Live Blogging at The Foreclosure Crisis Symposium: Challenges and Solutions to the Mortgage Meltdown

Laurence E. Platt, nation’s leading real estate and consumer finance lawyer, gave a very precise presentation on the issues associated with title recording and transfer in the mortgage market. His address was truly a practitioner’s guide and focused on four points.

The starting point was transfer of enforceable interest. Two pieces of legal documents are relevant for the purposes of mortgage transfers – promissory note and mortgage document. While the note is an actual promise to pay, the mortgage represents an interst in real property. Both these documents are dictated entirely by state law. The Uniform Commercial Code (‘UCC’), accepted by most state jurisdictions has dealt with the transfer of note in two provisions:

a)     Article 3 – applicable when the note qualifies as a negotiable instrument. Transfer in such cases is effected by delivery – actual or constructive and endorsement.

b)    Article 9 – applicable when the note falls short from qualifying as negotiable instrument. Transfer is effected by a purchase agreement that identifies with particularity the note being transferred.

UCC has clarified that mortgage follows the note, i.e. if note is properly transferred mortgage follows. However, Mr. Platt pointed out that a series of questions remain in real property law applicable in different State jurisdictions.

Next, he attended to the Securitization document (‘Sec Doc’) creating a special, sometimes higher standard of effective transfer. The Sec Doc may impose contractual requirements that exceed the applicable state law. The question arises, what shall be the consequences of not satisfying the standard for effective transfer – whether it is legal or transactional. In case of note transfers, UCC contains cures that can be adopted. For instance, if Article 3 is not followed, there exists a safety net in Article 9. However a real problem exists in the area of state property law. A few have argued that the higher contractual replaces the applicable legal standard, i.e. UCC and property law, to become the governing law, nonetheless, as Mr. Platt mentioned there is not enough support for this proposition. In fact he remarked, a mortgage-backed security might be nothing more than a security backed by air.

The other issue he spoke about is a scenario where enforceable interest is acquired but still there is failure to foreclose. This is a major problem in the current crisis and he illustrated by means of an example of Virginia state law. Under Virginia state law, assignment of real property interest is not required. However a recent law introduced a requirement of prior assignment to successfully foreclose. This constitutes a real problem for creditors.

The final step in the enquiry is where does Mortgage Electronic Registration System (MERS) stand? MERS was created to establish stock holding like depository holding only electronic interest. The idea was to make mortgage loans seem like securities. However a numerous problems have surfaced with MERS:

a) Consumer issues: borrowers cant find out who owns the mortgage on their property

b) Local recording office do not receive fee when assignment were not required by law

c) Third party purchasers might not know who owns – nevertheless, it is not a market protection issue but an inherent risk.

MERS sort of acts like a nominee for the lender. If that were so, can it so also act in such capacity in a foreclosure proceeding? A few cases have held no for absence of an actual economic interest.

Finally, he attributed the alleged failure of servicers to record an assignment to the absence of the requirement in State Law.

Live Blogging at The Foreclosure Crisis Symposium: Challenges and Solutions to the Mortgage Meltdown

Mr Benjamin Weber of the Office of the San Francisco Assessor-Recorder (‘SF ASR’) gave a presentation on Reforming Title Recording and Transfer. He explained what land records and recording are and what their existence is intended to do, as well as reviewed the non-judicial process (another route in addition to judicial foreclosures available in California). The Recorder’s Office is charged with certifying documents from a variety of sources. Indeed, a certified copy of land record constitutes constructive notice and performs an evidentiary function. The SF ASR explains the foreclosure process for all to understand, informs the necessary legislative change that updates California law for the modern mortgage market and ensures compliance with laws to protect the integrity of the system. He also talked about MERS which is a registry that attempts to track servicing rights and loans as well as investors’ beneficial rights and loans. Additionally, he summarized the non-judicial process in California which starts with a notice of default, followed by a notice of trustee sale and a trustee’s deed upon sale. Finally, he concluded with some thoughts on future considerations, in particular the use of digital documents and submissions as opposed to paper/scanned documents in order to facilitate the transfer of documents. He posited that this is what recorders are moving towards in California.

Live Blogging at The Foreclosure Crisis Symposium: Challenges and Solutions to the Mortgage Meltdown

Paul Leonard, Director of the California Office at the Center for Responsible Lending, just gave his initial remarks on the root causes of the mortgage crisis. According to Leonard, the root cause was not the Community Reinvestment Act or the actions of Fannie Mae and Freddie Mac. Rather, the problem was the evolution of the mortgage market to a free market system of lending in which banks were able to detach their portfolios from the underlying risk associated with their lending. This resulted in a shift from stable, fixed-rate, long-term mortgages to more short-term adjustable loans, often to high default risk recipients. Moreover, explained Leonard, regulators, despite ample warning, were asleep at the switch. The combination proved disastrous.

Live Blogging at The Foreclosure Crisis Symposium: Challenges and Solutions to the Mortgage Meltdown

By Joseph Santiesteban, J.D. Candidate 2014, U.C. Berkeley School of Law

David Moskowitz, Deputy General Counsel for Wells Fargo, Inc., just gave a presentation on the chronology of government programs that have been implemented since the beginning of the foreclosure crisis. The first government effort was Troubled Asset Relief Program, which in addition to “bailing out” banks, contained loan modification programs. Moskowitz also discussed the Home Affordable Modification Program, which was designed to help negative equity homeowners modify their mortgages through interest rate reduction, term extension, and principle forgiveness. Moskowitz also discussed the recent $25 billion robo-signing settlement. The settlement included $20 billion dedicated to homeowner relief and $5 billion to be used by each state for state-specific homeowner relief programs. The settlement also included new servicing standards and a compliance mechanism accomplished primarily through an independent monitor.

