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NY Appellate Division Overturns LI Couple’s Mortgage Victory

Kathleen A. Scanlon — Sat, 04 Dec 2010 04:22:22 +0000

On November 16, 2010, the NY Appellate Division delivered a stunning blow to the foreclosure defense community when it reversed the trial court’s choice in Indymac Bank v. Diana J. Yano-Horoski, 890 N.Y.S.2d 313 (Suffolk County, 2009)

In the highly publicized choice, Judge Spinner had not only vacated the Judgment of Foreclosure, but ordered that the mortgage and note be cancelled in their entirety. Spinner blisteringly castigated the plaintiff and characterized its course of conduct as “wholly unsupportable at law or in equity, greatly egregious and so completely devoid of excellent faith that equity cannot be permitted to intervene on its behalf. Indeed, plaintiff’s actions toward defendant in this matter have been harsh, repugnant, shocking and repulsive to the extent that it must be appropriately sanctioned”.

The Appellate Division held that the such a severe sanction was “not authorized by statute or rule” and the bank was not given “honest warning that such a sanction was even under consideration”. Further, the court held that the trial court’s equity powers did not include the “authority to cancel the note and mortgage since there was no acceptable basis for relieving the homeowner of her contractual obligations to the bank” noting that a judgement had already been entered in the bank’s favor. The court’s opinion can be found here.

Judge Spinner has gotten the attention of the banks in a huge way – his three recent decisions, Indymac Bank v. Yano-Horoski (cancelling note and mortgage), Wells Fargo v. Tyson (awarded $155,000 in hurts to the homeowner) and Emigrant Mortgage v. Corcione (awarded $100,000 in hurts to the homeowner) has made him the hero of the foreclosure defense community and a fearsome figure to the foreclosure plaintiffs. Spinner just issued another crushing choice on December 1st in U.S. Bank v. Mathon 2010 NY Slip Op 52082(U) granting Defendant’s Order to Show Cause, staying all proceedings and scheduling a hearing for possible sanctions against the Plaintiff and other possible remedial relief based on the bank’s appalling terrible faith dealings on a loan modification. The Banks’ attorneys no longer entrust their cases to junior associate,s when appearing in his courtroom at mandatory settlement conferences, because apparently, the risks are too fantastic.

Am I shocked at the Appellate Division’s reversal? Not at all – I really predicted this would be the outcome. As you get higher up the food chain, it gets to be more about policy than law sometimes. The Yano-Horoski trial court choice would have set a perilous precedent and sent shock waves through the mortgage credit industry. A mortgage is a debt security and should a judge just cancel such a debt based upon broad powers of equity, what bank would lend on a home in such a climate? And if the bank were willing to risk it, at what cost to the consumer? The banks would need to insulate themselves against the risk of mortgage cancellation and the way they do that is by increasing the profit margin dramatically. Also, lets look to the every day people who are paying their mortgage every day, even if their house is underwater – what would be their reaction if all of sudden, homeowners left and right were given free houses? The outrage would start to build (if it hasn’t already) – and they would start to wonder why should they pay their mortgages?

I believe that the parties will quietly come to a settlement, probably sealed of course, and the Horoskis will receive a nicely, modified loan with a stout principal reduction and the bank has a stellar precedent on the appellate record.

Suffolk County Crushes Deutsche Bank Over Fraudulent Foreclosure Docs

Kathleen A. Scanlon — Tue, 05 Oct 2010 01:06:28 +0000

The judges in Suffolk County (along with their Brooklyn counterparts) have been proactive in the fight against fraudulent foreclosure actions from the beginning. They have refused to rubber stamp the banks’ foreclosure filings and have consistently required them to adhere to the law. In Deutsche Bank, as Trustee v. McCoy, the judge denied the bank’s Motion for an Order of Reference based upon lack of standing to even bring the foreclosure action. Apparently, the bank attempted to retroactively file an Assignment to make standing. The Assignment was dated February 28, 2008 but declared an effective date of “January 19, 2008″. The court noted,

If an assignment is in writing, the execution date is generally controlling and a written assignment claiming an earlier effective date is deficient, unless it is accompanied by proof that the physical delivery of the note and mortgage was, in fact, previously effectuated (see, Bankers Trust Co. v Hoovis, 263 AD2d 937, 938, 694 NYS2d 245 [1999]). A retroactive assignment cannot be used to confer standing upon the assignee in a foreclosure action commenced prior to the execution of the assignment (Countrywide Home Loans, Inc. v Gress, 68 AD3d 709, 888 NYS2d 914 [2d Dept 2009]; Wells Fargo Bank, N.A. v Marchione, 69 AD3d 204, 887 NYS2d 615 [2d Dept 2009]).

The court also demanded the appearance of ”Sherry Hall,” who purports, in this particular case, to be the Vice President of Homecomings Financial Network, Inc., the attorney-in-fact for the plaintiff Deutsche Bank and ”Nikole Shelton,” the person who notarized Ms. Hall’s signature in this particular action, as well as in another action entitled GMAC Mortgage, LLC v Ingoglia, also pending in Suffolk County at the November 17, 2010 foreclosure settlement conference. Apparently, Ms. Hall is Vice President for Homecomings as well as GMAC – a state of facts that the court finds extremely suspect. Also problematic was that one of the affidavits was executed after it was notarized. I would hazard a guess that these two ladies are going to be in a bit of hot water when they appear before this judge.

This is, indeed, the tip of the iceberg. For too long, the banks have been filing thousands of foreclosure actions without a hitch…until now. The problem is, but, two-fold: the possible chill on lending if the banks cannot foreclosure on their security and second, those homeowners who faithfully pay their mortgages are going to be mighty upset at the thought of people getting a free house. These are two serious issues which I believe will guide policy at the appellate level. So although the trial courts may dismiss foreclosure actions and so forth, the appellate level might certainly see things in a far different light and have a far different ruling – if it reaches that point. I am sure that the banks and homeowners probably reach some sort of settlement, be it modification or otherwise, so these cases do not end up on appeal.

