February 22, 2013
Michigan Supreme Court holds that MERS has Standing to Foreclose on Homeowner’s Property by Advertisement
In Residential Funding Co., L.L.C. v. Saurman, 490 Mich. 909, 805 N.W.2d 183 (2011), the Michigan Supreme Court held that under Michigan law, mortgagees of record could commence foreclosures-by-advertisement.
Saurman and Messner purchased property and obtained financing from a financial institution. Both transactions involved loan documentation and a mortgage security instrument and the original lender in both cases was Homecomings Financial, LLC. The mortgage, however, did not list Homecomings Financial as the mortgagee but instead identified MERS. Defendants challenge the respective foreclosures as invalid because, they allege, MERS did not have authority under MCL 600.3205(1)(d)—regarding, inter alia, foreclosures by advertisement—to foreclose by advertisement. The Michigan Court of Appeals vacated foreclosure proceedings and remanded the case to the Michigan Supreme Court.
The court stated, pursuant to MCL 600.3204(1)(d), “Mortgage Electronic Registration System (MERS) is ‘the owner … of an interest in the indebtedness secured by the mortgage’ at issue in each of these consolidated cases because “[MERS’] contractual obligations as mortgagee were dependent upon whether the mortgagor met the obligation to pay the indebtedness which the mortgage secured.”
MERS’ status as an owner of an interest in the indebtedness did not equate to an ownership interest in the note. Instead, as record-holder of the mortgage, MERS owned a security lien on the properties, the continued existence of which was contingent upon the satisfaction of the indebtedness. This interest in the indebtedness authorized MERS to foreclose by advertisement under MCL 600.3204(1)(d).
The court also noted that in cases where the mortgagee transferred a beneficial interest but retained record title, courts have unanimously held that “[o]nly the record holder of the mortgage has the power to foreclose; the validity of the foreclosure is not affected by any unrecorded assignment of interest held for security.”
Finally, the court held that the phrase “interest in the indebtedness” denoted a category of parties entitled to foreclose-by-advertisement and indicated the Legislatures intent to include mortgagees of record among the parties entitled to foreclose-by-advertisement, along with parties who own the indebtedness and parties who act as the servicing agent of the mortgage. Therefore, the court reversed the Court of Appeals’ decision because it erroneously construed MCL 600.3204(1)(d).
February 22, 2013 | Permalink | No Comments
Do Foreclosures Cause Crime?
The Furman Center says yes. The Center conducted an empirical study in New York City and found that “foreclosure activity appears to be linked to subsequent crime” if “there have been three or more foreclosure notices issued on a blockface.” (4)
The study may give law enforcement agencies something to chew over now (perhaps CrimeStat should track foreclosures?!?), but it should also give those who study housing finance policy something to plan for as we look ahead to the next foreclosure crisis. If this finding is replicated in other jurisdictions, should federal and state governments put into place any policies and programs that will address this foreseeable consequence of concentrated foreclosures? The Furman study suggests some policies on its last page.
February 22, 2013 | Permalink | No Comments
U.S. Bankruptcy Court in Kentucky Holds MERS Valid Nominee of Mortgage, Had Authority to Assign Mortgage, and Lender Properly Assigned Note to Citi
In In re Jessup, 2010 WL 2926050, the U.S. Bankruptcy Court for the Eastern District of Kentucky (“Court”) denied the bankruptcy trustee’s (“Trustee”) motion for summary judgment in a suit to set aside Defendants’ mortgage lien against the bankruptcy debtors’ (“Debtors”) property.
In February 2007, Debtors executed a note to Homeland Capital Mortgage (“Lender”), and granted a mortgage to Defendant MERS as nominee for Lender. The mortgage identifies the mortgagee as MERS as nominee for Lender. In March 2007, the mortgage was duly recorded, and the note with “blank indorsement” was transferred to Defendant CitiMortgage, Inc. (“Citi”). In January 2008, MERS assigned the mortgage to Citi. In February 2008, the assignment of mortgage was duly recorded.
