Short Sale Sellers In 2014 Would Get Key Tax Break
A bill that would extend a key tax break to tens of thousands of short sale sellers who sold their homes in 2014 for less than they owed on their mortgages passed the U.S. House on Wednesday and is headed to the Senate for consideration.
A one-year extension of the Mortgage Debt Forgiveness Act, which expired Dec. 31, 2013, was included in the Tax Increase Prevention Act of 2014 and passed the House on Wednesday on a 378-46 vote. Short sale advocates and real estate groups have been lobbying hard all year to help homeowners sold their home through a short sale avoid a devastating tax bill which they likely could not afford.
Traditionally, if a lender allows a homeowner to sell a property for less than the amount owed on the mortgage, the homeowner has to report that forgiven debt as taxable income to the Internal Revenue Service. The Mortgage Debt Forgiveness Act of 2007, which had been extended multiple times, allowed taxpayers to exclude that forgiven debt from their annual income calculations.
The tax break lapsed in 2013, forcing homeowners to either gamble that it would be revived and proceed with a short sale or remain in homes that they either couldn’t afford or couldn’t sell because the mortgages were underwater.
If the bill does not pass, all is not lost. According to some experts, there are other ways under the IRS Code for insolvency to exclude a short sale tax forgiveness from income. Consult a qualified tax attorney or CPA for guidance.
An analysis earlier this year by the Urban Institute concluded that uncertainty over whether the tax break would be renewed could affect up to 2 million seriously underwater borrowers, including some who would eventually fall into foreclosure.
In another court ruling against embattled homeowners facing foreclosure, the Massachusetts Appeals Court has ruled that a defective 150 day cure notice is not a valid defense to a foreclosure sale. The case is Haskins v. Deutsche Bank (click for link to case). The ruling will make it more difficult for distressed homeowners to challenge foreclosure and could accelerate the pace of pending foreclosures.
150 Day Cure Notice
The 2010 Foreclosure Prevention Act requires that foreclosing lenders provide a borrower with a 150 day right to cure prior to starting a foreclosure proceeding. The notice must identify the current “holder” of the mortgage. Before this ruling, some trial courts had ruled that a bank’s failure to strictly comply with those requirements was sufficient grounds to halt a foreclosure sale.
In the Haskins case, the borrower challenged his foreclosure on technical grounds because the cure notice incorrectly identified the holder of the mortgage as IndyMac Mortgage Services. IndyMac was the mortgage servicer and mortgage was legally held in a securitized trust operated by Deutsche Bank.
Justice Mark Green, a former Land Court judge and former banking general counsel, recognized that today the vast majority of residential mortgages are serviced by large mortgage servicers while owned and held in securitized trusts. Rejecting the borrower’s form-over-substance argument, Justice Green ruled that as long as the borrower receives an accurate cure notice with the correct loan balance information and payment address so the borrower can pay up and cure, an erroneous identification of the actual mortgage holder should not affect the validity of the pending foreclosure.
Massachusetts foreclosure defense attorney Adam Sherwin, who represented the borrower, put up a valiant fight in this case. However, with this ruling and several recent decisions before it, foreclosure defense attorneys have suffered several setbacks in the courts, making it more difficult for distressed homeowners to challenge and stop foreclosures.
Senate Bill 1987 Would Have Cleared Title For Innocent Homeowners
Acceding to the demands of fair housing community activists, Massachusetts Governor Deval Patrick has rejected Senate Bill 1987, An Act Clearing Titles to Foreclosed Properties. The bill would have cleared title of homes affected by defective foreclosures with a one year waiting period from enactment of the bill while giving homeowners three years to challenge wrongful foreclosures. The Governor filed an amendment to the bill, raising the statute of limitations for homeowners to challenge foreclosures from 3 years in the current bill to 10 years. The Senate and House are unlikely to agree on such an absurdly long statute of limitations, so Patrick’s action should effectively kill the bill.
This is truly devastating news for the thousands of innocent homeowners who are stuck with bad title due to botched foreclosures.
The bill had cleared the Senate and House with near unanimous support. The bill also received favorable press in the Worcester Telegram and Boston Globe. The bill preserves the right to challenge foreclosures and sue the banks, while helping innocent homeowners stuck with bad title. Despite this, organizations such as the Massachusetts Alliance Against Predatory Lending and activist Grace Ross were successful in getting Governor Patrick on their side.
The Governor’s statement accompanying his action on the bill states as follows:
Massachusetts is emerging from a period of far too many foreclosures, on far too many families, and in far too many communities facing significant economic challenges. It is no secret that, too often, the foreclosure was not properly effectuated. The entity purporting to foreclose did not have the legal authority to do so. The effect of these impermissible foreclosures has been lasting. Families were improperly removed from their homes. Buyers who later purchased the property — or, at least, believed they had done so — are now faced with title questions. Many of these buyers were investors, but many are now homeowners themselves. I commend the Legislature’s effort to address these problems. But I believe the proposed three year period is insufficient. A family improperly removed from its home deserves greater protection, and a meaningful opportunity to claim the right to the land that it still holds. The right need not be indefinite, but it should extend for longer than three years. Certainty of title is a good thing — it helps the real estate market function more smoothly, which ultimately can help us all. But this certainty should not come at the expense of wrongly displaced homeowners or, at least, not until we have put this period further behind us.
