Legal News Impacting Lenders and Capital Markets--Not in a Good Way

In the last 50+ years Detroit has lost nearly two thirds of its population. (Yes, 2/3.) And now the City of Detroit is offering up a mortgage pairing that goes above 100% LTV to renovate houses - in some cases way above. Interesting. But wait! In Ohio, houses "were scooped up after the financial crisis by investors, who then make deals with low-income home buyers unable to get traditional mortgages."  I guess there are two sides to every crisis, but the last thing we need as an industry is more bad press - like when the word "trapped" is used. And per the WSJ, "Bank of America Corp. is rolling out a new mortgage product that would allow borrowers to make down payments of as little as 3%..." - non-FHA with no mortgage insurance.

As we all know, you can't work in the residential mortgage biz, or own a company, without paying attention to all the legal news that is out there. So as we wait for the CFPB's next enforcement action, let's take a gander at some relatively recent news.

Nevada's mortgage industry continues to face consequences from the Nevada Supreme Court's 2014 decision in SFR Investments Pool 1, LLC v. U.S. Bank, N.A.  Nevada lenders and servicers are heavily involved in litigation regarding the propriety of HOA foreclosure sales. The Nevada Supreme Court issued another HOA-related opinion that did provide some clarity to the pending litigation. But according to Bradley Arant attorneys Jon Patterson and Aaron Chastain the ruling also indicates that the lending community may have to individually litigate many or even most HOA-lien cases all the way through trial.

Yes, the ruling took place some weeks ago, but the industry is very concerned. An excerpt from Jon and Aaron's most recent insight can be seen below, and numerous additional analysis can be found here. "The upshot of the Court's ruling is that there is still a long road ahead for mortgagees seeking to rescue their security interests in Nevada. While the Court appeared to give some credence to some of the lenders' main arguments-that foreclosure sales for less than 20 percent of market value were commercially unreasonable and due to be set aside, and that an effort to pay the superpriority portion of an HOA's lien may serve as an equitable reason for setting aside a foreclosure-the opinion indicates that these issues will require extensive factual development before they are ready for adjudication. It looks like the lending and servicing community is left to fight each case on an individual basis-leading to incredibly expensive litigation for all involved."

And remember that in December the Rhode Island Supreme Court ruled that condominium association (COA) "super liens" hold true priority, so that at foreclosure-which may be conducted non-judicially-satisfaction of this lien can extinguish the condo's first lien mortgage under certain circumstances. Specifically, the Court noted that Rhode Island law allows COAs the right to hold a super lien-outside of their traditionally subordinate lien for delinquent assessments and fees-which includes the assessments due for the six months prior to the COA's foreclosure, plus certain attorneys' fees and foreclosure costs. Accordingly, if sums collected from the COA super lien foreclosure sale are not enough to satisfy junior liens, the first lien mortgage will be extinguished as a now-junior lien and the new owner will not acquire the condo subject to this mortgage.

The MBA reported that, "The Rhode Island decision dangerously parallels decisions recently made by the Nevada Supreme Court and the District of Columbia Court of Appeals. Notably though, Rhode Island law does grant the holder of a first mortgage/deed of trust a limited 30 day right of redemption from the date of the post-foreclosure sale notice. MBA vehemently supports the concept of "first in time, first in right" (see MBA's Statement of Principles for more information) and believes that common interest communities should never have the ability to extinguish a property's first lien mortgage. The Rhode Island decision, if allowed to stand, may adversely affect credit access and increase mortgage costs for qualified borrowers. Moreover, mortgage lenders may be less likely to make loans on properties subject to COA fees and/or charge higher rates and fees, considering this risk."

In California (known for its fruits & nuts) late last week the California Supreme Court rendered its decision in Yvanova versus New Century Mortgage Corp. (Case No. S218973, Cal. Sup. Ct. February 18, 2016), holding that borrowers have standing to challenge an assignment of a note and deed of trust in an action for wrongful foreclosure on the ground that the assignment is void. Fredrick S. Levin, a partner with BuckleySandler in Los Angeles, wrote saying, "This is a potentially significant decision for the mortgage industry in that it reverses the rule followed by the overwhelming majority of California courts that borrowers lacked such standing. The decision thus opens the door to lawsuits by borrowers claiming that their homes were improperly foreclosed upon by persons who allegedly lacked power under California law to institute foreclosure."

Mr. Levin further noted, "This decision has potential to increase litigation challenging securitized loans. For example, in Yvanova, the borrower challenged the validity of her foreclosure on the ground that her loans was assigned into a securitized trust after the trust closing date set forth in the pooling and servicing agreement governing the securitized trust, allegedly voiding the assignment. To date, California courts have rejected hundreds of similar claims. The Court's ruling breathes new life into this favorite theory of the foreclosure defense bar. The Court, however, left unaddressed, and thus unanswered, the question of whether this theory can survive on the merits."

In other words the Court ruled that borrowers may challenge a wrongful foreclosure on the grounds that the assignment of the deed of trust was invalid. The decision in Yvanova versus New Century Mortgage Corp. has the potential to radically increase the number of lawsuits brought by borrowers, particularly on loans that were pooled into securitized trusts. Can a defaulted homeowner contest the validity of the chain of assignments involved in the securitization of loans? It is just what owners of small lenders want: the potential for a flood of litigation. This particular case involved names like New Century, Ocwen, Deutsche Bank, and Morgan Stanley.

