Recently on these pages I reviewed a recent New Jersey Appellate Division ruling that makes mortgage lenders "dot their i's and cross their t's" to prove that they have the right to foreclose. This, along with recent scandals about "robo-signing", the flood of foreclosures, and budget cutbacks in state government, has created an enormous foreclosure backlog statewide.
The extent of the problem is astonishing. Recently, a respected partner at one of New Jersey's largest foreclosure law firms told me that statewide it is taking an average of three years from the start of the foreclosure process to foreclosure sale. I recently came across a February 12, 2011 article in the Press of Atlantic City which confirmed this. Quoting statistics compiled by Realty Trac, the article by Business Editor Kevin Post notes that in the last quarter of 2010 it is taking 849 days from the initial court filing to the date of property repossession. (Press of Atlantic City, "Bottom Lines: Foreclosures in New Jersey now take an average of 849 days").
For the homeowners whose home is being foreclosed, this is a boon of sorts. For up to three years, they enjoy the benefit of living in their home "rent free". And if the mortgage is a first mortgage, the chances of their ever being pursued for any unpaid balance after the home is sold are slim, due to a short time for the lender to file such suits (called deficiency actions), and the cloud on title any such suit will place on the property which the lender has sold or will want to sell as soon as possible.
For many borrowers, this allows them time to put their financial house in order, and to accumulate the cash they will need to move and pay rental security deposits.
For the rest of us in the long term, the result is nothing to be glad about. While there are a lot of reasons for the current mess and a lot of blame to go around, in the long run it is the investors in these bad mortgages, and also the rest of us who are fortunate enough not to be facing foreclosure, who will be the ones to pay the piper. That home mortgage financing might not be available to everyone who applies is not necessarily a bad thing. A return to the more careful and stringent lending that was the norm 25 years ago would not be a bad thing. Due to securitization, the pain of the resulting losses is spread among a large number of investors. However, those investors likely include pension funds and for them the losses will be felt down the road by the pensioners whose money is not there when they need it. To the extent the investors in these bad loans include mutual funds that you or I might have invested in, the pain comes back to us.
Most importantly, where is the money for the home loans of the future going to come from? The investors in today's bad mortgages were willing to invest because they were told the investment was safer than it really was, and because they were willing to ignore risk because it was spread out by pooling of larges numbers of individual loans into multi-tiered investment trusts. Given the painful dose of reality now upon us, one can hardly be surprised if future investors in mortgage loans are going to extract a higher risk premium which will then translate into higher cost for borrowers of the future.
This will help to depress the real estate market for a long time to come. The real estate boom of recent years was fueled by an influx of lots of money trying to find a place to invest. This made it easier for less and less qualified borrowers, to buy real estate. That larger pool of buyers increased demand greater than the supply of real estate to purchase. Thus, prices rose. And these price increases led to a self-fulfilling expectation of ever-rising future prices that fuelled more and more speculative buying and borrowing.
Now, just the opposite has happened. Everyone expects that prices will continue falling. That expectation keeps buyers out of the market waiting for the bottom. The bottom will be reached when the prices are low enough to attract enough buyers (besides just well-heeled bottom-fishing investors and those who can pay large sums of cash) so that demand equals supply. Attracting those additional buyers requires availability of financing. If money is harder or more expensive to come by, that will inevitably delay the day when we reach the real estate bottom.
Another cost to all of us derives from having houses in foreclosure for years at a time. Financially strapped homeowners knowing they will not be keeping their homes are not going to improve them. That improvement is one factor that increases property values. They will also defer needed maintenance. This is how neighborhoods and ultimately communities deteriorate. The effects are going to be long-lasting.
And of course, lower property values ultimately yield lower property taxes paid to local government, already hard-hit. Higher tax rates or larger budget deficits have to follow. Less money for schools and needed services means lower property values and a lower quality of life for all of us. Higher taxes will solve that problem, but higher taxes decrease property values.
The ripples of the current crisis are widespread and will be with us for a long time. The solutions will require some major adjustments in the system of mortgage lending, and some creative and cooperative thinking by both the borrower and lender communities. Whether this will happen anytime soon is very much in doubt. My experience is that lenders, constrained by pooling agreements which have no provision for dealing with these types of problems, cannot or will not consider deals that given the reality on the ground make good business sense. Sensible proposals which would have given bankruptcy courts the power to deal with this mess have been vigorously fought by the lending community. Regulations that might prevent a repeat of the speculative bubble that got us here are being fought by the same interest groups. What is clear is that business as usual has to change. Whether that will happen anytime soon is anybody's guess.
