Foreclosure Litigation Issues: Authority to Foreclose

©National Consumer Law Center 2013

Foreclosure Litigation Issues: Authority to Foreclose

Geoff Walsh

National Consumer Law Center September 24, 2014

The Mortgage Loan

•  Two key documents: •  The Note: represents the enforceable

obligation to pay •  The Mortgage: the instrument giving

interest in property to secure payment of note

Authority to Foreclose – the Mortgage

•  Is foreclosing party current holder of valid assignment of mortgage?

•  Did foreclosing party have valid assignment of mortgage when key foreclosure actions taken? – Notices – Advertisements – Foreclosure sale – Must assignments be in writing, recorded? – See U.S. Bank v. Ibanez, 941 N.E. 2d (Mass.

2011)

Authority to Foreclose – the Note

•  Must foreclosing party have authority to enforce promissory note?

•  How do Mass. statutes and common law define party authorized to conduct foreclosure sale?

•  Eaton v. Federal National Mortg. Ass’n, 462 Mass. 569 (2012)

The Note as a Negotiable Instrument

•  Defined in § U.C.C. 3-104 •  Unconditional promise to pay a fixed amount

of money, with or without interest •  Must be payable to bearer or order •  Payable on demand or at a definite time •  Does not state any other undertaking or

instruction by the person promising or ordering payment to do any act in addition to the payment of money

Key U.C.C. Concept: the PETE •  Person Entitled To Enforce the instrument •  § 3-602(a) ([A] [negotiable] instrument is

paid to the extent payment is made by or on behalf of a party obligated to pay the instrument, and to a person entitled to enforce the instrument.”)

•  § 3-301 defines under what circumstances a person is entitled to enforce an instrument

Who Can Be a Person Entitled To Enforce the Instrument?

•  U.C.C. § 3-301 defines PETE as: •  (1) the holder of the instrument •  (2) a nonholder in possession of the

instrument who has the rights of a holder, •  (3) a person not in possession of the

instrument who is entitled to enforce the instrument pursuant to § 3-309 [lost note] or § 3-418 [mistake in payment]

PETE Option # 1: Holder

•  Revised § 1-201(a)(21): “Holder” means: •  (A) the person in possession of a

negotiable instrument •  AND the instrument “is payable either to

bearer or to an identified person that is the person in possession.”

“Negotiation” of a Promissory Note

•  U.C.C. § 3-201 defines negotiation of a negotiable instrument as: –  Transfer of possession of instrument by person

other than issuer to person who becomes holder –  If payable to identified person, negotiation requires

transfer of possession of note and its indorsement by holder

–  If payable to bearer, negotiated by transfer of possession alone

Indorsement and Allonges •  “Indorsement” means a signature made on instrument for

the purposes of indorsing it. U.C.C. § 3-204 •  Indorsements are required to transfer loan notes that are

payable to an identified person until the payee (lender) or a subsequently identified person indorses in blank or to bearer. § 3-201(b), § 3-109; § 3-205.

•  Indorsements must appear on the note but can appear on a paper (allonge) “affixed to the instrument.” § 3-204(a).

Who Can Enforce Note?

•  U.C.C. § 3-301 “Person entitled to enforce” an instrument:

•  (1) the holder of the instrument •  (2) a nonholder in possession of the

instrument who has the rights of a holder, or

•  (3) a person not in possession of the instrument who is entitled to enforce the instrument pursuant to § 3-309 [lost note] or § 3-418 [mistake in payment]

PETE Option # 2: Non Holder Transferee

•  Person in possession with the rights of a holder

•  Party must be in possession of the instrument

•  Party [transferee] must have obtained the rights of a holder from the transferor

Proof of Rights of Transferor •  When the transferee is not a “holder,” the

transferor must have been a holder at the time of transfer. § 3-203, Comment 2.

•  When the note is not payable to the transferee, the transferee must account for possession of the unindorsed note by proving the transaction through which the transferee acquired it. § 3-203, Comment 2.

Who Can Enforce Note?

