Fannie Mae

New-QM-rulesNew Four Letter Word In the Mortgage Industry

Say the word “QM” (short for Qualified Mortgage) to any mortgage banker these days, and watch their reaction. If they were smiling, they will stop. Better yet, lock the doors to prevent them from jumping off the nearest bridge.

“QM” refers to the new Qualified Mortgage rules passed by the Consumer Financial Protection Bureau under the Dodd-Frank Act which went into effect on January 10, 2014. The Dodd–Frank Wall Street Reform and Consumer Protection Act was passed as a response to the late-2000s recession, and has brought the most significant changes to financial regulation in the United States since the regulatory reform that followed the Great Depression.

Seeking to prevent the sub-prime meltdown earlier in the decade, the new QM rules — through stricter underwriting guidelines and debt-income ratios — require lenders to ensure that the borrower has the ability to repay the loan today and into the future. In exchange, lenders will be protected from borrower lawsuits.

According to a recent ComplianceEase study, 20% of today’s mortgages would not meet the new qualified mortgage standards and would be rejected. According to most loan officers who I’ve spoken to, the general consensus is that the QM Rules will make for even stricter underwriting, more loan application rejections, especially for the self-employed, and even higher interest rates for certain loans.

Debt to Income Caps
For a loan to be considered a qualifying mortgage, the borrower’s debt-to-income ratio can be no more than 43%. This means that if a borrower has $4,500 in gross monthly income, his total debt payments including his new mortgage cannot exceed $1,935 per month. Previously, some lenders had been willing to go up to 45%.

Fee And Term Caps
Lenders will be less able to make creative loans, as well. Loans that meet the QM rule can be no longer than 30 years in length. They also cannot have closing costs and fees that exceed a cap of 3% of the loan’s balance.

Self-Employed

Self-employed borrowers will also take a hit under the QM rules. In addition to two years of personal and business tax returns — the typical requirement and now the official standard — self-employed borrowers should also be prepared to produce a profit-and-loss statement and a balance sheet.  A declining income trend will require explanation, because lenders need to establish the stability and continuity of the income source. Although capital losses and net-operating-loss carry-overs cited on a tax return could previously be added back to the income, their re-inclusion under the new rules will make the loan a nonqualified mortgage. The problem for self-employed people, as always, is that they want to minimize their tax liability, but some of the ways they do so impact their ability to borrow.

Less Availability Of Higher Risk Loan Products

The QM rules will also have a negative effect on the availability of non-QM loans with higher debt to income ratios, stated income loans for self-employed, and over 30 year term loans. Non-QM loans will be subject to significant legal risk under the Ability to Repay (ATR) rule and the liability for violations is draconian, according to Jack Hartings, President and CEO of The Peoples Bank at a House hearing panel. Mr. Hartings also noted that non-compliance with QM rules could also serve as a defense to foreclosure if the loan is deemed not to be a QM loan and small community banks do not have the legal resources to manage this degree of risk. Thus these banks, he said, will not continue to make some of the loans they have made in the past such as low dollar amount loans, balloon payment mortgages, and higher priced mortgage loans.

Loan officers, I would love to hear your thoughts about the new QM rules. Realtors, were you even aware of these rules coming down the pipeline which may affect your buyers?

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CFPB.pngCFPB Issues Long Awaited “Know Before You Owe” Mortgage Disclosures, Replacing Truth in Lending, Good Faith Estimate, and HUD-1 Settlement Statement

As part of a continuing overhaul of the home mortgage market, the Consumer Financial Protection Bureau today issued a final rule to bolster fairness and clarity in residential lending, including requiring a new good faith estimate of costs for homebuyers, Truth in Lending disclosure and a new HUD-1 Settlement Statement.

The new Loan Estimate will replace the current Good Faith Estimate (GFE) and the current Truth in Lending Disclosure (TIL). The new Closing Disclosure will replace the current HUD-1 Settlement Statement. The new forms are embedded below.

The real estate industry will have 20 months to implement the new disclosures, by August 1, 2015. The CFPB website has a summary of the new rules and disclosures here.

Initial Impressions, Did The CFPB Finally Get It Right?

Overall, I would say that the forms are a major improvement over the existing disclosures, especially the Truth in Lending disclosure. I always joke that the Truth in Lending disclosure should be called “Confusion in Lending” (which usually gives the borrower a chuckle) as it’s nearly impossible to explain even for a trained attorney and sophisticated borrower. That may be rectified now with the new forms — although I still may employ the joke!

The new HUD-1 Closing Disclosure is a longer and more involved form, but it basically just reorganizes all of the information now contained in the current 3 page HUD-1 Settlement Statement, and it appears to be easier to read and explain at the closing table.

The CFPB says that the new forms will replace the existing forms, resulting in a decrease in pages to review — which is a minor miracle in and of itself. A common complaint from borrowers is the sheer number of forms and disclosures signed at the closing, so this is welcome news.

3 Business Day Rule May Be Problematic

As Bernie Winne of the Massachusetts Firefighters Credit Union testified at the announcement hearing today in Boston, the new requirement that the Closing Disclosure (new HUD-1) be provided to the borrower within 3 business days of the closing may pose a problem in some transactions and will certainly result in a major adjustment in current practices. There are often last minute changes in closing figures, seller credits, holdbacks, payoffs, etc., which result in last minute changes. Hopefully, the CFPB will realize this in the upcoming implementation period and relax the rules in certain circumstances. There has already been significant chatter on Twitter and the blogosphere about this new requirement.

Another encouraging note was CFPB Director Cordray’s comments today about the agency pushing for more electronic closings. Fannie Mae has done squat to push e-closings, so hopefully CFPB will take the lead in this important area!

Loan Estimate Disclosure

  • The new Loan Estimate will combine the disclosures currently provided in the Good Faith Estimate and the initial Truth in Lending statement.
  • Lenders must provide the Loan Estimate 3 business days after an application is submitted by a consumer, excluding days that the lender is not open (e.g., Saturdays).  However, it is not clear based from materials available thus far when a consumer has submitted sufficient information to constitute an “application.”
  • The Loan Estimate will conveniently provide for the monthly principal and interest payment, projected payments over the term of the loan, estimated taxes and insurance (escrows), estimated closing costs, and cash to close.
  • It will provide for a Rate Lock deadline.
  • The Annual Percentage Rate (APR) appears on page 3, despite requests by consumer advocates that it appear in a prominent location on the first page.  In addition, it appears that the Bureau did not adopt the proposal to revise the APR calculation to include more items in the finance charge and thereby potentially increase the number of loans that would fail the Qualified Mortgage’s points-and-fees test or would be treated as “high cost” or “higher priced.”

Closing Disclosure

  • The Closing Disclosure will combine the disclosures currently provided in the HUD-1 settlement statement and any revised Truth in Lending statement. It is now a 5 page document compared to the current 3 page document.
  • Critically, the Closing Disclosure must be provided at least 3 business days before the closing. Lenders and closing attorneys will have to adapt to this new requirement as currently we usually get the final HUD approved by the lender 24-48 hours before the closing.
  • Page 1 of the Closing Disclosure carries over much of the Truth in Lending information previously found in the TIL form.
  • Page 2 and 3 replicate the existing HUD-1 Settlement Statement (pages 1 and 2) outlining the fees and closing costs, adjustments, and commissions charged to the buyer and seller. It also contained a more extensive section on Cash to Close which will be helpful to explain.
  • Page 4 contains a nice easy-to-read section on the escrow account which is often challenging to explain to borrowers.
  • The last page is similar to the current page 3 of the HUD-1, providing a quick summary of the loan terms, interest rate, total payments and APR.

CFPB Loan Estimate

CFPB Closing Disclosure

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government shutdown I’ve been glued to CNN in recent days, watching incredulously as those buffoons in Washington grind our government to a halt. I though for sure that a midnight deal would have been struck, but I woke up this morning with the dreaded news that the government has indeed shutdown. I’ve been trying to get a handle all morning on how this is going to affect the Massachusetts and national real estate market, and here’s what I have so far. (Updated 10/1/13 at 4:30pm below).

Tax Transcripts/SSN Verification Delays

Virtually all federally back mortgage lenders request copies of borrower’s tax transcripts through the IRS and social security numbers through the SSA. According to my friend Rick Moore, loan officer at Lendmark Loans in Framingham, and media reports, the shutdown will apparently either stop or hinder the federal agencies’ ability to issue those verifications, resulting in mortgage approval delays across the board. I know that lenders were furiously ordering tax transcripts and SSN verifications last week, in preparation for the shutdown. If your loan is in the middle of underwriting, speak to your loan officer now. You may be facing a delay in getting a clear loan commitment and a resulting delay in your closing date.

Federal Housing Administration (FHA)
The shutdown’s impact on FHA loans appears to be not as bad as originally thought. HUD’s Contingency Plan states that FHA will endorse new loans in the Single Family Mortgage Loan Program, but it will not make new commitments in the Multi-family Program during the shutdown. FHA will maintain operational activities including paying claims and collecting premiums. Management & Marketing (M&M) Contractors managing the REO portfolio can continue to operate. You can expect some delays with FHA processing.

VA Loan Guaranty Program
Lenders will continue to process and guaranty mortgages through the Loan Guaranty program in the event of a government shutdown. However, borrowers should expect some delays during the shutdown.

