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Chapman Law Review
ROBO SIGNERS: THE LEGAL QUAGMIRE OF INVALID RESIDENTIAL FORECLOSURE PROCEEDINGS AND THE RESULTANT POTENTIAL IMPACT UPON STAKEHOLDERS
Copyright (c) 2013 Chapman Law Review; Gloria J. Liddell; Pearson Liddell, Jr.
Reports began erupting through the press during the latter half of 2010 exposing a potentially virulent financial mishap in the banking and mortgage related industry wherein some of the largest mortgage companies in this country used the same document processor to process foreclosure paperwork. This document processor, Ally Financial, admitted to processing (or signing off on) the foreclosure paperwork without reading the documents. Indeed, Ally Financial had to stop evictions of homeowners in a number of states. It was reported at that time that many hundreds of other companies, including Fannie Mae and Freddie Mac, also used Ally Financial to service their loans. In addition to Ally Financial, there have been revelations involving other document processors acting as what have been termed “robo-signers.”
A New York Times article dated February 4, 2012, entitled: “A Mortgage Tornado Warning, Unheeded,” brought to light an internal confidential Fannie Mae document forewarning of the practice of “robosigning.” This report was in direct response to a personal investigation conducted by an individual who lost his family home to foreclosure.
[A]fter losing a family home to foreclosure, under what he thought were fishy circumstances, Mr. Lavalle, founder of a consulting firm called the Sports Marketing Group, began a new life as a mortgage sleuth. In 2003, when home prices were flying high, he compiled a dossier of improprieties on one of the giants of the business, Fannie Mae.
In hindsight, what he found looks like a blueprint of today’s foreclosure crisis. Even then, Mr. Lavalle discovered, some loan-servicing companies that worked for Fannie Mae routinely filed false foreclosure documents, not unlike the fraudulent paperwork that has since made “robo-signing” a household term. Even then, he found, the nation’s electronic mortgage registry was playing fast and loose with the law–something that courts have belatedly recognized, too.
You might wonder why Mr. Lavalle didn’t speak up. But he did. For two years, he corresponded with Fannie Mae executives and lawyers. Fannie Mae later hired a Washington law firm to investigate his claims. In May 2006, that firm, using some of Mr. Lavalle’s research, issued a confidential, 147-page report corroborating many of his findings.
“Robo-signing” has become a term of art. One court has defined robo-signing as “complet[ing] affidavits and other essential foreclosure documents without personal knowledge of the documents’ veracity and without verification of the documents’ contents.” Attorneys General in all fifty states investigated these improper foreclosure practices, and entered into a settlement agreement with the five largest banks in America that is estimated to be worth between twenty-six and thirty-nine billion dollars. Further, in light of these practices, courts have gone to the extent of dismissing foreclosure cases. For a time, various financial institutions had even placed a moratorium on foreclosures. However, these moratoria were gradually lifted. A report of the Special Master regarding Bank of America filed on August 15, 2011 concluded with a determination that:
[Bank of America Home Loans] has shown, on a Prima Facie basis, that it has processes and procedures in place which, if adhered to, will ensure that the information set forth in affidavits or certifications submitted in foreclosure proceedings is . . . properly executed and is based upon knowledge gained through a personal review of relevant records which were made in the regular course of business as part of BAC Servicing’s regular practice to make such records.
Yet, financial institutions appear to be proceeding cautiously to assure compliance with foreclosure requirements. Such caution may be warranted because some companies and at least one executive have been indicted on criminal charges as a consequence of the practice of robo-signing.
In the midst of this controversy federal lawmakers fashioned a short bill to address some of the issues raised by this burgeoning foreclosure crisis. The bill would have required courts to accept all out-of-state notarizations, including those stamped en masse by computers in a practice that critics say has been improperly used to expedite foreclosure orders. However, President Obama refused to sign the bill after realizing that certain foreclosure documentation standards would actually be loosened by this proposed legislation.
This paper explores the impact of the use of robo-signers and the resulting effect this practice may have upon the stakeholders. A closely related issue explored in this article, albeit on a limited basis, is the use of the Mortgage Electronic Registration Systems (“MERS”). MERS considered itself both a servicer for millions of loans in this country, and a proper party in both foreclosure proceedings and motions for relief from the stay in bankruptcy cases. Due to the sheer volume of foreclosures processed through MERS, mass processing of documents seems inherently problematic absent adequate controls–the solution for which may be as simple as increased staffing along with other controls.
We begin with a general discussion of foreclosure law to provide the framework for the discussion including types of foreclosures, redemption of property rights, and state and federal statutory/regulatory requirements. We then discuss how courts have dealt with the failures to comply with foreclosure procedures, looking at the types of defects that may have existed in those cases, and particularly where those legal deficits result from the use of robo-signers. This paper emphasizes the legal implications of such deficits, whose negative implications are exacerbated by the passage of time, unraveling transactions that have a direct impact upon people’s lives. That is, we explore the impact upon the stakeholders in this system, from the lenders, to the title insurers, to a possible lessor of premises whose legal underpinnings have unraveled. Or, like a stack of cards, each standing precariously and leaning upon the other–when one falls, a total collapse results.
I. The Law of Foreclosure
Real estate law is primarily state-law specific, particularly with respect to foreclosure proceedings. The two main types of foreclosure proceedings can be categorized as either judicial or non-judicial. Twenty states allow only judicial foreclosures, five states allow only non-judicial foreclosures, with the remaining states allowing for both procedures. States nevertheless each may have distinct procedural requirements.
Judicial foreclosures are generally far more time consuming since court hearings may be scheduled, and other court notification processes are involved. Yet, the procedures from state to state can vary significantly. The process may occur generally as follows:
the filing of a foreclosure complaint and lis pendens notice; the service of process on all parties whose interests may be prejudiced by the proceedings; a hearing before a judge or a master in chancery who reports to the court; the entry of a decree or judgment; the notice of sale; a public sale, usually conducted by a sheriff; the post sale adjudication as to the disposition of the foreclosure proceeds; and if appropriate, the entry of a deficiency judgment.
