MERS Exodus

The Mortgage Electronic Registration System (MERS) was created by the mortgage industry to fast-track the loan assignment process and helped bypass the burden of having to record every assignment.  MERS was a perfect solution during the mortgage securitization frenzy. 

When the housing bubble imploded and foreclosure activity went through the roof, MERS found itself the target of many lawsuits.  Homeowner after homeowner challenged MERS' legal authority to foreclose, as it was supposed to simply serve as an electronic registry, though it was often the named beneficiary under deeds of trust, though a "nominal" beneficiary.  MERS made it through the foreclosure crisis pretty well, all things considered.  Most legal challenges failed, as the courts likely couldn't open up that kind of systemic Pandora's box.  

Well, according to Bloomberg, MERS' chief legal officers, its national litigation coordinator, its corporate counsel, and its chief internal auditor have all now left the company.  Hard to say why the exodus, but it may signal another closed chapter in the foreclosure crisis.  Job done, time to move on. 

National Mortgage Settlement - Done?

Joseph Smith, the monitor of the National Mortgage Settlement has reported that the five major banks have officially fulfilled the consumer relief obligations of the National Mortgage Settlement.  He further reported that the banks have provided more than $50 billion of gross relief, which allegedly equates to more than $20 billion in credited relief. 

Smith filed final crediting reports with the U.S. District Court for the District of Columbia tfor Bank of America, JP Morgan Chase, Citi, and Wells Fargo, which detailed how these servicers gave consumer relief.

Smith's office found that more than 600,000 families received some form of relief, which was broken into 17% refinancing assistance, 37% first lien principal forgiveness, 15% second lien principal forgiveness and 31% other relief.

In total, Bank of America, Chase, Citi, Wells Fargo and ResCap provided $8.6 billion, $4.2 billion, $1.8 billion, $4.3 billion and $200 million, respectively, in total relief obligations.

Smith said that they will continue to monitor the servicers and are only about halfway through the settlement process. The office will continue to test the servicers’ compliance with the settlement’s servicing rules. 

The banks had major incentives to provide relief early, which they have complied with.  It remains to be seen whether the banks will be able to meet the stringent servicing requirements, which plagued them during the financial crisis. 

A View of the Pima County Tax Lien Sale (2014)

Well, the 2014 tax lien sales in Arizona are complete.  I attended the Pima County tax lien sale where over $10 million dollars of tax liens were sold over the course of two days.  What was readily apparent from the beginning is that investors looking to fetch high interest rates on tax liens were going to be sorely disappointed.  The competition was incredibly stiff, with one San Diego hedge fund purchasing nearly $4 million dollars worth of liens at rates of 3-4%, while another Florida fund purchased nearly $2 million dollars worth of liens in the 4-5% range.  Indeed, investors were even bidding down $200 liens to 4-5%.  Several liens were even purchased for 1-2%. 

This is a far-cry from just a few years ago where an investor could often pick up a $1,000 tax lien on improved property for 16%.  It is clear that in this low interest rate environment, where large funds are able to obtain money at extremely low rates, small investors have largely been shut out.  It is no longer about who has done the best due diligence, but who has access to the cheapest money.  By the end of the Pima County sale, it really was just a handful of investors that were purchasing all the liens.

So long as the Fed continues to keep interest rates at near historic lows, all those people who have bought into the late-night infomercial view that you can get liens for 16% and get houses free and clear will be sadly awakened to the new reality in tax lien investing.


Tax Lien Foreclosures & MERS

The Arizona Court of Appeals (Division 2) recently issued an opinion regarding the extent to which parties must be noticed in a tax lien foreclosure action.  

In this case, the subject real property (the "Property") was owned by Robert and Carri Anderson.  The Property had a first position Deed of Trust, securing the Promissory Note.  The Deed of Trust designated EquiFirst as the Lender and the Mortgage Electronic Registration System ("MERS") "as a nominee for Lender and Lender's successors and assigns," as the "beneficiary under the Security Instrument," and as the legal title holder. 

