On 7/3/14, the Maine Supreme Judicial Court decided Bank of America v. Greenleaf and dropped a bomb on residential mortgage foreclosure in Maine. The opinion vacates the trial court’s $560,000 foreclosure judgment against the Greenleafs. The court found that the bank had no authority to foreclose and that the evidence they offered at trial was insufficient.
In November of 2006, Scott and Kristina Greenleaf closed on a loan for $385,000 secured by a mortgage on a property in Casco, Maine. At the time of closing, the lender was Residential Mortgage Services (RMS). RMS was named as the lender on the mortgage, but the mortgage itself was granted to Mortgage Electronic Registration Systems Inc., or MERS.
After closing the deal, Countrywide, which later became BAC Home Loans Servicing, acquired the loan first held by RMS. Bank of America later bought Countrywide/BAC and that’s why they are part of the case. In December of 2008, the Greenleafs stopped paying their mortgage. By the time the Bank notified them of default, the Greanleafs had missed 25 payments and owed more than $70,000. The bank filed a foreclosure suit.
What is MERS and why do they have the mortgage?
Mortgage Electronic Registration Systems or MERS helped make the housing crisis possible. It was launched in 1997 as a way to streamline creating and trading in Mortgage Backed Securities. Before MERS, any sale of a loan secured by a mortgage required the seller to grant the buyer an assignment of the mortgage. That document then needed to be recorded in the local registry of deeds. As thousands of loans were bundled, sold, resold and sold again, this became very cumbersome and expensive.
The solution was to do the loan as usual, but to grant the mortgage, at least nominally, to MERS. They could act as a private, electronic registry, give the mortgage a number and track it as the associated loan was passed around the market. MERS would be listed as the lender’s “nominee” giving them authority to register the mortgage but not much else. The mortgage to MERS was recorded after closing but, if all went to plan, no other papers would need to be generated until the loan was paid off. If the lender needed to foreclose, MERS could assign the mortgage to that bank and let them have at it. MERS currently holds perhaps 50-70% all U.S. mortgages.
Proving ownership of the mortgage?
In foreclosure court, the Greenleaf’s lender had to prove that it had the right to enforce the note, that it owned the mortgage and that it had satisfied all the other elements of foreclosure. To prove they owned the mortgage, BAC gave the court a document assigning the mortgage from MERS, to BAC. The Greenleafs argued this was not sufficient proof of ownership but the trial Judge allowed the case to proceed; after all the bank had a valid assignment from MERS, the entity granted the mortgage in the first place.
But on appeal, the Maine Supreme Judicial Court disagreed. They reasoned that a “nominee” is not the true owner of the thing; they are simply an entity acting on another’s behalf for a limited purpose. As Justice Ellen Gorman wrote for the unanimous court:
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 as nominee—because MERS could not have granted to another person or entity any greater interest in the mortgage than that enjoyed by MERS.
The court also held that, without proof of ownership of the loan and the mortgage, the bank lacks standing to sue in the first place. The judgment of foreclosure had to be vacated.
This is a pretty big deal. With Greenleaf, Maine becomes perhaps the only jurisdiction to hold that MERS can’t assign a mortgage. Maine had already been in the minority by holding that MERS lacks standing to foreclose directly. These rules make it much harder for many banks to foreclose in Maine.
Other problems with this foreclosure
In any Maine foreclosure case, the bank must prove the following before they can take your home:
- A mortgage exists
- The bank owns the mortgage note and the mortgage
- Breach of a mortgage condition occurred
- The amount due on the note including fees and costs
- The order and priority of any amounts due to other parties
- A proper notice of default and right to cure was served on mortgagor
- Mediation was completed
- The mortgagor’s military status
In Greenleaf’s case, the court found that, even if the bank had standing, they failed to prove the amount due on the note and that a proper notice was served.
Amount due on the loan
The bank attempted to prove the amount due by offering a print out from the banks computer records. To authenticate the record, they provided a “litigation liaison” whose job was to testify at trial so as to facilitate the admission of documents. To become evidence, the bank offered the documents a business records under the rule 803(6)hearsay exception. That rule allows the documents to come in as long as a custodian or other qualified witness lays an adequate foundation. The court found that the liaison was not an adequate custodian of records.
when the court admitted Exhibit 6, [the witness] had not testified as to how long or in what capacities she has worked for the Bank, what type of familiarity with the Bank’s records is required for her job as a litigation liaison, or how or how often she accesses those records. Indeed, when asked how she first came to see the printout offered as Exhibit 6, Pollock testified that she had obtained it not through her employment with the Bank, but through the law firm hired to represent the Bank in the foreclosure action.
The court went on to say that:
Even if Pollock’s qualifications as a custodian of the Bank’s records had been established through her testimony, however, she did not testify to how the Bank’s payment records are created, checked for accuracy, or accessed, or that that her review of the records showed that the proper processes for creating, checking for accuracy, or accessing were followed in this case.
Notice of default and right to cure
There was one other fatal flaw with the bank’s case. Maine law requires a notice be sent to the homeowner detailing the payments missed, the amount due, and giving an “itemization of any other charges that must be paid in order to cure the default,”. The notice sent to Greenleaf quoted an amount but then included this language:
*Contact the servicer to obtain an up to date figure for outstanding attorney fees, unpaid taxes and costs before sending payment.
Greenleaf argued that this did not comply with Maine law and the court agreed:
Because the amount due as stated in the notice of default is the precise amount that the mortgagor has thirty-five days to pay in order to cure the default, the amount due is not, as the Bank suggests, open to any further accrual during that period…This, too, provides an independent basis on which we could vacate the foreclosure judgment.
Some thoughts on what it means
- It is going to be hard for banks to foreclose loans backed by MERS mortgages. They will need to get assignments from the bank that first named MERS as nominee and that might be impossible in some cases.
- Those notices are going to be a problem. The language in this case appears to be pretty standard. Banks had better try to dismiss, re-notice and then refile the case. It is not clear that this will work in every case.
- Greenleaf is probably now the leading case on the 803(6) business record hearsay exception. It lays out a pretty exacting standard and provides some good lines of cross for the opponent and an essential checklist for proponents of the records.