foreclosure

Guest Post: THE MORTGAGE FOLLOWS THE NOTE . . . . . or Does it?

foreclosure and the mortgage follows the note

 

Prior article at The Hallmark Abstract Sentinel: ‘The Foreclosure Process: What a difference a state makes!

THE MORTGAGE FOLLOWS THE NOTE . . . . . or Does it?

By Charles Wallshein Esq.

October, 2012, All Rights Reserved 

Perhaps most frustrating for attorneys defending securitized mortgage foreclosures is not knowing the identity of the loan’s actual owner. The case caption often reveals the Plaintiff as a large commercial bank acting as the “servicer “or as a large commercial bank acting as “trustee”. Even though the caption purports to identify the plaintiff, in more cases than not, the named plaintiff cannot prove it has an interest in the loan. In most cases the entity that appears as the “lender” on the promissory note is not a party to the action. Over sixty percent of all mortgages in the country situate in securitized mortgage pools.

Standing has become the most widely and most successfully used affirmative defense in securitized mortgage foreclosure cases. Standing is the demonstration that the plaintiff is the proper party entitled to relief. The plaintiff in a foreclosure action must make a prima facie case that it has a legal interest in the underlying indebtedness (promissory note) to the security interest (mortgage). Most simply put, the plaintiff has to either own the note or be an agent of the entity that owns the note.

New York law requires that at the time the foreclosure is commenced the entity foreclosing must own the note.1 New York law also requires that the plaintiff must file its lis pendens twenty days before the entry of its judgment of foreclosure and sale.2 Another requirement is that all mortgages (and assignments of mortgages) being foreclosed must be recorded prior to title to the property being transferred by the referee post-sale.3 This means that besides the plaintiff having to own the note prior to the commencement of the case, the mortgage has to be recorded in that party’s name before the plaintiff can enter a judgment of foreclosure and before the referee can transfer title.

These rules make perfect sense. The party cutting off the fee owner’s right of redemption and all entities with subordinate interests in the property must be identified with constructive notice to the world via the recording statutes. If this were not the case then anyone could foreclose on anyone. Foreclosure defendants could not defend their rights in real property against the proper parties.

“Who owns the note?” This question is asked most often during the modification process prior to the commencement of a foreclosure. Once the foreclosure is commenced defendants can see the plaintiff in the caption and automatically assume the entity named there owns the note. Too often the named plaintiff does not, cannot and has not ever owned the promissory note. In other words, the plaintiff has no standing.

One would think that a careful examination of recorded assignments at the county clerk’s office would reveal the last mortgagee of record and presumably that

assignee would also own the note. After all, what sane or right-minded transferee of a mortgage note would risk its priority position by not diligently recording the security instrument with the county clerk? You would be surprised.

Almost without fail the mortgage is immediately recorded after its creation. The borrower borrows the money and the title insurance company, having insured the priority and validity of the new mortgagee’s position, immediately records the mortgage. It is what happens thereafter that the note owner’s identity becomes murky.

One court eloquently described the rules governing transfer of notes and mortgages as having dual purposes for dual “worlds”.4 One can be seen as protecting competing interests from each other and the other protects fee owners from unlawful attacks or liens on their title. Real property law is a set of rules that ensures that entities with interests in real property know exactly what they have and their position against superior, subordinate and competing interests. Overriding these rules is the ancient rule against any law that restrains the alienation of property. The law has always favored the marketability of title.

The recording statutes were enacted to give the world constructive notice of the existence of liens and encumbrances on title to real property. Lien perfection is the cornerstone principle enabling existing and prospective lien-holders to have notice of each other’s existence for the purposes of determining their respective priority positions. A person who advances money against real property secured by a mortgage should know whether there is a pre-existing lien on the same property. Likewise, a purchaser of real property should know whether the entity he is taking title from has good and clear title to transfer.

Millions of parcels of real property are encumbered by mortgage liens that may be unenforceable yet those liens can never be removed. The culprit is the Residential Mortgage Backed Securities transaction. The RMBS transaction requires multiple transfers of the underlying mortgage notes and a corresponding number of transfers of the security instruments. It has become apparent that these transfers were improperly executed or not executed at all. None of it made any difference and nobody would have noticed until the entities that thought they owned these loans had to foreclose to recapture their investment.

