Foreclosure Buzz

While paying homage to School House Rock’s “I’m Just a Bill” and a host of other classic instructive cartoons of that series that began in the 70s, the Daily Show pulled no punches in describing the Dodd-Frank financial reform law including its creation of the Consumer Financial Protection Bureau - “a sham.”  The show’s version of Bill — HR 4173 — took the stage and castigated itself:

“The only way Congress would have passed me was if the details of the rules and regulations were unspecified giving K Street lobbyists all the time they would need to water me down post-passage … and if any actual tough rule managed to squeak through, Congress people [would] cut the budget of the agency responsible for enforcing it.  The whole thing is a giant punt.  I’m no law.  I’m no law, John. I’m just an undefined, impotent, 2,300 page piece of legislative sh#t.”

Dodd-Frank Act, as portrayed by John Oliver of the Daily Show, July 29, 2011, clip here (including crass humor).

When CFPB was created, many (including me) feared it would become the next OSHA or Consumer Products Safety Commission, and that fear has become fact.  The agency has become a political football. American Banker, here.

The Obama Administration has made big promises for American families tolling with the financial services industry — like the creation of the HAMP program, but the reality is that the pillars of all his promises are easier to dodge than the Maginot Line.

The administration at least should have stuck with Elizabeth Warren who conceived the bureau to let her head it.  It is not clear whether he could have appointed her during a Senate recess (Daily Show says he could have by now, but story here re May recess) — regardless he abandoned her.  Story here. (Now of course Senate Republicans are vowing to block any nominee until the agency is stripped of power.)  The administration could have reigned in the federal Office of the Comptroller of the Currency for the issuance of weak corrective suggestions (aka “consent orders”) in response to overwhelming evidence of systemic fraud in the foreclosure process across the county — which were made by OCC and other federal agencies some say to remove the political force behind a real enforcement effort by a task force of  all 50 state attorneys general. Story here. When will borrowers achieve justice?

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MERS, that strange little company that has played a significant roll in eliminating lender responsibility, accountability and transparency pulled back the curtain some more (after Fannie clipped its wings in April, story here):

Effective July 22, 2011:

• No foreclosure proceeding may be initiated, and no Proof of Claim or Motion for Relief from Stay (Legal Proceedings) in a bankruptcy may be filed, in the name of Mortgage Electronic Registration Systems, Inc. (MERS)

• The Certifying Officer must execute the assignment of the Security Instrument from MERS before initiating foreclosure proceedings or filing Legal Proceedings and promptly send the assignment of the Security Instrument for recording in the applicable public land records

MERS Policy Bulletin 2011-5 (here).

MERS remember was supposed to merely track the ownership of a mortgage and its servicer to eliminate the requirement of multiple assignments every time a mortgage was bought and sold.  It was allegedly never invented to be a dodge of the financial service industry so the industry says.  Of course MERS morphed itself at the behest of its members of the industry and began to pretend to take actions in its name and hide the real entity behind the curtain a la the Wizard of Oz (says the courts, story here and here).

It also appears that the Certifying Officer of MERS (a lender representative with credentials granted him or her by MERS with a click of a mouse) must now record an assignment in deed records before the foreclosure begins it appears.  The assignment would purport to transfer the  right to foreclose from MERS to the current owner of the note. In judicial foreclosure states this may already be happening, but in non-judicial foreclosures MERS was skipping this step unless it was sued.  Of course, whether the assignment by the CO of MERS is any good or not is another question — does MERS have the authority to transfer or assign anything?  The right to foreclose is based on the ownership of a promissory note for which there has been a default.  MERS never collects money from borrowers, it is not authorized to collect money, it does not ever own, possess or hold the promissory note — so how can it give something to someone it never owned?  Can it transfer the right to foreclose without transferring the right to collect the money?  Some courts say MERS can, some no.  Recent cases say yes, story here.  (MERS says: “This year alone courts in Georgia, California, Michigan, Kansas, New York and New Hampshire have upheld the MERS business model recognizing MERS as a mortgagee.” MERS release here.) Regardless, it is a nice to see MERS pulling back the curtain, although I think it would gladly help to foreclose on Dorothy and her little dog too.

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It has been more than two years and some attorneys for lenders and others are still out there claiming that the Protecting Tenants at Foreclosure Act (PTFA) does not require the purchaser at the foreclosure sale to honor a pre-existing lease of a bonafide tenant.  These attorneys are not uninformed — I would argue they hope to change what the public, tenants, judges, tenant advocates, media believe the law requires — in effect blunting it merely by misinformation.

