Good Riddance 30-Year Fixed Mortgage? Not So Fast…

J. Wallison’s recent article in the Wall Street Journal on government support
of the residential housing market (“What’s So Special About the 30-Year
“) is an interesting academic exercise but it has no relevance to
the reality of the U.S. housing market.

it is true that, for many years over the life of a 30-year loan, most of the
payments go to interest and not principle, if we were to remove the tax
deductibility of the interest paid
(regardless of the term of amortization) as
some have suggested, we would remove another 33% of value from the American homeowner,
based on the marginal rate at the Federal level of 28% and the average State
and local tax rate of 5%.


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State AGs to DeMarco: Let GSEs Participate in Principal Reduction

Officials from eleven states have formally petitioned the Federal Housing Finance Agency (FHFA) to reverse its opposition to mortgage loan principal reduction on the part of Freddie Mac and Fannie Mae.  The Attorneys General of California, Delaware, Illinois, Iowa, Maryland, Massachusetts, Minnesota, New Mexico, New York, Oregon, and Vermont sent a letter to the agency’s Acting Director Edward J. DeMarco with this request on Thursday.

DeMarco has been under pressure from Congress and from the U.S. Treasury to allow mortgages owned or guaranteed by the two government sponsored enterprises (GSEs) to participate in the Home Affordable Modification Programs Principal Reduction Alternative (HAMP PRA) which forgives a portion of the mortgage balances of homes that are both delinquent and “underwater.”  FHFA prefers instead that principal forbearance is used in order to preserve the GSEs assets.   Freddie Mac and Fannie Mae are under the conservatorship of FHFA.

The Attorneys General argue that the failure to implement principle loan forgiveness programs harms struggling homeowners and investors.  The letter, released by Massachusetts Attorney General Martha Coakley, said in part, “The financial stability of Fannie Mae and Freddie Mac will not be harmed if they engage in principal forgiveness and according to new data could save close to $1.7 billion.  We will soon see the results of the country’s largest banks implementing principal loan reduction as required under the recent Multistate Servicing Settlement. It is now time for the FHFA to accept the fact that principal forgiveness programs help borrowers, help communities and can improve the creditors’ bottom line.”

The letter argues there is no data to support the view that forgiveness conflicts with the goal of asset preservation but rather it restores a borrower’s status as a stakeholder and provides them a stronger incentive to maintain payments.

In the letter, the Attorneys General argue that the increase of incentive payments (by the U.S. Treasury) to investors for allowing forgiveness under the Home Affordable Modification Program (HAMP) should also reduce concerns regarding the potential impact on the financial stability of Fannie Mae and Freddie Mac as either owner or guarantor of these loans.  Nor is the reluctance to engage in principal forgiveness based on the inability of internal computer systems to handle new programs an excuse as major banks have overcome similar concerns after the Multistate Servicing Settlement reached last month.

The letter states further that because the GSEs together own a majority of the nation’s home loans, “they must be a leader in the arena of loan modification best practices and not an obstruction.”

Coakley’s office said that she had sent a similar letter on her own to DeMarco in February.  The new letter, now backed by 10 additional Attorneys General, “reflects a growing consensus around this issue.”

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Mass Court May Rule on Retroactivity of some Foreclosures Tied to ‘Naked Mortgages’

Another next major marker in the
convoluted foreclosure landscape will probably come in the next few weeks when the
Massachusetts Supreme Judicial Court (SJC) is expected to rule on Eaton v. Federal National Mortgage
Association (Fannie Mae). 
This is another
in a series of cases challenging the right of various lenders and nominees to
foreclose on delinquent mortgages based on assertions that those parties do not
own or at least cannot prove they own the enabling legal documents. 

Eaton raises an additional point that
has excited interest – whether or not that foreclosure can be challenged and
compensation enforced on a retroactive basis or whether such retroactivity
exacts too high a cost or permanently clouds title.

The details of the case are fairly
standard, involving a note given by Henrietta Eaton to BankUnited and a
contemporaneous mortgage to Mortgage Electronic Registration Systems (MERS).  The mortgage was later assigned by MERS to
Green Tree servicing and the assignment did not reference the note.  The Eaton Home was subsequently foreclosed
upon by Green Tree which assigned its rights under the foreclosure to Fannie
Mae which sought to evict Eaton.  Eaton
sued, charging that the loan servicer did not hold the note proving that Eaton
was obliged to pay the mortgage.

