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Pennsylvania Supreme Court Reaffirms Dunham Rule

bossman@jbizinfo.com — Mon, 06 May 2013 02:52:18 EST

In a much anticipated ruling, The Supreme Court of Pennsylvania has upheld a long-standing principle of real property law in the Commonwealth, putting to rest an issue of great concern to landowners and energy companies all across the Keystone State.

The so-called “Dunham Rule”, which has been well-settled law in this Commonwealth for more than 130 years, was recently reaffirmed by the high court in Butler v. Powers Estate, ___ A.3d ___, 2013 WestLaw 1749828, No. 27 MAP 2012 (Pa., April 24, 2013). (See my previous blog entry, When Is A Gas Not A Gas?) The state Superior Court in September of 2011 had reversed and remanded, paving the way for a potentially huge economic impact on the ownership rights of thousands of property owners and Marcellus gas leaseholders across the state.

In a recently published opinion, the Court ruled that the Superior Court erred in relying on a 1983 ruling as its rationale for reversal. In US Steel Corp. v. Hoge, 468 A.2d 1380 (1983), the state Supreme Court held that ownership of coalbed gas is conferred upon the owner of the coal. The high court did not deem the Hoge decision relevant, since that case did not discuss the applicability of Dunham.

In its unanimous decision, the Supreme Court reversed, stating that:

“We reaffirm that the rule continues to be the law of Pennsylvania,” the Court said in its 24-page opinion. “In our view, neither the Superior Court nor Appellees have provided any justification for overruling or limiting the Dunham Rule and its longstanding progeny that have formed the bedrock for innumerable private, real property transactions for nearly two centuries.”

This means that a unique aspect of Pennsylvania property law will continue in place for at least the foreseeable future. Since the law of most other states holds that a conveyance or reservation of "minerals" does indeed include oil & gas, Pennsylvania will remain an outlier in that regard. The full text of the opinion can be read here.

Why the cost of Closing Protection Coverage has increased in Ohio

rfranco@sourceoftitle.com — Thu, 02 May 2013 09:38:08 EST

Effective yesterday, the cost to consumers for closing protection coverage has increased by $5 for each covered party. Public records obtained from the Ohio Department of Insurance show that the change was largely due to concerns that losses caused by defalcations are uncertain and closing instructions are evolving. A Demotech report recommended the premium increase.

Closing protection coverage provides protection when a title agent fails to comply with written closing instructions. The most costly example of these failures tends to be when a title agent fails to follow instructions for handling money entrusted to them-- particularly when the agent puts the money in their own pocket instead! But closing protection also covers for failure to comply with other written closing instructions-- which are changing with great frequency, due to regulation and other factors. One could even guess that lenders are intentionally drafting their closing instructions in an attempt to include more potential losses under the protection of closing protection coverage.

Seeking support for a proposed increase in closing protection premiums, the Ohio Title Insurance Rating Bureau (OTRIB) authorized Demotech to analyze historical premium and loss experience for closing protection coverage in Ohio. Demotech's analysis found that "the pattern [of losses] is clear - the more recent the experience, the worse the loss and loss adjustment expense ratio."

According to Demotech, the data collected showed that total premiums collected for closing protection coverage have declined, while losses have risen. OTIRB members collected approximately $4.4 Million in Closing Protection Coverage premium in 2011, down from $5 Million in 2010. Losses, however, were nearly $2.6 Million in 2011, up from just under $1 Million in 2010.

Demotech's analysis cited two areas of "uncertainly and risk of material adverse deviation" in losses and loss adjustment expense ratio:

Given that Title insurance premium levels, and the underlying mortgage activity associated with Title insurance premiums, seem to have stabilized at a relatively low level compared to the peak years of 2003 through 2006, licensed agents that have been hiding escrow shortages or defalcations through a Ponzi like scheme, no longer have the financial capacity to continue the charade. Therefore, recent loss and loss adjustment expense ratios have deteriorated, and are likely to continue to deteriorate, due to the emergence of escrow shortages and defalcations.
Over the recent past, in response to changes in regulations, in response to suggestions from the United States Department of Housing and Urban Development or in anticipation of rules from the Consumer Finance Protection Bureau, the closing protection instructions issued by lenders have been revised several times. This is in marked contrast to the stability of procedures and instructions that had existed for more than 25 years. in this operating environment, meritorious claims based upon the fundamental coverage document have increased. With additional changes anticipated over the next several years, it is likely that the increased emergence of meritorious claims will continue until closing instructions stabilize and industry familiarity with lender instructions is enhanced.

Demotech is saying here that losses from defalcation are very hard to predict, and closing instructions have changed a lot recently and are expected to continue to change, causing additional losses for events other than defalcations.

The proposed rate change has gone into effect. Rates for Closing Protection Coverage in Ohio are now as follows:

$40 for a lender, its successors and assigns
$55 for seller(s)
$20 for buyer(s) or borrower(s)
$20 for each additional applicant for title insurance
There is a minimum premium of $40.

The study also noted that premiums in Ohio for Closing Protection Coverage are "well below the closing protection coverage premiums in other jurisdictions." The premium in Pennsylvania and Delaware is $75, according to Demotech.

Where is my loan? Who am I making payments to?

alex@protitleusa.com — Sun, 28 Apr 2013 21:26:23 EST

This is a question from many borrower’s who at one point took out a mortgage. This is a question that many recorders can not answer today. This is a question that can cause many claims without paying appropriate attention. At the same time, this is a question that only a few in the title industry are privileged to know the answer to. If you are a homeowner trying to find out why you are paying your mortgage to someone who is called as Servicers of your loan, it may cost you $100,000.00 yearly subscription and plenty of training to answer this question yourself.

Servicers operate per rules and guidelines defined by a document called Pooling and Servicing Agreement filed with SEC during formation of the securitized trust. One of the biggest problems with todays’ title work is a lack of understanding of securitization process and no connection of SEC filed document with mortgage related documents at the recorder’s office. In many cases, the mortgage is assigned into a servicer from the original lender per public records, while servicer never pays a dime for a note ( or a mortgage ) and only gets legal rights to initiate a foreclosure or execute a deed in lieu. The assignment of mortgage in fact hides the details of transaction (patches the chain of assignments) and makes the title clouded from the perspective of the mortgage transactions from origination to time of mortgage assignment.

Most of the assignments are from MERS serving solely as nominee for lenders to a servicers or trustees, but at the same time MERS is a shell system to track mortgages stating that it never owns a mortgage. MERS is supposed to be a transparent system to track all mortgage transactions but MERS is a first link in broken securitization system. MERS was formed to track the mortgage transfers and report the transactions to all interested parties, which is a great idea in theory. However, if the borrower tries to find out where the loan is under MERS tracking system by entering the name, address and SSN, the MERS Report will not give you much. You may get a report stating who servicer is, but not where the loan is securitized and any other related information on the transactions, especially the place where to find pooling and servicing agreement. The trustee, underwriter or issuer information is typically hidden within MERS, by stating that the information was hidden by request of the lender. Therefore, MERS system is only tracking and reporting for lender and not borrower. This is one item that certainly should be changed going forward and brought up to the attention of Consumer Financial Protection Bureau. Once the link between recorded mortgage and SEC is established, borrower may get access to all SEC based bi-laws, guidelines and servicing agreements for their specific mortgage. There will be no issues with mis- trusting the servicer collecting payments or trustee foreclosing on the property. At the same time, this approaches would force the originator disclose all of the information for the borrower, as well as, how to find it. If the loan is not acquired into the trust at the time or origination, borrower should be notified that there will be a letter from lender notifying where the loan is securitized and who the parties of the transaction are.

