December 20, 2012
9th Circuit Affirms Dismissal of Homeowner’s Challenges to Non-judicial Foreclosure in Arizona
In Buchna v. Bank of Am., NA, 478 F. App’x 425 (9th Cir. 2012), the court affirmed the District Court of Arizona’s dismissal of plaintiffs/homeowners Mariusz and Julita Buchna’s action against Bank of America, MERS, and Bank of New York Melon Corp. Amongst other allegations challenging the propriety of the foreclosure proceedings, the court found the Buchnas had failed to state a claim on four different grounds.
First, the Buchnas claimed that splitting the note and deed of trust rendered the non-judicial foreclosure provisions in the deed unenforceable. The court found this argument failed to state a claim and noted it was “conclusory speculation” that the parties exercising power under a deed of trust were not the note holders or agents of the holder. Particularly as the plaintiffs did not dispute the default nor the trustee’s right to foreclose.
Second, the court rejected the Buchnas claim that the beneficiary was required to prove ownership of the note before commencing a non-judicial foreclosure for the same reasons.
Third, and most interestingly, the Buchna’s argued defendants were not permitted to enforce the power of sale provision in the deed because they were not “persons entitled to enforce a negotiable instrument” under Sec. 47-3301 of Arizona’s UCC. The court again found this argument failed to state a claim as Arizona law does not require compliance with the UCC before a trustee commences a non-judicial foreclosure.
Fourth, the court found the Buchna’s argument that MERS was not a valid beneficiary also failed to state a claim.
Finally, the court affirmed the district court on all other grounds, and affirmed the implicit denial for the Buchnas to amend their complaint, as “amendment would have been futile.”
December 20, 2012 | Permalink | No Comments
December 17, 2012
NCUA Sues JP Morgan over MBS Representations
The National Credit Union Administration has sued J.P. Morgan Securities and Bear, Stearns & Co. for alleged securities laws violations relating to the sale of mortgage-backed securities to 4 credit unions that are now in NCUA conservatorship. According to the complaint, Bear Stearns (now owned by JPMorgan) made misrepresentations to the purchasing credit unions as part of its underwriting and sales of the MBS. The press release notes that NCUA has initiated eight similar suits against a variety of financial institutions.
One of the representations at issue states that “a mortgage loan will be considered to be originated in accordance with a given set of underwriting standards if, based on an overall qualitative evaluation, the loan is in substantial compliance with those underwriting standards.” (Complaint paragraph 408, page 170)
Given what we know about a lot of the securities that were issued, it is hard to imagine that reps like this were not violated for many of them.
December 17, 2012 | Permalink | No Comments
CFPB Issues Fair Lending Report That Highlights Data Collection
The Fair Lending Report of the Consumer Financial Protection Bureau provides an overview of the Bureau’s actions over the last year. Some of the most interesting elements of the report relate to future HMDA and TILA rulemaking:
Section 1094 of the Dodd-Frank Act amends HMDA to require the collection and submission of additional data fields related to mortgage loans, including certain applicant, loan, and property characteristics, as well as “such other information as the Bureau may require.” The CFPB is examining what changes it may propose to Regulation C. . . .
Finally, section 1403 of the Dodd-Frank Act requires that the CFPB prescribe regulations under TILA to prohibit “abusive or unfair lending practices that promote disparities among consumers of equal credit worthiness but of different race, ethnicity, gender or age. The CFPB has begun preliminary planning with regard to this rule. (26) (emphasis added)
Data collection about borrower and mortgage characteristics is very fraught. Lenders have typically fought against efforts to increase such data collection as it could only hurt them if others knew their business so well. Academics and consumer advocates have complained that data about the mortgage market is very hard to come by unless one had massive financial resources to pay private providers for it.
This was especially true, given the rapid rate of change in that market. Working with data that is twelve months old was the same as working with outdated information during the Boom years of the early 2000s. If the CFPB collects and analyzes data in something approximating real-time, it will be far more nimble than previous regulators. If it shares its data with outside researchers, it is likely to become even more sophisticated in its approach to the dynamic housing finance sector.
December 17, 2012 | Permalink | No Comments
December 14, 2012
Levitin and Wachter’s New History of American Housing Finance
Adam Levitin and Susan Wachter have released a very interesting paper on The Public Option in Housing Finance. The paper provides a history of the development of the housing finance infrastructure in the United States. It concludes that
[t]he experience of the U.S. housing finance market teaches us that public options can only succeed as a regulatory mode in certain circumstances. A public option that coexists with private parties in the market is only effective at shaping the market if all parties in the market have to compete based on the same rules and standards. Otherwise, the result is merely market segmentation. Moreover, without basic standards applicable to all parties, the result can quickly become a race-to-the-bottom that can damage not only private parties, but also public entities.(60)
Personally, I wish they struggled more with the trillion dollar issue that they highlight in the middle of the paper: “It is not clear how deep of a housing market can be supported if credit risk is borne by private parties rather than by government.” (30) As the Obama Administration seeks to impose a new order on the housing finance market that will likely last for generations, we should seek a consensus (or as close to one as we can) among policymakers as to how much credit risk the private sector can take when it comes to mortgages secured by single and multifamily housing. Personally, I believe it can handle a lot more than we give it credit for.
