Property Law Developments—Joseph William Singer

A federal District Court judge in Massachusetts has ruled in the case of Dixon v. Wells Fargo Bank, 2011 WL 2945795 (D. Mass. 2011), that a ban cannot induce a homeowner to stop making mortgage payments as a prerequisite to negotiations to modify the mortgage and then use that failure to make the mortgage payments as a predicate for foreclosing on the property and evicting the owner. The bank’s representation that it would renegotiate following the borrower’s cessation of mortgage payments constituted a promise on which the borrower reasonably relied and that promise could be equitably enforced by denying the bank the right to foreclose in the circumstances. The court did not find a promise by the bank to modify the mortgage but it did have a duty to negotiate the modification in good faith before foreclosing.

Attorney General Martha Coakley announced that the Commonwealth of Massachusetts settled a lawsuit with a subprime mortgage lender that originated subprime mortgages it knew were likely to fail and which not only targeted African American and Latino borrowers but gave its employees discretion to charge higher fees to such borrowers. The company will pay a penalty of almost $10 million to the Commonwealth and will direct its mortgage servicer to modify $115 million in loans either by writing down the principal balance of lowering interest rates. read article The settlement is based on the legal ruling in the earlier case of Commonwealth v. Fremont Inv. & Loan, 897 N.E.2d 548 (Mass. 2008), which held that it might violate the state consumer protection act to market mortgages that were almost certain to end in foreclosure.

In an extension of its earlier ruling in U.S. Bank Nat’l Ass’n v. Ibanez, 941 N.E.2d 40 (Mass. 2011) that a foreclosure is invalid unless the party seeking foreclosure proves that it owns the mortgage (has the right to foreclose) at the time of the foreclosure, the Supreme Judicial Court of the Commonwealth of Massachusetts ruled in the case of Bank of New York v. KV Bailey, 2011 WL 3307553 (Mass. 2011),  that a homeowner could challenge an eviction from his home even though it was foreclosed in a private sale to determine whether the mortgagor/lender had the power to foreclose. Because Massachusetts uses private foreclosure rather than court-supervised foreclosure, the ruling extends court supervision of foreclosure to homeowners by effectively requiring foreclosing parties to have proof of the right to foreclose before the foreclosure sale. It does so by denying power to evict an occupying homeowner without proof of the right to possession of the premises. Because the law generally protects a peaceable possessor of land unless the one seeking possession can show a better title denial of the right to evict has the effect of regulating the prior foreclosure process, which, in turn, will require that the market for transfers of mortgages comply with the requisite formalities of the statute of frauds.

An appellate court in New York has held that MERS (Mortgage Electronic Registration Systems) cannot file foreclosure lawsuits in its own name because it does not “own” the mortgage, having neither the right to payment under the note nor the right to foreclose. Bank of N.Y. v. Silverberg, 2011 WL 2279723 (N.Y. App. Div. 2011). Despite the fact that the parties put MERS’s name on the mortgage, it is not the real party in interest, having no right to payment under the note

The New York and Delaware Attorneys General have asked for information from two trustees of mortgage bundles (Bank of New York Mellon and Deutsche Bank) to determine whether they complied with all contractual obligations in the process of bundling the mortgages and selling shares to investors. The trusts that bundled the mortgages were supposed to ensure that proper paperwork was completed in transferring “ownership” of  the mortgages to the trust to ensure that the investors were actually investing in something that the trust owned. Many of the bundling contracts required the trust to examine the individual mortgages to ensure a proper chain of title and failure to do so would constitute a breach of contract that could lead to the whole thing unraveling. Read article

On May 19, 2011, the Maine Supreme Court denied summary judgment on a foreclosure claim when it found that affidavits filed by the lender were suspect and possibly fraudulent. HSBC Mortgage Services, Inc. v. Murphy, 2011 Me. LEXIS 59, 2011 ME 59 (Me. 2011). The question was whether the note had been validly assigned from the original lender to the entity now seeking to foreclose. The court found the affidavits testifying to that effect to be inherently untrustworthy because (1) one affidavit swearing that a mortgage assignment had been recorded was signed before the assignment was recorded, (2) another affidavit and assignment suggested the same person was simultaneously the vice president of both the assignor and the assignee, (3) an affidavit’s jurat was dated four days before the affidavit was signed, and (4) an affidavit in support of a summary judgment motion that was denied provided information vital to the entry of a judgment that was unavailable until over four months after the affidavit was signed. The court remanded for further proceedings.

