While I consider 2020 to be the Year of the Lease for California (which I wrote about at length here), a number of significant lending decisions came down last year as well.
For 2020, there were two notable lien priority cases with regard to HOA superpriority liens at the 9th Circuit level (involving Nevada but illustrative): CitiMortgage v. Corta Madera Homeowners Association (6/19/2020) 2020 DJDAR 6005 and Wells Fargo v. Mahogany Meadows Avenue Trust (9th Cir., 11/5/2020) 2020 DJDAR 11997.
Both cases reaffirm that a homeowner association’s CC&Rs control lien priority and that the HOA may dictate the manner of the payoff. When a developer records the CC&Rs, they are usually behind the developer’s construction loan. However, as the developer sells off the units, each new lender is subordinate in priority to the CC&Rs, which create a superpriority for later HOA liens.
CitiMortgage v. Corta Madera Homeowners Association
CitiMortgage was a secured lender who did not pay off the HOA liens ahead of it. Instead, the bank argued that it “offered” to pay superpriority portion of HOA’s lien, some nine months worth. This was not a valid tender.
Wells Fargo v. Mahogany Meadows Avenue Trust
Homeowners Carrasco and Kongnalinh bought a house in Las Vegas in the Copper Creek HOA, financed by Wells Fargo. They fell behind on their HOA dues and the HOA foreclosed for just over $5k and wiped out Wells Fargo. Wells Fargo sued the successful bidder at Trustee’s sale arguing that the Notice of the foreclosure sale was defective because it didn’t inform Wells Fargo that its lien was risk. It argued the notice was unconstitutional, along with an argument that HOA liens were a taking. The court did not find this argument persuasive. Because state law allowing superpriority for HOA assessment liens (based on homeowner’s failure to pay HOA fees), and HOA CC&Rs allowing for its liens to take priority over lender’s deeds of trust, were both enacted in in place before lender put its first priority deed of trust on property, there was no uncompensated taking when goverment passed the law allowing for superpriority liens. There was no taking based on the actual foreclosure, either, because the HOA was not an arm of the state when it conducted the foreclosure sale.
In California, one of the more colorful fact patterns I came across was one for mortgage fraud,
WFG National Title Ins. Co. v. Wells Fargo Bank, N.A. 51 Cal. App. 5th 881(June 12, 2020).
This was not your ordinary vanilla case of recording fake Substitutions of Trustee and Reconveyance however. Instead, the fraudsters pretended the Trustees sale happened (when it hadn’t), and recorded a fake Trustee’s Deed.
When borrowers defaulted, Wells Fargo commenced its foreclosure sale. However, the trustee’s sale did not take place. Instead a sham transaction occurred, wherein a forged Trustee’s Deed Upon Sale was recorded purporting to grant title to ATI. ATI “sold” the property to Vovk, who then borrowed $850k from Milestone Financial dba Alviso Funding. Alviso believed it had a lien in first position. Unfortunately Wells Fargo started up its foreclosure again, which put Alviso on notice of its defective title. Alviso sued for quiet title and dec relief. Wells Fargo prevailed on a motion for summary judgment as the trial court concluded WF had no duty to monitor public records for fraud and owed no duties to Alviso. The appellate court confirmed. COMMENT: a forged deed is void ab initio and affects the entire chain of title thereafter. Though a strange set of facts, it was a wholly predictable outcome.
In another long running saga, the case of Huang v. Wells Fargo Bank, N.A. (4/29/2020) 2020 DJDAR 4060 started back in 2000 when the Fasslers bought a home in Lafayette, which is a very nice community here in Northern California. The home appreciated significantly and the Fasslers borrowed against it with multiple lines of credit. There was a confusing sequence of refinances and payoffs of the three liens, culminating with a $1M loan from Countrywide, WAMU and ultimately and a foreclosure from BofA, the last lienholder. The Huangs purchased the home from BofA in 2009. Six months later, Wells Fargo tried to foreclose on one of the lines of credit. The Huangs tendered to their title policy. Nothing happened for 5 years!
