PORTLAND, Maine — In the second half of 2014, new home foreclosure filings in Maine fell off a cliff, by more than 50 percent.
It’s not that the economy suddenly improved or that the number of delinquent payments plummeted in three months, but that banks pulled back, unsure how to prove their rights to a property before a judge, in the wake of a ruling by the Maine Supreme Judicial Court.
The drop of filed foreclosures is one clear result of the court’s July 2014 ruling in the foreclosure case regarding the Casco home of Scott and Kristina Greenleaf, which since has been a topic of heated debate in the legal community and caused what mortgage industry representatives have called a crisis.
The issue could insert defects into the chain of title for more than half of mortgages in the state, creating problems when a homeowner prepares a property for sale, adding costs and time to the closing process. It also adds costs and complications for lenders in foreclosure cases.
For those reasons, banks, credit unions and the real estate industry have now turned to the Legislature to make the problem go away.
But foreclosure defense attorneys argue a bill headed to the Legislature would give the mortgage industry an unnecessary pass in future foreclosure cases for a legal quandary the industry should have seen coming.
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Greenleaf and MERS
In the Greenleaf case, which is bouncing between the courts for appeals on separate issues, Bank of America filed to foreclose. The Law Court ruled the records the bank relied on to prove its interest in the mortgage were insufficient.
For the majority of mortgages in Maine, other lenders rely on those same types of records, managed by the parent company of Mortgage Electronic Registration Systems, or MERS. The membership organization estimated there were 13,382 loans registered on its system in Maine last year, a market share of about 65 percent.
The Greenleaf case in Maine is not the first time MERS records have been challenged, here and elsewhere. Rulings in other states and Maine led the company to end its practice in 2011 of filing foreclosures on behalf of a lender.
Before foreclosure, the company assigns a mortgage back to the lender, who is then the plaintiff in the foreclosure.
Last year, MERS won cases in U.S. District Court in Minnesota, upholding its right to assign mortgages to banks before a foreclosure. It’s cleared in most other states, too.
The Law Court ruling in Maine, which also challenged standards for verifying other records used in foreclosures and how homeowners should be notified of delinquencies, made clear MERS did not prove its ability under state law to assign the mortgage to Bank of America.
The bank, in turn, had no right to foreclose, the court found.
That makes MERS a weak link in any chain of title for a home in Maine and, without the proper records, puts a lender’s claim to a delinquent mortgage or potentially a homeowner’s claim to a property they want to sell into question.
David Jones, an attorney at the firm Jensen-Baird specializing in real estate law, said correcting that title defect in foreclosure cases could be simple if the original lender was a bank or credit union that’s still in business.
“This just adds one more issue,” Jones said in a telephone interview. “If [the original lender] was a mortgage company that went out of business, then it could be a significant challenge and delay.”
MERS records serve as a placeholder at local registries of deeds for mortgage lenders. If a lender wants to sell the mortgage to the secondary market rather than hold on to the loan until it’s fully paid, it can do that without having to return to the registry of deeds and pay a fee for every transfer of title in a property.
That avoids millions in fees that would otherwise go to county registries of deeds. A U.S. District Court judge in Pennsylvania last year found Montgomery County’s claims that it lost out on more than $15 million in recording fees between 2000 and 2012 were sufficient for a trial, which is ongoing. MERS has had similar lawsuits in other states dismissed.
That system played a role in subprime mortgage lenders bundling up and selling bad mortgages to Wall Street investors leading up to the financial crisis of 2007, but it wasn’t MERS that made the underlying loans good or bad.
Selling to the secondary market has been a standard practice of lenders for years, according to the Maine Bankers Association. MERS makes that easier and less expensive.
“When the mortgage was granted to MERS, the assumption was that they would have the ability to discharge it or give a partial release or assign it to someone else,” John Cunningham, with the Maine Bankers Association, told the Legislature’s judiciary committee. “That’s just what we assumed.”
The attorneys who argued the Greenleaf case said that assumption by the mortgage industry is not the fault of Maine law or the courts and a problem the mortgage industry will have to handle.
“The source of this problem is not Greenleaf,” said Jack Clifford, a Lisbon Falls attorney who argued the Greenleaf case. “It’s a reiteration of what has been the law of this state for over 200 years.”
Linda Gifford, a title attorney and lobbyist for the Maine Realtors Association, wrote to the Legislature’s Judiciary Committee that the Greenleaf ruling’s implications for that system “shocked the marketplace in Maine” and is prompting title attorneys to require title insurance for mortgages, adding to closing costs.
Title insurance companies are willing to cover the issues raised by Greenleaf, Gifford wrote, but she warned the committee that might not be a permanent solution.
“Title insurance companies could just as easily decide not to allow coverage of this issue in the future,” Gifford wrote.
