RC11Gottlieb.LitigationConcerns

8/3/2019 RC11Gottlieb.LitigationConcerns

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Litigation Concerns for theCompliance Professional

Fall 2011 Update

Richard E. Gottlieb

Dykema Gossett LLP, Los Angeles CA

September 26, 2011


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Todays Headlines

1. The Vacant Property Problem:

City Challenges against Lenders

2. NJ Court System Clears Mortgage

Servicers

3. The Unkindly Assault against the

MERS System


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Vacant Property Dilemma

Topic One

Vacant Properties and Urban Blight:

Cities Go on Attack Against Lenders

and Servicers


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The Issue

Inner cities across America overwhelmed

by vacant homes

Dramatically reduces value of

neighborhoods, and cities forced to incur

huge sums to secure and remediateproperties

Walkaways a serious issue for cities:

lenders simply release the lien, abandon

the property without completing theforeclosure


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City of LA sues Deutsche Bank

Case filed May 4, 2011, LA Superior Ct

Names Deutsche Bank, individually and as

trustee of numerous mortgage pools

212 pages, 1040 paragraph complaint

Accuses Deutsche of failing to correct

ordinance violations on 166 REO properties in

LA and of unfairly forcing tenants out of

properties

Characterizes Deutsche as worst form of

slumlord, ignoring property maintenance issues

and demands to fix them


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LAs problem

2009: banks acquired 165,000 properties

in CA by FC, 39,000 in LA alone of which

17,000 occupied by 46,000 renters

Huge cost of maintaining abandoned

properties

Huge loss in property values hurts tax base


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The Reality

Deutsche is just a trustee for the actual

owners

Master servicer, not trustee, maintains

paper work for loans at issue

Servicer or investor, not trustee, generallymaintains REO properties and addresses

code violation notice

Deutsche: LA never attempted to get to the

truth; refused to cooperate with Deutsche,never re-identified the properties at issue


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Comparisons to Other City Suits

Suit most closely resembles City of Buffalo

mass housing court suit against multiple

lenders (specific properties; public

nuisance-type allegations)

Unlike the Baltimore or Memphis lawsuitsagainst Wells, no discrimination claims

Unlike the Cleveland lawsuit, no cause of

action for public nuisance, names just onedefendant, and identifies specific properties

(Cleveland never made that attempt)


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The Chicago Ordinance

A very different reaction to abandoned properties

7/6/11, Ald. Pat Dowell (3rd Ward) proposes change

to vacant property ordinance

Original ordinance, adopted in 2008, required

owners to secure and maintain vacant properties.

Similar ordinances enacted nationwide.

Dowells change: Define owner to include a

mortgagee who holds a mortgage on the property or

is an assignee or agent of the mortgagee.

Formally adopted in late July, and effective

September 18, 2011


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Chicago Ordinance Provisions

Completely unworkable in present form

No way for lenders/servicers to identify and track

vacant properties in absence of default

Very limited right to enter properties pre-foreclosure

judgment; other entries would be trespass,

conversion and/or wrongful eviction

Ordinance requires purchase property registration,

up front fees ($250), purchase of liability insurance,

security guards and other extraordinary costs

Daily fines of at least $500/day and up per property


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Negotiations with City

Lenders actively negotiating resolution with City

officials

If negotiations fail, litigation may be only option

City currently considering proposal that:

Scraps Ald. Dowells amendment (deleting

mortgagee within owner definition) Adds new ordinance enhancing obligations ofmortgagees to secure and maintain properties

Imposes one time fee for registration

Requires mortgagees to inspect homes ofdefaulting borrowers to determine if vacant

Effectively authorizes mortgagees to do whatmortgage documents already allow to morelimited extent


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The Springfield MA Ordinance

Takes similar approach to Chicago

Proposed 8/29/11; effective 9/13/11

Defines owner to include a mortgagee or

trustee for mortgage-backed securities

Like Chicago, lending industry has taken activerole in seeking to revise ordinance to more

workable form

Like Chicago, industry will likely challenge the

ordinance in court if no workable solution is

found


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Halting Foreclosures

Topic Two

NJ Court System Lifts the Veil onForeclosures, Clears Major

Servicers


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Background

Fall 2010 robo-signing allegations

Courts around country variously react to

allegations

Individual courts in Ohio, Florida and elsewhere

impose tougher rules to prove up right toforeclosure

Some states, like MD and NY adopt

emergency rules to examine pending

foreclosures, and impose additional obligations

on foreclosure firms

New Jersey takes a more proactive position


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NJ Court System Investigates Servicers

Background: 12/20/2010: NJ Supremes

issue 3 related orders:

Order to Show Cause directed to 6highest volume servicers in NJ (Ally,BofA, Chase, Citi, OneWest andWells) (group A)

Administrative Order directed to 24other NJ servicers (Group B)

Emergency order amending NJforeclosures rules of court


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NJ: the Order to Show Cause

Cites public record of alleged servicing violations,

including robo-signing

Suspends FCs by Group A servicers

Directs Group A servicers to demonstrate why order

should be lifted;

March 2011 stipulation: (1) requires prima facie showing(i.e., establishing) that each has procedures in place to

ensure proper affidavit execution practices (personal

knowledge, reliable data etc); (2) recommends special

master to confirm over 12-mo. Period that servicer is in

compliance.


