Foreclosure

In yet another move evidencing the Supreme Judicial Court’s ongoing concern over the impact of the foreclosure crisis in Massachusetts, the SJC is soliciting friend-of-the-court briefs in the next important foreclosure case, HSBC Bank v. Jodi Matt.

As we wrote about in our prior post here, the SJC is considering whether a lender holding a securitized mortgage has standing to even begin a foreclosure action in the Land Court under the Servicemembers Civil Relief Act–one of the first steps in the Massachusetts foreclosure process. The SJC will ostensibly decide whether lenders holding mortgages held in a securitized pool, with questions whether they in fact were validly assigned those mortgages, can start foreclosures in Massachusetts. The lower court Land Court opinion can be read here.

The text of the Court’s announcement is as follows:

February 17, 2012 – ANNOUNCEMENT: The Justices are soliciting amicus briefs. Whether the Land Court judge correctly concluded that a bank had standing to commence an action to determine whether the defendant (alleged to be in breach of her mortgage obligations) was entitled to the benefits of the Servicemembers Civil Relief Act, on the ground that the bank had a contractual right to become the holder of the note and mortgage. The case is tentatively scheduled for argument in May.

For more information about how to submit a friend of the court brief, go to the SJC Website.

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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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Updated (2.9.12 6:30pm)

In the largest national settlement since the tobacco litigation, the Boston Globe is reporting that Massachusetts Attorney General Martha Coakley is expected today to sign on to a settlement brokered by attorneys general nationwide with five major US lenders over the banks’ role in the country’s foreclosure crisis. As we wrote about here, in December of last year AG Coakley pulled out of the settlement and brought a historical lawsuit against the big lenders over foreclosure abuses.

As reported in the Globe, Coakley has been been negotiating for days with lenders over the pact, which has been months in the making. Massachusetts is one of only a few states that have yet to agree to the settlement, which reportedly could total between $25 billion and $30 billion. The money is being promised by Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., Citibank, and Ally Financial Inc.

According to Coakley’s office, Massachusetts estimated total share of the settlement is nearly $318 Million:

  • Massachusetts borrowers will receive an estimated $224 Million in benefits from loan term modifications and other direct relief.
  • Massachusetts borrowers who lost their home to foreclosure from January 1, 2008 through December 31, 2011 and suffered servicing abuse would qualify for $14.6 Million in cash payments to borrowers.
  • The value of refinanced loans to Massachusetts underwater borrowers would be an estimated $32.7 Million.

Banker and Tradesman is reporting that homeowners still living in underwater properties may get up to $20,000 each for principal reductions. That may not be nearly enough for many victims of foreclosure abuses. It’s unclear how much money will be available for much needed mortgage principal reduction and loan modifications.

However, the state was told yesterday it could sign on to the pact without giving up its right to litigate other issues related to the five lenders and how they conducted foreclosures, according to the Globe. Under terms of the tentative agreement, Coakley apparently will still be able to pursue claims against MERS and lenders for foreclosures in Massachusetts without having the proper paperwork.

For more information, here is the Attorney General’s Press Release.

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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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The Offer to Purchase Has Become Much More Important

With a glut of distressed property still on the market and lenders realizing foreclosures aren’t very cost-effective, analysts are predicting a healthy spike in short sales for 2012. Short sales are quite unique in terms of deal dynamics, and should be handled differently than the typical transaction.

Massachusetts real estate attorneys and Realtors, however, are set in their ways when it comes to real estate contracts. For decades, we’ve been using the standard form Offer to Purchase and Purchase and Sale Agreement from the Greater Boston Real Estate Board or some variation thereof. We have also developed a predictable process in which the parties sign the Offer, conduct property inspections, sign the Purchase and Sale Agreement, obtain financing, order title, and get to closing.

With the recent proliferation of short sales, we have had to … yes, that dreaded word, CHANGE, the way we do things. Some agents and attorneys still do things the “old way” for short sale transactions, but they are doing themselves and their clients a disservice by doing so.

In this post, I will outline —  and explain — the “newer and better” way of handling the legal contracts in a Massachusetts short sale transaction.

The Offer to Purchase: Now The Operative Contract Document

We are seeing a shift to making the offer the operative contract in a Massachusetts short sale transaction. And for good reason. A short sale, by definition, is subject to a critical contingency: obtaining short sale approval from the seller’s lender(s). No short sale approval, no deal. Experienced short sale attorneys and real estate agents (and their clients) don’t want to spend the time and incur the expense of drafting a comprehensive (and contingent) purchase and sale contract when there is no guaranty of getting short sale approval. Furthermore, short sale lenders will accept a signed offer from the buyer during the approval process.

When we were first doing short sales, there were several instances where we drafted up purchase and sale agreements and then the short sale approval fell through. We had to charge the client for the drafting work or eat the cost. No one was happy.

The better way has proven to be the following:

  • Build all contingencies into the Offer to Purchase, namely, Short Sale Approval and Financing (we’ll talk about home inspections later)
  • Use a standard rider with short sale contingency language, with a deficiency waiver
  • Seller to use best efforts in obtaining short sale approval
  • Buyer agrees to be bound for set approval period  (60-90 days) in exchange for seller taking property off the market and not accepting back up offers. Negotiate deposit amount, usually 1% of purchase price. Buyer will obtain his financing and loan commitment during this approval period.
  • Negotiate extension rights, with corresponding protection for Buyer’s financing/rate lock
  • Upon short sale approval, purchase and sale agreement is signed within 5-7 days and full 5% deposit made
  • Closing within 30 days of short sale approval. (Most short sale approvals are only good for 30 days)
  • Waiver of home inspection or inspection prior to offer acceptance. Sellers should never agree to allow a home inspection contingency giving the Buyer a right to terminate. If the buyer doesn’t want to pay for an inspection up front, he is not a serious short sale buyer.

Change Is Hard…

I recognize that this is a departure from the “normal” way we document residential real estate contracts, but trust me, it’s a better way, and will actually decrease the time it will take to obtain short sale approval, because the parties are not waiting around for the P&S to be negotiated and signed and the buyer (and his attorney) don’t have to do unnecessary work.

Another important piece here is that the Buyer must get his financing in order, ready to go by the time short sale approval comes through. Lenders must recognize the unique short sale process and work with borrowers to get a firm loan commitment issued timely. Also, there’s no need for a lender to insist that the borrower have a signed purchase and sale agreement for underwriting approval. Under the process that I’ve outlined and under established Massachusetts case-law (McCarthy v. Tobin), the Offer is a legal and binding contract for the sale of the subject property and is sufficient for underwriting purposes. If it’s ok for the short sale lender, it should be ok for the buyer’s lender.

Help Is An Email Away

If you are a Realtor and need some guidance on the new Short Sale Offer, email me here and I will send you the form Rider. Also, if you need a referral for an excellent short sale negotiator, I highly recommend Andrew Coppo at Greater Boston Short Sales LLC.

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Richard Vetstein, Esq. is an experienced Massachusetts short sale attorney. For more information, please contact him at [email protected] or 508-620-5352.

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

The Supreme Judicial Court has just issued an unusual order in the very important Eaton v. Federal National Mortgage Association case, indicating its deep concern 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. The Court is seeking supplemental briefing and friend-of-the-court briefs on these decisive issues. A final decision is expected in February or March.

As outlined in my prior post on the case, the Court is considering the controversial question of whether a foreclosing lender must possess both the promissory note and the mortgage in order to foreclose. This is the essence of the “produce the note” defense. In a securitized mortgage pool, in which over 60% of all U.S. mortgage are part, the note and mortgage are separated between securitized trusts, mortgage services or Mortgage Electronic Registration System (MERS).

If the SJC rules against lenders, it could render the vast majority of securitized mortgage foreclosures defective, thereby creating mass chaos in the Massachusetts land recording and title community. If you thought U.S. Bank v. Ibanez was bad, Eaton v. FNMA could be the Nuclear Option.

The text of the order is as follows:

ORDER :Having heard oral argument and considered the written submissions of the parties and the various amici curiae, the court hereby invites supplemental briefing on the points described below. Supplemental briefs shall not exceed fifteen pages and shall be filed on or before January 23, 2012. 1. It has been claimed that requiring a unity of the mortgage and the underlying promissory note, in order for there to be a valid foreclosure, would cloud any title that has a foreclosure in the chain of title, regardless of how long ago the foreclosure occurred. The parties are invited to address whether they believe that such a requirement would have such an effect, and if so, what legal or practical measures exist that might limit the consequences of such a requirement. 2. It also has been suggested that, if the court were to hold that unity of the mortgage and note is required under existing law, the court’s holding should be applied prospectively only. The parties are invited to indicate on what authority they believe (or do not believe) the court could make such a holding prospective only.

