|Nationally recognized foreclosure defense attorney Tom Cox (Photo by Andy O’Brien)
by Andy O’Brien
It’s been seven years since the mortgage meltdown hit, and after billions of dollars in legal settlements due to fraudulent banking practices, state lawmakers are still dealing with the fallout. Next week, homeowner attorneys and bankers will face off for another bitter showdown in Augusta over the state’s foreclosure abuse protection laws. This time, the top issue will be a recent Maine Supreme Judicial Court decision, which puts the future of the controversial Mortgage Electronic Registration System (MERS) in jeopardy.
MERS was at the heart of the 2007-2008 foreclosure crisis and has been described by investigative journalist Matt Taibbi as “essentially an effort at systematically evading taxes … and hiding information from homeowners in ways that enabled the Countrywides of the world to defraud investors and avoid legal consequences for same.” MERS was created by the mortgage industry in the 1990s as a way to facilitate the rapid securitization of mortgages and avoid paying recording fees to county registries of deeds for every sale. Using MERS, the deed is parked at the local registry of deeds, but whenever the mortgage note is reassigned, it is recorded electronically in the system rather than at the registry. The note is then bundled and passed around from bank to bank to trust to financial company.
In the years leading up to the foreclosure crisis, MERS allowed lenders to more smoothly bundle and securitize vast numbers of mortgages and resell them as mortgage-backed securities. However, the system was not equipped for the subprime mortgage meltdown in 2007, when it’s estimated that two-thirds of US mortgages were registered by MERS Inc.
“The implementation of MERS was terrible,” says Maine foreclosure defense attorney Tom Cox, who helped expose the fraudulent GMAC ‘robosigning’ scandal that led to the $25 billion National Mortgage Settlement with the country’s major banks. “When they designed the system, they weren’t anticipating a major foreclosure blow- out. And they weren’t anticipating the wave of litigation over the past five years.”
MERS allows loan servicers to be appointed as “vice presidents” of MERS for purposes of reassigning the loan. No matter who actually owns the loan, MERS remains listed as the legally registered assignee of the note.
“You send in an Internet request to have ‘Joe Jones’ appointed as a MERS ‘vice president’ and bingo, you get an appointment back,” said Cox. “Now Joe Jones of Rockland is a MERS VP for the purpose of signing assignments. The integrity of the assignment vanished with that assignment. It blew up transparency.”
Taibbi put it another way in a 2011 Rolling Stone column:
“The problem with MERS is a paradox at the heart of the ‘ownership’ question,” wrote Taibbi. “On the one hand, MERS is the legal assignee of a lot of these mortgage notes. On the other hand, it’s not the ‘real’ owner of the notes, in any way that could ever help you, or the state, or the investors in mortgage-backed securities…. In short, the mortgage industry considers MERS owner enough to foreclose on you, but not owner enough to be sued, or reasoned with, or even to provide basic customer service.”
Rep. Ralph Tucker (D-Brunswick), a former district court judge who handled foreclosure cases, says the flaws with MERS emerged during the recession when homeowners began to fall behind on their loans due to financial hardships. Tucker says local banks are usually very reliable at helping homeowners to work out loan modifications. However, entities known as “servicers” hired by the banks to handle the mortgage have not had such a positive record.
“We’ve had many homeowners involved in foreclosures who can’t get through [to the servicers],” said Tucker. “Their phone calls aren’t returned. They can never get the same person on the telephone when the mediation process requires that certain information be given. Sometimes, when the servicer requests information from the homeowner, the homeowner gives them the information and then a month later it will have been lost somewhere out of state.”
As Tucker explains, one of the reasons why Maine has a law requiring the mortgage mediation process to be judicially supervised is so that the homeowner can get a true representive from the lender and “not just someone in front of a computer screen in Indiana or Mumbai.” Maine also requires that the foreclosing entities must show proof of the promissory note and the title deed before foreclosing, but MERS has clouded that process.
“The banks, in their heyday of passing these mortgages around and making lots of money by securitizing them, were having a joyful time on Wall Street, but they were getting very sloppy about following the normal, traditional procedures for proving ownership and title,” said Tucker.
At the height of the foreclosure crisis, Tom Cox and other attorneys around the country began challenging the right of loan servicers to foreclose on homeowners on the grounds that they couldn’t prove ownership of the actual loan in the morass of MERS. As Cox explains, it matters to know who the actual owner of the note is because loan modification rules are different depending on which entity owns it.
But as industry insiders and legal experts have pointed out, lucrative fees that mortgage servicers charge delinquent homeowners have given servicers more incentive to foreclose than to modify the loans. As The Free Press documented in 2013 (“Have They Learned Their Lesson?,” 4/11/2013), national mortgage servicers operating in Maine have repeatedly committed foreclosure abuse by missing foreclosure mediation deadlines, acting in bad faith to process modifications and forcing homeowners into default through improper escrow charges.
MERS Legitimacy Challenged in Maine
Last year, Cox successfully challenged the legitimacy of MERS in Maine in the case Bank of America v. Greenleaf, which involved homeowners Scott and Kristina Greenleaf of Casco. In July 2014, the Maine Supreme Judicial Court ruled that a MERS mortgage assignment is not sufficient to prove an assignment of a mortgage. In Greenleaf, the original note listed the lender as a now-defunct company, while the “mortgagee of record” is listed as MERS. In its decision, the Court stated that MERS only had the right to record the mortgage, but not to foreclose on the homeowner.
“In short, the record demonstrates a series of assignments of the right to record the mortgage as nominee, but no more,” the Court stated. “In the absence of any evidence that [Bank of America] owned Greenleaf’s mortgage, we conclude that the Bank lacked standing to seek foreclosure on the mortgage and accompanying note.”
