Property Law Developments—Joseph William Singer

The Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692 et seq., regulates the processes by which debts are collected. The Third Circuit has agreed with other courts in holding that the filing of a foreclosure complaint can subject both the plaintiff bank and the lawyers filing the complaint to liability under the FDCPA. In the case of Kaymark v. Bank of America, N.A., 783 F.3d 168 (3d Cir. 2015), the allegation was that the complaint sought payments that were not yet due — a demand that violated the FDCPA. The Court applied the holding of the Supreme Court case of Heinz v. Jenkins, 514 U.S. 291 (1995) that had established that lawyers are “engage[d] in consumer-debt-collection activity” when they file lawsuits.

The Sixth Circuit has ruled that nonjudicial foreclosure satisfies constitutional due process requirements because the homeowner/borrower was given notice of the foreclosure and notice of who to cure the default or seek a loan modification and how to redeem the property (get it back) after the foreclosure sale during a six-month redemption period. Garcia v. Fed. Nat’l Mortg. Ass’n,  782 F.3d 736 (6th Cir. 2015). These statutory procedures satisfied the constitutional right to notice and an opportunity to be heard before being deprived of a property right.

In a classic application of a traditional doctrine of contract law, the Massachusetts Land Court allowed a mortgage document to be reformed because of mutual mistake. Citibank, N.A. v. Heywood, 2014 WL 2158409 (Mass. Land Ct. 2014). While courts are very reluctant to amend written property documents or contracts because of unilateral mistake, it is standard practice to ignore the written terms of the agreement, despite the statute of frauds, when the evidence shows that it does not reflect the intent of both parties. The court noted that [A] court acting under general principles of equity jurisprudence has broad power to reform, rescind, or cancel written instruments, including mortgages, on grounds such as fraud, mistake, accident, or illegality” as long as the mistake was mutual.

The Ninth Circuit held that a mortgage servicer that allegedly engaged in robo-signing may well have violated an Arizona statute, Ariz. Rev. Stat. § 33-420, that criminalizes filing false property title documents with the state recording offices. In re Mortg. Electronic Registrations Systems, Inc (Robinson v. Am. Home Mortg. Serv. Inc.), 2014 WL 2611314, 2 014 U.S. App. LEXIS 10934 (9th Cir. 2014). There was  evidence that trustee’s sale documents were notarized in blank and signed later by a person other than the one who was supposed to sign the document. Such signings were also done in bulk (robo-signing) and because not signed by the correct person were forged. In addition, notaries are supposed to witness the signature not notarize a blank document before any signature appears. The case is notable because the servicer was MERS (Mortgage Electronic Registration Systems, Inc.). Judge William Fletcher engaged in a detailed discussion about the advantages and disadvantages of the MERS system.

The First Circuit reaffirmed its view of the validity of the MERS system under Massachusetts law. Mills v. U.S. Bank, (1st Cir. 2014) (reaffirming Culhane v. Aurora Loan Services of Nebraska, 708 F.3d 282 (1st Cir.2013)). The court explained that there was no conflict between MERS’s role as the “mortgagee” and MERS’s role as the nominee (agent) for the mortgagee (the actual Lender to whom promises were made under the note). Thus the note could be transferred from bank to bank while MERS held “legal title” to the mortgage, giving MERS the power to transfer legal title to the final note holder to allow it to foreclose on the property after default by the mortgagor. According to the court the “MERS framework…separates the legal interest [in the mortgage] from the beneficial interest [in the underlying debt]” and is valid. This separation is valid under Massachusetts law which allows the note to be held by one person and the mortgage (or right to foreclose) held by someone else.

In particular, the court found no contradiction between the mortgage language that described MERS both as the “mortgagee” and the nominee for the lender, rejecting the plaintiff’s argument that one cannot be both the principal and the agent. Rather, the court explained that “MERS validly serves both as the holder of ‘bare legal title as mortgagee of record’ and as ‘nominee for the member-noteholder.'”

One caution is that the First Circuit may or may not be accurately predicting how the Supreme Judicial Court of the Commonwealth of Massachusetts would interpret its mortgage law and foreclosure statutes.