Flood Insurance
The Federal Emergency Management Agency (FEMA) confirmed that the National Flood Insurance Program (NFIP) will not be impacted by a government shutdown, since NFIP is funded by premiums and not tax dollars. Changes to the flood insurance program scheduled to take effect on Oct. 1 will be implemented as scheduled.

USDA Loans
For USDA loan programs, essential personnel working during a shutdown do not include field office staff who typically issue conditional commitments, loan note guarantees, and modification approvals. Thus, lenders will not receive approvals during the shutdown. If the lender has already received a conditional commitment from the Rural Development office, then the lender may proceed to close those loans during the shutdown. A conditional commitment, which is good for 90 days, is given to a lender once a USDA Underwriter approves the loan. If a commitment was already issued, the funds were already set aside and the lender may close the loan at its leisure. If Rural Development has not issued a conditional commitment, the lender must wait until funding legislation is enacted before closing a loan.

It is important to note that the traditional definition of “rural” for qualifying communities for assistance will be continued in effect during the shutdown.  We expect that language to continue the current definition will be included in whatever funding measure is eventually enacted.

Government Sponsored Enterprises
Fannie Mae and Freddie Mac will continue operating normally, as will their regulator, the Federal Housing Finance Agency, since they are not reliant on appropriated funds.

Treasury
The Making Home Affordable program, including HAMP and HAFA, will not be affected as the program is funded through the Emergency Economic Stabilization Act which is mandatory spending not discretionary.

Updated (Oct. 1 at 4:30pm). Memo from national mortgage lender:

“There has been no progress today toward a resolution to the government shutdown. Fortunately, the initial impact of the shutdown on mortgage originations has been small. The biggest concerns are obtaining transcripts from the IRS and social security verifications from the SSA. Certain Government produced economic reports will not be available. The Construction spending report due out this morning was not issued. The Non-Farm Payrolls report due on Friday may be affected. The impact on the mortgage market of this lack of data is difficult to anticipate.

At this time, Fannie, Freddie, and Ginnie say they will continue to operate as normal. VA says that they, too, will have no disruptions in services. FHA, however, expects delays due to reduced staffing. Origination companies, correspondent banks, and warehouse lenders may react differently as they access the risks associated with an extended shutdown.”

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hqdefaultSpecial Considerations For Drafting Two and Three Family Massachusetts Condominium Conversions Documents

Avid readers of this Blog know that I’m a huge Seinfeld fan. One of my favorite episodes was the “Serenity Now” episode where Kramer went a little nutty after being tormented by neighborhood kids, muttering “serenity now, serenity now” outside his toilet papered apartment. (Seinfeld buffs also know this as the episode where George beats Lloyd Braun in a computer sales competition). For your viewing pleasure, I’ve embedded the video below.

Serenity is a good topic when it comes to condominiums because condominium living can often bring out the worst in people. There have been some good ones in Massachusetts. I’ve written about the infamous case where a disgruntled unit owner dropped bags of dog poop labeled with the name of the condo board president in hallways and gave the “bird” to condo trustees. There are others, too many to mention here, where dysfunctional trustees have brought condominiums to financial ruin and chaos.

Despite this discordance, condominium conversions of two and three multifamily homes in and around Boston, Cambridge and Somerville continue to be a popular way to cash in on the hot real estate market. A lot of these homes are owned and occupied by extended families, some of whom stay in the new condominium, and some who leave for greener pastures. Smaller condominiums, however, can be a recipe for disaster without careful planning and drafting of the legal documents which govern them. I’m going to outline some important considerations in drafting Massachusetts condominium conversion documents which will put into practice the saying that “an ounce of prevention is worth a pound of cure.”

The Master Deed

The Master Deed is where it all starts. Condominiums are a “creature of statute.” That is, they are a special legal form of property ownership enabled only through a special law called the Massachusetts Condominium Act, General Laws Chapter 183A. The owner of the property must “submit” the property into the condominium regime through the recording with the registry of deeds of a master deed.

The Master Deed sets forth what is part of the units and what is part of the shared “common areas.” Units are typically defined as all of the interior space from the lower surface of finished ceilings, surface plaster of walls and the sub-floor in, while common area consists of the innards behind the walls and buildings, the roof, most common HVAC/plumbing/heating systems, yards, and exterior of the home, among other things.

The use of “limited common areas” are especially useful in two and three family condominiums. Limited common areas are technically common area space but reserved for the exclusive use of the unit owner which it serves. Examples include private decks, porches, roof decks, parking spaces, and storage areas. The drafter can be flexible and provide that limited common areas must be repaired by either the condo association or the unit owner.

The master deed will often impose restrictions upon the use of units or rights of first refusal for the trustees or other unit owners. Care must be taken here to ensure that the units remain marketable while also protecting the serenity of unit owners. Rights of first refusal are discouraged these days.

Declaration of Trust and By-Laws

The second component of creating a condominium is the Declaration of Trust, also referred to as the By-Laws. The declaration of trust creates the condominium trust association and a board of trustees which govern the condominium.

For smaller condominiums between 2 and 5 units, the key is crafting the provisions so as to prevent dead-locking on major decisions. I almost always provide for super-majority voting on all major issues. For 2 unit conversions, I recommend unanimous voting on all major issues. And for all condos I use a mandatory arbitration clause to mediate any deadlocks.

In the case of non-payment of condo fees, which can be financial disaster for two and three unit condos, I provide for the right of the paying unit owners to be granted authority and power to start condo lien proceedings against the non-payor and recover attorneys’ fees and costs.

The declaration of trust should also contain all of the unique rules and regulations of the condominium. Important note: If these are not attached and recorded with the declaration of trust, they are not binding on unit owners. Rules should be drafted in consultation with the owners and can cover anything from satellite dishes, pets, smoking, signs, preserving architectural integrity, noise, quiet hours, parties, trash, etc.

The declaration of trust should also have standard Fannie Mae/Freddie Mac provisions which will ensure that future buyers can obtain conventional financing on their units.

Annual Budget, Condo Fees and Real Estate Taxes

The condominium should have a written annual budget and monthly condo fees established. A separate condominium bank account should also be set up with checks, deposit slips, etc. For small projects, the budget can be rather simple, encompassing the master insurance premium, water/sewer, landscaping, maintenance, and a small capital reserve fund. The monthly condo fee is calculated as the annual budget divided by the number of units divided by 12.

With respect to real estate taxes on a condo conversion, the building will continue to be assesses as a single dwelling until the tax assessor catches up to the conversion. A tax letter agreement should be prepared so that real estate taxes are prorated and properly assessed and paid by each unit owner after the conversion until each unit becomes separately assessed.

Also don’t forget that in the City of Boston, a “Trager” excise tax of $500 per unit starting with the second unit will be assessed on all new conversions. The master deed must have a “Trager” stamp before being accepted for recording.

Unit Floor Plans and Site Plan

All new condominium conversions must have prepared unit floor plans, and in Boston, a surveyed site plan. Unit floor plans will detail each unit’s gross living area, and delineate common areas, limited common areas, exclusive use spaces, and units.

How Much Does All This Cost?

Even for two unit conversions, the cost is a fair amount. Legal fees range from $2,500 – $5,000 and upwards, depending on the complexity of the project and the attorney. Recording fees and Boston excise taxes run over $1,000 and upwards. Architect and survey fees range from $2,500 and upwards. And you always get what you pay for, so keep that in mind!

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RDV-profile-picture.jpgRichard D. Vetstein, Esq. is a seasoned Massachusetts condominium conversion attorney. Please contact him at rvetstein@vetsteinlawgroup.com or by phone at 508-620-5352.

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Lara Gordon, Coldwell Banker

Put Your Best Offer Forward & Get Pre-Approved Beforehand, Advise Local Experts

Well, it’s official now. With buyers back in droves, an abnormally low inventory of good properties, and bidding wars popping up all over the place, the Greater Boston real estate market has now made full circle into a seller’s market. As the Boston Globe recently wrote, the market is “desperately seeking sellers.”

images-11For prospective buyers in a seller’s market, the strategies to succeed and find your dream home are very different from just a year or two ago. To help you navigate these unfamiliar waters, I’ve asked Cambridge-Somerville Realtor, Lara Gordon of Coldwell Banker, and Brian Cavanaugh, Senior Mortgage Banker at RMS Mortgage, to join me in this “round-table” discussion about how buyers can succeed in a seller’s market. Lara and Brian were both featured in this month’s Boston Magazine Best Places to Live 2013.

Q: Laura, what are you seeing out there on the streets in terms of inventory, pricing, and respective bargaining power between buyers and sellers? Has the tide really shifted back to sellers?

A: (Lara Gordon) Yes—in a very big way. When sellers have 5-10 offers to choose from, which is typical for most listings in Cambridge & Somerville right now, they are really setting the terms, and some buyers are willing to accommodate just about any request they make, from waiving the inspection to offering a sale-and-lease-back if the seller needs time to find a new place. My listing at 27 Osgood Street, Unit 7 in Somerville (pictures to the right) is a good example — 6 bids.

Q:  Lara, I’m hearing about bidding wars on well-priced, good condition properties. What are you seeing out there, and what’s your best advice on getting that winning bid?

A: (Lara Gordon) I always tell my buyer clients this: if you know you’re going into a multiple offer situation, you should put your best foot forward from the start. Some people feel nervous about coming in high on their offer, thinking they need to leave some room to come up during negotiations, but that is a mistake. If a seller receives one offer that is significantly stronger than the others, they may well accept it without going back for a “best and final” round.

lr-mls

And again, price is just one aspect of the offer, so have a good pre-approval from a respected lender, do the best you can with the downpayment, be willing to work with sellers’ preferred dates, and make sure your agent is “selling” you as a knowledgeable buyer, reasonable to deal with, and committed to seeing the transaction through.

