Manafort’s Mystery Mortgage

photo by Kevin Dooley

NBC News quoted me in Manafort Got $3.5M Mystery Mortgage, Paid No Tax. It opens,

Former Trump campaign manager Paul Manafort took out a $3.5 million mortgage through a shell company just after leaving the campaign, but the mortgage document that explains how he would pay it back was never filed — and Manafort’s company never paid $36,000 in taxes that would be due on the loan.

In addition, despite telling NBC News previously that all his real estate transactions are transparent and include his name and signature, Manafort’s name and signature do not appear on any of the loan documents that are publicly available. A Manafort spokesperson said the $3.5 million loan was repaid in December, but also said paperwork showing the repayment was not filed until he was asked about the loan by NBC News.

News of the missing documents comes as New York Attorney General Eric Schneiderman is taking a “preliminary look” at Manafort’s real estate transactions, according to a source familiar with the matter.

On August 19, 2016, Manafort left the Trump campaign amid media reports about his previous work for a pro-Russian political party in Ukraine, including allegations he received millions of dollars in payments.

That same day, Manafort created a holding company called Summerbreeze LLC. Several weeks later, a document called a UCC filed with the state of New York shows that Summerbreeze took out a $3.5 million loan on Manafort’s home in the tony beach enclave of Bridgehampton.

Manafort’s name does not appear on the UCC filing, but Summerbreeze LLC gives his Florida address as a contact, and lists his Bridgehampton home as collateral.

A review of New York state and Suffolk County records shows the loan was made by S C 3, a subsidiary of Spruce Capital, which was co-founded by Joshua Crane, who has partnered with Donald Trump on real estate deals. Spruce is also partially funded by Ukrainian-American real-estate magnate Alexander Rovt, who tried to donate $10,000 to Trump’s presidential campaign on Election Day but had all but the legal maximum of $2,700 returned.

The mortgage notice for the loan, however, was never entered into government records by the lender. A mortgage notice normally names the lender, and gives the interest rate, the frequency with which payments must be made, and the length of the mortgage.

Real estate experts contacted by NBC News called the omission “highly unusual,” though not illegal.

David Reiss, a professor at Brooklyn Law School who specializes in real estate law, said, “It would be totally ill-advised to not record the loan on the property that is being secured. … Recording the mortgage on the property protects the lender.” Without it, there’s no public record that the borrower owes money.

The Lowdown on Blockchain & Real Estate

There is a lot of hype out there about the impact that blockchain technology will have on the real estate industry. There is no doubt that blockchain will be revolutionary over the long term, but its impact in the short term is much more limited. Spencer Compton and Diane Schottenstein have written an article for Law360 (unfortunately, behind a paywall), How Blockchain Can Be Applied To Real Estate Law, that provides a nice overview of where blockchain stands today in the real estate industry. It opens,

Real estate transactions are steeped in traditions that have hardly changed over hundreds of years. Today, as computer-based property recording systems are prevalent in our cities but roll out at a snail’s pace in rural areas (often hindered by strained municipal budgets), and e-signatures are little used (due to legitimate fears of fraud), arguably the real estate closing process has lagged in its use of computer aided technology. Yet other aspects of real estate ownership have been transformed by the internet: smart home technology to remotely control heating and lighting and monitor security; Airbnb which increases the value of real estate ownership and disrupts the hotel industry; and the real estate brokerage community’s design/photographic/communication technology to list and virtually show properties. Now add to our brave new world blockchain, a cloud-based decentralized ledger system that could offer speed, economy and improved security for real estate transactions. Will the real estate transaction industry avoid or embrace it?

What is blockchain?

Blockchain is best-known as the technology behind bitcoin, however bitcoin is not blockchain. Bitcoin is an implementation of blockchain technology. Blockchain is a data structure that allows for a digital ledger of transactions to be shared among a distributed network of computers. It uses cryptography to allow each participant on the network to manipulate the ledger in a secure way without the need for a central authority such as a bank or trade association. Using algorithms, the system can verify if a transaction will be approved and added to the blockchain and once it is on the blockchain it is extremely difficult to change or remove that transaction. A blockchain can be an open system or a system restricted to permissive users. There can be private blockchains (for ownership records or business transactions, for instance) and public blockchains (for public municipal data, real estate records etc.). Funds can be transferred by wires automatically authorized by the blockchain or via bitcoin or other virtual currency. Transparent, secure, frictionless payment is touted as one of blockchain’s many benefits.