Sunday, February 20, 2011
Wednesday, February 2, 2011
Who can foreclose in New Jersey? The Appellate Division makes lenders "Dot your i's and cross your t's"
On January 28, 2011, the New Jersey Appellate Division, in Wells Fargo Bank N.A. v Ford, 2011 WL 250561 answered the question that has led to differing results in New Jersey state and federal courts: What does a mortgage lender have to prove in order to be allowed to foreclose on a mortgage? The controversy centers on whether the the Plaintiff who has filed the foreclosure has to prove it is the current "holder" of the Note or otherwise entitled to enforce it under the requirements of the Uniform Commercial Code's Article 3, or whether it can get by using "equitable principles". The answer is now that Article 3 is what has to be followed.
In a mortgage loan, the borrower signs an "IOU", usually called a Mortgage Note, promising to repay the loan. To "secure" this promise, the borrower also signs a Mortgage which when recorded makes the title to the real estate subject to a valid lien or "security interest". Although a foreclosure is an action against the real estate based on the mortgage (and commonly for non-business transactions not a suit to collect directly from the borrowers until after a sheriff sale) the party that files for foreclosure must be the party that has the rights to enforce the Note. Because the Note is commonly "negotiable", ie can be sold or transferred, Article 3 of the Uniform Commercial Code applies.
In Ford, the Note had been signed in favor of Argent Mortgage Company. The loan was then "securitized" or sold off in bulk to investors through a trust. Typically, these loans are managed by a servicing company hired by the trustee of the trust. Wells Fargo filed the foreclosure as trustee of that trust. The borrower, however, filed an Answer and Counterclaim alleging among other things that Argent had committed fraud and engaged in predatory lending in making the mortgage loan, and that Wells Fargo was not the party that had the right to foreclose on it. In response, Wells Fargo filed a motion for summary judgment (ie judgment on the papers without a trial). In support it produced an affidavit from a supervisor for a company acting as agent for the servicintg company that was acting as agent for Wells Fargo. Without saying how he got this knowledge or supplying a copy of an assignment or endorsed Note, this person baldly asserted that Wells Fargo was the holder and owner of the Note and Mortgage. Only much later did Wells Fargo's attorneys produce what purported to be a written assignment to Wells Fargo from Argent.
After the lower court ruled for Wells Fargo, Ms. Ford filed an appeal. The Appellate Division held that Wells Fargo had not met its burden of proving its right to foreclose under Article 3 of the UCC. The foreclosure was not dismissed, but was sent back to the lower court for Wells Fargo to attempt to put together its proofs and prove its case properly.
This was not entirely a win for the borrower, but the decision laid out a definitive and binding roadmap of what is required. The court laid out three ways in which Wells Fargo to prove its right to foreclose. First, it could present the original Note endorsed over to it and prove that it had possession of the Note. (a common everyday form of endorsement is when you "sign over" a check payable to you to someone else by signing "Pay to the Order of.." that person on the back). Wells Fargo had gotten the Note, but it had never been endorsed over. For this reason, the "lost note" option did not apply. The only other way Wells Fargo could make its case was to show that it had gotten possession of the Note from Argent along with the lawful rights to collect or enforce the Note. Here, Wells Fargo did produce an assignment. What it did not do was supply an affidavit from a witness that this document was authentic. In short, Wells Fargo had not proven its case the right way. That requires an affidavit or testimony from someone with personal knowledge (showing under oath how he/she got such knowledge) that the assignment was "authentic" and that possession had been given lawfully with intent that Wells Fargo be able to collect and enforce the Note.
In other words, Wells Fargo had not presented proof from a credible and knowledgeable witness whose testimony met the requirements of evidence rules. At best, the borrower won on a "technicality", and Wells Fargo, duly instructed, will no doubt "dot its i's and cross its t's" in short order.
The message however is that in New Jersey, lenders need to do just that.
The borrower did win something valuable. Wells Fargo originally said that it was not subject to Ms. Ford's fraud and predatory lending claims because it was a "holder in due course" that got the Note before it had any notice of those claims, and was in essence, an "innocent buyer" and those claims need to be pursued only against Argent. Not so fast, the Appellate Division noted. By the time Wells Fargo had gotten its assignment, it knew about Ms. Ford's claims and those did not acquire the Note and Mortgage without notice of what it was buying.
