January 31, 2013
United States District Court in California Denies Plaintiff’s Motion for Temporary Injunctive Relief, Allowing Non-Judicial Foreclosure
In Chilton v. Fed. Nat. Mortg. Ass’n, 1:09-CV-02187 OWW SM, 2009 WL 5197869 (E.D. Cal. Dec. 23, 2009), the United States District Court, in the Eastern District of California denied Chilton’s motion for temporary injunctive relief. Chilton filed a complaint alleging that Federal National Mortgage Association (Fannie Mae) violated provisions within U.S.C. Title 15, regarding Commerce and Trade, and/or U.S.C. Title 18, regarding Crimes and Criminal Procedure, because Fannie Mae initiated a non-judicial foreclosure on her property without a genuine original note. Chilton then filed an order to show cause and motion for temporary restraining order, in an attempt to block the foreclosure process. The Court noted that in order to obtain temporary injunctive relief, Chilton must demonstrate a likelihood of success on the merits.
The Court rejected Chilton’s legal theory holding that non-judicial foreclosures can be commenced without producing an original promissory note. The Court noted that under California Civil Code § 2924, et seq. Section 2924(a)(1), regarding Mortgages in General, a trustee, mortgagee, beneficiary or any of their authorized agents may conduct a foreclosure. In addition, the party initiating the foreclosure need not be in possession of the original note. Consequently, the Court held that Chilton was unlikely to succeed on her claim for relief, and thus found it unnecessary to set Chilton’s motion for temporary injunctive relief for a hearing.
January 31, 2013 | Permalink | No Comments
Rhode Island Court Denies Plaintiff’s Claim to Invalidate Foreclosure Sale
In Porter v. First NLC Financial Services LLC, No. PC 10-2526 (R.I. Sup. March 31, 2011), the plaintiff challenged the validity of a foreclosure sale conducted by MERS. The defendant’s motion for summary judgment was addressed in this opinion.
The plaintiff argued that the original lender, First NLC, terminated its agency relationship with MERS by filing for bankruptcy protection. The plaintiff alleged that First NLC failed to affirm its contract with MERS which was required under Section 365 of the Bankruptcy Code. However, the court noted that the plaintiff failed to include affidavits or any evidence to support her allegations, as required to successfully oppose a summary judgment motion.
In addition, the plaintiff alleged that MERS was not the holder of the note or mortgage deed on the date of the foreclosure sale, MERS was not acting as an agent of the lender, and there was no chain of title to MERS or valid assignment of the note to the lender. The court found the plaintiff’s these objections to the foreclosure sale as substantially similar to Bucci v. Lehman Bros. Bank and adopted the reasoning to dismiss these claims. The plaintiff similarly claimed these actions were violations under both the mortgage agreement and Rhode Island’s statutes.
The court found the language in the mortgage agreement was unambiguous and clear in granting MERS status as both nominee for the First NLC and as mortgagee under the agreement. As a result, the statutory power of sale was specifically granted to MERS as mortgagee and lender’s nominee.
A statutory challenge to the authority of MERS was similar rebuffed. Since adopting the plaintiff’s argument would result in mortgagees and lenders being unable to use a mortgage servicer, the court rejected the argument.
Finally, a claim of tortious interference based on the plaintiff’s tenants who broke their leases and terminated their tenancy at the property as a result of the foreclosure was addressed. A claim of tortious interference requires the plaintiff to show an existence of a contract, the alleged wrongdoer’s knowledge of the contract, and the intentional improper interference of the contract along with damages as a result. The court found the foreclosure to be proper, which resulted in the tortious interference claim being dismissed since the interference must be improper in order to succeed.
The court ultimately granted the defendant’s motion to dismiss the case.
January 31, 2013 | Permalink | No Comments
FDIC Lawsuit against Bank Directors
The FDIC has filed a lawsuit (hat tip LaCroix by way of April Charney) against the officers and directors of a small bank in New Mexico alleging negligence, gross negligence and breaches of fiduciary duties. The FDIC alleges that the
Defendants, as officers and directors of Charter Bank of Santa Fe, New Mexico (“Charter Bank” or “the Bank”), committed $50 million – 72 percent of the Bank’s core capital of $69 million – to open and operate a highly risky and speculative subprime lending operation in Denver, Colorado in late 2006, when they knew or should have known that there was no secondary market for subprime loans. The Bank funded loans that no reasonable financial institution would have made at any time, much less in 2007 and 2008 when the risks of such lending were well recognized. The Defendants negligently permitted and presided over, and failed to suspend, limit or stop the production of a portfolio of approximately $50 million in risky, subprime residential loans intended for sale into a secondary market that at the time was recognized to be increasingly unstable, unpredictable, and illiquid due to concerns about the credit quality of subprime loans. (1)
While the allegations, if true, would prove that the bank engaged in predatory lending, the complaint is revealing about the behavior of the bank’s regulators too:
Federal regulators repeatedly warned the Director Defendants that the Bank was over-leveraged and needed to raise more capital. The Director Defendants responded that they could operate the Bank with less capital and more borrowed money because they had placed most of their loans in the real estate acquisition, development, and construction loan business. The Director Defendants asserted that, because these loans were shorter in duration, the Bank had less risk – an analysis that failed to anticipate any real downside risk in the real estate development business. (6)
One wonders if the regulators should have done more than “repeatedly warn” these defendants in the run up to its failure.
The complaint also has some revealing allegations about how far lenders went to skirt the Home Ownership and Equity Protection Act’s regulation of high cost loans by limiting “loans to interest rates of no more than 11.5 to 12 percent. Given the minimum FICO score and maximum debt-to-income ratios for SLG loans based solely on stated income, these artificially capped interest rates were simply insufficient to cover the very high risk of default.” (10) Clearly, incentives ran amok at this closely held bank.
January 31, 2013 | Permalink | No Comments
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
February 1, 2013
SEC Complaint on Improper Trading of MBS — Much Ado?
By David Reiss
Floyd Norris, the only journalist to whom I have written fan mail (sorry Gretchen, you’re next), has another interesting column about a case that the SEC has brought against an MBS trader, Jesse Litvak. The complaint alleges that
On numerous occasions from 2009 to 2011, Litvak lied to, or otherwise misled, customers about the price at which his firm had bought the MBS and the amount of his firm’s compensation for arranging the trades. On some occasions, Litvak also misled the customer into believing that he was arranging a MBS trade between customers, when Litvak really was selling the MBS out of Jefferies’ inventory. Litvak’s misconduct misled customers about the market price for the MBS, and, thus, about the transaction they were agreeing to. Litvak also misled customers about whether they were getting the best price for their MBS trades and how much money they were paying in compensation. MBS are generally illiquid and discovering a market price for them is difficult. Participants trading in the MBS market must rely on informal sources, including their broker, for this information.(1-2)
Norris is right to highlight what this case can reveal about the lack of transparency in the trading of MBS, a lack of transparency that does not exist in many other major secondary markets for securities.
But I was struck by how little is at stake in this SEC case. The complaint alleges that the misconduct occurred in 25 (count ’em, 25!) trades from 2009 through 2011 (7) and that Litvak’s behavior “generated over $2.7 million in additional revenue for his firm.” (2) Not for him personally, mind you, but for his firm! He, of course, should be punished if the allegations prove to be true. And yet . . ..
Time after time, the government brings cases against mid-level players somehow involved in the financial crisis. Time after time, people wonder why these are the best cases that can be brought. My earlier thoughts about this can be found here and here. Is it possible that even the SEC lacks the resources to investigate the massively document intensive cases that would get to the heart of the matter?
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February 1, 2013 | Permalink | No Comments