As ace financial reporter Kate Berry points out, 'Multiple lower courts in California had ruled in high-profile cases such as Jenkins v. JPMorgan Chase that borrowers have no standing to file a claim of wrongful foreclosure because they are not a party to or holder of the debt. However, the state Supreme Court disagreed with those rulings and essentially sided with a 2013 state appellate ruling in Glaski v. Bank of America, which held that a borrower has standing to challenge a nonjudicial foreclosure sale based on alleged violations of the terms of a pooling and servicing agreement."

"The borrower owes money not to the world at large but to a particular person or institution, and only the person or institution entitled to payment may enforce the debt by foreclosing on the security," the Supreme Court stated in a 33-page ruling. "A homeowner who has been foreclosed on by one with no right to do so has suffered an injurious invasion of his or her legal rights at the foreclosing entity's hands. No more is required for standing to sue."

Yes, the fun never ends for residential lenders. "This was the court in California directing lenders and Wall Street securitizers to be very careful in documenting their instruments and assignments," said Kenneth Styles, a litigator at the law firm Miller Starr Regalia. "They've been more than sloppy in the past, and this was a directive to make sure their procedures are clean."

Antognini, the attorney for Yvanova, put it this way: "if you claim you own a debt, you have to prove it. And if you claim to own a debt, the borrower has the ability to allege and later to prove that you don't own it."

Turning our collective gaze to the bond markets & interest rates, the Fed was looking for inflation and we finally found a little in the Producer Price Index for January (+.3%). In fact core inflation reportedly rose at its fastest pace in four years during the month of January. Aside from that, not much else happened to end the week.

Rule changes required under Dodd-Frank are impacting the biggest banks due to the amount of capital they must hold against securitizations. As such, the extra yield relative to benchmarks needed to sell commercial mortgage-backed securities has surged to the highest level in 5Ys.

This week we have quite a bit of scheduled news, and are hoping for peace and quiet overseas. There is nothing on the slate for today, however, aside from a minor number from Chicago. Tomorrow we'll see the December Case-Shiller 20-city Index, February Consumer Confidence, January Existing Home Sales, and a $26 billion 2-Year Treasury Auction. Wednesday is the MBA Mortgage Index, January New Home Sales, and a $34 billion 5-Year Treasury Auction.

Thursday is the usual Initial Jobless Claims, but also January Durable Goods Orders and December FHFA Housing Price Index. And don't forget the $28 billion 7-Year Treasury Auction. To end the week we have Q4 GDP and GDP Deflator (second estimate), January Personal Income and Spending, January Core PCE Prices, and the February Michigan Sentiment number. When the sun set Friday the yield on the 10-year was 1.75% and this morning we're at 1.78% with agency MBS prices worse about .125.

Jobs and Announcements

Envoy continues to grow its market share by providing "the best support in the industry for our sales team. We are seeking only the highest qualified Area Managers, Branch Managers and Loan Officers to join us as one of NMP Magazine's 2016 Top Mortgage Employers! At Envoy we created 'On Time. Every Time.' It's our unified, corporate commitment to our customer - the originator. This dedicated effort transcends to our referral partners, borrowers and all Envoy employees. We not only create a culture and environment that helps our people grow, we also reward our managers and originators with attractive compensation, recognition programs, recruiting bonuses, and loyalty bonuses. If you are open to exploring a new opportunity," please contact John Felice RVP, 201 803 7272 (NJ,NY,DE,MD,PA,VA, WV), Ken Panosian RVP, 248 212 3993 (OH,IN,WI,MI,MN,IL), Andy Pettola RVP, 860-372-2569 (CT,ME,MA,NH,RI), Cindy Brown RVP, 864-419-3822 (NC,SC,FL,GA,MS,TN,KY), Jim Hopkins RVP, 713-993-2212 (TX,LA,OK,KS,CO,ND,SD,AK,NM,NE,MS,UT, AZ), or Michael Kuehner RVP, 253-376-3284 (CA, NV, WA, OR, ID).

Expedite Financial is a mortgage lender based in San Francisco that is currently building out its national platform. Using proprietary technology developed by its in-house Silicon Valley software engineers, Expedite delivers fully compliant residential lending products through an industry-differentiating and tested Direct-to-Consumer origination channel. Expedite is currently growing quickly and seeking experienced mortgage sales talent to join its San Francisco team. If interested, view all open positions and apply here.

In the Virginia area Union Mortgage Group, a Richmond, Virginia based mortgage lender and non-bank affiliate of the holding company Union Bankshares Corporation (NASDAQ: UBSH), is looking for tenured sales leaders as part of its expanding mortgage business. Positions include a Senior Sales Leader for its Hampton Roads market. Candidates should be tenured mortgage leaders with five or more years of experience and possess the desire to grow and manage a large sales force while working in concert with the Bank's partners in lending, private wealth management, and small business lending. Products include a 100% Medical Professional program and a 95% construction-permanent program. All inquiries should be directed to SVP J. H. "Sandy" Peele, CMB, or to Laura Richmond, Senior Recruiter.  All will be treated in a professional and confidential manner. Headquartered in Richmond, Virginia, Union Bankshares Corporation (NASDAQ: UBSH), is the holding company for Union Bank & Trust (Union).  Union is the largest community banking institution in the Commonwealth of Virginia, operating in all major Virginia markets, made up of 124 branches and more than 200 ATMs. Non-bank affiliates of the holding company include: Union Mortgage Group, Inc., which provides a full line of mortgage products; and Union Insurance Group, LLC, which offers various lines of insurance products. We are proud to be an EEO/AA employer, Minority/Female/Disability/Veteran.