ProTitleUSA has an engine for securitization searching today, it’s not perfect, but it works for 90% of the loans, where we can state which trust the loan is securitized. We can help to get the information on each individual loan and pull all securitization documents. This is important for due-diligence work on the foreclosure and foreclosure defense.

Can title be transferred or mortgage assigned to Fannie or Freddie?

alex@protitleusa.com — Mon, 08 Apr 2013 08:53:51 EST

After the financial crisis in 2007-2008, most of the loans were securitized through Fannie Mae (Fannie) and Freddie MAC (Freddie). Fannie and Freddie, although operate as a government backed enterprise, maintain the course and methods of a private and publicly traded company, focused on bottom line. Fannie and Freddie are one of the last resorts for securitization market, continuing to securitize loans in REMIC trusts through today. We see many foreclosure actions were Freddie or Fannie become an owner after the foreclosure sale. In the few states, we see assignments executed into Freddie and Fannie. Well, this does not make complete sense to me, or at least this requires massive curative work, here is why!

Fannie and Freddie securitized the (conforming) loans in the similar fashion as the public securitization, forming REMIC trusts for investors to buy certificates with Fannie and Freddie guarantee. Every trust they formed maintained REMIC Trust documents (which you can find on the Fannie/Freddie respective sites) that would define a scope of each REMIC trust formed; typically these documents are REMIC Prospectus and Prospectus Supplement and Servicing Agreement (called Offering Circular). Freddie and Fannie would be named as Issuer and Guarantor and Trustee to this Trust in the documents, while servicer would selected from the list of approved servicers by Fannie and Freddie for each trust. The problem I see is a poor disclosure of securitization in the title work, as in my opinion, the title should really say, “Fannie Mae as Trustee for Guaranteed REMIC Pass-Through Certificates Fannie Mae REMIC Trust 20XX-XX. If you study Prospectus document, investors are paid consideration in the form of offering proceeds. The investors are the beneficiaries of this Fannie Mae REMIC. According to the IRS a REMIC is a passive conduit and the beneficiaries cannot take active participation in the management of the assets. As the beneficiaries of a Trust, they may be able to enforce their rights only in equity.

Quite recently Fannie Mae stated to report on when the loan was purchased into the trust; typically it’s within 30 days after origination of the loan. This would constitute the note transfer into the trust and in my opinion requires an assignment execution into REMIC Trust.

We currently only see an assignment into the servicer during the foreclosure process kick off or assignment into Fannie/Freddie directly through Foreclosure Deed. Also, there is a popular instrument call “Assignment of Bid” in the foreclosure to Fannie or Freddie to “patch” the chain of title and avoid securitization disclosure.

Write me at alex@protitleusa.com if you have any questions or comments or just post the comment here.

"I was never a Robo-signer" - You are a Robo-signer and you just don't know it.

alex@protitleusa.com — Mon, 01 Apr 2013 09:14:50 EST

A clerk, paralegal, attorney or title officer/agent signing the assignments of mortgages in volume - Is this a Robo-signing? Its hard to say. How do you go about proving that the signor on these documents is a Robo-signer. Besides presenting signature and position mismatch on varies assignments, as well as, notary mis-acknowlegdements, there is another more scientific way to demonstrate if a signer is a Robo-signed documents.

New method: Count the number of assignments executed in the single day by finding these documents in all accessible counties/states, where the signor operated their business. I know it’s tough, costly and practically impossible, however it was done before. ProTitleUSA managed to perform this search and results were astonishing.

ProTitleUSA selected a random date to find all assignments in few selected states where the signer was licensed to operate. After 2 weeks worth of research and finding searchers who can (or willing) examine the documents in the county records by recording date and instrument type only, we came up with book/page or instrument references to 115 assignments signed by same individual in a given day. Do the math: This would translate to around 1 assignment signed every 5 minutes in 8 working hours (without bathroom breaks).

To execute an assignment properly, the signor has to:

1. Review the property address

2. Borrower names

3. Originating Lender

4. Prior mortgage references and dates of the original mortgage

5. Chain of Assignment on the current title work

6. Assignor name

7. Violation of Pooling and Servicing Agreement by Assignor, if any

8. Presence of Power of Attorney if signed as Attorney-in-Fact

9. Corporate resolution for MERS or any other institution signed for

10. Assignee Name

11. For assignment to a Trustee for a Trust, verify Trust existence

After signor's review and signature, the notary should

1. Acknowledge the ID of the signer or see corp resolution to verify the signor’s authority to sign

2. Stamp and co-sign the document

3. Make an entry in the notary ledger

Can everything above be done in 5 minutes per assignment, I doubt it. Therefore, corners would need to be cut to maintain a pipeline of signing documents. This method to Robo-signer exposure would be an interesting twist in foreclosure court, where the Plaintiff (the trustee) would need to open up the corporate methods (assignment pipeline) used to show that the above is feasible.

Robo-signer today may be a clerk of the law firm tasked with signing the documents and reviewing them to be in the recordable format, but never review them using the review criteria above. Robo-signer would only know their work-flow and never would think to look “outside of the box”. Your opinion is greatly appreciated , do leave a comment.

Should Securitization become a part of the Title Exam? SEC vs Title Violations

alex@protitleusa.com — Thu, 21 Mar 2013 20:30:36 EST

There are a number of new court cases where securitization issues are pointed out and Plaintiff’s standing is under heavy scrutiny. I will not explain the securitization theory in this blog, instead, offer a simplified view of the issue through the title search example. Let’s say the loan originated by Washington Mutual in 12/2006 (non-MERS loan) and the foreclosing party is “Bank of America in the capacity of Trustee for XYZ Mortgage Backed Securities Trust 2007-1”. Per county records, there is an assignment of mortgage from Washington Mutual to “Bank of America in the capacity of Trustee for XYZ Mortgage Backed Securities Trust 2007-1” recorded in 2012. On the surface, you would not see any issues with this assignment document; however looking deeper at the securitization of the loan we may find a number of inconsistencies or violations of securities law that are not a part of any checks by recorder or title examiner or notary.

Documents to be tied to the Title work. Let me touch only on the few items....Typically there are 2 main SEC (Securities and Exchange Commission) filed documents that would describe the roles and responsibility of each party involved in securitization of this loan for a given trust: Prospectus and Pooling and Servicing Agreement (PSA). PSA would define a time lines on when the assignments have to be executed after the trust cut-off (closing) date (when all loans / notes are transferred under the trust entity and the interest is being paid out to certificate holders). Typically, the document states that Trustee has 90 days from the cut-off date of the trust to record all necessary assignments of mortgage (in PSA referred as cure timeline). Clearly, you can see that this is a first violation of our example. PSA requires all assignments to be filed within 90 days (say Q1 of 2007), while the recorded assignment is filed 2 years later in 2009, most likely at the time of foreclosure kick-off or loan liquidation from the trust. How to you avoid this violation in the future?