Live Blogging at The Foreclosure Crisis Symposium: Challenges and Solutions to the Mortgage Meltdown

By Joseph Santiesteban, J.D. Candidate 2013, U.C. Berkeley School of Law

Moderator Bill Falik just delivered his opening remarks, explaining in detail the nature of the mortgage crisis and potential solutions. Out of 50 million mortgages in the United States, 11 million have negative equity.  In addition, 10 percent of homes in the U.S. are currently in default. Panelists in the first session will be discussing both market-based and government-based solutions to this crisis from a policy perspective.

National Mortgage Servicing Reform Proposals are Under Consideration

As the debate over how to reform the housing finance market takes a back seat to the 2012 General Election, Dodd-Frank’s statutory changes to mortgage servicing will see no delay in its implementation.  On April 10, 2012, the Consumer Financial Protection Bureau released its first set of proposed mortgage servicing rules:

“The proposed rules currently under consideration aim to protect consumers from surprises by directing servicers to provide:

  • Clear monthly mortgage statements that explicitly breakdown principal, interest, fees, escrow, and due dates
  • Warnings before adjusting interest rates on certain adjustable rate mortgages (ARMs) that explain how the new rate was determined, when it will take effect, dates of future adjustments, and a list of alternatives for consumers to consider
  • Options for avoiding expensive “forced-placed” insurance, which is insurance charged to borrowers by servicers when their existing insurance appears to have lapsed
  • Early outreach to struggling borrowers that informs them of potential options to avoid foreclosure

We also want to address the issue of consumers getting the “run-around” when dealing with servicers.  To accomplish this, the Bureau is considering proposals that would require:

  • Payments to be credited to consumer accounts the day payment is received
  • Implementing new policies and procedures so that records are kept up-to-date and accessible
  • Quickly addressing and correcting errors
  • Giving homeowners direct and ongoing access to servicer staff members who have access to the homeowners’ records and can actually help address their issue(s)”

The rules are scheduled to become effective in early 2013 unless the Bureau issues finals rules first.  An outline of the proposals under consideration was also posted on the Bureau’s website.

To learn more about these proposed changes to mortgage servicing as well as other housing reforms arising out of the financial crisis, please register for “The Foreclosure Crisis: Challenges and Solutions to the Mortgage Meltdown,” Friday, April 13, 2012 at the International House on the U.C. Berkeley Campus, and stay tuned as we live-blog the event throughout the day.

$25 Billion Foreclosure Settlement Approved: What’s Next?

On April 5, 2012, U.S. District Court Judge Rosemary Collyer approved the $25 billion settlement negotiated on February 9, 2012, between 49 states and the federal government and five banks – Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, and Ally Financial.  The deal, the largest multistate settlement since the Tobacco Settlement in 1998, settles federal and state claims against five of the largest banks in the United States for what has become known as “robo-signing”: signing foreclosure related documents outside of the presence of a notary public and without ensuring the documents were correct.

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The Network Lecture Series: The Optimal Corporate Bailout – A Presentation by Professor Eric Talley

By Joseph Santiesteban, J.D. Candidate 2013, U.C. Berkeley School of Law, with contribution by Professor Eric Talley, Rosalinde and Arthur Gilbert Professor of Law; Director, the Berkeley Center for Law, Business, and the Economy

Introduction

In 2008-09, when the government spent $350 billion dollars bailing out corporations that it deemed systemically important, it confronted several issues. First, which companies should be bailed out? Second, what should the terms of the bailout be? And third, how should the program be funded. On March 20th at Berkeley Law’s weekly Law and Economics Workshop, Berkeley Law Professor Talley Eric Talley presented “A Model of Optimal Corporate Bailouts,” a paper he co-authored with UCLA Business School Professors Antonio Bernardo and Ivo Welch, which attempts to confront these issues with a theoretical model and compare their results to the Troubled Asset Relief Program (TARP).

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To Stagger Or Not To Stagger: Harvard’s Shareholder Rights Clinic v. Wachtell Lipton

Recent days have seen a flurry of activity around a student clinical program at Harvard Law School: The Harvard Shareholder Rights Clinic (SRC). The clinic “provides advice and representation, on a pro bono basis, to public pension funds and charitable foundations seeking to improve corporate governance.” Harvard Professor Lucian Bebchuk is a corporate governance activist and the clinic’s faculty advisor. This academic year, the clinic has advised six public institutional investors, including Illinois State Board of Investment, the Los Angeles County Employees Retirement Association, the Massachusetts Pension Reserves Investment Management Board, the North Carolina State Treasurer, and the Ohio Public Employees Retirement System.

One of the clinic’s major projects has been eliminating the use of so-called “staggered boards.” Under a staggered board structure, board members are divided into classes and a different class is eligible for election each year. Thus, it takes at least two years to replace a majority of the board. Mr. Bebchuk argues that the use of staggered boards serves to unduly protect existing board members and diminishes shareholders’ voting power.  Furthermore, other academics have found that companies that utilize staggered boards tend to be of lower value, make poorer choices in asset acquisition, and have compensation schemes that do not necessarily reflect board performance.

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Second Circuit Set to Reign in Rakoff

On March 15, the Second Circuit stayed proceedings in the now notorious case of SEC v. Citigroup. The case hit headlines last November when District Court Judge Rakoff refused to accept a $280 million settlement agreement between the SEC and Citigroup. Judge Rakoff’s decision was outlined in great detail in a previous post on the Network.

By granting a stay in the proceedings, the Second Circuit is allowing the SEC and Citigroup to avoid having to proceed with the trial litigation while appealing Judge Rakoff’s decision. The appeal is scheduled to be heard in September, though the dicta in the March 15 decision appears to support the position that the Second Circuit is prepared to overturn Judge Rakoff’s decision.

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