Non-judicial foreclosures, on the other hand, tend to be less involved and time consuming. Normally, if there is a “power of sale” clause contained in the deed of trust or mortgage instrument, this clause provides the authority for the lender to proceed with foreclosure through a streamlined auction process. “After varying degrees of notice, the mortgaged property is sold at a public sale by a third party, such as a sheriff or a trustee, or by the mortgagee.”
Nevertheless, even non-judicial foreclosures can be involved and complex. Furthermore, in all states there are additional time periods involved where the debtor is allowed opportunities for redeeming the property prior to, and in some cases even after, the date of the scheduled foreclosure.
B. Equity of Redemption and Statutory Redemption Periods
States that allow the debtor an opportunity to redeem the property prior to foreclosure through what is termed the “equity of redemption,” give the debtor an opportunity to become current on the payments in arrears before the date and time scheduled for the foreclosure. Once the foreclosure sale is completed the debtor’s “equity of redemption” is extinguished.
In addition to the additional time frame allowed by the “equity of redemption,” about twenty states afford the debtor the opportunity to redeem the property after the foreclosure has actually been completed. This is known as “statutory redemption.” Through the statutory redemption process there is an established timeframe within which the debtor must cure any default by tendering payment to the lender in an acceptable form. Usually certified funds will be required.
C. Federal Governmental Requirements
In addition to these state-defined foreclosure processes, there may also be federal governmentally-prescribed requirements affecting the foreclosure of mortgages. For example, for loans insured by the Federal Housing Administration (“FHA”) lenders are required to mail a booklet to borrowers entitled “How to Avoid Foreclosure,” and offer the debtor an opportunity for an interview.
In addition to FHA requirements, for the extra protection of debtors who may be on active duty in the military, the Service Members Civil Relief Act requires the filing of an affidavit averring that the affected mortgagor is not on active duty. If the mortgagor is on active duty at the time of the default, then a court hearing may be conducted and other protective provisions apply as well.
Finally, one of the most powerful federal governmental requirements that impacts foreclosures is Title 11 of the U.S. Bankruptcy Code (“the Code”). Specifically, section 362(a) of the Code contains a provision for automatically staying a foreclosure proceeding (among numerous other creditor actions). Note, however, that there are exceptions and limitations to the automatic stay such that it does not apply in every case. In addition, after notice and a hearing, a creditor can request that the stay be lifted, annulled, modified, or conditioned under certain defined circumstances, including where the creditor’s interest is not adequately protected. Most pertinent to this discourse is that disputes regarding the validity of the foreclosure process often arise in the context of a bankruptcy proceeding, particularly where MERS is the party seeking relief from the automatic stay, and there is a challenge on the basis of “standing.”
II. Defects in the Foreclosure Process
As has been discussed, the procedures required to be performed in connection with effectuating a valid foreclosure can be complex in many jurisdictions. These procedures reflect the need to assure that rights to property ownership are neither extinguished nor created in an environment with inadequate legal circumscriptions. It is not difficult to perceive that there may be inexorable consequences where faulty attendance to mandated requirements results in a foreclosure done in error. And, unfortunately, as the scenarios in Part IV depict, these consequences can be viral if they are not remedied before spreading from the borrower to other parties having an interest in the subject property.
A. Exercising Due Diligence
Mortgage lenders and their servicers have a general responsibility to exercise due diligence when initiating and processing documentation for foreclosures. However, there are a myriad of opportunities to fail to diligently comply with, or fail to conform to, processes requisite to a valid foreclosure proceeding. Generally, proper parties must be established; the property description must be accurate; financial information must be analyzed and validated; the circumstances adherent to justifying the foreclosure process itself must be assessed and confirmed; parties must be notified; and the person(s) assuring all requirements have been met must indeed do those things, and aver through a notarization process that all was done as stated.
B. Relevant Causes of Action Against Defective Foreclosure Proceedings
A person alleging a foreclosure was conducted improperly may do so based upon various legal theories, regardless of whether the foreclosure process is judicial or non-judicial. For one, a borrower may claim lack of due process of law because the lender failed to send proper notice of the foreclosure proceeding to the borrower. In the case of Jones v. Flowers, the borrower alleged that the lender failed to send proper notice of the borrower’s redemption rights. However, notice had been mailed, but the certified mail notice was returned unclaimed. The court held that since the notice was returned unclaimed, other reasonable steps should be taken to notify the owner in order for the notice to comport with the requirements of the Due Process Clause of the Fourteenth Amendment.
Proper notice is of prime importance in foreclosure actions. Notice of both the foreclosure action and any rights of redemption, along with other types of notices are required in varying degrees in different jurisdictions.
Another claim available to borrowers pertains to unfair and deceptive trade practices. Violations of state laws that prohibit unfair and deceptive trade practices fall within the purview of different regulatory bodies and the states’ attorneys general offices. In light of the existence of the various regulating bodies, those who service mortgage loans in a manner that is considered unfair and deceptive–for instance, by not verifying defaults sufficiently or failing to adequately notify borrowers of a looming foreclosure–may face the possibility of impending legal action.
An action closely related to the concept of unfair and deceptive trade practices is an action for fraud. Although more difficult to prove since intent to defraud would have to be shown, fraud is among the causes of action for which such claims are being brought, particularly by individual borrowers. In addition to these claims, negligence is a cause of action individual claimants use as a basis in these types of cases.