My recommendation is to enforce Trustees to present to County Recorder a signed affidavit before assignment recording that the assignment of mortgage complies with securities law and in particular complies with Trust’s PSA and Prospectus documents. Going one step further, one may provide references to Prospectus and PSA documents were the loan is securitize in the affidavit. …(taking about transparency for loans, something Congress and Senate were debating for some time…). We can argue if this affidavit should be a recorded as an exhibit to an assignment.

Trustee Roles and Responsibility Title vs. PSA: I will only point out the most important issue in the Pooling and Servicing Agreement relating to Trustee. (If you have some free time, you can read the 700+ page PSA document yourself)

Per Pooling and Servicing Agreement: Trustee has no right, title or interest in assets of the Trust (notes)
Per Pooling and Servicing Agreement: Trustee cannot act outside the scope of the PSA
Per Pooling and Servicing Agreement: Trustee not liable for Certificates or mortgage loans and is accountable for the use of, or application of funds by servicer.
Per Prospectus: Trustee exchanges certificates of no pre-existing value for notes of intrinsic value

After the Foreclosure is final and there is no bidders for the property at the sheriff’s sale, Trustee assumes the title ownership per Sheriff’s Deed, however PSA does not allow for the Trustee to take Title or interest to the property. How do you reconcile the PSA securities law and Title documents in this case?

In my opinion, the additional process has to be put in place to transfer the note from Trustee to foreclosing institution, investor or otherwise the legal entity that does not follow securities law under PSA. Additional assignment has to be executed as well. Of course, the problem is much deeper then that, but for the sake of discussion and additional assignment would address the PSA violation. (I will purposely leave Servicer discussion for later time. )

Hopefully, this article will trigger reaction on how to fix some of securitization and title inconsistencies, rather then playing the blame game. There are TONS of issues in the title work today; I want to get to the point of purity, transparency and clarity to avoid any future claims and problems.

Fraudulent use of Scanned Notary Stamps and/or Signatures, is it possible?

alex@protitleusa.com — Thu, 14 Mar 2013 11:49:57 EST

Can Robo-signed documents be completely done in an Abobe Photoshop with scanned notary stamps and scanned signatures?

We are all used to the idea of robo-signing being a process of signing and notarizing a stack of documents in a single day without any review of its content, similar to DocX pipeline operation of signing mortgage related documents.

If we would only look at the efficiency of the signing pipeline (for now, bypassing legal aspects of signing the documents), there is a better cost effective way for signing and notarizing the documents. With the age of digital recording, the document has to be presented in the recordable format, which means that the document has to have all attributes for the recorder to record the document in the county records. These attributes are broken down in parts, just like a document itself can be sliced into multiple elements. Documents would consist of parts that are constantly repeated, such as, authorized signatures and notary stamps and notary signatures.

Let’s now imagine a work flow that would combine the different elements of the document to create new documents using Photoshop. For example, authorized signor “Joe Smith” would always be on the Assignment of Mortgage document as VP of MERS paired together with notary “Jane Smith”, which would conveniently be located off the first page of the assignment. Additionally, there is also the notary acknowledgement testifying that the signor is an authorized signed under the perjury of the law. All of these elements can easily combined on the alonge or the 2^nd page of the assignment.

You can clearly see the economic benefit of preparing the assignments with signatures through Adobe Photoshop. It would take 2 people (signer and notary) to go though 100 paper assignments in 1 day, while photo shop approach would most likely triple the productivity at the lower cost. I know it’s not legal and fraudulent and possibility only my theory.

Evidence. I struggled with the thought in the beginning, but a few times I stumbled on some documents that really back up this theory. For example, Notary stamp distortion carrying through a number of documents. In other words, the notary stamp was scanned initially with some distortion and the same scanned version used in other documents as well. See Image 1. I don’t think the actual notary stamp is that damaged to make it into distorted shape. Some documents we stumbled on have an interchanged notary portion with different signature portion. In other words, the notary acknowledgement was testifying for one signor, while the signature states a different name and signature. See Image 2.

Proof. How do you find out whether the assignment was prepared and signed correctly and legally? My initial thought is to file for request for production of the notary ledger copy to verify that every notarization was entered as an entry in the ledger in for every document notarized. If the assignments were photo shopped, the notary ledger / log most likely do not exist, nor is Notary aware of which documents are being notarized.

I welcome all comments on my theory. I suspect that majority of document are correctly prepared, signed and notarized…How do you catch those who bypass in-person notarization?

Anti-Proposition 8 Arguments Based on Feelings, Not Facts

bossman@jbizinfo.com — Sun, 03 Mar 2013 17:47:43 EST

I recently read an article by Meg Whitman, CEO of Hewlett-Packard, in which she outlines her reasons for joining “a prominent group of conservatives, moderate Republicans and social libertarians” in signing onto an amicus brief in Hollingsworth v. Perry, a Supreme Court case challenging California’s Proposition 8. In citing her reasons for opposing Prop. 8, Ms. Whitman states in her article that, “I feel the time has come to bestow marriage equality to same-sex couples,” arguing that there is “no legitimate, fact-based reason for providing different legal treatment of committed relationships between same-sex couples.” I respectfully disagree.

In the interest of full disclosure, this writer is a Bible-believing disciple of Jesus Christ; therefore, my thoughts and opinions on this subject are firmly rooted in the tenets of His teachings. Furthermore, I am a true libertarian where this issue is concerned. However, I am against being compelled by militant homosexual activists to “tolerate” and agree with their lifestyle. Trust me when I say that I REALLY do not care what anyone does in the privacy of his/her bedroom. When someone insists, however, that it’s none of my business while flouting their sexual proclivities in my face, telling me that I MUST accept their lifestyle as "normal" or "natural", that’s where they lose me.

I also feel it necessary to point out here that nowhere in the Bible does it state that God "hates" or singles out homosexuals. His Word, as expressed in the Holy Bible, states that ALL sex outside of marriage, (hetero AND homo), is a sin. “Give honor to marriage, and remain faithful to one another in marriage. God will surely judge people who are immoral and those who commit adultery,” Hebrews 13:4 (NLT). It also espouses the principle that God hates the sin, “For everyone has sinned; we all fall short of God's glorious standard,” Romans 3:23 (NLT), but loves the sinner, “But God showed his great love for us by sending Christ to die for us while we were still sinners,” Romans 5:8 (NLT). Thus, “gay bashing” is DEFINITELY not in accordance with Christian teaching, either, despite the stories you see in the news about that handful of knuckleheads from the Westboro Baptist Church, who go around spewing that “God hates fags” nonsense. To be clear, bigotry and hatred are not my motivations here.

Marriage is a civil and social contract, to be sure, but it’s much more than just a “corporate merger” between two persons. Traditional marriage is not simply a creature of statute. Rather, it is based on the Scriptural principle of a holy union between man and woman, ordained by God, geared not only toward procreation, but the unity and well-being of both the husband and wife. We see this principle manifest throughout history. It has been codified into our system of laws. In the eyes of the law, a married couple is considered one person, which is an extension of the Biblical principle of “two becoming one flesh.” Our body of laws regarding tenancy by the entireties, spousal immunity, (which prevents the state from compelling one spouse to testify against the other), and community property are but a few examples of this.