In 2005, EquiFirst endorsed the Note "Without Recourse, Pay to the Order of" to Wells Fargo.  EquiFIrst also transferred the Note's servicing rights to Homecomings Financial, LLC, a subsidiary of GMAC.  GMAC subsequently became the holder of the Note, and placed it into trust, appointing U.S. Bank as trustee.

In February 2007, Delo purchased a tax lien on the Property from the Pinal County Treasurer on a property.  In June 2010, after the statutory three-year waiting period has passed, Delo initiated a tax lien foreclosure action.  Delo named as Defendants in the case, the Andersons, EquiFirst, and the San Tan Heights Homeowners Association.  However, DELO did not name MERS or any of the GMAC parties.  

None of the named Defendants appeared to defend or paid of the tax lien, and Delo obtained a default judgment.  On October 7, 2010, the Pinal County Treasurer issued a Treasurer's Deed for the Property to Delo. 

In the meantime though, the Andersons had defaulted on the Note and MERS instructed the trustee to initiate a trustee's sale to sell the Property.  In May 2010, before the Treasurer issued Delo the Treasurer's Deed, the trustee recorded a Notice of Trustee's Sale, setting an August 31, 2010 sale date.  GMAC, represented by U.S. Bank, was the highest bidder at the sale and a Trustee's Deed was issued to U.S. Bank. 

In December 2010, Delo filed a quiet title action against the GMAC parties.  The trial court ruled in favor of Delo concluded that because Delo had recorded a Lis Pendens against the Property on August 12, 2010, before any recorded interest of the GMAC parties, the GMAC parties had received notice and an opportunity to intervene in the Delo's tax lien foreclosure action.  The trial court further concluded that having failed to intervene, the GMAC parties could not claim that their interests were prior to Delo's interest.

The GMAC parties appealed the trial court decision arguing that as the holder of the Note they had the right to enforce it.  They further argued that the lack of a recorded assignment of the Note had no bearing on the case because MERS, as GMAC's agent, held a valid legal interest before Delo initiated his tax lien foreclosure action.  

The Court of Appeals reversed the trial court ruling that "due process requires a tax lien holder to engage in 'diligent search and inquiry' for persons and entities holding a legal or equitable interest in property before interests can be foreclosed by default."

The Court of Appeals concluded that the Deed of Trust designated MERS as nominee for the lender, its successors and assigns, the beneficiary of the Deed of Trust, and the legal title holder, and that it was recorded in September 2005.  Accordingly, the Court of Appeals reasoned, MERS' interest in the Property vested long before Delo acquired any interest in the Property, and MERS should have been named in Delo's tax lien foreclosure action.  

In the end, the Court of Appeals dispelled with this appeal pretty simply by stating that Delo knew that MERS was an interested party all along, as MERS was identified as the beneficiary under the Deed of Trust, which was identified in the limited report that Delo ordered. 

One take away for any tax lien holder or attorney representing a tax lien holder is order a litigation guarantee from the title company, as the title company would have identified the exact parties that would have needed to be named in the action.  A limited title report typically would not have such a section in the report. 

The other take away from this opinion is found in Footnote 3, where the Court stated that there is no requirement that an endorsement of a promissory note be recorded to be valid.  The Court relied on the recent Arizona Supreme Court case - In re Vasquez - that ruled recording an assignment of a deed of trust is not required prior to filing a notice of trustee's sale.  This case established in Arizona that simply holding the note provides the power to perform a trustee's sale.  This Footnote emphasizes the general trend towards a recognition of the MERS system nationally - though not every state has jumped on board that train.

When in doubt - name every party that MIGHT have an interest.  Better to spend a few hundred dollars extra on service of process then have a Treasurer's Deed overturned.

National Mortgage Settlement & Bounced Government Checks

The New York Times recently reported that when homeowners went to cash checks coming from the National Mortgage Settlement, the checks bounced - yes bounced. 

Ronnie Edward, whose home was sold in a foreclosure auction, apparently waited three years for his $3,000 check. When it arrived, he went to his local bank in Tennessee, only to learn that the funds “were not available.”  Mr. Edward was taken aback. “Is this for real?” he asked.

