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.

Fight Your Foreclosure Case

A New Jersey couple fought a bank foreclosure lawsuit and ended up keeping their home.  George and Mona Elghossain successfully defended against a mortgage loan servicer that tried to foreclose on their NJ home.  The April 4, 2011 court decision set a precedent for other homeowners in the state who can now cite this case as precedent for other foreclosure cases.

Mr. Elghossain, a real estate broker, used his industry knowledge to fight the case in court after he noticed that the servicer of the loan was not the lender that owned his loan.

According to New Jersey state law, the homeowner is supposed to be notified of various items, including the name of the lender that owns the loan and its contact information.

In its paperwork, the loan servicer, Bank of America, failed to include the names of the lender and the lender's representative in its notice of intent to foreclose, therefore violating New Jersey's Fair Foreclosure Act, which was enacted in 1995 and has been updated several times.

"The Fair Foreclosure Act is clear, unambiguous, and readily comprehensibly (especially to a sophisticated lender)," according to the opinion written by Judge Glenn Berman of Middlesex County.

Bank of America wanted the judge to expand the meaning of who is a lender so that it would include any "mortgage lender, mortgage investor or mortgage loan servicer that owns ... or is authorized to negotiate the terms of the homeowner's mortgage." Berman said the bank's argument "is misplaced."

The Elghossain’s purchased the home in 1985 and refinanced in 2004 with a local bank named New Millenium Bank for $260,000 at a 6.25 percent interest rate for 30 years.  About a month after the refinancing, New Millenium sold the loan to Countrywide Document Custody Services, which shortly transferred it to Countrywide Home Loans, Inc.  Countrywide sold it to the Bank of New York, but maintained a servicing agreement, which was recorded on December 7, 2006.  When Countrywide was purchased by Bank of America, they became the servicer, but Bank of New York remained the holder of the mortgage.

Bank of New York was one of 24 lenders to file 200 or more foreclosure actions in New Jersey in 2010, reported the New Jersey Law Journal.

"Homeowners in New Jersey don't contest their foreclosures, and they should," said Mr. Elghossain. "With all the forgery and fraud, people should contest their foreclosures. That's my advice. If they can't do it themselves, they should consult an attorney to make sure the lenders have complied with the rules."
 
"Before Bank of America filed its lawsuit, I wrote them a certified letter saying I'd like to start making my payments again. Instead of taking that with open arms, they never responded and they filed for foreclosure."

Although the family is holding on to the property, Bank of America does have the right to come back and serve the Elghossain’s with a proper notice of intent to foreclose.

For others facing similarly situations, Elghossain repeats, "Fight your foreclosures.”

The point being- do not allow lender’s to foreclose on your home without a legal fight. 

NY Federal Judge rules MERS has no right to transfer mortgages

Merscorp Inc. (MERS), operator of the electronic-registration system that contains about half of all U.S. home mortgages, has no right to transfer the mortgages under its membership rules, a judge held.   In the case, In re Agard, 10-77338, U.S. Bankruptcy Court, Eastern District of New York Central Islip), U.S. Bankruptcy Judge Robert E. Grossman, wrote in a decision that he knows would have “significant impact,” stated that the membership rules of MERS does not make it an agent of the banks that own the mortgages.

“MERS’s theory that it can act as a ‘common agent’ for undisclosed principals is not supported by the law,” Grossman wrote in his February 10 opinion. “MERS did not have authority, as ‘nominee’ or agent, to assign the mortgage absent a showing that it was given specific written directions by its principal.”

As indicated in a previous article here, MERS was created in 1995 to improve servicing after county offices couldn’t deal with the flood of mortgage transfers nationally.  The company tracks servicing rights and ownership interests in mortgage loans on its electronic registry, allowing banks to buy and sell the loans without having to record the transfer with the county, as required by local law.  It played a major role in Wall Street’s ability to quickly bundle mortgages together in securitized trusts.

 “MERS and its partners made the decision to create and operate under a business model that was designed in large part to avoid the requirements of the traditional mortgage-recording process,” Grossman wrote.  “The court does not accept the argument that because MERS may be involved with 50 percent of all residential mortgages in the country, that is reason enough for this court to turn a blind eye to the fact that this process does not comply with the law.”

