Abate v. Fremont Investment & Loan: High Court Rules That “Try Title” Procedure Only Available After Foreclosure Auction Completed
After Deutsche Bank foreclosed his Newton home, Thomas Abate brought a lawsuit in the Land Court challenging the foreclosure under the “try title” procedure under General Laws chapter 240, sections 1-5. Seeking to invalidate the foreclosure, Mr. Abate utilized the popular defense of attacking the assignment of his mortgage from MERS (Mortgage Electronic Registration System) to Deutsche Bank. After several months of legal wrangling in the Land Court, Judge Robert Foster dismissed Abate’s challenges to the MERS assignment, and dismissed his try title claim. Abate then appealed to the SJC.
Prior to the SJC’s ruling, there was confusion in the foreclosure setting regarding the proper method to determine whether the property owner had legal standing to bring a try title case and whether the owner must bring the case before or after the foreclosure. Putting the proverbial nail in this particular foreclosure defense coffin, the SJC held that a borrower can only use the try title procedure after a foreclosure has been concluded, not before. The Court also ruled that lenders can seek to test borrowers’ legal theories and dismiss these claims very early in the proceeding on a motion to dismiss. The net result is a blow to foreclosure challengers — borrowers must wait until after a foreclosure is completed to bring a lawsuit; and it will be easier for lenders to dismiss claims challenging mortgage assignments and the foreclosures based on such assignments.
I asked preeminant foreclosure defense Attorney Glenn Russell for his thoughts on the ruling, and he said this:
Well from a homeowner’s perspective I have to say that I was hoping for a different outcome, however it’s not all bad. Bottom line, borrowers cannot use try title unless the auction happened, or they can make argument that there never was a legally valid mortgage, or one is trying to enforce a void mortgage, or one that has been discharged. The key thing is that a homeowner cannot bring a try title claim (standing under the “first step” of the try title action), unless the mortgage is foreclosed.
So after several key rulings in favor of foreclosure victims in the earlier part of the decade such as the seminal U.S. Bank v. Ibanez case, the SJC has issued several pro-lender decisions of recent vintage. Is this a sign of foreclosure fatigue or are the justices merely following the law? Maybe a bit of both…
With the economy improving as well, the net effect is likely to be less foreclosures and less legal challenges to them — which will only continue to boost an improving housing market.
Banker and Tradesman is reporting that Bristol, Plymouth and Norfolk County Registrars of Deeds plan to file a class action suit against Mortgage Electronic Registration System (MERS), aiming to recoup land recording fees they believe they are owed. B&T reporter Colleen Sullivan reports that:
The counties are being represented by Bernstein Liebhard LLP, a New York firm specializing in class actions which has already brought a similar suit on behalf of all the counties of Ohio. John Mitchell, a Bristol County commissioner, said the board considered pursuing a claim last year, but decided to hold off until the national mortgage settlement between the banks and the states’ attorneys general was resolved. But as it became clear that the vast bulk of the funds in that settlement would go towards foreclosures and loan modifications, he said the county decided to pursue the matter. Bristol County officials estimate the county may have lost out on millions of dollars in fees over the past decade because of the alleged use of MERS as a kind of private registry among large banks. A rough calculation prepared by county officials last year came up with a figure of between $3.1 million and $6.5 million lost, using a conservative estimate of one or two additional non-recorded assignments per MERS- registered property.
“Over the last month, we were approached by [Bernstein Liebhard] and other firms….they already had Norfolk and Plymouth, and we thought it made sense to get as many counties together,” Mitchell told Banker & Tradesman. Mitchell said he wasn’t sure if the remaining Massachusetts counties with county-level governance would join the suit. The relatively small size of counties like Nantucket and Dukes would mean far smaller sums at stake.
County-level governance was abolished in Massachusetts in eight of the state’s 14 counties around the turn of the century. Only Barnstable, Bristol, Norfolk, Plymouth, and Dukes retain county boards; Nantucket has a combined city-county government. The remaining boards retain the right to bring independent actions in court.
“We’re familiar with their claims, and there’s no merit to them,” said Janis Smith, spokeswoman for MERS. Smith said that by registering under the MERS name, banks fulfill the purpose of having a registry, that is, alerting the public of any existing leins on a property. “MERS does not eliminate or replace county records, and the recording fees are paid,” she said. “The MERS business model is legal in all 50 states and has been affirmed by Massachusetts courts.”
