New York Appellate Division delivers major blow to MERS

In many foreclosure cases brought in New York, the previously discussed electronic mortgage registry, MERS (Mortgage Electronic Registration Systems, Inc.) executes an assignment document that allegedly transfers ownership of the mortgage to the foreclosing bank (the Plaintiff) sometime before the bank commences the foreclosure action. 

However, in a recent major decision, Bank of New York v. Silverberg (Appellate Division, 2nd Dept. 2011) a New York Appellate Judge, the Honorable John M. Leventhal, dismissed a foreclosure action on the basis that the assignment of the mortgage by MERS was invalid.  The court held that MERS did not have the right to assign the mortgage because MERS was not the actual owner or assignee of the underlying note, and therefore the plaintiff lacked standing.  

Background:

In a foreclosure action, the complaint must establish a chain of ownership of the note and mortgage from the original lender to the plaintiff instituting the foreclosure. 

Standing is an inquiry into whether a litigant has an interest in the lawsuit that the law will recognize as a sufficient predicate for determining the issue in question.

In a foreclosure action, standing is met when the Plaintiff is:

1)         Both the holder or assignee of the mortgage and

2)         The holder or assignee of the underlying promissory note at the time the action  

            is commenced.

Generally, one a note is properly assigned, the mortgage passes as an incident to the note (the security, or mortgage, does not have to be formally transferred in writing).  A mortgage is merely security for a debt and cannot exist independently of the debt.

The issue for the Court was:

Can MERS, as nominee and mortgagee for purposes of recording, assign the right to foreclose upon a mortgage to a Plaintiff, absent MERS right to, or possession of, the actual underlying promissory note?  No.

As nominee, MERS’ authority is limited to only those powers which were specifically conferred to it and authorized by the actual lender.  A nominee is a person or entity designated to act in place of another usually in a limited way.

In this case there was a consolidation agreement, which consolidated two previous loans taken out by the homeowner.  So instead of two loans, there was one debt obligation.  As such, the consolidation merged the two prior notes and mortgages.

Although the consolidation agreement gave MERS the right to assign mortgages, it did not specifically give MERS the right to assign the note, and therefore such assignment of notes was beyond MERS authority as nominee or agent of the lender.  A party who claims to be the agent of another bears the burden of proving the agency relationship by a preponderance of evidence.

Assuming the consolidation transformed MERS into a mortgagee for purposes of recording, the consolidation agreement never gave MERS title to the note, nor was the note physically delivered to MERS.  Therefore, the Plaintiff in this case, Bank of New York, stepped into the shoes of MERS, its assignor, and thus gained only that to which its assignor was entitled. See Uniform Commercial Code 3-201. 

Because MERS was never the lawful holder or assignee of the Note described in the consolidation agreement, the corrected assignment of mortgage by MERS is a nullity and MERS was without authority to assign the power to foreclose to Bank of New York (the plaintiff).    

The Judge went on to stress that proper procedural requirements must be followed to “ensure the reliability of the chain of ownership, to secure the dependable transfer of property, and to assure the enforcement of the rules that govern real property.”

This case stands for the proposition that:

1)  MERS did not actually own the promissory notes for the mortgage loans that it assigned to the bank that instituted the foreclosure.

2)  Only the owner (holder or assignee) of a promissory note may properly assign it to another party.

This case carries great importance because MERS hold about 60 million mortgage loans in its registry and is involved with about 60% of all mortgage loans in the U.S. today.

If your home is in New York and you are being sued in a foreclosure action, it is critical to your interests that you seek out a legal consultation. 

The Law Firm of Eran D. Grossman can help you stay in your home.

AIG sues Bank of America for 10 Billion Dollars

American International Group Inc. aka AIG said Monday it sued Bank of America Corp. (BOA) for more than $10 billion, claiming the BOA cheated it by selling residential mortgage-backed securities that were overvalued.  Thus claiming they were deceived through misrepresentation.  Bank of America denied the allegations, claiming AIG "recklessly" chased investments with high returns, and was sophisticated enough to know the risks involved in such purchases.  Banks have been hit by a series of suits over misrepresentations of mortgage-based securities.  As noted in earlier blogs, banks were pooling mortgages into a security instrument, a process known as securitization, and then sold it to investors, including AIG, for profit. 

AIG states Bank of America and two companies it took over, Countrywide Bank and Merrill Lynch, sold AIG $28 billion in securities backed by home mortgages between 2005 and 2007, during the peak of the housing boom.  AIG said it looked at more than 260,000 of the underlying mortgages, and found that the bank's "stated metrics" for 40 percent of the securities were false.  Surely, BOA will claim this is something AIG could have looked at before making any purchases, which is part of any due diligence process.

