August 29, 2014
by Santo Longo
Bendett & McHugh, PC – USFN Member (Connecticut, Maine, Vermont)
On July 3, 2014, the Maine Supreme Judicial Court issued its opinion in Bank of America v. Greenleaf, 2014 ME 89. In its decision, the court clarified the standing requirements in Maine. In addition to being the one entitled to enforce the note, the plaintiff also must be the “owner” of the mortgage. This ownership requirement is not described in, or required by, the state statutes. However, in reading the line of Supreme Judicial Court decisions leading up to Greenleaf, it can be discerned that one becomes an “owner” of a mortgage either by being the original mortgagee or by receiving a valid assignment of mortgage from the original mortgagee.
The trial court in Greenleaf had entered a foreclosure judgment on behalf of Bank of America. The borrowers appealed, claiming, among other things, that Bank of America did not have standing to foreclose because the only assignment introduced into evidence was from Mortgage Electronic Registration Systems, Inc. (MERS), as nominee for Residential Mortgage Services, Inc. (RMS), to BAC Home Loans Servicing, LP f/k/a Countrywide Home Loans Servicing, LP — which thereafter merged into Bank of America. There was no assignment of mortgage from RMS. The mortgage also contained the following language in bold and all capitals “FOR PURPOSES OF RECORDING THIS MORTGAGE, MERS IS THE MORTGAGEE OF RECORD.”
The court, seemingly attracted to the bolded language, seized on that language to find that MERS only had the right to record and was never a mortgagee under Maine law. The court referenced, but summarily disregarded, other persuasive provisions of the mortgage that would have bolstered claims that MERS did have the rights of a traditional mortgagee1. The court found that “the mortgage conveyed to MERS only the right to record the mortgage as nominee for the lender, RMS” and “when MERS then assigned its interest in the mortgage to BAC, it granted to BAC only what MERS possessed — the right to record the mortgage.” The court also noted that there was “no evidence in the record purporting to demonstrate that MERS acquired any authority with respect to Greenleaf’s mortgage by any means other than that defined in the mortgage itself.” As a result, the court concluded that since BAC only acquired the right to record the mortgage, it never became the “owner” of the mortgage, and Bank of America, as successor to BAC, did not have standing to foreclose.
Since Greenleaf, foreclosures in Maine on MERS mortgages have largely halted. MERS has issued a directive to its members not to obtain assignments from the original lender. Fidelity National Financial group of title companies has issued underwriting guidelines that require an assignment from the lender before a title policy will be issued without an exception. First American’s underwriting guidelines also require an assignment of mortgage from MERS and an assignment of mortgage from the original lender or other evidence (satisfactory to First American) that MERS had the authority to assign the mortgage and not just the right to record the mortgage. Obtaining the assignments from the original lenders will be impossible in many instances because many of the lenders are out of business. However, there are some that are still in business, and some servicers have powers of attorney from their correspondent lenders and could therefore execute assignments on the lenders’ behalf.
Other than obtaining assignments from the lenders, there have been discussions regarding introducing into evidence the MERS® System Rules of Membership and the current servicer’s MERS® Membership Application. These two documents, together with the MERS® Procedures, constitute the MERS® Membership Agreement as defined in the glossary of the current MERS® System Rules of Membership. The problem with this proposal is that the current servicer’s membership application is not relevant to the original lender’s application, and the current servicer cannot use its application to prove to the court what the original lender’s application stated. Also, the servicer may not know what version of the MERS® System Rules of Membership was in effect at the time the mortgage originated, and the court would likely preclude any of this testimony from the servicer.
Another proposal is to bring a quiet title or declaratory judgment action against the original lender before commencing the foreclosure action. There is Maine precedent that if the note holder and the mortgagee are not the same person, the note holder holds equitable title and the mortgagee holds legal title and further holds the mortgage in trust for the note holder. In equity, therefore, the note holder has the better title. Once a quiet title or declaratory judgment action results in a judgment in favor of the note holder, and that judgment has been recorded, the foreclosure could then be commenced.
As if the ruling concerning the MERS assignment was not bad enough, the court in Greenleaf also interpreted the Maine demand letter statute in a way that contradicted Maine practice. The court stated that the amount needed to cure the default must be fixed for the entire cure period, despite the fact that one or two additional monthly payments will come due if the borrower tenders the cure at the end of the 35-day cure period. Thus, in such an instance, the borrower will have “cured” the default but may still be one or two payments in arrears. Because most servicers’ demand letters were non-compliant with this new statutory interpretation, and since the foreclosure judges are, by rule, precluded from entering judgment unless they determine that the statutory demand letter requirements have been “strictly performed,” it is anticipated that many pending cases will be dismissed. In such a situation, the loan will need to be re-demanded, and after the new demand expires, the foreclosure will need to be recommenced.
Lastly, the Supreme Judicial Court raised the bar for the qualifications of a witness used to introduce business records. The court required that the witness be “intimately involved in the daily operation of the business” and that witness testimony show the first-hand nature of his or her knowledge of the servicer’s records. The court also established that the witness would need to testify as to how the servicer’s payment records are created, checked for accuracy, and accessed, and that the witness’s review of the records showed that the proper processes for creating, checking for accuracy, and accessing the records were followed for the loan in question. Thus, in order to obtain judgment (by motion or by trial), the proper foundation will need to be laid or the court may either dismiss the case (with or without prejudice) or enter judgment, with costs, for the defendant.
While the Greenleaf case has certainly revolutionized Maine foreclosure practice, significant questions remain open regarding how best to proceed to foreclosure, particularly in cases involving MERS and MERS assignments.
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1For example, the court referenced the following language: “[Borrowers] mortgage, grant and convey the Property to MERS (solely as nominee for Lender and Lender’s successors and assigns), with mortgage covenants, subject to the terms of this Security Instrument, to have and to hold all of the Property to MERS (solely as nominee for Lender and Lender’s successors and assigns) and to its successors and assigns, forever … [Borrowers] understand and agree that MERS holds only legal title to the rights granted by [Borrowers] in this Security instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender’s successors and assigns) has the right: (A) to exercise any or all of those rights, including, but not limited to, the right to foreclose and sell the Property; and (B) to take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument ... [Borrowers grant and mortgage to MERS (solely as nominee for Lender and Lender’s successors in interest) the property described [below