Kudos to Margaret Jurow from the Legal Services of New Jersey Predatory Lending Unit for taking this case on and up to the Appellate Division. We expect that lenders have already started preparing their cases more carefully. However, it has long been an open secret sloppy practices reigned, that home mortgages were bought and sold without attention to details, and that the original documents are not always ready at hand if they could be found. Thus, borrowers facing foreclosure will have a binding ruling that will support their demands that foreclosing lenders prove their case. Whether in any one case this is wise or worthwhile, achieving anything other than delaying the day of reckoning, remains to be seen.
In a mortgage loan, the borrower signs an "IOU", usually called a Mortgage Note, promising to repay the loan. To "secure" this promise, the borrower also signs a Mortgage which when recorded makes the title to the real estate subject to a valid lien or "security interest". Although a foreclosure is an action against the real estate based on the mortgage (and commonly for non-business transactions not a suit to collect directly from the borrowers until after a sheriff sale) the party that files for foreclosure must be the party that has the rights to enforce the Note. Because the Note is commonly "negotiable", ie can be sold or transferred, Article 3 of the Uniform Commercial Code applies.
In Ford, the Note had been signed in favor of Argent Mortgage Company. The loan was then "securitized" or sold off in bulk to investors through a trust. Typically, these loans are managed by a servicing company hired by the trustee of the trust. Wells Fargo filed the foreclosure as trustee of that trust. The borrower, however, filed an Answer and Counterclaim alleging among other things that Argent had committed fraud and engaged in predatory lending in making the mortgage loan, and that Wells Fargo was not the party that had the right to foreclose on it. In response, Wells Fargo filed a motion for summary judgment (ie judgment on the papers without a trial). In support it produced an affidavit from a supervisor for a company acting as agent for the servicintg company that was acting as agent for Wells Fargo. Without saying how he got this knowledge or supplying a copy of an assignment or endorsed Note, this person baldly asserted that Wells Fargo was the holder and owner of the Note and Mortgage. Only much later did Wells Fargo's attorneys produce what purported to be a written assignment to Wells Fargo from Argent.
After the lower court ruled for Wells Fargo, Ms. Ford filed an appeal. The Appellate Division held that Wells Fargo had not met its burden of proving its right to foreclose under Article 3 of the UCC. The foreclosure was not dismissed, but was sent back to the lower court for Wells Fargo to attempt to put together its proofs and prove its case properly.
This was not entirely a win for the borrower, but the decision laid out a definitive and binding roadmap of what is required. The court laid out three ways in which Wells Fargo to prove its right to foreclose. First, it could present the original Note endorsed over to it and prove that it had possession of the Note. (a common everyday form of endorsement is when you "sign over" a check payable to you to someone else by signing "Pay to the Order of.." that person on the back). Wells Fargo had gotten the Note, but it had never been endorsed over. For this reason, the "lost note" option did not apply. The only other way Wells Fargo could make its case was to show that it had gotten possession of the Note from Argent along with the lawful rights to collect or enforce the Note. Here, Wells Fargo did produce an assignment. What it did not do was supply an affidavit from a witness that this document was authentic. In short, Wells Fargo had not proven its case the right way. That requires an affidavit or testimony from someone with personal knowledge (showing under oath how he/she got such knowledge) that the assignment was "authentic" and that possession had been given lawfully with intent that Wells Fargo be able to collect and enforce the Note.
In other words, Wells Fargo had not presented proof from a credible and knowledgeable witness whose testimony met the requirements of evidence rules. At best, the borrower won on a "technicality", and Wells Fargo, duly instructed, will no doubt "dot its i's and cross its t's" in short order.
The message however is that in New Jersey, lenders need to do just that.
The borrower did win something valuable. Wells Fargo originally said that it was not subject to Ms. Ford's fraud and predatory lending claims because it was a "holder in due course" that got the Note before it had any notice of those claims, and was in essence, an "innocent buyer" and those claims need to be pursued only against Argent. Not so fast, the Appellate Division noted. By the time Wells Fargo had gotten its assignment, it knew about Ms. Ford's claims and those did not acquire the Note and Mortgage without notice of what it was buying.
Kudos to Margaret Jurow from the Legal Services of New Jersey Predatory Lending Unit for taking this case on and up to the Appellate Division. We expect that lenders have already started preparing their cases more carefully. However, it has long been an open secret sloppy practices reigned, that home mortgages were bought and sold without attention to details, and that the original documents are not always ready at hand if they could be found. Thus, borrowers facing foreclosure will have a binding ruling that will support their demands that foreclosing lenders prove their case. Whether in any one case this is wise or worthwhile, achieving anything other than delaying the day of reckoning, remains to be seen.
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