Mortgage Banking Update - August 23, 2012

by Ballard Spahr LLP

FHFA Questions Use of Eminent Domain for Underwater Mortgages

In response to threats from local governments in California and elsewhere to use eminent domain to acquire and restructure underwater mortgages, the Federal Housing Finance Agency (FHFA) has announced that it "has determined that action may be necessary on its part…to avoid a risk to safe and sound operations and to avoid taxpayer expense."

The FHFA is the regulator and conservator of Fannie Mae and Freddie Mac and the regulator of the Federal Home Loan Banks (FHLBs). In its notice published in the Federal Register on August 9, 2012, the FHFA stated that it "has significant concerns about the use of eminent domain to revise existing financial contracts and the alteration of the value of [securities held by Fannie Mae, Freddie Mac and the FHLBs]."

According to the FHFA, the use of eminent domain could result in losses to Fannie Mae and Freddie Mac that "would represent a cost ultimately borne by taxpayers" and "could undermine and have a chilling effect on the extension of credit to borrowers seeking to become homeowners and on investors that support the housing market."

In the notice, the FHFA requests input on various questions raised by the use of eminent domain, such as the constitutionality of such use, its effect on holders of existing securities, the impact on performing mortgages, and the role of the courts in administering or overseeing an eminent domain program. Input will be accepted "from any person with views on this subject" through September 7, 2012, "as the agency moves forward with its deliberations on appropriate action."

The FHFA's notice follows closely on the heels of its July 31, 2012, letter to members of Congress and a related paper explaining the FHFA's decision not to allow Fannie Mae and Freddie Mae to participate in the Home Affordable Modification Program's Principal Reduction Alternative. In the FHFA's view, the principal forgiveness contemplated by the program "would not make a meaningful improvement in reducing foreclosures in a cost effective way for taxpayers."

Barbara S. Mishkin

Only Promissory Note Holders Can Initiate Foreclosures in Washington State

The Supreme Court of Washington has determined that, under the Washington deed of trust act, only the actual holder of a promissory note can be the beneficiary with the power to appoint a trustee to proceed with a nonjudicial foreclosure on real property. If a party, MERS in this case, does not hold the note, that party is not the lawful beneficiary with power to direct a trustee to foreclose. Moreover, a homeowner may be able to state a claim under Washington's Consumer Protection Act based on a defendant's representation that it was a beneficiary if, in fact, it is not the lawful beneficiary. However, the mere fact that a defendant is listed on the deed of trust as a beneficiary is not itself an actionable injury.

The Supreme Court of Washington issued its opinion, en banc, in Bain v. Metropolitan Mortgage Group, Inc., on August 16, 2012. The case revolved around two homeowners who, after defaulting on their mortgages, sued to stop MERS and its appointed trustees from initiating foreclosure sales, claiming that MERS was not the proper beneficiary under the Washington trust deed statute. The primary issue in the case was whether MERS could be a lawful beneficiary with the power to appoint a trustee without actually holding the promissory notes secured by the deeds of trust at issue. The court held:

"A plain reading of the statute leads us to conclude that only the actual holder of the promissory note or other instrument evidencing the obligation may be a beneficiary with the power to appoint a trustee to proceed with a nonjudicial foreclosure on real property. Simply put, if MERS does not hold the note, it is not a lawful beneficiary."

The court reasoned that the deed of trust act must be construed in favor of borrowers since it provides an easy mechanism for foreclosure, without judicial oversight. Because of the relative ease with which a beneficiary can initiate foreclosure, and the resulting forfeiture of the borrower's interests, the act must be evaluated from the borrower's perspective. In addition, the deed of trust act should be construed to further three basic objectives: "First, the nonjudicial foreclosure process should remain efficient and inexpensive. Second, the process should provide an adequate opportunity for interested parties to prevent wrongful foreclosure. Third, the process should promote the stability of land titles."

Washington's trust deed statute defines "beneficiary" as "the holder of the instrument or document evidencing the obligations secured by the deed of trust, excluding persons holding the same as security for a different obligation." MERS argued that the context of the statute requires that MERS be recognized as the proper beneficiary because the intent of the legislature was to create a more efficient remedy for default, not to put up barriers preventing foreclosure. Further, MERS argued that the deed of trust language allows it to act as the beneficiary and the parties are entitled to contract around the statutory definitions. Finally, MERS argued that since it was the holder of the deed of trust, it was the proper beneficiary.