Reading into this order, perhaps a majority of the justices are already leaning towards ruling against the lenders and want to limit the potentially disastrous effect it could have on existing titles and pending and future foreclosures. Interestingly, lenders in the U.S. Bank v. Ibanez case asked the SJC to apply its ruling prospectively, but it declined, thereby leaving hundreds to thousands of property owners and title insurers to clean up toxic foreclosure titles.

In my opinion, an adverse ruling against lenders in Eaton could be the apocalyptic scenario, rendering open to challenge any title with a previous foreclosure in it and inserting a fatal wedge into the current securitized mortgage system. Hopefully this time around the Court is more sensitive to how its ruling will impact the real estate community. It will be interesting to see how this case continues to develop. We will continue to monitor it.

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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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2011 Massachusetts Real Estate Law Year In Review

by Rich Vetstein on December 30, 2011

It’s time again for our annual review of highlights in Massachusetts Real Estate Law for the past year. It’s been a very busy year. From the foreclosure fallout, to Occupy Boston, to the new homestead law, there’s been lots to report on. We’ll start in order of importance this year.

SJC Decides Controversial U.S. Bank v. Ibanez Case

2011 started off with a bang with the Supreme Judicial Court’s decision in the widely publicized foreclosure case of U.S. Bank v. Ibanez. Our coverage of the case can be read here and here. The Court’s ruling was rather elementary: you need to own the mortgage before you can foreclose. But it’s become much more complicated with the proliferation of securitized mortgages bought and sold numerous times on Wall Street. The Court held that the common industry practice of assigning a mortgage “in blank” — meaning without specifying to whom the mortgage would be assigned until after the fact — does not constitute a proper assignment, at least in Massachusetts. The ruling left many innocent homeowners and title insurance companies scrambling to deal with titles rendered defective due to the ruling. The fallout continues to this day with no resolution by lawmakers.

AG Coakley Sues Major Banks For Foreclosure Fraud

2011 was certainly the Year of Foreclosure Fallout. Earlier in December, Attorney General Martha Coakley filed a huge consumer protection lawsuit over wrongful foreclosures against the top 5 U.S. lenders, Bank of America Corp., J.P. Morgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Ally Financial. Coakley also names Mortgage Electronic Registration System, or MERS, the electronic mortgage registration system which proliferated during the securitization boom of the last decade. The lawsuit said it sought “to hold multiple banks accountable for their rampant violations of Massachusetts law and associated unfair and deceptive conduct amidst the foreclosure crisis that has gripped Massachusetts and the nation since 2007.” The case remains pending.

Massachusetts Real Estate Attorneys Win Legal Victory Ensuring Their Place At Closing Table

In the closely watched case of Real Estate Bar Association (REBA) v. National Estate Information Services (NREIS), Massachusetts real estate attorneys won a huge legal victory reaffirming their long-standing role to oversee the closing process and conduct closings in Massachusetts. The case pitted Mass. attorneys vs. out of state notary companies who were trying to conduct notary real estate closings without trained attorneys. Siding with the consumer, the court required “not only the presence but the substantive participation of an attorney on behalf of the mortgage lender.”

New Homestead Law

This year saw the passing of the long-awaited comprehensive revision to our outdated Homestead Act. Here is a summary:

  • All Massachusetts homeowners receive an automatic homestead exemption of $125,000 for protection against certain creditor claims on their principal residence without having to do anything.
  • All Mass. residents are eligible for a $500,000 “declared homestead exemption” by filing a declaration of homestead at the registry of deeds. For married couples, both spouses will now have to sign the form–which is a change from prior practice.
  • Homesteads are now available on 2-4 family homes, and for homes in trust.
  • The existing “elderly and disabled” homestead will remain available at $500,000.
  • If you have a homestead as a single person, and get married, the homestead automatically protects your new spouse. Homesteads now pass on to the surviving spouse and children who live in the home.
  • You do not have to re-file a homestead after a refinance.

More Foreclosure Fallout With Bevilacqua and Eaton Cases

The U.S. Bank v. Ibanez case was the start, but certainly not the ending of the foreclosure fallout. The case of Bevilacqua v. Rodriguez considered property owners’ rights when they are saddled with defective titles stemming from improper foreclosures. The ruling with a mix of good and bad news. The bad news was that victims of defective foreclosure titles could not seek redress through the Land Court “quiet title” procedure. The good news was that the court left open whether owners could attempt to put their chains of title back together (like Humpty-Dumpty) and conduct new foreclosure sales to clear their titles.

Eaton v. Fannie Mae is the next foreclosure case awaiting final decision. As outlined in my prior post on the case, the Court is considering the very important question of whether a foreclosing lender must possess both the promissory note and the mortgage in order to foreclose. Using the “produce the note” defense which has been gaining steam across across the country, the borrower, Ms. Eaton, was able to obtain an injunction from the Superior Court halting her eviction by a foreclosing lender. The SJC heard arguments in the fall and is expected to issue a final ruling early in 2012. A ruling against lenders would be as big, or even bigger, than the Ibanez case.

Lastly, another case to watch for in 2012 is HSBC Bank v. Jodi Matt which will decide whether a lender holding a securitized mortgage has standing to even begin a foreclosure action in the Land Court under the Servicemembers Civil Relief Act–one of the first steps in the Massachusetts foreclosure process. The case is should be ready for oral argument in late winter, early spring 2012.

Judge Evicts Occupy Boston Protesters

What would 2011 be without a homage to the Occupy Movement! Citing property and trespass law from centuries ago, Massachusetts Superior Court Justice Frances A. McIntyre issuing a ruling clearing the way for the eviction of the Occupy Boston protest which has taken over Dewey Square in downtown Boston. Our coverage of the ruling is here.

Well, that’s it for a very busy year 2011 in Massachusetts real estate law! The year 2012 is expected to be just as busy, and of course, we’ll be on top of all the breaking news here on the Blog.

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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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Tireless Determination The Key To Massachusetts Short Sale Success

What Is A Short Sale?

A short sale is special type of real estate transaction between a homeowner, his mortgage holder(s), and a third party buyer where the property owner’s mortgage balance exceeds the market value of the property — known as being “under water.” In a short sale, the homeowner’s mortgage lender agrees to accept less than what is owed on the outstanding mortgage, thereby being left “short.” Ideally, the lender will agree to release out the entire debt including any deficiency between the sales price and mortgage balance. This is called a deficiency waiver and most skilled short sale negotiators will insist on this.

The entire process can be extremely time consuming and typically requires a lengthy negotiation with the lender by a skilled Massachusetts short sale attorney or lawyer. Banks and loan servicers now realize that short sales are a preferred method to dispose of distressed properties as they are far less expensive than foreclosure. Short sales are generally reserved for homeowners who do not qualify for a loan modification.

Do I Qualify For A Short Sale?

Homeowners can qualify for short sale approval by proving a recognized involuntary financial hardship. An involuntary financial hardship is some event, beyond the homeowner’s control, that caused the mortgage payments to become unaffordable, even if only temporarily. Acceptable hardships typically include:

  • Loss of a employment
  • Curtailment of income
  • Increased mortgage payment or liabilities
  • Loss of tenant(s)
  • Divorce or Separation
  • Catastrophic medical event
  • Job relocation
  • Military service; or
  • Death in the family

Most lenders distinguish between someone who lost their job and someone who voluntarily quit their job. Thus, unless you are able to prove that you were forced to leave your job, or asked by your employer to take a significant pay cut, a change of employment status may not automatically qualify you for a short sale. Furthermore, many homeowners have suffered multiple hardships, and it can be difficult deciding which hardship you should present to your lender when requesting a short sale. 

The Hardship Letter

As a part of the short sale application process, a skilled Massachusetts short sale lawyer will draft a hardship letter detailing why you are no longer able to make mortgage payments on your home and why you qualify for a short sale. The hardship letter can be one of the most important aspects of the short sale process and should be as detailed as possible, telling a compelling story about the applicant’s individual circumstances.