•  U.C.C. § 3-301 “Person entitled to enforce” an instrument:

•  (1) the holder of the instrument •  (2) a nonholder in possession of the

instrument who has the rights of a holder, or •  (3) a person not in possession of the

instrument who is entitled to enforce the instrument pursuant to § 3-309 [lost note] or § 3-418 [mistake in payment]

PETE Option # 3: Lost Note •  U.C.C. 3-309

–  Person cannot reasonably obtain possession of the instrument because it is destroyed, lost, or in wrongful possession of an unknown person

–  Person was PETE when instrument lost –  Party seeking to enforce lost note must prove the

terms of instrument and its right to enforce it. –  Court may require bond, other protection to debtor –  Otherwise, person to whom demand for payment

made may require that the holder “exhibit the instrument.” U.C.C. § 3-501(b)(2)(I)

The Mortgage

•  Foreclosing party must be current assignee of the mortgage when: – Notice of cure given – Notice of foreclosure sale published – Foreclosure sale takes place

MERS •  Mortgage Electronic Registration Systems, Inc. •  Established early 1990s by GSEs, large lenders

to save money on recording fees •  MERS sells two basic services:

–  Loan IDs (MIN Numbers) for members to use –  Signing authority - 20,000 individuals (employees of

servicers & foreclosure mills) can sign documents as secretaries or vice presidents of MERS

MERS

•  What can be done in MERS’ name? •  Conduct a foreclosure sale? •  Provide a foreclosure notice? •  Assign a mortgage? •  Transfer a note?

MERS as Super-Agent

•  Are there legal limits on MERS’ agency claims?

•  Self-proclaimed agent for an undisclosed principal

MERS and Foreclosures

•  Foreclosures are no longer conducted in MERS’ name.

•  Policy Bulletin #2011-5 effective as of July 22, 2011, MERS barred members from initiating actions and filing proofs of claim in the name of MERS.

•  Fannie Mae and Freddie Mac prohibited MERS foreclosures earlier.

MERS and Notes

•  MERS is never the owner of a mortgage note

•  MERS never has possession of a mortgage note

•  MERS cannot transfer or assign an interest in a mortgage note

Authority to Foreclose •  Focus issues:

•  What are “void” assignments/transfers? •  What are “voidable” assignments/transfers? •  What do state statutes/common law require?

– Shifting burden of proof to show authority to foreclose

– What must borrower show? •  Extrinsic evidence of lack of authority •  How find it?

$$

Borrower

Lender

RMBS Securitization Map

$$$

Originator Processes and funds

individual loans

Note & Mortgage

$$$ Mortgage Payments

Borrower

$$$

$$$

Interim Servicer Services loans until

securitized

Primary Servicer Services individual loans, collects

payments, performs duties under PSA

Master Servicer Prepares reports for Trustee; remits monies; ensures Primary performs

$$$ Pool revenue less

servicing fee

Seller Purchases loans from originator; forms pool

Note & Mortgage

Depositor Creates issuing entity

Note & Mortgage

Trust Holds pool of loans; issues

certificates

Note & Mortgage

Trustee Oversees servicers

$$$ fees

$$$ purchase price

$$$ purchase price

Underwriter Sells certificates to investors,

collects proceeds

Certificates

Certificates $$$ offering

proceeds

Various Classes

Investors/Certificate Holders Purchase mortgage-backed securities as defined in certificates


proceeds

$$$ less servicing fee

$$$ less Trustee’s fee

Other parties not shown may include Credit Risk Manager, Securities Administrator, Swap Counterparty, and Rating Agencies

MLPA

PSA

PSA

PSA

PSA

MLPA or PSA

Document Custodian

Stores and maintains mortgage loan collateral files

Collateral File

Mortgage Broker Received broker’s fee, YSP

and processing fees

Understanding the Players in the Secondary Market

•  What is the secondary market? •  The Lineup:

– Mortgage Originator – Mortgage Holder – Mortgage Servicer

Who’s Who in Securitization •  Lender/Originator •  Sponsor/Seller •  Depositor •  Underwriter •  Trust/Trustee •  Servicer •  Custodian •  Rating Agencies •  Insurers •  Investors