The case of Beals v. Bank of America concerns, in part, systemic flaws in the country’s mortgage foreclosure practice relating to alleged instances of robo-signing. The plaintiffs’ claims arose out of allegations that the defendant bank and loan servicer did not fulfill a contractual agreement to modify the payment schedule as it had agreed. In this case, the plaintiffs raised seven counts as a basis of the claim for relief, including
(1) breach of contract[;] (2) breach of the covenant of good faith and fair dealing[;] (3) fraud and intentional misrepresentation[;] (4) constructive fraud and negligent misrepresentation[;] (5) negligent processing of loan modifications and foreclosure[;] (6) violation of the New Jersey Consumer Fraud Act . . . and (7) violation of the Fair Debt Collection Practices Act (“FDCPA”).
The Beal court made several rulings in connection with the motion to dismiss filed by the defendants. Significantly, the court concluded that plaintiffs had not stated a claim for negligence, and that defendants “owe[d] plaintiffs no duty independent of the contract.” The court stated that “even if defendants were negligent, plaintiffs’ damages ‘do not arise from any duty imposed by law but rather result from [the] alleged breach of contract.”’ Plaintiffs had asserted that the defendant’s duty
emanate[d] from the testimony of Bank of America executives before Congress, in which one stated that Bank of America ha[d] a responsibility to be fair . . . and [that] those who work[ed] with [the company] in connection with foreclosure proceedings, also ha[d] an obligation to do [their] best to protect the integrity of those proceedings.
With respect to the causes of action for breach of contract and breach of the covenant of good faith and fair dealing, the court denied the motion to dismiss where it had found a contract actually existed. In addition, with respect to all claims for fraud the court denied the motion to dismiss. The basis for the court’s denial was that the plaintiffs put forth a sufficient claim for fraudulent and negligent misrepresentations in connection with actions by the defendants to modify the loan agreement.
With respect to allegations by one of the plaintiffs that the assignment of the plaintiff’s mortgage involved a known robo-signer, the court noted that the plaintiff did not allege that the assignment was substantively defective. Nonetheless, the court acknowledged that “the validity and legitimacy of assignment documents are an important part of the foreclosure process . . . .” From the plaintiff’s perspective, the court viewed this defect essentially as part and parcel of causing the plaintiff to be “led down a path to believe that he was subject to foreclosure but that defendants would agree to (or at least seriously consider) a modification.” Further, as pertains to the specific cause of action for misrepresentation, the court found sufficient basis for the plaintiff’s claims that he was led to believe that a modification of the loan terms would be agreed to. With respect to the claim for violation of the Fair Debt Collection Practices Act, the court determined that the defendants were not “debt collectors” within the meaning of the FDCPA since the mortgage was not in default at the time it was assigned to defendant bank or at the time the mortgage servicer began servicing the loan.
In a Florida foreclosure case, the District Court of Appeals reversed an order of summary judgment in favor of the lender, finding that the evidence was insufficient to support a judgment of the amount due and owing on the note and mortgage. In this case the court found that the affidavit of the “specialist” for the loan servicer was inadmissible hearsay since the servicer had no personal knowledge regarding the veracity or accuracy of the data which was obtained from the bank computer. This case puts loan servicers on notice that courts are closely scrutinizing the processes these servicers use to verify loan foreclosure documents.
It must also be noted that several courts have dismissed claims by homeowners bringing actions against lenders in connection with robo-signing. In a class action suit in Maine, the district court dismissed three of the four claims against GMAC Mortgage. GMAC Mortgage filed affidavits in foreclosure cases without personal knowledge of the facts contained in the affidavits. The court ruled that the proper method of attacking an existing judgment is to seek a reversal. The court did allow a fourth claim, which is based upon the Maine Unfair Trade Practices Act.
The first robo-signing case scheduled to get to the Florida Supreme Court for oral arguments has been settled out of court by Bank of New York Mellon and the homeowner.
The settlement comes as a disappointment to homeowners in foreclosure who have been trying to challenge the use of fraudulent documents used by banks to expedite foreclosure orders for Florida circuit courts.
Enrique Nieves III of Ice Legal in Royal Palm Beach had been preparing for oral arguments in Roman Pino v. BNY Mellon after the Fourth District Court of Appeal upheld the bank’s right to voluntarily dismiss the case . . . .
With the settlement, the Fourth District Court of Appeal ruling remains the law in every court in Florida. In Pino v. BNY Mellon, the homeowner requested an evidentiary hearing when the bank tried to re-initiate a foreclosure that had been stalled because of a questionable assignment of mortgage documents.
The bank was trying to go forward with a cured document and Nieves was arguing they could not proceed until the original fraud allegation was aired on its merits.
Palm Beach Circuit Judge Meenu Sasser noted the bank had voluntarily dismissed the original foreclosure petition and that case could not be reopened. She treated the second foreclosure petition as an entirely separate matter, and Nieves appealed.
The Fourth District Court of Appeal sided with Sasser in an en banc decision. But there was a dissent, mainly on grounds that an attempt to perpetrate a fraud on the court was still actionable. The majority panel acknowledged the issue was of great public importance due to the rampant use of questionable documents; that certification helped Nieves put the case before the Supreme Court.
These cases illustrate the kinds of issues courts are facing in regard to systemic flaws in the robo-signing debacle. Although robo-signing per se may not always be directly related to the cause of action arising in each case, it certainly has a tangential impact. As was stated by the Beals court, “the validity and legitimacy of assignment documents are an important part of the foreclosure process.”
It is a common practice in the mortgage industry for mortgages to be assigned to multiple, successive parties. More often than not, the assigned mortgage becomes but a segment of a bundled package of usually homogenous mortgage documents in which investors take a shared interest. This process is known as securitization.
