Daily Archives: June 8, 2013

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Sen. Warren Blasts FHFA for Blocking Short Sales

Sen. Warren Blasts FHFA for Blocking Short Sales

WASHINGTON — Sen. Elizabeth Warren is taking the Federal Housing Finance Agency to task, criticizing the conservator of Fannie Mae and Freddie Mac for opposing short sale deals designed to keep original borrowers in their homes.

In an op-ed published this week in the Dorchester Reporter, a community newspaper based in the Dorchester section of Boston, the Massachusetts Democrat said the FHFA “has blocked the way” to such deals through what is known as an “arm’s-length” policy.

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EU Prepares Class Action Lawsuits Against Libor and Oil Price Fixing Cartels

EU Prepares Class Action Lawsuits Against Libor and Oil Price Fixing Cartels

The European Union will pave the way for private individuals to file class action lawsuits against companies that are found to be fixing prices but will put safeguards in place to avoid a mirror image of the US’ litigation culture.

 

In draft rules set to be unveiled by EU Competition Commissioner Joaquin Almunia on 11 June, potential victims in sixteen Eurozone countries will be able to sue for damages, from any company that is seen to have fixed prices, in any market.

The countries that are being given the greenlight include Britain, Germany, France, Spain, Italy and Poland.

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Proposed home finance reform could restrict Wells Fargo lending

Proposed home finance reform could restrict Wells Fargo lending

A bipartisan Senate effort to shut down Fannie Mae andFreddie Mac could curtail Wells Fargo & Co.’s enormous home lending business by restricting the bank’s ability to issue certain mortgage-backed securities.

The proposal, spearheaded by Sens. Bob Corker (R.-Tenn) and Mark Warner (D-Va.), has not yet surfaced officially, but this week a trade publication obtained a draft of the legislation.

Fannie and Freddie, the giant government-sponsored buyers and guarantors of mortgages, were bailed out by taxpayers during the financial crisis. They since have returned to profitability and have been repaying the combined $187.5 billion they received from the government.

The Corker-Warner proposal would replace them with a new backer of housing debt, the Federal Mortgage Insurance Corp., as a bridge to creating a fully private mortgage market.

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Bank of New York Deemed Indispensable Party to Homeowner’s Foreclosure Challenge in Rhode Island

Bank of New York Deemed Indispensable Party to Homeowner’s Foreclosure Challenge in Rhode Island

In Rosano v. Mortgage Electronic Registration Systems, Inc., et al., C.A. No. PC 2010-0310 (R.I. Super. June 19, 2012), the court held that defendant MERS had authority to assign plaintiff homeowner’s mortgage and deemed the foreclosure sale by assignee Bank of New York proper, dismissing plaintiff’s complaint to quiet title. The court further held that plaintiff’s failure to name Bank of New York as a defendant to the action rendered the complaint defective.

Plaintiff’s complaint failed to state a cause for relief beyond a speculative level, as plaintiff’s allegations were merely conclusory assertions. The court noted that plaintiff overlooked precedent confirming the validity of MERS’s assignments where mortgagee’s statutory power is clearly stated in the mortgage instrument. MERS, as mortgagee and nominee of the original lender, takes the place of the original lender and may assign its statutory power to another entity, who will then take the place of MERS with the same statutory right to foreclose. Plaintiff later alleged that the assignments were unauthorized, but the court held that no power of attorney was required since MERS was designated as mortgagee and nominee. Furthermore, plaintiff lacked standing to challenge the validity of the assignments, as plaintiff homeowner is not a party to any assignment. The court held that even if plaintiff had standing to challenge whether the assignments were authorized, plaintiff failed to plead such allegations in his complaint and cannot assert them in argument now.

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Rhode Island Superior Court Finds MERS has Standing and Assignment to Deutsche Bank Post-Foreclosure was Unchallengeable by Property Owners

Rhode Island Superior Court Finds MERS has Standing and Assignment to Deutsche Bank Post-Foreclosure was Unchallengeable by Property Owners

In Deutsche Bank v. Falconer (R.I. Sup. May 1, 2012) three actions were consolidated into one opinion. Deutsche prevailed on its possession of property claim in the Sixth Division District Court and Falconer appealed the decision and also filed a separate claim to quiet title.  All claims are consolidated here since they hinge upon whether MERS had standing to foreclose and assign its interest to Deutsche post-foreclosure.

In June 2007, the falconers obtained a $252,000 note with Fremont Investment and a mortgage designating MERS, “solely as nominee for Lender and Lender’s successors and assigns,” as the mortgagee with the “statutory power of sale.”  In 2009, MERS provided notice of foreclosure to the Falconers and publicized a foreclosure sale for twelve consecutive weeks and at the sale MERS prevailed as the highest bidder.  After the foreclosure sale, MERS assigned all of its title in the property to Deutsche Bank.

Foreclosure was proper: The court found that MERS had standing for the foreclosure because of the clear language of the mortgage, Rhode Island statute §34-11-24, as well as jurisprudence from Rhode Island.  Relying on Bucci ( WL 3328373, 2009), the court found that the language of the original mortgage provided that MERS was the mortgagee and the nominee for the lender and therefore could exercise all rights to the property, including its sale. Furthermore, §34-11-24 specifically provides that the assignment of a mortgage will be followed by the assignment of the note and any debt secured. Therefore, MERS must have the power of sale given that MERS has the power to assign the mortgage as well as the note under §34-11-24. MERS had standing to foreclose.