As a long time supporter of this bill, I am truly disheartened at this result. I thought the bill did a great job in balancing the rights of innocent home buyers who are stuck with unsellable properties through no fault of their own with the rights of folks who are fighting foreclosures. A three year statute of limitation — which is the same length for malpractice and personal injury claims — is a reasonable amount of time to mount a challenge to a foreclosure, especially when debtors have many months prior notice before a foreclosure sale. The people who would have benefited from this bill are everyday people who bought properties out of foreclosure, put money into them and improved them. I have personally assisted several of these families. Everyone agrees that the banks are largely at fault for the mess left behind with the foreclosure crisis but why put the rights of those who don’t pay their mortgages above those who do? I will never understand this rationale. Perhaps that’s why I could never be in politics!
So where do we go from here? I honestly don’t know. Fortunately, the Land Court recently issued a ruling which may help clear some of these toxic titles. Maybe the legislation will get another chance at the next session or when Patrick leaves office at the end of the year.
It appears we may be nearing the end of the misery resulting from the infamous U.S. Bank v. Ibanez foreclosure decision, which has caused hundreds if not thousands of title defects across the Commonwealth. A recent Land Court ruling combined with significant movement on curative legislation may clear the vast majority of these defective titles.
By way of background, titles of properties afflicted with Ibanez title defects came out of faulty foreclosures, and in worst cases, cannot be sold or refinanced. Many homeowners have been waiting for 5 years or longer for some kind of resolution so they can sell or refinance their homes.
Daukas v. Dadoun Land Court Ruling
This past week on July 23, 2014, Land Court Justice Keith Long (ironically the same judge who wrote the original Ibanez ruling) held that an Ibanez title can be cleared through the foreclosure by entry procedure as long as three years have passed since the faulty foreclosure. Typically in Massachusetts lenders use both the power of sale/auction method and entry method of foreclosure. Unlike the power of sale/auction method, however, a foreclosure by entry takes three years to ripen into good title. Judge Long ruled that even where the power of sale/auction method was defective due to non-compliance with the Ibanez decision, the foreclosure by entry method would not be affected by this non-compliance provided that the lender was the “holder” of the mortgage at the time of the entry and three years have passed since the entry.
So what does that mean in plain English? It means that titles with Ibanez defects may be insurable and marketable provided that (1) the foreclosing lender conducted and recorded a proper foreclosure by entry, (2) the entry was conducted by a lender who was the proper holder of the foreclosed mortgage, and (3) three (3) years have passed since the foreclosure entry. If you have been dealing with an Ibanez defective title, it’s best to contact an experienced title attorney and/or your title insurance company (if you have one) to see if you qualify. Feel free to contact me at [email protected].
Senate Bill 1987, sponsored by Shrewsbury State Senator Michael Moore and the Massachusetts Land Title Association, would render clear and marketable to any title affected by a defective foreclosure after 3 years have passed from the foreclosure. The bill, which has been passed by the Senate and is now before the House, is very close to being passed by both branches of the legislature, hopefully during this summer legislative session.
This is great news for the real estate market. I don’t have firm numbers, but there are probably hundreds, if not thousands, of these unsellable properties just sitting on the sidelines, and now they can get back onto the market. This is exactly what the inventory starved market needs.
Law Catching Up With Popular Airbnb Room Rental Website
With the promise of relatively easy money, Airbnb (Air Bed & Breakfast) is making innkeepers of many Greater Boston homeowners who are taking advantage of the popular website’s rental listing service. For those who don’t know already, Airbnb is a website where you can rent out one or more rooms in your home, condo or apartment for a nightly, weekly or monthly fee. But with some homeowners earning upwards of $20,000/year on rental income, Airbnb raises a multitude of thorny legal issues in Massachusetts, including whether an innkeeper or rooming house license is required, whether it violates condominium rules and regulations, and whether guests qualify as tenants. For example, in a recent case, a Back Bay condominium fined a unit owner over $9000 for unlawfully renting his unit out through Airbnb in violation of the condominium rules.
According to a recent Boston Globe article, Airbnb’s website currently lists nearly 3,500 properties for rent in the Boston area — a 63% increase since July 2013. Some of the lodging arrangements offered cost less than $50 per night and involve little more than a bed, a key, and zero conversation. Others offer entire homes, bed-and-breakfast-intensity chitchat, and prices that can top $800 per night. Aspiring innkeepers are everywhere, from Dorchester to Revere, Boston to Somerville, advertising “treetop views,” “steps to the T,” “cozy penthouses,” even “lovely puppies.”
But with success has come negative attention from cities and towns that want to tax the lodging arrangements as they do hotels, from landlords with leases that prohibiting sublets, and from neighbors who don’t want strangers traipsing through buildings. There are also some horror stories popping up with Airbnb guests turning into squatters and refusing to leave. In New York City, the Attorney General is waging a publicized legal fight to get Airbnb host names and recover unpaid hotel taxes. Last year, a group of Brookline residents dropped a dime on a local homeowner who rented out rooms to foreign exchange students via Airbnb. According to Brookline Building Commissioner Dan Bennett, an owner may rent up to two rooms to two lodgers as of right, as long as there are no separate cooking facilities. If an owner wants to have another lodger, they would require relief from the Zoning Board of Appeals.
Licensing and Registration Requirements
From a legal perspective, there is no doubt that Massachusetts municipalities will eventually be considering whether Airbnb qualifies as a rooming or lodging house, bed and breakfast or hotel for purposes of both regulation and taxation. Hey, you think cities will pass up a golden opportunity to increase tax revenue? No way.