December 14, 2012 | Permalink | No Comments
December 12, 2012
CRL Issues Report on State of Lending
The Center for Responsible Lending has issued a new report, The State of Lending in America and its Impact on U.S. Households. CRL, Cassandra-like, warned of an epidemic of millions of foreclosures at the height of the Subprime Boom, so they have a lot of street cred. And while they are consumer advocates, their research is solid.
Their policy recommendations include “the following key principles to ensure a robust and secure secondary market:”
• Government Guarantee: The U.S. government should provide an explicit, actuarially sound guarantee for mortgages in a future secondary market structure. This is an appropriate role to for the government to play in the event of a housing-market crash or market disruption. Discussion about the role of private capital in sharing losses is an important part of the conversation, but a catastrophic government guarantee is essential to the future of mortgage finance.
• Duty to Serve Entire Market: Mortgage finance reform should require secondary market entities that benefit from federal guarantees to serve all qualified homeowners, rather than preferred market segments. Without a duty to serve the entire market, lenders could recreate the dual credit market that characterized lending during the subprime crisis.
• Encourage Broad Market Access by All Lenders: The future mortgage finance system should encourage competition and further broad market access to the secondary capital markets for both small and large lenders. These goals should be met by establishing a cooperative secondary market model of one non-lender entity, owned in equal shares by member-users, that is able to issue guaranteed securities. Such a model of aligned interests will correct the shortcomings of Fannie Mae and Freddie Mac’s past and also prevent a further concentrated lending marketplace in the future. (53)
December 12, 2012 | Permalink | No Comments
December 10, 2012
MERS Must Possess Note or Have Authority to Act on Behalf of Note Holder in Order to Foreclose, According to Massachusetts Supreme Court
In Eaton v Federal National Mortgage Association, 462 Mass. 569 (Mass. 2012), the Supreme Judicial Court of Massachusetts addressed “the propriety of a foreclosure by power of sale undertaken by a mortgage holder that did not hold the underlying mortgage note.” In this case, the homeowner executed both a promissory note, solely to the lender, and a mortgage to the lender and to MERS. Under the terms of the mortgage, the lender was referred to as “lender” and MERS was referred to as “mortgagee.” As mortgagee, MERS was stipulated to hold legal title to the property with the power of sale “solely as nominee.” MERS was also given explicit authority under the mortgage to exercise the right to foreclose the property as nominee for lender. Subsequently, MERS assigned its interest to Green Tree servicing, LLC (Green Tree). The assignment was recorded in the county register of deeds, but without evidence of transfer of the note.
Eventually, the homeowner fell behind on his mortgage payments and Green Tree moved to foreclose. Green Tree was the highest bidder at the foreclosure auction, and assigned the rights to its bid to Fannie Mae. Fannie Mae later moved to evict the homeowner from the property. In response, the homeowner filed a counterclaim, arguing that the underlying foreclosure was invalid because Green Tree did not hold the note at the time of the foreclosure action. The housing court and the superior court found in favor of the homeowner, holding that a mortgagee must possess both the mortgage and the mortgage note to have authority to foreclose.
However, the Supreme Court, transferring the case to its court on its own motion, came to a different conclusion. The Supreme Court found that the lower courts relied only on common law for their holdings, and that statutory law, particularly G.L.c. 183, § 21 and G.L.c. 244, § 14, changes the analysis. Relying on these stautes, the court held “that where a mortgagee acts with the authority and on behalf of the note holder, the mortgagee may comply with these statutory requirements without physically possessing or actually holding the mortgage note.” Whether a mortgagee is acting with authority and on behalf of the note holder is a an agency question, which the Supreme Court could not address based on the record.
The court also held that the ruling only had prospective effect, and thus the ruling “appl[ies] only to mortgage foreclosure sales for which the mandatory notice of sale has been given after the date of this opinion.” However, the court also applied the ruling to the parties in the case, and the court remanded the case to the superior court to determine whether Green Tree was acting with authority and on behalf of the lender at the time of the closing.
December 10, 2012 | Permalink | No Comments
Retail Trading Comes to Mortgage-Backed Securities
By David Reiss
In a recent paper, Bessembinder et al. look at the implications of FINRA’s proposal to disseminate trade prices for structured products like mortgage-backed securities to the public. They evaluate how price transparency has impacted the corporate bond market and find that it “increased bonds’ propensity to trade and increased overall volume.” (24) They note that trading costs shrank. They argue that the same impact may be felt in structured product markets.
It is unclear what this change will mean for the homeowner, but it would seem to mean that there will be a reduction in interest expense and an increase in liquidity in the market for credit but perhaps also an increase in the role that “animal spirits” will play as the business cycle inexorably turns from bust to plateau to boom to bust . . ..
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December 12, 2012 | Permalink | No Comments