Q:  What do buyers need to do in terms of making their best and most competitive offer? Are we back to buyer’s writing a personal appeal to sellers and that sort of thing? 

A: (Lara Gordon) Some buyers do write letters to sellers, but it’s the list agent’s job to keep them focused on the strengths of the respective offers, so an emotional appeal really only gets a buyer so far. Buyers really need to put their best foot forward. This starts with price, downpayment, a solid pre-approval from a respected lender, tight contingency dates and as much as possible accommodating the sellers’ preferred timeframe for closing. Beyond that, list agents and sellers are looking for a deal that will proceed smoothly and will “stick” through closing, so buyers’ agents really need to “sell” their clients as educated on the market, realistic about the home inspection and committed to seeing the deal through.

Q:  Brian, I hear that buyers are coming to you at all hours and weekends for pre-approvals. When buyers come to you for mortgage approval, what sort of documentation should they have ready to go and how quickly can you close loans these days?

ex-mlsA: (Cavanaugh). Well, I’ll start off by staying that the pendulum has definitely swung around. When the market favored buyers, you would go look for houses, get an offer accepted then go to your mortgage banker for an approval. Now it’s the other way around. You need a mortgager approval in hand when you are out looking for homes. And that means from the start you need a very firm grasp on exactly what you can afford, how much to put down, etc. You need to work with a mortgage banker with a strong grasp of Fannie and Freddie guidelines.

As for the paperwork, you need 2 years of tax return and W2’s, 30 days of pay-stubs, one year of bank statements, statements for your 401ks, IRAs, and investment accounts. A lot of first time buyers use gifts of downpayment from their parents, which are particularly tricky. I tell them to get those monies into your account ASAP. You will need a gift letter executed by all parties involved and verification of funds.

Currently, we can close a single family loan in 45 days, and a condo purchase in about 60 days, since condo mortgages require more extensive FNMA approval.

Q:  How much are sellers looking at buyers’ financing? Are cash buyers winning out over financed buyers? What are the ways to ensure a seller that a financed buyer is of no greater risk that a cash buyer?

A: (Lara Gordon) Cash is definitely an advantage in that it takes one element of risk out of the equation. For sellers in a rush to close, a cash deal is also appealing because it can close a lot faster than when a lender is involved. But if timing isn’t a big deal and there are good comps for the property, there’s no reason a seller shouldn’t consider a good offer from a buyer who will finance. Of course, the size of the downpayment has become increasingly important as bidding wars drive prices up and appraisals become a concern.

Q: How are you dealing with contingencies in a seller’s market? Are buyers waiving inspection or even financing?
A: (Lara Gordon) There are certainly buyers out there waiving both financing and inspection contingencies, but it’s not always a good idea. While it’s fine for buyers to waive the financing contingency if they’re prepared to pay cash, I personally, would never advise someone to forego a home inspection. The key is to approach it as educational and a way out in case of a major issue, and not as a tool for renegotiating the price.

A: (Vetstein) I’m going to weigh in on this topic as it deals with legal issues. I would STRONGLY advise a financed buyer to resist the temptation to waive the financing contingency in the hope that it will make an offer more attractive. In this day and age of strict underwriting and frequent delays, this is simply a recipe for losing your deposit. I don’t care if a handful of lenders have told you that your file is a slam dunk — you could get laid off a few weeks before close and you’d be DOA for the closing. Same goes for the inspection contingency. Sellers know that buyers want to check the home’s bones beforehand. Trust me, it will cost you a lot more money down the line if you wind up buying equivalent of the “Money Pit.” Tightening the deadlines, that’s fine. Waiving them, that’s just asinine.

A: (Cavanaugh) I would echo Rich’s sentiments. In this day and age of tight lending guidelines, I would hate to see a buyer lose his deposit because he was under the assumption that he could qualify for a mortgage he really couldn’t qualify for. Again, talk to your mortgage banker before you make the offer.

Q: Last question guys. I always recommend that my buyers use a Realtor. But please tell the readers exactly why having a Realtor can greatly increase your chances of succeeding in a seller’s market?

A: (Lara Gordon) I’m glad you asked this question, Rich, because some people think that they will do better if they go directly to the list agent, but given the nature of the market right now, it just doesn’t make sense to try to go it alone.

A: (Cavanaugh). When my borrower works with a Realtor, it always makes the transaction run smoothly. I operate under a “team” concept with the agents, so I’m used to constant contact with both the buyer and listing agent to ensure we get access for the appraisal and all the documentation in place for the loan commitment and closing. When there’s a team of professionals involved in a transaction, it’s a win-win for everyone.

A: (Vetstein) A low inventory/seller’s market is precisely why you want a Realtor who knows the market inside out and can be your salesperson/spokesperson on your side. In a market where perception is everything, I think it’s fair to say that a listing agent/seller will take you more seriously if you are working with a top notch Realtor, rather than sauntering solo into an open house in your Bean duck boots. Not to mention that the buyer does not typically pay an agent commission in Massachusetts. Also, selfishly, working with a client with a Realtor is less stressful for the attorney.

Q: Lara and Brian, any final words of wisdom as we head full bore into the busy spring market?

A: (Lara Gordon) I guess I’d just like to acknowledge that this is a tough market for buyers, and I totally understand the stress and frustration many people are feeling. In an ideal world, you’d find a great house, take some time to think things over, maybe visit a few times, then make a fair offer in a non-competitive situation, and you’d have a new home. But buyers need to accept the reality of the market we’re in: we’ve got low inventory and high demand, and you won’t necessarily get the first house you bid on. Maybe not even the second or third. But if you are qualified financially, have realistic expectations, are patient and persistent, and know how to play the game, you will ultimately find a home.

A: (Cavanaugh). I would urge would-be buyers to talk to a mortgage banker as early as possible in the process. We still have near all time mortgage interest rates. Affordability may never be as good as now, so hang in there in terms of bidding wars and a seller’s market. RMS Mortgage is well known brand and people either know me by reputation or have worked with me. So you have some instant credibility with the listing agent who can vouch for a smooth and successful transaction, and that’s very important in this seller’s market.

Thank you to Brian Cavanaugh and Lara Gordon for a great round-table discussion! Lara can be reached at lara.gordon@nemoves.com or 617-245-3939. Lara blogs at Cambridegville. Brian can be reached at brian.cavanaugh@rmsmortgage.com and 617-771-5021. Brian blogs at Smarterborrowing.com.

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stop20foreclosure1Court Uses Novel Equitable Assignment of Mortgage Theory 

In what could be the first test case of a new theory to clear up defective foreclosure titles — and much welcome news for property owners stuck with toxic titles — Massachusetts Land Court Judge Gordon Piper has ruled that the theory of equitable assignment of an improperly foreclosed mortgage can be used to clear title of an improperly foreclosed property.

The case is Cavanaugh v. GMAC Mortgage LLC, et al., 11 MISC 447901 (embedded below) and was recently appealed by noted foreclosure attorney, Glenn Russell, Esq., who represented the prevailing homeowners in the landmark U.S. Bank v. Ibanez case. The case will now go up to the Massachusetts Appeals Court, or, given its importance, perhaps taken up by the Supreme Judicial Court on direct appellate review.

In this case, GMAC Mortgage foreclosed a mortgage given by Maureen Cavanaugh of Fairhaven, then granted a foreclosure deed to Fannie Mae. The foreclosure, however, was defective because notice of the foreclosure sale was not published in the local newspaper as required by Massachusetts foreclosure law. Fannie Mae later sold the property to Timothy Lowney.

Ms. Cavanaugh sued the lenders and Mr. Lowney in a Land Court “quiet title” action to re-claim her property back. This is essentially the same situation as presented in the Bevilacqua vs. Rodriguez case where a property owner was stuck with a defective foreclosure title. The Court in Bevilacqua suggested an alternative theory to solve the defective title by using the conveyance of the foreclosure deed as an equitable assignment of the original mortgage, so the new property owner could foreclose and obtain clear title in the process.

Judge Piper used this equitable assignment theory in the Cavanaugh case, ruling that Lowney, the new buyer, holds the GMAC Mortgage through equitable assignment, and may now foreclose upon Ms. Cavanaugh, thereby clearing the way to get clean title. Equally important, Judge Piper ordered GMAC and Fannie Mae to assign the underlying promissory note from Ms. Cavanaugh to Lowney so that he holds both the note and the mortgage as required by after the important Eaton v. Fannie Mae case several months ago.

This is an important and much-needed judicial development for assisting homeowners who have been unable to refinance or sell their properties due to “Ibanez” and other foreclosure related title defects. This case also illustrates the importance of obtaining an owner’s policy of title insurance which appears to have provided coverage to Mr. Lowney in this matter.

Cavanaugh v. GMAC Mortgage — Massachusetts Land Court by

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CPFB copy

New Rule Aims To Prevent Predatory Lending

The new Consumer Financial Protection Bureau has just issued what it deems “one of its most important rules to date.” It’s called the Ability To Repay Rule. The rule will ensure that a borrower should be able to afford their mortgage payment. Sounds like common sense, right? Yes and no, according to the agency. The CFPB is trying to prevent the subprime and predatory lending crisis of several years ago by requiring that lenders jump through several strict underwriting hoops for “fail-free” loans.

