It’s gratifying to see that some jurists are still able to be offended by banks who come to court assuming they can foreclose on borrowers based on their say-so. And this New Mexico Supreme Court ruling is also a reminder that even though the servicer versus homeowner war seems to have been settled in favor of servicers, there are still important fronts being contested.
The Supreme Court of New Mexico, in Bank of New York v. Romero, effectively rebuked the trial court by choosing to rule on the issue of standing even though that was not the basis for the appeal and reversing the lower court on its finding of fact that the note had been properly transferred to Bank of New York. Anyone who has dealt with foreclosures will recognize the brazen behavior of the Bank of New York. The Romeros had been talked into a refinance by Equity One which put them into a mortgage which had both higher interest rates and higher monthly payments than their original mortgage but allowed them to get $30,000 in cash. The loan was a no income, no assets loan, and Equity One did no income verification. The Romeros quickly became delinquent.
The foreclosure trials had almost every abuse rolled into one case: two versions of the “original” note presented, with the endorsed one showing Chase, not Bank of New York, as the owner; Bank of New York claiming to represent a trust of a similar name when SEC records showed the Romeros’ loan was in a trust with a similar-sounding name (that was in fact serviced by Chase); a servicer employee testifying that Equity One really, truly intended to transfer the loan to Bank of New York, even though that servicer had nothing to do with the loan until 11 months after the foreclosure was filed; and the usual rigarmorole that none of this mattered anyhow because MERS.
The Romeros made the expected standing arguments and also argued that the loan violated New Mexico’s Home Loan Protection Act, which among other things, makes it impermissible for lenders to make mortgage loans that do not provide a reasonable, tangible net benefit to borrowers.
The court not only ruled in favor of the Romeros, it went out of its way to set some important stakes in the ground. For instance, in dismissing the barmy notion that MERS, which is (at most) a mortgage registry, can transfer notes, the decision stated:
These separate contractual functions—where the note is the loan and the mortgage is a pledged security for that loan—cannot be ignored simply by the advent of modern technology and the MERS electronic mortgage registry system.
Similarly, the Supreme Court overruled the appeals court on the business records exception, which had enabled testimony from servicer employees who no personal knowledge of the case to be admitted as evidence. And it went out of its way to opine on the basis of the appeal, the question of whether the HLPA was preempted by Federal law, and if so, whether the loan fell afoul of it (remember, since the court found for the Romeros based on standing, it could have punted on the HLPA). From the decision:
But under the very next provision in the regulation, a lender cannot avoid its own obligation to consider real facts and circumstances that might clarify the inaccuracy of a borrower’s income claim. Id.(“Lenders cannot, however, disregard known facts and circumstances that may place in question the accuracy of information contained in the application.”) A lender’s willful blindness to its responsibility to consider the true circumstances of its borrowers is unacceptable. A full and fair consideration of those circumstances might well show that a new mortgage loan would put a borrower into a materially worse situation with respect to the ability to make home loan payments and avoid foreclosure, consequences of a borrower’s circumstances that cannot be disregarded.
And it also stated that making borrowers sign boilerplate documents averring that they had gotten a benefit was no substitute for the lender assessing the borrower’s situation.
Nathalie Martin at Credit Slips sees this ruling as important for homeowners all over the US:
The opinion spelled out the tough standards banks must meet to have standing to initiate foreclosures, reviewed a whole bunch of alleged “evidence” produced by Bank of NY to establish standing, including plenty of affidavits and testimony from people with no personal knowledge of what was going on. The opinion debunks the use of the business records exception to get in documents no one knows anything about and has some good MERS language too. The opinion on these facts should help homeowners with funky documentation in other states as the principles discussed are universal. As such, the case established strong principles for homeowner protection from unscrupulous lenders.
In some ways the second half of the opinion is even a better read as it establishes that a lender must consider a borrower’s ability to repay a home mortgage loan when it determines whether the loan provides a reasonable, tangible net benefit to borrowers, as required by a state home loan protection act….
The case grew out of the go-go securitized mortgage practices that led to the Great Recession, so hopefully, this decision will be a substantial precedent for the many homeowners facing falsely documented bank foreclosures.