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The increase in foreclosure activity has resulted in increased scrutiny of foreclosures by state regulators, consumer groups and title insurance companies. This article will take a brief look at some of the issues conveyancers should now be aware of when reviewing a foreclosure transaction as part of closing alone.

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There was something rotten in Denmark. Denmark, Maine, that is, and a desperate homeowner facing foreclosure contacted Pine Tree Legal Assistance, a provider of legal services for low-income Maine residents.

The file was assigned to Thomas Cox, a retired Maine attorney, who had worked on foreclosure cases for Maine National Bank. Mr. Cox claims to have noticed almost immediately that the foreclosure file did not look right as the documents from the lender had been approved by an employee whose title was “limited signing officer.”

Enter Jeffrey Stephan, a 41-year-old resident of Sellersville, Pennsylvania, and the team leader of a thirteen-person department of GMAC Mortgage. For GMAC, Mr. Stephen, who has been assigned the super villain moniker of “robo-signer”, signed off on as many as 10,000 foreclosures a month.

Although Mr. Stephan had previously been deposed, it became clear that, contrary to the statements set forth in the affidavit, he had no personal knowledge of the facts stated in the foreclosure affidavit; that he did not have custody and control of loan documents; that he did not review the exhibits attached to his affidavit; and that he did not appear before a notary public.

The revelation that a “robo-signer” had signed off on foreclosures without having read the paperwork forced Ally Bank, which is owned by GMAC to halt foreclosures in all 23 judicial foreclosure states. Soon after, other major banks, including JPMogan Chase and Bank of America, also halted foreclosures initially in the 23 judicial states and subsequently in all fifty states.

A flurry of activity followed. Old Republic National Title Insurance Company released a bulletin to its agents that it would cease to insure title to properties that were foreclosed by GMAC and Fidelity National Title Insurance Company entered into a Master Indemnity Agreement with Bank of America to “facilitate the underwriting process of insured sales in which Bank of America and its affiliates is the lender or servicer.”

Following internal investigations by the nation’s largest lenders, foreclosure proceedings were re-instituted; and despite the conclusion by the various lenders that errors were minimal or non-existent, State and Federal Regulators, as well as the media, have not been so easily assuaged.

Attorneys General from all fifty states have joined to form the Mortgage Foreclosure Multistate Group. This group, which also includes mortgage regulators, issued a statement on October 13, 2010, which states in part, “It appears affidavits and other documents have been signed by persons who did not have personal knowledge of the facts asserted in the documents. In addition, it appears that many affidavits were signed outside the presence of a notary public, contrary to state law. This process of signing documents without confirming their accuracy has come to be known as ‘robo-signing’. We believe such a process may constitute a deceptive act and/or an unfair practice or otherwise violates state laws.”

Although the White House did not support a nationwide foreclosure moratorium, President Obama did pocket veto the National Notary Bill which would have required that all federal and state courts recognize any lawful notarization made by a notary public licensed or commissioned under the laws of the state where the Court is located if:

a. The notarization occurs in or affects interstate commerce; and

b. A seal of office, as a symbol of the notary’s authority is used in the notarization or, in the case of an electronic record, the seal information is securely attached to, or logically associated with, the electronic record so as to render the record tamper resistant.

Consumer groups had warned that passage of the Bill, which had quickly passed through both Houses of Congress would create difficulties for homeowners who might want to contest questionable foreclosure sales and could possibly increase foreclosure fraud.

Mortgage Electronic Registration Systems, Inc. (MERS)

Questions concerning foreclosure practice raised by state courts, Attorneys General and consumers have led regulators to investigate Mortgage Registration Systems, Inc. (hereinafter “MERS”).

Since the advent of MERS, conveyancers have debated the treatment of MERS as a mortgagee and have questioned the failure of “lenders” to endorse the note as the mortgage is internally transferred within the MERS system.

When a foreclosure is initiated, the mortgage is assigned by MERS to the present “holder”. The original mortgage may run to MERS as nominee for “X” and the recorded assignment may run from MERS to “Y”. The assignment from “X” to “Y” was “off record”. This failure to record assignments has caused the State of Tennessee, by a realtor, to bring a Qui Tam suit against MERS, alleging that the “defendants were concealing and avoiding the payment of recording fees or other monies to the above named counties in this and other states…”

In a recent Opinion in the State of Maine, the Maine Supreme Judicial Court held that MERS could not institute a foreclosure action and invoke the jurisdiction of the Court because it lacked enforceable right in the debt that secured the mortgage. See Mortgage Electronic Registration Systems, Inc. v. Jon Saunders et al, 2010 ME 79.