The Party is Over: GMAC Halts Foreclosures Amid Pervasive Foreclosure Fraud

Kathleen A. Scanlon — Fri, 24 Sep 2010 10:09:20 +0000

This past week GMAC issued directives to its servicers and agents to halt evictions tied to foreclosures on homeowners in 23 states including Florida, Connecticut and New York. Apparently, one officer of GMAC Mortgage’s servicing unit has admitted during testimony given in a deposition that, while he signs thousands of affidavits each month (to the tune of 6,000 to 8,000) as part of the necessary documents that must be filed with the foreclosure action, he lacks personal knowledge of certain critical facts in the affidavit which he asserts to be right. The affiant must be directly involved with the facts he is asserting and this error is certainly not limited to this officer, as evidenced by this defective affidavit and its subsequent withdrawal or, for that matter: GMAC.

Bloomberg reported that,

GMAC Mortgage may “need to take corrective action in connection with some foreclosures” in the affected states, according to a two-page memo dated Sept. 17 marked “urgent.”….Brokers were told to immediately stop evictions, cash- for-key transactions and lockouts, according to the document, addressed to GMAC preferred agents. GMAC is also suspending sales on properties which it has already foreclosed on and extending closing dates in those transactions already in contract. The following is a list of the affected states, which are judicial foreclosure states:

Connecticut
Florida
Hawaii
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Nebraska
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Pennsylvania
South Carolina
South Dakota
Vermont
Wisconsin

Now of course, GMAC is attempting to downplay the seriousness of this matter and calling it a mere “technical” defect. But, foreclosure defense attorneys and agencies have advised that the questionable affidavits are only the “tip of the iceberg” and represent the beginning of the end for the foreclosure mills and for the banks and servicers who have been seeking to exercise foreclosure under fake pretenses. What foreclosure attorneys have been saying is finally coming to light: the nation’s foreclosure system is riddled with faked documents, forged signatures and lenders cutting corners when reviewing borrower’s files.

Not only are the Lenders, Servicers and Foreclosure Attorneys overwhemed but apparently the courts are too. The Washington Post reported yesterday that,

In theory, a judge should review the files one more time. But after the crisis produced massive numbers of delinquent homeowners, judges in many cases became overwhelmed. Some simply took at face value the documents handed over to them by the lenders – who in many cases were not checking the files, either, according to interviews with judges, attorneys and consumer groups.

This go by GMAC makes an opening for borrowers to contest some of the more than 2 million foreclosures that have taken place since the bubble burst. Every New York foreclosure defense attorney should be closely examining the foreclosure pleadings in current proceedings, as well as those that have already been foreclosed upon, for reliance upon faulty affidavits, which are tantamount to fraud and deposing all affiants. More than one case has been dismissed, with prejudice, because of fraud upon the court. Neil Garfield of Living Lies provides an brilliant analysis of a defective affidavit that was really submitted in support of an action to foreclose real property:

In general the affidavit is insufficient because it does not satisfy the basic requirements of personal knowledge.

1. “Affiant is an employee”: Affiant should be an officer or otherwise identified as having a specific scope of employment that should be identified and described for the period starting with the loan closing up through the date of the affidavit.

2. “Of Plaintiff or Plaintiff’s servicing agent”: Now they are withholding what entity employs the affiant so there is no presumption that the affiant in fact has personal knowledge of anything, or if affiant has personal knowledge of everything involved in the loan transaction and payments. Nor are they identifying or describing the function of either plaintiff or the servicing agent.

3. “Personally familiar”: Doesn’t mean personal knowledge. He probably got information from others (hearsay), and he does not identify himself as custodian of records for anyone on anything.

4. “The information is found in the servicing agent’s records”: So he might not employed by the servicing agent but he is swearing that the information is contained in their records. Hearsay, and lack of competence to testify because he is allowing that he might NOT have personal knowledge, which is the key component of a witness’ competency to testify — the four elements being oath or affirmation, personal knowledge, recall and the ability to communicate information that is relevant to the case from his personal knowledge and recollection. In addition there is no indication when the servicing agent started to service, who the servicing agent is, and whether they are still the servicing agent. And there is no indication of what information is tracked by the servicing agent — for example, does the servicing agent pay the holder in due course? who is the holder in due course? Since this loan was most likely securitized, what insurance, third party guarantees, reserves, cross collateralization and/or over collateralization payments have been made? Has the obligation been satisfied or assumed and assigned to a government sponsored entity, or in a bailout by the U.S. Treasury or Federal Reserve. Chances are the servicer can only say whether the maker of the note paid the servicer. The servicer cannot say and doesn’t know about third party payments on the note. He also cannot say whether payments were received by the payee or holder of the note by the borrower nor does he state the authority of the servicer to intermediate the payments.

5. “The entries are made”: How does he know that the entries are made and if so, by whom, under what authority and based upon what information. We already know he might be an employee of the Plaintiff and not the servicer. So he lacks competency to state anything about the business process or record keeping of the servicer.

6. “either people with first hand knowledge or…”: if they didn’t have first hand knowledge then somehow they got information from people who had first hand knowledge. Really? who? And how would he know about any of it?

7. “recording such entries is a regular practice of servicer or plaintiff”: Well, which is it? Which one is he saying has what information? He clearly is only saying that the records of only one company are involved, but he won’t say which one. What about the other one. Were payments made by borrower to one or the other or both? This second admission that there are two entities involved means at the very least that two affidavits are required — one from the servicer and one from the payee on the note. If the note has been assigned, then a third, fourth fifth etc affidavit needs to be executed by all those who have or ever had a claim to the revenue from the note.

8. “There is now due”: Lack of foundation for all the above reasons. Affidavit is subject to Motion to strike.

9. The numbers stated as charges to the account are unsubstantiated by copies of invoices or any other corroboration.

What does this mean for distressed homeowners? This will have to play out in the courts as only time will tell. You can be sure that all the servicers and lenders have already changed their procedures to rectify this glaring error although it couldn’t hurt to pursue this line of defense. Certainly the sheer volume of foreclosure filings is going to make it extremely hard for the Plaintiff to have affidavits executed by a capable party that will pass muster. Also, if a defective affidavit is grounds for dismissal, the question remains – with or without prejudice? That will depend upon the judges as they have broad powers of relief under the laws of equity which governs civil fraud. Judges have already dismissed foreclosure complaints, with prejudice, for fraud. We will have to wait and see what happens on the appellate level.

