FORECLOSURE SALES UP, TIME TO FORECLOSE GETTING LONGER

Foreclosure sales rose dramatically in most of our coverage area, though much of the increase was due to March having more days than February. In California foreclosure sales increased 35.1 percent overall, but rose just 10.5 percent on a daily average basis. Nevada foreclosure sales, however, bounced back dramatically after falling in February, rising 109.5 percent even on a daily average basis. Foreclosure starts, when viewed on a daily average basis, declined across our coverage area in March, though the overall number of filings increased in California, Nevada and Washington due to the longer month. Time to Foreclose continues to increase across the board, most notably in Nevada, where sales were impacted by a local court ruling.

Key month over month trends for March include:

CLICK HERE for our complete March 2011 Foreclosure Report

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FORECLOSURE ACTIVITY SLOWS ACROSS THE BOARD

Foreclosure activity slowed significantly across the board in February with filings down in Arizona, California, Nevada, Oregon and Washington. Foreclosure sales saw a similar deep dip throughout our coverage area, a dramatic about face from the surge in sales seen in January. Despite the drop in foreclosure sales back to the bank, Bank Owned Inventories were mostly flat, suggesting that fewer REOs were resold during the month.

Key month over month trends for February include:

CLICK HERE for our complete February 2011 Foreclosure Report

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A year ago we appeared before the Joint Oversight Hearing of the California Senate Banking, Finance and Insurance Committee and the Senate Judiciary Committee. In that meeting, we pointed out that government intervention, while clearly well intentioned, had done little more than add delays to the foreclosure process, allowing banks to avoid losses by pushing the problem off to another day. We saw then that SB1137 had a temporary drag effect on Notice of Default filings, but didn’t slow the growth trend for long. AB2X-7 and SB2X-7 was followed by a temporary decline in Notice of Trustee filings, but the drop was short lived, as most lenders were exempt from the law.

Our premonition is that we will likely see a similar temporary delay in foreclosure starts if SB 729 is passed into law as lenders adjust to the new requirements, but ultimately not much will change.

California Senate Bill 729 would require that lenders evaluate a timely loan modification request and provide the homeowner with a clear denial before beginning the foreclosure process with the Notice of Default. This is intended to stop the lender from double tracking the loan modification process with the foreclosure process, which has been said to sometimes result in a premature foreclosure on an otherwise qualified loan modification candidate. Stopping a premature foreclosure sale is good thing, but let’s not forget that there may be times when a denied loan modification is also a good thing.

Under SB 729, lenders must attach a detailed Notice of Compliance (see page 12, line 28 of the bill as introduced for an example) to the Notice of Default that, among myriad other things, attests to ownership of the note. That part of the requirement makes us think that the bill’s authors have been watching the pending Arizona foreclosure legislation and have read the recent Massachusetts Supreme Court opinion that speak to the similar subject of ownership assignments.

If the lender fails to comply with SB 729, the trustee sale can be stopped by the homeowner. If it’s too late because the property was already sold to a bona fide purchaser at trustee sale or as REO, then the lender can be held liable for triple the homeowner’s actual damages or $15,000, which ever is greater, as well as attorneys fees and costs.

SB 729 will help those few defaulting homeowners who might have their loan modification cut short by a premature foreclosure sale, and will also help many other defaulting homeowner by delaying the foreclosure start, allowing them to stay in their home for just a little while longer. But we still come back to the reality that the homeowner remains in default, is still underwater and the bank will continue to have a non-performing asset even if SB 729 becomes law. What is really needed is not governmental tinkering with the foreclosure process, but rather our elected representatives need to focus on creating and implementing housing policies that give us a realistic plan for dealing with the millions of homeowners still underwater, while providing a gradual path back to a healthy housing market, ultimately free of government intervention and subsidies.

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Arizona may require lender’s who are foreclosing on loans they did not originally make (a non-originating beneficiary) to document how the loan was transferred from the original lender to them.

Arizona Senate Bill 1259 is awaiting approval by the House after a 28 to 2 senate vote passing the matter about a week ago. The bill would require:

1.     A non originating beneficiary on a deed of trust, to record a summary document that contains past names and addresses of prior beneficiaries, the date, recordation number and a description of the instrument that conveyed the interest of each beneficiary.

2.     The summary document to be recorded at the same time and place that the notice of trustee’s sale is recorded and that a copy be attached to any notice of trustee’s sale that is required.

3.      Failure to properly record the summary document that demonstrates evidence of title for the foreclosing beneficiary as of the date of the trustee’s sale will result in a voidable sale.

