May 11, 2010 UPDATE since original post: 60 Minutes with Morley Safer did a piece on Strategic Defaults on May 9, 2010 that you may want to check out.
Today’s New York Times is running its latest article on the growing phenomenon of homeowners walking away from mortgages. Check out the article by David Stretfield, entitled “No Help in Sight, More Homeowners Walk Away.” Not that this is news to you if you’re reading this blog, as I’ve posted on this
My favorite take aways in the pop culture contribution department: What used to be called “house poor is now called “house arrest.” And the new phrase for mailing the keys to the lender? “Jingle mail.” Cute.
The attacks on the Mortgage Electronic Registration System (“MERS”) continues unabated at all levels. In the case MERS v. Johnston (Rutland County Superior Court case no. 420-6-09 Rdcv) another Court had held that MERS doesn’t have standing to complete a foreclosure of a mortgage which did not specifically name it as the mortgagee, or which secures a promissory note that didn’t specifically name MERS as payee. The opinion relied heavily on the Landmark National Bank v. Kesler decision from the Kansas Supreme Court that was issued in September of this year. The Kesler decision, in turn, relied heavily on the 2005 Nebraska Supreme Court decision Mortgage Elec. Reg. Systems v. Nebraska Dept. of Banking, 270 Neb. 529, 530, 704 N.W.2d 784 (2005).
It is still unclear just how much damage this line of cases will do to the infrastructure of the MERS nominee system. But at least one Federal Court has seemingly upheld the MERS system for at lease some purposes. On September 24, 2009, the US District Court for the District of Arizona handed down its trial court decision in Cervantes v. Countrywide (Case No. CV 09-517 PHX-JAT) in which the trial court determined that MERS is “not a sham,” as had apparently been alleged by the plaintiffs. This Arizona decision is only a trial court decision, however, and is not binding on any other court.
On August 28, 2009 the Kansas Supreme Court handed foreclosure advocates a major victory in the case Landmark National Bank v. Kesler. The decision appears to be a fairly wonkish and dryly academic legal essay–and it is–but the implications could be monumental and could have some effect on more than 60 million mortgages in the United States.
Warning to the non-lawyer: What follows is a somewhat technical discussion, and is probably more appropriate for lawyers or other mortgage industry professionals. The upshot of the Kansas decision is, well, it’s too soon to tell. It is clear that the MERS problem is growing, and will likely require some significant mortgage industry intervention to fix. Whether this decision offers any help to any particular person will depend on your situation. Obviously, a decision by the Kansas Supreme Court is binding only on Kansas courts, but this is a significant decision and may influence courts in other states. To my knowledge, no California court has yet dealt with the problem head on, though there have been some trial court decisions. (See, for example, Saxon Mortgage Services v. Ruthie B. Hillery, USDC, ND Cal. case no. C-08-4357 EMC. This decision is unpublished and not binding on any court, but it does suggest activity in the Northern District, and is probably just the beginning.)
So with that disclaimer out of the way…first some background.
MERS stands for Mortgage Electronic Registration System, and is a privately owned company that purports to acts as a “nominee” for millions of loans originated by lenders around the country. (For the MERS home page, go here. For a Wikipedia post on what MERS is, go here.) I say “purports,” because that relationship is increasingly under attack in courtrooms great and small around the USA. Notably, the case referred to above, Landmark National Bank v. Kesler, Kansas Supreme Court, Case No. 98,489.
MERS was created in an attempt to simply the processes by which loans and mortgages are sold, securitized, assigned and enforced. Basically the idea was to create a single “nominee” that would act in the place and stead of any one lender, so that when the need to enforce the loan terms or foreclose on the mortgage arose, the lenders wouldn’t have to chase around figuring out who owned what notes; they could just have MERS handle the entire transaction.
The Kansas Court, quoting a Nebraska court, described MERS as follows:
MERS is a private corporation that administers the MERS System, a national electronic registry that tracks the transfer of ownership interests and servicing rights in mortgage loans. Through the MERS System, MERS becomes the mortgagee of record for participating members through assignment of the members’ interests to MERS. MERS is listed as the grantee in the official records maintained at county register of deeds offices. The lenders retain the promissory notes, as well as the servicing rights to the mortgages. The lenders can then sell these interests to investors without having to record the transaction in the public record. MERS is compensated for its services through fees charged to participating MERS members.” Mortgage Elec. Reg. Sys., Inc. v. Nebraska Depart. of Banking, 270 Neb. 529, 530, 704 N.W.2d 784 (2005)
Good idea in principle. The problem that has come to the fore, however, is that MERS doesn’t actually own anything; it is just a named agent with a contractual power to enforce. And this is the problem that the Kansas Supreme Court addressed…and which has more than a few mortgage-industry Chicken Little-sorts presaging that the sky will be falling soon.