The court disagreed with MERS on each of these points. First, it held that a proper beneficiary must either actually possess the note or be the payee. Second, the court determined that the parties could not avoid the statutory definitions by contractually altering the definition of beneficiary. Finally, the court held that, under the relevant statutory scheme, the deed of trust follows the note, not the other way around. Accordingly, MERS cannot be the beneficiary by virtue of it possessing the deed of trust.

The court further observed that MERS acting as the beneficiary undermined some of the goals of the deed of trust statute. That scheme was designed, in part, to encourage borrowers and lenders to be able to work together to modify loans and otherwise resolve problems. Since MERS does not negotiate with borrowers on behalf of the actual note holders, and since, at least in this case, MERS could not identify the actual note holders, allowing MERS to act as the beneficiary would undermine these goals. Based on these concerns, the court held that MERS could not be deemed an agent of the actual note holders.

With regard to the deceptive trade practices claims, the court held that MERS' representations that it was the beneficiary could deceive a substantial portion of the public and, further, that such representations could have a broad public impact given that MERS is involved in as many as half of the mortgages in this country. Accordingly, the court held that, depending on the specific facts of the case, a party may be able to prove violations of the consumer protection statute when MERS holds itself out as a beneficiary of a note and deed of trust in the state of Washington.

In summary, MERS may not hold itself out as a beneficiary in the State of Washington unless it has actual possession of the promissory note or other documentation evidencing it holds the obligation secured by the deed of trust.

Anthony C. Kaye

Congress Amends SCRA and the Maximum Guaranty for VA Loans

On August 6, 2012, President Obama signed the Honoring America’s Veterans and Caring for Camp Lejeune Families Act, H.R. 1627. The Act provides a number of protections to military veterans, notably an extension of the Servicemembers Civil Relief Act (SCRA) foreclosure protection and a temporary increase in VA loan limits.

Effective 180 days after the enactment of the Act, Section 533 of the SCRA, the foreclosure protection is amended to expand the period of relief from sale, foreclosure, or seizure of the property from the period of military service plus nine months to the period of military service plus 12 months. The amendments are set to expire on December 31, 2014.

On August 6, 2012, the VA reverted to a previous calculation method to establish loan limits for VA guarantees. This change resulted in a temporary increase in some loan limits. The restored calculation method will be in effect until December 31, 2014. The loan limits for loans closed on or after August 6, 2012, through December 31, 2012, have been posted on the VA website. Loan limits for 2013 will be posted as soon as the VA receives median price data from the Federal Housing Finance Agency.

Emily G. Miller

Nevada Provides Clarification on Wholesale Lender Exemption

The Commissioner of the Nevada Division of Mortgage Lending addressed the licensing obligations of wholesale lenders under the Nevada Mortgage Brokers and Mortgage Agents Act in an August 20, 2012, memorandum. The Commissioner takes the position that a wholesale lender that only provides a funding source for a licensed (or exempt) mortgage broker to fund and close a loan secured by real property in Nevada in the licensed (or exempt) broker’s name is exempt from licensure requirements.

In order for the exemption to apply, the loan must be funded and closed in the licensed or exempt broker’s name as the lender of record. Accordingly, any wholesale lender that closes or funds a loan in its own name as the lender of record is required to be licensed. Note that this represents a change in long-standing Division policy.

The Commissioner also takes the position that a wholesale lender that buys a loan secured by Nevada real property from a mortgage broker after closing must be licensed since it is holding itself out as “being able to buy or sell notes secured by liens on real property.” As a result of this clarification, wholesale lenders that now must be licensed have until October 1, 2012, to apply for a license. If they fail to apply for licensure by December 31, 2012, and continue to conduct wholesale lender activity after that date, they will be subject to administrative disciplinary action.

Matthew Saunig

New York Codifies YSP Prohibition

Effective August 17, 2012, New York has amended various provisions of its banking law to prohibit yield spread premiums and any other compensation that is based on, or varies with, the terms of the loan. As with the federal loan officer compensation rule, compensation based on loan amount is not prohibited.

New York Issues Regulated Entity Assessment Fee Emergency Regulations

In May 2012, the New York Appellate Division ruled that the Banking Department’s methodology for assessing mortgage bankers had not followed the State Administrative Procedures Act and was, therefore, invalid for fiscal year 2010. In response, the Department of Financial Services (into which the Banking Department and Insurance Department were consolidated in October 2011), has issued regulations setting forth how annual assessments are to be determined. For licensed brokers, lenders, and servicers, the formula considers a number of factors, including total gross revenues from New York operations, including servicing and secondary market revenues, for all licensees. The new methodology applies to assessments tied to the fiscal year starting April 1, 2011. 

– John D. Socknat


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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