The bad argument goes that PTFA only requires a tenant get 90 days notice to vacate after a foreclosure sale if the lease is “terminable at will under state law”.  These folks claim that the state at issue allows a buyer at a foreclosure sale to ignore a pre-existing lease, therefore it is “terminable at will,” and therefore a lease for a fixed term of a year or whatever can still be terminated by the purchaser (often a lender) by merely giving the bonafide tenant 90 days.  This argument is sheer lunacy.

The sole purpose of PTFA is to require purchasers at foreclosure sales to honor pre-existing leases of bonafide tenants and thus to trump state law.  The exception “terminable at will under state law” refers to tenancies where there is no fixed term and are month to month or week to week.  In those cases PTFA mandated that these tenants at least get 90 days notice to vacate.

There are few cases on this point because the law is so obvious and few reputable attorneys have likely wanted to pursue it.  But here is one case where the tenant (Joel) tried to argue he had a lease for a fixed term and thus should have gotten more than 90 days notice from the lender who bought the property at the foreclosure sale (HSBC):

The issue is whether the lease is terminable at will, in which case HSBC can end the lease by providing 90 days’ notice to Joel, or whether it is a lease for a fixed term, in which case HSBC will have to let Joel remain in the property until it sells the property to a purchaser who will use it as a primary residence. The fact that HSBC was not a party to the original lease does not mean that it cannot interpret the express language of the contract to derive the parties’ intent.  Joel’s argument that the leasing agreement established a lease for a fixed term, rather than a tenancy at will, also fails. By its terms, the lease created a “month-to-month tenancy” that could be terminated by either party with 30 days’ notice. Because Georgia law requires at least 30 days’ notice before terminating a tenancy at will, the lease effectively created a tenancy at will. See O.C.G.A. § 44-7-7. Therefore, under the PTFA, HSBC could terminate the lease after providing 90 days’ notice to Joel.

Joel v. HSBC Bank USA, N.A., 2011 U.S. App. LEXIS 6707 (11th Cir. Ga. Mar. 31, 2011).

Here is another:

[PTFA] specifies that a successor property owner acquires its property interest subject to the right of a bona fide tenant who is “without a lease or a lease  terminable at will under state law” to receive “the 90 day notice under subsection (1).”   Accordingly, by its express terms, § 702 (a) requires that a successor property owner provide a bona fide month-to-month tenant with a 90-day notice to vacate before terminating the tenancy, and the 90-day period must be completed before the notice’s effective date.

Bank of N.Y. Mellon v. De Meo, 2011 Ariz. App. LEXIS 65, 8-9 (Ariz. Ct. App. May 3, 2011) (emphasis added).

The law itself, the legislative history of the law, and the opinions above make it obvious.  PTFA requires purchasers to honor leases of bonafide tenatns (unless they want to occupy it themselves as their primary residence).  Yet I continue to hear stories of lender attorneys in eviction cases in the lower courts making the argument that their clients don’t have to honor the lease and some servicers continue to give notice to tenants to be out in 90 days and not mention that they will honor existing leases.  Unless the tenant knows the law, they will likely move as demanded by the lender attorneys.  In court, unless the tenant is represented or the judge knows the law, some judges might fall for this bogus argument.  Regardless, the rhetoric — aka deceptive representation of the law — impacts the knowledge base of the public, even that of real estate attorneys that may be reputable.  For example in an ABC New story today:

“In a distressed economy, renters have to be extra cautious they know what they are getting themselves into,” says Singer. If the bank forecloses on the property after a homeowner association foreclosure the renter would only have 90 days to move based on the Protecting Tenants at Foreclosure Act. To keep themselves from falling victim to predators “tenants should do the due diligence” and find out who they are renting from, Singer says.

Gary Singer, Real Estate Attorney, ABC News, July 27, 2011 (story here).

The story discusses what happens after a HOA forecloses for nonpayment of dues — investors buy the property and then rent it out, but don’t pay the underlying mortgage. Then when the bank forecloses the tenants it appears fall victim per the story.  This is incorrect information.  No problem it is just ABC News. PTFA clearly requires a purchaser at a foreclosure sale to honor all fixed term leases of bonafide tenants (unless the purchaser intends to occupy the property as his primary residence).  Mr. Singer might have been misquoted, or might have been talking about tenants obtaining month-to-month leases from investors (but it does not look like it).

Even Fannie Mae, the largest lender in the world now controlled by the federal government dances around the subject in its materials and information it sends to tenants occupying property that has been foreclosed on.  It seems to give lip service to the law but clearly intends to deceive:

Fannie Mae’s REO Tenant-in-Place Rental Policy FAQs

Fannie Mae’s rental policy allows renters in Fannie Mae-owned, single-family foreclosed properties the opportunity to stay in their homes by signing a new lease with Fannie Mae or by continuing an existing lease protected under the Protecting Tenants at Foreclosure Act or other applicable law.

Who is affected by the rental policy?