Bank of America spokesman Lawrence Grayson said the blame lies with AIG.  "AIG recklessly chased high yields and profits throughout the mortgage and structured finance markets.  It is the very definition of an informed, seasoned investor, with losses solely attributable to its own excesses and errors."

AIG spokesman Mark Herr argued back saying "It is disappointing but unsurprising that Bank of America continues to attempt to blame others for its own misconduct.  Investors, no matter how sophisticated, were entitled to rely on its numerous written representations about the securities it sold."

In June 2011, Bank of America agreed to pay $8.5 billion to a group of investors for selling them poor-quality mortgage securities.  AIG's current suit is separate, but the company is raising questions about whether the settlement went far enough.  Last week, New York Attorney General Eric Schneiderman urged the judge to reject the settlement, calling it unfair.

If you are a homeowner who is currently in a foreclosure lawsuit where the loan was originated by Bank of America, CountryWide or Washington Mutual, it is in your best interest to consult a qualified attorney in your locality to discuss your options. 

Contact the Law Firm of Eran D. Grossman for New York City foreclosure cases. 

Second Liens- How Are banks valuing them?

I am back from a small summer hiatus and have more Big Bank news:  They are making more money than previously forecasted due to the slow housing recovery.  In July 2011, JPMorgan Chase earned $5.4 billion during the second quarter. Citigroup earned $3.3 billion.  You would think this is good news to help stimulate the economy- meaning more lending.  But that may not be the case as bank profits continue to soar.  

Despite such good news for banks, many of them face a continuing challenge, and one federal regulators want to know more about:  the potential costs associated with mortgage lending during the great credit boon.  Still to be dealt with are potentially large legal bills and final settlements related to accusations that many banks acted improperly, in bundling loans into mortgage securities, and later in their foreclosure practices.  But while the SEC has been pressing banks to make comprehensive disclosures about potential pitfalls, regulators have been quiet on another concern for investors:  how banks are valuing their vast holdings of home equity lines of credit, or secondary liens.

A Second Lien is a type of loan with a security interest in the asset(s) that is second in ranking behind a traditional first lien.  A lien is a form of security interest granted over a property (security) to secure the payment of a debt (for example a mortgage).  The second lien lender will typically be required to agree contractually to subordinate its claims on the asset to the first lien secured lender.  If a borrower defaults, second lien debts stand behind the first lien debt in terms of rights to collect proceeds from the debt's underlying collateral.

The SEC has been pushing banks hard on this issue.  As regulators review banks’ annual reports, they are asking tough questions about how institutions are valuing their second liens.  The numbers are significant.  Banks held $624 billion of such loans in the first quarter, FDIC data shows.  Millions of these loans are deeply troubled.  According to recent statistics, almost 11 million of the nation’s mortgaged properties (which is about 23 percent of the total) were underwater at the end of March 2011.  Some 4.5 million of those properties carried home equity loans- second liens. 

When a first mortgage runs into trouble, second liens are at even greater peril, even if homeowners manage to keep up with their payments. That is because in a foreclosure, first mortgages are to be paid off first before second mortgages.

The Big Four Banks, JPMorgan, Citigroup, Bank of America and Wells Fargo, not only hold home equity lines (second mortgages) but also service first mortgages held by other lenders on the same properties.  Some regulators worry that these servicers are able to protect their own holdings of second-lien loans while foreclosing on the first liens, since they are the same entity.

The big four are pretending that the second liens are still good because many are still performing, meaning that borrowers are making payments on the second mortgage, even if only the minimum.  Many home equity lines require only the payment of interest for the first 10 years.

Banks have written off about $500 billion in assets since 2008.  Most of those assets were related to housing, but write-downs on second liens have been pretty meager so far.  As of the first quarter of this year, Bank of America carried $136 billion of second liens on its books.  During 2010, it wrote down $6.8 billion. Wells Fargo held $108 billion in such loans in the first quarter, it wrote down only $4.7 billion last year.

A write-down is reducing the book value of an asset because it is overvalued compared to its market value.  This is then reflected in the banks’ income statement as an expense, thereby reducing its net income.

JPMorgan Chase’s exposure to second liens stood at $60 billion at the end of the second quarter. The bank wrote off $1.3 billion in the first half of 2011 and $3.44 billion in 2010.  Citibank’s home equity lines of credit totaled $46 billion last March; $6.2 billion belonged to borrowers with credit scores below 660, which is risky, and consisted of loan amounts that were greater than the values of the underlying properties.

The trouble in the housing market does not appear to be reflected fully on bank balance sheets yet.

If average home prices do not stabilize and hopefully recover, then banks are likely to feel pressure to begin wholesale write-downs of first and second liens.  There is probably as much loss prospectively facing the banking industry as a whole on residential real estate exposures as have already been written off.

This story will be continuing in the next several quarters.