The Mortgage Electronic Registration Systems, Inc. (“MERS”) was created as a vehicle to track mortgage securitization transactions. MERS was created because many of the state recording systems were deemed by the major lenders as slow, costly, and antiquated. The problem with state recording systems is not new. Many title insurance companies have maintained their own private records of real estate transactions since the 1960s to combat foreseeable problems with the state systems. Lenders saw an opportunity to speed up recording procedures with MERS while at the same time reducing the cost of each transaction; costs were reduced by computerizing the tracking of each assignment transaction, and MERS eliminated the need to pay recording fees for each assignment transaction since the “recording” is accomplished within the computerized system instead of within the public land records. MERS was also supposed to make foreclosures more efficient. However, ultimately, MERS may have made the foreclosure process more inefficient by sacrificing reasonable documentation for increased speed of the transaction. Originally, mortgages were recorded with public land records in the names of the lenders and then assigned to MERS to make all subsequent assignments within the MERS system. However, later lenders decided they could save even more money by making the first public record recording in the name of MERS as the mortgagee. Probably no one took a really serious look at the speed versus reasonable documentation problem in the early 1990s when MERS was being conceived. However, now many courts are closely analyzing the dichotomy and flaws that are being exposed, and due to this scrutiny, MERS now prohibits members from filing foreclosures in the name of MERS.
The problem of reasonable documentation became more exacerbated in the mid-1990s when lenders and brokers began the securitization of subprime loans. No one could have predicted in the mid-1990s the magnitude of the financial meltdown in 2007, which would precipitate the need to foreclose on 8.1 million loans. Because there may be multiple assignments on each loan, there are tens of millions of unrecorded assignments on the potential foreclosures. These unrecorded assignments can cause problems because of a lack of transparency, especially for the borrower. The nonpublic MERS records make it extremely difficult, if not impossible, for distressed borrowers to know whom to deal with in order to work out their problems.
By 2007, MERS had sixty million loans and sixty percent of new loan originations. With this high volume of new loan originations and 8.1 million potential foreclosures, coupled with tens of millions of unrecorded assignments, it is a small wonder that MERS, and mortgage service companies in the name of MERS, had to resort to an assembly line process whereby agents of MERS signed affidavits regarding the propriety of foreclosure documentation without reviewing the loan file.
Two Ohio cases brought to the forefront some serious problems with how some financial institutions dealt with the documentation of assignments in foreclosure actions. These cases were dismissed without prejudice because the lenders could not document that the assignments of the notes and mortgages were executed prior to the filing of the foreclosure actions as required by law. A more troubling problem was an appearance of a cavalier attitude of the mortgage lending industry toward compliance with foreclosure procedures. As Judge Boyko stated, “[t]he [financial] institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the Court to stop them at the gate.”
The furor created by the robo-signing put the spotlight on MERS and the practices of its members, which have been characterized as shoddy workmanship. In Bank of New York v. Mulligan, the court ordered the bank to provide three documents as follows:
(1) [A]n affidavit of facts either by an officer of plaintiff BNY or someone with a valid power of attorney from plaintiff BNY and personal knowledge of the facts; (2) an affidavit from Ely Harless describing his employment history for the past three years, because Mr. Harless assigned the instant mortgage as Vice President of MORTGAGE ELECTRONIC REGISTRATION SYSTEMS, INC. (MERS) and then executed an affidavit of merit for assignee BNY as Vice President of BNY’s alleged attorney-in-fact without any power of attorney; and, (3) an affidavit from an officer of plaintiff BNY explaining why it purchased the instant nonperforming loan from MERS, as nominee for DECISION ONE MORTGAGE COMPANY, LLC [ ].
Thus, the MERS system presents a potentially infectious issue. With such vast numbers of documents being processed through this system in an abbreviated period of time, is it endemic to such a system that summary and shallow controls will be employed? And if the aforementioned defect causes a loosening of the threads, to what consequence? To determine the answers to these and other questions, Eric T. Schneiderman, Attorney General of New York, recently filed suit against MERS, banks, and lending servicing companies. This suit is not affected by the landmark settlement reached by the states and the five large mortgage services. The suit avers that MERS, in conjunction with the banks, filed foreclosures with no legal right to do so, and indiscriminately used “certifying officers” to execute and file with courts defective documents which rendered said documents false, deceptive, and/or invalid. The suit asks the court to declare said practices illegal, to enjoin said practices, to mandate that the parties correct all defects in title caused by said practices, and for money damages. Furthermore, the states of Massachusetts and Delaware have filed deceptive practices suits, which are not affected by the settlement.
III. THE STAKEHOLDERS
Barbara Borrower, recently widowed, has been thrust into the role of being not only the sole breadwinner but the family financier as well. Finances befuddle her simply because she is untrained and inexperienced. Her focus had always been on raising her and her deceased husband’s two children and making sure they were properly educated. She lived in her home with her family for more than 20 years. Mr. Borrower had recently refinanced the mortgage loan and used the equity they had built up in the family home, Greenacres, to purchase his long desired cabin cruiser. Unfortunately, as fate would have it, he only got to use it a few times before expiring from a massive heart attack while out on the cabin cruiser. Mrs. Borrower sold the cabin cruiser but lacking the sophistication to negotiate beneficial terms, she received far less for it than they paid.
Mrs. Borrower has decided to move out of Greenacres and into an apartment, signing a one-year lease. She has realized that she can rent Greenacres for more than the cost to rent the apartment. And besides, Greenacres is more house than she needs since her children are now grown. However, sentimentality and the current market conditions restrain her from selling. With her low paying clerical job, combined with the rent she will receive, she is able to continue making the mortgage payments on the home. Mrs. Borrower rented Greenacres to Lisa Lessee and her family of three children. Unfortunately, due to the market downturn, the tenant, Lisa Lessee, lost her job. Because tenants were difficult to find in the existing market climate, and out of sympathy, Mrs. Borrower decided to let Lisa Lessee stay in Greenacres for a reduced rent. As one might expect, Mrs. Borrower found herself struggling to make her mortgage payments.