Foreclosure Proceedings and the Right of Redemption in NY

Kathleen A. Scanlon — Fri, 12 Mar 2010 01:42:54 +0000

New York is a judicial foreclosure state and the process can take over a year to proceed from Summons & Complaint through judgment and then auction. A homeowner has a right to redeem up and until auction, but unlike many states, there is no right of redemption after Sale (but see Bill proposing to allow right of redemption for up to 1 year post Sale.).

The New York Court of Appeal recently opined in NYCTL 1999-1 Trust v. 573 Jackson Avenue Realty Corp., 13.N.Y.3d 573 (December 15, 2009) that the definitive requirement for redeeming real property during foreclosure proceedings is the “unconditional tender [to the foreclosing party] of the full amount due” before auction. This general rule in mortgage foreclosure proceedings also applies to the foreclosure of a tax lien.

But, note that the Courts will exercise their broad equitable powers to void judgments and even set aside sales (extending the homeowner's right of redemption), where homeowners are seeking to modify or reinstate their mortgages while the lender continues with the foreclosure action. Jimmy Lathrop, Esq., the Director of Foreclosure Intervention at the Brooklyn Bar Association Volunteer Lawyers Project, recently discussed in his blog post, three cases where the court found that the homeowner's excellent faith negotiations mandated an equitable solution and a possible complete bypass of RPAPL §1341 which defines the requirements and time frame of the borrower's right of redemption.

Round Two: Suffolk County Supreme Court’s Judge Spinner Takes on Wells Fargo

Kathleen A. Scanlon — Tue, 09 Mar 2010 14:58:11 +0000

Having recently issued a choice canceling an Indymac mortgage lien in another foreclosure action, Judge Spinner turns his attention to the outrageous actions of Wells Fargo and holds the mortgage behemoth liable for trespass, resulting in $155,092.00 judgment, in Wells Fargo v. Tyson. At the outset, the court pointed out that the Plaintiff sent a per diem attorney to the first settlement conference who had no knowledge of the case so that any potential progress was thwarted. It is a common problem and a recurring complaint that usually Plaintiff’s representative, at these settlement conferences, has no authority to negotiate, thus preventing any meaningful settlement and violating the spirit of the law. Having aroused the ire of numerous judges, you would reckon that these foreclosure mill law firms would figure out that they had better send counsel with authority to enter into some sort of settlement or at least have the ability to get someone on the phone who has it.

Certain facts were not disputed – that Wells Fargo had a representative enter the premises, without notice, not once but twice. The representative changed the locks despite the fact that the premises were obviously not abandoned by the defendant. Defendant had previously winterized the home, secured it, maintained the exterior of the premises and did not remove his furniture, clothing, food etc. Defendant also visited the home at least once a week and had questioned a neighbor to keep an eye on the premises.

Plaintiff relies on certain language in the mortgage itself: “Lender, and others authorized by Lender may enter on and inspect the Property. They will do so in a reasonable manner and at reasonable times. If it has a reasonable purpose, Lender may inspect the inside of the home or other improvements on the Property. Before or at the time an inspection is made, Lender will give me notice stating a reasonable purpose for such interior inspection.” as well as the express provisions in another paragraph regarding abandonment: “If…I have abandoned the Property, then Lender may do and pay for whatever is reasonable and appropriate to protect Lender’s interest in the Property…Lender’s actions may include but are not limited to: (a) protecting and/or assessing the value of the Property; (b) securing and/or repairing the Property;…Lender can also enter the Property to make repairs, change locks…and take any other action to secure the Property.”

In its analysis, the court first noted that mortgage documents and their terms are not negotiable and as such, are contracts of adhesion. Therefore, they are to be construed strictly against the drafter – the plaintiff herein. Belt Painting Corp. v. TIG Insurance Company 100 NY2d 377 (2000). “Under the circumstances presented to this Court, it is appropriate and honest that the terms of the instrument be construed in favor of Defendant.” Using a honest reading of the above language, it is apparent that the Lender’s actions must be reasonable and entry can only be upon adequate notice. Further, abandonment of the property is a condition-predicate to entry and the testimony of the defendant substantiated defendant’s claims that he had not abandoned the property.

Based upon the foregoing facts, Spinner declared that the Plaintiff engaged in a Trespass on at least two occasions:

Distilled to its very essence, trespass is characterized by one’s intentional entry, with neither permission nor legal justification, upon the real property of another, Woodhull v. Town of Riverhead 46 AD3d 802, 849 NYS2d 79 (2nd Dept. 2007). The injury arising [*4]therefrom afflicts the owner’s right of exclusive possession of the property, Steinfeld v. Morris 258 AD 228, 16 NYS2d 155 (1st Dept. 1939), Kaplan v. Incorporated Village of Lynbrook 12 AD3d 410, 784 NYS2d 586 (2nd Dept. 2004). The elements of a claim for trespass are intent coupled with the entry upon the land that is in possession of another. In order for trespass to lie, general intent is legally insufficient. Instead, there must be a specific intent, either to enter the land or to engage in some act whereby it is substantially certain that such entry onto the land will result therefrom, Phillips v. Sun Oil Co. 307 NY 328, 121 NE2d 249 (1954). The intent need not be illegal or unlawful, MacDonald v. Parama Inc. 15 AD2d 797, 224 NYS2d 854 (2nd Dept. 1962) but even one who enters the land upon the erroneous belief that he has the right to enter thereon will be held liable in trespass, Burger v. Singh 28 AD3d 695, 816 NYS2d 478 (2nd Dept. 2006). Trespass will lie against a party if entry upon the land was perpetrated by a third party, such as an independent contractor or other party, at the direction of the party to be charged, Gracey v. Van Kamp 299 AD2d 837, 750 NYS2d 400 (4th Dept. 2002). Id.