The state Executive Office of Health and Human Services recently opined in a memo that lodging of this type is subject to local licensure as a bed and breakfast. For now, the City of Boston Inspectional Services Department has issued a temporary policy that they will not issue citations to homeowners while an internal group works on recommendations. A city policy is expected this fall, and as yet, no per-bed fee rate has been set.
The Licensing Board for the City of Boston requires a lodging house license if lodgings are rented to four or more persons not within the second degree of kindred to the person conducting the lodging. This license is an annual requirement and a lodging house is further required to keep, in permanent form, a register of the true name and residence of occupants for a period of one year. Lodging house license may require upgrades with smoke detectors and fire prevention systems which may be cost prohibitive for any Airbnb host.
The Boston Inspectional Services Department requires that a property be registered if it is to be occupied without the owner of the property present. This registration is done on an annual basis and inspection of the property is required on a five (5) year cycle by the Inspectional Services Department. This regulation applies to “a non-owner occupied room or group of related rooms within a dwelling used or intended for use by one family or household for living, sleeping, cooking and eating.” More information is available here.
In the suburbs, Airbnb may also run afoul of zoning by-laws which regulate whether a home is a single family or multi-family dwelling.
Taxes. The City of Boston excise and convention center taxes (together known as room occupancy taxes) may apply to an Airbnb listing. Refer to the Massachusetts Room Occupancy Tax Guide for more details. In addition, the Massachusetts excise tax may also apply. Refer to Section 64G(3) of the State Tax Code.
Guests Considered Legal Tenants?
Airbnb offers rentals for a daily, weekly or monthly charge. Whether a guest would be considered a legal tenant entitled to the vast protections under Mass. law depends primarily on the length of the tenancy. Under state law, if the premises is deemed a rooming house or lodging house, a rental for three consecutive months constitutes a tenancy at will which can only be terminated with a rental period notice of at least 30 days. Occupancy of a dwelling unit within a rooming house or lodging house for more than 30 consecutive days and less than three consecutive months may be terminated only by seven (7) days notice in writing by the operator of the rooming house or lodging house to the occupant. A daily rental is a grey area and would likely be considered a mere license. However, in all instances, the host must use court eviction proceedings to evict the guest, and cannot resort to self-help such as changing the locks, lest they be subject to liability.
Apartments
If you have the chutzpah of renting out a room in your leased apartment via Airbnb, the rental will likely violate your lease’s provision against sub-leasing and your landlord will not be happy. Most standard form apartment leases provide that any sub-lease must have the written consent of the landlord so the landlord can control who occupies the unit. Most landlords I know will not approve of an Airbnb rental situation, unless they are getting income and are assured of the security and safety of the situation. Renting out your apartment through Airbnb can violate your lease and subject you to a quick exist via eviction. From one legal question and answer website, tenants are already facing eviction for using Airbnb.
Condominiums
If you are renting out a room in your condo, Airbnb rentals may also conflict with condominium rules and regulations, many of which prohibit short term rentals, business use of units, or both. I highly doubt your condominium association and fellow unit owners would be happy if a unit were turned into a revolving door of bed and breakfast guests. Most condominium documents provide for rules governing the type and length of rentals of units. Unit owners who violate these rules can be subject to fines, penalties and court action. These cases should be popping up more and more.
Mortgage and Homeowner Insurance Policy Ramifications
Most conventional single family and condominium Fannie Mae compliant mortgages contain a provision where the owner agrees that the mortgaged property will remain the borrower’s principal place of residence and not an investment property. Investment property mortgage typically carry a higher interest rate and are sold in a different category in the secondary mortgage market. Homeowners who make a practice of using Airbnb may unknowingly be violating their mortgage agreements by converting the property into in essence a rental property. The same holds true for a standard homeowner’s insurance policy. Turning your home into a bed and breakfast certainly raises a host of new risks for both the homeowner and the insurance company underwriting those risks. If there is an unfortunate accident involving an Airbnb guest, watch out because the insurance company could deny the claim due to converting the character of the insured property into a rental property.
What’s Next?
Airbnb is certainly a game-changing technology in the rental space. As is common with any new distruptive technology the law is just catching up. But the law will catch up and Airbnb hosts and guest must pay attention and comply with whatever regulations and law that are passed. Check back here for more developments as I will be monitoring the situation.
Should Result In Much-Needed Inventory Boost To Housing Market
Good news to report for property owners saddled with toxic titles resulting from the seminal U.S. Bank v. Ibanez foreclosure ruling. Massachusetts lawmakers are poised to pass into law a new bill aimed at legislatively clearing up all of these defective titles.
By way of background, properties afflicted with Ibanez title defects, in worst cases, cannot be sold or refinanced. And homeowners without title insurance have been compelled to spend thousands in legal fees to clear their titles, while some have not been able to clear their titles at all.
The new legislation, Senate Bill 1987, would render clear and marketable any title affected by a defective foreclosure after 3 years have passed from the foreclosure. Most of these toxic titles were created prior to 2009, so the vast majority of them will be cleared up.
The bill does preserve any existing litigation over the validity of foreclosures. The legislation does not apply if there is an existing legal challenge to the validity of the foreclosure sale in which case record notice must be provided at the registry of deeds. The bill also does not shield liability of foreclosure lenders and attorneys for bad faith and consumer protection violations over faulty foreclosures.
The bill has recently been passed by the Senate and now moves on to the House. Word is that it should pass through the House and on to the Governor’s Desk.