The Supreme Judicial Court of the Commonwealth of Massachusetts has ruled that owners may make affirmative defenses to eviction claims by banks that acquired title to their property through a private or nonjudicial foreclosure. Bank of America v. Rosa, 466 Mass. 613 (2013). Those defenses may challenge the way in which the bank acquired title to the property through the foreclosure process and and power of the bank to foreclose in the first place. They may also include any equitable defenses that would defeat the claim for a right to possession of the property (the right to evict).

Several lawsuits have been in progress arguing that MERS violated state recording statutes by not recording mortgage assignments and thus cheating recording offices out of fees they otherwise would have earned. Interpreting Illinois law, the Seventh Circuit rejected that claim as have other courts that addressed the issue. Union County v. MERSCORP, Inc., 2013 WL 6017394 (7th Cir. 2013) (applying Ill. law). The court explained that Illinois law agrees with almost all other states in providing a voluntary recording system that is intended to protect those who record; that system does not require property transactions to be recorded for them to be valid. It merely protects bona fide purchasers from prior claims against which they had no notice.

New Hampshire law allows tenancies to be created at-will; that means they can be terminated by either party at any time. When the landlord lost the property through foreclosure, the tenancy ended automatically and no new landlord/tenant relationship was established merely because the tenant kept living on the property. Nor did a state statute that specifically prohibited self-help eviction, N.H. Ev. Stat. §540-A, apply in such a case. Nonetheless, the New Hampshire Supreme Court ruled that summary process was available to evict recover possession of the property and that this available procedure impliedly removed the self-help option. Evans v. J Four Realty, LLC, 62 A.3d 869 (N.H. 2013).

The Idaho Supreme Court endorsed the power of MERS (Mortgage Electronic Registration Systems) to initiate nonjudicial foreclosure proceedings. Edwards v. Mortg. Elec. Registration Sys. Inc., 300 P.3d 43 (Idaho 2013).The court held that MERS was an agent (nominee) for the actual lender and holder of the beneficial interest in the deed of trust and could act on behalf of its principal. The original deed of trust named Alliance Title as trustee, Lehman Brothers as the lender, and MERS as the beneficiary as nominee for the lender. After MERS substituted a new trustee, the borrower defaulted and the new trustee filed a notice of default to begin foreclosure proceedings. Although the court held that MERS could not be the beneficiary (since no debt was owed to it), MERS could be an agent for the beneficiary (in this case, Lehman Brothers). As agent for the beneficiary, MERS had legal authority to record the notice of default, appoint a new trustee, and initiate foreclosure proceedings.

California passed a statute on Jan. 1, 2013 called the California Homeowner Bill of Rights (Assembly Bill 278, ch. 86, adopted July 11, 2012) (effective Jan. 1, 2013). Among other things, it prohibits banks from proceeding with foreclosures if the homeowners is seeking a loan modification and it requires the bank to act on qualified applications for loan modifications. Cal. Civ. §2923.5.It also subjects banks to a penalty for recording unverified documents. Cal. Civ. §2924.17. It also prevents eviction of tenants who have fixed-term leases as long as those leases last even if the landlord loses the property to foreclosure before the end of the lease term and even if the lease was created after the mortgage. Cal. Civ. Proc. §1161b(b).

In 2012, HUD adopt an Equal Access Rule that prohibits lenders from discriminating on the basis of actual or perceived sexual orientation, gender identity or marital status in granting mortgages insured by the Federal Housing Administration (FHA). 24 C.F.R.Parts 5, 200, 203, 236, 400, 570, 574, 882, 8991, 982 (77 Fed. Regis. 5662 (Feb. 3, 2012). The rule applies to all housing programs administered by the department. In January 2013, HUD entered a settlement with Bank of America over a claim that it refused to grant a mortgage to a lesbian couple. See article. It was promulgated under HUD’s general statutory authority to promote the “goal of a decent home and a suitable living environment for every American family,” 42 U.S.C. §1441.

In Glazer v. Chase Home Finance, 704 F.3d 453 (6th Cir. 2013), the Six Circuit found lawyers who initiated a foreclosure may be “debt collectors” subject to the Federal Debt Collection Practices Act (FDCPA), 15 U.S.C. §§1692 to 1692p, if they regularly perform this function, and thus may be liable for making “false, deceptive or misleading representations” in connection with the foreclosure.