Turning to the issue of hurts, the court expressed that a foreclosure action is an action in equity and as such, it may impose punitive hurts. “In a suit in equity, the Court is empowered with jurisdiction to do that which ought to be done.” Id. Spinner then turned to address the bank’s egregious conduct:

Here, the Court is constrained to find that the conduct of Plaintiff in this matter was both willful and wanton, as evidenced by not one but two unauthorized entries into Defendant’s dwelling, occurring in complete derogation of Defendant’s right of possession. This conduct becomes even more glaring when consideration is given to the fact that Defendant affirmatively told Plaintiff that he had secured the property and that it was not abandoned and still contained his personal property. Even so, Plaintiff maintains that it has entered the property under a color of right, which turns out to be illusory under the circumstances. In spite of these declarations, Plaintiff willfully took it upon itself to enter the property on more than one occasion, doing so unreasonably and without notice, in direct contravention of the terms of its mortgage promulgated to Defendant by its assignor. This is even more distressing when it is considered that Plaintiff breaches its obligations to Defendant under the mortgage, running roughshod over Defendant’s rights with a specious claim that it is acting to protect its rights and the property. In small, the conduct of Plaintiff was nothing small of oppressive and would best be described as heavy handed and egregious, to say the very least. Certainly, the trespass was willful and calculated and was not accidental in any way and the Court finds that Plaintiff did not act in excellent faith. Under these circumstances, an award of both actual and exemplary hurts is necessary and appropriate in order to properly compensate Defendant for the losses he has sustained by way of Plaintiff’s shockingly wrongful conduct as well as to serve as an appropriate deterrent to any future outrageous, improper and unlawful deeds. Id.

Unfortunately, it appears that this type of behavior is not unheard of by members of the real estate bar. One member noted that a similar situation occurred with a foreclosure defendant client of his. Although he had secured and winterized the premises, the bank’s inspection service alleged the premises were wide open and entered the premises. They also changed the premises, turned the valves to “turn off the water” which instead resulted with the water being turned on. The pipes burst and flooded the home.

The court’s actions in Wells Fargo v. Tyson should send a clear and unequivocal message to Lenders and their various contractors that they do not have an absolute right to enter a mortgagor’s property and such behavior will not be tolerated.

REO Fraud: A Study In How NOT to Flip an REO

Kathleen A. Scanlon — Tue, 16 Feb 2010 03:31:08 +0000

So I have been playing around with a new feature added to Property Shark: Deep Owner Search. You can type in a person’s name, a corporation name or an address and see what properties are associated with that information. From there, you can also search that person’s associates and so forth. Since I have practiced real estate law for the past 15 years, I have a lot of names at my disposal so I search to see what everyone has been up to.

One of my searches led me to a couple of REO property flips involving a corporation represented by the same attorney. All the properties are located in Brooklyn. One of the transactions, the spread was over $320,000! Nice profit, isn’t it? So how did they do it? Buyer took out a conventional mortgage of $635,000 and closed the beginning of November 2008. Most, if not all, conventional lenders have seasoning requirements. Did this corporation buy the property and hold for 90 days? Nope. Now I am sure you are wondering – well how does she know? I know, because all of these transactions are part of the public record and, if you know what to look for, it is honestly simple to discern the methodology. These particular parties are stupid. But, they also had to be aided by the title company. So what did they do?

Take a look at this snapshot of one of the transfer tax documents – the RP5217 – that I copied straight from the ACRIS system:

Now look at the crossed-out dates (this one is such a particularly poor job, but it closed). I propose that it did, in fact, close on September 10, 2008. Look at the CRN number on the bottom of the form (circled in red). The CRN number starts with the year, month and day the property is supposed to change hands and is inputted by the drafter. These transfer tax returns are usually prepared within days of closing. This vast time difference would never occur. The parties needed to back date the transaction because of the bank’s seasoning requirements. Also, they needed to back date it far enough that they could avoid any additional value requirements for transactions taking place within 180 days of acquisition.

Suffice it to say this is only one of this buyer’s reo transactions and they rest follow the same trend. It is all laid out there in the public record. This kind of trend would certainly supply law enforcement with enough probable cause to obtain a warrant to secure the documents from both the first and the second closings. Perhaps there will be a show check, fake income documents and other indicia of fraud – who knows?

Now question yourself, if I can find this blatant evidence of REO fraud, who else could be looking?

U.S. Treasury: Putting the ‘Short’ Back in Short Sales?

Kathleen A. Scanlon — Sun, 06 Dec 2009 03:33:16 +0000

Any real estate professional, who engages in small sale negotiations, is fully aware of just how frustrating the process can be or even downright impossible. There are financial incentives for mortgage servicers to drag out the process as long as possible. It takes weeks, sometimes months, to get a response from the banks, who often misplace packages and request that they be faxed over and over again. This past Monday, but, the U.S. Treasury has issued guidance in its new Home Affordable Foreclosure Alternatives Program (HAFA) which takes effect April 5 , 2010 (supposedly, many servicers are already modifying their programs to be compliant). In small, HAFA provides incentives in accepting a small sale or a deed-in-lieu of foreclosure (DIL) on a loan eligible for modification under the HAMP program. HAFA applies to loans not owned or guaranteed by Fannie Mae or Freddie Mac (they will be implementing their own versions of HAFA shortly).

Highlights of the HAFA program are as follows:

Servicers have 10 days to approve or disapprove a request for small sale.
Uses borrower financials and other documents already submitted for a loan modification.
Allows borrowers to receive pre-approved small sales terms before listing the property (including the minimum acceptable net proceeds).
Prohibits servicers from requiring a reduction in the real estate commission agreed upon in the listing agreement (up to 6 percent).
Requires borrowers to be fully released from future liability for the first mortgage debt (no cash contribution, promissory note, or deficiency judgment is allowed).
Uses standard processes, documents, and timeframes/deadlines.
Provides financial incentives: $1,500 for borrower relocation help; $1,000 for servicers to cover administrative and processing costs; and up to $1,000 for investors (note holders).
Caps proceeds to second lien holders at $3,000.00. (fascinating but I wonder at how those lien holders in the second position feel about this)

Requirements:

Loan must be HAMP eligible – Services must evaluate a buyer for a HAMP modification first before giving any consideration for a HAFA small sale or Deed in Lieu (DIL);
Property is borrower’s principal residence;
the mortgage is a first lien and was originated before January 1, 2009;
the loan must be delinquent or default reasonably foreseeable;
loan amount limit is 729,750 (on 1 family units);
borrower’s total monthly payment exceeds 31 percent of the home owner’s income and attested to by affidavit;
Sale must be an arm’s length agreement and the buyer must agree not to sell the property for 90 days (problematic and I believe will diminish the potential of this program);
Requires property to be listed with a real estate broker (I wonder who lobbied for this…so this has to be added on to the servicer’s Minimum Net Proceeds and thus increases the cost to Purchaser)

While I admire the government’s attempt at allieviating the small sale log jam, as usual, they overstep their bounds. The American people are being questioned to yet again foot the bill for the banks’ irresponsible lending practices to the tune of $3,000 per closing. Further, mandating that properties be listed with a real estate broker across the board is excessive and will, in effect, add to the buy price paid by the prospective buyer. The arm’s length rule eliminates family attempting to save the home and the 90 day prohibition against resale will chill real estate investor participation which plays a major role in moving houses (I find this restraint on alienation to be disturbing as well and question its enforceability). Lastly, I question how many second lienholders are going to participate with their payments limited to $3,000.00. Without their participation, it will be an exercise in futility as many of these homeowners have 2 loans.

