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
Ohio Court of Appeals Holds that the Note Follows the Mortgage Where Intent of Parties is Clear
In Bank of New York v. Dobbs, 2009-Ohio-4742, the court found that the Bank of New York (Bank) had standing to bring a foreclosure action against the homeowners. In this case, Countrywide Home Loans (Countrywide) was the original note holder, and Bank claimed that Countrywide assigned the note to MERS, who then assigned to Bank. The homeowners argued that Bank did not have standing to foreclose because there was no evidence that Countrywide assigned the note to MERS and thus the chain of title was incomplete. In determining standing, the court found that “the chain of title between Countrywide, MERS and [Bank was] not broken” because “the obligation follows the mortgage if the record indicates the parties so intended” and in this case there was “clear intent by the parties to keep the note and mortgage together, rather than transferring the mortgage alone.” Thus, the note followed the mortgage upon transfer, and Bank was the lawful holder of the note.
February 24, 2013 | Permalink | No Comments
February 22, 2013
Utah District Court Holds that Consent Is Not Required for Lender to Assign Interest to MERS and that the Note and Deed of Trust Are Still Valid After Securitization; Court Holds TILA Claims Are Time Barred
In Witt v. CIT Group/Consumer Finance Inc., No. 2:10 CV 440 TS, 2010 WL 4609368 (D. Utah Nov. 5, 2010), the United States District Court of Utah granted Defendants’ motion to dismiss Plaintiffs’ claims.
On September 30, 2002, Plaintiffs executed a promissory note and a deed of trust in conjunction with a transaction to borrow money to finance a house. The deed of trust assigned all of the lender’s beneficial rights, title, and interest to MERS. On October 30, 2007, the lender securitized the mortgage loan and sold it to another party. Plaintiffs defaulted under the terms of the note and deed of trust, and on April 7, 2008, MERS appointed a successor trustee. Thereafter, the trustee initiated foreclosure proceedings on Plaintiffs’ property.
Plaintiffs first allege that the assignment from the lender to MERS was invalid because Plaintiffs never consented to the assignment. However, the court found that Plaintiffs’ consent was not required because “under general contract law, the assignability of a contract is assumed unless the parties express a contrary intent by contract.” In the case at hand, the plaintiffs “have not pled nor brought forth any evidence to suggest that Plaintiffs contracted for a prohibition on the assignment of the Note and Deed of Trust.” The court went on to say that the deed of trust, in fact, expressly provides for assignment.
Next, the plaintiffs claimed that the deed of trust and note were no longer valid because Defendants “split” the note in the process of securitization. The court, however, looked to “well-settled precedent” that establishes that “transfer of the note carries with it the security, without any formal assignment or delivery, or even mention of the latter.”
Finally, the plaintiffs brought forth a claim based on the violations of the Truth in Lending Act (TILA). The court quickly dismissed this claim as time barred. Under TILA, an action must be brought “within one year from the date of the occurrence of the violation.” A TILA violation occurs when the credit transaction is “consummated and completed.” The credit transaction at issue between the parties was consummated on September 30, 2002, and the opportunity for the plaintiffs to bring a TILA claim expired on October 1, 2003. Thus, the court dismissed each of the plaintiffs’ claims.
February 22, 2013 | Permalink | No Comments
Utah District Court Holds that MERS Has Authority to Initiate Non-Judicial Foreclosure and Does Not Need to Possess a Note to Appoint a Trustee; Court Holds that TILA Rescission Claim Was Insufficient
In McGinnis v. GMAC Mortgage Corporation, No. 2:10 CV 00301 TC, 2010 WL 3418204 (D. Utah Aug. 27, 2010), the United States District Court of Utah granted Defendants’ motion to dismiss Plaintiff’s claims.
On June 21, 2007, Plaintiff obtained a loan to purchase a property in Utah. The trust deed that Plaintiff signed in conjunction with the loan stated, “MERS is a separate corporation that is acting solely as a nominee for Lender and Lender’s successors and assigns. MERS is the beneficiary under this Security Instrument.” On July 18, 2009, the trustee appointed by MERS to conduct the foreclosure, recorded a notice of default against the property. Due to alleged disclosure violations of the Truth in Lending Act (TILA), Plaintiff then filed a notice of rescission on August 5, 2009.
First, Plaintiff claimed that MERS lacked authority to foreclose and that MERS could not appoint a trustee because MERS is “merely a nominee of the lender and does not possess the note.” The court found this argument unpersuasive, and stated that “courts have consistently held that [language such as that found in this trust deed] gives MERS the authority to foreclose in behalf of the lender and that MERS need not possess the note in order to appoint a trustee in behalf of the lender who does hold the note.” Moreover, the court pointed out that Utah Code Ann. § 57-1-21 to 38 contains no requirement that the beneficiary produce the actual note in order to authorize the trustee to foreclose on the property secured by the note.
Second, the plaintiff claimed that he rescinded his loan under the rescission provisions of TILA on August 5, 2009, because he was not provided with the proper disclosures under TILA. However, the court held that for the borrower to have the right to rescind under TILA, the lender “must fail to make a material disclosure.” The court went on to say that, although Plaintiff may have a claim for rescission, the court cannot determine based on the pleading how Defendants failed to provide him the material disclosures required by TILA. Therefore, the court granted Defendants’ motion to dismiss both claims. The court did, however, give the plaintiff an opportunity to amend his TILA rescission claim.
February 22, 2013 | Permalink | No Comments