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NJ: Admin Order against Group B

Administrative order cites much the same public record of

alleged servicing problems

Directed 24 servicers to submit certification (that is, a

sworn declaration) demonstrating to a special master that

each engaged in no servicing irregularities and that its

processes are reliable and accurate

Penalty for failure? Inclusion in Group A (suspended

foreclosures)

1/31/11 order: replaced reliable and accurate provision

with new but similar requirements


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NJ: Foreclosure Rules Change

NJ courts adopt emergent change to NJ

foreclosure rules

New rule required FC counsel of record to make

certain certifications within 45 days

Before obligations were triggered, however, court

suspended deadlines for filing FC counsel

certifications, and sought comment on the rule but

otherwise kept rule in place


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Courts Clears Servicers

On 8/15/11, NJ Superior Court judge Mary

Jacobson cleared the Group A servicers (BANA,Chase, Wells Fargo and Citi) to recommence NJ

foreclosures

Most Group B Servicers cleared by late August

2011 to re-commence FCs

Assurances made by servicers include:

That servicers have proper authority

Enhanced payment history systems

New, improved FC processes

Quality control for affidavits (notarization,knowledge of witnesses)

Better communication with FC firms


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Topic Three

The Unholy Assault on MERS:

A Status Report


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What is MERS?

MERS (Mortgage Electronic Registration Systems)

Operates electronic registry to track ownershipof securitized mortgage loans

MERS acts as the true owners nominee,thereby eliminating need to constantly fileassignments as ownership of pooled mortgages

are transferred in the secondary market Each mortgage receives unique 18-digit ID

number (the MIN)

Privately held; shareholders are the lenders and

insurers that benefit from its system


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Challenges to MERS System

Subprime lending crisis led to multiple nationwide

private challenges to the MERS system

DC AG Halts MERS foreclosures: 10/27/10:

foreclosing party may not proceed against DC

homeowner unless all assignments recorded

(challenge to MERS system)

In re Agard(Bankr EDNY 1/10/11) concludes that

MERS lacked right to assign mortgages under its

own rules, membership agreement, or the

mortgages themselves.


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MERS Multidistrict Litigation

Common core of federal lawsuits challenging MERS

practices have been consolidated into a singlelawsuit under federal multi-district litigation (MDL),

pending in Arizona.

All these actions possess a common factual core

regarding allegations that the various participants in

MERS formed a conspiracy to commit fraud and/or

that security instruments are unenforceable or

foreclosures are inappropriate due to MERSs

presence as a party. In Re: Mortgage Electronic

Registration Systems (MERS) Litig., 659 F.Supp.2d1368, 1370 (JPML 2009).


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The MERS MDL

Arizona federal court has essentially retained only

those portions of various federal actions that pertainto formation and operation of MERS. Other

portions remanded to various federal courts.

9/30/10 and 1/25/11: Court broadly dismisses

various claims with leave to replead, holding:

MERS system is proper, not a fraud onborrowers, courts or recording system

MERS has power as nominee to foreclose

Amended suits still pending, as well as various

procedural tactics (including attempt to havequestions certified to Nevada Supreme Court)


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Residential Funding v Saurman

Residential Funding v. Saurman(MIch App

4/21/11)) interprets Mich statute (MCL 600.3204),holds MERS cannot non-judiciallyforeclose in its

own name

MCL 600.3204(1)(d): in non-judicial FC, foreclosing

party must be owner of the indebtedness or of an

interest in the indebtedness or the servicing agent

of the mortgage.

Court holds that MERS fits none of these categories

Case on appeal to Michigan Supreme Court


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Post-Saurman Rulings

Harris v. Americas Wholesale Lender(Macomb

Cty Mich, 8/15/11) ruled in lenders favor, finds

Saurmaninapplicable, because borrower had

granted MERSs right to assign the mortgage.

Saurmaninapplicable because MERS not the

foreclosing party, says court.

Upholds MERS business model, confirming that

mortgage docs grant MERS right to assign

mortgage or act on behalf of owner of loan.


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Post-Foreclosure SaurmanAttacks

Multiple state court putative class actions

filed in Michigan; cases likely to be stayed

during pendency of Saurmanappeal

March v. Countrywide(ED Mich 7/12/11)

refuses to reconsider post-FC post-redemption period collateral attack based

on Saurman)

R F bl R li f MERS


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Recent Favorable Rulings for MERS

Henderson v. MERS(Alabama Supreme Court,

9/9/11) MERS has legal right to enforce mortgage(MERS was both mortgagee and holder of note

when suit commenced)

Cervantes v. Countrywide(9th Cir. 9/7/11)

affirms dismissal of putative class action (D Az.);

rejects claims that MERS system perpetrates fraud

on borrowers that led to predatory lending; no harm

to borrowers

Commonwealth Prop. Advocates v. MERS(Utah

App. 7/14/11) Utah statute does NOT prohibitMERS from seeking non-judicial foreclosure;

borrower contracted to allow MERS to act in this

manner

C lif i MERS Li i i


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California MERS Litigation

Four cases: Calvo v. HSBC(Cal App 2d Dist,

9/13/11); Robinson v. Countrywide(Cal App 4th Dist,9/12/11); Ferguson v. Avelo(Cal App 2d Dist,

6/1/11); and Gomes v. Countrywide(Cal App 4th

Dist, 2/18/11)

Rulings affirm MERS business model: MERS may foreclose in its name

Mtge docs grant MERS this right

MERS has power to assign deed of trust(Ferguson) (Dykema representing Avelo)

Borrowers dont have preemptive right tochallenge MERS standing (Robinson)

D ll C L i


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Dallas County Lawsuit

Dallas County v. Merscorp(Dallas County TX, filed

9/20/11) County DA challenge to MERS businessmodel under TX law

Also sued: Bank of America and Stewart Title, as

Merscorp shareholders, alleging both knew that

MERS system was illegal in TX, but allowed processto continue

Suit is hot off presses so no rulings as yet from court

Th k !


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Thanks!

Richard [email protected] or (312) 627-

2196
mailto:[email protected]:[email protected]

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