“When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford,” CFPB Director Richard Cordray said in a statement. “Our Ability-to-Repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes. This common-sense rule ensures responsible borrowers get responsible loans.”

The Qualified Mortgage (QM). The key feature of the new rule is the establishment of a “qualified mortgage” — with no risky loan features – such as interest-only payments or balloon payments – and with fees that add up to no more than 3% of the loan amount. In addition, these loans must go to borrowers whose debt does not exceed 43% of their income. These loans would carry extra legal protection for lenders under a two-tiered system that appears to create a compromise between the housing industry and consumer advocates.

End of No-Doc Loans. In the past, lenders could get away with offering low- or no-doc loans (they required few financial documents, if any, from the borrower and then could sell off the risky loans to investors). With the new rule, lenders must do a proper financial background. That means sizing up borrowers’ employment status; income and assets; current debt obligations; credit history; monthly payments on the mortgage; monthly payments on any other mortgages on the same property; and monthly payments for mortgage-related obligations.

Risky borrowers will have a harder time securing a loan. The lender must prove the borrower has “sufficient assets” to pay back the loan eventually. According to the CFPB, that’s determined by calculating debt-to-income ratio of no more than 43%.

Bye-bye to teaser rates. Lenders love to roll out juicy low introductory rates on mortgages to lure borrowers in, but under the new rule, they must calculate a borrower’s ability to repay his loan based on the true mortgage rate –– including both the principal and the interest over the long-term life of the loan.

The rule does not go into effect until January 1, 2014. This new rule has the potential of really shaking up the mortgage industry. We will be tracking future developments. We appreciate comments from mortgage professionals below.

More info:  CFPB Blog — Ability to Pay Rule
The Mortgage Porter: CFPB’s Qualified Mortgage Rule and The Ability to Repay

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IMG_1490Yesterday my firm sponsored a very informative breakfast seminar with veteran real estate journalist Scott Van Voorhis of Banker & Tradesman and Boston.com who offered his predictions on the 2013 Massachusetts real estate market. The presentation included a lively question and answer session with the 40+ Realtors attending from all over the Greater Boston area. Here are some take-aways from the seminar (in no particular order):

  • “Bright and sunny early, but with a chance of severe job cuts later.” According to Mr. Van Voorhis, the Fiscal Cliff and upcoming Debt Reduction negotiations may be the biggest obstacle remaining in the path of a sustained real estate recovery. At stake are anywhere from 50,000 – 70,000 jobs in Massachusetts if the current slate of proposed budget cuts pass — to defense (i.e., Raytheon), health care, hospitals, and medical research, and tech sectors. If Massachusetts sees severe spending cuts by the federal government, the Route 128 corridor will be most impacted. The current impact is of “wait and see” with defense contractors and tech companies waiting to see how the federal budget battle with be resolved. They are putting new hires on hold and bracing for possible cuts. The fact that Congress will likely wait until the last minute to resolve these important issues doesn’t help the market any!
  • We’re back…. Median sale prices in many suburbs are now back to 2005 levels. Natick’s median price is $418,500, just off from its ’05 high. Needham has surpassed its ’05 record with a median price of $670,000. Burlington has broken its ’05 record at $407,000 median price. A major driver of the real estate recovery is the tech-sector, with Route 128 lab space expanding by 50%, or 3.5 million square feet of space, since 2007, enough to fill three Prudential Towers of space. Shire in Lexington and Genzyme in Framingham have led with way.
  • Tear-Downs On The Rise. Builders are doing tear-downs instead of large scale subdivisions, where financial risk is minimal. Early data indicates increasing market activity in tear-downs in Lexington, Newton and Needham, for example.
  • Low Inventory of Move-In-Ready Homes. The attending Realtors lamented about the dearth of move-in-ready homes in the sought after towns. As we know, there is hardly any buildable land in Massachusetts, and builders have not been doing subdivisions for several years. The agents say bidding wars are back in a big way for these properties, which creates problems with potentially low bank appraisals as the “comps” must catch up with new sales data. The low inventory also affects potential home sellers, especially the empty nesters who are “paralyzed” as one agent described, waiting on the best time to sell.
  • Buyers’ Lack of Vision. We discussed that the current generation of buyers would rather pay a premium for a move-in-ready home with the requisite gourmet kitchen with granite and stainless steel appliances, rather than pay less for a fixer-upper. Some Realtors have enlisted trusted contractors to scope out fixer-uppers along with buyers, so they can envision the potential of a lower priced home.
  • Condos Remain Strong Sector. Condominiums remain the new starter home for many buyers, especially singles. Inventory is strong and pricing remains affordable in many communities. With interest rates still at historic lows and the mortgage interest tax deduction still in place, purchasing a condo is much cheaper than renting. The consensus is that condos will remain a strong sector through 2013.
  • Short Sales Strong & Less Time Consuming. As noted by veteran short sale negotiator Andrew Coppo of Greater Boston Short Sales LLC, short sales are now becoming far less time consuming with the new Fannie Mae short sale guidelines in place since the summer. Mr. Coppo reports that short sales are taking merely 60 days to get approval, and Bank of America finally “getting it” by implementing its computerized Equator streamlined short sale system. Also, the Mortgage Debt Relief Act was extended through 2013, giving short sale sellers tax forgiveness for discharged debt. There are still lots of underwater and struggling homeowners, so 2013 will remain another strong year for short sales.

What are your predictions and thoughts for the 2013 Massachusetts real estate market? We would love to hear from you!

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RDV-profile-picture-larger-150x150.jpgRichard D. Vetstein, Esq. is a Massachusetts real estate attorney who writes frequently about new legislation concerning the real estate industry. He can be reached at info@vetsteinlawgroup.com.

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2011-20121I always look forward to recapping the year that was, and bringing out the crystal ball to predict the year ahead. This year, like years prior, was an active year for Massachusetts real estate law, with several important court rulings, legislative developments, and emerging legal trends. The year 2013 is expected to be just as busy.

Eaton v. Fannie Mae and Fannie Mae v. Hendricks Foreclosure Rulings

Another year, another pair of huge foreclosure rulings by the Massachusetts Supreme Judicial Court. On June 22, 2012, in Eaton v. Federal Nat’l Mortgage Ass’n, the SJC held that lenders must establish they hold both the promissory note and the mortgage in order to lawfully foreclose. This posed major problem for the vast majority of conventional mortgages which lenders securitized and sold off on the secondary mortgage market, thereby splitting the note and mortgage among various securitized trusts and mortgage servicers. Responding to pleas from the real estate bar, the SJC declined to apply its ruling retroactively, thereby averting the Apocalyptic scenario where thousands of foreclosure titles would have been called into question. My prior post on the Eaton ruling can be read here.

The FNMA v. Hendricks case had the potential to change Massachusetts foreclosure practice, but the SJC rejected the challenge. The court upheld the validity of the long-standing Massachusetts statutory form foreclosure affidavit which provided that the foreclosing lender has complied with the foreclosure laws,rejecting the borrower’s claim that the affidavit was essentially robo-signed.

New Medical Marijuana Law Has Landlords, Municipalities Smoking Mad

Burned up Massachusetts landlords and anti-pot local pols are still fuming with concern over the state’s newly passed but hazy medicinal marijuana law. The law — rolling out Jan. 1 — mandates the opening of at least 35 medicinal marijuana dispensaries, and grants users the right to grow a two-month supply of marijuana at home if they cannot get to a dispensary because they are too sick or too broke. The new law also potentially opens landlords up to federal prosecution for violating the federal controlled substances laws. Many towns and cities are contemplating banning dispensaries or passing zoning by-laws regulating their locations. My prior post on the new marijuana law can be read here.

539wApartment Rental Occupancy Limits

In 2013, the SJC will consider the Worcester College Hill case which will significantly impact landlords renting apartments to students and in other multi-family situations. The question is whether renting to 4 or more unrelated persons in one apartment unit requires a special “lodging house” license which would, in most cases, make it cost-prohibitive to rent to more than 3 unrelated persons. (Lodging houses require a built-in fire sprinkler system, for example). The SJC will hear oral arguments in the case on January 7, 2013.

Foreclosure Prevention Act Passed

On August 3, 2012, Governor Deval Patrick signed the Foreclosure Prevention Act. The new law requires that lenders offer loan modifications on certain mortgage loans before foreclosing. Unfortunately, the law did not fix the problem with existing title defects resulting from the U.S. Bank v. Ibanez case in 2010. (Sen. Moore’s office plans to re-introduce Senate Bill 830 in 2013). My prior post on the new law can be read here.

SJC To Consider Realtor’s Liability for Erroneous MLS Info

Sometime in 2013, the SJC will issue a very important opinion in the controversial DeWolfe v. Hingham Centre Ltd. disclosure case where a Realtor was held liable for failing to verify the zoning of a listing on the Multiple Listing Service. The Court will also consider whether the exculpatory clause found in the Greater Boston Real Estate Board’s standard form purchase and sale agreement legally prohibits a buyer’s misrepresentation claim against the real estate agent. The Massachusetts Association of Realtors and the Greater Boston Real Estate Board have filed friend of the court briefs urging the SJC to limit Realtors’ disclosure obligations in the case. My prior post on the case can be read here.