RMBS Securitization Map

$$$

Originator Processes and funds

individual loans

Note & Mortgage

$$$ Mortgage Payments

Borrower

$$$

$$$

Interim Servicer Services loans until

securitized

Primary Servicer Services individual loans, collects

payments, performs duties under PSA

Master Servicer Prepares reports for Trustee; remits monies; ensures Primary performs

$$$ Pool revenue less

servicing fee

Seller Purchases loans from originator; forms pool

Note & Mortgage

Depositor Creates issuing entity

Note & Mortgage

Trust Holds pool of loans; issues

certificates

Note & Mortgage

Trustee Oversees servicers

$$$ fees

$$$ purchase price

$$$ purchase price

Underwriter Sells certificates to investors,

collects proceeds

Certificates


proceeds

Various Classes

Investors/Certificate Holders Purchase mortgage-backed securities as defined in certificates


proceeds

$$$ less servicing fee

$$$ less Trustee’s fee

Other parties not shown may include Credit Risk Manager, Securities Administrator, Swap Counterparty, and Rating Agencies

MLPA

PSA

PSA

PSA

PSA

MLPA or PSA

Document Custodian

Stores and maintains mortgage loan collateral files

Collateral File

Mortgage Broker Received broker’s fee, YSP

and processing fees

Who Owns the Loan?

•  Why this is important – Authority to conduct valid foreclosure – Authority to approve modification, other option

•  How do I find out who owners a given mortgage loan?

CFPB Servicing Rules

•  Two borrower tools: – Error resolution notice. 12 C.F.R. § 1024.35 – Request for information. 12 C.F.R. § 1024.36

Request for Information •  Servicer is required to respond to any written

request for information “with respect to the borrower’s mortgage loan”

•  A RFI is not limited to information “related to the servicing” of the loan

•  RFI may seek: –  information about a loan modification application –  “servicing file” vs. “mortgage file”

CFPB: Error Resolution Procedures

•  Apply to loss mitigation notices, dual tracking restrictions, and

•  “Any other error relating to the servicing of a borrower’s mortgage loan.”

Servicer Obligations •  5 business days (20 days before Jan. 10, 2014)

–  acknowledge error notice or information request, or –  take requested action

•  30 business days (60 days before Jan. 10, 2014) –  correct borrower’s account, or –  after conducting a reasonable investigation, provide

borrower written explanation as to why servicer believes account is correct, or

–  provide borrower with requested information or explanation why information is unavailable.

Servicer Obligations •  Exceptions to 30-day response period (effective

Jan. 10, 2014) –  7 business days for notice of error asserting failure to

provide accurate payoff statement

–  prior to foreclosure sale or 30 business days after receipt of notice of error, whichever is earlier, for notice of error based on 120-day pre-foreclosure waiting period or dual-track requirements

–  10 business days for request for information seeking identity of owner of mortgage

Identity of Mortgage Loan Owner RESPA/TILA

– RESPA Request for Information: Servicer must respond within 10 business days to request for identity, address, and other contact information about owner or assignee of loan. Reg. X § 1024.36(d)(2)

– Supplements TILA § 1641(f), but provides time deadline

Getting Information •  www.mersinc.org

•  freddiemac.com/mymortgage/

•  fanniemae.com/loanlookup/

•  TILA § 1641(f)(2) •  CFPB/RESPA Rule, 24 C.F.R. §

1024.36(d)

AG Settlement 14-day notice

Complying with Mass. Foreclosure Laws

•  In order to conduct valid sale, foreclosing party must comply

•  “with the terms of the mortgage and with the statutes relating to foreclosure of mortgage by the exercise of a power of sale.” M.G.L. c. 183 § 21


•  Three important notices to borrower – Statutory notice of right to cure – Contractual notice of acceleration – Statutory notice of foreclosure sale


•  Statutory notice of right to cure •  M.G.L. c. 244 § 35A (the “35A notice”) •  Must provide name and address of

“mortgagee” •  Offers time to bring current before

foreclosure starts (150- day cure period) •  U.S. Bank v. Schumacher, 467 Mass. 421

(2104) (in eviction case, must show harm from improper notice to set sale aside)


•  The acceleration notice •  Contained in the mortgage – usually

paragraph 22 •  “Lender” must send •  Explains right to reinstate mortgage and

contest foreclosure •  Contractual requirement for valid sale.


•  Notice of foreclosure sale •  Informs borrower of sale date and

procedures •  Must correctly identify the mortgagee – the

current assignee of the mortgage (Ibanez)


•  Identifying holder of note •  Lender/Servicer Affidavit under M.G.L. c.