Marriage also imposes certain duties and obligations upon both a husband and his wife. Throughout Scripture, a wife is regarded as highly valuable, thus worthy of great care and respect, “The man who finds a wife finds a treasure, and he receives favor from the LORD,” Proverbs 18:22 (NLT); Who can find a virtuous and capable wife? She is more precious than rubies,” Proverbs 31:10 (NLT). This is why God even sets forth a commandment to men in this regard: “For husbands, this means love your wives, just as Christ loved the church. He gave up His life for her,” Ephesians 5:25 (NLT). In addition, the Bible clearly sets forth the duties of husbands and wives toward one another in Ephesians Chapter 5. This is not to say that all marriages are perfect unions, by any means. As fallible human beings, we are prone to defect and failure, but this does not alter the principle of the ideal.

My main argument against so-called ‘homosexual marriage’ is based not only on the Bible, but also on science and biology. The physiological and psychological (as well as spiritual) differences between males and females are self-evident and are well-documented. Same-sex unions, by their very nature, are sterile unions whose primary purpose is to gratify of the desires of two persons, rather than to benefit society as a whole. They deny the innate differences between the sexes, not to mention the primary purpose of marriage: propagation of the human race. “This explains why a man leaves his father and mother and is joined with his wife; and the two are united into one,” Genesis 2:24 (NLT). The King James version calls this “two becoming one flesh.” In addition to the Scriptural argument, the biology is all wrong, therein is my problem with so-called "gay marriage". Biologically speaking, it is impossible for two persons of the same sex to “become one flesh”. The institution of marriage was founded out of biological necessity and if the word “marriage” is redefined to mean anything, it will eventually mean nothing. Allow me to explain.

Even traditional marriage between two opposite-sex persons imposes certain legal limitations upon its participants. Persons of the opposite sex, for example, cannot legally marry if they are related to one another, (i.e., brother and sister, father and daughter, etc.), not to mention laws against polygamy. Now, let's just say that in a state which recognizes homosexual unions, for example, Connecticut, that two brothers wish to be "married". What's to stop them from challenging laws prohibiting blood relatives from marrying? Already, the ACLU is using precedents set by the decisions regarding same-sex unions to argue for the legalization of polygamy. Simply put, every time society crosses one line, the activists move the goal post. If the state must grant equal status to same-sex couples based simply upon the fact that they love one another, on what logical basis can it prohibit such things as incest, bestiality or pedophilia?

I also reject the argument that traditional marriage somehow "deprives" homosexuals of their civil rights. There are already a number of ways that same-sex couples can secure and preserve their legal rights as couples; many companies now even offer the same benefit packages to employees with same-sex domestic partners as they do for traditional spouses. I am by no means against homosexual persons living their lives in any way they choose. I do believe, however, that state sanctioning of same-sex unions will have far-reaching implications for society that few people have really bothered to completely think through.

A SHINING EXAMPLE OF WHY I HATE E-SIGNATURES

CHARLENE PERRY — Fri, 08 Feb 2013 14:38:25 EST

The case at hand involves a elder seller who has relocated to her daughter's home in another state. Throughout the transaction, I have been in touch with seller, through her daugher. There are 2 real estate agents involved, one for seller, one for buyer. Seller will not be attending closing and there will not be a POA used, she will sign in her own capacity.

We are to close today. Seller has delivered all documents to me signed in ink and properly notarized. Good to go, right? Yup, until....

At the final walk through it is discovered that the house is full of furniture, no, not a piece or two, but 3 bedrooms, 1 dining room, 1 living room and the kitchen; ALL the furniture is still in the house. Buyer, as one might imagine, is not happy. It happens that the buyer is an investor and is able to have the furniture removed by a hauling company, but a cost. So, buyer asks seller, through the agents, to give a credit for furniture removal. OK, GOOD, UNTIL....

I receive from the listing agent an addendum e-signed by seller today authorizing a credit for removal of furniture; hmm... very curious given that I had to send documents to seller's daughter, seller's daughter had to print docs and deliver to seller for live signatures.

So, I called listing agent and inquired, is the seller with her daughter, at the computer, and did she (the seller) just e-sign this addendum. I get the empty air response.......

What am supposed to do with this? Well, I am not sure how you all would respond, but I for one am not going to accept this. I have decided to postpone closing to Monday to allow for seller to actually sign the addendum. Am I going to the extreme? Maybe. I have no doubt that the seller agreed to this, I have no doubt that the seller is willing and able to sign this addendum, I just don't like the way in which this addendum was magically e-signed, within minutes of delivery to the "seller" when I know as an actual fact that the seller was no where near a computer today.

I am old school, I admit it proudly. At the same time, I love technology, I embrace technology, but I also know that technology can create more problems that it cures if safeguards are not put in place and actually used.

That's my rant for the day. Thanks for listening -:)

Maryland Court of Appeals decision has far-reaching consequences

CHARLENE PERRY — Tue, 05 Feb 2013 14:07:01 EST

On January 29, 2013, the Maryland Court of Appeals handed down its decision in the 100 Investment Limited Partnership v. Columbia Town Center Title Company Case;

The opinion can be found here

The Maryland Land Title Association (MLTA) has issued comments on this case advising that this case may have far-reaching consequences for title agents in Maryland.

The court held that a title insurance agent who conducts a title search or provides a title commitment in a negligent fashion can be held liable for damages by those who reasonably rely on the search or commitment. The Court stressed that the customer's reasonable reliance on the the title commitment was foreseeable, and that, because the commitment erronouesly indicated good title to a parcel previously sold off, the title agent could be held accountable for damages for failing to discover the problem.

What does this mean to Maryland Title Agents?

Agents must be careful in how they define the scope of their work for their customers. In the ordinary course title agents rely upon the title search and examination solely for their use in evaluating whether or not title will be insurable; and it is not intended for use by the consumer for their own purposes. The commitment, on the other hand, is a product that provides the terms and conditions under which the title policy may be issued and is not intended as an opinion of title for the customer's own purposes. This case now makes it necessary for us to educate our consumers as to the purposes of the title search and our commitment to insure. Over the years I have debated with those of you on this forum as well in other forums whether or not the title commitment should be given to the consumer at or prior to closing. I still believe that the consumer has a right to review the title commitment, but now, with this opinion it will become necessary to come to a written agreement with the customer, prior to delivery of the commitmment, as to the purposes of the title search and examination and the commitment to insure.

Suggestions I have heard:

Confirm in writing that the only product your provide is title insurance and that the only services your provide are closing services
Have the customer sign a simple acknoweldgement of these facts and to confirm that, in the event of a title problem, the customer will seek recourse solely through the title policy and not against the agent.
Suggest, in writing, that should more specific title review be required, the customer should hire counsel or other title professionals themselves.
Communicate IN ADVANCE of closing the scope of your undertaking with the customer so that the customer will have the opportunity to engage the appropriate counsel, if desired. (engagement letters and contracts being strongly recommended)

Written communication will be an important part of the documentation in our files from here out as it relates to the way in which we receive orders for, and deliver, title and closing services for our customers. Agents should consider adding exculpatory language in communications and title orders.