Good Faith Estimate, TIL, and HUD-1 Settlement Statement To Change Dramatically

In the second major overhaul of closing disclosures in three years, the Consumer Financial Protection Bureau will be rolling out in 2013 a new “Lending Estimate” and “Closing Estimate” which will replace the current Good Faith Estimate, Truth in Lending Disclosure, and HUD-1 Settlement Statement. The changes are part of the Dodd-Frank Act, and has the lending and title insurance industries scrambling to figure out who should be ultimately responsible for the accuracy of closing fees and other logistics in delivering these new disclosures. My prior posts on the topic can be read here.

mw_1011_FISCAL_CLIFF_620x350Fiscal Cliff Anxiety Syndrome

The Year In Review would not be complete without mention of the dreaded Fiscal Cliff. As of this writing, President Obama and the House (which even rejected its own Speaker Boehner’s last proposal) have been unable to work out a deal to resolve the more than $500 billion in tax increases and across-the-board spending cuts scheduled to take effect after Jan. 1, 2013. If there is no deal, and the country goes over the fiscal cliff, the consensus is that it will have quite a negative effect on the economy and the real estate market in particular.

Upcoming Event! On January 8, 2013, we are sponsoring a breakfast seminar with veteran real estate journalist Scott Van Voorhis, who will offer his predictions on 2013. Please email me to sign up. The Facebook Event invitation is here. The venue is Avita in Needham, 880 Greendale Ave., Needham, MA.

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Richard D. Vetstein is an experienced Massachusetts real estate attorney who hopes the White House and Congress can get their acts together and pass a compromise bill to avoid the Fiscal Cliff.

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High Anxiety Heading Into 2013

The term Fiscal Cliff should be as ubiquitous as “Merry Christmas” and “Happy Holidays” through the year-end, especially if President Obama and Congress cannot work out a deal to resolve the more than $500 billion in tax increases and across-the-board spending cuts scheduled to take effect after Jan. 1, 2013. If there is no deal, and the country goes over the fiscal cliff, the consensus is that it will have quite a negative effect on the economy and the real estate market in particular. (I debated using the word “disastrous” because there is a segment of commentators who say the housing market may survive a fall off the cliff).

There are four particular aspects of the Fiscal Cliff which could impact the real estate market.

1.  Expiration of Unemployment Benefits. Emergency jobless benefits for about 2.1 million people out of work will cease Dec. 29, and 1 million more will lose them over the next three months if Congress doesn’t extend the assistance again. Unemployed, even those receiving assistance, cannot and do not purchases homes. Democrats and President Obama want the unemployment benefits extended, but the Republicans are attempting to use this as leverage for their own fiscal cliff agenda. The real estate market will surely suffer if benefits aren’t extended.

2. Mortgage Forgiveness Debt Relief Act. The Mortgage Forgiveness Act is set to expire December 31. This tax break is critical for short sales, relieving homeowners from being taxed on any mortgage debt that was forgiven through a short sale, foreclosure or loan modification. If distressed homeowners are subject to tax on millions in debt forgiveness, short sales will likely decrease dramatically.

3. Mortgage Interest Tax Deduction. Once the sacred cow tax break for millions of middle and upper class homeowners, the mortgage interest deduction is reportedly on the chopping block. The National Association of Realtors and real estate groups have been apoplectic in urging no change to this important benefit to homeowners. Eliminating the mortgage deduction would raise taxes on all homeowners, and could dissuade renters from becoming homeowners.

4.  FHA/Fannie Mae Bailout. The Federal Housing Administration, the lender of choice for first-time homebuyers, is nearly insolvent and it could require a taxpayer bailout next year, according Edward J. Pinto, a fellow at the American Enterprise Institute. Pinto claims the 78-year-old agency is $34.5 billion short of its legal capital requirement. “If it were a private company, it would be shut down,” argues Pinto. These aren’t the only issues threatening the real estate market. Since Fannie Mae and Freddie Mac were taken over by the government in 2008, taxpayers have plowed  $180 billion into them to keep them operational. This mess needs to be fixed next year.

Well, if your stomach isn’t in knots, mine is. Luckily, we have some medicine for you!

On January 8, 2013, we are sponsoring a breakfast seminar with veteran real estate journalist Scott Van Voorhis, who will offer his predictions on what 2013 will bring. Please email me to sign up. The Facebook Event invitation is here. The venue is Avita in Needham, 880 Greendale Ave., Needham, MA.

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Richard D. Vetstein is an experienced Massachusetts real estate attorney who hopes the White House and Congress can get their acts together and pass a compromise bill to avoid the Fiscal Cliff.

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All Politics Aside, It’s Time To Bring Housing & Real Estate Back To the Forefront

In the most tweeted, Facebook-ed and instant polled Presidential Campaign ever, there is one topic which has been met with surprisingly deafening silence: the U.S. Housing and Real Estate Market. During last week’s debate, we heard a lot about tax plans and cuts, energy, health care and jobs, but nothing on the real estate market. Nothing…This year’s presidential candidates have mostly avoided discussing an industry that’s largely responsible for the last five years of economic pain. But why?

For sure, the subject of housing remains an extremely sensitive one. President Obama might prefer that the real estate market, whose imbalances sparked the financial crisis, to remain a ghost issue because of a lackluster record at combating the foreclosure epidemic. He is also blamed for not doing enough on the loan modification front with the dismal HAMP and HARP programs. Mitt Romney, meanwhile, might like to steer clear of the topic because a hard stance on housing could alienate voters whom he needs to win. I’m not here to debate one particular side or candidate, but rather to simply pose the question of why no talk on real estate?

Obama Falls Short of Expectations?

“Obama’s major housing initiatives have fallen short of expectations, and so Obama doesn’t have big victories to point to,” said Jed Kolko, chief economist for listing service Trulia. “The housing market is still struggling in many parts of the country, so this is not a problem that’s been solved.” The administration’s flagship relief program, the Home Affordable Modification Program (HAMP), has helped 1 million homeowners obtain lower interest rates, principal reductions, more time to pay their mortgages or any combination of the three. But that pales in comparison to the 3 to 4 million homeowners whom the program was supposed to help. Meanwhile, the Home Affordable Refinance Program (HARP), designed to help 5 million homeowners refinance their mortgages into lower interest rates, has benefited only about 1.5 million homeowners.

Romney Gun-Shy On Housing?

Romney’s housing platform includes the potential elimination of Fannie Mae and Freddie Mac, and that prospect may be just too scary and radical to everyday voters and homeowners who have relied on the government giants to stabilized the formerly free-falling real estate market. “To stake out what you think Fannie and Freddie’s future is is to alienate somebody,” commented Mark Calabria, director of financial regulation studies at the Cato Institute. “Realtors and home builders tend to be politically active — and Republicans,” noted Mr. Calabria. Indeed, Romney’s free-market stance on housing, if articulated bluntly, could unsettle many distressed homeowners as well. He has said that he believes that the housing market should naturally “hit bottom,” and has harshly criticized Obama’s relief programs.

Let’s Get The Housing Dialogue Going!

Over the past several months, I’ve enjoyed healthy (and even civil) political discussion on the issues on my Facebook feed. (Please join in!). The real estate market and housing always comes up, whether it’s in the context of folks not able to refinance their underwater mortgages, the loss of their equity, or the impact of unemployment on the general real estate sector. Granted, the real estate market has made significant gains since the bottom fell out in 2008, but folks are still hurting out there and it’s really been the Fed and its low interest rates which have largely kept the market from imploding. So, we should be talking about all the issues. And that means federally assisted refinancing for underwater mortgages, Fed policy on interest rates, and the future of the GSE’s. Oh and by the way, where did all that foreclosure crisis settlement money go? I have yet to hear about anyone who has received any assistance from that fund.

Well, if Obama and Romney aren’t going to talk housing and real estate, we can do it here on this blog. Feel free to post your comments, diatribes or soapbox speeches in the comment section below. You can use the Facebook comments too. Keep the debate civil please!

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Coakley Expects Fed’s Compliance with New Loan Modification Law

Attorney General Martha Coakley is picking a very public fight with federal mortgage giants, Fannie Mae and Freddie Mac, in the wake of the new Massachusetts Foreclosure Prevention Act passed earlier in August. The new law requires that lenders first explore loan modifications before starting foreclosure proceedings.Fannie and Freddie control approximately 60% of all U.S. residential mortgages.

In a letter broadcast to the press yesterday, she demands that “Fannie Mae and Freddie Mac, like all creditors, to comply with these statutory obligations as they conduct business in Massachusetts. These loan modifications are critical to assisting distressed homeowners, avoiding unnecessary foreclosures, and restoring a healthy economy in our Commonwealth,” Coakley said. Stefanie Johnson, a spokeswoman for the Federal Housing Finance Agency, said, “We are reviewing the letter and will respond soon.”

The fact that AG Coakley had to write the letter begs the question. Will Fannie and Freddie comply with the new Massachusetts foreclosure law? Maybe not, if past performance is any indicator of future results.

The Federal Housing Finance Agent (FHFA), the federal regulator overseeing Fannie and Freddie, has been acting like some sort of federal rogue agency of late. Last month, the agency publicly rejected the new Obama principal reduction plan, to the chagrin of Treasury Secretary Tim Geither. And in June, it came up with a method to skirt the new tough foreclosure law passed in Hawaii. It seems that the sole concern of FHFA is to get foreclosures completed and REO properties sold off as quickly as humanly possible, homeowners be damned.