244 § 35C •  Authorizes recording of certification of

noteholder status – protection for innocent third party purchasers at foreclosure sales.

Other Defenses to Foreclosure

•  Challenging lender/servicer conduct related to loss mitigation

•  Violation of duty to consider borrower for eligibility for loan modification

Enforcing Loan Modification Rules

•  What might work – Breach of contract theories

•  Breach of TPP •  Breach of duty of good faith and fair dealing

– Promissory estoppel – Tort claims (negligence, intentional

misrepresentation) –  “93A” – unfair and deceptive acts in

commerce

Legal Theories for HAMP Enforcement

•  Two types of cases: •  Enforcing the obligation to consider

borrower for initial HAMP eligibility •  Enforcing conversion from trial payment

plan to permanent HAMP modification

What Relief does borrower want?

•  Evaluation or mod?

•  It helps to allege borrower is qualified for HAMP

•  Run CheckMyNPV.com

HAMP Enforcement - TPP

•  Enforcement of TPP as contract – Consideration – Terms of the contract – What about statute of frauds?

Prior TPP Letter Language •  “If I comply with the requirements in Section 2

[regarding payments] and my representations in Section 1 [regarding income verification] continue to be true in all material respects, the Lender will send me a Modification agreement for my signature and will modify my Loan Documents….”

Responding to the Servicer’s Failure to sign

•  What constitutes a signature? –  Signature? –  Or letterhead?

•  Partial performance can overcome contract formation and statute of frauds problems

•  Reference structure of HAMP

•  In re Pico, 2011 WL 3501009 (Bankr. S.D. Cal. Aug. 9, 2011) •  “The Court cannot adopt IBM's interpretation that Chase

was free not to sign the LMA despite promising to do so . . . .”

Did the Homeowner Comply with the contract?

•  Make all payments? •  Make all payments on time? •  Provide all information? •  Update all information?

•  What does TPP require?

What Is the Duty of Good Faith and Fair Dealing?

•  According to Restatement (2d) of Contracts: Remedy for “evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of power to specify terms, and interference with or failure to cooperate in the other party’s performance.” (§ 205)

•  Requirement for honesty, standards of decency, fairness and reasonableness

•  Adherence to industry standards for loss mitigation, including, perhaps, loss mitigation requirements of pooling and servicing agreement

EXAMPLES of BREACHES OF DUTY OF GOOD FAITH & FAIR DEALING

•  Falsely stating not a HAMP participant •  Falsely stating investor does not permit HAMP

modifications •  Offering non-HAMP mods with less favorable terms •  Demanding redundant, unnecessary documents •  Routine loss of documents •  Denying receipt of documents •  Failing to give decision •  Failing to send accurate notices of denial/cancellation •  Failing to disclose NPV data

Promissory Estoppel •  Unambiguous promise •  Foreseeable reliance by homeowner •  Detriment •  A contract, but no consideration

Initial Application & Promissory Estoppel

•  Aceves v. U.S. Bank, N.A., 2011 WL 242426 (Cal. App. Jan. 27, 2011):

•  Clear and unambiguous promise: not foreclose while we negotiate loan mod

•  Reliance on promise: declined to pursue bankruptcy relief, other options

•  Reasonable reliance to detriment •  Consideration not a required element

OTHER Possible Common Law theories

•  Negligence –  Is there a duty of care? – Breach/Injury/Causation

•  Fraudulent misrepresentation – One of the successful theories in Wigod

•  Court’s equitable authority

Understanding Government-Insured Mortgages

•  Three Federal Agencies Insure Loans:

•  HUD – manages FHA single-family insured loan program •  VA – manages VA single-family insured loan program •  USDA (Rural Housing Service, RHS, FmHA) – manages two

distinct programs: –  USDA insured single-family home loan program –  USDA direct loan program (purchase and home repair

loans)

Structural Similarities - Authority

•  Federal Statute •  Codified Regulation (C.F.R.) •  Agency Handbook •  Administrative updates (on website) •  Court decisions

59

FHA-Insured Loans •  Federal Housing Administration (FHA) Single

Family Insured Mortgage Program •  The United States Department of Housing

and Urban Development (HUD) runs the program through FHA, who manages the Mutual Mortgage Insurance (MMI) Fund. 12 U.S.C. § 1708(a).