Shrewsbury State Senator Michael Moore and the Massachusetts Land Title Association have sponsored this effort for several years now. I have been supporting this effort as well.
This is great news for the real estate market. I don’t have firm numbers, but there are probably hundreds, if not thousands, of these unsellable properties just sitting on the sidelines, and now they can get back onto the market. This is exactly what the inventory starved market needs.
(Hat tip to Colleen Sullivan over at Banker and Tradesman for passing along this important information).
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 Bankat 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?
Housing Courts Will Likely Face Increased Caseload
Giving an early Christmas present to distressed homeowners, the Supreme Judicial Court today ruled that a foreclosed upon homeowner may challenge a bank’s title and foreclosure sale irregularities through counterclaims in a post-foreclosure eviction in the Housing Court — rather than being forced to file a separate equity lawsuit in the Superior Court. The case is Bank of America v. Rosa, SJC-11330 (Dec. 18, 2013).
The high court also held that the Housing Court has jurisdiction to hear other counterclaims against foreclosing lenders, including fair housing, consumer protection (Chapter 93A), and HAMP related claims.
The likely impact of this ruling will be that the already busy Housing Court will now be “Ground Zero” for foreclosure related litigation. Foreclosed property owners will have more weapons to delay and prevent being evicted after foreclosures.
Overall, while the ruling seeks to protect the rights of foreclosed property owners, it has the potential to delay the housing recovery in Massachusetts. The longer folks who don’t pay their mortgages are allowed to live rent free in their foreclosed houses, the more the housing market suffers. There are plenty of creditworthy buyers and investors willing and able to buy up and rehab these foreclosed properties. Letting them sit and blight neighborhoods doesn’t help anyone in the long run. Just my opinion…
Court Points Out Potential Problem with Standard Notary Acknowledgment Form
Could the the standard form notary acknowledgment clause used in virtually every recent Massachusetts deed, mortgage and other recorded instrument be defective in certain situations involving power of attorneys? That may be the result of a recent court decision by the First Circuit Bankruptcy Appellate Panel in Weiss v. Wells Fargo Bank (click for link to case).
The ruling is causing quite a bit of angst in the real estate conveyancing community. Since Revised Executive Order 455 – Standards of Conduct for Notaries Public was passed by Gov. Romney in 2004, notaries public and attorneys have been using the approved notary acknowledgment form providing that the document is signed “voluntarily for its stated purpose. ” In the Weiss case, however, the court held that the notary acknowledgment of an attorney-in-fact under a power of attorney was defective as it failed to indicate that the principal has signed under “his free act and deed.”
The facts in the Weiss case are rather unique so it may have limited effect. But it should serve as a wake-up call for notaries public, attorneys and lenders that the better practice may be to use a notary public acknowledgment with the “free act and deed” language as was common before the 2004 notary rules.
Practice Pointer: Going forward, I recommend that real estate attorneys, notaries public and lenders should consider using “free act and deed” language in notary public acknowledgments. See below for form language.
Fact of the Case: Botched Notarization With Power of Attorney
In the Weiss case, a bankruptcy trustee for Chicopee homeowners attempted to use his “strong-arm” powers to void a refinance mortgage. The borrowers took out a refinance loan on their Chicopee home with Wachovia Mortgage. They signed a limited power of attorney to enable a one Shannon Obringer (who I assume was a bank employee) to sign the mortgage. The actual signing of the mortgage occurred in Pennsylvania by a Pennsylvania notary (I assume at Wachovia’s offices). You know this wasn’t going to end well….
The pre-printed notary acknowledgment form on the mortgage was the approved MA Executive Order form, which the notary partially completed as follows:
On this 11 day of June 2007, before me, the undersigned notary public, personally appeared Shawn G. Kelley and Annemarie Kelley by Shannon Obringer as Attorney in Fact, proved to me through satisfactory evidence of identification which was/were ________________ to be the person(s) whose name(s) is/are signed on the preceding document, and acknowledged to me that he/she/they signed it voluntarily for its stated purpose.
Although there was some ambiguity from the wording as to who actually appeared before the notary and the notary failed to fill out the identification form blank space, the Court held that these were not necessarily fatal. However, the Court ruled that the language in the notarization that it was signed “voluntarily for its stated purpose” was fatally defective because it did not sufficiently demonstrate that it was the borrowers’ “free act and deed” by the attorney-in-fact’s signature, as required by Massachusetts statutory and case law. The Court went on to void the mortgage in favor of the bankrupt debtor.
New Notary Public Acknowledgment
Going forward, I would consider using a notarization acknowledgment with the older “free act and deed” language in power of attorney signing situations. The 2004 acknowledgment should be ok for typical individual notarizations. Of course, you should consult with your title company, lender and/or attorney before notarizing in any tricky situations.
If you have any questions about notarization after this court ruling, please contact me at [email protected] or 508-620-5352.
CFPB 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.
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.
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.”
Rejects “In For One, In for All” Theory in Title Insurance Coverage
One little mistake in drafting and recording legal documents during a refinance can result in a huge problem for a lender — such as the lender having no legal ability to enforce the mortgage! (A slight problem..) GMAC Mortgage learned this the hard way last week at the Supreme Judicial Court in GMAC Mortgage v. First American Title Insurance Company (SJC-11161), where the court found in favor of First American Title Insurance Co., in a dispute over coverage under a lender’s title insurance policy.
