Litigation Concerns for the Compliance Professional Fall 2011 Update

Richard E. Gottlieb
Dykema Gossett LLP, Los Angeles CA September 26, 2011

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

Vacant Property Dilemma

Topic One

Vacant Properties and Urban Blight: Cities Go on Attack Against Lenders and Servicers

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 remediate properties

Walkaways a serious issue for cities: lenders simply release the lien, abandon the property without completing the foreclosure
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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

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, generally maintains 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 lawsuits against Wells, no discrimination claims Unlike the Cleveland lawsuit, no cause of action for public nuisance, names just one defendant, 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 of mortgagees to secure and maintain properties Imposes one time fee for registration Requires mortgagees to inspect homes of defaulting borrowers to determine if vacant Effectively authorizes mortgagees to do what mortgage documents already allow to more limited 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 active role 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 on Foreclosures, 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 to foreclosure

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 6 highest volume servicers in NJ (Ally, BofA, Chase, Citi, OneWest and Wells) (group A) Administrative Order directed to 24 other NJ servicers (Group B) Emergency order amending NJ foreclosures 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 ownership of securitized mortgage loans MERS acts as the true owners nominee, thereby eliminating need to constantly file assignments 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 single lawsuit 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.2d 1368, 1370 (JPML 2009).

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The MERS MDL

Arizona federal court has essentially retained only those portions of various federal actions that pertain to 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 on borrowers, courts or recording system MERS has power as nominee to foreclose Amended suits still pending, as well as various procedural tactics (including attempt to have questions 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-judicially foreclose 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 Saurman inapplicable, because borrower had granted MERSs right to assign the mortgage. Saurman inapplicable 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 Saurman Attacks

Multiple state court putative class actions filed in Michigan; cases likely to be stayed

during pendency of Saurman appeal

March v. Countrywide (ED Mich 7/12/11) refuses to reconsider post-FC postredemption period collateral attack based on Saurman)

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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 prohibit MERS from seeking non-judicial foreclosure; borrower contracted to allow MERS to act in this manner
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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 to challenge MERS standing (Robinson)
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Dallas County Lawsuit

Dallas County v. Merscorp (Dallas County TX, filed 9/20/11) County DA challenge to MERS business model 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 process to continue
Suit is hot off presses so no rulings as yet from court

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Thanks!

Richard Gottlieb rgottlieb@dykema.com or (312) 6272196

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