The article goes on to answer the following questions:

  • How does a blockchain differ from a record kept by a financing institution or a government agency?
  • How is a blockchain transaction more secure than any other transaction?
  • How widely is blockchain used?
  • How blockchain is being used to record real property instruments?
  • How might blockchain affect the role of title insurance companies?

If the impact of blockchain on the real estate industry has mystified you, this primer will give you an overview of where things stand today and maybe tomorrow too.

 

Mnuchin, When No One Is Watching

Alexander Hamilton

My latest column for The Hill is Hamilton Acted in Good Faith. Will Steven Mnuchin Do The Same? It reads:

UCLA’s legendary basketball coach John Wooden famously said, “The true test of a man’s character is what he does when no one is watching.”

Steven Mnuchin, another leading citizen of Los Angeles, is now in the spotlight as President-elect Donald Trump’s nominee to lead the U.S. Department of the Treasury.

Running the Treasury Department requires financial know-how, which this former Goldman Sachs banker has in spades. But it also requires character, as a large part of the Treasury secretary’s job is to embody the good faith that the American people want the rest of the world to have in us.

In Alexander Hamilton’s Report Relative to a Provision for the Support of Public Credit, written just after he became the first U.S. Treasury secretary, he notes that the government must maintain public credit “by good faith, by a punctual performance of contracts. States, like individuals, who observe their engagements, are respected and trusted, while the reverse is the fate of those, who pursue an opposite conduct.”

OneWest’s actions during Mnuchin’s tenure as chief executive officer raise questions about whether Mnuchin has demonstrated the character necessary to be a worthy successor to Hamilton.

A recently disclosed memo by lawyers at California’s Office of the Attorney General documents a pattern of bad faith toward homeowners with OneWest mortgages. The memo documents evidence of widespread wrongdoing that helped the bank and hurt the homeowners. The evidence includes the backdating of notarized and recorded documents in 99.6 percent of the examined mortgage files and unlawful credit bids and substitutions of trustees in 16.0 percent of those files.

These are not merely technical violations. They shortened the time that homeowners had to get their mortgages back in good standing and they violated a number of procedural protections for homeowners facing non-judicial foreclosures.

Non-judicial foreclosures give lenders the ability to bypass the courts so long as they strictly abide by the procedural protections set forth by statute. Non-judicial foreclosures can only maintain their legitimacy if lenders respect those procedural protections. This is because there is no judge to make sure that the procedural protections are being adhered to. Without them, a homeowner can be no more than a sheep being led to the financial slaughterhouse of an improper foreclosure.

Some bankers have argued that focusing on violations of mortgage terms is overly legalistic, and beside the point given the widespread defaults during the financial crisis. It isn’t. The violations documented in the memo benefited the bank and harmed homeowners by allowing foreclosures to occur faster than they would if the formalities were followed.

They also allowed the bank to avoid paying various taxes relating to the sale of foreclosed properties. Some of the violations documented in the memo can result in felony convictions, which shows just how seriously California views the procedural requirements relating to non-judicial foreclosures. Ultimately, California’s then-Attorney General (and now U.S. Senator) Kamala Harris, chose not to file this complex lawsuit, but the memo’s findings are disturbing nonetheless.

As Hamilton knew, acting in good faith, performing agreements as they are written and keeping promises lead to respect and trust, “while the reverse is the fate of those, who pursue an opposite conduct.” The American people deserve a leader at Treasury with those traits, one who cherishes the rule of law as the basis of a both a healthy market economy and a well-functioning democratic government.

Other nations expect that we meet this standard, too. If they see us as just another bully on the world stage, we will lose our ability to lead by example. Members of the Senate Finance Committee should ask Mnuchin whether his actions at OneWest met the standard set forth by Hamilton.

We won’t be in the rooms where important decisions happen, so we need to have confidence in how Mnuchin will act when he thinks that no one is watching.

Promissory Note v. Mortgage

photo by Thugvillage

 

Zing! quoted me in What’s the Difference Between a Promissory Note and a Mortgage? It opens,

Buying a home can sometimes feel like learning a new language. Preapprovals, appraisals and the fact that “concessions” don’t involve hot dogs at a baseball game can be more than a little bewildering for first-time homebuyers. If you’re in the market for a mortgage, the more you know, the more confident you’ll be with each transaction during the life of the loan. If you find yourself scratching your head over mortgage lingo, we’d like to make your contract a little clearer by explaining two items that are often confused for one another: a promissory note and a mortgage.