If Fannie and Freddie blow off Coakley, this will seriously dilute the new Foreclosure Act. We will monitor the situation as always.

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Richard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney with an expertise in foreclosure related issues. You can contact him at info@vetsteinlawgroup.com.

 

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Two Year Effort To Overhaul Foreclosure Practices

On August 3, 2012, Massachusetts Governor Deval Patrick signed into law what’s been called the new Foreclosure Prevention Law. The text of the law can be found at House Bill No. 4323. The new law makes significant changes to existing foreclosure practices, and also attempts to clean up the recent turmoil surrounding defective foreclosure titles after the U.S. Bank v. Ibanez and Eaton v. FNMA rulings, an issue for which I’ve been advocating for years. It goes into effect on Nov. 1, 2012. A quick summary is as follows with details below:

  • New requirement that mortgage assignments be recorded
  • New mandatory requirement to offer loan modifications and mediation to qualified borrowers
  • New Eaton foreclosure affidavit confirming ownership of note/mortgage loan
  • Protection for third party buyers of foreclosed properties

Mortgage Assignments Must be Recorded

Going forward, a foreclosure may not proceed unless the entire chain of mortgage assignments from the original mortgagee to the foreclosing entity is recorded. This is a statutory codification of the recommendation of the SJC in U.S. Bank v. Ibanez case, and should provide some well-needed clarity for titles. Under the new law, no foreclosure notice will be valid unless “(i) at the time such notice is mailed, an assignment, or chain of assignments, evidencing the assignment of the mortgage to the foreclosing mortgagee has been duly recorded in the registry of deeds . . . and (ii) the recording information for all recorded assignments is referenced in the notice of sale required in this section.”

Unfortunately, the new law does not address defective foreclosure titles created before the Ibanez decision, as we were hoping. Accordingly, folks who are still waiting for legislative help to cure their defective foreclosure titles may be left without a remedy.

Mandatory Loan Modification Efforts

In a provision pushed hard by housing advocates, the new law will require mortgage lenders to attempt to offer loan modifications instead of foreclosing. The qualification standards are rather complex and beyond the scope of this post. In sum, if the net present value of a modified mortgage exceeds the anticipated net recovery at foreclosure, the lender has to offer the borrower a modification.

Importantly, the new law provides immunity in favor of bona fide purchasers of foreclosed properties from claims by disgruntled borrowers that the lenders did not follow the loan modification rules.

New Eaton Affidavit

The new law also incorporates the SJC’s recent holding in Eaton v. Fannie Mae, where the SJC held that a foreclosing lender must be both the assignee of the mortgage and be either note holder or acting on behalf of the note holder. New Section 35C prohibits a creditor from publishing a foreclosure notice if the creditor “knows or should know that the mortgagee is neither the holder of the mortgage note nor the authorized agent of the note holder.” It also requires the creditor to record an affidavit swearing to its compliance with the new section. The affidavit will shield third-party buyers from title claims, but will not shield creditors from potential liability to the borrowers. Eaton suggested the use of affidavits, but now the statute requires it. Creditors cannot pass the cost of any corrective documentation upon borrowers or third parties.

Impact?

As with any major reform legislation, there will be a learning curve for foreclosing lenders and foreclosure attorneys to get documentation and systems in place to comply with the new requirements. We could potentially see additional litigation coming out of this new law brought by borrowers who feel they were not given a “fair shake” at a loan modification. From a real estate title perspective, the new law is a step in the right direction, but I was very disappointed that nothing was done to help folks who are still saddled with Ibanez title defects. This was the perfect opportunity to address that issue, and I’m afraid it won’t come up again.

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Richard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney with an expertise in foreclosure related issues. You can contact him at info@vetsteinlawgroup.com.

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Score One For Lenders and Mortgage Servicers In Long-Awaited Eaton v. Fannie Mae Case

The Massachusetts real estate community has been waiting 8 long months for a decision from the Massachusetts Supreme Judicial Court (SJC) in the much anticipated Eaton v. Federal National Mortgage Association (link) case. The decision came down June 22, and now that the dust has settled, I don’t think there is any question that lenders and the title community have been given a judicial Maalox. ((Some smart foreclosure defense folks disagree with me, but I’m confident in my analysis.))

The SJC held that lenders must establish they hold both the promissory note (indebtedness) and mortgage (a major problem for securitized or MERS mortgages where the note and mortgage are split between securitized trust and servicer). However, responding to pleas from the real estate bar, the Court declined to apply the new rule retroactively, thereby averting the Apocalyptic scenario where thousands of foreclosure titles would have been called into question. This would have been disastrous for folks who purchased distressed and foreclosed properties.

Even better, the Court outlined new procedures, including filing a statutory affidavit, to ensure that foreclosures are fair to borrowers going forward. The ruling gave lenders and the foreclosure industry a huge pass for past errors, and will clear the way for foreclosures to accelerate and run their course in Massachusetts and possibly other states if this case is followed. Let’s break it down.

Background: Borrower Used “Produce the Note” Defense To Stop Foreclosure

As with many sub-prime mortgage borrowers, Henrietta Eaton had defaulted on her mortgage to Green Tree Mortgage. This was a MERS mortgage (Mortgage Electronic Registration System) originally granted to BankUnited then assigned to Green Tree.

Ms. Eaton was able to obtain an injunction from the lower Superior Court halting her eviction on the grounds that Green Tree did not possess the promissory note underlying the mortgage when the foreclosure occurred. This is the “produce the note” defense and has been gaining steam across the country. Superior Court Judge Francis McIntyre bought into that argument, and stopped the foreclosure. Given the importance of the case, the Supreme Judicial Court granted direct appellate review.

FHFA Files Amicus Brief and SJC Asks For More Guidance

This case garnered substantial local and national attention from the lending, title and real estate community on one side, and housing advocates on the other side. Notably, the Obama Administration’s Federal Housing Finance Agency filed a rare friend-of-the-court brief in a state court proceeding, arguing for a ruling in favor of lenders. Spirited oral arguments were held back in October which I briefed here.

In January, when a decision was expected, the Court surprisingly asked the parties for additional briefing on whether a decision requiring unity of the promissory note and mortgage would cloud real estate titles. This was the apocalyptic scenario that the real estate bar and title community urged the Court to avoid. (The Court listened, as I’ll explained below).

 The Opinion: Unity Endorsed, A Foreclosing Lender Must “Hold” Both Note & Mortgage

The first issue considered by the court was the fundamental question of “unity” urged by the Eaton side: whether a foreclosing mortgagee must hold both the promissory note (underlying indebtedness) and the mortgage in order to foreclose. After reviewing Massachusetts common law going back to the 1800’s, the Court answered yes there must be unity, reasoning that a “naked” mortgagee (a holder of a mortgage without any rights to the underlying indebtedness) cannot foreclose because, essentially, there is nothing to foreclose. If the Court stopped there, lenders and MERS would have been in big trouble. But, as outlined below, the Court significantly limited the effect of this decision.

Disaster Averted: Ruling Given Prospective Effect

Swayed by the arguments from the Massachusetts Real Estate Bar Association that retroactive application of a new rule would wreak havoc with existing real estate titles in Massachusetts, the SJC took the rare step of applying its ruling prospectively only. As Professor Adam Levitin (who drafted an amicus brief) noted on his blog, this “means that past foreclosures cannot be reopened because of this case, so the financial services industry just dodged billions in liability for wrongful foreclosures and evictions, and the title insurance industry did as well.” So going forward, lenders must establish unity of both note and mortgage, but past foreclosures are immune from challenge.

MERS System Given Blessing?

Ms. Eaton’s mortgage was a MERS (Mortgage Electronic Registration System) mortgage. MERS is a private system created by the largest national lenders and title companies to track assignments and ownership of loans as they are bought and sold in the secondary mortgage market. MERS has come under fire from distressed homeowners and registrars of deeds (especially our own Essex County Registrar John O’Brien) for robo-signing and bungled foreclosures. Although the Court did not specifically rule on the validity of the MERS system, the decision cited several new MERS policies and said that lenders who follow these new policies will likely be in compliance with the court’s holding. So MERS will continue doing business in Massachusetts for the foreseeable future.

Make Way For the “Eaton” Affidavit

The most important aspects of the Eaton ruling, in my opinion, are what came after the two “headline” rulings above. First, the Court made the explicit point that lenders do not have to physically possess both note and mortgage to be deemed a “holder” able to foreclose. This is huge given the pandemic paperwork deficiencies common with securitized mortgage trusts.

Second, the court also stated in a very important footnote that it will “permit one who, although not the note holder himself, acts as the authorized agent of the note holder, to stand “in the shoes” of the “mortgagee” as the term is used in these [foreclosure statute] provisions.” This footnote opens the door wide open for servicers and MERS to establish that they are authorized to foreclose, and acting on behalf of, the securitized trusts who hold legal title to the mortgages.

Lastly, the court approved the use of a statutory affidavit filed at the county registry of deeds in which the note holder or mortgage servicer confirms that it either holds the promissory note or is acting on behalf of the note-holder. We will surely be seeing these “Eaton” affidavits being prepared and recorded in connection with foreclosures.

For guidance as to how title insurance companies are going to insure foreclosure titles after Eaton, please see this helpful bulletin by Chicago and Commonwealth Land Title Companies. 