As part of the short sale hardship package, the short sale applicant will also submit the following:

  • Third party authorization (allowing your lawyer and/or realtor to communicate with your lender)
  • Financial worksheet (breakdown of monthly expenses and income)
  • Hardship letter (why you could pay your mortgage before and why you cannot now)
  • Recent pay-stubs
  • Recent Bank statements
  • Offer to Purchase
  • MLS listing showing the market history of your property
  • Last 2 Years Federal Tax Returns

How Long Does Short Sale Approval Take?

Depending on who your lender is and how many loans you have, short sale approve can take on average between 60 – 120 days, depending on the particular lender and complexity of the case. If the lender makes a counter offer on the purchase price or if there are multiple mortgages and liens against the property, the process will take longer. One of the keys is to submit requested documentation as fast as possible, and to stay on the lender, with frequent requests for status updates. That’s what separates a skilled short sale attorney from the run-of-the-mill negotiators who’ll let your file languish.

Credit and Legal Ramifications

A short sale is far less damaging to your credit and ability to secure a mortgage down the road than a foreclosure or bankruptcy, although it does have some impact.

Foreclosure Short Sale
Credit Score Same impact as a bankruptcy, 200 – 300 negative points on a credit score.  Score affected minimum of 3 years and will report for 7 – 10 years. Any late/missed mortgage payments will show on credit score. Once the short sale is completed, it will be reported as settled for less than full amount due (or similar verbiage).  Impact can be as little as 50 points, lasting apprx. 12 to 18 months.
Credit History On credit history for 7 to 10 years. Only the late payments will be reported on your credit. The short sale will appear the same as a charge off on a credit card and will be reported as settled for less than full amount due (or similar verbiage).
Future Home Purchase (Primary Residence) Ineligible for Fannie Mae backed mortgage for 5 years. Ineligible for Fannie Mae mortgage for 2 years. (Can use local bank or private lender).
New Mortgage
Must disclose foreclosure on 1003 loan application which may affect future rates after the 5-7 waiting period. There currently are not any questions related to a short sale on the loan application.
Deficiency Rights In Mass., lender retains right to collect any deficiency judgment after foreclosure. It is rare however. We are typically successful in negotiating full and complete deficiency waiver in a short sale approval.

 

Do I Need A Short Sale Attorney?

Only if you want to maximize your chances of getting short sale approved, obtain approval in the fastest manner possible, and protect your legal rights and future credit history at the same time! There are real estate agents and short sale firms advertising themselves as short sale negotiators — and some are really good — however, they are not licensed to provide legal or tax advice, and you must seek that advice elsewhere at additional cost. With an experienced Massachusetts short sale attorney, the applicant can “kill two birds with one stone,” by having the attorney take over the entire short sale approval process. While negotiating with your lender, the short sale attorney can simultaneously perform all necessary short sale legal work, including reviewing and drafting the offer to purchase, short sale approval letter and purchase and sale agreement with short sale addendum/riders. The cost is relatively the same across the board, and some of the fees may be paid by the lender, depending on who it is.

We highly recommend Andrew Coppo at Greater Boston Short Sales LLC, an experienced and successful short sale negotiator. Andrew writes all about Massachusetts short sales on his fantastic blog, The Closing Table.

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Richard Vetstein, Esq. is an experienced Massachusetts short sale attorney. For more information, please contact him at [email protected] or 508-620-5352.

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Updated (1/14/13): SJC Rules Against Lender, Holds That Ownership of Mortgage Must Be Established

Court May Decide Lenders’ Standing In All Foreclosure Cases Involving Securitized Mortgages

With all the hoopla yesterday surrounding Attorney General Martha Coakley’s monumental lawsuit against the big banks over foreclosure practices, the Supreme Judicial Court on November 29, 2011 quietly agreed to hear an appeal over whether a lender holding a securitized mortgage has standing to even begin a foreclosure action in the Land Court under the Servicemembers Civil Relief Act–one of the first steps in the Massachusetts foreclosure process.

The case is HSBC Bank v. Jodi Matt. The docket can be downloaded here.

The SJC will ostensibly decide whether lenders holding mortgages held in a securitized pool, with questions whether they in fact were validly assigned those mortgages, can start foreclosures in Massachusetts.

First Steps: The Servicemembers Civil Relief Act

The Servicemembers Civil Relief Act is one of the first steps in the foreclosure process. Lenders must file a complaint in the Land Court under the Act to ensure the borrower is not in active military service. Once the Land Court determines the borrower’s status in the military, then the lender can proceed to advertise and hold a public foreclosure auction. Historically, the Servicemembers action was rather perfunctory, but today borrowers have begun to challenge lenders’ right to start foreclosures in these initial Land Court proceedings.

Lower Court Opinion

In the lower court, Land Court Judge Keith Long (the judge in both the landmark U.S. Bank v. Ibanez and Bevilacqua cases), ruled that HSBC Bank had standing to start the foreclosure process under the Servicemembers Civil Relief Act, despite serious questions as to whether HSBC validly held the mortgage. The original mortgage was held by New Century, which was in bankruptcy when it purported to assign the mortgage to HSBC. There was no evidence the assignment was authorized by the bankruptcy trustee and whether the signatory had any office or authority to transfer New Century’s bankrupt assets to other parties. Despite these questions, Judge Long ruled that HSBC, through a securitized pooling and servicing agreement, had the contractual right to become the holder of the mortgage, thereby conferring enough standing to start the foreclosure process.

SJC Takes Appeal Sua Sponte

The SJC, in a rare move, took the appeal on its own initiative (sua sponte in legalese) from the Appeals Court. It has not yet released an argument schedule. We’ll be following the case here, so stay tuned.

Notably, foreclosure defense attorney Glenn Russell, Esq., the attorney who prevailed before the SJC in the Ibanez case, is representing the home owner in this case.

The Land Court’s ruling is embedded below.

HSBC Bank v. Jodi Matt

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Mass. AG Martha Coakley Credit: Reuters

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness…” — Charles Dickens, A Tale of Two Cities

AG Martha Coakley Files Major Civil Action Against Big Banks

First, the big news. Attorney General Martha Coakley has filed a huge consumer protection lawsuit over wrongful foreclosures against the top 5 U.S. lenders, Bank of America Corp., J.P. Morgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Ally Financial. Coakley also names Mortgage Electronic Registration System, or MERS, the electronic mortgage registration system which proliferated during the securitization boom of the last decade. The lawsuit said it sought “to hold multiple banks accountable for their rampant violations of Massachusetts law and associated unfair and deceptive conduct amidst the foreclosure crisis that has gripped Massachusetts and the nation since 2007.” Specifically, Coakley blames the banks for not complying with the U.S. Bank v. Ibanez decision in foreclosing mortgages without evidence of legal ownership of the underlying debt, improper statutory foreclosure notices and illegal “robo-signing.”

I’m sure Coakley will be able to extract a sizable settlement from the banks, but the question remains, what about the foreclosure mess and toxic titles left in its wake? I hope Coakley seriously considers setting up a toxic title monetary fund to assist homeowners who lack title insurance with clearing their titles due to bungled foreclosures in their chain of title.

Here is a link to the AG’s Complaint.

Culhane v. Aurora Loan Servicers: Federal Judge William Young Grapples With Legality Of MERS System

While AG Coakley was putting the finishing touches on her lawsuit, across the way at the Moakley Courthouse at Fan Pier, U.S. District Judge William G. Young and his cadre of law clerks were attempting to work their way through the legal maze which is the MERS (Mortgage Electronic Registration System) system. The case is Culhane v. Aurora Loan Services of Nebraska. We’ve written about MERS quite a bit here on the blog.

I can say with confidence that Judge Young is one of the smartest jurists on the federal bench and in the Commonwealth. I know this first-hand because I clerked for him in law school.

It took him 59 pages to sort though the myriad of legal issues implicated by the complex MERS system, and he had some very choice (and funny) remarks about the system:

“MERS is the Wikipedia of Land Registration Systems.” . . . “A MERS certifying officer is more akin to an Admiral in the Georgia navy or a Kentucky Colonel with benefits than he is to any genuine financial officer.”

Judge William G. Young

But ultimately, Judge Young concluded that MERS did not run afoul of Massachusetts law, by the “thinnest of venires.” So there you have it. MERS is kosher in Massachusetts, at least according to Judge Young.

However, Judge Young’s ruling came with some important caveats. First, he held that MERS does not have the power to foreclose in its own name. This is no longer an issue as MERS new policy is not to foreclosure in its name. But what about prior foreclosures in MERS’ name? Are those still considered valid?

