January 29, 2013
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
Northern District of Ohio Holds that Mortgage Conveys Beneficial Interest to MERS as Nominee, Mortgagee
In Meehan v. Mortgage Elec. Registration Sys., Inc., 1:11CV363, 2011 WL 3360193 (N.D. Ohio Aug. 3, 2011), the United States District Court for the Northern District of Ohio held that MERS had a beneficial interest in the property based on the language of the mortgage agreement. In this case, the homeowners filed an action to quiet title, claiming, “MERS has no beneficial interest in the mortgage. . . [further,] MERS’s interest is adverse and constitutes a cloud on the title to [the] property.” MERS claimed it had a beneficial interest in the property because the mortgage named MERS as nominee for the lender as well as the mortgagee. The court found that the contract language was clear and an action to quiet title, which is an equitable remedy, was not available to the homeowners in this case. Thus, the court held that the homeowners claim was without merit and granted MERS’s motion to dismiss.
January 28, 2013 | Permalink | No Comments
January 25, 2013
Southern District of Ohio Unable to Determine Lenders’ Standing, Orders Lenders to Submit More Evidence or Have Case Dismissed
In In re Foreclosure Cases, 521 F. Supp. 2d 650 (S.D. Ohio 2007), the United States District Court for the Southern District of Ohio reviewed 27 private foreclosure actions based on federal diversity jurisdiction. In this case, the court was concerned with the issues of standing and subject matter jurisdiction, and was dissatisfied with the evidence submitted by the lenders. The court concluded by ordering the lenders to “submit evidence [within 30 days] showing that they had standing in the above-captioned cases when the complaint was filed and that this Court had diversity jurisdiction when the complaint was filed. Failure to do so will result in dismissal without prejudice to refiling if and when the plaintiff acquires standing and the diversity jurisdiction requirements are met.”
January 25, 2013 | Permalink | No Comments
Ohio Appellate Court Holds that Lender, as the Real Party in Interest, has Standing to Foreclose
In Countrywide Home Loans Servicing, L.P. v. Shifflet, 2010-Ohio-1266, the Court of Appeals of Ohio, Third District held that the lender had standing to bring a foreclosure action against the homeowners. The homeowners argued that “MERS, rather than [lender], was the holder of the mortgage, rendering [MERS] the real party in interest.” The court rejected this argument, and based their determination on the evidence submitted by the lender. The evidence submitted was (1) an affidavit from the lender’s assistant vice president stating that the lender is the holder of the mortgage deed and note, and (2) an assignment executed by MERS that assigned all of its right, title, and interest in the subject mortgage deed and note to the lender. The court found this evidence dispositive, stating, “[g]iven the affidavit of [the lender’s assistant vice president] and, more importantly, the documentary evidence of the assignment of the mortgage and note to [the lender], the trial court did not err in granting summary judgment to the lender.”
January 25, 2013 | Permalink | No Comments
