January 30, 2013
Rhode Island Superior Court Addresses Challenged to MERS
One of the earliest opinions addressing challenges to MERS in Rhode Island is Bucci v. Lehman Bros. Bank, No. PC-2009-3888 (R.I. Sup. August 25, 2009).
The plaintiff challenged MERS’s standing to foreclose on their house following the plaintiff’s default on their mortgage. The mortgage contained a provision granting the lender the statutory power of sale. The plaintiff requested a declaratory judgment and injunction relief by canceling the foreclosure sale of their house.
The plaintiffs argued that the mortgage agreement does not authorize MERS to foreclose by power of sale. They argue that the provision granting the lender the statutory power of sale specifically limits the ability to foreclose to the original lender, which is the Lehman Brothers Bank. However, the court found additional language in the mortgage agreement that expressly named MERS the nominee and granted MERS the right to invoke the statutory power of sale. The court also found that opinions from other jurisdictions outside of Rhode Island which addressed the issue have also supported the ability of MERS to foreclose as mortgagee and nominee for the beneficial owner of the note.
An additional statutory challenge was addressed by the court as well. The plaintiffs argued that a number of statutes implicitly prohibited MERS from foreclosing as a mortgagee in a nominee capacity. The plaintiffs argued that the term “mortgagee” in the statutes was intended to apply only to the lender. However, the court dismissed this as a narrow interpretation which “would undermine the role of servicers in the mortgage lending industry.”
As a result, the court dismissed the plaintiff’s request for declaratory and injunctive relief and held that MERS had standing foreclose the plaintiff’s mortgage.
January 30, 2013 | Permalink | No Comments
Strategies to Improve the Housing Market
Boston Consulting prepared this Strategies to Improve the Housing Market report on behalf of The Pew Charitable Trusts. The report focuses “on practical solutions that can readily be implemented by industry, agencies, and regulators working within existing mandates, or by nongovernmental organizations.” (6) I highlight three proposals in their report that I find particularly interesting.
1. Promulgate Consistent Set of Loan Servicing Standards
Mortgage servicing is governed by a number of loan servicing standards—including standards under the DOJ settlement, OCC consent orders, FHFA Servicing Alignment Initiative, CFPB, as well as those of individual states—which vary in scope and individual provisions. A consistent set of loan servicing standards across the servicing life cycle can both ensure a basic standard of service for all homeowners and reduce the operational complexity of complying with multiple, varying standards for servicers. (8)
This seems to be key to dealing with the misaligned incentives and anticommons problems that have become so apparent during the Subprime Bust.
2. Streamline The Foreclosure Process in Key States
The long foreclosure process, particularly in judicial states, creates negative impacts on both lenders and communities, particularly when borrowers are “free riding.” While preserving the primacy of states and localities in foreclosure law, experts highlighted the desirability of working with them to develop a “model” foreclosure process based on best practices, to be adopted by states and localities on a voluntary basis. We recommend that an NGO takes the lead on developing such a model, based on best practices across jurisdictions, brings in key states and other relevant stakeholders to build consensus, and advocates for change with state policy makers and legislatures. (9)
This issue is more complicated than the report (and most other commentators) concedes. The claim that borrowers are “free riding” is not exactly true. Lengthy foreclosure periods existed before the mortgages were entered into and were presumably priced into the cost of mortgages. Indeed, the FHFA is trying to reprice mortgages in jurisdictions with the longest periods. There are clearly policy choices at issue in the design of a foreclosure process. For homeowners and lenders alike, the difference between the lengthy judicial process and the relatively rapid non-judicial process is only the most stark example of how process (in this case, length of process) affects substantive rights (that is, post-default occupancy periods).
3. Rationalize First and Subordinate Lienholder Rights
In the context of continuing demand for home equity loans (second or subordinate liens), there is a need to clarify the rights of first and second lienholders to avoid a repeat of current frictions in the future and to restore investor confidence that first lienholders will have enforceable priority in the event of default. Any new framework put forward should achieve two key objectives:
> protecting first-lien priority
> standardizing treatment of seconds in loss mitigation efforts.
Conflicts between first and second lienholders have been a source of controversy and friction since the crisis began. It is unlikely that private investors will want to commit substantial new investment dollars to private securitizations until this issue is resolved. The industry, perhaps through the auspices of one of its trade association, should take the lead on further developing these options, in the first instance, with involvement from the FHFA, Treasury, and FDIC. (11, emphasis deleted)
This is a very important issue. I have been struck since the early days of the crisis how non-lawyers in particular (economists are particular offenders!) assume away the legal rights of seconds in their proposals to address the foreclosure epidemic. Unsurprisingly, the seconds (knowing what happens to those who “ass-u-me”) have successfully asserted their legal rights to protect their financial interests. Any solution to the problem of misaligned incentives between first and seconds must take the legal rights of these profit-maximizing entities into account.