More recently, the Register of Deeds for the Essex County (Southern District) Registty of Deeds, John L. O’Brien, Jr., contacted Attorney General Martha Coakley and requested that her office investigate MERS claiming that MERS has created its own registry of deeds and is not paying recording fees.

The most serious allegations have been raised by two law professors, Adam Levitan of Georgetown and Christopher L. Peterson of the University of Utah. As reported in the New York Times in October 2010, Mr. Peterson has questioned MERS’ attempt to have it both ways, acting as an agent in some cases and as a mortagee in others.

If MERS were a mortgagee, it could record loans in its own name, but since it does not own the loan it would violate the basic tenet that the assignment of the note carries the mortgage with it. “If the assignment of the note is a nullity, then the mortgage can no longer be enforced. The borrower would still owe the money, but no foreclosure would be possible and the borrower could still sell the house without paying off the mortgage.”

As an agent, MERS cannot list itself as mortgagee because various state laws require transparency and do not have provisions authorizing the use of shell companies.

Peterson further argues that local governments might sue MERS to collect recording fees and that this would have been avoided if legislation had initially been sought when MERS was created and if parties “followed the simple policy of specifying in the documents who owns what, a vast amount of confusing litigation and commercial uncertainty could have been avoided.”

The future of MERS seems uncertain, as lawyers for homeowners allege that MERS does not properly track the required paper trail to prove mortgage ownership. In October 2010, JPMorgan Chase Bank’s CEO stated that the bank had stopped using the MERS system.

REO Sales Risk Assessment

Several title insurance companies have issued underwriting alerts providing guidance on insuring sales of REO properties. These memorandums require a closing attorney to closely examine the foreclosure process pursuant to customary underwriting standards; and in addition, review or complete an REO Sale Risk Assessment Questionnaire. All questions on said Questionnaire must be answered with a “Yes” or “No”; and the form must be dated and signed by the agent reviewing the title and maintained in the title file.

If all questions have a “No” answer, the agent is authorized to issue a commitment or policy on behalf of the Company, subject to any other risk limitations that may be applicable, such as the agent’s authority limits or concerns related to other title matters. If any question has a “Yes” answer, the title company’s State Underwriting Department must be contacted for specific written approval to issue. The agent must retain a copy of the approval bearing the signature of the State Underwriter.

In addition to questions revolving around customary review of the foreclosure, the disclosure of any defects in the foreclosure process by the lender/seller or any other reasons to believe there might be defects in the foreclosure process by the lender, lender’s counsel, loan servicer or others, the Questionnaire includes the following:

a. Is there any affiliation between the seller and purchaser in the present transaction?

b. Does the purchase price exceed the amount due to the lender under the obligation secured by the mortgage that was foreclosed?

c. Is the property occupied?

d. Has litigation alleging defects in the foreclosure process related to the property been commenced or threatened?

In addition to this Questionnaire, several companies have provided a “Buyer’s Affidavit” which, in addition to the typical Mechanic’s Lien Affidavit, requires the buyer to note if the property has been visited by the buyer the buyer did not observe any tenants or other parties in possession; the buyer saw no evidence of work being performed on the premises; and the buyer has inspected the inside and outside of the premises.

You should check with your title insurance company to see whether they are requiring this additional Buyer’s Affidavit or a Risk Questionnaire. Even without requiring these new closing documents, a careful attorney should consider the questions being raised and should use additional care when closing post-foreclosures.

Saric – Affidavits

In the case of Federal National Mortgage Association v. Davor Saric 2010 Mass. App. Div. 177 the District Court’s Appellate Division determined that a certified copy of a recorded Affidavit of Sale “did not present competent evidence” that the Plaintiff Mortgagee had good title to the Defendant’s condominium unit.

Federal National Mortgage Association (hereinafter “FNMA”) had filed a suit to evict the Defendant – Appellant, Davor Saric, following a foreclosure sale. The Court determined that FNMA’s documentary evidence did not meet the evidentiary requirements for admission. The Court determined that as FNMA did not lay a foundation for the introduction of “secondary evidence”, FNMA was limited at trial to introducing the original deed to lay the proper foundation for the introduction of secondary evidence. The certified copy of the deed to FNMA was not accepted as evidence.