A Doozy of a Mistake
As title defects go, this is a doozy, because it was easily preventable, and yet wrecked so much legal havoc in its aftermath. Elizabeth Moore and her husband, Thomas Moore, lived in a home in Billerica, the title to which was in Mr. Moore’s name. In 2001, for the purpose of refinancing the property, Mr. Moore executed a note and a mortgage to GMAC’s predecessor corporation (which obtained a lender’s title insurance policy from an agent of First American). Mr. Moore also signed a deed conveying the property from himself to himself and his wife as tenants by the entirety, as his plan was for both of them to hold title jointly as husband and wife. Under the “first in time” rule, in order for the mortgage to properly attach to the property, it should have been recorded before the deed went on record. However, the closing attorney mistakenly recorded the instruments in the wrong order, so the mortgage only attached to Mr. Moore’s 1/2 interest in the Property. Mr. Moore died in 2007. After his death, record title to the property vested solely in Mrs. Moore, and GMAC was left with no ability to enforce its mortgage against her or the property.
GMAC sued Mrs. Moore to enforce its mortgage rights, and she countersued for a slew of wrongful foreclosure and consumer protection claims. GMAC and Mrs. Moore wound up settling out of court, but GMAC tried to recoup all its legal fees and losses against the lender’s title insurance policy issued by First American.
Court Rejects Complete Defense Doctrine for Title Insurance
Unlike commercial general liability policies, which courts have ruled must provide coverage to all claims in a lawsuit if merely one claim is covered — the “in for one, in for all” theory — the SJC ruled that title insurance policies do not provide such wide-ranging coverage. Reaffirming the notion that a policy of title insurance is merely an indemnification policy and not a guaranty of perfect title, the justices ruled that First American’s duty was only to cover the aspects of Mrs. Moore’s claims affecting title, and not her wrongful foreclosure and consumer protection claims. This ruling will mostly affect the relationship between the large banks and lenders and title insurance companies, but provides a good reminder about what title insurance does and what it doesn’t cover.
Title Insurance Coverages Often Misunderstood
As a former outside claims counsel for a leading title insurance company, I have found that most insureds and claimants do not fully understand title insurance coverages. And why would they? It’s complicated stuff.
Most regular folks think that title insurance provides a full and complete guaranty and assurance that title to their home is pristine and clean. While title insurance gives an ordinary homebuyer “max coverage” available for title defects, it does not provide a 100% warranty that every conceivable problem affecting legal ownership of a home will be covered.
Subject to various exclusions and exceptions noted on the policy, a title insurance policy provides coverage for loss or damage sustained by reason of a covered risk as of the time of the closing. What are those covered risks? Some risks such as forgeries, improper legal descriptions, and recording errors are covered. Other risks such as certain encroachments, boundary line disputes, wetland issues, and zoning issues are not covered. Defects or liens arising after the issuance of a policy are likewise not covered, unless a new policy is issued. Also, the new enhanced policies provide for more expanded coverages than the older standard policies. It’s best to consult an experienced title insurance attorney for a complete explanation of what a title policy covers.
Richard D. Vetstein, Esq. is an experienced Massachusetts title insurance claims and coverages attorney who was previously outside claims counsel to a leading title insurance company. You can reach him at [email protected] or 508-620-5352.
We introduce this subject with a riddle: What entity is not a bank but claims to hold title to approximately half of all the mortgaged homes in the country? The answer is MERS. –Circuit Judge Bruce Seyla in Culhane v. Aurora Loan Servicing of Nebraska,
For the second time in a week, the U.S. Court of Appeals for the First Circuit has issued a major foreclosure opinion, this one in Culhane v. Aurora Loan Servicing of Nebraska, No. 12-1285 (click to download opinion and embedded below). Writing for a distinguished panel which included retired U.S. Supreme Court Justice David Souter, Circuit Judge Bruce Seyla held that the MERS system passes legal muster, but — overruling numerous lower court decisions to the contrary — gave borrowers the right to challenge mortgage assignments in the wrongful foreclosure setting. In my opinion, the net effect of this decision will put to rest the ubiquitous challenges to the MERS regime in Massachusetts, yet could result in a slight uptick in foreclosure challenges by blessing borrowers with much sought after legal standing to challenge faulty mortgage assignments.
This opinion is a must read. Judge Seyla is well known for his linguistic talents. Make sure you get out your dictionaries — Judge Seyla likes big words.
MERS — Mortgage Electronic Registration System, Inc.
For those who have not read our prior posts on MERS, it is an electronic registry of mortgages created by lenders in the 1990′s in order to facilitate the securitization and sale of mortgage back securities on Wall Street. Basically, when mortgages are bought and sold by various investors and lenders, MERS documents the transfers in its electronic database. However, historically the MERS-assisted transfers were not recorded through mortgage assignments in the state registries of deeds, a practice subject to much criticism. As for who “owns” the actual mortgage — another issue subject to much criticism and litigation — MERS claims that it acts solely as a “nominee” for the actual lender and holds only bare legal title to the mortgage as the mortgage holder of record.
When a loan go into default status and into foreclosure, MERS would, as in the Culhane case, facilitate the execution of a mortgage assignment to the current loan servicer, Aurora Servicing in this case. In another much criticized practice, one person wearing “two hats” would often execute these mortgage assignments. For the Culhane loan, an Aurora employee who was also a MERS “certifying officer” executed the assignment transferring the mortgage from MERS to Aurora. Ms. Culhane challenged this practice in her lawsuit seeking to void the foreclosure conducted by Aurora.