Second, in accordance with Mass. Gen. Laws ch. 183, sec. 54B, he ruled that assignments from MERS’ vice presidents to loan servicers or holders are valid despite the signer’s lack of personal knowledge or proof of actual authority. This is a direct contradiction with AG Coakley’s claim that the MERS assignments are invalid.

Lastly, the most important aspect of Judge Young’s ruling was his agreement that foreclosing lenders must hold both the loan (promissory note) and the mortgage together in unity, to foreclose, following the controversial Superior Court opinion in Eaton v. FNMA which is now on appeal with the Supreme Judicial Court. However, Judge Young added an important distinction to this rule, saying that that loan servicers could foreclose in their names where the loan is held in a pooled securitized trust, provided they otherwise comply with Massachusetts foreclosure law. This is a very important distinction as a fair amount of foreclosures are brought in the name of the loan servicer. I’m not so sure Judge Young got this one right as a loan servicer rarely if ever holds the note as assignee, as Professor Adam Levitin notes, but the ruling certainly assists the industry.

So all eyes are back on the SJC awaiting its ruling in the Eaton case which could have even far more impact than the Ibanez decision. Of course, these two events underscore that foreclosures are still a mess crying out for legislative help (which hasn’t come at all), and the crucial importance of title insurance, which all buyers should elect at their closings.

I’ve done a quick video analysis and embedded Judge Young’s opinion below.

Culhane v. Aurora Loan Services

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Final Say Will Come Soon At SJC In Eaton v. FNMA

In Adamson v. MERS (embedded below), Superior Court Judge Raymond Brassard became the second Massachusetts trial judge to endorse the so-called “produce the note” defense in a foreclosure defense case. The question of whether a foreclosing lender must hold both the promissory note and the mortgage at the same time is now before the Supreme Judicial Court in the eagerly awaited case of Eaton v. Fannie Mae.

In Adamson, Mortgage Electronic Registration System (MERS) claimed to be the holder of the mortgage at the behest of Deutsche Bank. America’s Servicing acted as the servicer. This was a classic sub-prime mortgage with $440,000 in principal at 8.5% interest, with a balloon payment of $370,000 at the end of 30 years. (No wonder the borrower couldn’t keep up with the payments).

The kicker in this case was when America’s Servicing sent the borrower a denial letter for a loan modification stating that it would not foreclose in the next 30 days under the federal HAMP program to give the borrower a chance to explore other modification option. It foreclosed the next day. Ouch.

Unification Theory

Relying on the Judge McIntyre’s earlier decision in the Eaton case, Judge Brassard was persuaded that Massachusetts still holds on to the unification theory where a foreclosing lender must hold both the note and the mortgage at the time of foreclosure. Judge Brassard expressed concern that separating the mortgage from the note could lead to double liability for the borrower (first, a foreclosure, then an attempt to collect the note).

In a ruling which will make foreclosure defense attorneys salivate, Judge Brassard found merit to the borrower’s claim that the lender and the servicer violated the Massachusetts Consumer Protection Act, Chapter 93A, for foreclosing the day after the denial letter was issued, in violation of the 30 day safe harbor period.

Impact & What’s Next?

With two Superior Court judges endorsing this theory and several bankruptcy court judges rejecting it, all eyes are now on the Supreme Judicial Court’s decision in the Eaton v. Fannie Mae case which will be the final say in the matter. If the SJC accepts the unification theory, it will be a bigger bombshell than the U.S. Bank v. Ibanez case last year.

Until the SJC decides the Eaton case, this ruling will continue to slow down the pace of foreclosures in Massachusetts. This will, in turn, keep the inventory of REO properties high, causing further drag on the troubled housing market.

Thank you to the blogging attorneys at the Massachusetts Land Use Monitor for bringing this case to my attention.

Adamson v. MERS Decision

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No Easy Fix For Defective Foreclosure Titles After U.S. Bank v. Ibanez Ruling

The Massachusetts Supreme Judicial Court issued its opinion today in the much anticipated Bevilacqua v. Rodriguez case considering property owners’ rights when they are saddled with defective titles stemming from improper foreclosures in the aftermath of the landmark U.S. Bank v. Ibanez ruling last January. (Text of case is embedded below). Where Ibanez consider the validity of foreclosures plagued by late-recorded or missing mortgage assignments, Bevilacqua is the next step, considering what happens when lenders sell defective foreclosure titles to third party purchasers. Previously, I discussed the oral argument in the case here and detailed background of the case here.

The final ruling is mix of bad and good news, with the bad outweighing the good as fixing defective Massachusetts foreclosure titles just got a lot harder and more expensive. But, contrary to some sensationalist headlines, the sky is not falling down as the majority of foreclosures performed in the last several years were legal and conveyed good title. Bevilacqua affects those minority percentage of foreclosures where mortgage assignments were not recorded in a timely fashion under the Ibanez case and were otherwise conducted unlawfully. Importantly, Bevilacqua does not address the robo-signing controversy, which may or may  not be considered by the high court in another case.

The Bad News

First the bad news. The Court held that owners cannot bring a court action to clear their titles under the “try title” procedure in the Massachusetts Land Court. This is the headline that the major news outlets have been running with, but it was not a surprise to anyone who has been following the case. Contrary to the Daily Kos, the court did not take the property away from Bevilacqua. He never held good title it in the first place–and you can blame the banksters for that. If you don’t own a piece of property (say the Brooklyn Bridge), you cannot come into court and ask a judge to proclaim you the owner of that property, even if the true owner doesn’t show up to defend himself. It’s Property Law 101.

The Good News

Next the good news. The court left open whether owners could attempt to put their chains of title back together (like Humpty-Dumpty) and conduct new foreclosure sales to clear their titles. Unfortunately, the SJC did not provide the real estate community with any further guidance as to how best to resolve these complicated title defects.

Background: Developer Buys Defective Foreclosure Title

Frank Bevilacqua purchased property in Haverhill out of foreclosure from U.S. Bank. Apparently, Bevilacqua invested several hundred thousand dollars into the property, converting it into condominiums. The prior foreclosure, however, was bungled by U.S. Bank and rendered void under the Ibanez case. Mr. Bevilacqua (or presumably his title insurance attorney) brought an action to “try title” in the Land Court to clear up his title, arguing that he is the rightful owner of the property, despite the faulty foreclosure, inasmuch as the prior owner, Rodriguez, was nowhere to be found.

Land Court Judge Keith Long (ironically the same judge who originally decided the Ibanez case) closed the door on Mr. Bevilacqua, dismissing his case, but with compassion for his plight.

“I have great sympathy for Mr. Bevilacqua’s situation — he was not the one who conducted the invalid foreclosure, and presumably purchased from the foreclosing entity in reliance on receiving good title — but if that was the case his proper grievance and proper remedy is against that wrongfully foreclosing entity on which he relied,” Long wrote.

Given the case’s importance, the SJC took the unusual step of hearing it on direct review.

No Standing To “Try Title” Action In Land Court

The SJC agreed with Judge Long that Bevilacqua did not own the property, and therefore, lacked any standing to pursue a “try title” action in the Land Court. The faulty foreclosure was void, thereby voiding the foreclosure deed to Bevilacqua. The Court endorsed Judge Long’s “Brooklyn Bridge” analogy, which posits that if someone records a deed to the Brooklyn Bridge, then brings a lawsuit to uphold such ownership and the “owner” of the bridge doesn’t appear, title to the bridge is not conveyed magically. The claimant in a try title or quiet title case, the court ruled, must have some plausible ownership interest in the property, and Bevilacqua lacked any at this point in time.

The court also held, for many of the same reasons, that Bevilacqua lacked standing as a “bona fide good faith purchaser for value.” The record title left no question that U.S. Bank had conducted an invalid foreclosure sale, the court reasoned.

Door Left Open? Re-Foreclosure In Owner’s Name?

A remedy left open, however, was whether 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 Bevilacqua would be granted the right to foreclosure by virtue of holding an “equitable assignment” of the mortgage foreclosed upon by U.S. Bank. There are some logistical issues with the current owner conducting a new foreclosure sale and it’s expensive, but it could work.

