Recent Real Estate Law Trends Toward Protecting Borrowers

By Benjamin B. Childs

Two unanimous decisions by the Nevada Supreme Court on July 7, 2011 emphasize the importance of a homeowner electing mediation if his/her home is in foreclosure. The cases are Padillas v. HSBC Bank USA, 127 Nev. Ad. Op. 39 and Leyva v. National Default Servicing Corp. 127 Nev. Ad. Op. 40. The Nevada decisions follow similar reasoning in Massachusetts cases U.S. Bank N.A. v. Ibanez and Wells Fargo Bank N.A. v. LaRace et al, (SJC-10694). issued January 7, 2011. The Nevada Supreme Court expressly cited the Ibanez case as persuasive and supporting authority.

The Nevada cases came through appeals from the outcome of mediations, and decisions following judicial review, through the Nevada Foreclosure Mediation Program, (the FMP). The FMP statute is NRS 107.086. This statute and the rules promulgated by the FMP require the lenders to provide a clear chain of title as part of the mediation process. This requirement is based on basic contract and mortgage law, stated in the Uniform Commercial Code (UCC § 3-203 comment 2) and codified in NRS 104.3203(2). In simple terms, the foreclosing party must prove its right to enforce the note through an unbroken chain of transfers, assignments and endorsements, called a chain of title. While possession of the original note is required, mere possession is not enough. The chain of title must be proven.

The Nevada cases explicitly hold “that strict compliance is compelled by NRS 107.086(4) and (5).” Now, a foreclosing party that fails to strictly comply with the document requirements during an FMP proceeding must be sanctioned and cannot receive a foreclosure certificate which could allow them to complete the foreclosure sale.

Here’s another bombshell decision. On October 18, 2011 Massachusetts published its opinion in Bevilacqua v. Rodriguez (SJC-10880). The holding in this case affects the purchasers of foreclosed properties in the past five years, and all subsequent purchasers. Similar to the chain of title issues, the law is basic. If an owner acquired title through a foreclosure, and the foreclosure was not conducted properly, that owner does not have clear title. And since the foreclosing entity might not have clear title, every subsequent purchaser might not have clear title. Given the two thirds of all real estate transactions in the past five years have been foreclosed properties, this is a huge problem.

The Massachusetts Supreme Judicial Court is the oldest continuously functioning court in the western hemisphere. It is one of the most respected high courts in the country.

AB284 addresses chain of title issues
Meanwhile, back in Nevada, AB273 and AB284 are related laws that are fully in effect as of October 1. These bills need to be read in conjunction and they reinforce the requirement that lenders must have an unbroken chain of title to complete a foreclosure.

AB284 deals primarily with the foreclosure process. The lender must record a notarized affidavit setting forth the chain of title and that the beneficiary is in “actual or constructive possession of the note secured by the deed of trust”. What constitutes constructive possession is obviously ripe for litigation. The new law also creates a new statutory cause of action and relief for the owner if the lender does not comply with the chain of title affidavit procedure, but it seems unlikely that major trustees will not comply. This is the reason only 1,025 Notices of Default (NOD) were recorded in Nevada in October, down 81.5 percent from the previous month. Nevada was averaging about 5,000 NOD recordings a month in 2011 until October.

AB284 creates a new category C felony of mortgage lending fraud for making false statements, facilitating the use of concealment or failure to disclose a material fact, receiving money from the transaction knowing of the violation, or recording the related document, in addition to the general conspiracy to commit the fraud. This is the anti-robosigning provision to combat the pervasive abuses that were discovered when the foreclosure wave hit. A category C felony carries a penalty of 1 to five years in prison and/or a $10,000 fine. There’s also a civil penalty of $5,000, recoverable by the Attorney General. And criminal statute NRS 205.395 is also revised to create a category B felony for a pattern of criminal activity in mortgage lending.

Under AB284, lenders are now required to use trustees which are separate entities. Bank of America was using Recon Trust Company, which is a wholly owned subsidiary, as the trustee for its foreclosures. This is now prohibited specifically by the new law. All assignments are required to be recorded before foreclosing and an affidavit must be recorded with the NOD disclosing the name and address of every prior know beneficiary and that the lender or the trustee has the note.