Borrower Has Legal Standing To Challenge Mortgage Assignments In Certain Cases
In a question of first impression in the First Circuit, the court considered whether borrowers have standing to challenge a MERS-initiated mortgage assignment even though a borrower is not a party to it. Overruling a significant number of cases around the country, the panel held that borrowers do have legal standing to challenge assignments as “invalid, ineffective, or void (if, say, the assignor had nothing to assign or had no authority to make an assignment to a particular assignee).” Judge Seyla adopted some common-sense reasoning, noting that under Massachusetts’ non-judicial foreclosure system, borrowers would be effectively left without a remedy to challenge a faulty foreclosure without giving them standing to contest a defective mortgage assignment.
MERS System Is Legal And Borrower Ultimately Loses
Ms. Culhane’s victory as this point unfortunately became Pyrrhic. Although the court held that borrowers could challenge mortgage assignments going forward, it did Ms. Culhane no good because she could not muster an adequate challenge to the MERS-Aurora mortgage assignment in her case. The court rejected Culhane’s argument that MERS did not legally hold the mortgage so it could not assign it, reasoning that nothing in Massachusetts mortgage law prohibited splitting the note and mortgage as the MERS system does. The court also found no legal problem with the same person signing on behalf of both MERS and Aurora.
Not The Last Word…
Culhane, however, may not be the last word on MERS and foreclosures in Massachusetts, as the Supreme Judicial Court always has the last and final say on these matters. Coincidentally, this week the SJC announced that it was soliciting friend-of-the-court briefs in Galiastro v. MERS,on whether MERS “has standing to pursue a foreclosure in its own right as a named ‘mortgagee’ with ability to act limited solely as a ‘nominee’ and without any ownership interest or rights in the promissory note associated with the mortgage; whether the prospective mandate of Eaton v. Federal National Mortgage Association, 462 Mass. 569 (2012), applies to cases that were pending on appeal at the time that case was decided.” The Galiastro case is scheduled for argument in April 2013.
As always, I’ll be on top of the latest developments in this ever-fluid area of law. Now, it’s time to eat those bagels and lox I’ve been waiting for.
Federal Appeals Court Reinstates Borrower’s Wrongful Foreclosure Claim
Noted Massachusetts foreclosure defense attorney Glenn Russell is on a roll of a lifetime, yesterday winning a rare victory on behalf of a borrower at the U.S. Court of Appeals for the First Circuit in Boston. The case is Juarez v. Select Portfolio Servicing, Inc. (11-2431) (click for opinion). It is, I believe, the first federal appellate ruling in favor of a wrongful foreclosure claimant in the First Circuit which covers the New England area, and one of the first rulings to delve into the problem of back-dated mortgage assignments.
Melissa Juárez purchased a home in Dorchester, Massachusetts on August 5, 2005, financing it with reputed sub-prime lender New Century Mortgage. The mortgage was packaged and bundled into a real estate mortgage investment conduit (“REMIC”), a special type of trust that receives favorable tax treatment, ultimately being held by U.S. Bank, as trustee. Juárez could not afford the payments on the mortgage and defaulted. Foreclosure proceedings began in the summer of 2008, culminating in the sale of her home at an auction in October 22,2008. She claims, however, that lender did not hold the note and the mortgage at the time they began the foreclosure proceedings against her, and that the foreclosure was therefore illegal under Massachusetts mortgage law.
The problem in the case centered around the mortgage assignment into U.S. Bank, as trustee — the same problem the same bank faced in the landmark U.S. Bank v. Ibanez case. The “Corporate Assignment of Mortgage,” appears to have been back-dated. It was dated October 16, 2008 and recorded in the corresponding registry of deeds on October 29, 2008, after the foreclosure had been completed. However, at the top of the document, it stated: “Date of Assignment: June 13, 2007,” in an obvious attempt to date it back prior to the foreclosure.
First Circuit Reinstates Borrower’s Wrongful Foreclosure Claims
After federal judge Denise Casper dismissed Juarez’s claims entirely on a motion to dismiss, the First Circuit reinstated the majority of Juarez’s claims. U.S. Bank claimed that the back-dated mortgage assignment was merely a confirmatory assignment in compliance with the Ibanez ruling, but the appeals court concluded otherwise:
Nothing in the document indicates that it is confirmatory of an assignment executed in 2007. Nowhere does the document even mention the phrase “confirmatory assignment.” Neither does it establish that it confirms a previous assignment or, for that matter, even make any reference to a previous assignment in its body.
Lacking a valid mortgage assignment in place as of the foreclosure, U.S. Bank lacked the authority to foreclose, the court ruled, following the Ibanez decision. Ms. Juarez and Glenn Russell will now get the opportunity to litigate their claims in the lower court.
Will Lenders Ever Learn Their Lesson?
The take-away from this case is that courts are finally beginning to scrutinize the problematic mortgage assignments in wrongful foreclosure cases. This ruling may also affect how title examiners and title insurance companies analyze the risk of back titles with potential back-dated mortgage assignments. If a lender records a true confirmatory assignment, it must do much better than simply state an effective date.
Court 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.
Legal Standing For Mortgage Lender/Servicer Must Be Established To Start Foreclosure
Today the Massachusetts Supreme Judicial Court has issued what I believe to be another very important ruling involving foreclosures in the case of HSBC Bank v. Matt (embedded below).This case is the latest piece in the trilogy of recent landmark foreclosure opinions, starting with U.S. Bank v. Ibanezthen Eaton v. Fannie Mae — which has now come full circle from very limited judicial oversight of foreclosures to a much stricter legal environment for lenders.