I think that all title companies and abstractors doing business in Maryland should pay close attention to this case. Its impact on our liability is HUGE. It is up to you to protect yourself by putting in place some additional safe-guards; some of which are suggested above. I have no doubt that this issue will be discussed at great length in the board rooms of underwriters and title agencies state-wide and that more suggestions will be made.

I will keep my eye on this issue and will offer more insights and possible suggestions to limit liability as it becomes available.

Kentucky County Recorders File Suit Against MERS, Shareholders - Is Money Due?

john gault — Thu, 31 Jan 2013 22:20:01 EST

Kentucky county recorders have followed the actions of other states' county recorders and filed suit against MERS and others, including shareholders, for failing to pay statutorily mandated recording fees. The Kentucky case makes at least one salient point not made in other such actions: the defendents have availed themselves of the benefit of recordation, while at the same time avoiding the required fees for assignments. According to the suit, "They have taken advantage of the protections afforded by Kentucky's laws by recording mortgages while at the same time, they have failed to comply with Kentucky law requiring accurate information in mortgage instruments, the recording of assignments for the same mortgages, and the payment of required recording fees for the statutorily required recording of mortgage assignments." The suit also maintains that the members' general averments that MERS is anyone's agent is merely a claim (not a fact in evidence by reason of real property agency laws - sic).

So are the fees owed or not?
The collateral instrument, which one must acknowledge is signed by only the homeowner, states
that MERS is the beneficiary as nominee of the lender.
All right - let's say, then, that MERS is a nominal beneficiary. A nominal beneficiary is one
which, long and short, has no economic interest in the matter. Or say MERS IS an agent.
Doesn't matter here. In order for the loans to have been transferred to the trusts, there has
to be a writing somewhere which identifies the loans, because they surely are not transferred
by osmosis. Let's say that writing is the PSA - or any writing which meets the UCC Article 9
provisions for transfer -such as a Sale and Assignment Agreement - and it identifies the loans
with sufficient particularity to pass muster.
There could also be endorsements on the notes, which were called for by the PSA's, right?
There could also have been assignments of the collateral instruments, which were called for
by the PSA's, right? But we now know there were no individual assignments actually done for
the reliance on MERS as mutual nominal beneficiary. Some suspect, with good reason, such as
the mountain of lost note affidavits initially submitted by claimants, that not only were the
notes not timely endorsed and delivered to the trusts or their custodians, but also suspect
the endorsements and deliveries in the chain were also not done with rushed reliance on the
entries in the MERS' database, somewhat akin to a post-it note about what to handle when
there's time.

As to transfers to the trusts and perhaps others along the way, even if MERS remains the
nominal beneficiary, if the loans were factually transferred to the trusts by bulk Purchase
and Assignment Agreements pursuant to Article 9, the loans were transferred and the only
things missing are 1) Notice, 2) recordation of the assigning Agreements, and 3) fees due to county recorders. If the transfers took place by Article 9 S & A Agreements, which is suggested in
material published by those involved, the S & A Agreements could have been recorded to
provide Notice and the fees owing could have been paid. But that didn't happen.

It appears under the UCC that any failure to sell and assign by way of a Sale and Assignment Agreement as well as to deliver the notes, fully endorsed, to one who has paid for the sale and assignment, results in mere security interests to the party who has paid, makes the seller an obligor on the notes to that party, leaving the matter of that party's right to enforce the notes subject to the provisions of the UCC regarding security interests and more specifically, subject to the provisions of the UCC for enforcement of security interests in notes secured by real property. As to the trusts, even this must assume the earlier transfers on the way to securitization were effected and didn't themselves create only security interests.

There are two choices here: 1) the loans were factually transferred in oneor more bulk Sale and Assignment Agreements pursuant to Article 9 even though for lack of individual assignments, if not Article 3 endorsements, they didn't meet the provisions of

the psa's or 2) in the absence of a qualifying Sale and Assignment Agreement, the loans, for
lack of endorsement, assignment, and delivery, resulted only in security interests to the
trusts. If one takes No. 1 as a fact, then regardless of MERS maintaining its nominal status
in public record (disregarding the salient question of MERS' nominal status for non-member
investors), the transfer fees are due to the county recorders for every interest identified
in those bulk transfers (as well as the transfers prior to any to the trusts) since MERS'
nominal status, or even agency, didn't serve to undermine the transfers. In which case, all
those fees are owing and overdue.
The only way this could not be true is if MERS as beneficiary meant MERS had and retained
the economic interest of a true beneficiary, which would stand in stark contrast to MERS'
sworn testimony, most notably in MERS v Nebraska Dept of Banking and Finance, and calls into
question MERS' need to be appropriately licensed in each state. And of course, if MERS were
the true beneficiary, i.e., the party with the economic interest and not merely a nominee or
agent, the question of intended bifurcation and its ramifications necessarily arises.

If No. 2 is factual, that for lack of endorsement and written assignments, only security
interests were established for the trusts, it's possible no fees are due to the county
recorders since no sales and assignments actually occurred. But No. 2 is a concession MERS
and its members would hardly want to make; that is, that no sales actually transpired, that
what optimally occurred was the creation of security interests to the trusts and all the
ensuing entanglements. Since every MERS' assignment of the collateral instrument also contains a recitation of transfer of the note, one reasonably wonders if this document isn't to serve as a a belated Article 9 transfer of the note itself, although if MERS has any authority regarding the note, it hasn't come to light. Further telling, perhaps, is the fact that an assignment of the collateral instrument wouldn't actually require any consideration - it's the transfer of the note which must be supported by consideration - yet consideration is expressed in every MERS' assignment. The fact that the assignment is actually executed by an employee of the assignee as a MERS' officer further complicates the matter and possibly if not likely presents a conflict of interest as well as a legal snafu.
Unless MERS and its members want to stare down the creation of mere security interests to
the trusts, they might want to pony up and pay the County Recorders for those multiple
transfers. Of course, since there were no assignments of the collateral instruments done
because of reliance on MERS, if there were also no Article 9 bulk sales and assignments
at all, includng along the way to the trusts, that's another story.

The Kentucky County Recorders' Amended Complaint alleging fraud, conspiracy, and unjust enrichment may be found here:

http://www.scribd.com/doc/124006148/Kentucky-Recorders-v-MERS-et-al-Amended-Complaint

More on Schwartzwald: Ohio Supreme Court Reverses Another Foreclosure

rfranco@sourceoftitle.com — Mon, 21 Jan 2013 15:14:16 EST

The Schwartzwald case held that a Plaintiff in a foreclosure case that does not hold the note or mortgage at the time it files the complaint lacks standing, and the court therefore lacks jurisdiction. The big question that this left open was: what effect does that have on all of the faulty foreclosures that have already been completed? We may now have some insight into this thanks to a case that was reversed and remanded just last month, Washington Mutual Bank v. Wallace.

In 1999 Wallace purchased her home with financing from Norwest Mortgage. The note attached to the complaint had not been endorsed by Norwest and the mortgage was in favor of Norwest. In July 2008, Washington Mutual filed a complaint for foreclosure, alleging that it was the holder of Wallace's note and mortgage. The following month, on August 14, 2008, Wells Fargo Bank, successor to Norwest, executed an Assignment of Mortgage to Washington Mutual, "together with the Promissory Note secured thereby and referenced therein." The Assignment was recorded on August 21, 2008.