The RMBS transaction changed the incentives mortgage creditors had to, and the manner by which they perfected their interests. It is because of this that we are witnessing the total breakdown of a hundreds–of-years-old system caused by the blind acceptance of a brilliantly devised, logical and lawful transaction that was implemented poorly. It is counterintuitive to think that the multi-trillion dollar mortgage industry would systematically neglect to take steps to properly perfect their interests in real property. However, this is exactly what happened. It is called “securitization failure”.

Securitization failure is just what it sounds like. It is the failure of the note to lawfully vest in the possession of the entity claiming an interest therein. Securitization fail occurs in two ways; first, it is the unlawful transfer of notes to, and unlawful acceptance of notes by, the trust pursuant to the terms of the trust agreement. Second, it is the unlawful transfer of notes pursuant to statute.

The legal arguments are thus framed; is “securitization fail” a sound affirmative defense in mortgage foreclosure proceedings? And if it is, how does one prove it? The answers to these two questions require a basic understanding of the rules governing mortgage and mortgage note transfers in securitized mortgage transactions.

Securitization is the conversion of cash flow from a pool of loans (accounts receivable) into a security like a stock or a bond. An entity is created to collect the principal and interest payments from a pool of mortgage loans and redistribute that income to investors (certificate holders) according to the entity’s governing document. The entity is created as a common law trust under New York’s Estate Powers and Trusts law, as a government sponsored entity (Fannie Mae/Freddie Mac) or as a government guaranteed entity (Ginnie Mae). The trust sells certificates that entitle investors to receive a portion of the trust’s income.

The trust has two main objectives; first, to be insulated from creditors, especially chapter 7 trustees. Second, the trust has to qualify as a tax free pass through in accordance with the internal revenue code so the cash flow from the loans is only taxed once at the investor level and not twice as if it were regular income.5

When financial assets such as accounts receivable or other debts are securitized, parties to the transaction typically attempt to ensure that the assets are “bankruptcy remote.” This means that creditors of the party that originally extended credit cannot reach the financial assets and the assets cannot become part of the originating firm’s estate in the event of a bankruptcy.6 Instead, even with the bankruptcy of the originating firm, the securitized assets of the trust can continue to benefit of the certificate holders. Think of Lehman Bros. and Bear Stearns securitizations. The bankruptcy trustees could not invade the trusts created by Lehman and Bear to reach the assets.

Bankruptcy remoteness is typically concerned with establishing three things; first, the sale of assets is a true sale of the assets; second, the transfer of loans to the trust is not a fraudulent conveyance; and third, the assets in the trust will not be comingled with assets from other entities. In other words the trusts are “closed”.

Typically securitizations have three or four parties in between the originator of the loan and the trust. These intermediaries have no real purpose other than to serve as bona-fide purchasers of the assets. Attorneys for the industry apparently

felt that if there were three bona fide transactions in between the originator of the loan and the trust, creditors of the originator could not attack trust assets.

The loans therefore have to travel a path from originator to seller to depositor to the trust (A to B to C to D). This means that actual possession of the mortgage notes have to pass from originator to seller to depositor to the trust. Eventually the security instrument (mortgage) has to be recorded in the name of the trust to be enforceable against the borrower. A mortgage is an interest in real property a mortgage note is not. To establish race/notice priorities, mortgages and assignments of mortgages must be in writing and recorded. Notes and note transfers do not. To satisfy the statute of frauds, mortgages and assignments of mortgages have to be in writing. Note transfers do not.7

A promissory note by itself can be lawfully transferred by mere delivery. UCC Article 3 defines “a holder in due course” as one who lawfully possesses a negotiable instrument.8 A holder in due course has the presumption that it is the proper party to enforce or negotiate the instrument. UCC Article 9 governs transactions where there is a security instrument attached to the promissory note. If the provisions of Article 9 are not satisfied, a mortgage note that is transferred will not automatically transfer the security interest in the property attached thereto.