“I commend the counties,” said John O’Brien, the registrar of deeds in Essex County, who has been an active critic of MERS for the past two years. O’Brien was the first public official in Massachusetts to calculate how much the MERS system may have cost the state in allegedly lost recording fees, coming up with a figure of $22 million for his county alone. “If I had the authority, I would have filed this suit two years ago.”
The other registries fall under Secretary of State William Galvin’s jurisdiction. O’Brien said he plans to petition the legislature to recover his ability to bring suit on behalf of Essex County as one of its elected officials.
The Registrars are reportedly incensed that the MERS private recording system has deprived them of millions of recording fees. We will keep tabs on this important case.
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness…” — Charles Dickens, A Tale of Two Cities
AG Martha Coakley Files Major Civil Action Against Big Banks
First, the big news. Attorney General Martha Coakley has filed a huge consumer protection lawsuit over wrongful foreclosures against the top 5 U.S. lenders, Bank of America Corp., J.P. Morgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Ally Financial. Coakley also names Mortgage Electronic Registration System, or MERS, the electronic mortgage registration system which proliferated during the securitization boom of the last decade. The lawsuit said it sought “to hold multiple banks accountable for their rampant violations of Massachusetts law and associated unfair and deceptive conduct amidst the foreclosure crisis that has gripped Massachusetts and the nation since 2007.” Specifically, Coakley blames the banks for not complying with the U.S. Bank v. Ibanez decision in foreclosing mortgages without evidence of legal ownership of the underlying debt, improper statutory foreclosure notices and illegal “robo-signing.”
I’m sure Coakley will be able to extract a sizable settlement from the banks, but the question remains, what about the foreclosure mess and toxic titles left in its wake? I hope Coakley seriously considers setting up a toxic title monetary fund to assist homeowners who lack title insurance with clearing their titles due to bungled foreclosures in their chain of title.
Culhane v. Aurora Loan Servicers: Federal Judge William Young Grapples With Legality Of MERS System
While AG Coakley was putting the finishing touches on her lawsuit, across the way at the Moakley Courthouse at Fan Pier, U.S. District Judge William G. Young and his cadre of law clerks were attempting to work their way through the legal maze which is the MERS (Mortgage Electronic Registration System) system. The case is Culhane v. Aurora Loan Services of Nebraska. We’ve written about MERS quite a bit here on the blog.
I can say with confidence that Judge Young is one of the smartest jurists on the federal bench and in the Commonwealth. I know this first-hand because I clerked for him in law school.
It took him 59 pages to sort though the myriad of legal issues implicated by the complex MERS system, and he had some very choice (and funny) remarks about the system:
“MERS is the Wikipedia of Land Registration Systems.” . . . “A MERS certifying officer is more akin to an Admiral in the Georgia navy or a Kentucky Colonel with benefits than he is to any genuine financial officer.”
Judge William G. Young
But ultimately, Judge Young concluded that MERS did not run afoul of Massachusetts law, by the “thinnest of venires.” So there you have it. MERS is kosher in Massachusetts, at least according to Judge Young.
However, Judge Young’s ruling came with some important caveats. First, he held that MERS does not have the power to foreclose in its own name. This is no longer an issue as MERS new policy is not to foreclosure in its name. But what about prior foreclosures in MERS’ name? Are those still considered valid?
Second, in accordance with Mass. Gen. Laws ch. 183, sec. 54B, he ruled that assignments from MERS’ vice presidents to loan servicers or holders are valid despite the signer’s lack of personal knowledge or proof of actual authority. This is a direct contradiction with AG Coakley’s claim that the MERS assignments are invalid.
Lastly, the most important aspect of Judge Young’s ruling was his agreement that foreclosing lenders must hold both the loan (promissory note) and the mortgage together in unity, to foreclose, following the controversial Superior Court opinion in Eaton v. FNMA which is now on appeal with the Supreme Judicial Court. However, Judge Young added an important distinction to this rule, saying that that loan servicers could foreclose in their names where the loan is held in a pooled securitized trust, provided they otherwise comply with Massachusetts foreclosure law. This is a very important distinction as a fair amount of foreclosures are brought in the name of the loan servicer. I’m not so sure Judge Young got this one right as a loan servicer rarely if ever holds the note as assignee, as Professor Adam Levitin notes, but the ruling certainly assists the industry.
