Mortgage industry participants in the Golden State — especially those connected in some way to the default servicing business — are lately living out their own version of the Hunter S. Thompson seminal classic, “Fear and Loathing in Las Vegas.”
In the book, a journalist and lawyer spend most of their time searching desperately for the American Dream, fueled in part by an uncommonly large amount of psychedelic drugs. And like the characters in the book, many California legal experts might feel as if they’re on drugs right now when it comes to managing the most American of dreams: homeownership.
As the state’s legal system is adjusting not only to the Homeowner Bill of Rights — which has seen interest in non-judicial foreclosures soar during the first quarter of this year — there is also bubbling case law developing in the state’s court system that could quite simply represent the undoing of a large amount of secured home lending written in California.
Imagine a deed of trust or mortgage deed that suddenly isn’t secured by anything at all. Whether that’s the American Dream or a scene from American Psycho probably depends on what you do for a living.
THE HBR EFFECT
Nationally, RealtyTrac found that there were 2,348 judicial foreclosure notices filed in jurisdictions traditionally characterized by non-judicial foreclosure during the first quarter of 2014; up from just seven such filings one year earlier.
The sharpest increase in Q1 was seen in California, where 1,376 judicial foreclosures were filed, compared to just a single such filing one year earlier.
Legal experts have attributed the sudden shift to the state’s recently enacted Homeowner Bill of Rights, which places onerous penalties on a lender/servicer if certain requirements aren’t met.
“Non-judicial foreclosures are all anyone [in the mortgage community] knows in states like California: the mindset is ‘we have done it this way, so we are going to keep it this way.’ But the HBR makes all of the benefits of a non-judicial foreclosure disappear,” according to attorney Scott Jackson of the California-based law firm Jackson & Associates.
CONFLICTING LAW EMERGING?
And while lenders and servicers in the state are just now facing questions as to how to best proceed in managing a defaulted loan in the state of California — go judicial or trust the trustee sale? — conflicting law working its way through the state’s court system could promise to tip the scales of justice in a far more dramatic fashion.
It’s long been a point of established law in California that borrowers facing foreclosure generally lack the standing to challenge assignments of their mortgage loans, as they aren’t a party to or beneficiary of the assignment. At least, this was a point of established California law.
Until last year.
In mid-2013, a case stood out from the pack called Glaski v Bank of America, National Association, et al., in which a California Court of Appeal went against the majority rule and held that a borrower does have standing to challenge the validity of an assignment into an MBS trust if s/he alleges that the assignment violated the terms of the instrument that created the trust.
It’s an argument that consumer activists have been making in courtrooms across the U.S., and in California, for years — and in the Glaski decision, they notched their first win in the Golden State.
The case clearly represents a minority opinion in the state’s judicial system, as a growing body of law in California since that decision was published suggests that the district courts will not follow Glaski — at least, not yet.
Some examples: In Dahnken v Wells Fargo, the U.S. District Court for the Northern District of California refused to follow Glaski, with the Dahnken court adopting what it called the “majority position.” And in Diunugala v JP Morgan Chase, the U.S. District Court for the Southern District of California found “the reasons in the [pre-Glaski] case law to be more persuasive than that in Glaski.” And the U.S. District Court for the Eastern District of California reasoned in Newman v Bank of New York Mellon that “no courts have yet followed Glaski and Glaski is in a clear minority on the issue.”
But all of the above rulings came in late 2013.
The plot has thickened considerably since that time: in an effort to clear the decks surrounding the law of the land, a consortium of industry groups, including the California Bankers Association and others, sought to have the Glaski decision de-published by the California Supreme Court.
(“Depublishing” is a technical way of reversing an appeals court decision without the Supreme Court having to actually hear the case.)
In February of this year, despite Glaski being in the minority and numerous other rulings from district courts choosing to rule contrary to it, the California Supreme Court declined to depublish the controversial case.
Consumer attorneys cheered the Supreme Court’s decision to keep Glaski on the books, even if it is still a minority opinion.
California-based United Law Center (ULC) represents borrowers in California who are contesting foreclosure and says, for example, that while courtrooms may hesitate to apply the logic in Glaski, the law firm is seeing banks increasingly choosing to settle wherever the Glaski decision is cited.
“Banks don’t want to fight against Glaski in a jury trial,” the ULC said in a statement, which claimed that cases wherein Glaski is alleged may include principal reductions between 30-70%, interest rates fixed at 2-3% for 30 years and a cash award upwards of six figures.
But those types of settlements could become child’s play in the future.
AN APRIL SURPRISE
This April, the American Banker broke an exclusive story that probably should have been bigger than it was: Ginnie Mae won’t allow Bank of America to transfer servicing rights on FHA loans to another servicer because of custodial document problems.
Ginnie Mae President Ted Tozer admitted that Bank of America isn’t complying with the agency’s guidelines that require all mortgage documents to be delivered to custodians in a timely manner.
When asked if this problem was limited to Bank of America only? Tozer’s response: “I can’t say if it’s just B of A or not.”
It’s the first time any agency head in the mortgage industry has publicly acknowledged paperwork problems with their mortgages.
There’s an old adage that applies in situations like this: If it walks like a duck and quacks like a duck, then it’s a duck. And in this case, if Bank of America is having documentation problems on its Ginnie Mae loans, what are the odds that these problems are limited just to Ginnie Mae loans? What about Fannie Mae and Freddie Mac?
And what about privately securitized loans? After all, if Bank of America hasn’t been able to keep documentation straight on plain-vanilla government-regulated lending, what are the odds it kept documentation straight on fast-and-loose privatized securitization trust transfers?
Walks like a duck, talks like a duck.
These are the tough questions nobody in the mortgage industry wants to answer right now. And for good reason, too: the answer might mean a forfeit of full security interest in an untold amount of mortgage loans — especially in California, where Glaski is still a published decision and can therefore be alleged by a borrower in default.
Numerous sources of data, for example, suggest that some 70% to 80% of Californians who financed a home between 2003 and 2008 had their note securitized via private markets.
That’s a lot of exposure for wrongful foreclosure claims, by any measure.
And how many people simply took out an FHA loan via Bank of America?
The admission of documentation problems at Ginnie Mae could prove to be the fire that ignites the fuse on the now-dormant Glaski decision, turning it from a minority opinion largely ignored by the California court system into a dangerous legal flashpoint that redefines legal precedent.
Mortgages can be defective for a number of reasons — but a wide swath of an entire class of mortgages suddenly being found defective, all at once, would represent an industry migraine of epic proportions.
“Whatever the reason, a defective mortgage can cause big headaches for title insurers, lenders and their counsel,” wrote Robert Scott and Glenn Cline, attorneys with Ballard Spahr, in a 2011 paper on the subject.
“A bank seeking to foreclose on a defective mortgage may face adverse claims from judgment creditors, competing mortgagees and tax authorities who claim that their subsequent liens take priority over the bank’s recorded — but legally defective — instrument. Alternatively, a bankruptcy trustee may seek to have the mortgage declared invalid, allowing the estate to avoid the lien entirely.”
Right now, the above is nothing more than an illusion, a story. If this were part of a Hunter S. Thompson novel, the scenario described above would be just another bizarre hallucinogenic trip in a long line of bizarre hallucinogenic trips.
But it’s important to remember: Life sometimes does imitate art. Even in the mortgage industry.