In March 2009, Debtors filed for Chapter 7 bankruptcy relief. In September 2009, the Trustee filed a complaint to “Determine Validity, Extent and Priority of Liens and for Sale of Real Property,” and the parties cross-moved for summary judgment. In essence, the Trustee seeks to set aside Citi’s mortgage lien as invalid pursuant to the Trustee’s “strong-arm power” under Section 544 of the U. S. Bankruptcy Code.
The Trustee set forth three bases for his contention:
First, the Trustee argued there was no evidence Lender appointed MERS as nominee, and therefore, no valid mortgagee was named in the mortgage. The Trustee argued Lender failed to provide a written nomination of MERS to act as mortgagee. The Court rejected this argument, however, and held the language in the mortgage itself was sufficient to identify MERS as nominee.
Second, the Trustee argued MERS lacked authority to assign the mortgage to Citi. The Trustee argued MERS failed to provide evidence that it nominated an “Authorized Signator” to execute the assignment. In fact, the person who executed the assignment was an employee of an entity authorized to execute MERS documents, but was inadvertently left off the list of officers authorized to execute MERS documents. Defendants submitted an affidavit of the Secretary of MERS, which stated the assignment was executed with MERS’s authority an consent. The Court held the ratification in the affidavit was sufficient to establish MERS’s authority to execute the assignment to Citi.
Finally, the Trustee argued Citi was not holder of the note. Under Kentucky Law, a note is negotiated by “special indorsement” from one creditor to another, or by “blank indorsement.” Blank indorsement converts the note into bearer paper that may be negotiated by transfer of possession alone. The Court held Lender transferred the note with blank indorsement to Citi, and since Citi had physical possession of the note payable to bearer, it is the holder entitled to enforce it.
February 22, 2013 | Permalink | No Comments
Kentucky Court of Appeals Holds that Bank Lacked Standing Because it did Not Obtain an Interest in the Note Until after Commencing the Foreclosure Action
In Morgan v. HSBC Bank USA, NA, 2011 WL 3207776 (Court of Appeals of KY, 2011), the Court of Appeals of Kentucky reversed the trial court’s judgment as a matter of law that HSBC Bank USA, NA (“HSBC”) had standing to enforce a note against Morgan (“Borrower”) in a foreclosure action, and remanded for further proceedings.
In August 2005, Borrower executed a note to Ownit Mortgage Solutions, Inc. (“Ownit”), and granted a mortgage to MERS as nominee for Ownit. In early 2008, Borrower defaulted under the note.
On July 31, 2008, HSBC commenced foreclosure proceedings against Borrower. HSBC claimed to be holder of the note, but stated a copy was unavailable at the time it filed the complaint. Borrower moved to dismiss arguing, inter alia, there was no proof HSBC had standing because it failed to attach a copy of the note to its complaint. In its response, HSBC attached a copy of the note between Ownit and Borrower. HSBC was not a party to the note.
On August 11, 2008, an assignment of mortgage from Ownit to HSBC dated August 4, 2008 was recorded.
On December 3, 2008, HSBC moved for summary judgment, and attached a copy of the note to its motion. The note included an undated note allonge purportedly assigning it to HSBC.
The trial court denied Borrower’s motion to dismiss and granted HSBC’s motion for summary judgment holding the endorsement in the note allonge was sufficient proof that HSBC was the holder of the note.
The Court of Appeals reversed, describing the foregoing sequence of events a “troubling.” Specifically, the court was uneasy about the fact HSBC did not attach a copy of the note it its complaint, and then later the undated note allonge purportedly assigning the note to HSBC appeared in the record. Further complicating the issue was the fact HSBC did not obtain an interest in the mortgage until after it commenced the foreclosure action. As a result, the Court of Appeals held the trial court erred because (1) the record was insufficient to determine when HSBC obtained an interest in the note, and (2) HSBC did not obtain an interest in the mortgage until after it commenced the foreclosure action against Borrower.
