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Eighth Circuit Reinstates Portions of Minnesota Quiet Title Action, Upholds Dismissal of "Show-Me-The-Note" Claims
On November 8, the U.S. Court of Appeals for the Eighth Circuit revived two claims brought by a group of borrowers alleging that the nominal mortgagee on their mortgage loans, and the servicer to whom the mortgagee assigned each mortgage, were not entitled to foreclose on their properties. Murphy v. Aurora Loan Servs. LLC, No. 12-1398, 2012 WL 5439284 (8th Cir. Nov. 8, 2012). The Eighth Circuit, following the Minnesota Supreme Court’s interpretation of state law, has previously held that the servicer has an undeniable right to initiate foreclosure as the legal holder of title. Here, the district court earlier dismissed claims that the servicer and mortgagee lacked authority to foreclose as repackaged “show-me-the-note” claims. The appeals court determined that two of the borrowers’ theories do not rely on the failure of the foreclosing party to produce the note, and therefore should be reinstated. The court reinstated theories that the assignments from the mortgagee to the servicer either were unrecorded or executed by individuals who lacked authority to do so, resulting in a defective chain of title that would undermine the servicer’s authority to foreclose. Because the parties did not specifically brief these theories the court remanded to allow the district court to address the two claims at issue. Specifically, the court directed that additional briefing should address whether the borrowers still have any interest in the properties and whether the borrowers’ interest is adverse to the interests of the mortgagee or servicer.
Fannie Mae and Freddie Mac Announce New Guidelines for Management of Law Firms
On November 9, Fannie Mae and Freddie Mac announced new, coordinated requirements with respect to the management of law firms for default servicing, bankruptcies, and related litigation. As described in Freddie Mac Bulletin 2012-25, effective June 1, 2013, servicers (i) will be permitted to choose their own attorneys, create their own processes for managing foreclosure processing, and maintain direct relationships with their law firms, (ii) will be required to establish procedures to manage and monitor all aspects of the law firm's performance and compliance with applicable requirements, and (iii) upon request, will be required to perform a due diligence review and provide Freddie Mac with the results. Fannie Mae Servicing Guide Announcement SVC-2012-22 similarly details new servicer requirements with regard to the use of outside law firms. Both Fannie Mae and Freddie Mac will accept and respond to servicer recommendations of law firms beginning March 1, 2013, and will begin conducting new firm training in April 2013. Law firms that are currently in the retained attorney network are not exempt from the new selection and retention processes.
Federal Reserve Board and OCC Renew Efforts to Market Independent Foreclosure Reviews
On November 13, the Federal Reserve Board and the OCC announced renewed efforts to remind eligible borrowers to participate in the Independent Foreclosure Review Program by December 31, 2012. Under the program, an eligible borrower can have his or her foreclosure reviewed for free by independent consultants to determine whether the borrower was financially injured due to errors, misrepresentations, or other deficiencies in the foreclosure process. An injured borrower may be eligible for compensation or other remedies. The program originally was scheduled to close April 30, 2012, but has been extended numerous times over the past year. The renewed marketing effort includes targeted print, radio, and online advertising, as well as direct coordinated outreach by community, housing, and faith-based groups.
Fannie Mae, Freddie Mac Announce Additional Storm Relief Measures
On November 9, Fannie Mae and Freddie Mac announced that effective immediately servicers can suspend for 90 days evictions and foreclosures involving borrowers affected by Hurricane Sandy in order to assess the borrowers’ situations. In addition, next week Fannie Mae and Freddie Mac will issue guidance to servicers to expand the options they can offer to homeowners impacted by the hurricane. Under the new Fannie Mae guidance, servicers will be authorized to (i) extend forbearance for up to 12 months, where appropriate, (ii) provide loan modifications, once the homeowner is able to resume monthly mortgage payments, (iii) waive any late payment charges, (iv) suspend credit reporting for any homeowner for whom relief is granted, and (v) delay the initiation of any foreclosure action to determine the condition of the property and the borrower’s employment and income status. Freddie Mac’s policy changes will authorize servicers to (i) automatically suspend for 90 days evictions and foreclosure sales for borrowers with homes secured by Freddie Mac owned-or guaranteed mortgages and located in eligible disaster areas, (ii) verbally grant 90-day forbearances to all borrowers in eligible disaster areas, including borrowers with mortgages modified under HAMP or who are currently in a HAMP or Standard Modification Trial Period Plan, and (iii) expedite the distribution of insurance proceeds on storm damage claims. Additionally, Freddie Mac will maintain pricing that was in place at the time of the storm for mortgages that are secured by homes in eligible disaster areas and delivered through Freddie Mac's bulk guarantor channel.
State Banks and Servicers Provide Post-Hurricane Mortgage Relief in New York
On November 7, New York Governor Andrew Cuomo announced that several major state-chartered banks and mortgage servicers are offering a range of relief for borrowers impacted by Hurricane Sandy. While the particular relief may vary by institution and borrower circumstances, the following types of relief generally are being offered: (i) 90-day postponement of foreclosures and evictions, (ii) 90-day waiver of late fees on mortgage payments, including online payments, (iii) 90-day or more forbearance on mortgage payments where the borrower has been impacted by the storm and is seeking relief, (iv) waiver of interest where a refinancing transaction has been closed, but not funded, (v) late payment relief for borrowers in a trial modification, and (vi) suspension of notification to credit bureaus if borrowers make late payments. Additionally, a state order prohibiting the termination, cancellation, or non-renewal of homeowners’ insurance policies for 30 days started October 26, which means servicers cannot force place insurance on any homeowner who had insurance in effect as of that date.