UCC §9-203(g) is the codification of the common law maxim “the mortgage follows the note”. New York and every other jurisdiction recognize that a security instrument cannot be enforced independently of ownership of the underlying indebtedness.9 In other words, a person cannot have a security interest in nothing, there has to be an underlying promise to secure against.

The most common affirmative defense in securitized mortgage foreclosures is that the failure to record the assignments of mortgage in each entity’s name in the chain of possession to the note from originator to seller to depositor to trust is fatal to the trust’s foreclosure. It is the norm for assignment of the mortgage directly from the originator, or by MERS as nominee of the originator/lender, to the plaintiff-trust (leaving out the assignment of the mortgage to the seller and from seller to depositor and depositor to trust). Meanwhile plaintiffs argue that lawful delivery of the note from originator to seller to depositor to trust is sufficient to vest standing to foreclose in the plaintiff-trust because the mortgage follows the note.

The securitization industry has relied on both the common law and the codified versions of “the mortgage follows the note” to demonstrate priority of ownership against competing interests in the mortgage AND enforceability of the mortgage in securitized mortgage foreclosures.10 The industry was only half correct.

To demonstrate that lawful delivery of the note obviates the need for every assignment of the security instrument to be in writing the securitization industry uses the “Article 9 argument”. The 2001 amendments to Article 9 include sales of promissory notes, accounts, and payment intangibles, not just classical security

interests. When a promissory note is sold under Article 9, the buyer is the “secured party.”

The terms used for the participants in the Article 9 revisions have their origins in the section’s secured transactions roots. The note-seller is the “debtor,” and the note is the “collateral.” The buyer’s ownership interest in the promissory note is a “security interest.”11

The American Securitization Forum’s12 “Article 9 argument” is as follows:

1. The sale of a promissory note is a grant of a security interest in the promissory note.13

2. A security interest is good against the parties to the transaction when it attaches, and good against the rest of the world when it is perfected.14

3. The buyer’s security interest in a purchased promissory note is perfected as soon as it attaches.15

4. The buyer’s security interest in the mortgage attaches as soon as the interest in the note attaches16

5. and is perfected as soon as the interest in the promissory note is perfected.17

6. While ”the creation and transfer of an interest in or lien on real property” is excluded from Article 9, there is an express exception to this rule.18

In other words, recorded (written) assignments of security interests (mortgage) are irrelevant as long as there is lawful transfer of the underlying promises to pay (mortgage notes).

The ASF’s position is that the UCC takes priority over state real property laws even when note transferees do not record the transfer of the associated assignment of mortgage pursuant to state recording statutes. This may be true as to competing interests in the priority of payments with regard to the mortgagee’s priority against other mortgagees. However, extending this argument to give note purchasers priority against subsequent bona fide purchasers of the real property is absurd.

The Article 9 argument seems to reason that a mortgage note endorsed in blank automatically vests the right of the §9-203(g) “note-owner” or the §3-204 “holder in due course” to elect to enforce the equitable remedy in foreclosure against the mortgagor’s property without ever recording the assignment of the security instrument in the public record.

Any practitioner who has conducted a forensic review of the collateral file associated with a securitized mortgage foreclosure has observed that a majority of note transfers in the A to B to C to D chain are indorsed in blank. As a practical matter the Article 9 argument fails because it reduces the security instrument (the mortgage) to nothing more than a personal check made out to a bearer that endorses it in blank. The party entitled to enforce the mortgage in foreclosure is either a mystery or a secret. In either case the proper party’s identity is not a matter of public record.

1 U.S. Bank v Collymore, 68 AD3d 752 (2nd Dept. 2009).

2 Real Property Law §1331

3 Real Property Law §1353

4 In re SGE Funding Corp., 278 B.R. 653 (Bankr. M.D. Ga. 2001).

5 Internal Revenue Code §860.

6 The End of Mortgage Securitization? Electronic Registration as a Threat to Bankruptcy Remoteness, John Patrick Hunt, Richard Stanton and Nancy Wallace August 10, 2011

7 New York General Obligations Law §5-703.

8 UCC §3-301, §3-302.

9 UCC §9-203((g) Lien securing right to payment. The attachment of a security interest in a right to payment or performance secured by a security interest or other lien on personal or real property is also attachment of a security interest in the security interest, mortgage, or other lien.