Mrs. Borrower received a notice from a bank whose name she did not recognize, initiating a non-judicial foreclosure process. After fretting for many weeks with no apparent solution, Mrs. Borrower contacted her children and they agreed to help. Mrs. Borrower sent the funds to Big Bank to stop the foreclosure process. To her shock and horror, Mrs. Borrower received a notice in the mail stating that the foreclosure process had been completed and that any opportunity to redeem the property had long since expired. She tried to contact Big Bank but was told her mortgage was sold to another bank (for various reasons much of her mail did not get forwarded to her new apartment). When she finally reached the bank to whom her note and mortgage had been sold, she was informed that the funds she sent were insufficient to cure the default and that the funds were not received on time.
Bob and Betty Buyer purchased Greenacres at the foreclosure proceeding, taking out a loan with American Bank. The Buyers evict Lisa Lessee and her family. Confident that they will prevail in a pending action to quiet title, Mr. and Mrs. Buyer, with their three children in tow, move in to Greenacres as their primary residence.
There are numerous stakeholders whose interests can be affected by the unraveling of the cords that once seemed tightly woven and enmeshed to construct and complete a real estate transaction. A primary purpose of the legal process for completing a real estate transaction in this country is to provide societal stability and durability. It is unlikely that the resulting impact of “undoing what has been done” in these matters will be a positive one for all of the parties involved. Indeed, there can be a direct, far reaching and consequential negative impact upon a variety of parties and positions. Metaphorically, once the cords are unconstrained, they quickly whip out, or with determined and minimal effort steadily unravel, until the cord becomes nothing more than a loose conglomeration of bare thread–weakened and fragile.
Arguably, but not necessarily, the most affected by such a calamitous event is the borrower/homeowner. The borrower presumably precipitated the process by failing to meet her contractual obligations. Yet the borrower may shift from being the victimizer, i.e. the naughty debtor who apparently failed to meet her contractual obligations, to the victim of an illegal ousting from what is, in most cases, one’s most vital and inestimable material possession–the place of residence. On the other hand, the pre-eviction, foreclosed-upon homeowner may rejoice in the extra time allowed by the legal deficits exposed in the foreclosure process. For the homeowner who has indeed caused a default in his or her contractual obligations, time can be a coveted commodity– allowing that extra breathing space to make necessary arrangements and adjust to the trauma of being dispossessed of his or her abode.
In the case of Barbara Borrower, she no longer resides at Greenacres. Thus, she does not have to suffer the consequence of no longer having a place to live. Nonetheless, she will suffer repercussions. First of all, she loses Greenacres and the tangible reminders of the cherished memories it holds. Secondly, she will no longer be the beneficiary of any equity that might have remained or been recovered when market conditions possibly improved in the future. In this case, however, any equity that existed was quickly consumed by transaction costs involved with the foreclosure process. Thirdly, although the landlord-tenant relationship between Mrs. Borrower and Lisa Lessee has been terminated upon foreclosure, Mrs. Borrower may be liable to Ms. Lessee for breach of contract and for the return of any security deposit she may have obtained.
Lisa Lessee and Her Children
Lisa Lessee and her three children moved in with her sister. Lacking a substantial source of income, she had no alternative. The sporadic child support she receives from her ex-husband is insufficient to pay a normal rent. As a victim of a foreclosed-upon landlord, Ms. Lessee is not alone. Professor Rodriguez-Dod states, “[r]eportedly, approximately 40% of families being evicted–about 70,000 renters–have been displaced because their landlords’ properties were foreclosed. It is estimated that in the northeastern United States up to 50% of foreclosures involve renters. And in the Chicago area, foreclosure-related tenant evictions tripled from 2007 to 2008.”
But Ms. Lessee, and others similarly situated, are not without rights. On May 20, 2009, President Obama signed into law the Protecting Tenants at Foreclosure Act of 2009 (“PTFA”). By this law, Ms. Lessee, as a bona fide tenant, would be entitled to ninety days notice prior to being evicted from the foreclosed upon property; however, in this case since the Buyer family will be living on the property as their primary residence, Ms. Lessee is not entitled to remain in possession of the premises after the ninety-day period. In addition to the PTFA, the foreclosure crisis has spawned other laws, both federal and state, to ameliorate the impact upon tenants in varying degrees of forcefulness.
The Buyer Family
Although not quite the untainted purchaser, since the pungent reflux from the agitated foreclosure process cannot reasonably escape notice of one so intricately involved, the purchaser of the foreclosed-upon property nonetheless has a reasonable expectation that correct legal processes were complied with, particularly in a court-ordained foreclosure proceeding. Furthermore, the Buyers have been assured that title has been quieted through that separate judicial process. Mr. and Mrs. Buyer realized that they must give the Lessee family ninety-days notice. They did so with some reluctance and marginal compunction, being fully aware of the circumstances surrounding the underlying default by Mrs. Borrower and the impact upon her tenant. Yet they too had a family to provide for and needed Greenacres since it was within walking distance of the school they preferred for their children, and was just a few blocks from the city subway system to facilitate both of them getting to and from work. Greenacres was perfect.
Big Bank and its Assignees
Mrs. Borrower was foreclosed upon through a non-judicial foreclosure process based upon a power of sale clause in the deed of trust between the Borrowers and Big Bank. Big Bank, consistent with its recapitalization model, assigned the note and mortgage to an assignee. Because of the volume of mortgage loans Big Bank makes, it had subscribed to MERS soon after it was established in the mid 1990s, thus minimizing the transaction costs involved in the assignments. As the nominee for Big Bank and its assigns, MERS was responsible for assuring that all the necessary documents relating to foreclosure are processed and that the affidavits averred to by its document processors are properly done. Because of the age of the original loan from the Borrowers, the loan originated in the name of Big Bank and was later assigned to MERS. Since MERS was the mortgagee of record in the county land records, the foreclosure proceedings were commenced on behalf of Big Bank’s assignee by MERS.