In answer to two certified questions from the First Circuit the Massachusetts high court has ruled that Massachusetts law requires the presence and substantive participation by a lawyer on behalf of the mortgage lender but that routine title examination does not constitute the unauthorized practice of law. The case is Real Estate Bar Assn for Mass. Inc. (REBA) v. National Real Estate Information Services (NREIS), 2011 Mass. LEXIS 244 (Mass. 2011).

A New Jersey trial court has interpreted a state statute, N.J. Stat.. §2A:50-56,  to require mortgage foreclosure notices to include the name of the lender (the current holder of the mortgage) as well as contact information. Because a notice included only the name of the mortgage servicer, the court dismissed the foreclosure complaint. read article

When banks foreclose on property and then purchase the property at the foreclosure sale, they become the new owners of the property. They would like to resell the property as soon as possible. But in a recession, that is not always possible and when banks retain title to those foreclosed properties, they are subject to local law regulations to maintain the property and ensure that it does not become dilapidated. But many banks have been failing in that regard. They are in the business of financing the sale of property not in managing it. That has prompted the City of Boston to impose more than $80,000 in fines on Wells Fargo & Co and Bank of America for allowing many vacant properties in their possession ‘to fall into disrepair and blight neighborhoods.” Megan Woolhouse, Banks high on list of delinquent property owners, Boston Globe, Apr. 15, 2011.

Bank officials deny they own some of the properties, sometimes on the ground that they are merely the loan servicer or the trustee for securitized mortgages. This illustrates a problem with the securitization process and the practice of not recording the name of the bank that actually “owns” the mortgage. The city is using public records to contact the owner of record; if that institution is not the one who is the real owner, the fault lies not in the city but the failure of the banks to follow the requirements of the state recording laws which are designed to allow public identification of those with property interests in each parcel of real estate in the city.

An Alabama judge refused to allow a trustee to foreclose on a mortgage that had been made part of a securitized package of loans because there was no signed endorsement on the note (the contract creating the original loan) when the mortgage was transferred to the trust that held the securitized mortgages. Because the parties did not strictly adhere to the writing requirement in the state version of the UCC (Uniform Commercial Code) — a particularized version of the statute of frauds — the transfer of the mortgage never occurred and the trustee has no power to foreclose. Nor did the trustee have the rights of a “holder” of the note under the UCC because it did not acquire the note in a manner that complied with the rules in its foundational documents. In effect the party bringing the foreclosure action could not show that it had acquired the right to foreclose through properly executed documents evidencing the transfers of the mortgage from the original lender down the chain of title. see article

In Perlas v. GMAC Mortgage, 113 Cal. Rptr. 3d 790 (Ct. App. 2010), a bank made $417,000 worth of loans to borrowers with a gross income of only $50,000. Although that income was inadequate to make the mortgage payments, and the bank found that the borrower “qualified” for the loan, the court held that the bank did not engage in fraud. Qualification, the judge noted, does not imply affordability and the bank had no duty to the borrower to disclose the fact that the borrowers could not afford to make the loan payments. Contract this case with Commonwealth v. Fremont, 897 N.E.2d 548 (Mass. 2008) which held that granting such a loan might constitute an “unfair” practice in violation of the state consumer protection statute.

In the case of Wells Fargo Bank, N.A. v. Ford, 2011 N.J. Super. LEXIS 13 (N.J. Super. Ct. App. Div. 2011), the court remanded to allow the bank to provide proof that it had a right to foreclose through authenticated writings proving that it was assigned the mortgage and note by the prior holder of the mortgage and that it had the right to foreclose at the time the foreclosure action was brought.

A bank lost the mortgage note and thus could not pass it along when it assigned the mortgage to the Bank of America, preventing the Bank of America from producing the note to prove that it had the right to foreclose on the property. The loan in question had been securitized and transferred from the original mortgagee, Washington Mutual Bank, to LaSalle Bank (the holder of the securitized and pooled loans) which was then acquired by Bank of America. Because Bank of America could show evidence of the assignment (but not written proof of the original mortgage), the trial court allowed it to foreclose on the ground that the mortgagor/homeowner would otherwise be unjustly enriched. In effect, the court used equitable principles to create an exception to the applicable statute of frauds which requiring a writing for the mortgage to be enforceable via foreclosure. The case is Bank of America, N.A. v. Alvarado, (N. J. Ch. Ct. 2011). See Mary Pat Gallagher, Judge Finds Equity Allows Foreclosure to Proceed Though Mortgage Note Lost, 203 N.J. L.J. 1 (Jan 24, 2011).