Wallace never filed an answer and the Court granted default judgment against her on August 20, 2008. Wallace did not appeal. But, about nine months later, on May 11, 2009, Wallace filed a Motion to Vacate a Void Judgment. Wallace claimed that because Washington Mutual failed to establish that it was the holder of the note and mortgage, the court lacked standing and its default judgment was void.

On May 14, 2009, Wallace filed a Motion for Relief from Judgment, arguing that it should be granted because Washington Mutual falsely represented that it held the note and mortgage when it filed its complaint, and that she had a meritorious defense to the action - that Washington Mutual lacked standing to bring the foreclosure.

The trial court overruled both motions and Wallace appealed. The court of appeals affirmed the trial court's default judgment, relying in part on one of its earlier cases in which it held that "when the appellants failed to raise their real-party-in-interest objection or defense in the trial court at a time when the issue could have been effectively dealt with, the objection or defense was deemed waived." The Court then concluded that "the fact that WaMu did not become the real party in interest in the 2008 foreclosure until 34 days after WaMu commenced the action but before final judgment was entered in that action did not deprive the trial court of subject-matter jurisdiction to enter default judgment against Wallace and in favor of WaMu."

Wallace then appealed to the Ohio Supreme Court, which accepted the appeal with a stay on briefing until the Court decided Schwartzwald. Schwartzwald, of course, held that "a party commencing litigation must have standing to sue in order to present a justiciable controversy and invoke the jurisdiction of the common pleas court," and "a lack of standing at the outset of litigation cannot be cured by receipt of an assignment of the claim or by substitution of the real party in interest."

Washington Mutual urged the Court to reactivate the Wallace appeal for briefing and oral argument, arguing that the issue raised was not addressed by Schwartzwald. The difference, according to Washington Mutual, was that in Schwartzwald the defendants actively defended the action, raising the issue of standing in their answer -- and in Wallace the defendant did not defend, default judgment was rendered against her, and she did not appeal.

In essence, Washington Mutual presented the problem now created by Schwartzwald: what is the retro-active effect of the case on past foreclosures where the Schwartzwald problem was never raised? According to Washington Mutual:

This case affords the Court to opportunity to address how the rule in Schwartzwald applies to motion to vacate judgments, whether a lack of standing is a component of subject matter jurisdiction, and whether a lack of standing can be waived. If-- as contended here-- a plaintiff's failure to prove standing at the time of the complaint deprives a common pleas court of subject matter jurisdiction-- then every judgment rendered in Ohio could be attacked. Because void judgments are not subject to time limits of Civil Rule 60(B), those attacks would throw into question literally hundred of thousands of cases that have long been over.

Wallace argued that the propositions of law in both were identical and the Schwartzwald Court ruled on each of those points:

The Court ruled that standing is a necessary component of a common pleas court's jurisdiction. And it held that standing must be established as of the filing of the complaint. It clearly stated that Civ. R. 17(A) cannot be used to cure a lack of standing. And the Court made clear that its decision is premised on the fact that Freddie Mac was not entitled to enforce the note, and therefore had suffered no injury, at the time it filed suit.

The Ohio Supreme Court denied Washington Mutual's motion and reversed the court of appeals decision and remanded the case to the trial court for further proceedings consistent with Schwartzwald.

The sale of the Wallace property was confirmed on January 24, 2011, though it appears that Washington Mutual assigned its bid to its successor-in-interest and receiver, JP Morgan Chase Bank, which still holds title today.

Though the Supreme Court did not provide any written opinion to provide guidance on the issue, it appears that it may never be too late to challenge a judgment in a foreclosure case that is void for lack of standing under Schwartzwald. How then will the title industry deal with many properties plagued by old Schwartzwald problems?

Underwriters have begun to require exceptions on policies to make it clear that they will not cover claims related to attempts to set aside foreclosure judgments or subsequent sales based on lack of standing arguments. But, many policies have already been issued without such exceptions. Is there any way to cure this type of defect?

One possibility may be quiet title actions brought by the "new owners," but this was unsuccessfully tried in Massachusetts. Following the Massachusetts Supreme Court case, U.S. Bank v. Ibanez, which was similar to Schwartzwald, a homeowner plagued by defective title filed a "try title" action and the Court dismissed it for lack of standing.

Francis Bevilacqua had purchased the property from U.S. Bank after it foreclosed on Pablo Rodriguez. U.S. Bank, unfortunately, did not hold the mortgage at the time it purported to foreclose. Thus, U.S. Bank never acquired title to the property - the sale was "wholly void." Because U.S. Bank did not hold title to the property, it could not convey tile to Bevilacqua which was fatal to Bevilacqua's claim to "own" the property for purposes of his try title action.

Interestingly, Rodriquez did not even attempt to defend his title. Nevertheless, the trial court explained that the mere fact that Bevilacqua had a deed recorded in his name was irrelevant. The court wrote that "in the classic example, a litigant could go to the registry, record a deed to the Brooklyn Bridge, commence suit, hope that the true owners ignored the suit or... could not be readily located and [would thus] be defaulted, and secure a judgment."

[For more on Bevilacqua v. Rodriguez, see Bevilacqua v. Rodriguez-- Mass. Buyers out of Foreclosure Get the [Mostly] Bad News.]

Though I think the court got the Bevilacqua case wrong, it does have some merit and if followed in Ohio it would make it very difficult to cure Schwartzwald defects. In at least some of these types of cases, the foreclosures are long over and the party who would have standing to institute a new foreclosure would have little incentive to do so. Those people who have been wrongly foreclosed on, who may have standing to file a quiet title action, have likely moved on and probably have little interest in getting involved. Yet, those who have purchased foreclosed properties with defective title may have trouble obtaining title insurance or selling their homes.

We may have to wait for the next big Ohio Supreme Court case to provide us with the answer.

Though it has created a lot of uncertainty, the Schwartzwald case is certainly a landmark case in Ohio. Attorney Andrew M. Engel, who represented Schwartzwald and Wallace, deserves kudos. 2012 was a great year for him and he has provided homeowners with a great, and much needed, defense in foreclosure actions.

The OCC Abandons the "Independent Foreclosure Review"

john gault — Tue, 08 Jan 2013 20:02:58 EST

The Office of the Comptroller of the Currency has announced it's ending the Independent Foreclosure Review, apparently on the basis it's inconclusive. The OCC left the review in the hands of the banks: how was this "independent"? It wasn't , and as such, I hope it wasn't the polity which had to pay for this show-boat exercise in futility.

The Office of the Controller of the Currency has apparently decided to abandon the 'Independent Foreclosure Review". Well, now there's a mislead if ever there were one. Given that it was the banks themselves

which controlled and directed the review, there was nothing independent about it. The OCC has apparently taken the position that at $250.00 an hour for review, it's a colossal waste of money. Under the circumstances, the fox guarding the henhouse, who could disagree? I don't know where they got that 250 figure. An acquaintance of mine does a portion of the audits for a large company and is paid 40.00 per file. She works from her home and no overhead is required by the company for her efforts. I suppose some attorneys may be involved at the "250 level", though I've yet to meet an attorney who could identify predatory lending if it bit him.

