Norm Assymtrey between Main Street and Wall Street

By Nicholas M. Moccia
Law Offices of Robert E. Brown, P.C.

Richard H. Thaler presents an interesting analysis about the next wave of foreclosures that is destined to sweep across the nation. The difference between the on-coming wave and previous waves is that these foreclosures are likely to be spurred less by spells of unemployment and more by strategic thinking.

Mr. Thaler observes that many homeowners are dutifully making mortgage payments when, at least from an economic perspective, it makes no sense to do so. He cites the following all-too-common scenario:

A family that financed the entire purchase of a $600,000 home in 2006 could now find itself still owing most of that mortgage, even though the home is now worth only $300,000. The family could rent a similar home for much less than its monthly mortgage payment, saving thousands of dollars a year and hundreds of thousands over a decade.

Thaler attributes this behavior to the prevailing sentiment that it is immoral for borrowers to default on loans. Yet at the same time lenders are free to maximize profits and dispense obscene bonus at their expense. “It’s as if borrowers are playing in a poker game in which they are the only ones who think bluffing is unethical.”

Thaler predicts that this sentiment is likely to transform in the near future as borrowers become increasingly conscious of the "norm asymmetry" that exists between Main Street borrowers and Wall Street financial players.

See Underwater, but Will They Leave the Pool?

Bankruptcy concerns for the Main Street Real Estate Attorney

By Nicholas M. Moccia
Law Offices of Robert E. Brown, P.C.

I recently encountered an interesting article entitled “DIP Financing and Other Bankruptcy Concerns for the Transactional Real Estate Attorney” by S.H. Spencer Compton and Andrew D. Jaeger.  The stated purpose of the article is to familiarize real estate lawyers with some basic elements of bankruptcy law which may arise in connection with real estate transactional practice.

A key concept raised by the authors is Debtor in Possession (“DIP”) Financing.  DIP Financing is a creature of statute arising out of Section 364 of the Bankruptcy Code.  Section 364 authorizes a bankrupt debtor to borrow money to preserve the “bankruptcy estate” or to further the debtor’s rehabilitation efforts during the reorganization process.  Section 364 purportedly provides special protections to prospective lenders, allowing for what is called a “§ 364 lien” on all the debtor’s assets.  Should the debtor default, the bankruptcy court will enforce the order granting such a lien.  The Section 364 lien is some circumstances is given a senior or equal lien priority on previously encumbered assets (§364(d)).  Better still, § 364 liens may even acquire “super-priority” over administrative expenses incurred during the course of a bankruptcy (§364(c)(1)).  It should be noted that, with exception of certain domestic support obligations, administrative expenses have priority over all other claims on the bankruptcy estate. See § 507.  

One question that the authors raise is whether a real estate attorney can expect a state court to honor the DIP lender’s lien where no mortgage is of record, especially in situations where the bankruptcy court no longer has jurisdiction.  In a similar vein, questions arise as to whether § 364 liens should be recorded, and if so, whether the applicable mortgage tax should be paid.  According to the authors, these issues are all questions of first impression and have not been address by case law.  After running a few searches, it appears the authors’ observation in this regard is correct--at least as far New York State case law is concerned.

I welcome comment from practitioners experienced in this area.

Lenders Now Freezing Bank Accounts and Garnishing Wages in Staten Island

By Nicholas M. Moccia
Law Offices of Robert E. Brown, P.C.


See linked article by Karen O'Shea of the Staten Island Advance which treats of a new foreclosure tactic whereby lenders or debt collectors holding second mortgages freeze bank accounts or garnish pay checks, making it even more difficult for people to hold on to their homes and service their first mortgage.

Robert E. Brown, Esq., is featured herein and it is reported that Mr. Brown managed to vacate a default judgment under one such claim for his client, Maria Gil.

As a follow up to his recent vacatur, Mr. Brown just days ago served a motion to dismiss for failure to state a cause of action in the poorly drafted complaint of the lender's debt collection law firm.

Click here for article:    http://www.nedap.org/pressroom/documents/2009-12-06_StatenIslandAdvance.pdf 

More to follow.

New Nightmare on Main Street: FDIC Receiver Attempts to Intervene in Foreclosure Action and Scuttle Defendant Counterclaims

By Nicholas M. Moccia
Law Offices of Robert E. Brown, P.C.
 
An interesting new development, increasingly common in the foreclosure defense practice area, is the attempted judicial intervention of new Main Street villain, the FDIC Receiver. The FDIC appears to be increasingly active in local foreclosure actions with the result that many defendants may lose their ability to raise the usual counterclaims which attempt to remedy the ubiquitous abuses perpetuated by consumer lenders. In addition to losing a legal remedy, FDIC intervention effectively removes any leverage a foreclosure defendant may have to settle with the foreclosing lender by way of a loan modification.

