January 17, 2013
New Jersey Superior Court Dismisses Foreclosure Suit, Requiring Physical Possession of Note & Mortgage at Time of Filing
In Bank of New York v. Raftogianis, 418 N.J. Super. 323, 13 A.3d 435 (Ch. Div. 2010) the Superior Court of New Jersey, Chancery Division, Atlantic County, found that although the lender had not separated the note and mortgage through the securitization process, there was insufficient evidence that the trustee had physical possession of the original note as of the date the foreclosure was filed.
Defendant, Michael Raftogianis, executed a note in the amount $1,380,000 to American Home Mortgage Acceptance, Inc. (“AHA”) and corresponding mortgage in September 2004. The mortgage described MERS as the mortgagee, as nominee for the Lender. In December 2004, defendant’s mortgage was securitized along with a group of other mortgages held by AHA to American Home Mortgage Securities, LLC. Afterwards, defendant’s mortgage was resold to plaintiff’s trust. Defendant defaulted in October 2008. Bank of New York was prosecuting this foreclosure case as indentured trustee for the trust.
After a lengthy discussion of the UCC, MERS recording system, and securitization in general, the court concluded “[w]hile it was clear the note had been indorsed prior to the time it was presented to the court, presumably as a part of the securitization process, it was not clear just when that occurred, or when the note had been physically transferred from American Home Acceptance to some other individual or entity.”
In turn, the court addressed the three central issues necessary to resolution.
First, the court rejected defendant’s “separation theory.” Splitting the note and the mortgage, in the sense the note was payable to the lender, and the mortgage was directed to MERS as nominee for the lender does not restrict the ability to foreclose. Interestingly, the court seemed to focus in part on the lender’s intent, stating “[i]t is clear, however, that there was no real intent to separate ownership of the note and mortgage at the time those documents were created.”
Second, the court rejected plaintiff’s argument that it did not have to establish it had possession of the note at the time of filing as it was a “real party in interest” under New Jersey Rule 4:26-1. The court focused on the permissive nature of this statute and the uncertainty that the trust had possession of the note (which would be required under the UCC) to reject this position.
Third, the court addressed plaintiff’s claim that possession of the note after the complaint was filed was sufficient to overcome any initial deficiencies. Citing to the Southern District of Ohio, the court stated to satisfy Article III’s standing requirements, “the plaintiff in a foreclosure action must establish that it was the holder of the note and the mortgage at the time the complaint was filed.”
Here, the bank’s witness was unable to offer any direct proof as to the physical transfer of the note at issue. Accordingly, the court found “[p]laintiff failed, even by the preponderance of the evidence standard, [to establish] that it did have possession of the note as of the date the complaint was filed” and dismissed without prejudice.
January 17, 2013 | Permalink | No Comments
January 16, 2013
New York Supreme Court, Appellate Division, Second Department Holds that MERS has Standing to Foreclose
In Mtge. Elec. Registration Sys., Inc. v Coakley, 41 A.D.3d 674 (2d Dept. 2007), the Supreme Court, Appellate Division, Second Department found that MERS had standing to foreclose on the homeowner. The court held, “[t]he record shows that the promissory note was. . . ultimately transferred and tendered to MERS. Therefore, at the time of the commencement of this action, MERS was the lawful holder of the promissory note and of the mortgage, which passed as an incident to the promissory note. . . . Moreover, further support for MERS’s standing to commence the action may be found on the face of the mortgage instrument itself. Pursuant to the clear and unequivocal terms of the mortgage instrument, Coakley expressly agreed without qualification that MERS had the right to foreclose upon the premises in the event of a default.” Thus, in this case MERS was able to prove that it held both the mortgage and the underlying note, which was enough for the court to determine that MERS had standing to foreclose.
January 16, 2013 | Permalink | No Comments
Federal Involvement in Real Estate — It’s Big!
SmartGrowth America has issued an interesting report, Federal Involvement in Real Estate: A Call for Examination, which provides a high level summary of the topic. While it does not contain any surprises, it is somewhat shocking to see the range of budget and tax expenditures all laid out in one document. The report states, “While $450 billion was the average amount directly committed to real estate each fiscal year by the federal government, the government’s impact goes even further. This figure does not include the obligations of GSEs Fannie Mae and Freddie Mac, which exceed $5.5 trillion in outstanding loans and loan guarantees.” (4, footnote omitted)
The report makes the obvious point, “Though many think of the United States as a free market economy, real estate is greatly influenced by government policies.” (6) While obvious, it bears repeating often and loudly whether one is a free marketeer who would like to reduce the government role in real estate or a proponent of the welfare state who would like to see government resources directed more rationally.