Today at Forbes, writer Daniel Fisher, commenting on the OCC's decision to end the review, says:

"This so-called “predatory lending” doesn’t make any economic sense, unless you’re willing to buy the theory that the fees flowing from an ultimately unprofitable loan were enough to induce bankers to destroy

their own institutions in search of a year-end bonus."

"Destroy their own institutions"? This assumes they knew their acts would destroy their institutions, which lo and behold, it hasn't. No, we the people got to pick up the tab, something more likely foreseeable to the

bad actors under the too big to fail blanket. Even if the actors could have foreseen the result of their acts on their own institutions, that's what they did: they plowed right ahead, like a runaway train, stopped by neither the dictates of conscience nor business acumen when in fact making predatory loans and attempting to pawn the inevitable losses on another group.

It's certainly what FNMA did (notwithstanding FNMA's default-guarantee to the investors). The executives who got those production bonuses did in fact abandon their fiduciaries to FNMA for those fat bonuses. They willfully turned blind eyes to the garbage that was coming in. I remember hearing it for the first time in 2008 - I just about fell off my chair, I did. I was literally horrified, and enraged may I add, at such dereliction and greed in what has become the course d'jour these days. A sad saga indeed.

FNMA and FHLMC were formed to provide funds for home loans. Someone, and I can see how this idea (shared risk, more or less) was formulated since even I once thought of it in the 80's. Someone(s) decided there should be a way to further spread the risk of defaults on these home loans and

maybe that would have in fact created a viable investment opportunity for pension funds, etc.

But it's undeniable that the plan hasn't worked and it's also undeniable that both corporate and individual (mucks' bonuses do in fact come to mind) greed was at the heart of the failure. The bankruptcy remoteness for one thing, ultimately for the benefit of the securitization trusts, complicated the matter by requiring multiple transfers before the loans were to find their resting places in the trusts.

The multiple transfers on such volume, volume fueled by reduced underwriting standards ,inflated appraisals, and in some cases plain abandonment of those standards, proved to be too much of a challenge.

That's on a good day. Now throw in the greed Mr. Fisher appears to want to deny: the parties involved cut corners and did not create the appropriate paper trail, here short for transfer and delivery, which would legitimately establish entitlement to enforce the contracts.

These aren't just any contracts - they'are contracts involving provisions of the UCC and the Statute of Frauds / real property laws. Enter MERS, whose attempt to save some time on recordations of assignments of collateral instruments nonetheless - at best - left the UCC requirements for transfers of notes

solidly in place.

Some people believe the participants said "hey, we'll just fund the loans with the Pensioners' money". I can't speak to that, although it has a certain ring of truth, but one way or another, forensic accounting is called for here to determine parties' rights. I would venture the next few years will find an onslaught of overdue e-discovery in that regard.

These loans are contracts and subject to all available defenses, just like any others. To say a party showing up with no interest for its own failure to either follow the rules or take action to protect its own interest but

demanding recourse as if it did because we owe SOMEone is not fraud is absurd and a great insult to all Americans and the law. The party who messed up whether by design or negligence is the one who is legally required to bear any loss. That's a fact and it's one the judiciary routinely overlooks when coming from "you're not getting a free house". And as I've asked before, would it be so bad, especially given the state of our economy, if the party to benefit from another's malfeasance and misfeasance were the

homeowner?

In his article, Mr. Fisher asks, "Has there been a single case in the past five years of a homeowner who was current on his mortgage being foreclosed through fraud?" First of all, yes there has. But more importantly, what's default got to do with anything? Nothing. Default doesn't determine the rights of parties.If it did, you or I could start a used car business with all the cars with payments in default we could get our hands on. Equity, even if it could stand in place of the UCC and land laws, is a consideration to be extended to those with clean hands and only those with clean hands.

It appears at least Mr. Fisher is espousing a view that it's a victimless crime when one with a bigger stick may deprive another of his home on some theory that the homeowner has it coming.

What's going on is far from victimless. What's at stake is who we are.

Foreclosures in Ohio After Schwartzwald

rfranco@sourceoftitle.com — Mon, 31 Dec 2012 13:02:11 EST

On October 31, 2012, the Ohio Supreme Court decided Federal Home Loan Mortgage Corporation v. Schwartzwald, finally answering the question: Can the lack of standing or a real party in interest defect in a foreclosure be cured by the assignment of the mortgage prior to judgment? Until Schwartzwald, there was a split on this issue among the courts of appeal. According to the Ohio Supreme Court, "a lack of standing at the outset of litigation cannot be cured by receipt of an assignment of the claim or by substitution of the real party in interest." What does this mean for the many foreclosures that have not followed this rule of law and what do title examiners need to look for when reviewing foreclosures in the chain of title?

The Schwartzwalds purchased a home in November 2006 with a mortgage from Legacy Mortgage in the amount of $251,250. Legacy then endorsed the note to Wells Fargo, and assigned it the mortgage. After falling on hard times in 2008, the Schwartzwalds moved to Indiana to find employment and eventually defaulted on their mortgage in January 2009.

In March 2009, the Schwartzwalds and Wells Fargo were negotiating a short sale. In April 2009 the Schwartzwalds entered into a contract to sell the home, with a closing date in June 2009. Despite the negotiations with Wells Fargo, on April 15, 2009 Federal Home Loan Mortgage Corporation (Freddie Mac) filed a foreclosure action. Freddie Mac's complaint attached a copy of the mortgage to Legacy and alleged that "a copy of the note is currently unavailable."

Wells Fargo apparently told the Schwartzwalds that this was "standard procedure" and "don't worry about it because we are doing a short sale." Unfortunately, due to delays in the process, the short-sale buyer rescinded their offer.

On May 15, 2009, a month after the complaint was filed, Wells Fargo assigned the note and mortgage to Freddie Mac, and a copy of the assignment was filed with the Court on June 17, 2009. Both the Schwartzwalds and Freddie Mac moved for summary judgment. The Schwartzwalds asserted that Freddie Mac lacked standing to foreclose on their property.

The trial court entered summary judgment in favor of Freddie Mac and ordered the property to be sold. On appeal, the Second District Court of Appeals affirmed the decision finding that Freddie Mac "had established its right to enforce the promissory note as a nonholder in possession, because assignment of the mortgage effected a transfer of the note it secured." The court further explained that standing is not a jurisdictional prerequisite and that a lack of standing may be cured by substituting the real party in interest for an original party pursuant to Civ.R. 17(A). Thus, the court concluded that although Federal Home Loan lacked standing at the time it commenced the foreclosure action, it cured that defect by the assignment of the mortgage and transfer of the note prior to entry of judgment.

The court of appeals certified that its decision conflicted with other courts of appeals cases that held "that a lack of standing cannot be cured by substituting the real party in interest for an original party pursuant to Civ.R. 17(A)." The Ohio Supreme Court accepted the discretionary appeal.

The Ohio Supreme Court recognized that "standing is a jurisdictional requirement." Because standing to sue is required to invoke the jurisdiction of the common pleas court, "standing is to be determined as of the commencement of suit." Because Freddie Mac "failed to establish an interest in the note or mortgage at the time it filed suit, it had no standing to invoke the jurisdiction of the common pleas court."