Big Bank’s assignee was thankful that the Buyers purchased the property since they had a bulging inventory of bank-owned properties. The assignee was not interested in being in the real estate business. The homes they owned barely sold for the outstanding balance on the mortgage loan.
The Title Insurance Companies
WeGotYourBack Title Insurers provided title insurance to the Buyers in connection with the mortgage loan they used to purchase Greenacres. However, the title insurance policy contained an exception for anything pertaining to defects in the foreclosure process itself.
Guaranty Title Insurers provided title insurance to American Bank, the Buyers’ lenders. The policy specifically covered any defects in connection with the foreclosure process.
American Bank provided a loan to the Buyers to purchase the property at foreclosure.
IV. The Cord Unravels: Defective Foreclosures and Their Impact Upon Stakeholders
It has been discovered through testimony made by a document processor for MERS in connection with the action to quiet title that the affidavits in connection with the foreclosure on Greenacres were not actually verified in the presence of a notary. Far more significantly, after this revelation, a careful review of the documentation was made and the assignee realized that indeed the payments sent by Mrs. Borrower from the funds her children gave her were not timely recorded to her account, causing invalid late fees to accrue. Had they been properly recorded, Mrs. Borrower clearly would have cured the default on her loan prior to the expiration of the statutory period for redemption. In spite of the fact that Mrs. Borrower did not contest the foreclosure, due to the egregious behavior of both MERS and the assignee for Big Bank, the court denies the action to quiet title, deeming the foreclosure process defective. The threads rapidly begin to whip apart.
Who ends up in actual possession of Greenacres depends upon the law of the jurisdiction in which the property is located. In a case where it is a “technical” defect, such as failure to properly notarize an affidavit or obtain proper service as well as underlying facts justifying a foreclosure, it is likely the court will allow a party to re-foreclose with any necessary damages being paid by the offending party. In these cases the foreclosure action might be dismissed without prejudice. However, as in the facts of this case, where the homeowner actually was not in default of the mortgage obligation, a court may reinstate her status as the owner of Greenacres in a suit to set aside the foreclosure action, and void the mortgage on Greenacres obtained by the Buyers in favor of American Bank.
If the foreclosure action is set aside, American Bank might seek recourse from Guaranty Title Insurance Company, which in turn might seek recourse from Big Bank, the original lender. Or American Bank can seek relief directly from Big Bank and its assigns for the monies these institutions received to pay off the debt owed by Mrs. Borrower.
The Buyers might suffer the greatest hardship of all since they may be forced to leave Greenacres. Also, since their title policy excluded defects in the foreclosure process itself, they lack that protection. Of course, since American Bank may obtain satisfaction from Guaranty Title for the amount of the loan it extended to the Buyers, they may be free from that debt obligation (assuming there is no deficiency). The Buyers may also be able to bring an action for unjust enrichment against Big Bank and its assigns for the monies received in the foreclosure action, which might include any down payment made by Buyers to purchase the property. Nevertheless, the Buyers must endure the hardship of relocating and finding a new home. There are a variety of causes of action, rights to subrogation, indemnification and defenses thereto that the various parties may have, and this article does not portend to address them. Rather, its purpose is to highlight the complexities that can result when the cord begins to unravel.
V. The Tie That Binds: Remedies and Enforcement Action
Certainly it would benefit most stakeholders, and, generally, the country’s economy as a whole to have a real estate foreclosure system with ingrained stability–a system where due process is given its greatest opportunity to thrive, and where trade practices promote fairness and full disclosure–or at least one which minimizes the opportunity for structural disintegration.
Recent changes have been made in the court system, by state statute, and internally by financial institutions in response to the practice of robo-signing that would have a positive impact on the system. For example, North Carolina passed the Mortgage Debt Collection and Servicing Act in April of 2008 to improve mortgage servicing. In Nevada, the State Assembly enacted a law on October 1, 2011, to prevent robo-signing. The law imposes both civil and criminal penalties for misrepresentations regarding real estate titles.
Two title officers in Nevada employed by Lender Processing Service, a Jacksonville, Florida-based company, were indicted on multiple criminal charges. Both were indicted on charges of offering false documents for recording and false certification on certain instruments. The Michigan Attorney General filed criminal subpoenas to out-of-state mortgage processing companies in June 2011 after twenty-three county registers of deeds filed a criminal complaint in connection with robo-signed documents. And the New York Attorney General is conducting a banking probe against certain financial executives that could lead to criminal charges. In Missouri, both DocX, a large foreclosure servicing company, and its founder and former president, Lorraine O. Brown, were indicted on charges of forgery. The California, Delaware and Illinois Attorneys General are also conducting similar investigations.
The New Jersey court system promulgated what have been termed “anti robo-signing” rules to better ensure that a foreclosure is effectuated properly, and in an environment that lessens the opportunity for defects. These rules place heightened responsibilities upon both the financial institutions and the attorneys who represent the financial institutions. In announcing this administrative order, the New Jersey court stated:
This order addresses several steps taken by the Judiciary today in an effort to ensure the integrity of the residential mortgage foreclosure process: (1) Judge Jacobson’s order directing six lenders and service providers who have been implicated in irregularities in connection with their foreclosure practices to show cause why the processing of uncontested residential mortgage foreclosure actions they have filed should not be suspended; (2) administrative action directing twenty-four lenders and service providers who have filed more than 200 residential foreclosure actions in 2010 to demonstrate affirmatively that there are no irregularities in their handling of foreclosure proceedings, via submissions to retired Superior Court Judge Walter R. Barisonek, who has been recalled to temporary judicial service and assigned as a Special Master; and (3) the adoption of amendments to the Rules of Court and a Notice to the Bar which require plaintiff’s counsel in all residential foreclosure actions to file certifications confirming that they have communicated with plaintiff’s employees who have (a) personally reviewed documents and (b) confirmed the accuracy of all court filings, and which remind all counsel of their obligations under the New Jersey Rules of Professional Conduct.