4.      Any person with an interest in the trust property can file an action to void the trustee’s sale for failure to comply and would be entitled to an award of attorney fees and damages, to include an award of attorney fees for any injunction or other provisional remedy related to the claim.

In essence, if signed into law the bill will require lender’s that didn’t originate the loan to produce the full chain of assignments at the time the foreclosure is recorded to establish ownership, or risk the foreclosure sale being voided. An argument for a similar type requirement was recently shut down in a California court decision in which MERS came out the winner. Not surprisingly, MERS reportedly hired a lobbyist to contest this Arizona bill.

An interesting aside is that State Senator Michele Reagan, who sponsored SB 1259, has had her own battles with her lender over alleged predatory lending practices. In fact, Senator Regan’s lawyer in the litigation was quoted to say “It makes Michele mad that the bank servicers will not disclose to a borrower the true noteholders.” We’ve seen increasing anger over the actions taken by banks, and it should come as no surprise to see a backlash like this one.

The reality is that all too often our legislators, like Senator Regan, continue to pursue worthless stop-gap band aids rather than focusing on the real problem – negative equity. This bill may temporarily halt a few foreclosures, but what does it ultimately solve? The homeowner will still be underwater and the bank will still have a non-performing asset. Unless the goal is to provide homeowners free rent at taxpayer expense (don’t forget that the majority of home loans are now backed by the federal government), or perhaps dish banks a little well deserved pay-back (that ultimately we’ll pay for anyway in increased fees or further bailouts), what is it that Arizona legislators really expect to accomplish with this bill?

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As the national debate continues over whether MERS (Mortgage Electronic Registration System) has standing to foreclose, a recent San Diego, California based Appellate Court decision considering the issue has clearly sided with MERS. Last week, the 4^th District Court of Appeals issued a published opinion in Gomes v. Countrywide Home Loans that held (1) California’s nonjudicial foreclosure statute does not allow speculative lawsuits by homeowners to determine whether MERS is authorized to initiate a foreclosure; and (2) even if they did, the homeowner consented to the use of MERS to initiate the foreclosure when he signed the deed of trust.

For those who may still be unclear, let’s begin with what MERS is? The Gomes case had a nice explanation: “MERS is a private corporation that administers the MERS System, a national electronic registry that tracks the transfer of ownership interests and servicing rights in mortgage loans. Through the MERS System, MERS becomes the mortgagee of record for participating members through assignment of the members’ interests to MERS. MERS is listed as the grantee in the official records maintained at county register of deeds offices. The lenders retain the promissory notes, as well as the servicing rights to the mortgages. The lenders can then sell these interests to investors without having to record the transaction in the public record. MERS is compensated for its services through fees charged to participating MERS members. A side effect of the MERS system is that a transfer of an interest in a mortgage loan between two MERS members is unknown to those outside the MERS system.”

In the Gomes case the court said that California’s nonjudicial foreclosure rules, Civil Code sections 2924 through 2924k, are intended to be a one-stop-shop for how to exercise the power of sale in a deed of trust. Section 2924(a)(1) of the statute is clear that a “trustee, mortgagee, or beneficiary, or any of their authorized agents” can initiate a foreclosure (and this court found MERS was an agent, as will be discussed in a moment.) Importantly, the statute does not provide an additional requirement that the agent demonstrate in court that it is authorized to initiate a foreclosure and to do so would “fundamentally undermine the nonjudicial nature of the process and introduce the possibility of lawsuits filed solely for the purpose of delaying a valid foreclosure.” So, the court concluded, they would not allow speculative lawsuits to test MERS authority to initiate a foreclosure.

The court went on to volunteer that even if MERS was required to demonstrate that it was an authorized agent, it could do so. In a footnote, the court stated in conclusionary fashion that “MERS may initiate a foreclosure as the nominee, or agent of the noteholder” under Civil Code section 2924(a)(1) without further discussion. But on top of that, the court pointed to the deed of trust signed by the homeowner that provided that MERS was a nominee for the Lender and the Lender’s successors and assigns had the right to foreclose. Case closed.

California has squarely joined the ranks that allow MERS to foreclose that according to one commentator has grown to 19 states, thus providing us with a little more certainty going forward when it comes to this particular aspect of the nonjudicial foreclosure process. Just as the California courts recently provided some clarity on documentation irregularities in Aceves v. U.S. Bank saying that minor errors were of no legal consequence.

This reinforces our belief that despite minor misdeeds or process short cuts by lenders there will ultimately be no free homes for defaulting borrowers.

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