10 American Securitization Forum, Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Market [hereinafter ASF White Paper] (Nov. 16, 2010).

11 UCC §9-102(28)(B), (12)(B) & 1-201(35).

12 The American Securitization Forum is the lobbying group that represents the interests of the securitization industry.

13 UCC §9-109(a)(3)

14 UCC §9-308, comment 2.

15 UCC §9-309(4)

16 UCC§9-203(g)

17 UCC§9-308(e)

18 UCC 9-109(d)(11)(A) “. . . (d) Inapplicability of article. This article does not apply to: (11) the creation or transfer of an interest in or lien on real property, including a lease or rents thereunder, except to the extent that provision is made for: (A) liens on real property in Section 9-203 and 9-308;

Irrespective of the enforceability of bearer paper with attached security instruments in foreclosure, plaintiffs still bear the burden of proof that they actually took title to the mortgage notes in a lawful manner. Even if the mortgage follows the note, the alleged note owner still has the burden of proof that it is the note’s lawful owner.19

In New York a foreclosure plaintiff cannot commence a foreclosure unless it owns the mortgage note and cannot complete its foreclosure until it records the assignment of mortgage in its name. So far, there is no decision in New York that states otherwise. Sooner or later a court of review will be called upon to resolve the apparent conflict between the Real Property Law and the Uniform Commercial Code. If the dicta in MERS v. Romaine is any indication of how the Court of Appeals may still feel about secret ownership of mortgages, proponents of the Article 9 argument will have a lot to think about.

19 UCC §9-203(b)(1), (2) & (3)(A); a security interest is enforceable against the debtor and third parties with respect to the collateral only if: (1) value has been given; (2) the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party; and (3) one of the following conditions is met: (A) the debtor has authenticated a security agreement that provides a description of the collateral . . .

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The Foreclosure Process: What a difference a state makes!

US foreclosure statistics

Does it matter whether a property foreclosure is being pursued within a judicial state or a non-judicial state? You bet it does!

For those who may be unfamiliar with the difference between judicial and non-judicial foreclosures, the short answer has much to do with time. Lots and lots of time.  And, as we say in the business, time is money!

Here are the descriptions for both the judicial and non-judicial foreclosure process provided by the Mortgage Bankers Association:

Judicial Foreclosures

A judicial foreclosure is a court proceeding that begins when the lender files a complaint and records a notice in the public land records announcing a claim on the property to potential buyers, creditors and other interested parties. The complaint describes the debt, the borrower’s default and the amount owed. The complaint asks the court to allow the lender to foreclose its lien and take possession of the property as a remedy for non-payment.

Non-Judicial Foreclosures

The requirements for non-judicial foreclosure are established by state statute; there is no court intervention. When the default occurs, the homeowner is mailed a default letter and in many states a Notice of Default is recorded, at or about the same time. The homeowner may cure the debt during a prescribed period; if not, a Notice of Sale is mailed to the homeowner, posted in public places, recorded at the county’s recorder’s office, and published in area newspapers/legal publications. When the legally required notice period (determined by each state) has expired, a public auction is held and the highest bidder becomes the owner of the property, subject to recordation of the deed. Prior to the sale, if the borrower disagrees with the facts of the case, he or she can try to file a lawsuit to enjoin the trustee’s sale. (Source)

Tale of the Time and National Foreclosure Statistical Overview!

In the first quarter of 2013 the average length of time to go through the foreclosure process in the State of New York, a judicial state, was 1,049 days.

Alternatively in California, a non-judicial state, the average amount of time to foreclose for a $450,000 home is a little over 500 days.

national foreclosure statistics

Click to make bigger

To examine the per state foreclosure statistics as well as other foreclosure metrics please read a great analysis provided in the CoreLogic National Foreclosure Report, April 2013 here.

