InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Nevada Supreme Court Validates MERS' Role as Beneficiary and Its Relationship to Note-Holder
On September 27, the Nevada Supreme Court held that when Mortgage Electronic Registration Systems, Inc. (MERS) is named as the beneficiary of a deed of trust but a different party holds the promissory note, such a split does not invalidate the instrument if the promissory note and deed of trust are later reunified. Edelstein v. Bank of New York Mellon, No. 57430, 2012 WL 4461716 (Nev. Sep. 27, 2012). In Edelstein, a borrower challenged a bank’s standing to foreclose on his property arguing that the initial designation of MERS as the beneficiary on the deed of trust and another entity as the beneficiary of the promissory note irreparably split the documents such that the bank’s foreclosure was precluded. The borrower argued that state law requires a party seeking to foreclose to demonstrate that it holds both the deed of trust and the promissory note. While acknowledging this requirement, the court rejected the borrower’s argument that the bank lacked standing to foreclose. The court held that while the designation of MERS’ as the initial beneficiary of the deed of trust effectively “split” the note and the deed, that split was not fatal and MERS could and did properly assign its interest in the deed of trust to the bank that had been assigned the promissory note at some point after the inception of the loan. Because the bank held both the deed of trust and the note, the court concluded that the bank had standing to foreclose on the borrower’s property.
State Law Update: California Enacts Additional Mortgage-Related Bills
Last week, California enacted several additional mortgage-related bills. First, AB 1599 requires that a mortgagee, trustee, beneficiary, or authorized agent attach to the already required recorded notice of default and notice of sale, a summary of the information required to be contained in those notices. The notices must include a statement referencing the attached summary, but the summary need not be recorded or published. Second, SB 980 extends until January 1, 2017 the existing prohibition against persons facilitating loan modifications from requiring or accepting pre-performance compensation, requiring collateral to secure payment, or taking power of attorney from the borrower. Finally, AB 2010 requires that reverse mortgage counseling be conducted in person, unless the borrower elected to receive counseling in another manner.
House Member Introduces Eminent Domain Bill
Recently, Representative John Campbell (R-CA) introduced a bill, H.R. 6397, that would prohibit Fannie Mae and Freddie Mac from buying mortgages originated in localities that employ eminent domain to rescue borrowers from their underwater mortgages by seizing the loans and selling them to private investors to be restructured. The FHFA currently is considering its options for responding potential action by localities absent legislative intervention.
Ohio Supreme Court Holds Website Notice of Sheriff's Sale Does Not Satisfy Due Process
On September 6, the Supreme Court of Ohio held that notice of a sheriff's sale via the sheriff's website was insufficient to satisfy due process and reversed an appellate court decision that denied a foreclosing lender's motion to set aside the sheriff's sale. PHH Mortg. Corp. v. Prater, No. CA2010-12-095, WL 3848454 (Ohio Sept. 6, 2012). The lender obtained a motion for default judgment and permission to foreclose on a borrower. The sheriff's office tried multiple times to schedule a sale and each time withdrew the sale at the lender's request. The sheriff's office informed the lender in a letter that the sheriff's office no longer would send notices of scheduled sales via letter, and that the lender would need to check the sheriff's website for future notices. Notice subsequently was posted on the website and the property was sold. Both the trial court and intermediate appellate court denied the lender's request to set aside the sale. The lender argued that the sale was invalid because it had not received written notice. In a unanimous decision, the Ohio Supreme Court held that the notice directing the lender to check the sheriff's website was notice of a change in procedure and did not constitute actual notice of the sale. While the court acknowledged that Internet publication may conserve resources, it held that such notice is akin to newspaper notice and is insufficient to satisfy due process. The court agreed with a dissenting appellate court judge who identified e-mail notice as a closer substitute for mail notice, and explained that, in any event, such a change in notice requirements would have to be effectuated through a change to state or local law. The court reversed the appellate court's decision and set aside the sheriff's sale.
State Law Update: California Enacts Blight Bill As Part of Homeowner Bill of Rights, Broadens Servicemember Protections
On August 27, California enacted Assembly Bill 2314, another bill included as part of the state’s proposed Homeowner Bill of Rights. The bill extends indefinitely portions of existing state law that (i) require property owners maintain vacant property obtained in foreclosure, (ii) authorize local enforcement of vacant property maintenance requirements, and (iii) provide for notice and processes to correct or contests violations. The extended provisions were due to sunset on January 1, 2013. The bill also provides a sixty day period for purchasers of foreclosed properties to remedy any violations of state housing law or building codes. Current law only requires a thirty day period for all properties in violation. Finally, the bill requires that an entity that releases a lien on a property subject to corrective action for maintenance violations must provide notice to the enforcement agency within thirty days of releasing the lien. These changes take effect on January 1, 2013.
Also on August 27, California enacted Assembly Bill 2475, which extends from three to nine months the period following military service within which it is unlawful to sell, foreclose upon, or seize a servicemember’s mortgaged property. These changes also take effect on January 1, 2013.