Potential Bad News For U.S. Bank v. Ibanez Defect Victims

The Court’s ruling may be bad news for those property owners stuck with defective title issue stemming from a botched foreclosure under the seminal U.S. Bank v. Ibanez case. Last year, the Court, in Bevilacqua v. Rodriguez, suggested that owners could attempt to put their chains of title back together and conduct new foreclosure sales in their name to clear their titles. The legal reasoning behind this remedy is rather complex, but essentially it says that the current owner would be granted the right to foreclosure by virtue of holding an “equitable assignment” of the mortgage foreclosed upon. The Eaton v. Fannie Mae ruling, however, may have killed that remedy because the current owner now needs to hold both the promissory note and the mortgage. Ibanez titles remain toxic, and I am hearing that title insurers who are on the hook for them are not even willing to try to fix them until a legislative fix.

What’s Next?

As a real estate and title attorney, what I appreciate about this decision is that the SJC took into account the disastrous effect a retroactive rule would have on past titles (now held by innocent third party purchasers) and came up with new ground rules for foreclosing lenders to follow going forward. It’s like the court said “what’s done is done, now let’s move forward doing it the ‘right’ way.” We will definitely see foreclosures that were in a holding pattern resume again. On the closing side, when I am reviewing a title with a past foreclosure, my client and I can sleep better knowing that the risk of a defective title just got a reduced substantially. This is good for the housing market and it makes more properties marketable.

However, this is not the end of foreclosure litigation in Massachusetts. As with most landmark cases pronouncing a new rule of law, subsequent litigation to clarify what the court meant is likely to follow in this case. Some remaining unanswered questions include:

  • Is the produce the note defense truly dead for previously completed foreclosures–even where promissory notes are lost and not produced?
  • If challenged, what further documentation, if any, will suffice to establish agency for MERS and mortgage servicers of mortgages held in securitized trusts.
  • Will borrowers be able to challenge new “Eaton” affidavits which appear to be fraudulent or robo-signed?

All things considered, I will agree with Prof. Levitin who opined: “In the immediate term, I’d score the case as a major victory for the financial services industry, which avoided liability for its failure to comply with state law foreclosure requirements. Going forward, however, things are more complicated.”

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Richard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney. He can be reached by email at info@vetsteinlawgroup.com or 508-620-5352.

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Huge Sigh of Relief For Mortgage and Foreclosure Industry

The much awaited opinion by the SJC in Eaton v. Fannie Mae has just been released, and it is a huge Maalox for the banking and real estate community. Case embedded below. I have written a more detailed analysis here but here are the highlights:

  • Although the Court adopted some of the Eaton side’s arguments, I believe that lenders and MERS ultimately came out as the winners, as initial reports indicate. The Court basically gave lenders a pass on prior defective foreclosures and created new “rules of the road” for foreclosures going forward. There will definitely be more litigation after this case to sort out what foreclosing lenders and servicers need to prove in order to foreclose.
  • Agreeing with the Eaton/homeowner side, the Court ruled that going forward, lenders will have establish that they “hold” both the mortgage and promissory note, in order to foreclose. However, the court endorsed several methods in which lenders will be able to satisfy this requirement, thereby potentially creating several exceptions which will swallow the general rule.
  • Agreeing with lenders and Fannie Mae, the Court took the rare step of declining to apply the the key holding retroactively. The ruling will apply prospectively and will have no impact on previously completed or in process foreclosures. Those foreclosures will likely be immune from challenge along the lines Eaton asserted. This saved the lender and title insurance industry millions of dollars in claims.
  • Critically for the lending and title community, the Court ruled that lenders do not need to physically hold both note and mortgage at time of foreclosure, striking a huge blow to the “produce the note” defense:  The court acknowledged that the Massachusetts foreclosure statute, enacted well before the proliferation of securitization and MERS, was unclear in the modern era of securitizing mortgages.
  • The court essentially blesses the current MERS and current servicer system where mortgage servicers can show that they have legal authority to act on behalf of mortgage holder/lender to foreclose. The SJC overturned the injunction against the lender and the case was remanded below where the servicer, Green Tree, will have the opportunity to establish they have the legal authority and agency to foreclose on behalf of the mortgage holder.
  • We will see new attorney and custodian of records affidavits being filed and used to establish the chain of ownership the court said would comply with the foreclosure laws.
  • More Coverage:  Banker & Tradesman, BusinessWeek, Wall St. Journal, Credit Slips (Prof. Adam Levitin)

Eaton v. Fannie Mae SJC Ruling

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Real Estate Crash Has Resulted In Many More Forms and Disclosures

These days buyers are leaving closing rooms with not only their keys but a mild case of carpal tunnel syndrome! The reason for sore forearms and wrists is the voluminous stack of closing documents which are now required to be signed and notarized at every Massachusetts real estate purchase or refinance closing.

One of my opening “break the ice” lines at closings is to suggest that the buyers start massaging their writing hands. Then I show them the 2 inch stack of documents they must review and sign, and they usually say, “Are you serious? We have to sign all that?” Yep, I reply. You can thank Fannie Mae and the real estate collapse for that! All the new rules and regulations passed in the last 5 years have resulted in, you guessed it, more forms. Do you think the Feds and state ever eliminate old or out-dated forms? Nope.

Let me quickly go over some of the more important — and less important — documents signed at a typical Massachusetts real estate closing.

The Closing Documents

  • HUD-1 Settlement Statement. This is arguably the most important form signed at closing. It breaks down all the closing costs, lender fees, taxes, insurance, escrows and more. We did a full post on the HUD-1 and all the closing costs you can expect to pay here. Under the newer RESPA rules, most closing costs must be within 10% tolerance of the Good Faith Estimate provided by the lender (which you will also re-sign at closing).
  • Promissory Note & Mortgage. These two documents form what I like to call the “mortgage contract.” The promissory note is the lending contract between borrower and lender and sets the interest rate and payment terms of the loan. It is not recorded at the registry of deeds. The Mortgage or Security Instrument is a long (20+ page) document and provides the legal collateral (your house) securing the loan from the lender. The Mortgage gets recorded in the county registry of deeds and is available to public view. Read a full explanation of the Note and Mortgage in this post.
  • Truth in Lending Disclosure (TIL). The Truth in Lending should really be called “Confusion In Lending,” as the federal government has come up with a confusing way to “explain” how your interest rate works. This is a complex form and we’ve written about it extensively in this post. Your closing lawyer will fully explain the TIL form to you at closing.
  • Loan Underwriting Documents. With increased audit risk on loan files, lenders today are requiring that borrowers sign “fresh” copies of almost all the documents they signed when they originally applied for the loan. This includes the loan application, IRS forms W-9 and 4506’s.
  • Fraud Prevention Documents. Again, with the massive mortgage fraud of the last decade, lenders are requiring many more forms to prevent fraud, forgeries, and straw-buyers. The closing attorney will also make a copy of borrowers’ driver’s licenses and other photo i.d. and submit the borrower’s names through the Patriot Act database. They include Occupancy Affidavit (confirming that borrowers will not rent out the mortgaged property), and the Signature Affidavit (confirming buyers are who they say they are or previously used a maiden name or nickname).
  • Escrow Documents. Unless lenders waive the requirement, borrowers must fund an escrow account at closing representing several months of real estate taxes and homeowner’s insurance. This provides a cushion in case borrowers default and the taxes and insurance are not paid.
  • Title Documents. For purchase transactions, Massachusetts requires that the closing attorney certify that a 50 year title examination has been performed. Buyers will counter-sign this certification of title, as well as several title insurance affidavits and documents which the seller is required to sign, to ensure that all known title problems have been disclosed and discovered. Of course, we always recommend that buyers obtain their own owner’s title insurance which will provide coverage for unknown title defects such as forgeries, boundary line issues, missing mortgage discharges, etc.
  • Property Safety Disclosures. In Massachusetts, buyers and sellers will sign a smoke/carbon monoxide detector compliance agreement, lead paint disclosure, and UFFI (urea formaldehyde foam insulation) agreement. These ensure that the property has received proper certifications and will absolve the lender from liability for these safety issues.
  • Servicing, EOCA and Affiliated Business Disclosures. Chances are that your lender will assign the servicing rights to your mortgage to a larger servicer, like JP Morgan Chase or CitiMortgage. You will sign forms acknowledging this. You will be notified of the new mortgage holder usually within 30-60 days after closing. In the meantime, the closing attorney will give you a “first payment letter” instructing you where to send your first payment if you don’t hear from the new servicer. You will also sign forms under the federal and state discrimination in lenders laws and forms disclosing who the lender uses for closing services.

Well, those are most of the documents that buyers will sign at the closing. Sellers have a slew of their own documents to be signed at closing, and I’ll cover that in a future post. As I said, at your closing, massage your signature hand, grab a comfy pen, and sign your life away!

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Richard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney. He can be reached by email at info@vetsteinlawgroup.com or 508-620-5352.

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Borrowers, Shut Up, Listen, And Do What Your Lender Asks–Even If It’s The Third Time They’ve Asked For The Same Documentation!

When I was a kid, my dad would often answer my questions with “because I said so,” and it would drive me crazy! Now it’s prudent advice to borrowers says Mark Greene at Forbes.com. Mr. Greene recently wrote one of the best articles I’ve seen in a long time about the current state of mortgage underwriting. It’s called The Perfect Loan File (click for link). It’s a must read for consumers and real estate professionals alike.