That is if the SJC rules in the upcoming Eaton v. FNMA case that foreclosing parties do not need to hold both the promissory note and the mortgage when they foreclose. An adverse ruling in the Eaton case could throw a monkey wrench into the re-foreclosure remedy–it would also be an even bigger bombshell ruling than Ibanez, as it would throw into question the foreclosure of every securitized mortgage in Massachusetts.

In Bevilacqua’s case, he did not conduct the new foreclosure sale, so it was premature for the court to rule on that issue. Look for Bevilacqua to conduct the new foreclosure and come back to court again. The SJC left that option open.

Other Remedies & What’s Next?

The other remedy to fix an Ibanez defect, which is always available, is to track down the old owner and obtain a quitclaim deed from him. This eliminates the need for a second foreclosure sale and is often the “cleanest” way to resolve Ibanez titles.

Another option is waiting out the 3 year entry period. Foreclosure can be completed by sale or by entry which is the act of the foreclosure attorney or lender representative physically entering onto the property. Foreclosures by entry are deemed valid after 3 years have expired from the certificate of entry which should be filed with the foreclosure. It’s best to check with a real estate attorney to see if this option is available.

The last resort is to demand that the foreclosing lender re-do its foreclosure sale. The problem is that a new foreclosure could open the door for a competing bid to the property and other logistical issues, not to mention recalcitrant foreclosing lenders and their foreclosure mill attorneys.

Title insurance companies who have insured Ibanez afflicted titles have been steadily resolving these titles since the original Ibanez decision in 2009. I’m not sure how many defective foreclosure titles remain out there right now. There certainly could be a fair amount lurking in titles unknown to those purchasers who bought REO properties from lenders such as U.S. Bank, Deutsche Bank, etc. If you bought such a property, I recommend you have an attorney check the back title and find your owner’s title insurance policy. Those without title insurance, of course, have and will continue to bear the brunt of this mess.

More Coverage:

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Richard D. Vetstein, Esq. is an experienced real estate litigation attorney who’s handled numerous foreclosure title defect matters & cases in Land Court and Superior Court. Please contact him if you are dealing with a Massachusetts foreclosure title dispute.

Bevilacqua v. Rodriguez; Massachusetts Supreme Judicial Court October 18, 2011

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

I just finished watching the oral arguments in the SJC case of Eaton v. Federal National Mortgage Ass’n, The webcast should be up soon on the SJC Website. You can read the briefs in the case here.

As outlined in my prior post on the case, the Court is considering the very important question of whether a foreclosing lender must possess both the promissory note and the mortgage in order to foreclose. If the SJC rules against lenders, it will be another national headline story — potentially bigger than U.S. Bank v. Ibanez.

Quick Recap: Ultimately, the SJC will have to decide how old common law decided in the late 1800′s now applies to mortgages in the 21st century with securitization, servicers and MERS. Does the law need to be modernized? I think it’s time. Unlike the U.S. Bank v. Ibanez case, this one is much harder to handicap. So I’m not even going to try!

For those unfamiliar with the facts of the case, I’ll state them again.

Borrower Able 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. Green Tree foreclosed in 1999 and assigned its winning bid to Fannie Mae who attempted to evict Eaton in January 2010.

Eaton was able to obtain an injunction from the Superior Court halting the eviction on the grounds that Green Tree did not possess the promissory note underlying the mortgage when the foreclosure occurred. This has been coined the “produce the note” defense and has been gaining steam across across the country. This is the first Massachusetts appellate case that I’m aware of to consider the defense and surrounding legal issues.

The Superior Court judge, Francis McIntyre, wrote a 10 page opinion, explaining that Massachusetts has long recognized that although the promissory note and the mortgage can travel different paths after the borrower signs them, both instruments must be “reunited” to foreclose. “The mortgage note has a parasitic quality, in that its vitality depends on the promissory note,” the judge ruled. As is becoming increasingly prevalent, neither Green Tree nor Fannie Mae could located the original signed promissory note; they were only able to produce a copy endorsed in blank without an amendment, or allonge, indicating when it was endorsed or who held it at the time of the foreclosure. Without the note properly endorsed and assigned to Green Tree, the foreclosure was a nullity, the judge held.

Pointed Questions During Oral Argument

The oral argument was pretty interesting with the majority of the justices’ questions centered around questions of the mortgage servicer’s authority to foreclose or enter into a loan modification, Fannie Mae’s role and the role of MERS. Here’s my running diary of the argument.

Fannie Mae Arguments

  • Attorney Richard Briansky, who did a solid job, represented the Fannie Mae side, and started first. Judge Gants asked whether there was any evidence that Ms. Eaton, the borrower, failed to pay insurance or real estate taxes to justify foreclosure  on other grounds? There was no evidence; purely breach of note, replied Briansky.
  • The justices raised a question of the authority of the signer of the mortgage assignment. The signer was a “Monica” who worked for Green Tree Servicing and had signatory authority for MERS. Of course, this is the robo-signing question which is being raised across the county. (Read our post on the high percentage of robo-signed documents found at the Essex Registry of Deeds here). The justices asked was she employee or MERS or Green Tree?  Dual roles. However, they agreed that this issue is not properly raised in this case.
  • Justice Cordy asked whether Green Tree, the servicer, was in a position to extinguish the debt? The answer was no. The loan proceeds are held in trust for note holder.
  • Justice Botsford was worried about the possibility of double liability where the note holder sues Eaton on note. Never been an issue, says Briansky.
  • Justice Lenk asked who determines whether or not to foreclose? Attorney Briansky said Green Tree, because it has been collecting payments and acts as servicer. Now the justices started exploring the contractual relationship between servicer and note holder. The discussed turned to the servicer’s authority for loan mods, etc.
  • Justice Botsford had questions over who could make important decisions under mortgage.
  • Justice Duffly asked about the status of MERS as nominee. It’s a “tripartite relationship,” explained Briansky. The justices seemed very skeptical of the MERS relationship.
  • Justice Ireland, citing the friend of the court brief, asked Briansky point blank whether Massachusetts law required unity of the note and mortgage holder at foreclosure. Briansky countered with argument that times have changed and current complex mortgage securitization requires a modernization of the law.
  • Justice Duffly pointed out that the proliferation of servicers and MERS has created a unique situation and is bad for consumers. She thinks that there is a disincentive for servicers to modify loans; that they make more money for foreclosure. An interesting point.
  • Justice Lenk asked a very good question: What would preclude Fannie Mae from holding the mortgage? I can tell you that as a matter of policy, Fannie Mae prefers not to hold mortgages themselves, instead letting the servicers do the “dirty work” of defaults and foreclosures.

That concluded the Fannie Mae side.

Eaton Arguments

Now for the Eaton side, Sam Levine, a Harvard Law student, argued under a SJC Rule permitting third year law students to argue in court. What a thrill it must have been for a law student who hasn’t even passed the Bar, to be arguing a major case in front of the SJC. However, his inexperienced showed at times, as he often slipped into prepared remarks when the justices where looking for an answer far more specific. But all in all, the kid did OK for not even being a real lawyer yet.

  • The justices ask about all the lower court and bankruptcy court decisions holding that you don’t need pure unity of note holder and mortgage holder to foreclose. Levine stood his ground on the older cases holding that this isn’t the law. The justices will have to grapple with whether the law needs to be modernized.
  • Justice Gants asked what’s wrong with an agent acting as servicer? Levine said for servicing it’s fine, but for foreclosure, the principal must foreclose.
  • There was an extended discussion over the standard MERS mortgage form as to MERS’ authority to invoke power of sale and foreclose. The justices appeared confused as to who has the right to invoke the power of sale and foreclose. Does MERS or does the lender, or both? And who is MERS’ successors and assigns?
  • Justice Cordy asked hasn’t borrower agreed in the mortgage that MERS can foreclose? Didn’t she waive any common law right that the note holder and mortgage holder be united for foreclosure. Good question.
  • Justice Lenk asked that if Fannie Mae had foreclosed, everything would have been fine. That’s ultimately true.
  • Justices Cordy and Spina were definitely getting frustrated with the simple fact that Eaton simply didn’t pay mortgage. Look for them to vote to reverse the lower court opinion in this case.

What’s Next?

The SJC will release a final opinion within 120 days or so. A lot of the questioning centered on side issues not squarely relevant in the case. The question in the case is simply whether a foreclosing lender must hold both the note and mortgage at foreclosure. Clearly, the justices have been reading the press reports about the foreclosure crisis and are trying to be responsive to it. But they have to decide cases based on the facts before them. Again, I’m not going to try to handicap this one, but I have a feeling it will be a close decision with concurring and dissenting opinions. If the SJC rules against lenders, it will be another national headline story, rest assured.