However, the Court gave no instructions to the trial court for further action on the case.
“The trial judge, not liking the idea of a homeowner getting a clean win, entered an order dismissing the case without prejudice, meaning that the trial was of no consequence and that the bank gets a chance to do it all over again,” said Cox.
Cox has appealed the ruling, arguing that traditional rules of “res judicata” bar a plaintiff from getting a new trial on the same issues after they were already fully litigated once. National foreclosure litigators will be watching closely, as Maine is the first state supreme court to hand down such a decision. If other states go the same way, MERS could face an uncertain future. Oral arguments will begin in June.
Bankers Hit Back Against Greenleaf Decision
In the meantime, the Maine Bankers Association (MBA) is backing a measure sponsored by Rep. Matt Pouliot (R-Augusta) that would effectively overturn the Bank of America v. Greenleafdecision by clarifying that an entity that holds legal title as nominee, like MERS, is presumed to have the authority to execute a mortgage assignment.
Maine Bankers Association President Chris Pinkham said that the bill, LD 321, is an effort to help home buyers and sellers who discover there’s a break in the chain of title.
“So everyone – the Title Bar in Maine, real estate attorneys, realtors, lenders – all said, oh my god we gotta fix that,” said Pinkham. “[LD 321] shouldn’t be controversial because those people didn’t do anything, they’re not in foreclosure or default. They just may have a flaw in their chain of title, which may not appear until they sell the house.”
However, Cox says the legislation is not necessary because even if servicers like Bank of America can’t locate the original lender because it’s out of business, they should either provide evidence that MERS membership rules allow them to assign a mortgage or execute a “quiet title” action in court to determine the owner of the title.
“How much of a burden is it for MERS to put in the freakin’ proof that the assignee and the lender really is a MERS member and that MERS has the authority?” asked Cox.
The bill, LD 321, will be presented to the Judiciary Committee on April 22.
Cox Fires Back at the Bankers
On that same day, Cox will be backing LD 920, which would require mortgage servicers to act in good faith when dealing with borrowers seeking loan modifications in the foreclosure mediation process. As The Free Press has reported, a Belfast District Court judge dismissed a foreclosure case against the Oathout family of Liberty in September 2012 after attorneys for Aurora Loan Services repeatedly acted in bad faith by filing documents late and defied a court order by failing to provide adequate answers concerning the status of the Oathout’s account.
At the time, Cox had collected over 40 court sanctions against various national loan servicers for acting in bad faith. Now he claims to have over 80 sanction orders, ranging from dismissals for major failures of servicers to act in good faith to impositions of fines, rollbacks of interest and fees where servicers have delayed the mediation process, awards of legal fees, and orders to implement modification agreements made but not honored. And the reason this keeps happening, says Cox, is that court sanctions are not enough to deter unethical behavior on the part of the loan servicers.
For instance, in the case of Bank of America v. Greenleaf, a district court sanctioned the bank – represented byAttorney John Doonan of the Massachusetts firm Doonan, Graves and Longoria (the same lawyer who represented Aurora in the Oathout case), for failing to comply with filing requirements and presenting statements described as jumbles [of] multiple sentences” rather than short, concise facts. The Court also pointed out that many of the Bank’s “purported statements of fact inappropriately contained argument or analysis.” Finally the Court determined that Doonan had tried to create a foundation of evidence by submitting an affidavit containing “his knowledge” of the Bank’s recordkeeping practices, while also asserting facts that he admitted “he lacked any personal knowledge” of.
For all of that, the Court imposed a fine of $625 on Doonan. It denied Cox’s appeal for a stiffer penalty.
“Maine law has imposed no duty upon servicers to cause them to be liable to homeowners when those servicers act dishonestly, unfairly or carelessly,” said Cox. “LD 920 would create an entirely reasonable duty of good faith and allow injured homeowners to recover damages when the servicers fail to act in good faith.”
The bill would also require the courts to keep a record of sanctions against servicers so that they have sufficient data to punish repeat offenders.
Maine’s Judicial Branch spokesperson Mary Ann Lynch said it was a “biased and loaded question” to suggest that there have been repeated instances of national mortgage servicers acting in bad faith, but admitted that the Branch does not distinguish between a national servicer and a local bank. She said that the Judicial Branch has not taken a position on the bill.
“I understand that Attorney Cox has collected 80 sanctions,” wrote Lynch in an email. “Keep in mind there are thousands of [foreclosure] cases filed each year.”
The sponsor of LD 920 is Rep. Ralph Tucker, who is also the former judge who dismissed the Oathout case after it was found Aurora was acting in bad faith.
“This is not a problem with the local banks,” says Tucker. “This is a problem with mortgages that have been sold out of state and passed around. There have been some mortgage servicers that have been highly irresponsible and don’t comply with the rules of the mediation process, and this bill is an effort to put some responsibility on them.”
Chris Pinkham of the MBA said his organization acknowledges that some of its members have made mistakes and have paid out settlements for their behavior, but that most of the cases of foreclosure abuse are “ancient history.”
“My sense is that we are going to oppose anything that looks at history and tries to make that look as if it’s current data,” said Pinkham.
Finally, the Judicary Committee will also hear LD 401, sponsored by Rep. Bobbi Beavers (D-South Berwick), which would require a mortgage loan owner to conduct a foreclosure in the name of the mortgage loan owner, instead of a mortgage loan servicer, to ensure that homeowners and courts know that the foreclosing plaintiff is the mortgage loan owner with the knowledge of which loan modification programs would be available to the homeowner.
However, Cox, who wrote the bill, says he’s not confident that the bill will survive. Beavers has submitted the bill twice before, but it was defeated both times after strong opposition from the Maine Bankers Association. Governor LePage vetoed it the first time in 2012, stating that it would add a new burden on lenders.