The point Mr. Greene makes so well is that lenders are going absolutely nutty over borrower financial documentation to create a “put-back” immune loan file. (A put-back is when Fannie Mae or Freddie Mac make lenders buy back bad loans). Mr. Greene tells to borrowers to give their lender everything they ask for even if they want to stick needles in their eyeballs, and don’t talk back. I will just highlight some gems from the article:

When I was a kid, my father occasionally issued directives that I naturally thought were superfluous, and when asked why I needed to do whatever it was he wanted me to do, his answer was often: “Because I said so.” This never seemed to address my query but always left me without a retort, and I would usually comply. This is exactly what consumers should do during the mortgage approval process. When your lender requests what seems to be over-documentation and you wonder why you need it, accept the simple edict – “because I said so.” You will find the mortgage approval process much less frustrating.

Every nook and cranny of your financial life has to be corroborated, double- and triple-checked, and reviewed again before closing. This way, if the originating lender has created a loan file that is exactly consistent with published underwriting guidelines and has documented while adhering to those guidelines, the chances are that your loan will not be subject to repurchase.

It all comes down to your proof. If the lender asks for a specific document, give them exactly what they are asking for, not what “should be OK,” – because it won’t be.  This is where the approval process tends to go off the rails, when the lender asks for specific documentation and the borrower supplies something else. Here, too, is where both sides get frustrated. So if the lender asks for a bank statement and there are 5 pages for that bank statement, send them all 5 pages, and not just the summary. If you send them the summary page and they ask again, don’t complain that the lender keeps asking for the same thing when you never sent it in the first place. This may sound elementary, but the vast majority of mortgage approval process woes stem from scenarios just like this.

So when your loan officer or underwriter responds to another one of your questions with “because I said so,” do him or her a favor and do it.  Your loan approval will go a lot smoother and quickly if you do.

Borrowers, agents, and loan officers, feel free to share your thoughts and advice on this article!

~Rich

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Final product will be a combination of both the final Truth in Lending (TIL) form and the HUD-1 Settlement Statement — a dramatic change from the existing forms.

For the second time in as many years, the federal government is substantially overhauling two of the most important disclosures given to mortgage borrowers, the Truth in Lending Disclosure and the HUD-1 Settlement Statement. The revisions are mandated by the Dodd-Frank Act. The new Consumer Financial Protection Bureau is in charge of re-designing and testing the new forms.

Most real estate industry professionals are unaware that these new changes are on the horizon. The new forms are expected to be implemented in 2013 after rule-making and industry comments are completed.

If you want to track the CFPB’s activity on these forms, I highly recommend the CFPB Monitor. The CFPB’s “Know Before You Owe” website also has updates and is pretty good for a government site.

Here is the new prototype HUD-1 Settlement Statement:

20120220 Cfpb Basswood Settlement Disclosure

What do you think about the new forms? At first, glance it is easier to read, understand and explain to borrowers. We’ll keep track of this important issue.

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by Brian Cavanaugh, Senior Mortgage Banker, RMS Mortgage and SmarterBorrowing.com

Overall, despite being a fairly light week in terms of economic releases and relate events, it is still relatively crucial for the mortgage market. We saw the yield on the benchmark 10-year Treasury Note spike higher Friday as a result of the stronger than expected employment data. Stocks rallied as a result of that data, extending the 2012 stock rally that has pushed the Dow up over 5% and the Nasdaq up 11% year-to-date. Both indexes are at their highest levels since May 2008 and December 2000 respectively. This has me believing we are due to see a pullback in stocks fairly soon. If/when this happens, we should see funds shift back into bonds for safety, leading to lower mortgage rates. Keep in mind that this is more or less just speculation, but I am expecting to move to a less conservative approach regarding short-term mortgage rates in the near future.

If I were considering financing/refinancing a home, I would….

LOCK if my closing was taking place within 7 days…

LOCK if my closing was taking place between 8 and 20 days…

FLOAT if my closing was taking place between 21 and 60 days…

FLOAT if my closing was taking place over 60 days from now…

This is only my opinion of what I would do if I were financing a home. It is only an opinion and cannot be guaranteed

There are only two pieces of monthly economic data scheduled for release this week. Neither of them is considered to be highly important, so we don’t have much to pin our hopes on or to be concerned with this week. There are two Treasury auctions on the calendar that may influence mortgage rates the middle part of the week and the second part of Fed Chairman Bernanke’s testimony to Congress, but no important economic data.

Nothing of concern is due tomorrow, so look for the stock markets and news from Europe- particularly Greece, to drive the markets tomorrow. Fed Chairman Bernanke will speak to the Senate Budget Committee at 10:00 AM Tuesday. I don’t expect him to say anything different than he said last week to the House Budget Committee, but the Q&A portion of his appearance could lead to something new. It is worth watching, but it will probably not lead to a noticeable change in the markets or mortgage rates.

Treasury Auctions Ahead

The two important Treasury auctions come Wednesday and Thursday when 10-year Notes and 30-year Bonds are sold. The 10-year sale is the more important one as it will give us a better indication of demand of mortgage-related securities. If the sales are met with a strong demand from investors, we should see the bond market move higher during afternoon trading the days of the auctions. But a lackluster interest from buyers, particularly international investors, would indicate a waning appetite for longer-term U.S. securities and lead to broader bond selling. The selling in bonds would likely result in upward afternoon revisions to mortgage rates.

Unemployment Numbers

With little monthly and no quarterly economic reports being posted, Thursday’s weekly release of unemployment figures may end up moving the markets and mortgage rates more than it traditionally does. The Labor Department is expected to announce that 370,000 new claims for unemployment benefits were filed last week, rising slightly from the previous week’s total. The higher the number of new claims for benefits, the better the news for the bond market and mortgage pricing as it would indicate weakness in the employment sector.

The first monthly report comes early Friday morning when December’s Goods and Services Trade Balance data will be posted. This report measures the U.S. trade deficit and can affect the value of the U.S. dollar versus other currencies, but it usually does not cause enough movement in bond prices to affect mortgage rates. It is expected to show a $48.2 billion trade deficit.

Consumer Sentiment

February’s preliminary reading to the University of Michigan’s Index of Consumer Sentiment will be released late Friday morning. This index measures consumer willingness to spend and usually has a moderate impact on the financial markets. If it shows an increase in consumer confidence, the stock markets may move higher and bond prices could fall. It is currently expected to come in at 74.0, down from January’s final reading of 75.0. That would indicate consumers were less optimistic about their own financial situations than last month and are less likely to make large purchases in the near future. Since consumer spending makes up over two-thirds of the U.S. economy, this would be considered good news for bonds and mortgage pricing.

  • Are you a possible Massachusetts First Time Homebuyer?
  • Do you have a Real Estate client inquiring about current Mortgage Rates?
  • Do you have any Refinancing questions?
  • Should you be thinking about Refinancing out of your ARM (Adjustable Rate Mortgage)?
  • Have your Real Estate clients been Pre Approved?

bc@smarterborrowing.com  617.771.5021

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Update (6/22/12): SJC Issues Final Opinion (click to read)

For interested legal observers of the foreclosure crisis, it really doesn’t get any better than this.

Supplemental and amicus curie legal briefs have been filed in much awaited case of Eaton v. Federal National Mortgage Ass’n, and they make for great reading. The briefs were filed in response to the SJC’s concern, mid-appeal, over whether an adverse ruling against foreclosing lenders will have a disastrous impact on foreclosure titles and, if so, whether its ruling should be applied prospectively rather than retroactively. Click here for our past posts on the case.

Notably, the Federal Housing Finance Association, the congressional conservator of the bailed out Fannie Mae and Freddie Mac, filed a rare amicus brief and laid a shot across the SJC’s bow. It suggested that the congressional bailout law would trump an adverse decision by the SJC to the extent that it interfered with Fannie and Freddie’s mission to secure the health of U.S. secondary mortgage market. This is the first time that I’m aware of the federal agency intervening in a particular foreclosure case.

Not surprisingly, Fannie Mae, FHFA, and REBA (Real Estate Bar Ass’n) and the other industry groups argue against a retroactive application of an adverse ruling, claiming that it would have a disastrous effect on homeowners with foreclosures in their titles.

Eaton (which cited this Blog), the legal services groups and foreclosure defense groups say that the sky will not fall down if the unity rule is applied retroactively; indeed, foreclosures in Mass. have increased post-Ibanez. They also argue that the law is the law, and it’s the lenders fault for creating a securitization scheme in violation of the law, so they should have to deal with the repercussions.

I have also attached REBA’s and Attorney Glenn Russell’s (lead counsel in U.S. Bank v. Ibanez) submissions on the recent Land Court ruling in Wells Fargo v. McKenna where the Land Court Judge Gordon Piper held that Massachusetts does not require the unity rule.

A final decision is expected in February or March.

Click here for the particular brief:

Real Estate Bar Ass’n (REBA) Brief      REBA Letter re. McKenna case

Land Title Ass’n Brief

WilmerHale Legal Services Brief

Appellee Henrietta Eaton Brief (citing this Blog)

Fannie Mae Brief

Federal Housing Finance Ass’n Brief

Ablitt Schofield PC Foreclosure Law Firm Brief

McDonnell Property Analytics Brief

Professor Adam Levitin Brief

National Foreclosure Defense Group Brief

Attorney Glenn Russell Foreclosure Defense Brief (Part 1 and Part 2)

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Richard D. Vetstein, Esq. is an experienced Massachusetts real estate litigator and attorney. Please contact him if you are dealing with a Massachusetts foreclosure title dispute.

 

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