In addition, in September 2011, a settlement agreement was reached between the New York State Department of Financial Services and New York Banking Department and Goldman Sachs (“Goldman”), owner of Litton Loan Servicing (“Litton”), providing conditions by which Goldman could sell Litton to Ocwen Financial Corp., a mortgage servicing company. The purpose of the settlement was to make changes in the mortgage servicing industry, such as the practice of robo-signing. The settlement agreement specifically calls for an end to the practice of robo-signing and requires services to withdraw any pending foreclosure action where affidavits may have been robo-signed.
New court rules, statutes, and other efforts are essentially creating a means by which the lack of due process in such situations can be measured. Although there cannot be a perfect solution in an imperfect world (and courts most assuredly will have to continue in their role of determining failures to comply with the system), these efforts may aid in binding the transactional cord of the foreclosure process.
MERS itself will no doubt need to revise its procedures so that its role in the foreclosure process is of a less menacing nature. As stated earlier, MERS is ending the practice of allowing its members to file foreclosure actions in the name of MERS in cases involving assignments. In the future, the lenders are to record mortgage assignments with the county clerks responsible for recordation of mortgage instruments before bringing an action for foreclosure.
It seems MERS is having to reinvent itself. Will these changes be adequate? Robo-signing, as it has come to be known, surely will have to cease.
We refer to the well-known maxim: “if it ain’t broke, don’t fix it.” We apply the converse: “if something’s bad wrong, fix it.” If the reader will excuse the colloquialisms, there is something “bad wrong” with a system that would allow a document processor to review, sign, and verify the voluminous documents necessary to document a foreclosure process in an average of 1.5 minutes. The stability and security of our real estate system demands better. There can be no valid argument against the fact that the numbers of real estate transactions occurring daily have outpaced the historical mechanisms designed to accommodate them. Technological advances should be fully exploited to promote efficiency. Yet, the system should not be allowed to advance at a pace that loosens the threads of its existence.
Dr. Gloria “Pepper” Liddell has been teaching business law courses on both the undergraduate and graduate level at the College of Business, Mississippi State University since 1992, both as an adjunct and as an assistant professor. These courses include legal environment of business, law of commercial transactions, real estate law and a course in “Law, Ethics and Dispute Resolution” for MBA students. She has also co-designed and co-taught business law courses abroad in both Australia (international comparative law) and Korea (international business ethical systems). Dr. Liddell also has extensive experience designing and teaching courses in the online environment.
Dr. Pearson Liddell, Jr., is a full professor of Business Law in the College of Business at Mississippi State University, having served there since 1996. He has taught courses on both the graduate and undergraduate level in legal environment of business, law of commercial transactions, environmental law, and international business law. He has also designed and taught courses abroad in both Australia (international comparative law) and Korea (international business ethical systems). Dr. Liddell also teaches courses to prepare students for the law portion of the CPA exam. Further, he serves as a public defender for Oktibbeha County, Mississippi.
The history of foreclosure law also begins in England, where courts of chancery developed the “equity of redemption”–the equitable right of a borrower to buy back, or redeem, property conveyed as security by paying the secured debt on a later date than “law day,” the original due date. The courts’ continued expansion of the period of redemption left lenders in a quandary, since title to forfeited property could remain clouded for years after law day. To meet this problem, courts created the equitable remedy of foreclosure: after a certain date the borrower would be forever foreclosed from exercising his equity of redemption. This remedy was called strict foreclosure because the borrower’s entire interest in the property was forfeited, regardless of any accumulated equity. The next major change took place in 19th-century America, with the development of foreclosure by sale (with the surplus over the debt refunded to the debtor) as a means of avoiding the draconian consequences of strict foreclosure. Since then, the States have created diverse networks of judicially and legislatively crafted rules governing the foreclosure process, to achieve what each of them considers the proper balance between the needs of lenders and borrowers. All States permit judicial foreclosure, conducted under direct judicial oversight; about half of the States also permit foreclosure by exercising a private power of sale provided in the mortgage documents. Foreclosure laws typically require notice to the defaulting borrower, a substantial lead time before the commencement of foreclosure proceedings, publication of a notice of sale, and strict adherence to prescribed bidding rules and auction procedures. Many States require that the auction be conducted by a government official, and some forbid the property to be sold for less than a specified fraction of a mandatory presale fair-market-value appraisal.
BFP v. Resolution Trust Corp., 511 U.S. 531, 541-42 (1994) (citations omitted).
(a) Mortgage as security. This section applies only to an obligation on real or personal property owned by a servicemember that —
(1) originated before the period of the servicemember’s military service and for which the servicemember is still obligated; and
(2) is secured by a mortgage, trust deed, or other security in the nature of a mortgage.
(b) Stay of proceedings and adjustment of obligation. In an action filed during, or within 9 months after, a servicemember’s period of military service to enforce an obligation described in subsection (a), the court may after a hearing and on its own motion and shall upon application by a servicemember when the servicemember’s ability to comply with the obligation is materially affected by military service–
(1) stay the proceedings for a period of time as justice and equity require, or
(2) adjust the obligation to preserve the interests of all parties.
(c) Sale or foreclosure. A sale, foreclosure, or seizure of property for a breach of an obligation described in subsection (a) shall not be valid if made during, or within 9 months after, the period of the servicemember’s military service except —
(1) upon a court order granted before such sale, foreclosure, or seizure with a return made and approved by the court; or
(2) if made pursuant to an agreement as provided in section 107 [section 517 of this Appendix].