William Hultman, a vice president of legislative affairs for MERS owner Merscorp Holdings, testified before the Judiciary Committee that one major lender has stopped purchasing loans with MERS assignments. Industry representatives said they’re concerned about being an outlier in a system used nationally for recording mortgages.
Banks push for change
To get rid of those problems, the Maine Bankers Association, the Maine Credit Union League and the Maine Association of Realtors came out in support of LD 321, which split committee members on whether to recommend passage. The committee has yet to formally file a recommendation and minority report.
“It’s a simple but elegant [part of the] process that MERS plays and that now unfortunately has been undermined,” said Ben Marcus, a lobbyist for Drummond Woodsum. “LD 321 provides an opportunity to fix that.”
Lobbyists for the bank and credit union organizations listed the bill in multiple lobbying reports through January and March, and the Realtors and bankers associations were among the top donors to members of the Judiciary Committee in 2014, including the bill’s sponsor, Rep. Matthew Pouliot, R-Augusta.
The amount contributed by the Bankers Association made up less than 6 percent of its $41,020 in state political contributions for the year and less than 2 percent of the $77,518 from the Realtors group.
Peter Hatem, an attorney based in Scarborough, said the mortgage industry’s concerns are overblown and that the proposed law goes too far.
“LD 321 is like shooting a mosquito with a bazooka right now,” said Hatem, who works to defend homeowners from foreclosure through the program Maine Attorneys Saving Homes. “It has not stopped lenders from lending in Maine, it hasn’t even come close. It’s an issue that has to be dealt with because the foreclosure process didn’t work because the plaintiffs didn’t prove their case.”
Frank D’Alessandro, an attorney with Pine Tree Legal Assistance, said the bill is a “judicial bailout,” exempting MERS from the state’s standards for evidence.
“The application of the Rules of Evidence and Civil Procedure to foreclosure cases has been critical in uncovering both past bad acts of mortgage servicers and the continuing failure of servicers in foreclosure actions to establish that they are entitled to judgment,” D’Alessandro said.
The committee in an April 27 work session tabled another bill, LD 1261, sponsored by House Minority Leader Ken Fredette, R-Newport, and drafted by the Maine State Bar Association’s Real Estate and Title Section and supported but less preferred by the banks and real estate groups because it doesn’t deal with future MERS issues.
“It is narrowly tailored to address a specific problem with assignments of mortgage, discharges of mortgage and partial releases of mortgage that was created by an arguably unexpected opinion of the Maine Supreme Court,” wrote Robin Watts, head of the Maine State Bar Association’s Real Estate and Title Section subcommittee.
Pouliot said LD 321 “is more comprehensive” and that Fredette also supported the broader bill.
“It’s important for us to keep that in mind when making a decision on this that consumers are stuck in the middle with a title that is not marketable,” Pouliot said.
The legal fight
Pierce Atwood attorney John Aromando picked apart the court’s decision in a fall issue of the Maine Bar Journal. Tom Cox, the attorney arguing the Greenleaf case, co-authored a response in the spring issue.
The two first tangled in the case that made Cox’s name nationally, over a foreclosure case in the town of Denmark that prompted national scrutiny of mortgage lenders’ practice of hastily approving foreclosure documents, dubbed “robo-signing.” Aromando represented GMAC mortgage in that case.
That duel will continue as the case heads back to the Law Court this summer over a lower court’s decision to dismiss Bank of America’s foreclosure case but keep the door open to them bringing that case forward again.
Cox, who in 2008 came out of retirement to volunteer at Pine Tree Legal Assistance and ended up on a crusade against bad mortgage lending practices, argues the Greenleaf ruling denies the bank the right to file that foreclosure again.
On the horizon
In the background of the disputes over Greenleaf is a possible shortfall in the budget for the state’s foreclosure counseling program, started in 2009. The program draws revenue in part from foreclosure auctions.
The state’s Bureau of Consumer Credit Protection administers the program, which contracts with certified housing counselors around the state who can help homeowners deal with foreclosure.
Will Lund, superintendent of Maine’s Bureau of Consumer Credit Protection, said it’s still too early to tell how the Greenleaf decision’s impact on filed foreclosures will affect the budget for the program with laws before the Legislature in flux. Pre-foreclosure notices, which tell a homeowner of their ability to get free counseling, were on the decline at the end of 2014 but still on par with most of 2010.
The program plugged a $300,000 budget gap for the current fiscal year with a portion of Maine’s money from two national settlements with mortgage lenders and servicers.
It’s a voluntary program. Parties foreclosing on a home are required to notify the state, which then sends out a packet of information to homeowners that includes contact information for counselors, like Jason Thomas, with Coastal Enterprises Inc.
Thomas said CEI counselors attend required mediations between a homeowner and a lender.
“Very few homeowners have the ability or the financial ability to be represented by legal counsel,” Thomas said. “And because of that, the legal process is sometimes an unequal playing field.”