•  National Housing Act, 12 U.S.C. §§ 1707 –

1715z25

FHA LOSS MITIGATION AUTHORITY

•  Statute; 12 U.S.C. § 1715u •  HUD Regulations: 24 C.F.R. § 203.500, et seq. and §203.600,

et seq. •  HUD Mortgagee Letters •  HUD Handbooks (e.g. No. 4330.1) •  Court Decisions •  HUD/FHA website: http://www.hud.gov/offices/adm/hudclips/ (contains Mortgagee Letters, Handbooks)

FHA Mortgage Terms •  There is both a contractual and regulatory

basis for the mandatory nature of loss mitigation.

•  Paragraph 6(B) of the FHA Note: “In many circumstances regulations issued by the Secretary [of HUD] will limit Lender’s rights to require immediate payment in full in the case of payment defaults. This Note does not authorize acceleration when not permitted by HUD regulations.”

Litigation - Breach of Contract

•  The FHA note and mortgage specifically incorporate the loss mitigation regulations.

•  When servicers breach the regulations, they also breach the contract.

•  While this argument is sometimes couched in different terms, it essentially boils down to a breach of contract.

FHA Loss Mitigation Tools •  Repayment agreement •  Forbearance •  “Special forbearance” •  FHA standard loan modification •  FHA HAMP •  Assumptions •  Pre-foreclosure sale •  Deed in lieu of foreclosure

FHA-HAMP •  When the FHA standard mod is not affordable

–  Does not leave borrowers with “surplus income” of at least $300/month

–  Does not reduce payment by 10% •  Total partial claim may not exceed 30 percent of

the unpaid principal balance as of the default date (if arrearages exceed this amount, they may be capitalized)

•  .Payment between 25% and 40% •  No formal NPV test

Major Mortgagee Letters •  2000-05 (general structure) •  2009-23 (implements FHA-HAMP) •  2009-35 (adjusts loan modification) •  2012-22 (revised FHA-HAMP) •  2013-32 (fixed issues with 2012-22) •  Others: Mortgagee Letters 2013-17 (interest

rates), 2013-38, 2013-39 (communications with homeowners), 2013-40

FHA Policy - Caveat •  On September 11, 2014, HUD issued a

draft version of its Single Family Housing Policy Handbook related to mortgage servicing.

•  HUD’s website claims the new handbook consolidates policy and provides a comprehensive guide for servicing.

•  Comments are due by October 17, 2014. •  Final version expected mid-2015.

Mortgagee Letter 2000-05 •  Provides the basic structure of FHA loss

mitigation

•  Includes “partial claim” – this is a major component of FHA-HAMP

•  HUD’s website on partial claims: “The Borrower will execute a Promissory Note and Subordinate Mortgage payable to HUD.”

Mortgagee Letter 2000-05 •  The partial claim note is interest free. •  The entire principal balance is payable as

one balloon payment. No monthly or periodic payments are required.

•  The note is due at the earlier of 1) payoff of the first mortgage, 2) when the borrower no longer owns the property, or 3) other specified event. See Mortgagee Letter 2013-19

Mortgagee Letter 2009-23 •  FHA’s first try at a HAMP-type program.

•  Prior to Mortgagee Letter 2009-23, FHA had a loan modification program, but it did not have an affordable payment target, such as 31% of gross income.

•  FHA-HAMP generally did not include steep interest rate reductions or extensions of the the loan term to 40 years.

Mortgagee Letter 2009-23 •  Term extensions are limited by 24 C.F.R. §

203.616, and the interest rate is not significantly reduced under FHA-HAMP.

•  Instead, FHA-HAMP combined a partial claim

with a loan modification. •  The payment reduction was generally

supposed to come from the partial claim. Under FHA-HAMP, the partial claim could include more than just arrears.

Mortgagee Letter 2009-23

•  Very few people qualified for this program.

•  Consumer advocates complained to HUD for years about the original version of FHA-HAMP.


•  Mortgagee Letter 2012-22 uses basic concepts from past Mortgagee Letters, including the combination of a partial claim and a loan modification for FHA-HAMP.

•  It made significant change to the waterfall, making FHA-HAMP much more prominent and changing other programs.


•  2013-32 is a clarifying mortgagee letter that addressed problems.

•  Like 2012-22, it relies heavily on a flow chart to illustrate the program.