(d) Misdemeanor. A person who knowingly makes or causes to be made a sale, foreclosure, or seizure of property that is prohibited by subsection (c), or who knowingly attempts to do so, shall be fined as provided in title 18, United States Code, or imprisoned for not more than one year, or both.
50 U.S.C.A. app. § 533 (West Supp. 2012).
a) Except as provided in subsection (b) of this section, a petition filed under section 301, 302, or 303 of this title, or an application filed under section 5(a)(3) of the Securities Investor Protection Act of 1970, operates as a stay, applicable to all entities, of —
(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title.
11 U.S.C.A. § 362(a)(1) (West 2012).
On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay —
(1) for cause, including the lack of adequate protection of an interest in property of such party in interest;
(2) with respect to a stay of an act against property under subsection (a) of this section, if —
(A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective reorganization;
(3) with respect to a stay of an act against single asset real estate under subsection (a), by a creditor whose claim is secured by an interest in such real estate, unless, not later than the date that is 90 days after the entry of the order for relief (or such later date as the court may determine for cause by order entered within that 90-day period) or 30 days after the court determines that the debtor is subject to this paragraph, whichever is later —
(A) the debtor has filed a plan of reorganization that has a reasonable possibility of being confirmed within a reasonable time; or
(B) the debtor has commenced monthly payments that —
(i) may, in the debtor’s sole discretion, notwithstanding section 363(c)(2) [[11 USCS § 363(c)(2)], be made from rents or other income generated before, on, or after the date of the commencement of the case by or from the property to each creditor whose claim is secured by such real estate (other than a claim secured by a judgment lien or by an unmatured statutory lien); and
(ii) are in an amount equal to interest at the then applicable nondefault contract rate of interest on the value of the creditor’s interest in the real estate; or
(4) with respect to a stay of an act against real property under subsection (a), by a creditor whose claim is secured by an interest in such real property, if the court finds that the filing of the petition was part of a scheme to delay, hinder, or defraud creditors that involved either —
(A) transfer of all or part ownership of, or other interest in, such real property without the consent of the secured creditor or court approval; or
(B) multiple bankruptcy filings affecting such real property. If recorded in compliance with applicable State laws governing notices of interests or liens in real property, an order entered under paragraph (4) shall be binding in any other case under this title purporting to affect such real property filed not later than 2 years after the date of the entry of such order by the court, except that a debtor in a subsequent case under this title may move for relief from such order based upon changed circumstances or for good cause shown, after notice and a hearing. Any Federal, State, or local governmental unit that accepts notices of interests or liens in real property shall accept any certified copy of an order described in this subsection for indexing and recording.
11 U.S.C.A. 362(d) (West Supp. 2012).
The definition of a deceptive act currently involves the examination of a series of factors: “First, there must be a representation, omission or practice that is likely to mislead the consumer….Second, we examine the practice from the perspective of a consumer acting reasonably in the circumstances….Third, the representation, omission, or practice must be a ‘material’ one.”
(citing Letter from James C. Miller III, Chairman, to Rep. John D. Dingell, Chairman of House Comm’n on Energy & Commerce, FTC Policy Statement on Deception (Oct. 14, 1983), available at http://www.ftc.gov/bcp/policystmt/ad-decept.htm).
Courts have grappled with the issue of whether MERS has standing to foreclose. Some courts in interpreting state statutes have ruled that MERS was not a proper party. In In re Salazar, the U.S. Bankruptcy Court for the Southern District of California determined that MERS was only a nominal beneficiary and was not the beneficiary at the time of the foreclosure sale and thus did not satisfy the requirement that the bank have a recorded beneficial interest in the property. In re Salazar, 448 B.R. 814, 819-22 (Bankr. S.D. Cal. 2011), rev’d, In re Salazar, 470 B.R. 557 (S.D. Cal. 2012) (finding that both U.S. Bank and MERS are entitled to invoke the power of sale). Other courts have validated MERS as a proper party. In Gomez vs. Countrywide, the U.S. District Court held that MERS as a nominee was essentially an agent and thus gave MERS the right to foreclose on the deed of trust. See Gomez v. Countrywide, No. 2:09-cv-01489-RCJ-LRL, 2009 U.S. Dist. LEXIS 108292, at *6, *7 (D. Nev. Oct. 26, 2009).
Anecdotes abound about foreclosures and consequent evictions of renters. Tenants dutifully paying their monthly rent have found themselves forced out of their rental homes because landlords defaulted on their mortgages. Many have been low-income tenants who receive little notice before being uprooted and have little savings to afford a move to new housing.
Id. at 245.
In all residential foreclosure actions, plaintiff’s attorney shall annex to the complaint a certification of diligent inquiry: (a) that the attorney has communicated with an employee or employees of the plaintiff who (i) personally reviewed the documents being submitted and (ii) confirmed their accuracy; and (b) the name(s), title(s) and responsibilities in those titles of the plaintiff’s employee(s) with whom the attorney communicated pursuant to paragraph (2)(A) of this rule.
See also Andrew Keshner, New Rule Says Attorneys Must Verify Foreclosure Papers, N.Y. L.J., (Oct. 21, 2010), available at LEXIS (doc-id #1202473628860 #) (showing similar requirements now exist in New York).
But perhaps the most important lesson of Ibanez is that even in an age of rapid innovation in mortgage lending and securitization, mortgage lenders and other participants in the mortgage loan market must still comply with state property law, even if that law has been infrequently examined for over a century and no longer corresponds with widespread mortgage lending industry practices.
See also U.S. Bank Nat. Ass’n v. Ibanez, 941 N.E.2d 40, 55 (2011) (“The legal principles and requirements we set forth are well established in our case law and our statutes. All that has changed is the plaintiffs’ apparent failure to abide by those principles and requirements in the rush to sell mortgage-backed securities.”)