So all eyes are back on the SJC awaiting its ruling in the Eaton case which could have even far more impact than the Ibanez decision. Of course, these two events underscore that foreclosures are still a mess crying out for legislative help (which hasn’t come at all), and the crucial importance of title insurance, which all buyers should elect at their closings.
I’ve done a quick video analysis and embedded Judge Young’s opinion below.
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.
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!
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.
Judge Tells Lenders You Can’t Have Your MERS Cake & Eat It Too
“The sophisticated financial minds who wrought the MERS regime sought to simplify the process of repeatedly transferring mortgage loans by obviating the need and expense of recording mortgage assignments with each transfer. No doubt they failed to consider the possibility of a collapse of the residential real estate market, the ensuing flood of foreclosures and the intervention of state and federal courts.”
–Judge Melvin S. Hoffman, U.S. Bankruptcy Court Judge for Massachusetts, In Re. Schwartz, Aug. 22, 2011
Coming off a ruling (In re. Marron) that the MERS mortgage registration system does not run afoul of Massachusetts law, the same jurist, Bankruptcy Court Judge Melvin Hoffman, on Monday issued a ruling voiding a MERS-held mortgage which fell victim to sloppy paperwork. As Banker & Tradesman reports, the case is potentially troubling for any MERS held mortgage in default. The case is In Re. Schwartz and is embedded below.
Debtor Challenges Foreclosure Of Securitized Mortgage
During her bankruptcy proceeding, the debtor, Sima Schwartz, challenged the May 24, 2006 foreclosure of her Worcester home by Deutsche Bank. She asserted that under the U.S. Bank v. Ibanez decision issued by the Massachusetts Supreme Judicial Court earlier in the year, Deutsche did not own the mortgage on the property when it first started the foreclosure process.
The “lender” on her original mortgage was Mortgage Electronic Registration System (MERS), as nominee for First NLC. Many housing advocates have criticized MERS’ role in the foreclosure crisis, with the New York Times weighing in most recently. The mortgage loan was securitized and subsequently transferred at least 3 times, ultimately winding up held by Deutsche Bank. No assignments of mortgage were recorded with the registry of deeds until a day before the foreclosure sale on May 23, 2006. That assignment was executed by Liquenda Allotey, one of the hundreds of deputized vice presidents of MERS, and an alleged “robo-signer” for Lender Processing Service (LPS) which has come under fire for document irregularities. The assignment ran to Deutsche Bank, which completed the foreclosure sale on May 24, bid its mortgage debt and purchased the property.
There was no dispute that under the U.S. Bank v. Ibanez case, the late-filed mortgage assignment rendered the foreclosure defective unless Deutsche could establish its ownership of the mortgage loan when the foreclosure process started. During the trial, Deutsche submitted all the various agreements documenting the securitization process including the pooling and servicing agreement (PSA), loan purchase agreement, bill of sale and custodial log.
Judge: Lenders Can’t Have Their MERS Cake And Eat It Too
Critically, as the judge noted, the PSA provided that for a MERS mortgage such as this, assignments of mortgages did not have to be prepared or delivered to the buyer of the loans. As is endemic with most securitized mortgages, the participants in the securitization did not deliver and record any assignments documenting such transfers, instead, relying on the internal MERS registration system, which is out of the public records view. Throwing this provision back in the lenders’ faces, the judge basically said “you can’t have your cake and eat it too” — rendering his ruling that the mortgage itself (as opposed to the underlying loan) was never transferred through the securitization system from entity A, B, C, to Deutsche Bank, and that MERS had always held, and never relinquished, “legal title” to the mortgage. Accordingly, the judge held, Deutsche Bank was never the owner of the mortgage in the first place, could not foreclose in its name, and its foreclosure sale was null and void.
Impact: Are Foreclosures Of MERS Mortgages Now Open To Challenge?
I’m not sure what’s going to happen with Ms. Schwartz’s home. She’s been living in it since 2006 probably mortgage/rent free! Certainly, MERS could (and should have) started a second foreclosure and done it the right way. I’m perplexed why Deutsche and MERS kept fighting this case in court. As for the broader implications, it’s still unclear as to the effect on past and current foreclosures. One this is for certain, the ruling is yet another example of the legal fallout from the deficiencies in the MERS system.