January 30, 2013 | Permalink | No Comments
January 29, 2013
New York Appellate Court Holds that Bank Lacks Standing to Bring Foreclosure Action if it did not Own the Mortgage Note and Mortgage on the Date it Commenced the Foreclosure Suit
In Wells Fargo Bank, N.A. v. Marchione, 69 A.D.3d 204 (N.Y. App. Div. 2d Dep’t 2009), the New York Supreme Court, Appellate Division, Second Department held that an assignee of a note and a mortgage does not have standing to commence a foreclosure action prior to the date of execution of the assignment.
Defendants Vincent and Debbie Marchione executed a mortgage with Option One Mortgage Corporation on September 2, 2005 for real property in Mamaroneck, New York. Vincent Marchione also signed an adjustable rate note on the same day.
On November 30, 2007, plaintiff Wells Fargo (acting as trustee for Option One Mortgage Corporation) commenced a foreclosure action against Defendants, alleging that they had not made payments beginning April 1, 2007. The assignment to Wells Fargo from Option One occurred on December 4, 2007—5 days after Wells Fargo commenced the action. Although a provision in the assignment said it became effective on October 28, 2007, it was not attached to the November 30th complaint.
The defendants were served on December 7, 2007, and the assignment was not submitted to the court until January 18, 2008, following a pre-answer motion to dismiss made by the defendants, who did not yet know of the contents of the assignment. The defendants then filed a reply, properly challenging the standing of Wells Fargo. The Supreme Court found that because Wells Fargo was not yet the assignee of the mortgage on the day the action was commenced the bank lacked standing to file the action.
Wells Fargo argued that it did have standing because the assignment was executed before the defendants were served. This argument failed because in New York an action is commenced when the summons and complaint (or summons with notice) is filed with the County Clerk, not when service is made upon the defendant. Here, the summons and complaint were filed a week before the defendants were served, and the assignment was executed during that week – after the summons was filed but before service upon the defendant was made.
Wells Fargo argued further that the assignment became valid on October 28, 2007, before the commencement of the action. Citing LaSalle Bank Natl. Assn v. Ahearn,.59 A.D.3d 911, 912 (N.Y. App. Div. 3d Dep’t 2009), the court held that with no proof that the mortgage and note were actually delivered on a retroactive date, the execution date of a written assignment is controlling.
January 29, 2013 | Permalink | No Comments
Court in Suffolk County New York Holds that Bank that Held Note and Mortgage by Way of Assignment from the Original Lender and MERS had Standing in Foreclosure Action
In US Bank N.A. v. Flynn, 27 Misc.3d 802 (N.Y. Sup. Ct. 2010), the Supreme Court of New York, Suffolk County, granted a motion by plaintiff US Bank for partial summary judgment and for dismissal of defendant’s affirmative defenses and counterclaims.
In February, 2007, defendant Flynn took out a mortgage for $2,000,000 on his residential real property in Southampton, New York. On November 21, 2008, US Bank commenced a hybrid foreclosure suit against Flynn in connection with this mortgage.
US Bank’s first cause of action was to foreclose on the mortgage given by Flynn to secure a note for $2,000,000 for his purchase of residential real property in Southampton. US Bank’s second cause of action was for declaratory relief to extinguish liens owned by the other defendants.
US Bank’s motion for partial summary judgment of first cause of action was granted because US Bank established a prima facie case for summary judgment, and Flynn failed to rebut that prima facie case. US Bank properly presented copies of the mortgage, the unpaid note, and due proof of a default in payment in their moving papers, as required to establish a prima facie case for summary judgment. Flynn failed to rebut the US Bank’s prima facie case for summary judgment because he did not submit sufficient factual proof or demonstrate an affirmative defense.
Flynn’s argument that US Bank lacked standing to sue because it did not own the note and mortgage failed because US Bank does in fact hold ownership of the note and mortgage by way of a written assignment from the original lender to US Bank.
Flynn’s second argument, that the assignment from MERS to US Bank was an invalid transfer because MERS never owned the note or the mortgage, also failed because the language of the mortgage document itself names MERS as the mortgagee of record and nominee of the lender, and grants MERS the rights associated therewith, including the right to release or discharge the mortgage.
The court held that where an entity (such as MERS) is identified as nominee of the lender and mortgagee of record in the mortgage indenture, that entity has all of the powers of the lender. A written assignment of that mortgage is a valid transfer of good title. US Bank established that a valid transfer had taken place before the litigation, and US Bank thereby had standing to sue defendant Flynn.
Flynn’s affirmative defenses were dismissed as unmeritorious because US Bank’s assignment was effective, so it had standing to sue; and Flynn failed to assert his other affirmative defenses in opposition to US Bank’s motion. Flynn’s counterclaim is also unmeritorious because he asserts relies on a duty of the plaintiff—to notify the mortgagor of the assignment—which did not exist.
Note: The United States Bankruptcy Court for the Eastern District of New York declined to follow US Bank v. Flynn in In re Agard, 444 BR 231, 235 (Bankr. E.D.N.Y. 2011) because the plaintiff failed to show that it held ownership of the mortgage and the note, thereby negating plaintiff’s standing to bring suit.