February 22, 2013 | Permalink | No Comments
The GAO’s Take on The FHA
The Government Accountability Office issued an update to its 2013 HIGH-RISK SERIES. It had this to say about the Federal Housing Administration:
a new challenge for the markets has also evolved as the decline in private sector participation in housing finance that began with the 2007-2009 financial crisis has resulted in much greater activity by FHA, whose single-family loan insurance portfolio has grown from about $300 billion in 2007 to more than $1.1 trillion in 2012. Although required to maintain capital reserves equal to at least 2 percent of its portfolio, FHA’s capital reserves have fallen below this level, due partly to increases in projected defaults on the loans it has insured. As a result, we are modifying this high-risk area to include FHA and acknowledge the need for actions beyond those already taken to help restore FHA’s financial soundness and define its future role. One such action would be to determine the economic conditions that FHA’s primary insurance fund would be expected to withstand without drawing on the Treasury. Recent events suggest that the 2-percent capital requirement may not be adequate to avoid the need for Treasury support under severe stress scenarios. Additionally, actions to reform GSEs and to implement mortgage market reforms in the Dodd-Frank Act will need to consider the potential impacts on FHA’s risk exposure. (25)
Discussion about the FHA is getting in high gear, in large part because of Ed Pinto. I expect to take up the issue of the FHA’s appropriate role in the housing market over the coming months and will offer an alternative vision to his.
February 22, 2013 | Permalink | No Comments
Reiss on Qualified Mortgages and Fair Housing
Law360 ran Banks Fear CFPB Rule Could Spur Fair Lending Fights (behind a paywall) which asked for my thoughts:
banks may be getting a bit ahead of themselves when it comes to worrying about how the fair lending law will work in the qualified mortgage context, said David Reiss, a professor at Brooklyn Law School.
Any mortgage that is purchased by Fannie Mae, Freddie Mac and — key for low-income borrowers — the Federal Housing Administration for seven years after the rules take effect in January will be deemed qualified mortgages. The FHA currently backs around $1.1 trillion worth of mortgages.
Unless the FHA drastically reduces its presence in the market that should cover many of the loans that have banks worried, he said.
The banks are not wrong to flag potential problems that may arise in the future, and the issue of fair lending law bumping up against decisions regarding extending only qualified mortgages is a legitimate potential problem, Reiss said.
It’s simply a bit premature with the federal government’s heavy role in the housing finance market.
“They are predicting a scenario, but there’s a lot that’s going to happen between now and that scenario ever being actualized,” Reiss said.
February 22, 2013 | Permalink | No Comments
February 21, 2013
Rhode Island Court Compares Case to Kriegal
In Chhun v. Mortgage Electronic Registration Systems, et al., C.A. No. PC 2011-4547, (R.I. Super. June 26, 2012), the plaintiff sought a declaration from the court to quiet title following a foreclosure sale. The plaintiff claimed that the foreclosing party did not have the statutory power of sale at the beginning of the foreclosure proceedings.
The defendant made a motion to dismiss, which the court addressed in this opinion. The court found the allegations similar to the facts in Kriegel v. Mortgage Electronic Registration Systems and adopted the reasoning in the case.
The court notes that the plaintiff failed to distinguish their case from Rhode Island precedent and instead criticized both Kriegel and Payette. The plaintiff also argued that Bucci should not be followed because of the mortgagor’s allegations of fraud. The court dismissed these arguments as unpersuasive.
The plaintiff argued that the assignment between the Lender and MERS was invalid. However, the court found the plaintiff relied on case law from other jurisdictions that were not binding on this court. The court dismissed challenges to the assignment based on Colorado and Massachusetts case law and distinguished their holdings from the precedent in Rhode Island. The court also found that an allegation that “robo-signers” existed was not substantiated with facts to explain the allegation. The court then dismissed the challenge of the assignment because the plaintiff lacked standing.
The court ultimately held that the same outcome in Kriegel, a dismissal of the plaintiff’s complaint for failure to state a claim of relief, is warranted in this case.
February 21, 2013 | Permalink | No Comments
