October 28, 2013

SJC to consider foreclosure sale notice mistakes

By Brandon Gee, Mass. Lawyers Weekly

The state’s Housing Court judges are increasingly overturning foreclosure sales due to mistakes in the notices banks must send homeowners, but the Supreme Judicial Court soon will consider whether anything less than strict compliance with G.L.c. 244, §35A should indeed outright void an extrajudicial foreclosure sale.

The law requires banks to send a notice to homeowners of their right to cure their default — and how that might be done — at least 90 days before the house is foreclosed on or otherwise seized. Housing Court judges have split on whether strict or merely substantial compliance with the law is necessary for a foreclosure sale to be valid.

The SJC has solicited amicus briefs on the question in U.S. Bank National Assoc. v. Schumacher, et al., which is scheduled for oral argument Nov. 7.

Many of the problems with the notices have resulted from banks’ use of the Mortgage Electronic Registration Systems, or MERS, which was created in 1995 to reduce headaches.

As a way to avoid the hassle of state- and county-level recordation requirements — and to make it easier to bundle mortgages into securities — MERS stands in for lenders as the owner of record of the security interest in their mortgages. As the “real” owners and servicers of a mortgage change, that activity is tracked by MERS, but MERS itself remains the owner listed in county land records until either the loan is paid back and the mortgage or deed of trust is reconveyed to the borrower, or, in the case of a default, the mortgage is assigned to the real party in interest to initiate a foreclosure.

By eliminating the need to record any assignment at the local level except the first and last ones, MERS saves mortgagees and their servicers a significant amount of money and eases the computerized trading of mortgage-backed securities.

‘Lamoureux’ and ‘Brown’

Uncontroversial for years, MERS has been at the center of legal challenges since the subprime mortgage crisis — including the challenges of §35A notices being argued by foreclosure defense attorneys, and increasingly accepted by judges, in Massachusetts.

A recent case in the Western Housing Court, Federal National Mortgage Association v. Lamoureux, et al., illustrates the issue.

In 2004, Doreen and Mark Lamoureux purchased a home with a loan from Fleet National Bank. MERS was identified as the mortgagee “solely as nominee for lender.”

After the mortgage went into default, on Nov. 4, 2010, MERS assigned and transferred the mortgage to PHH Mortgage Corp., which, on May 17, 2011, conducted a foreclosure sale. The Federal National Mortgage Association, or Fannie Mae, was the high bidder.

In the midst of all the activity, the Lamoureuxes received a §35A notice from PHH identifying PHH as “the current holder of the mortgage” on March 22, 2010 — more than seven months before MERS officially transferred the mortgage to PHH.

Judge Dina E. Fein found that strict compliance with §35A was required, granted the Lamoureuxes’ motion for summary judgment, and ruled that judgment for possession should enter in their favor.

Fein reasoned that, even though an argument for substantial compliance “has persuasive appeal” since PHH was the party the Lamoureuxes needed to deal with in order to cure their mortgage, “that argument is for the Legislature to consider, not for the courts to impose.”

“The consequences of foreclosure are significant, and the only protections that exist for consumer homeowners and the public at large are those self-effectuating statutory procedures established by the Legislature,” Fein wrote. “Importantly, it is in the context of non-judicial foreclosure that the Legislature has enacted, and refined over time, the statutory power of sale. Requiring strict compliance with the statutory power of sale is therefore sound public policy, as it assures the necessary measure of confidence that foreclosures are legally justified, and that the transfers which result from foreclosure sales are sound and not subject to collateral challenge.”

Fannie Mae’s lawyers at Korde & Associates in Chelmsford did not return phone messages seeking comment on the case.

Hugh D. Heisler of Heisler, Feldman, McCormick & Garrow in Springfield represented the Lamoureuxes. He could not be reached prior to deadline.

Fein has made two other similar rulings in recent months and noted that other judges have done the same since 2011. Judge David D. Kerman of the Northeast Division Housing Court, for example, has overturned several foreclosure sales on the same basis.