The Court further stated that “similarly, although G.L. c. 244 s. 15 directs that an Affidavit of Sale showing that the ‘requirements of the power of sale and of the statute have in all respects been complied with…’ shall be admitted as evidence that the power of sale was duly executed.” The affidavit here did not meet those statutory requirements for admissibility.

The form of affidavit in the Saric case follows the form set forth in G.L. c. 183, App. Form 12 with the exception that the execution line merely reads “PHH Mortgage Corporation f/k/a Cendant Mortgage Corporation.” The recorded affidavit omits the line “sworn to by the said…” If this was an issue for the Court, there is no reference to it in the Opinion. As is noted in the excellent article by William B. Hovey and Michael Pill, Foreclosure Fallout: Don’t Become a Casualty, published in the December 20, 2010 edition of Lawyers Weekly, it is noted that no Massachusetts case has addressed the issue of whether a foreclosure affidavit must be based on personal knowledge. As part of scrutinizing the foreclosure procedure, the issue has arisen of who must execute the affidavit. The attorney typically caused the publication to be done and has also overseen the compliance with G.L. c. 244 s. 14 while the lender is typically the party aware that the principal and interest obligations mentioned in the mortgage have not been tendered prior to the sale.

Calling into question the validity of the affidavit itself potentially raises even more serious issues.

Title Insurance

Historically, title insurance has been a whipping boy for the major media publications, most of which question whether anyone has collected on a title insurance policy. As noted in an October 8, 2010 New York Times article, “It ultimately feels like a tax – an extortionate one at that – and not a protective measure.”

Finally, title insurance is being viewed as a valuable commodity. In Massachusetts, those who purchased owner’s title insurance policies may now breath easier if their title is clouded by an Ibañez situation. Nationally, those who have purchased title from foreclosing lenders whose interest in the mortgage may now be questioned can also breathe easier. Still, even articles that admit to the value of an owner’s policy of title insurance still acknowledge that title insurance remains a mysterious proposition for homebuyers.

Federal Housing Finance Agency Guidelines

On October 1, 2010, the Federal Housing Finance Agency implemented a four-point policy framework detailing its plan to identify foreclosure process deficiencies. Said four-point policy framework includes the following:

1. Verify Process 
Mortgage Servicers must review their processes and procedures and verify that all documents have been completed in compliance with legal requirements. If the Servicer’s review reveals deficiencies, the Servicer must take immediate corrective action.


2. Remediate Actual Problems
When a foreclosure process deficiency has been identified, it must be remediated in a timely fashion. If the Servicer identifies shortcomings with regard to foreclosure affidavits, the following steps should be taken:

a. Pre-Judgment Foreclosure Action
Servicers must review any filed affidavits to ensure that the information contained in the affidavits is correct and that the affidavits were completed in compliance with applicable law. If the review indicates that the affidavit was not correct or was not completed correctly, the Servicer must work with foreclosure counsel to take appropriate remedial actions.

b. Post-Judgment Foreclosure Action (Prior to Foreclosure Sale)
Before a foreclosure sale can proceed, Servicers must review any affidavits relied on in the proceedings to ensure that the information contained in the affidavits iss correct and that the affidavits were completed in compliance with applicable law. Again, if the review indicates that the affidavit iss not correct or was not completed in compliance with applicable law, the Servicer must work with foreclosure counsel to address the issues.

c. Post Foreclosure Sale (Including Eviction Actions and Real Estate Owned Sales)
In the case of eviction actions, Servicers with deficiencies must confirm that the information contained in any affidavits iss correct and that the affidavits were completed in compliance with applicable law. With respect to clearing of title for REO properties, again, information set forth in all affidavits must be confirmed and said affidavits completed in compliance with applicable law.

In the case of bankruptcy cases, all affidavits must be reviewed.

Servicers are further reminded to report any fraudulent activity and to avoid delay when all foreclosure alternatives have been unsuccessful.

Foreclosures have always required additional scrutiny by conveyancers. It is particularly important now that conveyancers not only be aware of the various quirks, i.e. Special Notice to the Internal Revenue Service and Special Notice pursuant to M.G.L. c. 61A, but should also be checking all foreclosed parties for bankruptcy; determine all foreclosure papers were properly executed and authorized; and determine whether the property being closed is presently vacant.