In the case of Bevilacqua v. Rodriguez, 2010 WL 3351481 (Mass. Land Ct. 2010), the court held that parties cannot cure an invalid foreclosure by a quiet title action.The bank that brought the foreclosure action had no proof at the time of the foreclosure that it owned the mortgage (the right to foreclose) because it had no written assignment from the prior mortgagee. For that reason, the foreclosure was invalid under the rule adopted by the Supreme Judicial Court of the Commonwealth of Massachusetts in U.S. Bank National Ass’n v. Ibañez, 458 Mass. 637 (2011). Ibañez held that foreclosures are invalid if the mortgagee bringing the foreclosure action cannot (at the time the foreclosure action) produce a written document proving that it was assigned the benefit of the mortgage from the prior mortgage holder. Thus when the bank sought a declaratory judgment that the foreclosure was valid, the court rejected its claim. That meant that a subsequent purchase of the property by a third party did not convey good title to the third party. Bevilacqua restates the Ibañez rule but goes further and holds that the third party cannot bring a quiet title action to seek a judgment that it has title to the property. Because it has a quitclaim deed from a seller who has no valid title, it cannot legitimately argue a basis for a quiet title action, leaving title with the party who held it prior to the invalid foreclosure.

A trial judge in Massachusetts has ruled in Citibank (South Dakota) v. DeCristoforo, (Mass. Super. Ct. 2011), 39 Mass. Lawyers Weekly 1 (Jan. 19, 2011), that a South Dakota based credit card company’s interest rates above 18 percent charged to a defaulting credit card borrower in Massachusetts were unconscionable. The judge applied Massachusetts common law to protect the borrower from interest rates deemed to be onerous even though the bank that issued the credit card was located in another state whose law would have allowed the interest rate. The contract presumably contained a choice-of-law clause for South Dakota law and if such a clause were in the contract, the judge overrode it in deciding to apply Massachusetts law to protect a Massachusetts domiciliary. The case is of interest because it may be used as precedent in subprime mortgage case involving borrowing from out-of-state banks.

The Supreme Court of New Jersey has issued an order setting a hearing for January 19, 2011, asking all mortgage loan servicers in the state to explain why the state should not stop all foreclosures for irregularities. A lower court judge had issued a more limited administrative order involving loan servicers who had filed more than 200 foreclosure actions in 2010. The Supreme Court is concerned about recent disclosure of serious flaws in recent foreclosures, especially since most foreclosures in the state are uncontested.

A New Jersey trial court has held that a lender cannot bring a foreclosure action unless it can prove standing to sue. That requires proof that it owns the note and the mortgage giving it the power to foreclose on the property to pay off the debt evidenced by the note. Physical possession of the note is requried at the time the foreclosure action is filed; possession at the time of appeal was not sufficient to allow the foreclosure to go forward. Bank of New York v. Raftogianis, F-7356-09 (N.J. Super. Ct. Ch. Div. 2010).

Three large lenders, GMAC Mortgage, JPMorgan Chase, and Bank of America, have all suspended foreclosures because of irregularities in documents used to proof that they are entitled to foreclose. Various newspaper articles have talked about “technical” problems or “paperwork” problems but the real issue is that banks have obligations to prove they “own” the mortgage and have a right to foreclose, at least in states that require court proceedings for foreclosure. The problem is that many lenders did not keep accurate written records of all the assignments of these mortgages.

The statute of frauds in every state requires mortgages to be in writing and some states require them to be recorded. In lieu of providing a paper trail, some lenders have provided courts with affidavits that swear that the signing party has seen proof that the lender owns the mortgage and is entitled to foreclose. But some of the affiants now admit that they “signed” hundreds or thousands of affidavits a day, obviously with no knowledge of the underlying facts. If this is true, it is a fraud on the court and may have resulted in foreclosures when the bank was not legally entitled to foreclose. In addition, notaries often approved signed affidavits even though they did not witness the signatures as required by law.