The crux of the problem seems to be the pesky requirement that borrowers are entitled to know the identity of the person or lender to whom they owe money. That doesn’t seem unreasonable. If Larry lends money to Bob, and takes a promissory note, and Larry later sells that Note to Artie, Bob is entitled to know that, and only Artie can have the legal right to enforce the Note. If Bob has a problem with his loan, he needs to know the actual identity of the person with whom is in in a contractual relationship.
But the MERS system essentially does an end run around that requirement by saying that, “since we put MERS into the original note and deed of trust as a lender nominee, we don’t need to satisfy those notice and registration requirements. Courts around the country are increasingly saying “foul” top that arrangement.
Again, quoting from portions of the Landmark decision, in which that court quotes from other courts around the country…
The legal status of a nominee, then, depends on the context of the relationship of the nominee to its principal. Various courts have interpreted the relationship of MERS and the lender as an agency relationship. See In re Sheridan, ___ B.R. ___, 2009 WL 631355, at page 4 (Bankr. D. Idaho March 12, 2009) (MERS “acts not on its own account. Its capacity is representative.”); Mortgage Elec. Registration System, Inc. v. Southwest, ___ Ark. ___, ___, ___ S.W.3d ___, 2009 WL 723182 (March 19, 2009) (“MERS, by the terms of the deed of trust, and its own stated purposes, was the lender’s agent”); LaSalle Bank Nat. Ass’n v. Lamy, 2006 WL 2251721, at *2 (N.Y. Sup. 2006) (unpublished opinion) (“A nominee of the owner of a note and mortgage may not effectively assign the note and mortgage to another for want of an ownership interest in said note and mortgage by the nominee.”)
The relationship that MERS has to Sovereign is more akin to that of a straw man than to a party possessing all the rights given a buyer. A mortgagee and a lender have intertwined rights that defy a clear separation of interests, especially when such a purported separation relies on ambiguous contractual language. The law generally understands that a mortgagee is not distinct from a lender: a mortgagee is “[o]ne to whom property is mortgaged: the mortgage creditor, or lender.” Black’s Law Dictionary 1034 (8th ed. 2004). By statute, assignment of the mortgage carries with it the assignment of the debt. K.S.A. 58-2323. Although MERS asserts that, under some situations, the mortgage document purports to give it the same rights as the lender, the document consistently refers only to rights of the lender, including rights to receive notice of litigation, to collect payments, and to enforce the debt obligation. The document consistently limits MERS to acting “solely” as the nominee of the lender.
Indeed, in the event that a mortgage loan somehow separates interests of the note and the deed of trust, with the deed of trust lying with some independent entity, the mortgage may become unenforceable.
“The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. [Citation omitted.] Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. [Citation omitted.] The mortgage loan becomes ineffectual when the note holder did not also hold the deed of trust.” Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 619, 623 (Mo. App. 2009).
The Arkansas Supreme Court has noted:
“The only recorded document provides notice that [the original lender] is the lender and, therefore, MERS’s principal. MERS asserts [the original lender] is not its principal. Yet no other lender recorded its interest as an assignee of [the original lender]. Permitting an agent such as MERS purports to be to step in and act without a recorded lender directing its action would wreak havoc on notice in this state.” Southwest Homes, ___ Ark. at ___.
In any event, the legislature has established a registration requirement for parties that desire service of notice of litigation involving real property interests. It is not the duty of this court to criticize the legislature or to substitute its view on economic or social policy. Samsel v. Wheeler Transport Services, Inc., 246 Kan. 336, 348, 789 P.2d 541 (1990).
Essentially, the Court is saying that MERS has no rights to enforce. Of course, that could wind up being an overbroad interpretation, but the drums are beating nonetheless. More will be revealed.
The San Francisco Chronicle is reporting that a recent study estimates that more than $30 billion in so-called “option ARM” resets in the Bay Area are due to hit the foreclosure stats next year. (If the above link has expired, I have uploaded a reprint here.) If you are one of the borrowers who fit into this difficult spot, you probably already know it. For those who don’t, here’s a brief primer.
An “Option ARM” is an adjustable rate mortgage that includes a feature which allows the borrower to decide whether he is going to pay just the interest or interest and principal. There may be other flavors, variations or exotic trim packages, but that’s the basic idea: Borrower gets to choose the payment that they will make in any particular month. The problem with most of them is that they usually include a negative amortization (or “neg am”) risk, meaning that, if the borrower elects to make the minimum payments, the amount of the outstanding principal actually increases over time. So with housing prices declining and loan balances increasing, you have the perfect storm for a home loan disaster. Whether it’s a whole new home loan disaster or just a continuation of the one we’re already in, well, I’m not sure that we need to slice it that thin. In short, more bad news coming.