A Major Bank Brought to its Knees: LaSalle Bank NA v. Shearon

Kathleen Scanlon — Fri, 11 Apr 2008 14:57:25 +0000

The New York Supreme Court recently found in favor of the defendant homeowner on a Motion for Summary Judgment in a foreclosure action, brought by LaSalle Bank, N.A., the successor in interest to WMC Mortgage. LaSalle Bank, NA v. Shearon (N.Y. Sup. Ct., 850 N.Y.S.2d 871) The court considered both mortgages to be "high cost loans" within the meaning of the New York Banking Law statute Section 6-L based solely on the fact that the Lender provided high cost disclosures to the borrower and failed to apply any sort of statutory test to see whether or not the loans met the thresholds in said statute.

Once the court found the loans to be high cost loans, the statutory violations were numerous, including the financing of more than 3% of the principal loan amounts for closing costs. NY Banking law limits closing cost financing to 3% when the loan is considered a high cost loan. Further, the court found the Lender’s due diligence to be inadequate to determine whether or not the Shearons had the ability to repay the loan, that certain documents were forged and the disclosures were inadequate. The penalties for violation of NY’s Anti-Predatory statute are severe – the entire mortgage can be forgiven, all monies paid by the homeowner refunded plus hurts. (see extended post for text of entire NY Slip Opinion)

While this choice is sure to be appealed, it sends a message to the Lenders and the Secondary Mortgage market that they will be held accountable. It provides an invaluable tool also to those of us representing these homeowners who might have been coerced and tricked into these types of loan programs who are seeking modifications and small sales from these lenders. But, I do not recall closing any high cost loans and if the fees were excessive, most Lenders required the mortgage broker to reduce their fees so as not to fall within this category and trigger the onerous compliance requirements. But, I am sure that there were mortgage brokers and lenders out there who didn’t quite care and flew in the face of caution – GO GET ‘EM!