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From personal experience I give our highest recommendation to the Real Estate Assessment Group that recently reduced my property tax liability over $3,000. Visit the website here or email Mark Davella at mdavella01@gmail.com.

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We accomplish this through the level of service we provide, the attention directed to every detail of a transaction, our quick turnaround times and finally through our extremely conservative pricing on non-policy related fees. These are just some of the things that our clients have come to expect from us!

And that’s why we continue to earn their business, time and time again!

Call or email us today to set-up an appointment and we will come to your office, learn about the nuances of your practice and explain to you the way that we approach ours!

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Hallmark Abstract Service comments on the civil penalty levied in a misuse of MERS case!

Sign of the times - Foreclosure Hallmark Abstract Service partner Michael Haltman quoted in Mortgage Professional Magazine!

The U.S. Attorney’s office in New York has levied a civil fine on the Steven J. Baum PC law firm over the firm’s mortgage foreclosure practices.

Michael Haltman was asked by Mortgage Professional for a comment which appears below. The entire article can be read at this link.

“When one considers the enormous number of foreclosure cases that this firm may not have done properly, or worse, that led to families losing their homes, people who may have potentially had other options, the punishment seems somewhat light,” said Michael Haltman, a partner of Jericho, N.Y.-based Hallmark Abstract Service LLC. “However, it is also my understanding as a non-attorney who has read analysis of the decision that that while this was a civil penalty under the statutes of FIRREA, the Baum Law Firm may still have exposure criminally, from the New York State Bar and from homeowners who incurred damages from the firms proceedings.”

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Is MERSviable despite some significant losses in court?

Does the controversy that’s surrounding MERS and the foreclosure process signal a death knell for the firm or is it much ado about nothing?

In an article here last week a New York State Appellate Court decision was discussed which held that the foreclosing entity needs to be in possession of both the mortgage and the note in order to have the proper “standing” to foreclose. This is an excerpt:

“… Finally, the recent New York State Appellate Court ruling upholds the idea that the entity foreclosing needs to be in possession of both the mortgage and the note! Because MERS was a mortgage registry and not a holder of the note, in essence this ruling says that MERS cannot assign the right to foreclose because it was never in the possession of the note – Strike Three?

Said the judge in the case: “… This matter involves the enforcement of the rules that govern real property and whether such rules should be bent to accommodate a system that has taken on a life of its own…”

While this ruling appears to be extremely detrimental to the operations and longevity of MERS, at HousingWire there is an article that offers a different view.

It provides the opinions attorney’s who feel that while MERS is down it is definitely not out. This view stems partially from the fact that there are so many different courts around the country coming to different conclusions concerning the legality of foreclosures that MERS is involved in.

While the fix won’t be quick, cheap or easy, they feel that MERS will ultimately survive.

It is an extremely informative article at HousingWire you can find here.

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MERS, foreclosures, the mortgage note, the New York State Appellate Court decision and another nail in the coffin!


Important update: The court case referenced in the article is Bank of New York, etc., respondent, v Stephen Silverberg, et al., appellants, et al., defendants. (Index No. 17464-08), 2010-00131, SUPREME COURT OF NEW YORK, APPELLATE DIVISION, SECOND DEPARTMENT, 2011 NY Slip Op 5002; 2011 N.Y. App. Div. LEXIS 4899, June 7, 2011, Decided.

MERS : Mortgage Electronic Registration System


A ruling out of the New York State Appellate Court is yet one more strike against MERS that will likely put a huge roadblock in front of the foreclosure process.

If you are not familiar with MERS, the video at MERS 101 will bring you up to speed.

In a nutshell MERS serves as an electronic database that allows mortgages to be sold with title transferred quickly. This was particularly important in the age of securitizations when mortgages could change hands many times over. One case was related to me where a mortgage was sold hundreds of times.

In addition to saving time MERS also allowed for a significant saving of money because after the original transaction was complete the loan documents from future transactions were no longer filed at the county clerks office.