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Richard D. Vetstein, Esq. is an experienced real estate litigation attorney who’s handled numerous foreclosure defense and title defect cases in Land Court and Superior Court. Please contact him if you are dealing with a Massachusetts foreclosure and title dispute.

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SJC To Hear Oral Arguments In Eaton v. FNMA On Monday

by Rich Vetstein on September 30, 2011

Updated: Click Here For Our Oral Argument Recap

Just a reminder to those following the important SJC case of Eaton v. Federal National Mortgage Ass’n — oral arguments will be held on Monday, October 3rd, starting at 9am. You can view the oral argument live via webcast through the SJC Website. You can read the briefs in the case here. Interestingly, one of the foremost commentators on the mortgage meltdown, Adam Levitin of Georgetown Law, has filed his own friend of the court brief.

As outlined in my prior post on the case, the Court will consider the “produce the note” defense in foreclosure cases — whether a foreclosing lender must possess both the promissory note and the mortgage in order to foreclose. Based on arguments asserted by the lender, the court may also consider the circumstances by which a mortgage granted to Mortgage Electronic Registration System (MERS) can be effectively foreclosed in Massachusetts.

Look for a new blog post on Tuesday after I watch the arguments.

~Rich

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Richard D. Vetstein, Esq. is an experienced real estate litigation attorney. He has handles many foreclosure defense and title defect cases in Land Court and Superior Court. Please contact him if you are dealing with a Massachusetts foreclosure and title dispute.

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During this Great Recession, we’ve been closely covering the foreclosure crisis from a real estate law perspective. I am not a bankruptcy attorney, and don’t claim to be. So I thought: why don’t we have an experienced bankruptcy attorney guest blog about the interplay between foreclosure and bankruptcy? Attorney Matthew P. Trask, a partner with Kelsey & Trask, P.C. in Natick, MA, was kind enough to do just that. Matt writes an awesome bankruptcy law blog, Don’t Go Alone. Welcome, Attorney Trask!

The Bankruptcy Automatic Stay, A Valuable Last Resort

Thanks Rich. It’s great to be here.

On September 13, 2011, CNBC reported that foreclosures owned by Bank of America surged more than 200%. “August traditionally is a high month for foreclosure actions, so part of the increase might be seasonal,” says RealtyTrac’s Rick Sharga. “[The increase is attributable to] any number of reasons – but with 3.5 million delinquent loans, this had to happen sooner or later.”

Continuing economic troubles coupled with high unemployment means that many homeowners are more than 90 days past due on their mortgage payments, setting the stage for the lender to take back title to the property, a legal process known as foreclosure. Oftentimes, consumers aren’t just behind on mortgage payments but other consumer debts, such as credit cards, medical bills, and even taxes. In addition to foreclosure, consumers who have fallen behind on debt may also face lawsuits, wage garnishments or asset seizures as creditors move to seek payment.

If you are between a rock and a financial hard place, bankruptcy may be an option to eliminate or catch up on past-due debt, and give you time to reorganize your finances. Additionally, bankruptcy law protects debtors as soon as a case is filed. Immediately upon filing bankruptcy, the U.S. Bankruptcy Code, 11 U.S.C. § 362(a), dictates that no creditor may take any judicial or non-judicial collection efforts against the debtor or the debtor’s property. This is called the Automatic Stay.

The Automatic Stay means that a pending foreclosure of your home, collection calls, wage garnishments, asset seizure or lawsuits must immediately cease until either the bankruptcy is completed, or the creditor obtains specific permission from the bankruptcy court. The benefit of the automatic stay is that it creates additional time for the debtor to deal with logistical issues associated with the bankruptcy, housing, cash flow or simply gives a debtor “breathing room” to work with their bankruptcy and real estate attorneys to protect their assets, eliminate debt, without the risk of losing property or assets during that time. Any creditor who ignores the automatic stay is subject to significant penalties by the bankruptcy court.

In the case of a debtor who wishes to keep his or her home, but has fallen behind on payments and facing an imminent foreclosure, the Automatic Stay, coupled with a Chapter 13 Bankruptcy can stop the foreclosure in many cases. Filing a Chapter 13 Bankruptcy petition creates the opportunity for repayment of the arrears over a period of between three and five years, and, in certain instances, completely discharges a home equity line or second mortgage if the value of the property is less than the balance on the primary mortgage.

Even if a debtor has previously modified their mortgage, and the terms of the modification appear to waive the debtor’s automatic stay protections, Emergency Standing Order 10-2 effectively voids any provision of any loan modification or forbearance agreement which states that upon default of the lender, the benefits of the automatic stay are waived. Prior to Emergency Standing Order 10-2, if a modification included such a waiver, the bank or mortgage lender could proceed with a foreclosure or other collection actions despite the filing of a Chapter 7 or Chapter 13 bankruptcy.

In summary, the automatic stay is a powerful tool available to individuals seeking bankruptcy protection, and is often key to any financial reorganization. If you have questions about how the bankruptcy code, including the automatic stay, may help brighten your financial future, speak to an attorney. Bankruptcy is a complex and technical process, but, if done correctly, can protect your assets and give you a fresh financial start.

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Attorney Matthew P. Trask is a partner with Kelsey & Trask, P.C., and represents business and consumer debtors and creditors before the United States Bankruptcy Court, District of Massachusetts.  Kelsey & Trask, P.C. is a debt relief agency, helping clients file for relief under the U.S. Bankruptcy Code.

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FNMA v. Nunez: Tenant Foreclosure Act Applied Retroactively

On September 6, 2011, in Federal National Mortgage Association v. Nunez (embedded below), the Supreme Judicial Court considered for the first time the 13-month-old “Tenant Protections In Foreclosed Properties” Act which protects tenants living in foreclosed properties from eviction in certain circumstances. The issue was whether the Act applied retroactively, and the court answered “yes,” applying it “to protect all residential tenants on foreclosed properties who, on or after August 7, 2010, had yet to vacate or be removed from the premises by an eviction, even where the owner purchased the property before the act’s effective date, and initiated a summary process action before that date.”

Summary Of Act

The Act, passed in August 2010 and now codified in a new Mass. General Laws Chapter 186A, bans institutional lenders (not private parties) who own foreclosed properties from evicting residential tenants without “just cause.” What this means in plain English is that foreclosing lenders such as Fannie Mae cannot evict tenants of foreclosed properties unless they stop paying rent or commit serious lease violations such as illegal activity on the premises.

Loophole: Private Purchasers

There is a huge loophole in the Act however. It does not apply to private individuals who purchase properties at foreclosure. They are free to evict tenants for any reason. But, they must provide tenants with at least 90 day notice to move, and the tenant retains the right to ask for more time to leave in any eviction legal proceeding.

Impact: Slow Down In Sales of Foreclosed Properties

The impact of this ruling will be to expand the number of tenants who will be protected from eviction when their apartments fall into foreclosure. It will also slow down the pace of selling off REO and foreclosed properties to individual owners and investors who will now inherit tenants with expanded occupancy rights in foreclosed properties.

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Richard D. Vetstein, Esq. is an experienced real estate litigation attorney who’s handled over 500 eviction cases in the District and Housing Courts. Please contact him if you are dealing with a Massachusetts landlord-tenant dispute.

 

 

FNMA v. Nunez

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

SJC Orders Additional Briefing On Potential Impact of Ruling (1/6/12)

Oral Argument Analysis (10/3/11)

Do Lenders Need To Hold Both Promissory Note & Mortgage At Foreclosure?

In a rare “sua sponte” (on their own) direct appellate review, the Massachusetts Supreme Judicial Court has agreed to hear an appeal considering the controversial “produce the note” defense in foreclosure cases and whether a foreclosing lender must possess both the promissory note and the mortgage in order to foreclose. Based on arguments asserted by the lender, the court may also consider the circumstances by which a mortgage granted to Mortgage Electronic Registration System (MERS) can be effectively foreclosed in Massachusetts.

This could be a very important decision — potentially as important as the landmark U.S. Bank v. Ibanez case issued in the spring. A ruling against the lenders could expose a gaping and fatal legal black hole with many foreclosure-bound mortgages that were hastily bundled and sold to Wall Street during the real estate boom years. A rejection of the borrower’s arguments as recently made by a bankruptcy judge in Worcester, however, could significantly reduce some MERS induced anxiety and heartburn presently being experienced by lenders and foreclosure attorneys.