AB273 affects how the amount of deficiency judgments and the procedure for obtaining them
AB273 deals primarily with the deficiency judgment process. The major impact is that there must be a hearing to determine fair market value as of the date of commencement of the action. Further, and of far greater impact, the amount of the deficiency judgment is limited to the lesser of the difference between the balance due and the fair market value or the amount of consideration the lender paid for the “right to enforce the obligation”. What happens when a the foreclosing party is a successor bank that acquired the assets as part of a forced merger along the lines of World Savings Bank to Wachovia to Wells Fargo? In other words, how much did Wells Fargo pay for the Wold Savings Bank portfolio? Any insurance proceeds received by the lender from a mortgage insurance policy also directly reduce the amount of the deficiency judgment.
 AB273 also shortened the deadline for a junior mortgage holders to initiate collection to the six months after the foreclosure sale. This is the same deadline as the foreclosing lender.

Benjamin B. Childs has been a solo practitioner in Las Vegas since 1990. He is a mediator with the Nevada Foreclosure Mediation Program and has a general practice of law.

Lenders Unprepared in Half of Nevada Foreclosure Mediations

By Michael S. Sommermeyer

A future historian might conclude the foreclosure crisis that gripped Nevada since 2008 suddenly turned the tide in October 2011. According to the state’s county recorders, the number of notices of default and elections to sell for October totaled 40, compared to September’s 4,688. Unfortunately, the foreclosure crisis did not suddenly vanish in October; it just went into a holding pattern. Despite the rapid drop in default filings, Nevada registered the highest number of foreclosures in the United States, with one in every 180 households receiving a foreclosure-related notice in October, based on research by RealtyTrac, a foreclosure tracking service.
Everyone involved is still sorting out the root cause of the problem. Nevada’s high unemployment rate, the overwhelming number of individuals who lost their jobs or faced other financial difficulties in the past three years, and the inability of many homeowners to reach their lenders continues to play out across the state, especially in Clark County. In some ways, the foreclosure crisis in Nevada never went away; it just became a part of the common experience. Combined with the Robosigning scandal of late 2010, which delayed foreclosure filings as banks struggled to review and confirm loan documents and ownership, it becomes apparent this problem is not going away anytime soon. To illustrate the continuing foreclosure threat, the mortgage industry estimates as many as 100,000 homes remain potentially headed for foreclosure in Nevada.

To focus on the staggering problem, Nevada addressed the crisis head on in 2009. The State of Nevada Foreclosure Mediation Program (FMP) was created by the Nevada Legislature to serve as a pause in the foreclosure process, allowing homeowners and lenders to meet and seek alternatives to foreclosure. The FMP requires lenders to sit down and negotiate with homeowners who elect into the program, bring to mediation an original or certified copy of the deed of trust or mortgage note, and provide certified assignments of the deed of trust or mortgage note. Finally, lenders must provide a confidential proposal and an evaluative methodology for reviewing the loan for a modification. All of these requirements have led many people to call Nevada’s program, “mediation with a kick.”

Robosigning and the widespread creation of improper foreclosure documents prompted the 2011 Nevada Legislature to pass AB284, which requires lenders to provide a notarized affidavit detailing the note and assignments when filing the notice of default in a county. The effect of AB284 resulted in a reduction of default filings in October 2011 by as much as 81 percent. Lenders have admitted they have struggled to ensure their documents are in order and correct.

“There has been a paradigm shift and their business model no longer fits the requirements of the marketplace,” said Deputy Director Verise V. Campbell, program administrator of Nevada’s Foreclosure Mediation Program. “It can no longer be business as usual for the banks because that attitude will no longer be tolerated by the states.” The 50 state attorney generals spent much of 2011 investigating whether banks and loan servicers used false documents and signatures to justify hundreds of thousands of foreclosures.

From the beginning of the FMP, the statute and rules governing the program have required lenders to prove they own the mortgage note and have the authority to proceed to foreclosure. Unfortunately, during the first two years of the program, not all lenders have come prepared to mediate. In FY 2011, which ended June 30, 2011, nearly half the beneficiaries who attended a foreclosure mediation failed to provide complete documents, provide a person with authority to negotiate, or participate in good faith—all key requirements of the program. A total of 3,143 mediations resulted in no agreement between the lender and homeowner because of lender non-compliance with NRS 107.086. Lender non-compliance resulted in approximately 49 percent of all mediations ending in no foreclosure in fiscal year 2011. In all of these cases, the lender was unable to foreclose on the property.

“Lack of participation by the banks not only halts the mediation, but it places homeowners further in limbo,” said Campbell. “Neither party can proceed. The bank is unable to obtain a certificate and the homeowner is unable to find a way to save their home, eliminate late charges, and come to some sort of resolution. Homeowners want help, yet nearly half of the lenders are not coming to mediation prepared and able to negotiate.”