The reports key points include, among others, the fact that federal housing policy favors homeowners over renters, single-family homes over multifamilies, vacation homeowners and upper-income households. (6-8)
Last point: Appendix B has an interesting table that compares total single-family and multifamily expenditures from 2007 through 2011. it comes out to about $606 billion for the former and $227 billion for the latter, nearly a 3-1 ratio. (17)
January 16, 2013 | Permalink | No Comments
Class Action Recording Fee Suit in Missouri Dismissed
Jackson County, Missouri v. MERSCorp, Inc., et al., No. 12-0665-CV-W-ODS (W.D. Mo. Jan. 14, 2013) is a suit by Jackson County to recover lost recording fees resulting from the use of MERS. This suit is a class action law suit where the plaintiff county also sought to recover lost fees for all of the counties in Missouri along with St. Louis. The plaintiffs argued that each assignment of a deed of trust within their respective county (or within St. Louis) must be recorded and a recording fee must be paid. In addition to the lost revenue, they also argued that their land records are inaccurate or incomplete because of MERS.
The defendants argued that the plaintiff lacks standing because it cannot recover fees for assignments it never recorded and there is no duty under Missouri law to record deed of trust assignments.
The Court found there was standing because the plaintiff alleged an injury to its financial interest caused by the lost recording fees and inaccurate county land records.
The defendants also argued that there was no private right of action to enforce any violations of statutes regarding recording the assignments. However, the Court found the plaintiffs were not enforcing any statutory requirement to record assignments because the Missouri recording statutes only “encourage” recording, not require them.
The plaintiffs argued the defendants were unjustly enriched because each assignee retained the original assignor’s priority by listing MERS as the beneficiary. However, the Court finds because there is no duty to record assignments, there cannot be unjust enrichment. The defendants did not act improperly by not recording further assignments since it is permissible under Missouri statute.
A claim of civil conspiracy was also dismissed because it relied on the finding of unjust enrichment as the basis of the conspiracy.
Plaintiff also argued that a prima facie tort occurred. This claim requires the plaintiff to establish: (1) an intentional lawful act by defendant; (2) an intent to injure the plaintiff; (3) injury to plaintiff; and (4) insufficient justification for defendant’s action. However, this claim is disfavored under Missouri law, particularly when there are other remedies or tort claims available. However, the defendants argued there was no intent to harm the plaintiffs. The court found no evidence or allegation of malicious intent to injure the plaintiff, as required to satisfy the second prong of the claim. As a result, the claim is dismissed.
The plaintiff’s requests for a declaratory judgment and injunctive relief are dismissed because they are remedial actions. Since the court has not found a viable claim for the plaintiff to request remedial action, the court denied the requests.
The court ultimately finds that the plaintiff must convince the legislature to change the statute to create a legal duty to record assignments in order to recover from the defendants (with a private right of action that the plaintiffs can avail of). As a result, the motion to dismiss the claim was granted.
January 16, 2013 | Permalink | No Comments
January 15, 2013
Land Use Controls Caused The Financial Crisis?
Respected Housng Economist Edwin Mills and co-author B.N. Jansen write in their article, “Distortions Resulting from Residential Land Use Controls in Metropolitan Areas”,
The strong conclusion of this paper is that stringent residential land use controls were a primary cause of the massive house price inflation from about 1992 to 2006 and possibly of the deflation that started in 2007.
Indeed, it is difficult to imagine another plausible cause of the 2008-2009 financial crisis. Popular accounts simply refer to a speculative housing price bubble. But productivity growth in housing construction is faster than in the economy as a whole [citation omitted] and the US has an aggressive and competitive housing construction sector. In the absence of excessive controls, housing construction would quickly deflate a speculative housing price bubble.
A final comment is that there appears to be no interest at any level of government, or among the articulate population, in reducing the stringency of land use controls. Indeed, recent trends are in the opposite direction. (200)
Jansen and Mills rely heavily on a dataset constructed by Joseph Gyourko and others to analyze local land use control stringency. I am not in a position to evaluate the dataset or the model that they use, but their findings are consistent with those of Gyourko and Edward Glaeser in Rethinking Federal Homeownership Policy.
It seems to me that Jansen and Mills overstate their case quite a bit — stringent land use controls may have been a necessary condition for the bubble, but I can’t see how their argument demonstrates that it was sufficient unto itself. That being said, I would agree wholeheartedly that this hypothesis is worthy of serious study. The relationship between land use and housing policy is way more important than most members of the “articulate population” understand.