Lastly, while I don’t claim to be a mortgage securitization expert, if the mortgage was not assigned/transferred properly and if it is MERS that holds legal title, then there is a mortgage backed security investor somewhere who THINKS he owns this mortgage but, in fact, does not. Even if MERS wanted to transfer the mortgage to the relevant trust or foreclose, sell the property and transfer cash, they may not be able to for legal and tax reasons. Now multiply by a million. So how many mortgage backed securities are missing how many mortgages? Are there mortgage backed securities out there that don’t actually own ANY mortgages? If someone sells a “mortgage backed” security that doesn’t legally own the mortgages in question, hasn’t that someone committed fraud? And furthermore, how the hell do we clean this up?
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.
First the robo-signing controversy. Then the U.S. Bank v. Ibanez ruling. Now the next bombshell ruling in the foreclosure mess has just come down from a New York federal bankruptcy judge.
The case is In Re Agard (click here to download), and essentially throws a huge monkey wrench into a hugely important cog of the entire U.S. mortgage market, the Mortgage Electronic Registration System, Inc. known as MERS.
What Is MERS?
MERS, even for many seasoned real estate professionals, is the most important entity you’ve never heard of. In the mid-1990s, mortgage bankers created MERS to facilitate the complex mortgage securitization system where hundreds of thousands of mortgage loans were (and still are) packaged and bundled as securities for sale on Wall Street. Each mortgage entered into the MERS system has a unique 18 digit Mortgage Identification Number (MIN) used to track a mortgage loan throughout its life, from origination to securitization to payoff or foreclosure. The MERS system was vital to the proliferation of the $10 trillion U.S. residential securitization mortgage market.
Critics say that the decision to create MERS was driven, in large part, to avoid paying recording fees charged by county registry of deeds which required that all mortgage transfers and assignments be properly recorded and indexed in publicly available registries of deeds. Thus, MERS was designed essentially as a privately run, national registry of deeds under which MERS would act as the record “owner” and depository of all mortgages participating in the system, while the mortgage notes and loans themselves were freely bought and sold on the secondary market. About 50% of all U.S. mortgages participate in the MERS system.
The Ruling: MERS Cannot Legally Transfer & Assign Mortgages
Bankruptcy court judge Robert E. Grossman’s ruling is a bombshell and appears to be the first federal ruling holding that MERS cannot legally do what it was set up to do: transfer and assign mortgages through its electronic registry. Judge Grossman ruled that the foreclosing lender had to show that it owned both the note and the mortgage — rejecting the popular theory that the “note-follows-the-mortgage” — and there was no evidence that it held the note. “By MERS’s own account, the note in this case was transferred among its members, while the mortgage remained in MERS’s name,” Grossman wrote. “MERS admits that the very foundation of its business model as described herein requires that the note and mortgage travel on divergent paths.”
The judge found that the MERS membership agreement wasn’t enough to assign the mortgage and that to do so the lender would have to give power of attorney or similar authority to MERS. MERS’s membership rules don’t create “an agency or nominee relationship” and don’t clearly grant MERS authority to take any action with respect to mortgages, including transferring them, Grossman wrote. Because the interests at issue concern “real property” — land and buildings — under state law, any transfer has to be in writing, which isn’t done under the MERS system, he said.
The judge concluded, rather harshly, that “MERS’s position that it can be both the mortgagee and an agent of the mortgagee is absurd, at best.”
Impact of the Decision
The impact of this ruling may be quite muted. First the ruling is “dicta” which means that the ruling didn’t have much to do with the case since the judge upheld the validity of the foreclosure. Second, this ruling comes from the lowest level of the federal bankruptcy court system in New York, and will surely be appealed to a federal appeals court, and then possibly to the U.S. Supreme Court. Other courts have ruled in favor of MERS on the same issues, as well. The ruling could be overturned ultimately–if it gets there. Third, Congress and state legislatures could intervene, and bless what MERS has been doing for the past decade. The judge invited lawmakers to do just that.
Thus, it’s hard to say how much, if any, impact this ruling with have in other states or nationally. Plus, any easy fix would appear to be for MERS and its lender partners to go back, and record their mortgage assignments and pay the recording fees due.
That said, the decision definitely sends a shot across the bows of MERS and its partners (Fannie and Freddie), and should be watched closely by industry experts.
Richard D. Vetstein, Esq. is regarded as one of the leading real estate attorneys in Massachusetts. With over 25 years in practice, he is a four time winner of the "Top Lawyer" award by Boston Magazine, a "Super Lawyer" designation from Thompson/West, 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.
Abate v. Fremont Investment & Loan: High Court Rules That “Try Title” Procedure Only Available After Foreclosure Auction Completed