The case is Eaton v. Federal National Mortgage Association (Fannie Mae), SJC-11041. The court will hear arguments in October, with a decision coming several months later. The court is also seeking amicus, or friend of the court, briefs from interested parties.

Where’s The Note?

As with many sub-prime mortgage borrowers, Henrietta Eaton had defaulted on her mortgage to Green Tree Mortgage. This was a MERS mortgage originally granted to BankUnited then assigned to Green Tree. Green Tree foreclosed in 1999 and assigned its winning bid to Fannie Mae who attempted to evict Eaton in January 2010.

Eaton was able to obtain an injunction from the Superior Court halting the eviction on the grounds that Green Tree did not possess the promissory note underlying the mortgage when the foreclosure occurred. This has been coined the “produce the note” defense and has been gaining steam across across the country. This is the first Massachusetts appellate case that I’m aware of to consider the defense and surrounding legal issues.

The Superior Court judge, Francis McIntyre, wrote a well-reasoned 10 page opinion, explaining that Massachusetts has long recognized that although the promissory note and the mortgage can travel different paths after the borrower signs them, both instruments must be “reunited” to foreclose. “The mortgage note has a parasitic quality, in that its vitality depends on the promissory note,” the judge ruled. As is becoming increasingly prevalent, neither Green Tree nor Fannie Mae could located the original signed promissory note; they were only able to produce a copy endorsed in blank without an amendment, or allonge, indicating when it was endorsed or who held it at the time of the foreclosure. Without the note properly endorsed and assigned to Green Tree, the foreclosure was a nullity, the judge held.

Potential Impacts Far and Wide

As I mentioned before, a ruling that foreclosing lenders must produce both the note and mortgage held by the same entity would drastically alter existing foreclosure practice in Massachusetts, and may open existing foreclosures to legal challenge. Although I don’t practice in foreclosures, I do know that rarely, if ever, are properly endorsed and assigned promissory notes in the hands of lenders when they foreclose. As with this case, they are typically endorsed in blank, that is, to no one, and in storage somewhere in New Jersey or Ohio held by a loan servicer. In fact, obtaining such promissory notes from lenders can be nearly impossible. They are often lost, missing pages, or destroyed.

This case, which is typical, illustrates the problem with the entire system. According to Fannie Mae’s brief, after the loan funded, the note was indorsed in blank and allegedly transferred to Fannie Mae. How does an entity as sophisticated as Fannie Mae purchase a loan without getting the promissory note properly indorsed and assigned to it? God only knows. So the best Fannie could do was produce a copy of the note indorsed to no one. That’s just great…

The mortgage took a different path along the securitization trail. This was a MERS mortgage, so it was originally granted to MERS, the electronic registry who admittedly acts only as a “nominee” and holds no financial stake in the loan. A Mass. bankruptcy court judge recently voided the foreclosure of a MERS mortgage for some of these reasons. Now while the paper is held by Fannie Mae, the mortgage supposedly gets assigned to Green Tree, the loan servicer, which like MERS has no financial stake in the loan. Green Tree then conducts the foreclosure sale, although it has no real financial interest in the loan–that remains with Fannie Mae. Now it doesn’t take a Louis Brandeis to ask, why didn’t the mortgage get assigned to Fannie Mae, and why didn’t Fannie Mae conduct the foreclosure sale since it held all the financial cards in this transaction? I would love someone to explain this to me because I don’t get it, and I’m not the only one. At this point, the whole system is FUBAR.

Of course, a favorable ruling for lenders would preserve the status quo and business-as-usual atmosphere for foreclosures in Massachusetts, while upholding the effectiveness of the MERS mortgage. The SJC wasn’t afraid to drop a bombshell in U.S. Bank v. Ibanez. Eaton v. Fannie Mae may be next. At the very least, the SJC joins a steady stream of jurists who have concerns about the way in which foreclosures are being conducted in a post-subprime world. When the decision comes down, I’ll be on it!

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Richard D. Vetstein, Esq. is an experienced real estate litigation attorney who’s handled numerous foreclosure defense and title defect cases in Land Court and Superior Court. Please contact him if you are dealing with a Massachusetts foreclosure and title dispute.

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Mass. Bankruptcy Judge Voids Foreclosure Of MERS Mortgage

by Rich Vetstein on August 23, 2011

Judge Tells Lenders You Can’t Have Your MERS Cake & Eat It Too

“The sophisticated financial minds who wrought the MERS regime sought to simplify the process of repeatedly transferring mortgage loans by obviating the need and expense of recording mortgage assignments with each transfer. No doubt they failed to consider the possibility of a collapse of the residential real estate market, the ensuing flood of foreclosures and the intervention of state and federal courts.”

–Judge Melvin S. Hoffman, U.S. Bankruptcy Court Judge for Massachusetts, In Re. Schwartz, Aug. 22, 2011

Coming off a ruling (In re. Marron) that the MERS mortgage registration system does not run afoul of Massachusetts law, the same jurist, Bankruptcy Court Judge Melvin Hoffman, on Monday issued a ruling voiding a MERS-held mortgage which fell victim to sloppy paperwork. As Banker & Tradesman reports, the case is potentially troubling for any MERS held mortgage in default. The case is In Re. Schwartz and is embedded below.

Debtor Challenges Foreclosure Of Securitized Mortgage

During her bankruptcy proceeding, the debtor, Sima Schwartz, challenged the May 24, 2006 foreclosure of her Worcester home by Deutsche Bank. She asserted that under the U.S. Bank v. Ibanez decision issued by the Massachusetts Supreme Judicial Court earlier in the year, Deutsche did not own the mortgage on the property when it first started the foreclosure process.

The “lender” on her original mortgage was Mortgage Electronic Registration System (MERS), as nominee for First NLC. Many housing advocates have criticized MERS’ role in the foreclosure crisis, with the New York Times weighing in most recently. The mortgage loan was securitized and subsequently transferred at least 3 times, ultimately winding up held by Deutsche Bank. No assignments of mortgage were recorded with the registry of deeds until a day before the foreclosure sale on May 23, 2006. That assignment was executed by Liquenda Allotey, one of the hundreds of deputized vice presidents of MERS, and an alleged “robo-signer” for Lender Processing Service (LPS) which has come under fire for document irregularities. The assignment ran to Deutsche Bank, which completed the foreclosure sale on May 24, bid its mortgage debt and purchased the property.

There was no dispute that under the U.S. Bank v. Ibanez case, the late-filed mortgage assignment rendered the foreclosure defective unless Deutsche could establish its ownership of the mortgage loan when the foreclosure process started. During the trial, Deutsche submitted all the various agreements documenting the securitization process including the pooling and servicing agreement (PSA), loan purchase agreement, bill of sale and custodial log.

Judge: Lenders Can’t Have Their MERS Cake And Eat It Too

Critically, as the judge noted, the PSA provided that for a MERS mortgage such as this, assignments of mortgages did not have to be prepared or delivered to the buyer of the loans. As is endemic with most securitized mortgages, the participants in the securitization did not deliver and record any assignments documenting such transfers, instead, relying on the internal MERS registration system, which is out of the public records view. Throwing this provision back in the lenders’ faces, the judge basically said “you can’t have your cake and eat it too” — rendering his ruling that the mortgage itself (as opposed to the underlying loan) was never transferred through the securitization system from entity A, B, C, to Deutsche Bank, and that MERS had always held, and never relinquished, “legal title” to the mortgage. Accordingly, the judge held, Deutsche Bank was never the owner of the mortgage in the first place, could not foreclose in its name, and its foreclosure sale was null and void.

Impact: Are Foreclosures Of MERS Mortgages Now Open To Challenge?

I’m not sure what’s going to happen with Ms. Schwartz’s home. She’s been living in it since 2006 probably mortgage/rent free! Certainly, MERS could (and should have) started a second foreclosure and done it the right way. I’m perplexed why Deutsche and MERS kept fighting this case in court. As for the broader implications, it’s still unclear as to the effect on past and current foreclosures. One this is for certain, the ruling is yet another example of the legal fallout from the deficiencies in the MERS system.

