Bank of New York v. Silverberg & why it's important

MERS has become somewhat of a mysterious figure in the recent foreclosure boom. Many attorneys that work in the industry remain unsure of what exactly MERS is and who exactly works for MERS. It’s found its way into numerous magazines and newspaper articles and I’m pretty sure my mom has asked me about it a few times.

MERS serves as a common agent for numerous participating banks. It was created in the early 1990's in response to delays at local recording offices. The idea was that if all of the participants used a common agent the agent could track ownership and assignments while saving the participants recording costs and speeding up the transfer process.

While MERS does not lend money or service loans it was involved in the origination of approximately 60% of all United States mortgage loans. MERS participating banks have typically named MERS nominee on a Mortgage while leaving themselves listed as the lender on the Note. A Note is a promise to pay money; a Mortgage attaches that promise to pay to a piece of property. If someone doesn’t pay their Note (aka the promise to pay) they may be at risk of losing their property because the Mortgage clearly states that if the Note is violated the underlying property can be sold.

When MERS serves as nominee on the Mortgage it is generally stated that it has the power to assign the Mortgage. As a result, when one MERS participating bank buys a loan from another MERS participating bank they create an Assignment of Mortgage that assigns the Mortgage from “MERS as nominee for the First Bank” to “the Second Bank”. This was relatively simple and straightforward way of transferring Mortgages back and forth. Silverberg (a currently unpublished Second Department decision issues on June 7, 2011) likely changed everything.

In a typical MERS Assignment of Mortgage it states that the Note is transferred with the Mortgage. The issue, as the Court in Silverberg points out, when a Note is transferred to and accepted by an assignee, the Mortgage naturally follows. In contrast, the transfer of a Mortgage without the transfer of the Note does not actually transfer any incident. Remember….a Note is the promise to pay; the Mortgage simply backs up that promise with a piece of property. MERS (or any person or entity) would have the authority to transfer the Note if possessed or owned the Note or was given authority by the owner. Nowhere is it stated that MERS was given the authority to transfer the Note by the owner and it is rarely proven that MERS actually possess the physical Note. Therefore, in Silverberg the Plaintiff, Bank of New York, stepped in the shoes of MERS and had the power to assign the Mortgage but did not gain ownership of the Note because MERS was unauthorized to transfer ownership. In addition, since MERS did not have the power to commence a foreclosure on behalf of the previous owner Bank of New York did not have standing to bring the action and the defendants Motion to Dismiss the Action was granted.

The simple rule that comes out of this case is one that has been around forever – a foreclosing party must be the holder or assignee of the Mortgage and the Note at the time the action is commenced. The twist that is about to cause a lot of banks a lot of problems is that a typical MERS Assignment of Mortgage does not properly transfer ownership of the Note. Since so many banks have commenced foreclosure based on an Assignment that did not actually give them ownership of the underlying Debt at minimum hundreds (at most thousands) of active New York foreclosures will need to be discontinued and then re-filed after new Assignments are created. At minimum this case will slow down New York Residential Foreclosures 6 months to a year. At maximum it prolong the foreclosure boom another couple of years.

Possible Change in HAMP Modifications - Automatically Going Permanent

As I've explained in previous blog postings, HAMP modifications are government incentivized modifications that work off of a homeowners gross monthly income to determine an affordable monthly payment. After determining what the homeowner can afford the bank weighs the value of the modified loan against the value of a foreclosure of the property. If the modified loan has a greater net present value it is offered in the form of a trial modification. After 3 trial payments are made the homeowner is again reviewed prior to the modification going permanent.

A major issue with HAMP modifications is that after making the 3 monthly trial payments banks drag their feet on completing a permanent modification review or reject the homeowner(s) for the permanent review altogether. Banks had little incentive to determine the net present value of the modification compared to the foreclosure prior to offering a trial plan because the banks had no actual risk. Should the modification pass the net present value test a permanent modification would be offered. Should the bank determine the net present value of the foreclosure was greater than the modification the homeowner would be rejected and the bank would retain the 3 trial payments. It appears things may be changing.

Recently I have seen numerous HAMP trial modifications that automatically go permanent upon the final trial payment. No permanent review is required and all net present value calculations appear to have been conducted prior to the trial modification offer. This will likely lead to an increased number of rejections for homeowners who do not make enough money to pass the net present value test upon the trial modification review, it should lead to a large increase in permanent HAMP modifications. Assuming this is the new practice there will be a few side effects:

(1) Increased Bank Efficiency - Presumably each major bank has hundreds (if not thousands) of workers somehow involved loan modifications. If loan modifications are automatically going permanent the staff responsible for the permanent modification review would likely be directed towards assisting with other aspects of the modification review.