In my opinion, the net effect of the HSBC v. Matt ruling is to make Massachusetts somewhat closer to a judicial foreclosure state than a non-judicial foreclosure state, as the ruling requires a foreclosing lender or mortgage servicer to submit actual evidence of legal standing to foreclose when they start a Servicemembers Act proceeding, a requirement that has never existed under Massachusetts law. This new requirement could prove to be potentially problematic to mortgages which are held in complex mortgage backed securitized trusts. However, a portion of the Court’s ruling — that only military members can raise a challenge — could turn out to blunt its impact. In the short-term, the Land Court will have to determine what evidence and documentation is legally sufficient for lenders to establish proper legal standing to foreclose.
The case involves the Servicemember’s Act proceeding which protects active military members from foreclosure. In Massachusetts, after a lender issues default notices, it will commence a Soldiers and Sailors Civil Relief Act in the Land Court to ensure that the borrower is not on active military duty and to cut off any rights to challenge the foreclosure based on military status. Although a Soldiers and Sailors Act proceeding is not mandatory in order to legally foreclosure, the customary practice in Massachusetts is for lenders to go through the proceeding in order to ensure clear title to the foreclosed property. A Soldiers and Sailors Act proceeding has historically been perfunctory, but in recent years with the mortgage meltdown, borrowers have increasingly tried to challenge foreclosure in the Soldiers and Sailors Act proceeding.
Jodi Matt, represented by noted foreclosure defense attorney, Glenn Russell, Esq. (who also brought the Ibanez case), challenged HSBC Bank’s ability to foreclose in the Soldier’s and Sailors proceeding, arguing that HSBC could not establish that it held the right to foreclose as the trustee of the securitized trust which purported to hold Matt’s mortgage. The Land Court rejected Matt’s challenge on the grounds that Ms. Matt was not in military service. The SJC took the case on direct appellate review.
SJC Changes The Foreclosure Landscape Yet Again
Although it recognized that Ms. Matt was not in the military service — and ruled that borrowers not in the military cannot bring challenges under the Soldiers & Sailors Act — the SJC reached the question whether HSBC Bank had legal standing to start the foreclosure process in the Soldiers & Sailors Act proceeding. Following its prior landmark rulings in Ibanez and Eaton, the Court held that HSBC Bank lacked standing under the Act because it merely claimed to have the contractual option to become the holder of the mortgage. The SJC said that wasn’t good enough, and going forward a foreclosing lender must provide actual evidence to the Land Court that it is the actual holder of the mortgage or a duly authorized agent on behalf of the mortgagee.
When this decision is read together with the Court’s opinion in Eaton, which held that foreclosing lenders must hold both the promissory note and the mortgage, and in the context of securitized mortgages, the Matt ruling starts looking like a very BIG decision. Because of the extremely complex manner in which securitized mortgage trusts were organized by Wall Street (outside the scope of this post), there is an inherent problem in ascertaining which entity within the trust framework actually holds the mortgage and the underlying indebtedness, and therefore, the power to foreclose. As a result of this ruling, foreclosing lenders and mortgage services may have a much more difficult time in foreclosing.
What type and the quality of evidence that lenders need to submit will be left to the Land Court justices, as gate-keepers, to decide in future cases. That is a huge unknown question. The Land Court is presently overwhelmed with pending foreclosure petitions, quiet title actions and other matters given recent court budget cuts. Rest assured, this may play a factor in how they handle foreclosures post-Matt.
I will continue to monitor this ever-changing area of the law.
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.
Court Will Consider Mortgage Servicer/MERS Standing and Statutory Foreclosure Affidavits
The Supreme Judicial Court has a busy Fall Term with several important foreclosure cases on the docket. Here’s a quick summary.
HSBC Bank v. Jodi Matt (SJC-11101)
The SJC is considering whether a mortgage servicer 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. I wrote about this case in a prior post here. This ruling will affect just about every conventional mortgage foreclosure in the state. The lower court Land Court opinion can be read here. The court asked for friend-of-the-court briefs, and the Real Estate Bar Association filed a brief supporting the foreclosing lenders. Glenn Russell’s brief for the appellant Jodi Matt can be read here.
Oral arguments were held in early September, but unfortunately the webcast is unavailable. One of my sources told me that the justices were very active and peppered both attorneys with lots of questions.
Following the recent Eaton v. FNMA case, which held that a mortgage servicer may foreclosure upon a showing of proper agency and authority, I predict that the Court will ultimately hold that servicers and lenders holding rights to securitized mortgages have legal standing to start the Servicemembers Civil Relief Act proceeding, even if they merely hold a contractual right to the actual mortgage. The most compelling rationale for such a ruling is that the only purpose of the Servicemember proceeding is to ascertain whether the borrower is in active military service. It is not intended to be a forum to litigate issues relating to the propriety of securitized mortgage transfers and contractual standing.
Federal National Mortgage Ass’n v. Hendricks (SJC 11234)
This case has the potential to change Massachusetts foreclosure practice. The issue presented is whether the long-standing Massachusetts statutory form foreclosure affidavit that the foreclosing lender has complied with the foreclosure laws is on its face sufficient. The case will also decide whether the statutory power of sale form, originally drafted in 1912, is also facially sufficient. The docket and briefs filed in the case can be found here.