In the case, Select Portfolio Servicing, a mortgage servicer, sought to bypass the automatic shield against legal claims triggered by Ferrel L. Agard’s filing for personal bankruptcy in September.

Select Portfolio wanted permission to foreclose on Agard’s home in Westbury, New York, on behalf of U.S. Bancorp’s U.S. Bank unit, the trustee for the mortgage-backed trust the home loan was in. The house is worth about $350,000 and the mortgage amount was $536,921, according to the decision.

The Judge addressed whether a mortgage transfer by MERS is valid, because “MERS’s role in the ownership and transfer of real-property notes and mortgages is at issue in dozens of cases before this court,” including those where “there have been no prior dispositive state-court decisions,” he wrote.

Select Portfolio argued in part that MERS’s February 2008 assignment of the mortgage to U.S. Bank was valid because Agard agreed that MERS would hold title to it for the original lender, Bank of America Corp.’s First Franklin, and for whichever banks it was further assigned to.  First Franklin transferred the promissory note to Lehman Brothers Holdings Inc.’s Aurora Bank and then Aurora Bank to U.S. Bank, according to the decision.  “An adverse ruling regarding MERS’s authority to assign mortgages or act on behalf of its member/lenders could have a significant impact on MERS and upon the lenders which do business with MERS throughout the United States,” Grossman wrote. “It is up to the legislative branch, if it chooses, to amend the current statutes to confer upon MERS the requisite authority to assign mortgages under its current business practices.”

MERS intervened in the case and argued that Agard’s mortgage, the terms of its membership agreement and New York state law gave it the authority to assign the mortgage. MERS says it holds title to mortgages for its members as both “nominee” and “mortgagee of record.”

Judge Grossman said Select Portfolio had to show that U.S. Bank owned both the note and the mortgage, and there was no evidence that it held the note. Judge Grossman disagreed with Select Portfolio’s argument that U.S. Bank held the note because the note “follows” the mortgage, which it said U.S. Bank owned.

“By MERS’s own account, the note in this case was transferred among its members, while the mortgage remained in MERS’s name,” Grossman wrote. “MERS admits that the very foundation of its business model as described herein requires that the note and mortgage travel on divergent paths.”

The judge said that the membership agreement wasn’t enough to assign the mortgage and that to do so the lender would have to give power of attorney or similar authority to MERS.

MERS’s membership rules don’t create “an agency or nominee relationship” and clearly do not grant MERS authority to take any action with respect to mortgages, including transferring them, Grossman wrote. Because the interests at issue concern “real property” -- land and buildings -- under state law, any transfer has to be in writing, which isn’t done under the MERS system, he said.

“Without more, this court finds that MERS’s ‘nominee’ status and the rights bestowed upon MERS within the mortgage itself, are insufficient to empower MERS to effectuate a valid assignment of mortgage,” the judge wrote. “MERS’s position that it can be both the mortgagee and an agent of the mortgagee is absurd, at best.”

Grossman said parties coming to him to seek to lift the automatic ban on legal claims in cases involving MERS will have to show they own both the mortgage and the note.

We will follow the case on appeal, and whether the decision is upheld.

By: Eran D. Grossman, Esq.

Banks lose important case in Massachusetts High Court

In U.S. Bank v. Ibanez, 10694, the Supreme Judicial Court of Massachusetts (Boston), upheld a lower court's decision that said two foreclosure actions were invalid because the banks, US Bancorp and Wells Fargo & Co., did not prove that they owned the mortgages in question because they were improperly transferred into two mortgage-backed trusts.  The plaintiff's in this case were not the original mortgagees and failed to prove that they were in fact holders of the mortgages at the time the forecosure case was initiated.

This case deals a devastating blow to banks because they allegedly own hundreds of thousands of mortgages in the same exact fashion as this case illustrates.  The case will also guide lower courts in Massachusetts and will be persuasive in other states since the methodology in alleged mortgage ownership is conducted similarly as part of the securitization process. 

This case also provides a further glimps into bank practices and deepends the divide between their practices and state law.   