Attorneys General in several states are now investigating these practices to see if they violate state consumer protection or property laws or if they are actionable violations of court rules. See article.

Assuming Governor Deval Patrick signs the law, the Massachusetts legislature just passed a statute called “An Act to Stabilize Neighborhoods” that protects tenants from being evicted from property after foreclosure as long as they are paying the rent. Tenants can be evicted if the property is being sold to a third party, but if the lender buys the property at foreclosure, it must continue renting to the tenant–and complying the landlord’s obligations under state law to provide habitable housing. The law also requires lenders to have at least one meeting with the defaulting borrower to try to work in good faith to negotiate a new arrangement; this must happen before the bank forecloses on the property. If the lender does not do this, it must wait an extra two months before beginning foreclosure proceedings.  The bill also criminalizes mortgage fraud. read article

Litigation concerning subprime mortgages granted by Countrywide Financial Corp. (now owned by Bank of America) has been settled in Massachusetts. Attorney General Martha Coakley obtained agreement to lower the principal amount owed by borrowers whose properties are worth less than the outstanding debt (so-called “under water properties”) by as much as 30 percent. Some borrowers who lost their homes through foreclosure of such mortgages may get some compensation from a $2.4 million fund set up for that purpose. The agreement will provide about $18 million in mortgage help for Massachusetts homeowners and it  is part of a wider nationwide settlement that will provide about $3 billion to 45,000 homeowners across the nation. The settlement builds on a 2008 agreement between Bank of America and numerous state attorneys general to provide loan modifications for certain borrowers. read article

Another judge has refused to grant a foreclosure when  the bank could not prove that it validly acquired the mortgage by assignment from the original mortgagee. Deutsche Bank Nat. Trust Co. v. McRae, 894 N.Y.S.2d 720 (Sup. Ct. 2010). The court emphasized that foreclosure actions can only be brought by those who have title when the action is commenced and that mortgages can be assigned in two ways—by delivery of the note and mortgage by the assignor to the assignee with the intent to assign or by a written instrument of  assignment. The written assignment in this case was insufficient because it assigned the mortgage but not the note (the underlying contractual obligation). The plaintiff sought to introduce evidence of a note that was endorsed by the assignor with notice of assignment. However, the assignment was not dated and conflicted with the unsigned note attached to the plaintiff’s foreclosure  complaint, leading the judge to believe the endorsement had been made after the court’s order that the plaintiff prove assignment of the note. Because there was no proof of the assignment at the time the action was filed the foreclosure claim was dismissed.

In Commonwealth v. Fremont Investment & Loan, 897 N.E.2d 548 (Mass. 2008), the highest state court in Massachusetts allowed the Attorney General to move forward on a claim that adjustable rate mortgages violated the state consumer protection act as “unfair or deceptive” practices when the borrowers’ incomes were not high even to allow them to afford to pay the higher interest rates. Granting mortgages on the assumption that the borrower would refinance at that point or the lender would foreclose assumed that the lender was entitled to base the security for the loan on the projected increase in market value of the collateral rather than the borrower’s ability to pay. The court allowed the claim to go forward even though the loans at issue did not constitute predatory loans as defined by state law.

Justice Arthur Sacks of the New York Supreme (trial) Court dismisses foreclosure actions when the mortgagee fails to prove ownership of the mortgage or has otherwise failed to comply with the formalities of the recording, property transfer, and foreclosure process as required by state law. read article

Millions of mortgages are recorded in the name of “MERS” – Mortgage Electronic Registration System – which holds mortgages as a “nominee” or stand-in for the real owner of the mortgage. MERS was created to make it easier to transfer mortgages electronically on a central computer system without having to re-record the mortgage. This was useful for mortgages that were securitized and resold many times but some courts are beginning to find the system inconsistent with recording requirements. One court in Kansas has denied MERS standing to receive notice of a foreclosure on the ground that it does not own the mortgage and is not the real party in interest in the transaction. Landmark National Bank v. Kesler, 2009 WL 2633640 (Kan. Ct. App. 2009). read opinion

This strategy has been used to protect homeowners from having their property foreclosed and it may undermine the business model relied on by MERS. read article

Costco CEO Jim Sinegal complains that it is hard for the company to buy new real estate to open new stores because “in many instances nobody knows who owns the land anymore.” read article