In Pasqualino v. Washington Mutual Bank, 982 N.E.2d 72 (Mass. App. Ct. 2013), the court was forced to decide which of two innocent parties should bear the financial burden of a forged deed. Although the normal rule is that a forged deed is a nullity and conveys nothing, in this case, the court protected the party that relied on the forged deed because the original owner contributed to the problem by making the forger the trustee of the property. The property was originally conveyed by Salvatore Pasqualino to a trust controlled by his son Ronald. The father Salvatore knew his son used aliases in his real estate business and the recorded documents listed the trust of the trustee of the trust as “Jonathan Pasqualino III,” an alias used by Ronald. Ronald subsequently forged a deed from the trust to a fictitious buyer who then took out a $166,600 loan from a bank (Washington Mutual Bank) in exchange for a mortgage. Ronald died shortly thereafter in police custody on unrelated charges and the bank sought to foreclose on the mortgage.

The court framed the question as a choice of which innocent party should bear the risk (and the loss) associated with the forgery. A forged deed usually conveys no title and that would suggest that the bank should bear the loss of the money. But the court determined otherwise, allowing the bank to foreclose on the property. It did so on the grounds that the father knew his son Ronald engaged in deceptive activities by using an alias in his real estate transactions and was in a better position to prevent the forgery from occuring.

The superior court in the Commonwealth of Massachusetts granted a preliminary injunction against a company called ANADeeds, Inc. to stop it from preparing and selling deeds and other legal instruments for the conveyance of property in Massachusetts. Real Estate Bar Ass’n v. ANAdeeds, 2012 Mass. Super. LEXIS 380 (Mass. Super. Ct. 2012). Judge Lauriat explained that “[i]n Massachusetts, drafting a deed constitutes the practice of law,” citing Real Estate Bar Ass’n of Massachusetts (REBA) v. Nat’l Real Estate Info. Servs., 946 N.E.2d 665 (Mass. 2011).

State courts have disagreed about whether MERS (Mortgage Electronic Registration Systems) has standing to foreclose on property or to assign whatever interest it has in the mortgage to the bank that holds the mortgage currently so that that bank can bring foreclosure proceedings. Some courts have held that MERS has no property interest in the mortgage but is a mere agent for the mortgage owner so it cannot bring foreclosure proceedings itself or assign the mortgage to anyone else.   Bain v. Metropolitan Mortgage Group, Inc., 285 P.3d 34, 36–37 (Wash. 2012) (because MERS does not hold the note, it can neither initiate nonjudicial foreclosure proceedings not assign an interest in the note to a trustee who can do so). But others have held that MERS may initiate foreclosure proceedings in its own name and/or assign the mortgage to someone else.  Gomes v. Countrywide Home Loans Inc., 121 Cal. Rptr. 3d 819, 826–827 (2011) (MERS may initiate nonjudicial foreclosure under deed of trust); Mortgage Electronic Registration Systems, Inc. v. Revoredo, 955 So. 2d 33, 34 (Fla. Dist. Ct. App. 2007) (MERS may foreclose as agent of the note holder); Residential Funding Co., LLC v. Saurman, 805 N.W.2d 183 (Mich. 2011) (MERS had sufficient “interest in the debt” to initiate nonjudicial foreclosure proceedings); Jackson v. Mortgage Electronic Registration Systems, Inc., 770 N.W.2d 487, 494–495, 501 (Minn. 2009)(applying Minn. Stat. §507.413 allowing MERS to initiate foreclosure proceedings).

In Culhane v. Aurora Loan Servs. of Neb., — F.3d —, 2013 WL 563374 (1st Cir. 2013), the First Circuit, applying Massachusetts law, has now held that MERS may assign mortgages because it does own a legal interest in the mortgage. In an opinion by Judge Selya, the court held that MERS has the “legal interest” in the mortgage because it is named as the mortgagee but that the bank that actually issued the note and has the right to enforce the mortgage to secure the loan has the “beneficial interest” in the mortgage. The court reasoned  that the party that owns the note or is entitled to enforce it (not necessarily the same party) has the equitable right to the protection of the mortgage giving it a right to foreclose and that MERS is merely holding title to the mortgage for the benefit of that party. At the same time, MERS has a sufficient interest to hold the mortgage title for the benefit of the owner of the “beneficial interest” in the mortgage. It is not clear if that would mean that MERS could bring foreclosure proceedings in its own name or that means that the right to foreclose cannot be separated from rights in the note.