The case originated from the Boston Housing Court where Hendricks fought his post-foreclosure eviction by Fannie Mae, asserting that the affidavits filed by Fannie Mae reciting compliance with the foreclosure statute were inadmissible and insufficient. A Housing Court judge disagreed, and upheld the foreclosure and the eviction.
With the well-publicized robo-signing controversy looming in the background, I would not be surprised if the SJC rules in favor of Hendricks here and in the process tightens up the requirements for filing foreclosure affidavits. Indeed, that is the trend with the Legislature’s recent passing of the Foreclosure Prevention Act. As with the Eaton v. FNMA ruling, the Court should likely make its ruling prospective and not retroactive so as to not disrupt titles in the Commonwealth.
Galiastro v. MERS (SJC DAR 20960)
The SJC just accepted direct appellate review from the Appeals Court in this interesting case. This case will finally decide whether Mortgage Electronic Registration Systems (MERS) has standing to foreclose in its own name. The case, however, is somewhat mooted because MERS no longer forecloses in its own name, but there are plenty of MERS foreclosures in back titles. The SJC has announced that it will solicit friend-of-the-court briefs on the issue of “whether MERS “has standing to pursue a foreclosure in its own right as a named ‘mortgagee’ with ability to act limited solely as a ‘nominee’ and without any ownership interest or rights in the promissory note associated with the mortgage; whether the prospective mandate of Eaton v. Federal National Mortgage Association, 462 Mass. 569 (2012), applies to cases that were pending on appeal at the time that case was decided.” This case will be argued in April 2013. I will have analysis after that.
Condo Sales May Get Slight Boost, But Financing Rules RemainTight
Responding to lender, condominium association and consumer outcry that the existing FHA condominium lending guidelines are too strict, the Federal Home Administration (FHA) on September 13, 2012 announced a round of changes which will hopefully make it easier for borrowers to qualify for FHA condo loans. The full FHA announcement can be found here.
While some of the changes are a step in the right direction, I think overall they are a mixed bag, as FHA left some of the most onerous provisions intact. I’m skeptical that these new changes will have a major impact on condominium sales, but of course, any loosening of the strict requirements is a good thing.
Condo Fee Delinquency Rule Increased to 60 Days Overdue
FHA is softening its stance on delinquent monthly condo fees and home owner association (HOA) dues. FHA is now allowing up to 15% of a project’s units to be 60-days delinquent on condo fees, up from just 30 days delinquent under the prior rule. This change acknowledges the depressed economy which has caused many condo unit owners to have trouble paying their condo fees. This is definitely a good change.
Expanded Investor Purchasing Allowed
Under the new rules, investors can come in and buy more units in a project than they could previously. They can now buy up to 50% of the project units, up from just 10% before, but with an important caveat: the developer must convey at least 50% of the units to individual owners or be under contract as owner-occupied.
Owner Occupancy Limits and Total FHA Financing Percentage Unchanged
The biggest disappointment of the new rules is that the main impediment to FHA condo financing remains unchanged, and that’s the 50% rule. Before any new buyer can obtain FHA financing, 50% of a project’s units be sold to third party buyers. This is what I’ve called the Catch-22. FHA provides the most first time home financing, so how can a developer expect to sell out his project if he cannot offer initial FHA financing? Doesn’t make any sense. I agree with the National Association of Realtors and the Community Association Institute on this one. Get rid of the 50% rule or decrease it to 25% or less.
Another restriction that hasn’t changed is the number of units that can have an FHA-backed loan. Only half the units can have FHA financing, so a borrower can’t get FHA approval if his unit would put the number of FHA financed units over 50%. That limitation remains unchanged, and that’s a killer for a lot of projects.
Spot Approvals Remain Dead
Mortgage lenders used to love FHA “spot approvals” which could by-pass the involved standard FHA approval process in order to get individual unit financing. Problem was is that they love spot approvals way too much, and they got abused. Ah, a few bad apples ruin it for everyone. FHA did not resurrect spot approvals from the dead on this go-around. Maybe they will be back when the economy gets better.
More Commercial Space OK
Projects can also have more space devoted to non-residential commercial uses than before. You see this a now in Boston with Starbucks and a bank office on the ground floor of a new condominium building. Up to this point, only 25% of project space could be used for commercial purpose. Now 50% of the project can be commercial, although certain authority for approval is reserved for the local FHA office. This will benefit the newer mixed use projects in urban markets.
Fidelity Insurance Coverage Required
Important for all condominium professional management companies. If the condominium engages the services of a management company, the company must obtain its own fidelity coverage meeting the FHA association coverage requirements or the association’s policy must name the management company as an insured, or the association’s policy must include an endorsement stating that management company employees subject to the direction and control of the association are covered by the policy. This is a substantial change to the previous requirements that required management companies to obtain separate fidelity insurance for each condominium.
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Richard D. Vetstein, Esq. is an experienced Massachusetts condominium attorney who regularly advises condominium associations on FHA certification issues. Please contact Mr. Vetstein at [email protected].
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.
Richard D. Vetstein, Esq. is regarded as one of the leading real estate attorneys in Massachusetts. With 25 years in practice, he was voted a "Super Lawyer," a "Top Lawyer" by Boston Magazine and "Best of Metrowest." For Rich's professional biography, click here. If you are interested in hiring Rich or have a legal question, email or call him at [email protected] or 508-620-5352.
Short Sale Sellers In 2014 Would Get Key Tax Break