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Rhode Island Superior Court Finds in Favor of MERS, Upholding Foreclosure by Deutsche

Rhode Island Superior Court Finds in Favor of MERS, Upholding Foreclosure by Deutsche

In O’Brien v. Mortgage Electronic Registration Systems KC 2009-1695 (R.I. Sup. June 4, 2012) the court found in favor of the defendants, MERS and Deutsche Bank. The court held that Rhode Island law allows for the assignment of a mortgage where a homeowner has executed a mortgage with explicit language providing the right to assign the mortgage and allows for the separation of a mortgage from a note.

O’Brien brought this action to quiet title to his property challenging the foreclosure sale by Deutsche Bank. On January 3, 2007, O’Brien executed a promissory note in favor of New Century Mortgage Corporation and he also executed a mortgage on the property naming MERS as the nominee providing that “if necessary to comply with law or custom, MERS has the right: to exercise any or all of those interest, including but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument.” Six days after executing the mortgage a corrective mortgage was executed to include metes and bounds which had been excluded from the initial mortgage.  One year and two months later MERS assigned the mortgage to Deutsche Bank.   O’Brien defaulted on the mortgage in the summer of 2009 and Deutsche foreclosed on the property.

The court relied upon Payette v. Mortgage Electronic Registration Systems in finding that the mortgage sale was valid because O’Brien bound himself to the language of the execution with MERS which stated in clear and unambiguous language that MERS held the right to “release.”  Rhode Island law does not require a recording of power of attorney for MERS to act on the behalf of a company as its nominee.  O’Brien then argued that New Century’s bankruptcy terminated its nominee relationship with MERS but this argument failed since the mortgage was executed with MERS well before New Century became bankrupt.

The court rejected O’Brien’s argument that the mortgage to Deutsche was void because only the defective mortgage was transferred.  The court found that mortgages lacking formal requisites are considered agreements to give a mortgage and effective as between parties though not binding as to third parties. Relying upon Kriegel v. Mortgage Electronic Registration Systems, when MERS assigned the mortgage to Deutsche, all of the legal rights which MERS held by the agreement, including the power to sell after O’Brien’s default, were transferred to Deutsche.  Therefore, the deeds defectiveness was irrelevant because the agreement was binding between the original parties and MERS transferred its entire interest to Deutsche, including the right to sell.

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David Reiss: REMIC Armageddon on the Horizon?

David Reiss: REMIC Armageddon on the Horizon?

Brad Borden and I have warned that an unanticipated tax consequence of the sloppy mortgage origination practices that characterized the boom is that MBS pools may fail to qualify as REMICs.  This would have massively negative tax consequences for MBS investors and should trigger lawsuits against the professionals who structured these transactions. Courts deciding upstream and downstream cases have not focused on this issue because it is typically not relevant to the dispute between the parties.

Seems that is changing. Bankruptcy Judge Isgur (S.D. Tex.) issued an opinion in In re: Saldivar, Case No. 11-1-0689 (June 5, 2013)) which found, for the purposes of a motion to dismiss, that “under New York law, assignment of the Saldivars’ Note after the start up day [of the REMIC] is void ab initio.  As such, none of the Saldivars’ claims” challenging the validity of the assignment of their mortgage to the REMIC trust  “will be dismissed for lack of standing.” (8)

If this case holds up on appeal, it will have a massive impact on many purported REMICs which had sloppy practices for transferring mortgages to the trusts. That is a big “if,” as the case relies uponErobobo for its take on the relevant NY law. Erobobo, a NY trial court opinion, itself reached a controversial result and is hardly the last word on NY trust law. The Court also acknowledges that additional evidence may be proffered relating to a subsequent ratification of the conveyance of the mortgage, but for the purposes of a motion to dismiss, the homeowners have met their burden.

For those few REMIC geeks out there, it is worth quoting from the opinion at length (everyone else can stop reading now):

The Notice of Default indicates that the original creditor is Deutsche Bank, as Trustee for Long Beach Mortgage Loan Trust 2004-6. The Trust is a New York common law trust created through a Pooling and Servicing Agreement (the “PSA”). Under the PSA, loans were purportedly pooled into a trust and converted into mortgage-backed securities. The PSA provides a closing date for the Trust of October 25, 2004. As set forth below, this was the  date on which all assets were required to be deposited into the Trust. The PSA provides that New York law governs the acquisition of mortgage assets for the Trust.

The Trust was formed as a REMIC trust. Under the REMIC provisions of the Internal Revenue Code (“IRC”) the closing date of the Trust is also the startup day for the Trust. The closing date/startup day is significant because all assets of the Trust were to be transferred to the Trust on or before the closing date to ensure that the Trust received its REMIC status. The IRC provides in pertinent part that:

“Except as provided in section 860G(d)(2), ‘if any  amount is contributed to a REMIC after the startup day, there is hereby imposed a tax for the taxable year of the REMIC in which the contribution is received equal to 100 percent of the amount of such contribution.”

26 U.S.C. § 860G(d)(1).

A trust’s ability to transact is restricted to the  actions authorized by its trust documents. The Saldivars allege that here, the Trust documents permit only one specific method of transfer to the Trust, set forth in § 2.01 of the PSA. Section 2.01 requires the Depositor to provide the Trustee with the original Mortgage Note, endorsed in blank or endorsed with the following: “Pay to the order of Deutsche Bank, as Trustee under the applicable agreement, without recourse.” All prior and intervening endorsements must show a complete chain of endorsement from the originator to the Trustee.

Under New York Estates Powers and Trusts Law § 7-2.1(c), property must be registered in the name of the trustee for a particular trust in order for transfer to the trustee to be effective. Trust property cannot be held with incomplete endorsements and assignments that do not indicate that the property is held in trust  by a trustee for a specific beneficiary trust.

The Saldivars allege that the Note was not transferred to the Trust until 2011, resulting in an invalid assignment of the Note to the Trust. The Saldivars allege that this defect means that Deutsche Bank and Chase are not valid Note Holders.