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Pennsylvania Federal Court Holds Promissory Note Transfer Equivalent To A Mortgage Assignment And Must Be Recorded
On July 1, the U.S. District Court for the Eastern District of Pennsylvania held that in Pennsylvania the assignment or transfer of a promissory note secured by a mortgage on real estate is equivalent to a mortgage assignment and, as such, must be recorded. Montgomery County, Penn. Recorder of Deeds v. Merscorp, Inc., No. 11-6968, 2014 WL 2957494 (E.D. Pa. July 1, 2014). A Pennsylvania county recorder of deeds filed a putative class action against an electronic mortgage registry claiming the registry violated state law and unjustly enriched itself by failing to record conveyances of interests in real property. The recorder challenged the registry’s practice of serving as the mortgagee of record and as the nominee for a lender, which obviates the need to record the transfer of a note each time it is sold. The court held that although state law recognizes a clear distinction between a promissory note and a mortgage and that a promissory note generally may be transferred without recording, a promissory note still falls within the meaning of a “conveyance” under state law, and therefore must be recorded. The court further explained that notes and mortgages are legally inter-woven, and “whether effectuated via a writing or a mere ‘transfer of possession’ of a note, the result is the same by operation of law”—an interest in the property has been assigned and conveyed and therefore must be recorded. The court acknowledged evidence that the registry may have been unjustly enriched by avoiding recording fees on transfers the court now determined were required to be recorded, but declined to make that determination as a matter of law, let alone a determination as to the amount of damages. The court left those issues to be determined at trial. The decision is likely to be appealed to the Third Circuit.
California Removes Statutory Restrictions On Virtual Currency
On June 28, California Governor Jerry Brown signed AB 129, which repeals a state ban on the issuance or circulation of anything but lawful money of the United States. As described in a legislative staff analysis of the bill, the repeal is designed to ensure that forms of alternative currency such as digital currency, points, coupons, or other objects of monetary value do not violate the law when those methods are used for the purchase of goods and services or the transmission of payments in California.
Senate Confirms HUD Secretary
On July 9, the Senate voted 71-26 to confirm Julian Castro to serve as HUD Secretary. The former San Antonio, Texas mayor will replace Shaun Donovan, who the Senate subsequently confirmed to lead the Office of Management and Budget.
FHFA Proposes Mortgage Insurer Eligibility Requirements
On July 10, the FHFA sought input on a proposal to establish new eligibility requirements for private mortgage insurers seeking to insure Fannie Mae and Freddie Mac (the Enterprises) mortgages. As described in an overview document, the FHFA proposes to revise business requirements to identify, measure, and manage exposure to counterparty risk. The FHFA also proposes new financial requirements and minimum quality control program requirements, which it states are intended to (i) facilitate an insurer’s monitoring of adherence to its underwriting and eligibility guidelines; (ii) ensure data accuracy; and (iii) prevent the insuring of fraudulent mortgages or mortgages with other defects. An insurer would be required to submit to each Enterprise a copy of its quality control program annually, with changes noted from the prior year’s version. The proposal also describes numerous potential remedies available to the Enterprises should an insurer fail to meet its requirements, ranging from more frequent dialogue or visits with an insurer to suspension or termination. All components of the requirements would become effective 180 days after the publication date of the finalized requirements. During the input period, and until the requirements are finalized, any insurer already approved to do business with the Enterprises that does not fully meet each Enterprise’s existing eligibility requirements would continue to operate in its current status and would be given a transition period of up to two years from the publication date to fully comply. Comments on the proposal are due by September 8, 2014.
FHA Releases New Draft Handbook Sections
Recently, the FHA released for comment two additional draft sections of its new Single Family Policy Handbook. The first, Doing Business with FHA, outlines the requirements associated with FHA mortgagee approval, including eligibility requirements, application processes, operating requirements, post-approval changes, the recertification process, and processes for applying for supplemental mortgagee authorities. The second, Quality Control, Oversight and Compliance, outlines the ongoing lender and mortgagee responsibility to perform institution and loan-level quality control, and details the repercussions for failing to act in accordance with FHA requirements, including explanations of possible administrative actions and sanctions. Comments on both sections are due by July 29, 2014.