The system was basically issue free until the collapse of the real estate market and the huge volume of foreclosures that resulted.

Because the mortgage was held in the name of MERS for tens of millions of mortgages, MERS would have to assign that mortgage back to the entity that was going to foreclose, or MERS would begin the foreclosures in its own name.

The problems are many, but for starters it has been determined that MERS cannot be the party to the foreclosure – Strike One

Because of the way that mortgage ownership was transferred in MERS by anyone who had a user name and a password, in many cases it is not known if the lender or servicer involved in the foreclosure actually has the “standing” to foreclose. Put another way, is the entity foreclosing actually the rightful owner of the mortgage and the note – Strike Two

Finally, the recent New York State Appellate Court ruling upholds the idea that the entity foreclosing needs to be in possession of both the mortgage and the note! Because MERS was a mortgage registry and not a holder of the note, in essence this ruling says that MERS cannot assign the right to foreclose because it was never in the possession of the note – Strike Three?
Said the judge in the case: “… This matter involves the enforcement of the rules that govern real property and whether such rules should be bent to accommodate a system that has taken on a life of its own…”
Stay tuned!

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Hallmark Abstract Service June Newsletter

Hallmark Abstract Service June Newsletter

If you would like to receive the newsletter by email in the future send your name and email address to mhaltman@hallmarkabstractllc.com or leave them in the comment box below.

Hallmark Abstract Service

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Visit our website to find out more

If your practice involves residential or commercial real estate transactions, you know that steering clear of any potential stumbling blocks and getting a deal closed is critical! At Hallmark Abstract Service our goal is to ensure, 100% of the time, that the title portion of any transaction will be seamless so that our clients can focus on the other aspects of a deal.

The Hallmark Abstract Newsletter – June 2011 Edition

Hallmark Abstract Service, Jericho, NY, 516.741.4723

More on MERS (Mortgage Electronic Registration System)

The foreclosure saga continues to drag on across the United States. One of the centerpieces of the crisis is a company or database that goes by the acronym of MERS (Mortgage Electronic Registration System).

The MERS database was a way for the mortgage industry and Wall Street to speed the transfer of mortgages from owner to owner which was particularly helpful in the age of mortgage backed securities.

The system bypassed the normal recording methods that have been around since the beginning of real estate transactions.

As is often the case, when the desired outcome is speed and cost avoidance, mistakes happen.

And the mistakes that have come out of MERS and the rest of the foreclosure mess will take years to clean-up.

Read “More on MERS” at The Hallmark Abstract Sentinel here.

New York State Foreclosure Activity

This map provides a look at the foreclosure activity in New York State broken out by region. As the map indicates the hotbed for activity is currently downstate.

Courtesy of RealtyTrac

Advice for your clients who are selling their homes

If you are fortunate enough to be in touch with your client early in the selling process it is important that they try to avoid some of the more common seller mistakes. In the buyers market that we are in, sellers have to put their best foot forward from the start!

  1. Pricing Your Home Too High
  2. Not Using Up to Date Information
  3. Not Utilizing Current Marketing Technology
  4. Ignoring the Importance of First Impressions
  5. Not Providing Easy Access for Showings
  6. Not “Staging” Your Property Correctly
  7. Not Knowing the Competition

  8. Believing Your Agent is Not Doing the Job When There Aren’t Any Offers
  9. Not Re-Evaluating the Marketing Plan
  10. Errors in Market Timing
  11. Not Giving the Sales Effort Enough Time
  12. Taking An Inflexible Position on Financing
  13. Not Making the Right Kind of Repairs
  14. Believing That Selling Property is Seasonal
  15. Not Screening Prospects Adequately
  16. Believing That You are Not Part of the Marketing Plan


(Source)

Hallmark Abstract Service
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Jericho, New York 11753
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Feeling the effects of foreclosure crisis mitigation efforts


@font-face { font-family: “Calibri”; }@font-face { font-family: “Cambria”; }p.MsoNormal, li.MsoNormal, div.MsoNormal { margin: 0in 0in 10pt; font-size: 12pt; font-family: “Times New Roman”; }div.Section1 { page: Section1; Hallmark Abstract was asked to participate in the writing of an article from The Legal Description: Legislative and Legal Analysis for Settlement Services

Hallmark was asked by “The Legal Description” to participate in the writing of an article on the impact that the foreclosure crisis could have on our business and the title insurance industry in general. The full article is below with the section provided by Hallmark Abstract highlighted in bold and italicized.