District of Columbia Enacts Emergency Bill to Enhance Foreclosure Protections
On October 26, the District of Columbia enacted, on an emergency basis, Bill 914, which extends to borrowers that receive a defective notice of default on a residential mortgage the same protections that apply with regard to a defective notice of intention to foreclose. The bill also (i) provides that a foreclosure sale is void if a lender files a notice of intention to foreclose without a mediation certificate, (ii) revises the definition of residential mortgage, and (iii) creates a Foreclosure Mediation Fund to collect the proceeds from the mediation program and the national servicing settlement completed earlier this year. Those proceeds can be used for specified purposes, including financial fraud and consumer protection enforcement and certain borrower outreach and assistance. The bill was made retroactively effective to September 13, 2012, and expires on January 24, 2013.
HUD and Banking Regulators Offer Borrower and Institution Relief Following Hurricane Sandy
Recently, HUD has made a series of announcements regarding housing relief for individuals displaced by Hurricane Sandy. For example, on October 30 HUD granted a 90-day moratorium on foreclosures and forbearance on foreclosures of FHA-insured mortgages. Similar announcements have followed for victims in New York, Connecticut, and Rhode Island. Also on October 30, the Federal Reserve Board, the OCC, and the FDIC issued a statement on supervisory practices impacted by the hurricane. For example, the regulators stated that “prudent efforts to adjust or alter terms on existing loans in affected areas should not be subject to examiner criticism.”
Ohio Supreme Court Holds Standing to Foreclose Cannot Be Established by Assignment of Note After Filing
On October 31, the Ohio Supreme Court held unanimously that a party’s standing to foreclose on a delinquent borrower is determined as of the filing of the complaint, and the party’s receipt of an assignment of a promissory note and mortgage after such filing does not cure initial lack of standing to bring the action. Fed. Home Loan Mortg. Corp. v. Schwartzwald, No. 2012-Ohio-5017, slip op. (Ohio Oct. 31, 2012). The borrowers in the case appealed a trial court holding that allowed Federal Home Loan Mortgage Corporation (Freddie Mac) to foreclose, notwithstanding the fact that Freddie Mac commenced the action prior to obtaining an assignment of the promissory note and mortgage securing the borrowers’ loan. According to the borrowers, because Freddie Mac did not hold the assignment and mortgage at the time of filing, it had no standing to sue. The Ohio Second District Court of Appeals held that Freddie Mac had cured the lack of standing by obtaining an assignment from the real party in interest after it filed for foreclosure. The Ohio Supreme Court reversed the Second District and agreed with the borrowers. Freddie Mac did not hold both the assignment and mortgage as required under Ohio law as a predicate to foreclosure and admitted that it had not suffered any injury at the time it commenced the foreclosure action. The state supreme court held that because standing to sue is required to invoke the jurisdiction of the trial court, standing must be determined at the beginning of the suit. Further, the court found that Freddie Mac could not avail itself of civil procedures that allow for substitution of the real party in interest because such rules were not intended to cure a lack of standing. The court agreed with the borrowers that Freddie Mac lacked standing and dismissed the foreclosure without prejudice and without adjudicating the underlying indebtedness.
FHFA Plans to Improve Efforts to Recover Losses from Certain Defaulting Borrowers
On October 17, the FHFA Office of Inspector General (OIG) reported that the FHFA does not currently oversee the deficiency management programs of Fannie Mae and Freddie Mac (the Enterprises) and that some oversight is necessary. When borrowers default on mortgage loans held by Fannie Mae and Freddie Mac, the Enterprises absorb the losses. To date, the Enterprises have only recovered a small fraction of losses by pursuing defaulting borrowers that may have the ability to repay, such as strategic defaulters, including those defaulting on vacation homes or investment properties. The FHFA OIG recommended, and the FHFA agreed, that the FHFA should collect from the Enterprises data about their deficiencies, their efforts to target defaulting borrowers who have the ability to repay their loans, and other related data. The FHFA also agreed with the OIG that with such information in hand, the FHFA can proactively oversee the Enterprises’ deficiency management programs and provide supervisory guidance on managing deficiency collections.
Federal District Court Holds Foreclosures Negate Trust's Ability to Enforce Representations and Warranties
On October 1, the U.S. District Court for the District of Minnesota granted a lender’s motion for partial summary judgment finding that a trustee’s foreclosure on properties securing mortgage loans extinguished the loans and rendered them unavailable for repurchase by a lender. MASTR Asset Backed Securities Trust 2006-HE3 v. WMC Mortgage Corporation, No. 11-2542, 2012 WL 4511065 (D. Minn. Oct. 1, 2012). The trustee filed the action to compel the lender to repurchase certain loans the lender sold to the trust, alleging that the lender breached representations and warranties made in connection with the sale. The lender moved for partial summary judgment on the grounds that (i) the loans at issue no longer existed to be repurchased after the trust foreclosed on the properties securing the mortgages, and (ii) the trust failed to provide the lender with “prompt notice” of the alleged breaches on which its repurchase demands were based as was required by the relevant agreement between the parties. In opposition to the lender’s motion, the trustee argued that, notwithstanding its foreclosure on the properties securing the loans, the loans remained available for repurchase given that the relevant agreement between the parties defined “mortgage loans” to include proceeds from any foreclosure sale. The court rejected the trustee’s argument and granted the lender’s motion for partial summary judgment, concluding that the loans no longer existed for repurchase. With respect to the lender’s “prompt notice,” that court said that while it found notice was not “prompt” under the circumstances presented, it could not grant summary judgment on that basis prior to discovery.