- On the Cyclicity of Regional House Prices: New Evidence for U.S. Metropolitan Statistical Areas, Michael André Flor & Torben Klarl, CESifo Working Paper Series No. 5471.
- How Mortgage Finance Affects the Urban Landscape, Sewin Chan, Andrew Haughwout & Joseph S. Tracy, FRB of New York Working Paper No. FEDNSR713.
- House-Price Expectations, Alternative Mortgage Products, and Default, Jan K. Brueckner, Paul S. Calem & Leondard I. Nakamura, FRB of Philadelphia Working Paper No. FEDPWP15-1.
- A Cost-Benefit Analysis of Judicial Foreclosure Delay and a Preliminary Look at New Mortgage Servicing Rules, Lawrence R. Cordell & Lauren Lambie-Hanson, FRB of Philadelphia Working Paper No. FEDPWP15-14.
- Sharing Property, Kellen Zale, University of Colorado Law Review (Forthcoming); U of Houston Law Center No. 2015-A-16.
- [Re]Integrating Community Space: The Legal and Social Meanings of Reclaiming Abandoned Space in New York’s Lower East Side, Andrea L. McArdle, 2 Savannah Law Review 247 (2015).
- Bankruptcy Weapons to Terminate a Zombie Mortgage, Andrea J. Boyack & Robert Berger, Washburn Law Journal, Vol. 54, No. 3, 2015.
Tag Archives: judicial foreclosure
Wednesday’s Academic Roundup
- Amidst the Walking Dead: Judicial and Nonjudicial Approaches for Eradicating Zombie Mortgages, by Andrea Clark, Emory Law Journal, Vol. 65, No. 3, Forthcoming.
- The Paradox of Judicial Foreclosure: Collateral Value Uncertainty and Mortgage Rates, by David Harrison & Michael Seiler, Journal of Real Estate Finance and Economics, Vol. 50, No. 3, 2015.
- Debt, Default and Crises: A Historical Perspective, by Antonie Kotze, Financial Chaos Theory; Department of Finance and Investment Management.
- Demographic and Financial Determinants of Housing Choice in Retirement and the Rise of Senior Living, by Calvin Schnure & Shruthi Venkatesh, March 31, 2015.
- The Impact of State Foreclosure and Bankruptcy Laws on Higher-Risk Lending: Evidence from FHA and Subprime Mortgage Originations, by Qianqian Cao & Shimeng Liu, February 19, 2015.
- Zoning and Land Use Planning: How Real is Gentrification, by Michael Lewyn, 43 Real Est. L.J. 344 (Winter 2014).
- Maximizing Inclusionary Zoning’s Contributions to Both Affordable Housing and Residential Integration, by Tim Iglesias, Washburn Law Journal, Vol. 54, No. 4, 2015.
Whitman on Foreclosing on E-Note
Professor Dale Whitman posted a commentary on Good v. Wells Fargo Bank, 18 N.E.3d 618 (Ind. App. 2014) on the Dirt listserv. The case addresses whether a lender foreclosing a mortgage securing an electronic note must provide proof that it had “control” of the note when it filed the foreclosure action. This is an interesting new take on an old issue. Dale’s commentary reads:
By now, everyone is familiar with the requirements of UCC Article 3 with respect to enforcement of negotiable notes. Article 3 requires either proof that the party enforcing the note has possession of the original note, or as an alternative, requires submission of a lost note affidavit. With conventional paper notes, it has become common for courts in judicial foreclosure states to require, as a condition of standing to foreclose, that the note holder or its servicer have had possession of the note on the date the foreclosure complaint or petition was filed. This requirement is problematic if (as is often true) the endorsement on the note is undated. In such cases, the servicer will usually be expected to provide additional proof (commonly in the form of affidavits of employees of the holder and/or servicer) that the note had been delivered to the foreclosing party before the date of filing of the action. See, e.g., Deutsche Bank N.T. v. Beneficial New Mexico, Inc., 335 P.3d 217 (N.M. App. 2014); Boyd v. Wells Fargo Bank, N.A., 143 So.3d 1128 (Fla.App. 2014); U.S. Bank, N.A. v. Faruque, 991 N.Y.S.2d 630 (N.Y.App.Div. 2014).