(2) Increase Court Efficiency - Every settlement conference part is bogged down with cases that require 5+ appearances to negotiate. Nearly every case that results in a permanent modification has one or two conferences that serve as a status updates where the appearing attorney simply advises that the permanent review has not yet been completed. If loan mods go permanent automatically it should result in less conferences per file.

(3) More Initial Rejections - Homeowners that don't have enough income or have too much equity in their homeowner to pass the net present value test should find out upon the initial trial review as opposed to making three (or more) trial payments before being rejected.

Prior to last week I had never seen a HAMP mod that automatically went permanent. I've explained in previous posts that in-house mods were my preferred modification mainly because they almost always went permanent upon completion of the trial. Should this be an industry-wide change in HAMP modifications it would be a major step in the right direction towards dealing with our country's foreclosure problems.

How Do I Know If I'm Eligible for a HAMP Modification?

If you are in foreclosure the Court will direct the Bank to first review you for a HAMP (Home Affordable Modification Program) Modification. If you are not in foreclosure a bank that is part of the HAMP program is supposed to review your mortgage for a HAMP modification upon request. Many of the larger banks (Bank of America, Chase, OneWest, etc.) are part of the HAMP program and offer HAMP modifications where possible. Some smaller banks are not part of the HAMP program and while they will consider you for other modifications, they will not review you for a HAMP modification.

In order to be considered for HAMP you must live in the mortgaged premises and have a mortgage below a certain threshold amount (for one family homes the threshold amount is $729,750.00). Your current mortgage payment (including taxes and insurance) must exceed 31% of your pre tax monthly income and you must pass an NPV (Net Present Value Test).


31%

To calculate this percentage, add up all of the monthly income your household earns before taxes are removed. This includes additional income such as pension or Social Security income. Contribution income that live-in relatives give you monthly and 75% of rental income is included as well. A HAMP mod will decrease your monthly mortgage amount to 31% of that number. If your mortgage payment (along with taxes and insurance) are less than the 31% figure then you are likely ineligible for a HAMP modification.


NPV

Assuming your current mortgage amount is greater than the 31% figure, the bank will then run the NPV (Net Present Value) test. Under this test the bank determines whether the value of foreclosing on your property is greater than the value of giving you a modification. This test is extremely complicated and it is normally difficult to predict whether this test will come out in your favor or not.While the banks that take part in this program are forced to consider you for a HAMP modification they are only obligated to give you a modification if the modification benefits them more than a foreclosure.




If everything goes well you will be placed on a 3 month trial plan where you will pay a monthly figure of 31% of your gross monthly income. After the trial plan you will be reviewed for a permanent modification. Keep in mind that many homeowners remain on a trial plan for far longer than 3 months and it is still possible to fail the NPV test after making all 3 trial payments.

Are Banks Stopping Foreclosures?

The short answer is that over the past month-6 weeks certain banks (ex. Bank of America, Chase, etc.) have paused some of their residential foreclosures. This does not mean that delinquent mortgages will be forgotten. It simply means that banks are slowing down their foreclosures and halting the beginning of certain new foreclosures while they review their paperwork.

The main reason banks are pausing some foreclosures is because they have discovered that many affidavits and assignments of mortgages have errors. It doesn't mean the foreclosure itself is fraudulent as many people are speculating. What it means is that banks are pumping out too many foreclosures and don't have the time to review all of their paperwork. A law firm sends a bank hundreds of affidavits a day and instead of inspecting each one carefully the Vice President sign dozens a minute. Assignments of mortgages are created in a similar manner.

Regardless of whether the bank has engaged in fraudulent practices or not, these errors can be used against the bank to your benefit. A faulty assignment of mortgage can mean that your bank does not have standing to bring a lawsuit on the mortgage. In addition, courts will no longer allow foreclosures to proceed on mass-produced affidavits and are actually requiring affidavits from attorneys to verify all of the information is correct. Therefore these issues can result in your foreclosure action being dismissed and thrown out of court. This won't solve the underlying problem because the bank will simply fix their paperwork and re-commence the action. If your goal is to annoy the bank then this is a perfect result. If your goal is to modify the better course of action would be to use this as a negotiation tool with the bank. Law firms don't want to tell their clients their actions are being dismissed and banks don't want to pay to recommence their actions.

I understand these are complicated topics and not easy to comprehend by homeowners without extensive litigation and mortgage experience. If you are in foreclosure please contact a foreclosure attorney to walk you through this process.