January 15, 2013 | Permalink | No Comments
January 13, 2013
United States Bankruptcy Court Bound by Precedent to Recognize Bank’s Standing in Foreclosure Action, but Opines on MERS’s Flawed Assignment Process and Status as Agent
In In re Agard, 444 BR 231, 235 (Bankr. E.D.N.Y. 2011) vacated in part sub nom. Agard v. Select Portfolio Servicing, Inc., BR 8-10-77338 REG (E.D.N.Y. 2012), the United States Bankruptcy Court for the Eastern District of New York held that U.S. Bank, the assignee bank in this case, had standing to foreclose because the state court had already determined that the assignment of the mortgage by MERS to U.S. Bank was a valid assignment. The court stated the issue as follows: “[homeowner] argues that the only interest U.S. Bank holds in the underlying mortgage was received by way of an assignment from. . . MERS, as a ‘nominee’ for the original lender. [Homeowner]’s argument raises a fundamental question as to whether MERS had the legal authority to assign a valid and enforceable interest in the subject mortgage.”
In holding for U.S. Bank, the court stated the homeowner’s argument had to be rejected because of the application of the Rooker-Feldman doctrine. The court stated, “[t]he Rooker-Feldman doctrine is derived from two Supreme Court cases, Rooker v. Fidelity Trust Co., 263 U.S. 413 (1923), and D.C. Court of Appeals v. Feldman, 460 U.S. 462 (1983), which together stand for the proposition that lower federal courts lack subject matter jurisdiction to sit in direct appellate review of state court judgments.” Also, the court found that res judicata precludes the homeowner from prevailing here: “The state court already has determined that U.S. Bank is a secured creditor with standing to foreclose and this Court cannot alter that determination in order to deny U.S. Bank standing to seek relief from the automatic stay.”
However, the court in this case found it necessary to expound upon whether it believed that U.S. Bank had standing to foreclose, despite the state court’s binding opinion. “[T]he Court believes that it is appropriate to set forth its analysis on the issue of whether [U.S. Bank], absent the Judgment of Foreclosure, would have standing to bring the instant motion.” The court began its analysis by stating, “in order to have standing to seek relief from stay, [U.S. Bank]. . . must show that [it] holds both the Mortgage and the Note. . . [U.S. Bank] can prove that [it] is the holder of the Note by providing the Court with proof of a written assignment of the Note, or by demonstrating that [it] has physical possession of the Note endorsed over to it. . . the Assignment of Mortgage is not sufficient to establish an effective assignment of the Note.” Therefore, U.S. Bank would have to show that MERS both assigned the note and that it had authority to assign the note. Regarding MERS’s authority to assign the note, the court held, “[w]hat remains undisputed is that MERS did not have any rights with respect to the Note and other than as described above, MERS played no role in the transfer of the Note… [U.S. Bank]’s failure to show that [it] holds the Note should be fatal to the Movant’s standing.”
Furthermore, the court took issue with MERS’s status as agent of the original mortgagee. The court stated, “the record of this case is insufficient to prove that an agency relationship exists under the laws of the state of New York between MERS and its members. According to MERS, the principal/agent relationship among itself and its members is created by the MERS rules of membership and terms and conditions, as well as the Mortgage itself. However, none of the documents expressly creates an agency relationship or even mentions the word “agency.” MERS would have this Court cobble together the documents and draw inferences from the words contained in those documents.” The court went even further in its criticism, saying, “Aside from the inappropriate reliance upon the statutory definition of ‘mortgagee,’ MERS’s position that it can be both the mortgagee and an agent of the mortgagee is absurd, at best. . . . even if MERS had assigned the Mortgage acting on behalf of the entity which held the Note at the time of the assignment, this Court finds that MERS did not have authority, as ‘nominee’ or agent, to assign the Mortgage absent a showing that it was given specific written directions by its principal. This Court finds that MERS’s theory that it can act as a ‘common agent’ for undisclosed principals is not support by the law. The relationship between MERS and its lenders and its distortion of its alleged ‘nominee’ status was appropriately described by the Supreme Court of Kansas as follows: ‘The parties appear to have defined the word [nominee] in much the same way that the blind men of Indian legend described an elephant – their description depended on which part they were touching at any given time.’ ”
Absent the state court precedent that the court was bound to follow, the court likely would have emphatically refused to recognize MERS’s authority to assign the note as well as the mortgage, and in turn would have prevented U.S. Bank from proceeding with the foreclosure. Thus, in future cases before the court with similar facts that are not bound by state law precedent, MERS and any assignee bank will not have standing to foreclose.
January 13, 2013 | Permalink | No Comments