The Massachusetts Superior Court
relied on a January, 2011 ruling in U.S.
Bank V. Ibanez
in which the court held that the assignment of a mortgage
must be effective before the foreclosure in order to be valid and that as holder
of the note separated from the mortgage due to a lack of effective assignment,
the Plaintiffs had only a beneficial interest in the mortgage note and the
power of sale statute granted foreclosure authority to the mortgagee, not to
the owner of the beneficial interest.   

In Eaton the lower court said it was “cognizant of
sound reason that would have historically supported the common law rule
requiring the unification of the promissory note and the mortgage note in the
foreclosing entity prior to foreclosure. Allowing foreclosure by a mortgagee not in
possession of the mortgage note is potentially unfair to the mortgagor. A
holder in due course of the promissory note could seek to recover against the
mortgagor, thus exposing her to double liability.”

In its brief to the Supreme Judicial Court, Fannie
Mae contests the lower court ruling on the grounds that:

1.  Requiring unity of the note and mortgage to
foreclose would create a cloud on the Title and result in adverse consequence
for Massachusetts homeowners.

2.  A ruling requiring
unity of the note and mortgage to conduct a valid foreclosure should be limited
to prospective application only (because)

 Such a ruling was not clearly foreshadowed and

application could result in hardship and injustice.

The case has been the impetus for filings of nearly
a dozen amicus briefs from groups such as the Land Title Association, Real
Estate Bar Association, and foreclosure law firms, most in response to a SJC
request for comment on whether any ruling should be applied retroactively and
if so what the impact would be on the title of some 40,000 homes foreclosed in
the last few years.   

Of particular interest is a brief filed by the
Federal Housing Finance Agency, conservator of both Fannie Mae and Freddie Mac
which some observers said might be the first time the agency had
intervened in a particular foreclosure case.

FHFA asked the court to apply any decision to uphold the lower court
decision prospectively rather than retrospectively.  It’s argument:  applying a ruling retroactively would be “a
direct threat to orderly operation of the mortgage market
.”   FHFA also said “Retroactive application of a
decision requiring unity of the note and the mortgage for a valid foreclosure
would impose costs on U.S. Taxpayers and would frustrate the statutory
objectives of Conservatorship.” 

“There presently is no mechanism or requirement under Massachusetts law to
record the identity of the person entitled to enforce the note at the time of
foreclosure,” FHFA said.  “Therefore, a
retroactive rule requiring unity of the note and mortgage for a valid
foreclosure would potentially call into question the title of any property with
a foreclosure in its chain of title within at least the last twenty years.”

A contrary opinion was advanced in a brief filed by Georgetown University Law
School Professor Adam Levitin who called the ruling that a party cannot
foreclose on a “naked mortgage” (one separated from the note) merely a restatement
of commercial law and “to the extent that the mortgage industry has disregarded
a legal principle so commonsensical and uncontroversial that it has been
encapsulated in a Restatement, it does so at its peril.”

Levitin argues that it is impossible to know how widespread the problem of naked
mortgages may be either in Massachusetts or nationwide so this should temper
any evaluation of the impact of retroactivity. 
He also states that there are several factors “that should assuage
concerns about clouded title resulting from a retroactively applicable ruling
requiring a unity of the note and mortgage.” 
He points out that adverse possession, pleading standards, burdens of
proof and equitable defenses such as laches all combine to make the likelihood
of challenging past foreclosure unlikely and sharply limiting the retroactive
effect of a ruling.

Kathleen M. Howley and Thom Weidlich, writing for Bloomberg noted that a decision to uphold the lower court “could
lead to a surge in claims from home owners seeking to overturn seizures.”

According to Howley and Weidlich, the SJC ruled last year on two foreclosure
cases that handed properties back to owners on naked mortgage grounds.  The
case, referenced above dealt with two single family houses, but in Bevilacqua v. Rodriguez the court handed
an apartment building back to the previous owner five years after the
foreclosure.  In the interim a developer
had purchased the building and turned it into condos.  The condo owners lost their units without
compensation and the building now stands vacant. 

The decision may be available before month’s end and as said, “For interested legal observers of the
foreclosure crisis, it really doesn’t get any better than this”.

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