The Tenant-in-Place rental policy applies to qualified renters occupying a Fannie Mae-owned home at the time of foreclosure. Mortgagors may also have the opportunity to rent through Fannie Mae’s Deed-for-Lease program (more information on this program is available at http://www.fanniemae.com). Renters occupying any type of single-family property may be eligible. This includes residents of two- to fourunit properties, condominiums, co-ops, single-family detached homes and manufactured housing. The policy applies to all renter-occupied single-family Fannie Mae-owned properties. Approval from the Department of Housing and Urban Development will be required on properties where the loans were insured by FHA.

Source: http://www.fanniemae.com/homebuyers/pdf/rental_faqs.pdf

Notice that Fannie Mae says nothing about the law requiring it to honor existing leases — Fannie merely states that they have a policy with requirements.  It is true that a tenant must be bonafide before PTFA applies — but that merely means that the lease is legitimate (not between family, for market rent, etc.). Fannie clearly is trying to hide the ball from renters so that they will not realize that they have rights under PTFA.  Fannie then completely states a complete falsehood — that FHA must give approval before it has to honor a pre-existing lease.

I’m sure if I kept digging I could find more examples all over the place.  My point is we must diligently defend tenants’ rights under PTFA from attacks from all sources — if nobody corrects the media, servicers, GSEs and others then in the end the law has been eviscerated and the lenders will have once again weaseled their way out of another federal law.

Note: Another lender attorney argument is that while PTFA requires an actual notice to vacate of 90 days to be sent to people with month-to-month leases, lenders merely have to wait 90 days before starting eviction proceedings and never have to give the notice.  This argument is consistent with the audacity of the one above and lenders’ view of federal laws in general as opposed to federal bailouts.  This notice-not-required argument has also failed when it reached at least one appellate court. Bank of N.Y. Mellon v. De Meo, 2011 Ariz. App. LEXIS 65 (Ariz. Ct. App. May 3, 2011).

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In a decision today (here), a federal judge assigned to handle 26 class action cases filed in 19 states against Bank of America and is servicing subsidiary BAC Home Loans Servicing LP dismissed claims made by borrowers wanting to obtain loan modifications under HAMP, but allowed claims to go forward for homeowners who entered the HAMP program but were never given a permanent loan modification.  Judge Rya Zobel of the United States District Court of Massachusetts presides over the consolidation of cases called “multidistrict litigation” and was faced with a lengthy motion to dismiss the combined case which collectively alleges breach of contract, common law tort, violations of consumer protection statutes and federal law.

The case essentially focuses on the mismanagement of the HAMP program by BofA and BAC, which factually is hard for anyone to dispute.  Even the federal coverup agency that systemattically protects the industry called the Office of the Comptroller of the Currency (OCC) had to acknowledge the blunders of their good friends through consent decrees (which contained more empty promises and no penalties of course).  Story here.  However, given that the financial industry crafted HAMP originally and gave it to the Obama administration essentially as a gift it lieu of real reform, meaningful homeowner assistance, or statutory authority of bankruptcy judges to modify residential loans (judges already can modify loans for second homes, and even boats) — it is no wonder it failed.  Moreover, the industry made sure that HAMP gave borrowers little in terms of rights, so crafting legal claims based on program mismanagement would not be easy.

A summary of the decision follows:

Injunction to Prevent Foreclosures of Borrowers in HAMP.  The court noted that it had not yet certified any class action members (who would be in the case by definition) and so it would be premature to enjoin BofA and BAC from foreclosing on a class of homeowners engaged in the HAMP program.  But the court clearly left that question on the table.  Decision at 16.

Two class of plaintiffs: SPA and TPP.

First, [Plaintiffs' propose] a class of homeowners whose mortgage loans have been serviced by one or both defendants, but who were never admitted into the [program] (the “SPA Class”).  While not parties to any contract, they reason that they are among the intended beneficiaries of a Servicer Participation Agreement (“SPA”) between [BofA] and the U.S. Treasury. Second, [Plainitffs'] propose 15 statewide classes of homeowners who entered into the [program] but were not given a permanent HAMP [loan] modification or a written notice that their request for permanent modification had been denied (the “TPP Class”).

Decision at 3-4.

SPA Plaintiffs’ Claims Dismissed.  The claims made by the homeowners that were never allowed into the program, ie, never given a trial period plan (TPP) did not do well in this case.  These claims related to a contract entered between the government and the lender called a Servicer Participation Agreement (SPA) which sets up the HAMP program for that lender.  The court held as a matter of law that homeowners could not claim a breach of a contract between the government and BofA, and more specifically held that the contract did not intend homeowners to be able to sue under the contract even if they were incidental beneciaries of the the contract.  Of course the financial industry wrote and approved these contracts and made sure a claim like this would fail.  The court noted that because there is no contract claim here, there also cannot be a claim for breach of the duty of good faith and fair dealing. Decision at 7.  The court further held that the SPA plaintiffs lack standing to bring a promissory estoppel case.