•  Likely to be confusion over implementation

Mortgagee Letters 2012-22 and 2013-32

•  Revised FHA-HAMP is still early in implementation, and it is unclear still how some of the rules will work in practice.

•  You need to understand how the flow chart works (Attachment A) in order to catch inevitable servicer mistakes.

New Applications

•  CFPB “one bite at the apple” for complete applications limits only CFPB/RESPA remedies

•  For FHA, if prior denial of option: – May re-apply if changed circumstances

•  For FHA, if prior option failure: – May re-apply if changed circumstances

FHA National Servicing Center

Oklahoma City Office U.S. Department of HUD

301 NW 6th Street, Ste 200 Oklahoma City, OK 73102

Fax: (405) 609-8405 or

(405) 609-8421

www.hud.gov/offices/hsg/sfh/nsc/nschome.cfm E-mail: [email protected]

1-877-622-8525

See also HUD Neighborhood Watch: https://entp.hud.gov/sfnw/public/ (data on FHA loss mitigation activity by state and by servicer)

RURAL HOUSING LOANS

•  U.S.D.A.’s Rural Housing Service (“RHS,” formerly “FmHA”) manages two single-family home loan programs for borrowers in rural areas.

•  Guaranteed Loan Program: private lender, guarantee not obvious from mortgage and note

•  Direct Loan Program: The United States is the lender and they tell you they are

RHS RESOURCES Guaranteed Loans: 42 U.S.C. § 1472, et seq. USDA Regulations: 7 C.F.R. § 1980.301, et seq. RD Instruction 1980-D (tracks regulations) at

http://www.rurdev.usda.gov/regs/ RD Administrative Notice 4433 at

http://www.rurdev.usda.gov/regs/ •  Includes USDA Rural Development Loss Mitigation

Guide (Single Family Guaranteed Loan Program) – Appendix 4: Loss Mitigation Checklist – Appendix 5: Loss Mitigation Forms

RHS Guaranteed Loan Program

•  RHS Guaranteed Loans: Loss Mitigation obligation: 42 U.S.C. § 1472(h)(13)

•  Options for RHS Guaranteed Loans – Special Forbearance – Loan Modification – Pre-Foreclosure Sale – Deed-in-Lieu

RHS-HAMP •  For RHS-Guaranteed loans only •  Very similar to FHA-HAMP •  Appears in form of new final RHS Loan Modification

Regulation: 7 C.F.R. § 980.373 (effective 9/24/10) •  HAMP Supplemental Directive 10-10 (9/17/10) •  MHA Handbook for Non-GSE Servicers Ch. VI

–  Handbook describes servicer & borrower incentives –  Requires servicer participation agreement to get

incentives

Rural Housing Direct Loans These are loans directly from the United States

government (USDA) to the borrower for purchase or construction of residence

•  “Section 502” loans under U.S. Housing Act – Regulations: 7 C.F.R. Part 3550 – Handbook HB-2-3550 (Centralized Servicing

Center): http://www.rurdev.usda.gov/regs/hblist.html

RHS Direct Loans

•  Direct Loans Special Features: •  Interest credit/payment assistance

reduces monthly payment toward interest based on household income

•  Periodic payment adjustments and review •  Forborne interest is subject to “recapture”

VA Loans - Introduction

•  VA guarantees loans by private lenders •  Available for eligible veterans •  Can be for purchase, construction,

refinance •  Relatively low interest rate, no down

payment

VA Loans Resources

•  Regulations: 38 C.F.R. § 36.4800-4893 & 38 C.F.R. § 4316-19

•  VA Handbook H26-94-1 •  Servicer Loss Mitigation Program

Handbook •  Both handbooks at http://

www.homeloans.va.gov/servicers.htm

What Are the VA Options? •  Repayment Plan •  Special Forbearance •  Loan Modification •  VA-HAMP •  Compromise (short) sale •  Deed-in-Lieu of foreclosure •  Refinance •  Assumption •  Refunding- VA takes over loan

The nonprofit National Consumer Law Center® (NCLC®) helps build family wealth for low-income and other disadvantaged people in the U.S. by offering advocacy expertise through publications, policy analysis, research, litigation services, and training. www.nclc.org

Foreclosure Litigation Issues: Authority to Foreclose

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