In Federal Home Loan Mortgage Corp. v. Schwartzwald, 2012 Ohio 5017, 2012 Ohio LEXIS 2628 (Ohio 2012), the Supreme Court of Ohio joined other courts that have refused to allow banks to foreclose if they cannot prove by written evidence at the time of foreclosure that they have a legal right to foreclose. In this case, Federal Home Loan commenced a foreclosure action before it obtained an assignment of the promissory note and mortgage securing the loan, although it attempted to “cure” that defect by obtaining the assignment later. The Supreme Court of Ohio reversed lower court rulings that had decided that the cure would allow the foreclosure to proceed; instead, it held that state law required lawful standing at the time the foreclosure action was brought. It cited cases from other states that denied standing to MERS (Mortgage Electronic Registration Systems) because it did not possess any interest in the note or the mortgage. The court dismissed the foreclosure claim without prejudice, so the lender can refile now that it has obtained a written assignment of the mortgage and lawful possession of the note. The court’s ruling suggests, however, that a bank that cannot provide proof that it “owns” the rights in mortgage and/or the note may not be able to foreclose, leaving to another day the question of whether the lender can use alternate evidence to prove its property rights and how a borrower/homeowner can clear title to the property that appears to still be encumbered by a mortgage.

In Washington state, lenders typically use the deed of trust form for mortgages where the lender is the “beneficiary” of the trust and the “trustee” has the power to act to protect the beneficiary’s interest by foreclosing on the property if the borrower defaults on the note (the underlying loan). MERS is typically listed as the beneficiary of the deed of trust rather than the lender that actually issued the loan  (and signed the note) in order to avoid having to record future assignments of the mortgage; the deed of trust is recorded listing MERS as the beneficiary rather than the lender that issued the note to the borrower/homeowner. Interpreting the meaning of the word “beneficiary” in state foreclosure statutes, the Washington Supreme Court agreed with other courts that have held that MERS is not actually the beneficiary of the note and thus has no power to initiate a nonjudicial foreclosure of the property upon default of the payments. Bain v. Metropolitan Mortgage Group, Inc., 2012 WL 3517326 (Wash. 2012).

The court refused to say what the consequences of this ruling would be, although it did suggest that the proper party to bring the foreclosure is the current holder of the note who actually possesses the note or can demonstrate the chain of transactions that makes it the beneficiary of the note. The court also suggested that MERS might act as an agent of the actual beneficiary but only if it could identify the principal and prove that it had been granted agency power to act on behalf of that principal.

The court also held that the facts might present a violation of the state consumer protection act because MERS misrepresented itself as the beneficiary to the borrower, thus engaging in a deceptive business practice. Whether the statute was violated depended on whether the borrower could show that she was injured by the deceptive statement. This is a potentially explosive ruling because MERS’s entire business model depends on listing it, rather than the lender, as the “mortgagee” or “beneficiary” of the deed of trust. On the other hand, the court finds no consumer protection violation unless the borrower can show injury and MERS could avoid causing injury by keeping track of who holds the note and revealing that information to the borrower. This would represent a significant change in MERS’s original business model since it typically only would reveal to borrowers the identity of the loan servicer, not the current holder of the note and not the chain of assignments from the original lender.

In Eaton v. Fed. Nat’l Mortgage Ass’n (Fannie Mae), 2012 Mass. LEXIS 488 (Mass. June 22, 2012), the Supreme Judicial Court of Massachusetts held that a foreclosing party must be in physical possession of both the note and the mortgage (or be acting on behalf of someone who does) when bringing a foreclosure proceeding. However, the ruling applies only prospectively to foreclosures that occur in the future, with the exception that the plaintiff in Eaton that convinced the Court to clarify this rule can take the benefit of it. The refusal to apply the rule retroactively was based on the belief that the law may have been unclear beforehand and that it was the case that many people acted without regard for this principle in the past.

In Pasillas v. HSBC Bank USA, 255 P.3d 1281 (Nev. 2011), the Nevada Supreme Court held that a bank cannot foreclose if it fails to act in good faith to participate in state-mandated mediation with the borrower.