Most of TPP Plaintiffs’ Claims Survived.  A borrower in the HAMP program begins the process by applying for assistance from a participating loan servicer.  If a servicer such as BofA finds the homeowner qualifies for a modification, it offers the homeowner a trial period plan (TPP) lasting three months and “promise[s] that if the borrower complied with the terms of the agreement and the borrower’s representations on which the offer of a modification was based remained unchanged in all material respects, then the borrower would receive a permanent modification [of the loan] on the same terms.”  Decision at 2.  The homeownersin the TPP class allege that BofA did not offer permanent loan modifications as promised, or did not explain to the homeowners why they did not get a permanent loan modification.  BofAargued two reasons why the contract could not be enforced.

1. Breach of Contract. First, BofA claimed the contract cannot be enforced because there was no “consideration” given to back up the deal.  The court rejected BofA’s argument: ”The requirements of the TPP all constitute new legal detriments.  See Durmic v. J.P. Morgan Chase Bank, N.A., No. 10-cv-10380-RGS, 2010 WL 4825632, *12 (D. Mass. Nov. 24, 2010) (holding that requirements of TPP constitute valid consideration), and Bosque v. Wells Fargo Bank, N.A., No. 10-cv-10311-FDS, 2011 WL 304725, *20-21 (D. Mass. 2011) (same).  The TPP established these conditions, which plaintiffs had no preexisting legal obligation to meet.  The complaint adequately alleges valid consideration.” Decision at 10.

Second, BofA claimed the homeowners did not comply with their obligations (“conditions precedent”).  The court found the homeowners allegations sufficient and rejected BofA’s argument here as well.  Thus, the court’s decision allows the breach of contract claim to go forward in cases where the homeowner has entered into a trial period plan and the lender failed to make it permanent.

2. Promissory Estoppel, Breach of Duty of Good Faith and Fair Dealing.  The court rejected BofA’s argument that these claims should be dismissed and thus is allowed to proceed.

Defendants argue that plaintiffs have not adequately pled that BOA acted with any intent of causing them injury, much less with the “dishonest purpose or conscious wrongdoing necessary for a finding of bad faith or unfair dealing.”  Schultz v. R.I. Hosp. Trust Nat’l Bank, NA, 94 F.3d 721, 730 (1st Cir.1996) (applying Massachusetts law). However, the complaint states that BOA willfully failed to modify qualifying loans, declined to properly train and supervise its agents, encouraged and/or allowed employees to make inaccurate representations, all “in bad faith and for its own economic benefit.”  See CAC ¶¶ 464-465; 523-524.  These allegations are sufficient to state a claim.

Decision at 11-12.

3. Consumer Protection Statutes.  The court prelimiarily rejected BofA’s arguments and found that the homowners adequately pleaded their case.

Count VI of the consolidated complaint asserts claims by fourteen statewide classes for unfair and deceptive acts under various state consumer protection acts which defendants seek to dismiss on various grounds.  First, defendants assert that such claims are an “impermissible end-run” around HAMP’s lack of a private right of action.  However, claims under state consumer protection statutes may proceed even in the absence of a private means of recovery if the alleged violation is unfair or deceptive. … The allegations of this complaint are sufficient to withstand the motion to dismiss on this ground.  See Bosque v. Wells Fargo Bank, N.A., 10-cv-10311-FDS, 2011 WL 304725, *8 (D. Mass. Jan. 26, 2011).  Plaintiffs charge defendants with making deceptive, false or misleading representations regarding their eligibility for a permanent loan modification under HAMP.  (See CAC ¶¶ 489-521.)  In particular, they state that they were led to believe that they would be entitled to a permanent loan modification or a denial of eligibility so long as they complied with the obligations set forth by the TPP.

Decision at 12-13.

The court did dismiss the TPP Plaintiffs’ claim that BofA violated the Equal Credit Opportunity Act (ECOA) for failing to notify them of adverse action when BofA decided not to make the trial modification plan and permanent one. “Here, notification was not necessary because defendants did not take an adverse action; they did not refuse to grant credit as plaintiffs had requested.  Thus, defendants’ motion to dismiss this count is allowed.” Decision at 15.

Undoubtedly, BofA was hoping all the class cases would go away today, and clearly their hopes were dashed.  Of course that assumes a corporation can hope, and I have yet to find that a multinational financial corporation feels or cares about anything.  I think I can say that BofA’s lawyers are thrilled to be able to bill their client for hundreds and hundreds of more hours of research and writing.

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