But at least one other judge, Jeffrey M. Winik of the Boston Housing Court, has taken an opposing stance based on the practicalities of the situation.

In HSBC Bank USA v. Brown, et al., Winik rejected the defendant’s argument that a §35A notice should have included the name and address of MERS.

“Minor mistakes will not under normal circumstances invalidate a statutory notice as long as the notice otherwise substantially complies with the statutory requirements,” Winik wrote. “[Section 35A] is intended to enable the borrower to contact the lender or the lender’s agent to cure a default. I do not believe that in enacting Section 35A the legislature intended to impose a requirement that, construed as Brown argues it should be, would turn a statutory cure provision … into a landmine designed to explode in the face of a note holder/mortgagee months or years after the notice was given and the foreclosure was completed … .”

‘Schumacher’

If Fein and Kerman’s reasoning prevails at the SJC, the ruling “may provide some ammunition and buy more time for distressed homeowners,” Framingham real estate lawyer Richard D. Vetstein said.

Like the SJC’s landmark 2011 ruling in U.S. Bank National Association v. Ibanez (regarding the requirement that mortgage holders must be identified accurately in a foreclosure proceeding), Vetstein said “lenders must learn the hard way before they change their procedures and practices, but they will get it eventually.”

Vetstein added that strict compliance should not be a “big deal” for lenders: They should find out who truly holds the mortgage and put that name on the default notice.

Benjamin L. Hall Jr., a foreclosure defense attorney in Edgartown, said strict compliance is particularly important in a state like Massachusetts that does not require that foreclosures be carried out under the supervision of the courts.

“Because of the devastating impact a non-judicial foreclosure can have, … the public policy intention of the Legislature, as found in the other cases cited by Judge Fein, was clearly that a strict adherence to statutory notice requirements must be the standard to be applied,” Hall said. “Any other result would not give homeowners the non-judicial process to which they are absolutely due.”

In Schumacher, the case currently before the SJC, Jeffrey S. Patton and Morgan T. Nickerson of Boston’s Nelson, Mullins, Riley & Scarborough argue on behalf of plaintiff-appellee U.S. Bank that §35A is merely “related to,” but does not actually “involve,” the power of sale.

“This result conforms with the reality that a §35A does not affect record title, as one cannot examine a property’s title to determine whether a §35A notice is proper,” the lawyers say in their brief.

Patton and Nickerson also argue that noncompliance with §35A should not automatically void a foreclosure sale, but make it “voidable in equity.”

“Not all noncompliant §35A notices result in the same degree of harm to the mortgagors who receive them or effect whether a foreclosure sale should go forward,” they write. “Thus, a blanket ‘one size fits all’ remedy that voids all foreclosure sales, no matter how trivial the noncompliance, lacks the rationale for voiding the foreclosure in Ibanez, fails to take into account the Housing Court’s ability to fashion remedies appropriate to harm sustained, and unnecessarily delays the foreclosure process by voiding foreclosure sales that even the borrower/mortgagor may want to take place.”

But in an amicus brief submitted in support of the defendant-appellant, Community Legal Aid Inc. says the mistakes being made are more than mere technicalities and that strict compliance must be required.

Community Legal Aid attorneys Allen Acosta, Sora J. Kim and Uri Y. Strauss argue in the brief that one of the purposes of the notices was to allow the Division of Banks to develop a database to track foreclosure activities by particular lenders, brokers and servicers. Even if a mistake identifying the players has no practical impact on individual foreclosures, it undermines the monitoring effort, the organization contends.

Community Legal Aid says mistakes are widespread and varied and have included notices that list incorrect telephone numbers, that have been sent to the wrong people, that have identified the wrong mortgage, and that have included the incorrect amount of money required to cure a default.

Defendant-appellants John and Edna Schumacher are represented by Elizabeth Benton and Max Weinstein of the Legal Services Center of Harvard University. ▪