January 29, 2013 | Permalink | No Comments
Empirical Evidence of Predatory Steering in the Mortgage Market
Agarwal and Evanoff have released a draft of Loan Product Steering in Mortgage Markets. They sought to determine whether there was empirical support for the frequent anecdotes of credit steering in the literature about predatory lending. They find such support. They find evidence
consistent with institutions steering customers to affiliated lenders that provide more-expensive loan products. Specifically, we find that steered loans have an annual percentage rate (APR) 40–60 basis points higher than that of non-steered loans after controlling for various borrower and loan characteristics. Given the average APR for the sample of loans is 6.5%, a rate 40–60 basis points differential is economically significant. We also find that the steered customers perform better on their mortgages—consistent with them being lower-risk, better-qualified borrowers than those normally associated with their eventual loan products. Specifically, we find that the probability of steered loans being delinquent is 1.4–2.0 percentage points lower than that of non-steered loans. Again, given an average delinquency rate of 5%, this differential is also an economically significant result. (22, footnote omitted)
While I am not in a position to evaluate their empirical findings, I question the following: “We also find that steered loans are often placed in private securitized pools—much more so than being held in portfolio or sold to the housing GSEs. This is consistent with the steering taking place in an attempt to satisfy the demands of investors looking for highly rated mortgage-back securities.” (22) This assertion does not appear to take into the robust literature about the market for lemons which would suggest that originators would try to keep the lower risk mortgages for their own portfolios. It also does not appear to account for how securitizers actually structure MBS in order to achieve a high rating (using techniques such as overcollateralization, subordination and insurance to do so). In other words, securitizers do not need low risk mortgages to make low risk MBS if they can otherwise provide credit enhancements as part of the structure of the MBS.
The authors state that their results are “the first explicit evidence of systematic mortgage lending abuse during the run-up in the housing markets.” (1) They also demonstrate the difficulty in regulating away predatory behavior from the mortgage markets as profit-seeking holding companies appear to have developed techniques to achieve net profits even while one subsidiary took actions that appeared to be inconsistent with its own quest for profits. This should give regulators at the CFPB something to think about.
January 29, 2013 | Permalink | No Comments
Federal Reserve Report on the 30 Year Fixed Rate Mortgage
Fuster and Vickery have posted Securitization and the Fixed-Rate Mortgage, a FRB of NY Staff Report. This paper brings some empirical research to the debate over the proper fate of the 30 year mortgage. Commentators are sharply divided over whether the government must be intimately involved in the operations of the residential mortgage markets in order to keep the 30 year FRM available in the United States. (Whether that is a worthy goal is another question entirely.)
Peter Wallison at the American Enterprise Institute has argued that the existence of 30 year FRMs in the jumbo market demonstrates that the government does not need to play an active role in the mortgage markets to ensure the availability of that mortgage product. David Min, formerly of the Center for American Progress, has argued that the government must continue to play an active role in order to keep that product in the market. My own position has been in the middle — the government can reduce its dominant role in the mortgage markets while retaining a role during financial crises.
Fuster and Vickery test whether securitization, by allowing interest rate and prepayment risk “to be pooled and diversified, increases the supply of FRMs relative to ARMs.” (1) They find that “lenders are averse to retaining exposure to the risks associated with FRMs in portfolio. Securitization increases lenders’ willingness to originate FRMs by transferring these risks to a diverse international pool of MBS investors.” (2) Unsurprisingly, they also find that “when private MBS markets are liquid and well functioning, as in the period before the onset of the financial crisis in mid-2007, private and government-backed securitization perform similarly in terms of supporting FRM supply. However, public credit guarantees may make securitization less susceptible to market disruptions, thereby improving the stability of FRM supply.” (2) Fuster and Vickery suggest that the current GSE- centered mortgage finance system may not be necessary for FRMs to remain widely available at competitive rates, but only as long as private securitization markets are liquid.” (30)
Fuster and Vickery do not mean to say that they have produced the last word on this topic, but their findings are intuitive to me. This debate is central to any plan for the future of the American housing finance system, so more empirical work in this area is most welcome.
January 29, 2013 | Permalink | No Comments
January 28, 2013
GAO Report on Challenges for Financial Regulatory Reform
The GAO has issued a report, Financial Regulatory Reform: Regulators Have Faced Challenges Finalizing Key Reforms and Unaddressed Areas Pose Potential Risks. The report notes that
A variety of challenges have affected regulators’ progress in executing rulemaking requirements intended to implement the act’s reforms. Regulators to whom we spoke indicated that the primary challenges affecting the pace of implementing the act’s reforms include the number and complexity of the rulemakings required and the time spent coordinating with regulators and others. In addition, some regulators identified additional challenges, including extensive industry involvement through comment letters and litigation resulting from rulemakings, concurrently starting up a new regulatory body and assuming oversight responsibilities, and resource constraints. (23)
These challenges are only compounded by the recent court decision that throws CFPB rulemaking into a pit of uncertaintly. While the decision addresses the legality of NLRB recess appointments, it clearly implicates the appointment of Richard Cordray as the Director of the CFPB. This has serious consequences for Bureau rulemaking which cannot be occur without a Bureau Director being in place. (See Dodd-Frank section 1022(b)(1), codified at 12 U.S.C. section 5512(b)(1))
January 28, 2013 | Permalink | No Comments