The Times further reports that "it is unclear how many of the 1.4 million homeowners who were mailed the first round of payments covered under the foreclosure settlement have had problems with their checks. But housing advocates from California to New York and even regulators say that in recent days frustrated homeowners have bombarded them with complaints and questions." 

"The first round of the settlement checks was mailed last week. In recent days, problems arose at Rust Consulting, a firm chosen to distribute the checks, people briefed on the matter said. After collecting the $3.6 billion from the banks, these people said, Rust failed to move the money into a central account at Huntington National Bank in Ohio, the bank that issued the checks to homeowners."

"Banking regulators, frustrated with missteps at Rust, urged the consulting firm to shore up the account Tuesday. Now, regulators say the problems are resolved, and are urging homeowners to try again. Officials worry that homeowners, weary from a process that has stretched on for years, will give up."

“We apologize to anyone who experienced problems trying to cash their checks,” a senior vice president at Rust, James Parks, said in a statement. “We are working hard and communicating with the banking regulators, the servicers, and other banks to ensure those issues are not repeated.”

This obviously will not engender much hope or trust in a system that has been mired in controversy since the housing crash that started to implode in late 2007.

Foregiveness Act Survives the Fiscal Cliff

The Mortgage Debt Relief Act of 2007 has survived the "fiscal cliff," which will invariably lead to a continued increase in the number of short sales nationwide.  The "fiscal cliff" deal will extend the Act for another year, meaning that homeowners who receive debt forgiveness resulting from a foreclosure, deed in lieu, or short sale will be exempt from being taxed on that forgiven debt.

The amount extends up to two million of debt forgiven on the homeowner's principal residence.  In order for a homeowner to qualify, the forgiven debt must have been used to "buy, build, or substantially improve" their principal residence and be secured by that residence.

Will They Extend It?

So, the election is over and the "fiscal cliff" is awaiting.  Will The Mortgage Forgiveness Debt Relief Act of 2007 (the "Act") be extended?  Given its bi-partisan support in the past, I would venture to say that it likely will be extended another year. 

The extension of the Act is a concern for many given that the housing market is nowhere near out of the woods.  The real issue is that if the Act is not extended, borrowers in most states will have to pay income tax on the amount of any debt forgiven in a short sale, deed in lieu of foreclosure, or foreclosure.

However, for some property owners in Arizona, the expiration of the Act may not have any appreciable impact because of Arizona's broad anti-deficiency protections for borrowers.  Assuming your property is located on under 2 1/2 acres and utilized as a single or two-family home, the property is deemed a qualifying property for anti-deficiency protection.  Additionally, assuming your loan (and even a second loan) was used for the purchase of the home, it is deemed a non-recourse loan and and any deficiency will not be considered income because it is non-recourse debt.  See I.R.S. Publication 4681.  This IRS Publication states that "if you are not personally liable for the debt, you do not have ordinary income from the cancellation of the debt..." Therefore, in Arizona, even if the Act is not extended, you may not have any tax liability in the event of a short sale or foreclosure if your property is protected by Arizona's anti-deficiency statutes. 

Extension of The Mortgage Forgiveness Debt Relief Act

For many people considering short sales or allowing their property to go to foreclosure, one of the crucial issues lately is whether Congress intends to extend The Mortgage Forgiveness Debt Relief Act, which is set to expire at the end of 2012. 

Here is a link to an article by Kenneth Harney from The Real Deal, which talks about where Congress is at with extending relief to homeowners.  Election year politics will certainly be at play here.

Another Affirmation of Arizona's Anti-Deficiency Protections

The Arizona Court of Appeals in Phoenix recently ruled in Independent Mortgage Company v. Alaburda, that Arizona's anti-deficiency law (A.R.S. Section 33-814(G)) protects a borrower who has a fractional interest in a vacation home. 

The Alaburdas purchased a 1/10th fractional interest in a single-family residential condo in the exclusive Villas at Seven Canyons in Sedona.  Independent Mortgage financed the Alaburda's purchase and took a note for $321,750, secured by a deed of trust on the 1/10th interest in the property.  The Alaburdas were only allowed to use the property for 28 days each year for vacation purposes. 