Then the Huangs (via their insurance defense counsel) sued Wells Fargo to quiet title. Wells Fargo brought a motion for summary judgment and won, the Huangs appealed. The appellate court reversed, finding that the statute of limitations had not expired. The deadline for filing as to one in possession does not start running until actual possession was disturbed. Wells Fargo gave notice but mere notice of an adverse claim does not trigger 5 year deadline.
In the case of Robin v Crowell (2020) 55 Cal. App. 5th 727, a judicial foreclosure sale failed to wipe out a junior lender because the junior lender was not named in the action. Where a senior lienholder omits to include a junior lienholder in a judicial foreclosure action, the junior lienholder’s rights are unaffected by the foreclosure. Senior lienholder may file quiet title or additional judicial foreclosure action against junior lienholder. However, action must be filed within statute of limitation period for a foreclosure following default on the underlying obligation. The court did not decide if 4 or 6 year statute of limitation applied, because senior lienholder waited over 8 years to commence action against junior lienholder following breach of promissory note by owner, which was too late by either potentially applicable limitations period.
It has been many years now since the subprime meltdown but we are still seeing the loan modification cases work their way through the court system. This case chronicles a five year saga where the borrower attempted to confirm a loan modification, possibly paid $50k to halt a foreclosure sale, was told to send his HAMP application to 3 different states and started over multiple times, even filing bankruptcy to stave off foreclosure. Unsurprisingly, the court found that when a lender that offers loan modification, it has a duty of reasonable care in processing the application. Borrower adequately pleaded breach of the duty of care because allegations that the servicers had misdirected the borrower, which the court liberally construed, were sufficient to allege that the servicers had misrepresented to the borrower that the modification would be granted and had failed to direct the borrower to other loan workout options. Weimer v. Nationstar Mortgage, LLC (4/2/2020) 2020 DJDAR 3066; 47 Cal. App. 5th 341
Last but not least, the most interesting damages theory goes to this case. The City of Oakland filed suit against Wells Fargo damages caused by redlining (a harmful and illegal practice) and reverse redlining.
“Redlining is the practice of denying home loans to residents of minority neighborhoods. Reverse redlining, by contrast, is the practice of issuing home loans to minority borrowers with significantly higher costs and more onerous terms than those offered to similarly situated White borrowers—also known as “predatory loans.” Predatory loans include, for example, subprime loans, negative amortization loans, “No-Doc” loans that require no supporting evidence of a borrower’s income, loans with balloon payments, and “interest only” loans that carry a prepayment penalty. According to Oakland, Wells Fargo not only issues predatory loans to its Black and Latino residents, but also refuses to refinance those loans even though it is willing to refinance the loans of similarly situated White residents.
Using Wells Fargo’s own data, Oakland employs a number of regression analyses to show that its Black and Latino residents are more likely to receive predatory loans from Wells Fargo; that those predatory loans cause foreclosures; and that those foreclosures reduce property values and consequently diminish the City’s property-tax revenues. The City also alleges, albeit without statistical backing, that Wells Fargo’s predatory loans increase its municipal expenses, forcing it to reduce its spending in fair-housing programs aimed at guaranteeing that all of its residents have equal access to safe and affordable housing.”
The City went on to allege “Furthermore, borrowers in minority neighborhoods in Oakland are 3.207 times more likely to receive a predatory loan than similarly situated borrowers in non-minority neighborhoods.”
Increased predatory lending led to increased foreclosures which led to the City of Oakland spending significantly more municipal funds for police, firefighting and safety code enforcement, as well as decreased property tax revenue. Oakland sued Wells Fargo under the FHA to recover damages in the form of lost property tax revenues and increased municipal expenses and to enjoin Wells Fargo from continuing to issue predatory home loans to Black and Latino borrowers. The 9th Circuit found that the city plausibly alleged that it suffered a decrease in property tax revenue due to foreclosures on predatory loans and resulting devaluation of properties subject to taxation, lender’s motion to dismiss properly denied. City of Oakland v. Wells Fargo & Co. (9th Cir., 8/26/2020) 2020 DJDAR 9367