Feeling the effects of foreclosure crisis mitigation efforts

After the foreclosure processes of several mortgage servicers were called into question last fall, Congress jumped to action, holding hearings to investigate these procedures. All 50 state attorneys general teamed up to hold their own investigation and are currently negotiating a settlement with the largest mortgage servicers in the country, a settlement which could result in major reforms for the servicing industry.

The states have also taken action, with certain states jumping into action with judicial rules or emergency legislation. Other states are being more methodical in their efforts, introducing legislation during the regular session of the legislature and carefully examining the bills’ potential impact.

With actions being considered in several states, The Legal Description examined the impact of actions already taken in three jurisdictions: Washington, D.C., New York and Maryland.

Standstill in D.C. 
Virtually no foreclosures have occurred in Washington, D.C., since the council adopted the Saving D.C. Homes from Foreclosure Congressional Review Emergency Amendment Act of 2011. The new law requires mortgage lenders to provide homeowners with a notice of default on residential mortgages. It also provides homeowners with the right to engage in mediation prior to foreclosure on residential mortgages.

The written notice of default lenders are required to send out must include, among other things, a description of all loss mitigation programs available to the borrower and a mediation election form. A mediation administrator appointed by the commissioner of the Department of Insurance Securities and Banking (DISB) is then required to reach out to the borrower, offering their services and reminding the borrower that they will lose the right to mediation if they do not return the loss mitigation application to the lender and the mediation election form to the mediation administrator within 30 days of the notification. If the borrower elects to engage in mediation, a mediation session would be scheduled for no later than 45 days after the mailing of the notice of default.

Before the troubled property can be sold to a third party, the lender must receive a certificate of mediation from the DISB, either after the borrower has indicated they do not wish to engage in mediation or after mediation is completed.

Currently, the DISB is drafting regulations to implement the new law. Because the new law states that a certificate of mediation must be received before property can be foreclosed upon, no foreclosures have taken place since the new law was passed.

The D.C. Land Title Association (DCLTA) has been working with the DISB on the efforts to ensure that when title is transferred after a foreclosure, it is clear and marketable.

“The title industry’s goal is to determine whether foreclosures will be insurable,” said Roy Kaufmann, counsel to Jackson & Campbell P.C., lobbyist for DCLTA and the immediate past chair of the D.C. Bar’s Real Estate Housing and Land Use Section. “For us to determine that, we need to know, irrefutably, whether a borrower has exercised rights under the [new law] and if he has exercised them, whether he has successfully exhausted his administrative rights conclusively so the lender can move forward to foreclose.”

Kaufmann said the association’s primary objective is to get the legislation or the regulations to state dispositively that the process has been completed. He said that if a borrower can come back and refute the mediation, asking for the mediation certificate to be set aside, it would wreak havoc on the title industry because a title insurer will have insured the sale of the property in question. Kaufmann noted the group has given their suggestions to the DISB for consideration.

No clear answers in New York 


The New York State court system has instituted a new filing requirement in residential foreclosure cases to protect the integrity of the foreclosure process and prevent wrongful foreclosures. The requirement, handed down by Chief Judge Jonathan Lippman on Oct. 20, 2010, states that plaintiff’s counsel in foreclosure actions are required to file an affirmation certifying that counsel has taken reasonable steps — including inquiry to banks and lenders and careful review of the papers filed in the case — to verify the accuracy of documents filed in support of residential foreclosures.

Since then, courts have handed down decisions that added confusion. Michael Haltman, a partner at Jerich, N.Y.- based Hallmark Abstract Service LLC, said that when the Lippman decision was handed down and title insurers came out with new indemnification requirements, “it seemed that [the requirements] would be incredible stumbling blocks” because lawyers were not going to put their license on the line to assert that everything that has been done has been done correctly.