The Chronicle article, written by Chronicle staffer Caroline Said, lays the problem out nicely, and does a good job of showing what’s on the horizon. It’s not pretty.
To wit, the following frightening statistics:
- Bay Area Mortgages written between 2004 and 2008 that have the Option ARM feature: This varies by county, but the high is in Solano County, at 28.12%, and the low is in the San Francisco/Marin/Alameda/Contra Costa and San Mateo cluster at 19.52. One fifth AT LEAST.
- The percent of these loans that are either already in default or foreclosure, again varying by county, is a low of 27.23%, and a high of 36.91%
- The average loan value across the 9-county range is $584,000, so we’re not talking studio condos. This is a problem that is going to hit the higher priced neighborhoods.
- Total outstanding loan balance: $30.9 billion.
- Borrowers who make the minimum payments? 94% Eeek. That is a scary number. And to my mind, it suggests that most of these properties are seriously under water and that the minimum-payment syndrome is a rent-paying strategy designed to buy time and make room for an unlikely “hail Mary option” to miraculously show up on the doorstep.
- And the two most jarring stats: Average loan-to-value ratio at time of loan inception: 79%. Average now? 126%
- 9-County figure of Option ARM borrowers who are delinquent now? 39.3%.
So what does all this mean? It’s pointless to try reading tea leaves with information like this, but it seems pretty clear that the Bay Area has a long way to go before our housing market is completely out of the woods. It’s very hard to believe that all of these loans are going to cure without some very painful side effects, like bankruptcies, foreclosures and other “rip cord” type solutions, hitting a higher income bracket than ever before. People who borrow a half-million dollars aren’t used to the word “bankruptcy” being in their day-to-day lexicon.
And what if you’re a homeowner who falls into this picture? Well, that’s beyond the scope of this little blog. But the question that presents itself is the same one that has been presenting to many, many other folks in the last couple of years: How underwater are you, and how long do you want to keep dumping good money after bad? To me, in most instances, the problem isn’t much more complicated than that. The hard question isn’t what to do, it’s more a matter of when to do it and whether there are planning steps that can or should be considered.
There is no on-size-fits-all solution to this problem, and your strategy is going to have to depend on a very careful and detailed analysis of your total financial picture.
Do you need to see a lawyer? Maybe, but I wouldn’t start there. I’d start with an accountant and an appraiser to get the best picture of your exposure. The legal decisions after that are easy. In fact, the legal decision will probably be obvious once the true facts are known. What do you have? What do you owe? What do you want to do about it and are there any timing issues that need to be considered?
There’s an old saying: Beware of Greeks bearing gifts. It refers to the Trojan horse that the Greek army used to trick its way into Troy during the Trojan War. It has come to refer to situations and people that hide fraud and trickery behind a friendly and perhaps even generous demeanor.
The hottest new business in California? One guess…. Mortgage modification. Everyone and their brother is now opening up “mortgage modification” companies. They appear friendly and eager to “help you save your home,” but be careful.
For instance, one I recently heard about is American Home Mortgage Servicing Company. This company is not licensed as a real estate broker by the California Department of Real Estate. (If you want to check whether the company that is pitching you to modify your mortgage is a licensed real estate broker, use the DRE license check tool here.) Therefore, it is not a licensed “mortgage broker” and is thus not legally licensed to modify mortgages. It is not a law firm. It is not a non-profit credit counselor. In fact, a little research reveals that it is nothing but a debt collector. An unlicensed debt collector phishing for people with financial difficulties, which it refer to as “customers.” (For reasons unknown, California doesn’t require debt collectors to be licensed any more. It does, however, require them to comply with the California Fair Debt Collection Practices Act.)
Do what I did. Call their toll free number. Once you get past the language preference, the first thing on the tape is: “American Home Mortgage Servicing Company is a debt collector and may record and/or monitor calls.” Then, follow the various links on their website as if you are looking to modify your mortgage. You will eventually wind up on a form that you need to fill out and return to them. Do not do this. This form is designed to solicit highly confidential financial information from you which will, in all likelihood, be used against you in the event that you default on your mortgage.