Well, the Alaburdas defaulted on the note and a trustee's sale was held on their 1/10th interest and Independent Mortgage took back the interest on a credit bid of $285,000.  It then filed a deficiency action against the Alaburdas, alleging a deficiency of $57,884.  The Alaburdas filed a motion for summary judgment arguing that they were protected by A.R.S. Section 33-814(G) - Arizona's anti-deficiency law for deeds of trust, against any deficiency claim.

Independent filed a cross-motion for summary judgment arguing that partial ownership in a vacation home cannot be characterized as a single family dwelling; therefore, no anti-deficiency protection existed for the Alaburdas.

The Court of Appeals upheld the trial court's granting of summary judgment in favor of the Alaburdas, finding they were not liable for any deficiency.  The Court of Appeals, relying on past Arizona decisions in this realm (Pinetop Properties and Mid Kansas), held that the Alaburdas used the property as a single family vacation home; and thus, met the broad requirement under the anti-deficiency laws that the property "is limited to and utilized for either a single one-family or a single two-family dwelling."  The Court rejected Independent's narrow definition of "dwelling," finding that the Alaburda's sporadic use of the property did not limit the application of the anti-deficiency protections. 

The Court also rejected Independent's argument that because the Alaburdas did not own the property as tenants in common and they were not entitled to continuous and total use of the property.  The Court ruled that the definition of "trust property" includes any interest in real property.  Further, the Court ruled that A.R.S. Section 33-814(G) does not limit its protection to only those that own all of the trust property described in the deed of trust.  To rule otherwise would have cast doubt on the protections afforded condominium owners (as in the Pinetop decision).  The Court was not going to go that direction.

This is another in the long string of factually distinguishable cases that are testing Arizona's broad application of the anti-deficiency statutes.  It is clear that many more cases are on their way up the legal chain. 

Cash Out Refinance - No More Anti-Deficiency Protections in Arizona

The Arizona Court of Appeals (Division 1 in Maricopa County) just issued an opinion entitled Helvetica v. Pasquan, which addresses the scope of Arizona's anti-deficiency protections in the judicial foreclosure (non-trustee's sale) context. 

The first issue the Court addressed is whether refinancing a purchase money loan forfeits a borrowers' anti-deficiency protection, to the extent that the proceeds from the refinancing transaction were used to satisfy the underlying purchase money obligation.  The Court held that refinancing alone does not destroy the purchase money status and the borrower does not lose the protections of Arizona's remedial anti-deficiency protections.

The Court next addressed the open question of whether a loan that funds construction of a statutorily qualifying residence (as defined in A.R.S. Section 33-729(A)) is a purchase money obligation.  The Court held that a construction loan qualifies as a purchase money obligation if: (1) the deed of trust securing the loan covers the land and the dwelling constructed on the land and the loan proceeds were in fact used to construct a residence that meets the size and use requirements set forth in A.R.S. Section 33-729(A).

Finally, the Court addressed an issue that has been hanging in the balance since 1997, when the same Court decided Bank One, Arizona v. Beauvais, which held that regardless of whether the subject workout note was an extension, renewal, or new obligation, it was a purchase money obligation and the borrower was protected by the anti-deficiency laws.  However, Bank One did not address the propriety of segregating non-purchase money portions of the loan, as Bank One abandoned that argument in that case.

On this issue, the Court of Appeals held that loan proceeds used to construct a qualifying residence (as set forth in A.R.S. Section 33-729(A)) merit anti-deficiency protection under certain circumstances, but those sums disbursed in a loan transaction for non-purchase money purposes may be traced, segregated, and recovered in a deficiency action.

This decision now opens the door for lenders to pursue borrowers who took out money in a refinance and used it for purposes other than the purchase (or construction of a property on vacant land) of a home.  While this decision is limited to judicial foreclosures, as opposed to the trustee's sale context (which accounts for almost all foreclosure sales in Arizona), the logic would seem to apply to the trustee's sale context, but it remains to be seen whether the courts will extend this ruling to the deed of trust statutes.  Stay tuned as always.