What is HAMP and why is the program not working as contemplated?

HAMP is a program introduced in February 2009 by the Obama Administration’s comprehensive Financial Stability Plan during the housing market collapse to help homeowners modify and/or refinance their existing mortgage.  HAMP is an acronym for Home Affordable Modification Program.  It is designed to help those homeowners with an economic hardship modify the terms of their mortgage so that it becomes more affordable, manageable and thereby helps avoids a foreclosure.

To qualify for the program the following criteria must be met:

1)  The mortgage is for your primary residence.

2)  The amount of your first mortgage is equal to or less than $729,750.

3)  You have a qualified hardship.

4)  The Mortgage was obtained before January 1, 2009.

5)  The payment on your first mortgage (including principal, interest, taxes, insurance and   

     homeowner's association dues, if applicable) is more than 31% of your current gross

     household income.

 

Trial Period vs. Permanent Modification

Permanent mortgage modification rose to about 31,000 in November, up from about 26,000 in October.  That brings the total active permanent modifications to just over 500,000 since the programs inception.  Considering how slow new modifications are being offered, it is clear that the program designed to prevent three to four million foreclosures will be lucky to hit even 25% of its target.
Let's look at trial modifications.  A trial modification is when the lender provides a temporary trial periods in which modified payments are to be made for several month (usually 4-6), and if paid timely, should be made permanent.  Trial modifications peaked at nearly 160,000 in October 2009, but have declined ever since.  The number of new trial modifications increased to about 30,000 in November, up from about 24,000 in October. 

With so few active and new trial modifications, it will be harder for this number to increase in the future.  18,000 modifications were cancelled in November 2010.  This is mostly due to loan servicers finally having worked through most of their backlog of "aged trial modifications" which were modifications that were active for an extended period without being cancelled or made permanent.  Many were ultimately cancelled, which is why there was a flood of cancellations from March through July 2010.

So what’s next in 2011 for the program? 
All indications are that foreclosures are expected to rise, even though HAMP appears to be winding down and comprehensively not having the teeth to compel lender compliance as envisioned. 
As of December 2010, more troubled homeowners are dropping out of the Obama Administration's HAMP program, which has been widely criticized for failing to help more homeowners keep their homes and modify “bad loans” to more traditional long- term fixed-rate mortgages.

On December 22, 2010, the Treasury Department said that about 774,000 homeowners have dropped out of the program as of last month.  That's about 54 percent of the more than 1.4 million people who applied for a modification.  As noted, this program is intended to help those at risk of foreclosure by lowering their monthly payments. Borrowers start with lower payments on a trial basis, but for reasons not made very clear or public, lenders have not converted them into permanent loan modifications, causing trouble for the program as a whole.

Foreclosure filings fell by 21 percent last month, their largest monthly decrease since 2005.  However, the government warned that this decrease is only temporary.  Lenders are expected to revise and resubmit paperwork in the coming months to reignite their foreclosures. 
Borrowers applying for HAMP relief are faced with a bureaucratic black hole, with banks losing documents, failing to return phone calls, and simply not keeping track of all documents submitted. 
Lenders are blaming homeowners for failing to submit needed and requested documentation.  Lenders are often times operating on a dual track, where on one hand they are attempting to modify a loan, and on the other hand prosecuting a foreclosure on that property.

A homeoner should be extremely careful when entering into a trial modification.  There is no guarantee that the terms will become permanent.  Thus the bank is collecting payments for several months (from thousands of borrowers) and then for frivolous reasons is not making that modification permanent.  At the same time, continues to prosecute the foreclosure lawsuit.  Such behavior can be classified as violating the lenders obligation to operate in good faith and conduct fair dealings with the borrowing public.        

Homeowners accepted into HAMP can receive lower interest rates and can repay their loans over a longer period of time.  Those who remain in the program on a permanent basis see their monthly payments cut on an average of about $500.

If you or someone you know is dealing with a potential foreclosure of their mortgage, it is in your best interest to speak to a competent lawyer in your specific jurisdiction.

By: Eran D. Grossman, Esq. (212) 227-6755