There is no need to provide this information at this stage of the conversation with anyone. (I’m a bankruptcy attorney subject to very strict rules of confidentiality. I usually have very good reasons to request this information from clients. Yet I never solicit this level of detail from prospective clients until they are an actual client and I have a rational and business-related reason for collecting this information.) How do I know this isn’t a bona fide form for dealing with a mortgage modification? Look at it. It doesn’t even ask who your lender is. How are they going to modify a loan or provide you with advice and an opinion on the criteria required to modify the loan if they don’t know who the lender is? (Lenders’ criteria for modification are not uniform, and a loan that one lender may modify may not qualify under another lender’s program.)
Here’s the fact: No one has authority to modify your mortgage except you and your mortgage lender. Anyone who claims to be able to assist you in modifying your mortgage but doesn’t ask who holds that mortgage right out of the chute is probably up to something very different. Fortunately, these people tell you: They are “debt collectors.” I wouldn’t give them the name of my dog without a written disclosure of who they represent, what they are actually authorized to do and a written representation from them as to what exactly is going to be done with the information I provide them. I suspect that if you call them and make this demand as a precondition to your giving them any confidential financial information, they will hang up on you.
Who are these people? Are they licensed? Are they supposed to be? Who’s regulating these guys?
In short, no one. It’s the Wild Wild West. The California Department of Real Estate is supposed be on it, but in practical reality, it looks more like substitute teacher day in 5th Grade, erasers flying, tongues wagging, the whole works. And who can blame the CDRE? They’re overwhelmed. So it will fall on the consumer. If you try to do this without counsel, make sure that the person you’re dealing with knows what she is doing and that you’re protected.
Here are the rules, at least regarding licensing:
First, in order to function as a “mortgage modification company” in California the company must first be licensed as a “real estate broker” by the California Department of Real Estate. (California does not have a separate licensing category for “mortgage brokers” nor for “mortgage modifiers.”) Modifying a mortgage is essentially the functional equivalent of originating a mortgage, so the same licensing rules prevail. (Here’s an interesting opportunity to get a fly-on-the-wall ear to brokers talking to each other about this topic.)
Next, in order to collect any fee in advance for “mortgage modification” services, the entity must be licensed by the DRE and must submit its contract for services for approval to the DRE. So if someone tells you they’re a “mortgage modifier” and wants you to pay them for providing those services, first demand their DRE brokers’ license number and then check the DRE website to see if their contract has been approved yet by the DRE. If it hasn’t, then tell them you’ll pay them if and when they get a result for you.
[Update: Effective July 1, 2009, it is unlawful for a foreclosure consultant, as defined in Civil Code Section 2945.1 to engage in the foreclosure consultant business unless it has registered with the Attorney General’s Office at: http://www.ag.ca.gov/register.php. All foreclosure consultants operating in California must post a $100,000 bond and register with Attorney General’s Office by July 1, 2009. There is list of companies whose agreement has been approved. It’s very short. You can find it on this rather hard to find site called California Foreclosure Prevention Act. There is also a list of companies that have not been approved by the Attorney General, although that strikes me as sort of foolish. Given that scam artists work pretty hard to cut a low profile, its a bit like saying “raise your hand if you’re not here.”]
American Home Mortgage Servicing is not on that list. American Home Mortgage Servicing is also not a licensed real estate broker in the State of California. In fact, American Home Mortgage Servicing does not appear to be licensed to do anything more complicated than exist in the State of California. And it’s a Delaware corporation so it’s not even domiciled here. (Debt collectors no longer need to be licensed in California.)
(Here’s a link to the California Attorney General’s recent online posting about how to avoid being ripped off by foreclosure rescue scams. And here’s another article/consumer warning by the DRE about scams offering to “cut your home payments in half.”)
There is a growing number of unscrupulous people out there right now looking to take advantage of people who are in financial extremis. There are also tons of folks who, while maybe not slimeballs, are woefully unqualified to “modify” anything more complicated than a typo on a spelling test.
Current statistics suggest that only 5% of the people who attempt to modify their mortgages are actually succeeding right now, and of those? More than 50% re-default in the first 6 months! I’m not going to blame all of that on slimeballs and idiots, but I can’t think of any argument that suggests that the presence of opportunistic and unscrupulous slimeballs and idiots posing as “mortgage modifiers” is helping matters.
But there are also a lot of good, qualified and experienced people who want to help, who charge a reasonable fee and who know what they’re doing. (And I absolutely guarantee you that they don’t refer to themselves on their voicemail as “debt collectors.”) Some are mortgage brokers, some are attorneys, some are credit counselors. None are debt collectors. Look for non-profit credit counselors as a start.
I’m not suggesting that everyone who wants to investigate mortgage modification hire an attorney. But at least do a little homework and make sure the person or company you hire is qualified and licensed. If they disclose that they are “debt collectors” run the other way. Such people have nothing of value to offer you.