NRS 107.086 gives a district court judge the ability to sanction beneficiaries if they fail to comply with the law and the rules of the program. Questions regarding the authority of FMP mediators to recommend sanctions to the district court, and the lack of sanctions being imposed, led to two key rulings in 2011 by the Supreme Court of Nevada.

Pasillas vs. HSBC Bank USA and Leyva v. National Default Servicing Corp. both addressed the need for proper documentation and compliance with the statute. Further, in the case of Pasillas, the court indicated a beneficiary’s failure to comply with NRS 107.086 should clearly result in sanctionable offenses and the imposition of sanctions by the District Court.

In reviewing NRS 107.086(5), the supreme court interpreted it to mean, “the commission of any of the four statutory violations prohibits the [FMP] program administrator from certifying the foreclosure process to proceed and may also be sanctionable.” In effect, failure to attend mediation, failure to participate in good faith, failure to bring to mediation each required documents, and failure to demonstrate the authority or access to a person with the authority to modify the loan, may lead to sanctions against the lender.

The court also provided guidance on the factors that apply when the court is considering sanctions in a foreclosure mediation context. “District Courts should consider the following non-exhaustive list of factors: whether the violations were intentional; the amount of prejudice to the non-violating party; and, the violating party’s willingness to mitigate any harm by continuing meaningful negotiation.” In effect, beneficiaries are encouraged and, by statute, required to participate fully in the FMP once a homeowner elects foreclosure mediation, or they face sanctions by the court.

After review of the Pasillas and Leyva decisions by the FMP Advisory Committee, the program has modified its mediator statement to allow mediators to detail in particularity the reasons for recommending sanctions against beneficiaries who fail to comply with the statutory requirements. These recommendations will be relied upon by the district court in petition for judicial review hearings after mediation. Adding this section to the Mediator Statement makes it clear that beneficiary compliance is an essential component of the program and any sanctions recommended by program mediators should be seriously reviewed by the district court for intent and prejudice.

Fiscal year 2011 of the FMP resulted in an increase in the number of homeowners electing to participate in mediation. The program completed 7,424 mediations, a 76 percent increase from the previous fiscal year’s total of 4,212. At the same time, the program issued 1,983 certificates for eligible properties in which homeowners chose not to participate in the program. The program is available to homeowners of owner-occupied residential property in Nevada who elect to participate by submitting an election form along with a non-refundable $200 mediation fee. A matching $200 fee is submitted to the program by the respective lender. Eligible homeowners also may choose to waive participation in the program, which does lead to a certificate of foreclosure issued by the FMP allowing the beneficiary to proceed with foreclosing on the property.

Already into its third fiscal year, the program has made an initiative to measure program metrics, focusing on beneficiary compliance with NRS 107.086 and FMP rules. The program intends to detail beneficiary compliance in coming months looking in particular at the four statutory violations detailed in the Pasillas decision. Metrics and other information will be compiled by quarter and provided to the public for review on the program’s Web site. This effort stems from the passage of AB300 in the 2011 Legislature, which was later vetoed by Governor Sandoval. In vetoing the legislation, the governor indicated the FMP should consider voluntarily creating its own metric reporting program.

The FMP ended FY 2011 by fulfilling an order from the Supreme Court of Nevada directing the program to create an advisory committee made up of members representing lenders, homeowners, mediators, homeowner representatives, trustee representatives, real estate professionals, and trust company representatives. The committee was tasked with advising the FMP on rule changes, real estate foreclosure trends, governmental programs, and laws affecting the program. Already the committee has recommended substantial changes in processes and compliance with NRS 107.086 and FMP rules. Moreover, the committee has identified strengths from other state programs, and is directing efforts to provide education to lenders, realtors, homeowners, and mediators.

The strength of the FMP is in providing homeowners and lenders with a forum to meet and discuss loan modification, voluntary surrender of the property, or other solutions that may avoid a foreclosure. Since the inception of the program in July 2009, the State of Nevada Foreclosure Mediation Program has completed 12,556 mediations with 88 percent resulting in no foreclosure.

Michael S. Sommermeyer serves as the Quality Assurance Manager for the State of Nevada Foreclosure Mediation Program where he oversees quality service, program processes, and public outreach and education. Before joining the Supreme Court of Nevada, Mr. Sommermeyer was the public information officer for the Clark County courts.