LaSalle Bank, N.A. v Shearon
2008 NY Slip Op 28032
Chose on January 28, 2008
Supreme Court, Richmond County
Maltese, J.
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the printed Official Reports.
Chose on January 28, 2008
Supreme Court, Richmond County
LaSalle Bank, N.A. AS TRUSTEE
FOR THE MLMI TRUST SERIES, 2006-WMC2, c/o Wilshire Credit Corporation,
Plaintiff against
David Shearon, COMMERCE BANK, N.A., NEW YORK CITY ENVIRONMENTAL CONTROL
BOARD, NEW YORK CITY PARKING VIOLATIONS BUREAU, NEW YORK CITY TRANSIT
ADJUDICATION BUREAU, JOHN DOE (Said name being ficticious it being the
intention of the Plaintiff to designate any and all occupants or
premises being foreclosed herein, and any parties, having or claiming
an interest or lien upon the mortgaged premises), Defendants
100255/2007
Plaintiff is represented by Steven J. Baum, P.C.
Defendant is represented by Cilmi & Associates, PLLC
Joseph J. Maltese, J.
This
court has denied the plaintiff bank’s summary judgment motion in a
mortgage foreclosure action because it has found that the original
lender has violated the "predatory lending" statutes found in New York
Banking Law §6L. As a result of the findings of violations of the
predatory lending sections of the New York Banking Law this court
grants the defendant home owner summary judgment wherein he may be
entitled to hurts to include the voiding of the mortgage and loan,
along with the return of all mortgage payments, the expenses of
obtaining the loans and attorney fees.
Facts
In the summer of 2005, after living in a rental home for three years,
the Shearons, as first time home buyers, chose to buy a house in
Staten Island, New York. After searching for the "right" home, they
executed a contract of sale for real property located at 33 Westport
Lane in Staten Island, New York. [*2]
To
locate this home, the Shearons utilized the services of a real estate
agent from Coldwell Banker. After finding their home, they utilized the
services of Glen DeLuca and Michael Farber, mortgage brokers associated
with Liberty Capital Mortgage,^[FN1]
to provide them with all necessary financial information and potential
lenders in order to obtain financing for the buy. In August and
September 2005, Michael Farber advised the Shearons that they would
qualify for traditional loan products with fixed interest rates and
that he was "shopping around for the best rates." At the time the
Shearons were applying for financing, as husband and wife, in
connection with purchasing their home, David Shearon’s credit score was
696 and Karen Shearon’s credit score was 760 on a scale where 800 is
the maximum score.
The Shearons presented a joint tax return which shows a combined adjusted yucky income of $29,567.^[FN2]
On October 17, 2005 the Shearons entered into a contract of sale to
buy the house for $335,000. But, the Contract listed a
buy price of $355,100 with a "Seller’s Concession" of $20,100. At
the execution of the contract, the Shearons deposited $5,000 with the
seller’s attorneys, which would leave a balance of $350,100. But the
financing was for the full $355,000, implying that it would be a "no
money down" buy at closing where arguably that amount should have
reflected a deduction of the $5,000 deposit that the Shearons paid at
the contract signing.
From the time of the contract until
closing in January 2006, Michael Farber advised the Shearons that WMC
Mortgage Corp. would be able to finance the entire $355,100 of the
buy price in two loans. The plaintiff, LaSalle Bank, N.A.,
(hereinafter "lender") was the trustee and successor for WMC. The first
mortgage was for $284,000 and the second mortgage was for $71,000. The
closing for the subject property occurred on or about January 27, 2006.
But, David Shearon was listed as the sole purchaser and sole
borrower on all closing documents.
Shearon, in his answer alleges that he has been the victim of "Predatory Lending"
practices by the mortgage brokers and the lender regarding the finance of his home. Shearon
alleges the following six separate and distinct acts to justify his claim of predatory lending:
1)
Excessive financing was approved and extended to 106% of the buy
price, which permitted Shearon to finance the points, broker fees and
costs;
2) Improper, inadequate or non-existent
lender due diligence regarding Shearon’s ability to repay the high cost
home loan given;
3) The intentional and
improper placement of Shearon into sub-prime loan products with
excessively high interest rates, longer loan terms and impaired
refinancing flexibility to the sole benefit of the lender;
4) Absent or inadequate state and federally mandated truth-in-lending ("TILA") [*3]disclosures
regarding material elements of the financing being obtained including,
without limitation, matters relating to closing costs and fees,
counseling services, loan terms, amortization schedules and balloon
payment requirements;
5) Forgeries of numerous
loan-related documents, including without limitation the (i)
Residential Loan Application, dated November 7, 2005;
(ii) undated "Addendum to Contract of Sale"; and
(iii)
"Request for Verification of Rent", dated January 3, 2006 (purportedly
signed by Jennifer Ogman) reflecting inaccurate information used to
underwrite the Loans; and
6) The employment of
repeated and continuous coercive and concerted tactics by plaintiff and
other non-parties who stood to benefit from the loan process, which
successfully targeted and forced Shearon to close on the loans and the
property or face significant and dire financial consequences (i.e.
losing the loan commitment, defaulting under the buy contract,
losing the down-payment/deposit).
New York Banking Law
Predatory lending practices are prohibited by both New York State and Federal laws. Here, the "home loans"^[FN3]
in question are governed by New York Banking Law § 6-L (1)(d) which
governs "High Cost Home Loans" which are classified as such by the
scheme provided for in Banking Law § 6-L(1)(g). New York Banking Law §
6-L(2) prohibits certain practices by lending institutions when
offering High Cost Loans. The statute also provides for a six year
statute of limitations accruing from the origination of the loan,^[FN4] as well as remedies for violations of the statute.^[FN5] A court may also award reasonable attorneys fees to the prevailing borrower.^[FN6]
And the Court may grant the borrower injunctive, declaratory and such
other equitable relief to enforce compliance with this section.^[FN7]
But,
the most drastic remedies provided are found in Banking Law §§ 10 and
11 of the statute. Banking Law § 6-L(10) states:
"Upon
a finding by the court of an intentional violation by the lender of
this section, or regulation thereunder, the home loan agreement shall
be rendered void, and the lender shall have no right to collect,
receive or retain any principal, interest, or other charges whatsoever
with respect to the loan, and the borrower may recover any payments
made under the agreement."
[*4]
New York Banking Law 6-L(11) states:
"Upon
a judicial finding that a high-cost home loan violates any provision of
this section, whether such violation is raised as an affirmative claim
or as a defense, the loan transaction may be rescinded. Such remedy of
rescission shall be available as a defense without time limitation."
Discussion
Shearon is alleging that he is the victim of "predatory lending" defined by New York Banking Law § 6-L, et. seq. Specifically,
Shearon alleges that he was given excessive financing on a High Cost
Loan without the lenders inquiry as to his ability to pay, which is
mandated by NY Banking Law § 6-L(2)(k). The lender alleges that loans
of 7.65% and 10.5 % are less than the 16% usury statute and hence are
not "high cost" loans. But the home loans were considered high cost
loans by the lender because the lender prepared the following forms
dated December 8, 2005: a New York High Cost Loan Disclosure; New York
High Cost Loan Payment Disclosure; and New York High Cost Loan
Insurance.
It is undisputed that Shearon was given
$355,000 to finance the buy of a $335,000 house, where the extra
$20,000 or 6% of the buy price was used to pay points and fees
associated with the closing on the property. Specifically, when
examining the HUD-1 closing statement prepared at the time of closing,
it is apparent that $19,145.69 was used to pay all costs and fees
associated with securing the High Cost Loans. These monies were paid
from financing received above and beyond the contract price of
$335,000. This ultimately left Shearon with negative equity in the
property.
The financing of the fees and points associated with the loan is also a violation of Banking Law 6-L(2)(m) which states:
"In
making a high-cost home loan, a lender shall not, directly or
indirectly, finance any points and fees as defined in paragraph (f) of
subdivision one of this section, in an amount that exceeds three percent of the principal amount of the loan" (emphasis added).
Here,
the amount financed to cover the fees are in violation of the statute
because the points and fees exceed 3% of the principal amount of the
loan. Three percent of the loan equates to $10,650. But, the
expenses of the loan were $19,145.69, which equates to about 5.4%
($19,145.69 ÷ $355,000 = .0539) which is more than the 3% allowed by
the statute. What is more egregious is that $19,145.69 in expenses is
5.72% of the original cost of the $335,000 house ($19,145.69 ÷ $335,000
= .0572).
Shearon also alleges that the Lender did not
conduct a "due diligence" or any inquiry into their ability to repay
the High Cost Loan. The plaintiff argues in its motion for summary
judgment that David Shearon stated that he reported $7,200 as monthly
income when [*5]
he first applied for the loan. The plaintiff then states in paragraph
25 of their attorney’s affirmation that Mr. Shearon "cannot argue that
his annual income of $86,400 places him in a category of low-income."
If
David Shearon and his wife stated on the original loan application that
their monthly income was $7,200, the lender’s statutory requirement is
to make an inquiry as to the truth of the statement and the borrower’s
ability to repay the loan. While this court will not condone fraud by
the borrower, New York Banking Law § 6-L(2)(k) states that:
"A
lender or mortgage broker shall not make or arrange a high-cost home
loan without due regard to repayment ability, based upon consideration
of the resident borrower or borrowers’ current and expected income,
current obligations, employment status, and other financial resources
(other than the borrower’s equity in the dwelling which secures
repayment of the loan), as verified by detailed documentation of
all sources of income and corroborated by independent verification."
(emphasis added).
Here, plaintiff’s counsel states in both the moving papers and answer papersthat
"Based
on Defendant’s income, credit history, and the low interest rate on the
Mortgage loan, along with the Defendant’s lack of evidence supporting
predatory lending, the Defendant is precluded from alleging the same.
As such, the Defendant’s mortgage loan was in compliance with all
applicable laws, including, but not limited to, all anti-predatory
lending laws."
While statements contained in an attorney’s affirmation are not proper evidence before the court,^[FN8]
the plaintiffs do not offer one scintilla of evidence as to their
required "due diligence" inquiry regarding David Shearon’s ability to
pay, which is a violation of New York’s Banking Law governing High Cost
Loans.
Shearon also alleges that he and his wife were
intentionally placed into a sub-prime loan product. He bases the
