The Maine Supreme Court has been active in the last few months – issuing several decisions that will likely impact foreclosure actions in that state. The decisions covered a full range of foreclosure issues, from whether a lender can establish standing when it holds an assignment of the mortgage from Mortgage Electronic Registration Systems, Inc. ("MERS") to the amount a borrower must pay to cure a default. If you originate and/or service residential mortgage loans in this state, you may want to review these recent cases. This alert focuses on the court's holdings in one of these cases, Bank of America, N.A. v. Greenleaf, --- A.3d ----, 2014 WL 2988236 (Me., July 3, 2014) (Review the Maine Supreme Court Opinion.)
Assignment from MERS May Only Transfer Right to Record Mortgage
The Maine Supreme Court's decision in Greenleaf may require lenders to make some changes before they initiate foreclosure actions in this state in which the mortgage identifies MERS as the nominee for the lender. This case presented some simple basic facts, but the court's holdings may raise concerns. In 2006, Scott Greenleaf executed a promissory note for $385,000 to Residential Mortgage Services, Inc. ("RMS") and signed a mortgage securing the debt. The note was endorsed in blank. The mortgage listed RMS as the lender and MERS as the nominee for the lender.
In 2011, Bank of America, N.A. ("BofA") initiated foreclosure proceedings against Greenleaf. It was undisputed that Greenleaf had failed to make payments on the loan since 2008. Although some interim drama played out in the foreclosure proceeding, a trial was held in 2013. BofA presented the following documents to the court: the original note, the mortgage, and a document recorded in 2011 reflecting the assignment of the mortgage from MERS to BAC Home Loans Servicing, LP ("BAC"), an entity that subsequently merged with BofA. The court entered a judgment of foreclosure in favor of BofA and Greenleaf appealed.
Greenleaf alleged, among other things, that BofA lacked standing to seek foreclosure of the property since BofA did not have an interest in both the promissory note and the mortgage securing that note. Since the note was endorsed in blank and BofA had possession of the note, the Maine Supreme Court held that BofA met the first prong of the standing test. However, the court found that BofA failed to establish the second prong of the test, ownership of the mortgage.
The court struggled with the 2011 assignment of the mortgage by MERS to BAC. The court focused on one sentence in the 2006 mortgage that specifically provided that MERS was the mortgagee of record for purposes of recording the mortgage. The court held that this provision of the mortgage only granted MERS the right to record the mortgage as the lender's nominee. When MERS then assigned its interest to BAC, the court held that it granted BAC only the right that it possessed, the right to record the mortgage as nominee for the lender. When BAC then merged with BofA, BofA only obtained the right that BAC had possessed, the right to record the mortgage as nominee. The court also noted that there was no separate and independent assignment of the mortgage from RMS to MERS, BAC, or BofA. As such, the court held that the record only demonstrated a series of assignments of the right to record the mortgage as nominee. In the absence of evidence that BofA owned the Greenleaf mortgage, the Maine Supreme Court held that BofA lacked standing to seek foreclosure and vacated the lower court's judgment of foreclosure.
Since similar "right to record" language is included in many mortgage forms, lenders and servicers should pay particular attention to whether they are relying on assignments from MERS before initiating a foreclosure action in this state. Unless a lender holds or can obtain an assignment of the mortgage from the originating lender (and many of this lenders may no longer be in business), a lender may need to explore other options for establishing the second prong of the standing test in Maine. A mortgage assignment by MERS, standing alone, may not be sufficient to prove an assignment of a mortgage.
In response to the Greenleaf decision, many of the title insurers in the state have issued guidance regarding title issues under various scenarios in which MERS had assigned the mortgages. At least one title insurer has indicated that if MERS assigned the mortgage in a pending foreclosure action, an assignment from the original lender to the foreclosing mortgagee will be required in order for title to be insured without exception.
No Adjustments to Disclosed Payoff Amount Permitted During Cure Period
The Greenleaf court also defined the amount a borrower can be required to pay to cure a default. The notice of default and right to cure sent to Greenleaf included an itemization of all past due amounts and identified the total amount required to be paid by Greenleaf to cure the default. This total amount included a footnote reference that Greenleaf should "[c]ontact the servicer to obtain an up to date figure for outstanding attorney fees, unpaid taxes and costs before sending payment" and the notice also separately provided that Greenleaf should contact BAC at a prescribed telephone number "to obtain an up to date figure before sending payment." Similar disclosures are generally included in the right to cure notices provided by many lenders and servicers.
Me. Rev. Stat. Ann. tit. 14, § 6111 provides that the contents of the notice of default and right to cure must include, among other things, an itemization of all past due amounts causing the loan to be in default and an itemization of any other charges that must be paid in order to cure the default. Greenleaf argued that the addition of the "call for updated information" references did not meet the statutory requirement that the notice itself must provide an itemization of other charges that must be paid in order to cure the default. The Maine Supreme Court agreed with Greenleaf and held that state law effectively freezes additions to the payoff amount during the cure period.
As such, the amount stated in the notice of default and right to cure is the only amount the borrower can be required to pay to cure the default during the 35 day cure period. Any attorneys' fees incurred in continuing efforts to recover on the loan and advances made for property taxes or insurance during the cure period – none of these amounts can be added to the amount a borrower may be required to pay to cure the default. The court noted that the incorrect "call for updated information" references in the cure notice were an independent basis on which they could have vacated the lower court's foreclosure judgment.
Lenders and servicers should work closely with their foreclosure counsel to ensure they can establish standing before initiating a foreclose action in Maine. Lenders and servicers may also want to work with the title insurers to address any title issues that may arise in connection with MERS assignments. With certain changes in their foreclosure practices, lenders and servicers should still be able to prove up ownership of each mortgage sufficient to pass the Greenleaf court's standing scrutiny. In addition, lenders and servicers should review their cure notice form templates used in this state and any corresponding policies and procedures to ensure that a borrower is never advised or required to pay more than the total amount due as disclosed in the cure notice. The Greenleaf court may have stirred the lobster pot – but lenders and services have options to adapt to the court's recipes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.