Suppose, however, that the note was electronic rather than paper. Such notes are enforceable under eSign and UETA, but these statutes modify the concepts of delivery and possession. Because an electronic note can be reproduced as many times as desired, and each copy is indistinguishable from the original, eSign creates the concept of the note as a “transferrable record.” Such records must have the following characteristics:
1. The record must be held within a system in which “a single authoritative copy of the record (the note) exists, which is unique, identifiable, and unalterable.”
2. To have the equivalent of possession of such a note, if it has been transferred, a person must have “control” in the sense that the system for tracking such notes must reliably establish that the person enforcing the note is the one to whom the record was transferred.
3. Finally, if the record has been transferred, the authoritative copy of the record itself must indicate the identity of the person who whom it was most recently transferred.
See 15 U.S.C. sec. 7021.
There are very few cases thus far involving foreclosures of mortgages securing e-notes, and little authority on exactly what the holder must prove in order to properly foreclose. In the Good case Wells Fargo was acting as servicer for Fannie Mae, the holder of an e-note that was registered in the MERS e-registry. (MERS’ role with e-notes is very different than for paper notes. In paper note transactions, MERS does not take possession of the note and has no dealings with it, but in e-note transactions, MERS operates a registry to track who has control of the note.)
Accompanying its foreclosure complaint, Wells filed an affidavit by one of its officers, stating that Wells was the servicer, that it maintained a copy of the note, and that its systems provided controls to assure that each note was maintained accurately and protected against alteration. Finally, it stated that the paper copy it submitted with the foreclosure complaint was a true and correct copy of the original e-note.
Unfortunately for Wells, the court found that this affidavit was woefully inadequate to establish Wells’ standing to foreclose the mortgage. Here is the court’s list of particulars:
1. The affidavit stated that Wells possessed the note, but the court couldn’t tell whether it meant the electronic note or a paper copy.
2. The affidavit did not assert that Wells had “control” of the record, either by maintaining the single authoritative copy itself in its own system, or by being identified as having control of the single authoritative copy in the MERS registry system.
3. In fact, Wells never even mentioned the MERS registry system in its affidavit, even though it is obvious from the facts that the note was being tracked within that system.
Wells tried to repair the damage at trial; an employee of Wells testified that Wells was in control of the note, currently maintained it, and serviced the loan. But the court found that this testimony was “conclusory” (as indeed it was) and was insufficient to establish that Wells had control of the note.
Comment: The court provides an extremely useful road map for counsel representing a servicer in the judicial foreclosure of a e-note. The statute itself provides (in 15 U.S.C. 7021(f)) that the person enforcing the note must provide “reasonable proof” that it was in control of the note, and the court felt this must be detailed information and not merely a bare statement.
While the case involved a judicial foreclosure, one might well ask how the “reasonable proof” requirement would be satisfied in a nonjudicial foreclosure. In about eight states, the courts have held (with paper notes) that their nonjudicial foreclosure statutes do not require any assertion or proof of possession of the note. But it is arguable that, if the note is electronic rather than paper, eSign overrides this conclusion by virtue of its express requirement of “reasonable proof.” And since eSign is a federal statute, it is quite capable of preempting any contrary state legislation. On the other hand, the “reasonable proof” requirement only applies “if requested by a person against which enforcement is sought.” In a nonjudicial foreclosure proceeding, how would the borrower make such a request? These are interesting, but highly speculative questions.
Is Freddie the “Government” When It’s In Conservatorship?
Professor Dale Whitman posted a commentary on Federal Home Loan Mortgage Corp. v. Kelley, 2014 WL 4232687, Michigan Court of Appeals (No. 315082, rev. op., Aug. 26, 2014) on the Dirt listserv:
This is a residential mortgage foreclosure case. The original foreclosure by CMI (CitiMortgage, apparently Freddie Mac’s servicer) was by “advertisement” – i.e., pursuant to the Michigan nonjudicial foreclosure statute. Freddie was the successful bidder at the foreclosure sale. In a subsequent action to evict the borrowers, they raised two defenses.