argument upon two facts. First, David Shearon and his wife originally
applied jointly for the loans where he had a credit score of 696 and
his wife had a score of 760 on a scale of 800. The Shearons jointly
were considered "A paper," a term given to those loan applicants that
are deemed to have the highest level of credit-worthiness.^[FN9]
Shortly before the closing, Karen Shearon was removed as a borrower for
the loans. The Lender claimed that since no loan terms were modified,
the application was not subject to any new underwriting or analysis and
the closing occurred without any apparent change to the entire
financing process. But, removing the higher rated borrower from the
loan would require a new underwriting inquiry, but none was conducted.
Therefore, the Shearons argue that they were intentionally placed into
a sub-prime loan product.
The second factor that the Lender used to place the Shearons into a sub-prime product [*6]was
an adjustable rate mortgage. Throughout the process, Michael Faber from
Liberty Capital stated that the Shearons would be placed into a
traditional loan product with fixed interest rates. But, when
Shearon closed title, he obtained the First Loan with a 7.59% rate for
the first 2 years, which would thereafter re-adjust and rise to no more
than 10.59% in February 2008. But, every six (6) months thereafter
it was subject to increase with a ceiling of 14.09% with anticipated
finance charges over the life of the loan of $682,821.49. The Second
Loan had a fixed rate of 10.750% for the life of the loan with
anticipated finance charges over the life of the loan of $121,861.87.
Therefore, Shearon would be obligated to pay up to $804,683.36 for a
house that sold for $335,000. At the time of closing, these loans were
considered sub-prime products, even though they had qualified for
traditional fixed loan products at lower rates, because of their "A
paper" credit worthiness.
Shearon also alleges a violation of Banking Law § 6-L(2)(l)(I), which has been dubbed the "Counseling Statute."
This section provides that a lender or mortgage broker must deliver,
place in the mail, fax or electronically transmit the following notice
in at least twelve point type to the borrower at the time of
application: "You should consider financial counseling prior to
executing loan documents. The enclosed list of counselors is provided
by the New York State Banking Department." Banking Law § 6- L(2)(l)(ii)
requires that the lender or mortgage broker within three days after
determining that the loan is a high-cost loan, but no less that ten
days before closing, give the "Consumer Caution and Home Ownership
Counseling Notice" to the borrower. This was not done.
David
Shearon states in his affidavit that: 1) he has never been provided
with, nor did Liberty Capital ever advise him of the nature of the
loans and or the disclosures regarding counseling services available;
and 2) the repercussions of the loans on his credit or that a balloon
payment was required in connection with the loan. Moreover, the
plaintiff fails to provide any evidence of the required disclosure in
any of their papers. Their attorney simply states that their loans were
sold in compliance with the various regulating statutes including RESPA, TILA, HOEPA, New York State Banking law and Federal Statutory Law prohibiting predatory lending.
A
motion for summary judgment must be denied if there are "facts
sufficient to require a trial of any issue of fact (CPLR §3212[b]).
Granting summary judgment is only appropriate where a thorough
examination of the merits clearly demonstrates the absence of any
triable issues of fact. "Moreover, the parties competing contentions
must be viewed in a light most favorable to the party opposing the
motion".^[FN10]
Summary judgment should not be granted where there is any doubt as to
the existence of a triable issue or where the existence of an issue is
arguable.^[FN11] As is relevant, summary judgment is a drastic remedy that should be granted only if [*7]no triable issues of fact exist and the movant is entitled to judgment as a matter of law.^[FN12] On a motion for summary judgment, the function of the court is to issue findings, and not to issue a determination.^[FN13]
In making such an inquiry, the proof must be scrutinized carefully in
the light most favorable to the party opposing the motion.^[FN14]
Here, the plaintiff has place forth a plethora of documentary evidence
that, at the very least, precludes summary judgment on behalf of the
plaintiff; and accordingly, their motion is denied.
But,
when making a motion for summary judgment, the movant always runs the
risk that the court may search the record, and in the absence of a
cross-motion, award summary judgment on behalf of the non-moving party.^[FN15]
When doing so, the court must offer the same careful scrutinization of
the proof in the light most favorable to party which summary judgment
is being sought against.^[FN16]
In moving for summary judgment, the plaintiff was required to assemble
and lay bare its proof entitling it to summary judgment.^[FN17]
Here,
the voluminous documentary evidence demonstrates violations of New York
Banking Law § 6-L(2)(k), which deals with the plaintiff’s due diligence
into the ability of the defendants to repay the loan. The plaintiff has
not offered one scintilla of evidence of any inquiry into the
defendants ability to repay the loan. New York Banking Law § 6-L(2)(k)
requires this inquiry to be "verified by detailed documentation of all
sources of income and corroborated by independent verification." This
failure to inquire is a violation of New York’s Banking Law. Therefore,
summary judgment on this affirmative defense is granted in favor of the
defendant.
The plaintiff apparently also violated NY
Banking Law § 6-L(2)(l)(I), which requires the lending institution to
provide a list of credit counselors licensed in New York State to any
recipient of a High Cost Loan. David Shearon states in his affidavit
that he never received the notice for required counseling. This
document was also not provided to the court by plaintiff, although a
copy of the entire origination file was provided.^[FN18] Failure to provide this notice is a [*8]violation of NY Banking Law § 6-L(2)(l)(I).
In
this action, clearly the most egregious violation of NY Banking Law is
the violation of § 6-L(2)(m) which states that no more than 3 percent
of the amount financed is eligible to pay the points and fees
associated with closing the loans on the real property. The amount
financed to cover the fees are violative of the statute because more
than 3% of the amount financed was used to pay the fees and points
associated with the loan. The $19,145.69 in expenses equates to nearly
5.4% of the High Cost Loan and is a clear violation of the statute.
After
searching the record, it is clear that the lending institution, in
providing home financing to David Shearon, violated, at least three
provisions of New York’s Banking Law. Therefore, summary judgment is
granted in favor of the defendant, David Shearon, on his counter claims
for violations of NY Banking Law §§ 6-L(2)(k); 6-L(2)(l)(I); and
6-L(2)(m). Consequently, the finding of these violations now triggers
NY Banking Law § 6-L(7) through § 6-L(10) which is the remedy and
hurts provisions of the statute.
New York Banking Law §
6-L(7) provides in pertinent part that: "Any person found by a
preponderance of the evidence to have violated this section shall be
liable to the borrower for the following:
(a) actual hurts, including consequential and incidental hurts; and
(b) statutory hurts as follows (i) all of the interest, earned or unearned, points and
fees, and closing costs charged on the loan shall be forfeited and any amounts paid
shall be refunded; except that this element of statutory hurts shall not be awarded
for violations of:
(1) paragraph (i) of subdivision two of this section regarding loan flipping;
and
(2) paragraph (k) of subdivision two of this section regarding ensuring the
borrower’s
ability to repay the loan, so long as the lender demonstrates that at
the time of the loan, it verified by detailed documentation all sources
of theborrower’s income and corroborated it with independent
verification;
or
(ii) five thousand dollars per violation or twice the amount of points and fees and
closing costs as defined in this section, whichever is greater, for violations of:
(1) paragraph (i) of subdivision two of this section regarding loan flipping; [*9]
and
(2) paragraph (k) of subdivision two of this section regarding ensuring the
borrower’s ability to repay the loan, where the borrower is not entitled to
relief under subparagraph (i) of this paragraph."
In
this case, the defendant David Shearon demonstrated by a preponderance
of the evidence that the Lender violated the anti-predatory lending
statutes of New York’s Banking Law. Therefore, David Shearon may be
entitled to receive: actual, consequential and incidental hurts, as
well as all of the interest, earned or unearned, points, fees, the
closing costs charged for the loan; and a refund of any amounts paid.
This
court will hold a hearing where all parties shall present any evidence
as to actual hurts and any other evidence not otherwise mentioned
herein that may mitigate the findings of this court pertaining to the
alleged intentional behavior of the Lender who violated several
sections of the New York Banking Law § 6-L. The finding of intentional
violation renders the home loan agreement (mortgage) void, and strips
the lender from having a right to collect, receive or retain any
principal, interest, or other charges whatsoever with respect to the
loan, as well as giving the borrower the ability to recover any
payments made under the agreement.^[FN19] The hearing shall also be used to determine the amount of hurts.
Additionally, the defendant is entitled to receive reasonable attorneys fees in conjunction with the defense of this action.^[FN20]
Accordingly, it is hereby:
ORDERED, that the plaintiff’s motion for summary judgment is denied in its entirety; and it is further
ORDERED,
that the foreclosure action shall be stayed until the final
determination by this court as to the extent of the applicability of
New York Banking Law § 6-L(10) as well as the assessment of any
hurts; and it is further
ORDERED, that the defendant,
David Shearon, shall prepare an affidavit outlining his financial
hurts in detail to be exchanged with plaintiff’s counsel by February
15, 2008; and it is further
ORDERED, that counsel for the Defendants, Cilmi & Associates, PLLC, shall prepare [*10]an
affidavit outlining their attorney’s fees for the defense of this
action and shall serve same upon the plaintiff’s counsel and this Court
on or before February 15, 2008; and it is further
ORDERED,
that all parties shall appear in this court at DCM3, 355 Front Street,
Staten Island, New York 10304, at 1:30PM on Friday, February 29, 2008 for a hearing to determine the extent of any hurts the defendant, David Shearon, has sustained and for counsel fees.
ENTER,
DATED:January 28, 2008
Joseph J. Maltese
Justice of the Supreme Court
Footnotes
Footnote 1: Liberty Capital Mortgage was doing business as (d/b/a) HCI Mortgage Company located in Lake Ariel, Pennsylvania.
Footnote 2: 2005 Internal Revenue Service Abstract and Return for David and Karen Shearon.
Footnote 3: "Home Loans" are defined in NY Banking Law §6-L(1)(e).
Footnote 4: NY Banking Law § 6-L(6).
Footnote 5: NY Banking Law § 6-L(7).
Footnote 6: NY Banking Law § 6-L(8).
Footnote 7: NY Banking Law 6-L(9).
Footnote 8: Jeune v. O.T. Trans Mix Corp. 29 AD3d 635 [2d Dept 2006]; Pautienis v. Legacy