HUD Seeks Comments On Limits Of Insurability Of Fixed Interest HECM Products, Announces Other HECM Program Changes
On July 10, HUD published a request for comment on its recent amendments to the Home Equity Conversion Mortgage (HECM) reverse mortgage program to limit the insurability of fixed interest rate reverse mortgages. Although those changes already took effect under the emergency action taken by HUD, it now seeks public comment on those changes. HUD also recently took two other actions related to the HECM program. In Mortgagee Letter 2014-10, HUD reminded mortgagees of the FHA’s requirements prohibiting misleading or deceptive advertising, described those prohibitions, and clarified that they extend to misleading or deceptive descriptions of the HECM program. On June 27, HUD issued Mortgagee Letter 2014-12, which announced new HECM principal limit factors. HUD’s new principal limit factor tables now include principal limit factors where the borrower has a non-borrowing spouse younger than 62.
HUD Adds Requirement For Voluntary Termination Of FHA Mortgage Insurance
On July 3, HUD issued Mortgagee Letter 2014-13, which requires mortgagees seeking voluntary termination of FHA mortgage insurance to obtain a signed borrower consent form from each borrower on the mortgage. HUD states that in order to ensure that voluntary terminations of mortgage insurance are processed in accordance with the National Housing Act and HUD regulations, HUD now requires mortgagees requesting such termination to inform borrowers in writing that electing to terminate the mortgage insurance means that the mortgage will no longer be governed by FHA insurance program rules and regulations, including FHA’s loss mitigation requirements. Effective October 1, 2014, mortgagees must obtain a signed Borrower’s Consent to Voluntary Termination of FHA Mortgage Insurance, which must be on the mortgagee’s letterhead and must include the language in the sample form provided by HUD. HUD will require each borrower on the mortgage to sign the consent form in order for the request for voluntary termination to be considered valid by FHA. Mortgagees must retain copies of the consent form(s) in the servicing file in accordance with HUD’s record retention policies.
Fannie Mae Offers Alternative To Repurchase For Mortgage Insurance Rescission, Announces Numerous Other Servicing Policy Updates
On July 1, Fannie Mae issued Servicing Guide Announcement SVC-2014-13, which describes a new alternative to repurchase, an “MI stand-in.” The MI stand-in is defined as the full mortgage insurance (MI) benefit that would have been payable under the original mortgage insurance policy if the mortgage loan liquidates. The alternative was first announced earlier this year as part of broader updates to Fannie Mae’ representation and warranties framework. Fannie Mae will not require immediate repurchase when the MI is rescinded on mortgage loans acquired on or after July 1, 2014, and instead will offer the MI stand-in if: (i) the responsible party meets Fannie Mae’s eligibility criteria; and (ii) the only defect Fannie Mae identifies in the mortgage loan is the rescission of MI; or (iii) the responsible party cures all defects identified, except the MI rescission defect, during the required cure period. A mortgage loan will not be eligible for the MI stand-in if: (i) Fannie Mae identifies other defects during the full file quality control review which the responsible party fails to cure during the required cure period, or (ii) the responsible party does not respond in a timely manner or submit all of the required documents within the timeframes required by Fannie Mae. If the responsible party cures the defects that made the mortgage loan ineligible for the MI stand-in, Fannie Mae will review the mortgage loan and responsible party for this alternative to repurchase. On July 9, in Servicing Guide Announcement SVC-2014-14, Fannie Mae announced that servicemembers can use alternatives to Fannie Mae’s form for documenting active duty orders. The announcement also updates policies regarding (i) ordering a property valuation for short sales, Mortgage Releases, and foreclosure sale bidding instructions; (ii) submitting financial statements and reports; and (iii) loan modification monthly principal and interest payment requirements.
Fannie Mae Advises Sellers Of Bank Secrecy Act Obligations
On July 1,Fannie Mae issued Selling Guide Announcement SEL-2014-09 to remind lenders and originators—as it recently did for servicers—of their obligations to be in compliance with applicable provisions of the Bank Secrecy Act and its implementing regulations and to have internal policies, procedures, and controls in place to identify suspicious activities.
FINRA Targets Brokers' Routing Of Orders
On July 8, FINRA released a targeted examination letter it sent to 10 firms to assess their compliance with requirements related to order routing and execution quality of customer orders in exchange listed stocks during the period of January 1, 2014 to present. The letters include numerous requests for information, including requests that each firm explain: (i) how it uses reasonable diligence to ascertain the best market for orders that the firm routes for execution to an exchange, or broker-dealer, so that the resultant price is as favorable as possible for its customer under prevailing market conditions; (ii) how the firm’s exchange order-routing decisions are made for customer non-marketable, customer market, and marketable limit orders; and (iii) how the firm reviews the execution quality of such orders. The letters also include requests related to each firm’s use of the “Smart Order Router.”