“Since then, different rulings in different courts have come up with different determinations,” Haltman said. “Where it looked like it was going in one direction, now with Mortgage Electronic Registration Systems Inc. (MERS), you’ve had some situations where the courts have upheld MERS and then you’ve had other decisions where the courts have not upheld MERS in terms of the right of the lender to foreclose in the name of MERS. It’s kind of morphed from something that looked like a certainty and now has really changed to a court by court [situation]. There is really no certainty right now.

Haltman pointed to the decision of the U.S. Bankruptcy Court for the Eastern District of New York in In re: Ferrel Agard, in making his point. In that case, the court ruled in favor of MERS, but cautioned that in all future cases involving MERS, the moving party must show that it validly holds both the mortgage and the underlying note in order to prove standing.

Haltman noted that his company has been in a few situations since the ruling came down where it couldn’t establish a good chain of title and decided not to insure those deals. He also pointed out that in making that decision, his company was in close contact with the attorneys at the underwriter to make sure both companies understood the proposed risk before deciding to say no.

“Any time there is a foreclosure, any time that MERS is involved, it may be cliché, but you have to dot every I and cross every T,” he emphasized. “Make yourself comfortable so that you can make your underwriter comfortable. That is how you avoid problems down the road.”

Slow in Maryland 
The Maryland Court of Appeals adopted new Rule 14-207.1 and amendments to Rules 1-311 and 14-207. The rules changes allow courts to screen affidavits filed in residential foreclosure cases, and if they have reason to believe that an affidavit may be invalid, enter an order directing the affiant, and where applicable, the notary to appear before the court and establish that the affidavit is genuine, failing which the foreclosure action may be dismissed.

Charlene Perry, manager, The Preferred Title Group Inc. in Baltimore Md., said that business has slowed down since the adoption of the new rules. Time lines associated with getting the foreclosure process completed have been extended as a result of the rules. In addition, she said judges are taking more time reviewing the files, which is also creating a delays in the final ratification of the sales by the courts and by the auditors.

“On more than one occasion over the last 6 months or so we have seen a larger number of properties that were under contract and ready to proceed to closing suddenly put into a ‘hold’ status by the servicer or by the lender,” Perry said. “The reasons are varied but many of these ‘holds’ were placed as a result of the new rules and stricter review of the foreclosure cases and documents presented in those cases.”

Perry said that because of the new rule, her office requires that its attorney/abstractors pull the foreclosure file and copy every page of the file as part of their title search/exam. In years past, the company was able to review the docket entries and rely upon the order of ratification by the court and the auditor.

Her company also requests that the foreclosure attorney provides it with copies of proof of notices to all parties, not relying on the blanket notice affidavit filed in many foreclosure files, but instead insuring that all necessary parties have been notified of the foreclosure action.

“Every document has to be reviewed and if we find such things as corrective affidavits in the foreclosure file, that case needs to then be examined by underwriting counsel and specific approval for issuance of the title policy must be given,” Perry said.

She also said that signatures are being reviewed more carefully, “not for purposes of determining their authenticity, keeping in mind that title agents are not handwriting experts, but to cross check the names with those we know of that have admitted to robo-signing.” If a known robo-signer has executed any of the documents, they too must be approved by underwriting counsel, Perry noted.

“Prior to the current crisis in the foreclosure arena there was a different level of comfort for those of us writing policies on properties being conveyed out of foreclosure,” Perry concluded. “The general thinking was that the foreclosure ‘scrubbed’ many issues away. Now though with the allegations of fraud, robo-signing, forged deeds etc., we find a different level of review of all files that have been foreclosed upon and different issues that need to be addressed. The problems associated with a faulty foreclosure are felt by all title agents in Maryland and nationwide. With the vast number of foreclosures that have been completed in Maryland even those agents who don’t specialize in transferring property out of foreclosure will see more and more files where there has been a recent foreclosure. It is important that we all stay abreast of the issues surrounding foreclosures in our home state as well as nationwide.”

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