Capital Corp. 36 AD3d 462 [1st Dept 2007].
Footnote 9: See EMC Mortg. Corp. v. Batista 15 Misc 3d 1143(A) [Sup. Ct. Kings County].
Footnote 10: Marine Midland Bank, N.A., v. Dino, et al., 168 AD2d 610 [2d Dept 1990].
Footnote 11: American Home Assurance Co., v. Amerford International Corp., 200 AD2d 472 [1st
Dept 1994].
Footnote 12: Rotuba Extruders v. Ceppos,, 46 NY2d 223 [1978]; Herrin v. Airborne Freight Corp.,
301 AD2d 500 [2d Dept 2003].
Footnote 13: Weiner v. Ga-Ro Die Cutting, 104 AD2d 331 [2d Dept 1984]. Aff’d 65 NY2d 732
[1985].
Footnote 14: Glennon v. Mayo, 148 AD2d 580 [2d Dept 1989].
Footnote 15: CPLR 3212(b); Gorman v. Town of Huntington, 2007 NY Slip Op. 08186 [2d Dept,
Oct. 30, 2007]; Dunham v. Hilco Const. Co., Inc. 89 NY2d 425 [1996].
Footnote 16: Federal Nat. Mortg. Ass’n v. Katz 33 AD3d 755 [2d Dept 2006]; Lacy v. New York
City Housing Authority 4 AD3d 455 [2d Dept 2004].
Footnote 17: First Nat. City Bank v. Mayes 35 AD2d 922 [1st Dept 1970].
Footnote 18: See Answer Affirmation of Heather A. Johnson, Esq. paragraph 3.
Footnote 19: NY Banking Law § 6-L(10).
Footnote 20: NY Banking Law § 6-L(8).