Their first defense was based on the argument that, even though Freddie Mac was concededly a nongovernmental entity prior to it’s being placed into conservatorship in 2008 (see American Bankers Mortgage Corp v. Fed Home Loan Mortgage Corp, 75 F3d 1401, 1406–1409 (9th Cir. 1996)), it had become a federal agency by virtue of the conservatorship with FHFA as conservator. As such, it was required to comply with Due Process in foreclosing, and the borrowers argued that the Michigan nonjudicial foreclosure procedure did not afford due process.
The court rejected this argument, as has every court that has considered it. The test for federal agency status is found in Lebron v. Nat’l Railroad Passenger Corp, 513 U.S. 374, 377; 115 S Ct 961; 130 L.Ed.2d 902 (1995), which involved Amtrak. Amtrak was found to be a governmental body, in part because the control of the government was permanent. The court noted, however, that FHFA’s control of Freddie, while open-ended and continuing, was not intended to be permanent. Hence, Freddie was not a governmental entity and was not required to conform to Due Process standards in foreclosing mortgages. This may seem overly simplistic, but that’s the way the court analyzed it.
There’s no surprise here. For other cases reaching the same result, see U.S. ex rel. Adams v. Wells Fargo Bank Nat. Ass’n, 2013 WL 6506732 (D. Nev. 2013) (in light of the GSEs’ lack of federal instrumentality status while in conservatorship, homeowners who failed to pay association dues to the GSEs could not be charged with violating the federal False Claims Act); Herron v. Fannie Mae, 857 F. Supp. 2d 87 (D.D.C. 2012) (Fannie Mae, while in conservatorship, is not a federal agency for purposes of a wrongful discharge claim); In re Kapla, 485 B.R. 136 (Bankr. E.D. Mich. 2012), aff’d, 2014 WL 346019 (E.D. Mich. 2014) (Fannie Mae, while in conservatorship, is not a “governmental actor” subject to Due Process Clause for purposes of foreclosure); May v. Wells Fargo Bank, N.A., 2013 WL 3207511 (S.D. Tex. 2013) (same); In re Hermiz, 2013 WL 3353928 (E.D. Mich. 2013) (same, Freddie Mac).
There’s a potential issue that the court didn’t ever reach. Assume that a purely federal agency holds a mortgage, and transfers it to its servicer (a private entity) to foreclose. Does Due Process apply? The agency is still calling the shots, but the private servicer is the party whose name is on the foreclosure. Don’t you think that’s an interesting question?
The borrowers’ second defense was that Michigan statutes require a recorded chain of mortgage assignments in order to foreclose nonjudicially. See Mich. Comp. L. 600.3204(3). In this case the mortgage had been held by ABN-AMRO, which had been merged with CMI (CitiMortgage), the foreclosing entity. No assignment of the mortgage had been recorded in connection with the merger. However, the court was not impressed with this argument either. It noted that the Michigan Supreme Court in Kim v JP Morgan Chase Bank, NA, 493 Mich 98, 115-116; 825 NW2d 329 (2012), had stated
to set aside the foreclosure sale, plaintiffs must show that they were prejudiced by defendant’s failure to comply with MCL 600.3204. To demonstrate such prejudice, they must show they would have been in a better position to preserve their interest in the property absent defendant’s noncompliance with the statute.
The court found that the borrowers were not prejudiced by the failure to record an assignment in connection with the corporate merger, and hence could not set the sale aside.
But this holding raises an interesting issue: When is failure to record a mortgage assignment ever prejudicial to the borrower? One can conceive of such a case, but it’s pretty improbable. Suppose the borrowers want to seek a loan modification, and to do so, check the public records in Michigan to find out to whom their loan has been assigned. However, no assignment is recorded, and when they check with the originating lender, they are stonewalled. Are they prejudiced?