Reverse Mortgages and Foreclosure

A reverse mortgage operates completely differently from a normal mortgage. A person with equity in their home trades their equity for the right to live in the home for as long as they are living and the ability to cash out the equity over time similar to a Home Equity Line of Credit. Since the person, who must be over the age of 62 and from my understanding not own the home with anyone below that age, can cash out the equity there is a possibility that equity can be used to pay off outstanding mortgages and liens. The amount of money a person can receive in a reverse mortgage depends on their age (the older you are the higher percentage of equity you can take out) and the value of the home. Therefore, in certain situations a Reverse Mortgage is a viable alternative to foreclosure. The following are two examples. The first is where a Reverse Mortgage is a viable option. The second is where it is not.

Example Where It Works: Person A owns a $800,000 home with a $200,000 mortgage with Bank B. Person A receives an equity line in a reverse mortgage from Bank C for $300,000 (half the remaining equity). Person A takes out $200,000 from that equity line with Bank C and pays off the mortgage with Bank B. Person A now has a $300,000 reverse mortgage on the property with Bank C but no mortgage with Bank C.

Example Where It Doesn't Work: Person A owns a $500,000 home with a $550,000 mortgage with Bank B. The property lost a lot of value when the market fell apart and was once worth nearly a million dollars. Bank C won't give Person A a reverse mortgage because there is no equity in the home.

Reverse Mortgages are a complicated topic. If you are looking into applying for one you should see someone who has experience handling their application process.

Home Affordable Unemployment Program (HAUP)

HAUP offers unemployed homeowners who are unable to make their monthly mortgage payments a few extra months to get back on their feet while looking for employment. Homeowners are eligible if they:

(1) Are unemployed;
(2) Live in the mortgaged premises (meaning the property is their primary residence);
(3) Have a first lien mortgage originated on or before January 1, 2009; AND
(4) Have an unpaid principal balance less than or equal to $729,750.10.


Homeowners that qualify will have their mortgage payments suspended for up to three months (or until they are employed). Homeowners that find a job while on the program will be considered for the Home Affordable Modification Program. If the homeowner does not find a job they will be considered for the Home Affordable Modification program 30 days prior to the completion of the Unemployment Program forbearance plan.

HAUP does not cancel any mortgage payments, it merely suspends such payments. Homeowners that successfully complete the program will resume normal payments once the plan ends.

Home Affordable Refinance Program (HARP)

A refinance can perform a number of different functions. It can be used to consolidate debt, pull equity out of one's home, obtain a mortgage with a lower rate, change from adjustable to fixed, etc. Typically as interest rates drop the economy experiences a influx of refinances. Currently we have low interest rates but few refinances because many homes are "upside down". This means that the homeowner owes more on that property than the property is worth. HARP is the governments solution to this problem.

When a homeowner owes more on a property than what it is worth the homeowner is typically unable to find a bank that would give them a new mortgage. Here's an illustration of why this situation doesn't lend itself to refinancing:

John owns his home and owes $500,000 on the premises. The property is worth $300,000. His original mortgage is with Bank A and he'd like to refinance with Bank B. In a refinance Bank B would pay Bank A for the entire amount due (here $500,000) and John would then owe Bank B the value of his property, therefore giving him a new mortgage. In this situation Bank B would pay $500,000 to satisfy John's mortgage with Bank A and then receive a new mortgage from John of $300,000. Clearly Bank B is losing too much money. Therefore John would need to pay Bank B $200,000. In today's economy people like John don't have excess capital sitting around and therefore they are having problem taking advantage of lower rates.

The government's solution to this problem is called HARP (Home Affordable Refinance Program). A person may be eligible for HARP if they:

(1) Own a one-to-four unit home as a primary residence;
(2) Have a mortgage owned by Fannie Mae or Freddie Mac;
(3) Are current with their mortgage;
(4) Have not been late on the mortgage within the past 12 months;
(5) Have a first mortgage not exceeding 125% of the current market value of the home;
(6) Have income sufficient to support the new mortgage payments; AND
(7) Can improve the long-term affordability of the loan with the refinance.

Note that this allows homeowners with a second mortgage to refinance so long as the first mortgage does not exceed 125% of the current market value of the home. In addition, the homeowner does not need to actually live in the home. This is the first government program to allow refinancing for vacation and investment properties.

This program differs from typical refinancing because the homeowner cannot take cash out from the refinance and because the homeowner must be current on their mortgage.

Refinancing your home loan is not an easy process. If you would like more information on HARP or any other type of refinance/modification program feel free to email me at AFriedma@PulversThompson.com.