What’s a Promissory Note?

Essentially, a promissory note is an agreement that promises that the money borrowed from a lender will be paid back by the borrower. “It also includes how the loan is to be repaid, such as the monthly amount and the length of time for repayment,” explains David Bakke, a finance expert at MoneyCrashers.com.

Although the home loan process involves both a mortgage and a promissory note, a promissory note can be used singularly in a lending relationship between two individuals. In this case, a promissory note is simply a promise to pay back the amount of money that is borrowed in a set amount of time.

“Another way to think of it is that the promissory note is the IOU for the home loan,” says David Reiss, who teaches about residential real estate as a law professor at Brooklyn Law School in New York.

What Is a Mortgage?

The second part of the home loan involves a mortgage, also referred to as a deed of trust. While a promissory note provides the financial details of the loan’s repayment, such as the interest rate and method of payment, a mortgage specifies the procedure that will be followed if the borrower doesn’t repay the loan.

“The actual home loan (or mortgage) provides information as far as the lender being able to demand complete repayment if the loan goes into default, or that the property can be sold if the buyer fails to repay,” says Bakke.

In the case of a home loan, the promissory note is a private contract between the client and the lender, while the mortgage is filed in the regional government records office. “Once you have paid off your loan your lender will record a document that releases you from the liability of the deed of trust and the promissory note,” says Ross Kilburn, CEO of Ark Law Group, PLLC.

It’s a Package Deal

In the home loan process, a mortgage and a promissory note are not a question of one or the other, but rather, both play distinct roles in the relationship between the lender and borrower. “A home loan refers to a transaction where a borrower borrows money from the lender and in turn signs a promissory note that reflects the indebtedness as well as a mortgage that gives a security interest in the home in case the debt is not paid back,” explains Reiss.

LawProfs in MERS Litigation

The Legal Services Center of Harvard Law School (through Max Weinstein et al.); Melanie Leslie, Benjamin N. Cardozo School of Law; Joseph William Singer, Harvard Law School; Rebecca Tushnet, Georgetown University Law Center and I filed an amicus brief in County of Montgomery Recorder v. MERSCorp Inc, et al. (3rd Cir. No. 14-4315). The brief argues,

MERS represents a major departure from and grave disruption of recording practices in counties such as Montgomery County, Pennsylvania, that have traditionally ensured the orderly transfer of real property across the country. Prior to MERS, records of real property interests were public, transparent, and provided a secure foundation upon which the American economy could grow. MERS is a privately run recording system created to reduce costs for large investment banks, the “sell-side” of the mortgage industry, which is largely inaccessible to the public. MERS is recorded as the mortgage holder in traditional county records, as a “nominee” for the holder of the mortgage note. Meanwhile, the promissory note secured by the mortgage is pooled, securitized, and transferred multiple times, but MERS does not require that its members enter these transfers into its database. MERS is a system that is “grafted” onto the traditional recording system and could not exist without it, but it usurps the function of county recorders and eviscerates the system recorders are charged with maintaining.

The MERS system was modeled after the Depository Trust Company (DTC), an institution created to hold corporate and municipal securities, but, unlike the DTC, MERS has no statutory basis, nor is it regulated by the SEC. MERS’s lack of statutory grounding and oversight means that it has neither legal authority nor public accountability. By allowing its members to transfer mortgages from MERS to themselves without any evidence of ownership, MERS dispensed with the traditional requirement that purported assignees prove their relationship to the mortgagee of record with a complete chain of mortgage assignments, in order to foreclose. MERS thereby eliminated the rules that protected the rights of mortgage holders and homeowners. Surveys, government audits, reporting by public media, and court cases from across the country have revealed that MERS’s records are inaccurate, incomplete, and unreliable. Moreover, because MERS does not allow public access to its records, the full extent of its system’s destruction of chains of title and the clarity of entitlements to real property is not yet known.

Electronic and paper recording systems alike can contain errors and inconsistencies. Electronic systems have the potential to increase the accessibility and accuracy of public records, but MERS has not done this. Rather, by making recording of mortgage assignments voluntary, and cloaking its system in secrecy, it has introduced unprecedented and perhaps irreparable levels of opacity, inaccuracy, and incompleteness, wreaking havoc on the local title recording systems that have existed in America since colonial times. (2-3)

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.