Well, not if it’s a MERS loan, since they can quickly find out who holds the loan by querying the MERS web site. (True, the MERS records might possibly be wrong, but they’re correct in the vast majority of cases.) And then there’s the fact that federal law requires written, mailed notification to the borrowers of both any change in servicing and any sale of the loan itself. If they received these notices (which are mandatory), there’s no prejudice to them in not being able to find the same information in the county real estate records.
So one can postulate a case in which failure to record an assignment is prejudicial to the borrowers, but it’s extremely improbable. The truth is that checking the public records is a terrible way to find out who holds your loan. Moreover, Michigan requires recording of assignments only for a nonjudicial foreclosure; a person with the right to enforce the promissory note can foreclose the mortgage judicially whether there’s a chain of assignments or not.
All in all, the statutory requirement to record a chain of assignments is pretty meaningless to everybody involved – a fact that the Michigan courts recognize implicitly by their requirement that the borrower show prejudice in order to set a foreclosure sale aside on this ground.
Hawaii Court Holds that Debtor had Standing to Enforce Note and Mortgage Under Haw. Rev. Stat. § 490:3-301(ii) Even Though it was a Non-Holder
The court in deciding 1250 Oceanside Partners v. Katcher, 2013 Bankr. (D. Haw. 2013) recommended that the district court enter a decree of foreclosure in favor of the debtor.
The debtor in possession of 1250 Oceanside Partners sought to enforce a promissory note and foreclose a mortgage made by defendants, the Katchers. Oceanside sought summary judgment, the Katchers argued that the court lacked jurisdiction, that Oceanside was not entitled to foreclose, and that if it was entitled to foreclose, it was not entitled to a deficiency judgment.
The court found that there was no dispute as to any material fact and that Oceanside was entitled to foreclose on the property, but it was not entitled to a deficiency judgment against the Katchers at this stage in the litigation.
The court held that the debtor had standing to enforce the note and mortgage under Haw. Rev. Stat. § 490:3-301(ii) even though it was a non-holder, as it was in possession of the note and had the rights of a holder. The court also found that the mortgagors’ defenses to foreclosure were based entirely on debtor’s failure to develop a project as the purchase contract required, but the terms of the purchase contract provided that the mortgagors’ claims against debtor would be decided separately from debtor’s foreclosure claims. Moreover, the debtor’s claim for a deficiency judgment related to monetary damages or costs and thus, was subject to arbitration under the agreement.
Settling NY Foreclosures
Three legal services providers issued Stalled Settlement Conferences: A Report on Residential Foreclosure Settlement Conferences in New York City. The report opens,
New York has coped with the foreclosure crisis by implementing a pioneering settlement conference process administered by the court system, designed to promote negotiation of affordable home-saving solutions. These conferences present a remarkable opportunity for lenders and borrowers to meet face-to-face in a court supervised settlement conference at which creative solutions can be forged, and have allowed thousands of New Yorkers to avert foreclosure. But banks routinely flout the law by appearing without required information or settlement authority, causing delays that cost borrowers money and can make home-saving settlements impossible. The process can be far more effective, and less prone to delay, if the courts rigorously enforce the requirements of the settlement conference law, as this report recommends.
Notwithstanding media reports about rebounding real estate markets, New York remains mired in a foreclosure crisis. In fact, in 2013 foreclosure cases represented approximately one third of the judiciary’s civil case load. New York State’s courts experienced a significant increase in foreclosure fi lings during 2013, with the pending inventory increasing more than 16% in 2013, with over 84,000 foreclosure cases pending as of the last report issued by the judiciary, and with 44,035 projected new filings for calendar year 2013 (representing an increase of nearly 20,000 new filings over 2012). (2)
This is clearly an advocacy document, but it is also clear that it is documenting a real problem, one that has cropped up time after time in judicial decisions. It may, however, go too far when it states that “banks and their lawyers themselves are largely responsible for prolonging the process.” (3) In fact, NY’s foreclosure process was longer than most before the mandatory conferences were implemented and remain long even as other jurisdictions adopt similar requirements.