The nightmare scenario runs as follows:

Players:

    • Borrower Joe (our consumer borrower)
    • Originating Bank (soon to be failed Originating Bank);
    • Solvent Bank (i.e. who was “too big to fail” and rescued by cronies
       in D.C.);
    • FDIC (our new villain)

Sequence of Events:

    1. Borrower Joe gets mortgage from Originating Bank.

    2. Originating Bank fails and is taken over by the FDIC Receiver.

    3. FDIC Receiver attempts to salvage failed Originating Bank by selling off its “good assets” to Solvent Bank through “Purchase and Assumption Agreement.” Among these “good assets” are Borrower Joe’s loan obligations.

    4. Liabilities remain with failed Originating Bank including claims made by the failed banks’ creditors. FDIC Receiver has the power to settle these creditor claims administratively with broad discretion to accept or deny claims outright.

    5. Borrower Joe defaults on his loan and Solvent Bank commences a foreclosure action.

    6. Borrower Joe hires Main Street Attorney who raises a host of counterclaims against Solvent Bank.

    7. FDIC Receiver gallops to the rescue of Solvent Bank and tells Borrower Joe that its counterclaims are “liabilities” of failed Originating Bank and Solvent Bank is not responsible for these liabilities pursuant to the Purchase and Assumption Agreement.

   8. FDIC Receiver then moves to intervene in the foreclosure action. Judge grant FDIC’s request to intervene, and then FDIC removes Borrower Joe’s counterclaims from local court to its discretionary administrative resolution panel in Washington D.C. or North Dakota.

   9. As a result, Borrower Joe loses all leverage to settle with foreclosing Solvent Bank and also discovers that the FDIC Receiver denies his claim or gives him pennies on the dollar as a remedy because Borrow er Joe is too small to rescue.

The good news is that this nightmare scenario probably can be avoided with well crafted opposition papers.  Under the NY CPLR and supporting case law, there is a very strong argument against allowing the FDIC to intervene in such a nightmare scenario. The policy reasons for not allowing such an intervention are self-evident.

If you are interested in discussing some of the arguments this office has made against the FDIC-Receiver feel free to comment below or visit our website:   www.robertbrownlaw.com/

UNMASKING THE MASKED EXECUTIONER ON WALL STREET--MERS

By Nicholas M. Moccia
Law Offices of Robert E. Brown, P.C.

Throughout history, executioners have always worn masks.  In the American mortgage lending industry, Mortgage Electronic Registrations System, Inc., commonly known as “MERS”, has become the masked man wielding the home foreclosure axe.

Christopher L. Peterson, who is the Associate Dean of Academic Affairs and Professor of Law at the University of Utah, has unmasked the shadowy entity at the foreclosure chopping block—an entity conceived of and created by a tight-knit group of powerful mortgage industry insiders whose stated goal is to “capture every mortgage loan in the country.”  Any “Main Street” legal practitioner who so much as entertains the idea of doing foreclosure defense work should carefully peruse Mr. Peterson invaluable article on MERS entitled, “Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registrations System.”  The article can be downloaded for free at http://ssrn.com/abstract=1469749 .

This Article is the first academic piece that explores the legal and public policy foundations of the MERS system.  It explains how MERS works, why mortgage bankers created it, and what MERS has done to transform the underlying assumptions of state real property recording law.  Of particular value to the practitioner is the section which queries whether MERS actually has standing to bring foreclosure actions. 

MERS frequently attempts to bring home foreclosure proceedings in its own name rather than the name of the actual owner of the loan—its name is ubiquitous on legal captions nationwide.  In thousands upon thousands of cases MERS’ counsel continues to recite the statement “MERS holds legal title to the mortgage” as though it were, in Mr. Peterson’s words, “the finance equivalent of some tantric mantra.”  Yet, Mr. Peterson’s analysis exposes this claim as a simple falsehood--MERS is not a mortgagee simply because ink on paper makes this assertion.  In support of this claim, Mr. Peterson cites the following:  First,  MERS does not fund any loans; second, no homeowners promise to pay MERS any money and MERS is never entitled to receive any monthly payments; and third, and most importantly, MERS is never entitled to receive the proceeds of a foreclosure sale.

Mr. Peterson’s article is scholarly and well-cited.  It is a welcome companion to foreclosure defense practitioners and it would be a fitting, if not humorous, exhibit to every Motion to Dismiss for Lack of Standing against MERS.

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