Lastly, while I don’t claim to be a mortgage securitization expert, if the mortgage was not assigned/transferred properly and if it is MERS that holds legal title, then there is a mortgage backed security investor somewhere who THINKS he owns this mortgage but, in fact, does not. Even if MERS wanted to transfer the mortgage to the relevant trust or foreclose, sell the property and transfer cash, they may not be able to for legal and tax reasons. Now multiply by a million. So how many mortgage backed securities are missing how many mortgages? Are there mortgage backed securities out there that don’t actually own ANY mortgages? If someone sells a “mortgage backed” security that doesn’t legally own the mortgages in question, hasn’t that someone committed fraud? And furthermore, how the hell do we clean this up?

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Richard D. Vetstein, Esq. is an experienced real estate litigation attorney who’s handled numerous foreclosure defense and title defect cases in Land Court and Superior Court. Please contact him if you are dealing with a Massachusetts foreclosure and title dispute.

 

In Re Schwartz

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This is the first post in a new series I’ve been wanting to try out for awhile: Rich’s Realty Ramblings (not sold on the name yet–feel free to suggest alternatives). This series will be kind of like a weekly news wire report for those topics I find interesting but not warranting an entire blog post. So let’s go….

MERS Case Reaches U.S. Supreme Court

According to Housing Wire, a controversial case challenging the ability of Mortgage Electronic Registration Systems (MERS) to foreclose on a California man was filed with the U.S. Supreme Court Monday, making it the first major MERS case to reach the nation’s highest court. If the Supreme Court agrees to hear Gomes v. Countrywide, Gomes’ attorney, Ehud Gersten, says the court will have to decide whether a lower court stripped his client, Jose Gomes, of due process by allowing MERS to foreclose without ensuring the registry had the noteholder’s authority to foreclose. “I believe this to be the first case in the country to take MERS to our Supreme Court,” Gersten told HousingWire.

The U.S. Supreme Court rarely takes such cases, and I’m not sure if the due process issues surrounding MERS warrant constitutional intervention, but the case caught my eye and I’ll keep a watch on it.

Old Landfill Found Under New Subdivision

Tampa homeowner Brian Dyer hired a contractor to install a pool in the backyard of his five year old home in the Oak Run Subdivision for his four children. Within hours of breaking ground, construction halted when the contractor discovered a sizable underground dump complete with tires, washing machine tubs, a lawn mower and old trash dating back to the 1970s. With a hole in his yard and a pile of garbage beside it, Dyer approached the county about the eyesore and was told they were unaware of the trash and told him he would be required to handle the problem. (Source: Agent Genius).

Yikes! Mr. Dyer has a potentially large claim against the developer and builder of his subdivision and home. What a stinking mess!

Fannie Mae Abusing Foreclosure Powers?

A Detroit Free Press investigation claims that Fannie Mae spent $27,000 on a foreclosure for a $3,000 debt, and violated its own internal rules to foreclose on struggling homeowners. Fannie Mae has been the target of Congressional ire for some time now. Homeowners across the U.S. are literally begging for loan modifications to stay in their homes in order to avoid foreclosure.

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Battle Over Invalid Foreclosures May Shift To Evictions In Housing Courts

In the closely watched case of Bank of New York v. Bailey (embedded below), the Massachusetts Supreme Judicial Court ruled on August 4, 2011 that the Housing Court may hear a homeowner’s challenge that a foreclosing lender failed to conduct a foreclosure sale in accordance with state law and under the now seminal U.S. Bank v. Ibanez decision. Previous to this decision, foreclosing lenders and their attorneys were quite successful in evicting homeowners even where there were defects in the foreclosures.

A Subprime Eviction

KC Bailey obtained a mortgage in 2005, which appears to have been of the sub-prime vintage (America’s Wholesale Lender), on his home in Mattapan. Merely two years later, he defaulted, and the lender commenced foreclosure proceedings. Bailey claimed that the lender never provided him with any notice of the foreclosure, and he first learned about it when an eviction notice was duct taped to his fence. The lender started an eviction in the Boston Housing Court. Bailey defended on the basis of the alleged defective notice. The Housing Court judge ruled in favor of the lender, and the case went up to the SJC.

Ruling: Housing Court May Hear Foreclosure Challenge

The SJC first ruled, in a case of first impression, that the Housing Court had jurisdiction to consider whether the lender had properly completed the foreclosure sale and provided adequate notice to Bailey. The court noted that such a challenged was “long-standing.” Next, the Court ruled that all foreclosing lenders seeking eviction must show that it has completed the foreclosure sale in full compliance with state law. This is a change in prior practice as lenders would typically submit the foreclosure deed as evidence of good title and ownership without additional investigation.

Impact: More Difficult To Evict, But More Opportunity For Loan Mods

This decision is going to make it more difficult and expensive to evict foreclosed homeowners and get these properties off lenders’ books. On the positive side, it may give homeowners more leverage to negotiate loan modifications to enable them to stay in their homes and recover from financial distress. Evictions based on faulty foreclosures will be nearly impossible to complete and could potentially drag on for months if not years.

This decision will also have a substantial impact on the already over-burdened Housing Court system. If you have ever been to the Thursday summary process session at Boston or Worcester Housing Court, it’s akin to a refugee camp, with hundreds of cases lined up and families facing homelessness. It’s very sad. I’m sure the judges will push lenders and homeowners dealing with faulty foreclosures to resolve their differences out of court, or tell them to wait in back of the line for trial assignment.

Bank of New York v. Bailey

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Ironically on the same day Bank of American is about to sign a historic $8.5 Billion settlement agreement over bad mortgages, somebody finally went through a registry of deeds to look at the effect of the U.S. Bank v. Ibanez decision and the validity of mortgage assignments in Massachusetts. This just came in off the Housing Wire and is scorching through the real estate newswires.

Audit Shows 75% of Mortgage Assignment Are Invalid In Mass. County

According to an audit performed by McDonnell Property Analytics, in the Salem, Mass. Registry of Deeds, 75% of mortgage assignments are “invalid.” About 27% of invalid assignments are fraudulent, McDonnell said, while 35% are robo-signed and 10% violate the Massachusetts Mortgage Fraud Statute.

McDonnell said it could only determine the financial institution that owned the mortgage in 60% of the cases reviewed. There are 683 missing assignments for the 287 traced mortgages, representing about $180,000 in lost recording fees.

“What this means is that the degradation in standards of commerce by which the banks originated, sold and securitized these mortgages are so fatally flawed that the institutions, including many pension funds, that purchased these mortgages don’t actually own them,” according to analysts at McDonnell. “The assignments of mortgage were never prepared, executed and delivered to them in the normal course of business at the time of the transaction.”

John O’Brien, register of deeds for Essex County in the northeastern corner of Massachusetts, urged state attorneys general for a third time to cease settlement talks with the nation’s largest servicers. In May, O’Brien sent a letter to Iowa Attorney General Tom Miller for this same purpose.

“My registry is a crime scene as evidenced by this forensic examination,” said O’Brien. “This evidence has made it clear to me that the only way we can ever determine the total economic loss and the amount damage done to the taxpayers is by conducting a full forensic audit of all registry of deeds in Massachusetts.”

Is This Audit Flawed Though?

Now, a few observations about this “audit.”

First, McDonnell Property Analytics is a company engaged in the business of stopping or delaying foreclosures and performing related audits. The company makes money when consumers hire them to perform audits of the mortgage paperwork when they are facing foreclosure. The owner of the company is on a crusade against the mortgage industry to expose the paperwork and robo-signing mess, not that that’s a bad thing. But there’s some built in bias here on this purported audit.

Second, there’s no indication of the methodology to determine whether a mortgage assignment is “invalid” or “fraudulent.” What does that mean exactly? What are the audit’s definitions of “invalid” and “fraudulent.” Same for “robo-signed.” Who is determined to be a “robo-signer,” and how is that determination made? I’d like to see the underlying assumptions here.

Based on what I’ve read so far on this “audit,” I’m not sure it would hold up in a court of law. The 75% invalid rate seems very high and questionable, in my opinion. But certainly, these are good questions to ask and analyze and bring to the forefront. It’s clear that Essex Registrar of Deeds John O’Brien wants to recoup all the millions in recording fees he’s lost to the securitization industry and MERS, and he’s the most outspoken of all the registrars of deeds on this problem. (Hmmm, I wonder if Mr. O’Brien has higher political aspirations?).

Well, this problem is big enough that BofA just threw $8.5 Billion to make it go away, and bank stocks are still anemic. So we’ll see how this ultimately plays out.

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