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New York AG Files Suit Against MERS and Servicers Alleging Deceptive and Fraudulent Foreclosure Practices
On February 3, New York Attorney General Eric Schneiderman filed a lawsuit against MERS and several major banks, challenging the MERS system and alleging that the defendants engaged in fraudulent and deceptive foreclosure practices in violation of state law. Among the allegedly illegal practices, the New York Attorney General claims that the defendants (i) initiated thousands of foreclosure proceedings without proper standing, (ii) submitted in court deceptive and invalid mortgage assignments, (iii) misled borrowers by submitting in court defective mortgage assignments executed by untrained and unsupervised certifying officers and assignments that were automatically generated (i.e. "robosigned"), (iv) created a system that deliberately obscures the chain of title for a loan or hides the current note-holder. The Attorney General is seeking (i) an injunction to stop the practices recited in the complaint, (ii) disgorgement of all profits obtained in connection with those practices, and (iii) payment of other damages and civil penalties.
Illinois AG Files Suit Alleging Improper Recording of Mortgage Assignments
On February 2, Illinois Attorney General Lisa Madigan filed a lawsuit in Cook County Circuit Court alleging that a Florida-based company that prepares documents for use in default servicing and foreclosure actions filed faulty documents with Illinois county recorders. According to a press release issued by the Attorney General, the defendant processes and records mortgage assignments that are used in foreclosure proceedings by some of the largest mortgage lenders and servicers. The defendant's activities in Illinois purportedly violate the state consumer protection statutes, and are alleged to have contributed to the state's mortgage crisis. The state is seeking an order requiring that the company (i) review and correct all documents it unlawfully created and recorded in Illinois, (ii) disgorge all financial gains obtained in connection with the allegedly unlawful practices, and (iii) pay civil penalties.
New York Issues Emergency Rules Regarding Mortgage Servicing
On February 1, the New York Department of Financial Services (Department) published in the state Register emergency rules regarding the conduct of mortgage loan servicers in the state. The rules are intended to provide clear guidance to servicers regarding the procedures and standards they should follow with respect to loan delinquencies. For example, the rules establish requirements for (i) handling consumer complaints, (ii) handling loss mitigation, (iii) payment of taxes and insurance, and (iv) crediting payments from borrowers and handling late payments. The rules also describe the recordkeeping requirements and specify certain prohibited practices and conduct, including placing homeowners' insurance on property when the servicer has reason to know that the homeowner has an effective policy. The emergency rules are effective as of January 17, 2012 and expire on April 11, 2012. The Department expects to issue a rulemaking to make these rules permanent.
Obama Administration Expands Housing Recovery Plans
On February 1, President Obama unveiled a plan to expand government support for the housing market, including a broad-based refinancing plan. The plan, announced during the President's State of the Union Address, combines changes to existing programs and creation of new initiatives, some of which will require congressional action. First, the President will ask Congress to enact legislation to allow the Federal Housing Administration (FHA) to provide government support for the refinancing of non-Fannie Mae and non-Freddie Mac mortgages. The $5 to $10 billion program would be funded by a fee imposed on the largest financial institutions. For borrowers with Fannie Mae or Freddie Mac loans, the legislation would further streamline existing refinance programs and create incentives for borrowers to accept shorter loan terms to build equity. Second, the administration will continue its work to create new mortgage origination and servicing standards in an effort to create a Homeowner Bill of Rights. Third, the Federal Housing Finance Agency (FHFA) will conduct a pilot program through which it will sell foreclosed properties to be transitioned into rental housing. Finally, the President's upcoming budget will include a national program to put unemployed construction workers back to work refurbishing vacant and foreclosed properties.
The President also highlighted the work of the recently-formed Residential Mortgage-Backed Securities Working Group, and reviewed the success of existing government efforts (e.g., those related to unemployment forbearance). Further, the announcement incorporated a Treasury Department move last week to enhance the Home Affordable Modification Program (HAMP) by (i) extending HAMP's deadline through December 31, 2013, (ii) expanding borrower eligibility for HAMP, and (iii) encouraging use of principal reduction for loans insured or owned by Freddie Mac or Fannie Mae. In response, the FHFA reiterated its opposition to use of principal reduction by Fannie Mae and Freddie Mac.
FRB Governor Reviews Mortgage Servicing Enforcement Actions
On January 7, Federal Reserve Board (FRB) Governor Sarah Bloom Raskin, in a speech to the Association of American Law Schools, reviewed the status of federal banking regulators’ enforcement responses to what she characterized as the "foreclosure crisis". Governor Raskin described the enforcement actions brought last year by the FRB and other banking regulators against mortgage servicers as “only a start in a comprehensive enforcement response to the foreclosure crisis” and provided a reminder that anticipated monetary penalties for alleged deficient servicing and foreclosure practices are still to come. Further, Governor Raskin identified strong enforcement as a necessary incentive to developing an improved mortgage servicing model.
Freddie Mac, Fannie Mae Announce Unemployment Forbearance Programs
On January 6, Freddie Mac published Bulletin 2012-2, which allows servicers to offer eligible borrowers a short-term unemployment forbearance period, and the possibility of an extended unemployment forbearance period, if needed. On January 11, Fannie Mae followed with Servicer Guide Announcement SVC-2012-01, implementing a substantially similar program. Under the new programs, servicers may suspend or reduce an eligible borrower’s mortgage payments for a period of six months. With approval from Freddie Mac or Fannie Mae, respectively, servicers also may extend the six-month forbearance period for up to an additional six months, provided that the period does not extend beyond a date that would cause the delinquency to exceed twelve months. Further, following an unemployment forbearance period, a borrower may be re-evaluated for a new Home Affordable Modification Program (HAMP) or non-HAMP trial-period plan if the borrower was complying with the terms of the existing trial plan before obtaining unemployment forbearance. Under the Freddie Mac program, servicers must incorporate unemployment forbearance into their operations by February 1, 2012, but servicers have until March 1, 2012 to comply under the Fannie Mae program.