Nonetheless, lenders should comply with the letter and spirit of the law. The report advocates for courts to “vigorously enforce the settlement conference law and deter banks from violating it by penalizing parties who appear in court without the authority and information needed to negotiate in good faith.” (2) Seems like a pretty reasonable recommendation to me.
Imposing Order on Recording Chaos
Dale Whitman has posted A Proposal for a National Mortgage Registry: MERS Done Right. This is great timing because he will be touching on some of the issues raised in this article in tomorrow’s webinar. His proposal for a national mortgage registry also shares things in common with elements of Adam Levitin‘s recent proposal.
Whitman’s abstract reads:
In this Article, Professor Whitman analyzes the existing legal regime for transfers of notes and mortgages on the secondary market, and concludes that it is highly inconvenient and dysfunctional, with the result that large numbers of market participants simply did not observe its rules during the huge market run-up of the early and mid-2000s. He also considers Mortgage Electronic Registration System (MERS), which was designed to alleviate the inconveniences of repeatedly recording mortgage assignments, but concludes that it was conceptually flawed and has proven to be an inadequate response to the problem. For these reasons the legal system was ill-prepared for the avalanche of foreclosures that followed the collapse of the mortgage market in 2007, and continues to be beset by litigation and uncertainty. This Article then provides a conceptual outline for an alternative National Mortgage Registry, which would supplant the present legal system and would provide convenience, transparency, and efficiency for all market participants. He concludes with a draft of a statute that could be enacted by Congress to create such a registry.
The article concludes:
A national mortgage loan Registry structured along the lines outlined here would resolve all of the major legal problems that beset the secondary mortgage market today. To be specific, the following problems would be put to rest.
1. The lack of clarity in the distinction between negotiable and nonnegotiable notes that exists today would become irrelevant for purposes of loan transfer. Negotiable and nonnegotiable notes would be treated exactly alike and would be transferred in the same manner.
2. The need to physically deliver original notes in order to transfer the right of enforcement – an extremely burdensome and inconvenient requirement for negotiable notes in today’s market – would be eliminated. Transfers would take place electronically with assurance that they would be recognized by local law in all jurisdictions.
3. The necessity of recording mortgage assignments in local recording offices would be eliminated. MERS was designed to remove the need for such assignments (except at the point when foreclosure was necessary), but the national Registry would accomplish this without the artificiality and con-fusion engendered by MERS’ “nominee” status.
4. Borrowers would be protected against competing claims by purported mortgage holders because the Registry’s records of loan holdings would be conclusive. Whether in cases of loan modification, payoff and discharge, approval of a short sale, or foreclosure, a borrower would know with certainty whether a purported holder’s claim to the loan was authentic, and whether its purported servicer was authorized to act.
5. All foreclosures, both judicial and non-judicial, could be conducted with assurance that the correct party was foreclosing. The Registry’s certificate could be recorded under state law and become a part of the chain of title of property passing through foreclosure, thus permitting future title examiners to verify that the foreclosure was conducted by the person authorized to do so. Concerns of title insurers about the validity of titles coming through foreclosure, currently a major worry, would be largely eliminated.
6. The current confusion and litigation about separation of notes from their mortgages, and about what proof is needed to foreclose a mortgage, would be brought to an end. The Registry’s certificate would provide all of the documentary evidence necessary to foreclose.
7. The holder in due course doctrine, with its potential for unfair harm to borrowers, would probably disappear in the context of mortgage loans as secondary market participants abandoned the practice of physical delivery of mortgage notes.
The system for transferring mortgage loans with which we are saddled today is a shambles. The result has been enormous uncertainty and likely huge financial loss for investors, servicers, and title insurers. It is time for Congress to act to create a sensible, simple, and efficient alternative. (68-69)
Many (including Brad Borden and I) have argued that the current recording system is horribly flawed. It is unclear whether there is sufficient political will to engage in a structural reform at this time. If there is not, expect to see another foreclosure mess once the current one has played itself out.