Eighth Circuit Finds No Merit in Borrowers' "Show-Me-The-Note" Case
On August 27, the U.S. Court of Appeals for the Eight Circuit upheld a district court’s dismissal of a suit by borrowers challenging the validity of a foreclosure completed by their mortgage servicer. Butler v. Bank of Am., N.A., No 11-2653, 2012 WL 3641469 (8th Cir. Aug. 27, 2012). On appeal, the borrowers argued that their putative class action suit should be reinstated because the district court mistakenly characterized their claims as a single “show-me-the-note” claim, rather than as a quiet title action. After a close review of the allegations and causes of action, the court found no merit in this “borderline frivolous lawsuit” and upheld the dismissal. The court characterized the borrowers’ claims that the foreclosure was invalid because the servicer held the mortgage but not the note as a “flawed theory” unsupported by Minnesota law. Under Minnesota law and previous application of that law by the Eighth Circuit and Minnesota Supreme Court, the court held that the servicer has an undeniable right to initiate foreclosure as the legal holder of title.
Massachusetts AG Outlines Foreclosure Expectations for Fannie Mae and Freddie Mac
On August 23, Massachusetts Attorney General Martha Coakley sent a letter to FHFA Director Edward DeMarco in which she advised Fannie Mae and Freddie Mac about their obligation to comply with a recently enacted state law that will make it harder to initiate foreclosures. The letter states that like all creditors, Fannie Mae and Freddie Mac are expected to follow the new statutory requirements and generally should “pursue common-sense loan modifications for borrowers” when economically beneficial to borrowers. The letter also asks the FHFA to reconsider its decision to not require Fannie Mae and Freddie Mac to offer principal forgiveness. Also on August 23, the Massachusetts Division of Banks announced that it will hold a public hearing on August 29, 2012 to gather input regarding regulations it is required to develop to implement the state’s new foreclosure law.
Washington Supreme Court Rules on Electronic Mortgage Registry's Role As Beneficiary
On August 16, the Supreme Court of the State of Washington held that an electronic mortgage registry system cannot commence a nonjudicial foreclosure in that state if it is not the promissory note holder. Bain v. Metro. Mort. Group, Inc., No. 86206-1, 2012 WL 3517326 (Wash. Aug. 16, 2012). In this case, the registry, as the named beneficiary of the deeds of trust, appointed trustees to initiate foreclosure proceedings against two borrowers. The borrowers sought injunctions in federal court to halt the foreclosures, arguing that the beneficiary did not actually hold the promissory notes, and therefore could not foreclose in its own name. The federal court certified several questions for consideration by the Washington Supreme Court. The Washington Supreme Court held that under Washington law only the actual holder of the promissory note evidencing the obligation may be a beneficiary with the power to appoint a trustee to proceed with a nonjudicial foreclosure. The court concluded that the electronic registry “does not hold the note, it is not a lawful beneficiary,” and therefore cannot commence a nonjudicial foreclosure. The court also noted that an agent can represent the note holder, but found that the electronic registry failed to identify the entities that “control and are accountable for its actions,” and therefore failed to establish that it is an “agent for a lawful principal.”
Missouri Attorney General Settles "Robosigning" Case
On August 2, the Missouri Attorney General (AG) and the parent company of indicted firm DocX LLC announced a settlement of the state’s criminal allegations that the company engaged in so-called "robosigning." In his February indictment, the AG alleged that DocX (i) directed employees to falsely sign mortgage documents in the names of various bank vice presidents without proper authorization, (ii) falsely notarized the forged documents, and (iii) subsequently filed the documents in courthouses across the state. Pursuant to the agreement, DocX agreed to pay a $1.5 million fine plus fees and costs of the investigation, and will continue to cooperate with the AG’s office as it pursues criminal charges against the company’s former president.
President Obama Expands SCRA Protections for Servicemembers
On August 6, President Obama signed into law the Honoring America's Veterans and Caring for Camp Lejeune Families Act of 2012, H.R. 1627. Section 710 of this Act expands foreclosure protections for active duty servicemembers. Currently, under the Servicemembers Civil Relief Act, 50 U.S.C. app. § 533 (SCRA), an individual is entitled to foreclosure protection during the period of active duty and for nine months thereafter. This extended foreclosure protection was set to expire at the end of calendar year 2012, at which point the foreclosure protection would only last for ninety days after the end of active duty.
This bill signing makes three important changes to the SCRA that expand protections for servicemembers:
- The SCRA will continue to provide servicemembers with foreclosure protection during the period of active duty and for nine months thereafter past the end of the current calendar year into 2013;
- One-hundred-and-eighty days from the date of enactment (i.e., February 2, 2013), the mortgage foreclosure protection will extend to one full year after the period of active duty; and
- On January 1, 2015, the SCRA's expanded foreclosure protection will sunset, and the protection period will revert to its 2008 level: the period of active duty service plus ninety days.
Additionally, this Act requires the Comptroller General of the United States to report to Congress information related to the use of this expanded foreclosure protection. This report is due a year-and-a-half after enactment-giving Congress several months to review the report prior to the 2015 sunset.