In US Bank Nat’l Ass’n v. Guillaume, 38 A.3d 570 (N.J. 2012), the Supreme Court of New Jersey applied the equitable doctrine of substantial compliance to allow a bank to foreclose despite its failure to include the name and address of the actual lender on the notice of intent to foreclose as required by state law. The notice actually only included the name of the mortgage service, not the mortgage lender. Dismissal without prejudice is not the exclusive remedy for the service of a notice of intention to foreclose that does not satisfy Fair Foreclosure Act’s requirement that a notice of intention include the name and address of the actual lender. Instead, the trial court may dismiss the action without prejudice, order the service of a corrected notice, or impose another remedy appropriate to the circumstances of the case; overruling Bank of N.Y. v. Laks, 27 A.3d 1222 (N.J. Super. Ct. App. Div. 2011).

Washington state passed the Foreclosure Fairness Act, 2011 Wash. Legis. Serv. 58, requiring telephone notification and a 60-da6 opportunity to meet with the lender before foreclosure proceedings can begin. read article

Banks that have obtained title to foreclosed properties traditionally would sell them quickly but the current real estate malaise resulting from the subprime crisis has made it difficult for them to do so. The result is that many properties remain on the books of the banks. Under state property law, the banks have the obligations all landowners have to comply with housing codes and the warranty of habitability. But many banks do not have established procedures for keeping track of all the individual properties they own, especially when the mortgages to those properties were securitized, making the owner of the trust that owns those mortgages the effective landlord of thousands of homes. Both localities and tenants are having to deal with the failure of banks to comply with regulations mandating maintenance of rental properties. read article.

Contrary to the ruling of some other courts, the Michigan Supreme Court held that MERS (Mortgage Electronic Registration Systems) has standing to foreclose on properties for which it is the record holder of the mortgage even if it does not “own’ the note or the right to moneys under the note. The court held that because MERS is the “holder of the mortgage, MERS owned a security lien on the properties, the continued existence of which was contingent upon the satisfaction of the indebtedness.” The court concluded that the legislature would want the record mortgage holder to have the right to foreclose on the property. The case is Residential Funding Co. v. Saurman, 805 N.W.2d 183 (Mich. 2011).

In an important but almost inevitable case, Bevilacqua v. Rodriguez,  2011 WL 4908845 (Mass. 2011), the Supreme Judicial Court of the Commonwealth of Massachusetts held that a lender who does not follow proper procedures to foreclose on property cannot pass good title to a subsequent purchaser. The court’s earlier ruling in U.S. Bank Nat’l Ass’n v. Ibanez, 941 N.E.2d 40 (Mass. 2011) had held that a nonjudicial foreclosure cannot lawfully happen unless the party conducting the foreclosure can show requisite assignments of the mortgage given it the right to foreclose. In Bevilacqua, the original buyer Rodriguez granted a mortgage to MERS (Mortgage Electronic Registration Systems, Inc.) as nominee for the real lender Finance America, LLC. At the time of the private foreclosure proceedings, MERS had not formally assigned the mortgage from the original lender to U.S. Bank National Association (US Bank); for that reason, the foreclosure brought by US Bank was invalid. The buyer at the foreclosure sale (also US Bank as trustee for a securitized pool of mortgages) could not therefore transfer good title to the property. Thus the buyer Bevilacqua had no title to the property and no standing to bring a quiet title action against the original owner/borrower. The court did suggest that the buyer could sue the bank from whom he tried to obtain title in order to get relief either in the form of damages or actions would satisfy the statute of frauds and actually result in a clear transfer of title from the original owner to the subsequent buyer.

A dispute has arisen between South Essex Register of Deeds John O’Brien and the Massachusetts Real Estate Bar Association (REBA) over O’Brien’s refusal to allow seemingly “robo-signed” mortgage documents to be recorded in the Registry of Deeds. REBA contends that state law allows the recording of any document “purporting” to be signed by an authorized signatory to a mortgage or a mortgage assignment. Mass. Gen. Laws ch. 183, § 54B. But Register O’Brien points to 1,300 documents received that were signed “Linda Green” but which exhibit different handwriting styles and different titles, and some were filed after 2010 when it was believed that Green stopped working for a mortgage company. O’Brien takes the position that he will not record documents signed by “known robo-signers” and he will also forward suspicious documents to the Attorney General’s office for investigation of mortgage fraud. Scott Pitman & MIchael Pill, To record or not to record robo-signed documents? 40 Mass. Lawyers Weekly 9 (Sept. 26, 2011).