Posted by kevin on May 24, 2013 under Foreclosure Blog | 
Over the last two weeks, there have been two unpublished appellate division opinions which tighten the screws on the borrowers in default judgment situations. One case, Walsh, involved Aurora Loan Services, which was the servicing arm of Lehman Brothers. Right off the bat, you know that Aurora probably did not lend the money to the borrower but why quibble over details. Interestingly enough, the panel consisted of only two judges. I guess they knew there would not be a tie. The borrower was pro se but did raise some interesting issues which the undermanned panel swatted away like a mosquito on an August evening. Basically, default judgment was entered and the sheriff sale was put off 11 times. Walsh argued lack of standing. The court said that standing was not jurisdictional and that failure to prove standing does not equal a void judgment under Rule 4:50.
Oddly enough, the second case, Cole, also involved a two judge panel, a default judgment with 11 adjourned sheriff’s sales and a standing argument. (Note that both opinions seem to infer that the mediation was protracted to the detriment of the lender when anyone who has been through the mediation process knows that it is the lender who drags out the process.) In this case, we had a Fremont loan (another notorious predatory lender examined and sanctioned by the feds). The MERS assignment of mortgage (which Judge Todd in Raftogianis said is at best a distraction and does not transfer the mortgage loan) was executed after the complaint was filed. No problem says the panel because no answer was filed, and the process was delayed to the detriment of the lender.
Two points: First, most of the recent default judgment cases have said that standing is not jurisdictional. None of the cases, however, mention two NJ Supreme Court cases (Baby T and Watkins) which both state that if the plaintiff does not prove standing, the court does not have the right to decide the substantive issues of the case. Sure sounds like the NJ Supremes are saying that standing is jurisdictional, or something close to it. I argued this in Polanco and was ignored by that panel. My client did not want to take this issue up to the Supreme Court because of the expense. I could not afford to work pro bono on that appeal so the case died on the appellate level. Why are the courts avoiding the clear language in two Supreme Court cases which appear to say the opposite of what is now a commonplace holding in foreclosure cases? I have my theories, but…
The second point is the more practical point; that is, the standard to vacate a default judgment in a foreclosure case in NJ is now almost insurmountable. I did it in Bagley with a very favorable set of facts. But there have not been many decisions like Bagley that have come down the line in the last couple of years. And those more recent cases have a chilling effect on defense counsel. For an attorney, the days of financially rolling dice on these cases are over. Borrowers are going to have to subsidize this type of litigation. Or better yet, avoid the issue in its entirely by hiring counsel when you get a Notice of Intent.
Posted by kevin on May 9, 2013 under Foreclosure Blog |
Historically, MBIA wrote insurance on municipal bonds. It made good, but not spectacular, money for years. In the early 2000’s, however, it saw how much $ AIG was making on insuring mortgage backed securities (“MBS’s”), and wanted in. To induce investment in MBS’s, the sponsor would offer insurance or credit default swaps to investors. MBIA would be paid a premium to issue that insurance. An easy way to make lot’s of money because the MBS’s were rated triple A by S&P, or other rating agencies. However, notwithstanding the triple A rating, the mortgages that backed the MBS’s were ticking timebombs which started to go off in 2007. The results were disasterous for companies like MBIA.
Countrywide (“CW”) was one of the leading purveyors of toxic mortgages. It sold many of its loans to securitized trusts. MBIA wrote the insurance on these MBS’s. When the proverbial s*%t hit the fan, MBIA had to pay out about $3 billion in claims. By that time, Bank of America (“BOA”) had bought out CW. MBIA sued BOA on the grounds that the representations and warranties made in the various prospectuses that securitized CW mortgages were nothing but a pack of lies. These were not safe investments made to well qualified borrowers. They were predatory loans that should never have been written in the first place. After years of litigation, BOA agreed to pay MBIA $1.7 billion the case.
A victory? For MBIA, yes. But what about the average borrower who got screwed by CW? I mean CW lied to MBIA and the investors about the quality of the loans. Borrowers were lied to or taken advantage of by CW who put the borrower in loans that the borrowers could not afford. Without the underlying bad loans, there would be no MBS’s, no investors, and no insurance or credit default swaps. So, does the borrower have a new defense that the various chancery judges in NJ will be eager to enforce?
Don’t bet on it. I am afraid that most Jersey judges will ignore the argument on the grounds that the borrowers do not have standing to raise the breach of warranty issue because the borrower is not a party to or a third party beneficiary of the Pooling & Servicing Agreement (“PSA”). That’s precious considering that the breaches of warranty and misrepresentations deal with the underlying loans made by the banks to the borrowers. Without borrowers, there would be no representations and warranties.
We have lots of laws, but who do they protect?
Posted by kevin on May 4, 2013 under Foreclosure Blog |
Right now, with the new HAMP guidelines, modifications are more available, and fairer, than before. Although my website states that we fight foreclosures (and we do), we are also for the first time encouraging clients to actively engage in the modification process.
That being said, I have been interviewing many prospective clients who are in foreclosure because they defaulted on a modification granted in 2009 or earlier. Here is the scenario. The borrower got an option arm or similar ARM type loan with an initial interest rate of 10% or greater. The loan was either a “no doc” or stated income loan. The borrower was not represented by a lawyer. On its face, there may be TILA violations, consumer fraud violations and predatory lending issues. The borrower defaulted and then the servicer, usually unsolicited, offers a modification which takes all the arrearages and charges (late and attorneys fees and escrow advances) and adds them to the loan. Then, the interest rate is dropped to about 6-8%. They don’t ask for an application, tax returns, paystubs or anything. And it is not negotiable-it is “take it or leave it”- known as a contract of adhesion. Finally, the modification agreement has buried in it a clause that says that if you accept the mod, you waive all defenses on the original note.
You can’t afford the mod but you take it because the alternative is that you are out on the streets. Inevitably, you default. The bank recites the original loan and modification. You take the position that the loan was unconsicionable so you have defenses. The lender says, “not so fast”, the original predatory, unconscionable deal cannot be considered by the court based on waiver of defenses claue in the modification agreement. In other words, the lender gets a free pass after they sucked you in on a bad loan to begin with.
So far, I have been able to argue around this point on motions to set aside default or default judgment. And, I have fashioned some arguments that attack the lender’s position that the underlying loan is off the table. However, I am convinced that if the borrower just argues that the waiver of defenses in the modification agreement is void because it is a contract of adhesion, many New Jersey judges will hold against you..
In New York, however, NYCRR Section 419.11 states that servicer shall not require a homeowner to waive legal claims and defenses as a condition of a loan modification. Now, this is just a regulation and not a statute, but it does give the borrower’s attorney in New York a stronger footing to argue against waiver clauses in modifications. (Remember, Regulation Z dealing with Truth in Lending is a regulation and not a statute but courts routinely accept it.
So, contact your State senator or assemblyman and tell him or her that New Jersey should adopt a statute that outlaws waiver of defense claims in modification agreements. In the meanwhile, I am scouring cases from around the country that hold that such contracts of adhesion are void because they violate public policy.
Lenders routinely lobby State and federal representatives. It is about time that consumers do the same.
