Eaton v. Fannie Mae

The First Circuit Strikes Again in Culhane v. Aurora Servicing! Grants Borrowers Legal Standing To Challenge Mortgage Assignments, But Upholds MERS System

by Rich Vetstein on February 16, 2013

in Foreclosure, Mortgage Crisis, Mortgages, Title Defects

11119985-homeowners-stop-foreclosureWe 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.

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RDV-profile-picture-larger-150x150.jpgRichard D. Vetstein, Esq. is a Massachusetts real estate attorney who writes frequently about new foreclosure issues concerning the real estate industry. He can be reached at [email protected].

Culhane v. Aurora Loan Servicing (1st Cir. Feb. 15. 2013) by

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Averting The Apocalypse: Foreclosing Lenders Avoid Disaster and Given More Options To Foreclose In Eaton v. Fannie Mae Case

by Rich Vetstein on June 22, 2012

in Fannie Mae, Foreclosure, Massachusetts Real Estate Law, Mortgage Crisis, Mortgages, Title Defects, Title Insurance

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

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

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

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

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

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

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

FHFA Files Amicus Brief and SJC Asks For More Guidance

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

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

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

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

Disaster Averted: Ruling Given Prospective Effect

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

MERS System Given Blessing?

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

Make Way For the “Eaton” Affidavit

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

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

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

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

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

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

What’s Next?

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

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

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

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

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Richard D. Vetstein, Esq. is an experienced Massachusetts real estate attorney. He can be reached by email at [email protected] or 508-620-5352.

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Breaking: SJC Rules For Lenders and MERS In Eaton v. Fannie Mae Case

by Rich Vetstein on June 22, 2012

in Fannie Mae, Foreclosure, Massachusetts Real Estate Law

Huge Sigh of Relief For Mortgage and Foreclosure Industry

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

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

Eaton v. Fannie Mae SJC Ruling

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Supplemental and Friend-Of-The-Court Briefs Filed In Eaton v. Federal National Mortgage Ass’n (Fannie Mae)

by Rich Vetstein on January 31, 2012

in Fannie Mae, Foreclosure, Massachusetts Real Estate Law, Mortgage Crisis, Mortgages, Title Defects, Title Insurance

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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Breaking News: SJC Concerned Over Potential Disastrous Impact On Foreclosure Titles In Eaton v. Fannie Mae

by Rich Vetstein on January 9, 2012

in Fannie Mae, Foreclosure, Massachusetts Real Estate Law, Mortgage Crisis, Mortgages, Title Defects

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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Massachusetts Superior Court Again Endorses “Produce The Note” Foreclosure Defense

by Rich Vetstein on November 8, 2011

in Foreclosure, Massachusetts Real Estate Law, Mortgage Crisis, Mortgages

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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SJC Looks At Roles Of Mortgage Servicers and MERS In Eaton v. FNMA Arguments

by Rich Vetstein on October 3, 2011

in Fannie Mae, Foreclosure, Massachusetts Real Estate Law, Mortgage Crisis, Mortgages

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

in Fannie Mae, Foreclosure, Massachusetts Real Estate Law, Mortgage Crisis, Mortgages

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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SJC To Consider “Produce The Note” Foreclosure Defense In MERS Mortgage Case

by Rich Vetstein on September 8, 2011

in Fannie Mae, Foreclosure, Massachusetts Real Estate Law, Mortgage Crisis, Mortgages

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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