERS continued to hold the Mortgage in trust for whomever happened to own the Note.”
Finally, the court rejected the argument that MERS must hold the note in order to assign the mortgage. They found this argument contrary to case law. The court stated, “In Massachusetts, the mortgage does not automatically follow the note and the mortgage and the note may be held by different parties. . . . An assignor of a mortgage is not required to have possession of or beneficial interest in the note in order to assign the mortgage because it holds the mortgage in trust for the note holder. ” Thus, MERS had authority to assign the mortgage despite not being in possession of the underlying note.
February 25, 2013 | Permalink | No Comments
February 24, 2013
The California Court of Appeal holds that MERS may Foreclose on Homeowner’s Property Because an Assignee does not Have to Record an Assignment when the Power of Sale is Conferred in a Deed of Trust Rather than a Mortgage
In Calvo v. HSBC Bank USA, N.A., 199 Cal. App. 4th 118, 130 Cal. Rptr. 3d 815 (2011), the California Court of Appeal held that MERS had the statutory right to foreclose on behalf of lender’s assignee because an assignee does not have to record an assignment when the power of sale is conferred in a deed of trust rather than a mortgage.
Eugenia Calvo obtained a loan from CBSK Financial group, Inc, which was secured by a deed of trust against her residence. CBSK assigned the loan and deed to HSBC Bank USA. MERS was also substituted after the loan was originated. After Calvo defaulted, the MERS initiated foreclosure proceedings and executed a foreclosure sale on Calvo’s residence. Plaintiff sought to set aside the trustee’s sale for an alleged violation of Civil Code § 2932.5—which requires the assignee of a mortgagee to record an assignment before exercising a power to sell real property. Defendants’ demurred.
The court held that the statutory scheme described in Civil Code § 2932.5—requiring that an assignment of the beneficial interest in a debt secured by real property must be recorded in order for the assignee to exercise the power of sale—applies only to a mortgage and not to a deed of trust. Citing the case, Stockwell v. Barnum, 7 Cal. App. 413, 94 P. 400 (1908), the court noted that a mortgage creates only a lien with title to the real property remaining with the borrower/mortgagee, whereas a deed of trust passes title to the trustee with the power to transfer marketable title to a purchaser.
The court also held that MERS had the right to initiate foreclosure on behalf of HSBC Bank pursuant to the langue of the deed of trust. Accordingly, HSBC Bank and MERS, its nominal beneficiary and agent, were entitled to invoke the power of sale in the deed of trust.
February 24, 2013 | Permalink | No Comments