The Court then explained the "real party in interest" requirement. Civil Rule 17(A) requires that a complaint be brought in the name of the real party in interest. This is to "enable the defendant to avail himself of evidence and defenses that the defendant has against the real party in interest, and to assure him finality of the judgment, and that he will be protected against another suit brought by the real party at interest on the same matter."

According to the Court, "a common pleas court cannot substitute a real party in interest for another party if no party with standing has invoked its jurisdiction in the first instance... a litigant cannot pursuant to Civ.R. 17(A) cure the lack of standing after commencement of the action by obtaining an interest in the subject of the litigation and substituting itself as the real party in interest."

The case was reversed and dismissed!

Several court of appeals decisions post-Schwartzwald have followed or attempted to distinguish that ruling. For example, the Eighth District, in CitiMortgage v. Patterson, focused on the word "or" in the holding - "it failed to establish an interest in the note or mortgage at the time it filed suit." That court held that Schwartzwald "stands for the proposition that a party may establish its interest in the suit, and therefore have standing to invoke the jurisdiction of the court when, at the time it files its complaint of foreclosure, it either (1) has had a mortgage assigned or (2) is the holder of the note." It reinstated a foreclosure judgment where the lender attached a copy of the allonge to the note to its complaint, but the mortgage was not assigned until after the complaint was filed.

The Schwartzwald case is troubling for title insurers. First, state and federal courts have held that a lack of standing, being a jurisdictional defect, renders any judgment not just voidable, but void. A foreclosure sale premised on a void judgment would have to be set aside. Second, there is nothing in the decision that limits the Schwartzwald ruling to be prospective in nature. What becomes of all of the foreclosures that have already gone to sale based on a potentially void judgment?

Some underwriters have already issued bulletins requiring exceptions on title policies where foreclosures in the chain of title do not demonstrate that the foreclosing lender held the note and mortgage at the time the complaint was filed. How far back in the chain the examiner must carefully review foreclosures for this problem is uncertain.

Although subject matter jurisdiction can be raised at any time and cannot be waived, at least one court of appeal has explained that "although adverse parties may not confer jurisdiction upon a court by mutual consent, where none would otherwise exist, they may stipulate to the truth of facts that are sufficient to confer jurisdiction... In this way a party can be estopped from challenging either the facts which establish jurisdiction, or the facts which defeat jurisdiction."

Thus, if sufficient facts were alleged in the complaint to establish jurisdiction, whether those facts are true or not may not matter. As a practical matter, a party may be estopped from relitigating those facts to set aside a judgment. **

** [UPDATE: See More on Schwartzwald: Ohio Supreme Court Reverses Another Foreclosure.]

Examiners should also be cautious when relying on back-title, or when updating a prior policy. It is unlikely that the prior examiner was looking for this particular issue and a more in depth search would be prudent.

Until the courts have further reviewed this matter in light of Schwartzwald, title examiners will need to be extra cautious in reviewing not only pending foreclosures, but any prior foreclosure in the chain of title. Undoubtedly, underwriters will be providing additional guidance to be disseminated to their agents and examiners as further developments occur.

The Title Industry: The Ethical Rock in the Cesspool of Mortgage Finance?

Slade Smith — Fri, 28 Dec 2012 15:42:41 EST

Last year, a senior vice president at First American made the following claim:

In my opinion, during the boom years leading up to the real estate crash, government regulators, lending institutions, appraisers and ratings agencies, loosened their risk management criteria or relaxed their standards of ethical business conduct. The title insurance industry did not.

The claim was made by S.H. Spencer Compton, senior vice president and special counsel at First American Title Insurance Company, New York division. The claim was made in an article published in the New York State Bar Real Property Law Journal, entitled Underwater Underwriting: Title Insurance in the Post-Lehman Era. Compton went on to say:

That said, as in every period of economic decline, there was an increase in embezzlements by title insurance agents and even a bankruptcy filing by the holding company of one of the largest title insurers arising out of the misuse and loss of funds entrusted to its 1031 Exchange division. Nonetheless, the crucible of trust created by the due diligence and subsequent issuance of title insurance products backed by the deep reserves of Fortune 500 insurance companies remains unbroken and largely unblemished.

Compton characterized "Wall Street and its related service industries" as "drunks facing their families after an all-night bender." So he had no trouble seeing failings and excesses in the housing and financial meltdown.

He just could not find failings and and relaxed standards in his own industry.

The only relaxed standards in the title industry that this First American executive could cite were things that happened at another title underwriter (LandAmerica) that is no longer in existence, and the bad acts of agents. In other words, in all the excesses of the housing bubble, First American and the other remaining "Fortune 500" title underwriters-- the only ones that apparently matter!-- did nothing to damage the "crucible of trust created by the due diligence" of those big underwriters.

To be sure, the four remaining large title insurers should be congratulated for making it through the housing meltdown intact. But I have to question whether this "crucible of trust" remains intact-- if it ever existed in the first place.

I wonder, for instance, how Compton would argue that "due diligence" was not relaxed during the boom years, when Compton's own company, along with its competitors, began issuing title insurance with no title search at all! The title search is the cornerstone of due diligence in the title insurance industry. How is eliminating title examinations from title underwriting not a loosening of risk management criteria? Does Compton really believe that the due diligence for title insurance is not weakened when underwriting consists of credit reports and statements made by the borrower? [See Bank of America Sues First American for Over $500 Million, Source of TItle, 3/17/2010]

Then, there's the small matter that Compton didn't even acknowledge that banks were suing his own company for hundreds of millions of dollars over denied claims on those no-search title policies, as was the case at First American as Compton wrote this article. I've read the complaints of Bank of America and KeyBank in their multimillion dollar suits against First American, and while an argument can and has been made that First American was legally justified in denying the claims, it's hard to reconcile headings in KeyBank's complaint such as "FIRST AMERICAN'S BAD FAITH SETTLEMENT PRACTICES" with "crucible of trust". [See First American Still Haunted by No-Search Title Policies, Source of Title, 11/15/2012]

And this is not the only time where I've seen "bad faith" and a title insurer's name closely linked recently. Perhaps motivated by the passage of tort reform laws which limit their potential liability from punitive damages in many jurisdictions, title insurers appear to be increasingly aggressive in denying claims, to the point where courts are not only finding that the title insurers improperly denied claims, but that they failed to operate in good faith in doing so. A Wisconsin appeals court, for example, recently upheld a $1M award of punitive damages against First American for denying a claim despite knowing it had no reasonable basis to do so. [See How to Turn a $40k Loss into a $1M Loss, Source of Title, 10/16/2012]

Perhaps a more blatant example of bad faith in resolving a claim came earlier this year courtesy of Old Republic subsidiary Mississippi Valley Title, which had the bright idea of resolving claims arising from a title fraud by subdividing a tract in violation of local law and conveying to its bank policyholders unsellable lots. This aggressive strategy, which was crafted to technically fulfill the insurer's duty under the policy at minimum cost, provided no benefit whatsoever to the policyholders and was roundly batted down by the courts and ruled not to have been in good faith. [See Too Clever by Half, Source of Title, 12/17/2012]

None of these things are compatible with Mr. Compton's claims about the high underwriting and ethical standards of the major title insurers, including the one that employs him. It appears to me that the title insurance industry has a ways to go to live up to the high praise that Compton gives it.