Legislature passes ‘one of the more disturbing bills’ following insolvency decisions

Nearly four months ago, two decisions were issued that involved parties in a commercial mortgage-backed securities loan — a non-recourse loan — which required the defendant landowner remain a “single purpose entity.” But the defendants became insolvent and defaulted on the mortgage.

The Michigan Court of Appeals ruled in Wells Fargo Bank v. Cherryland Mall Ltd. Partnership, et al. and the U.S. District Court in 51382 Gratiot Ave. Holdings, LLC v. Chesterfield Development Co. LLC that, by becoming insolvent, the defendants lost its single-purpose entity status, causing the loans to become recourse loans and allowing the plaintiffs to sue for the deficiency.

Now, the Detroit Free Press has reported that:

Wells Fargo bank will file a court challenge to a new state law signed by Gov. Rick Snyder that overturned a $2.4 million judgment against the brother and business partner of Michigan Republican Party Chairman Bobby Schostak, the bank’s attorney said Friday.

The law Snyder signed Thursday, which says a lender can recover only the real estate offered as collateral when a certain type of commercial loan goes into default, is unusual because it is retroactive, to the benefit of Schostak’s brother.

It sailed through the Legislature with bipartisan support but left some unhappy lawmakers in its wake.

“It was one of the more disturbing bills that we’ve taken up this session,” said Rep. Tom McMillin, R-Rochester Hills, who chairs the House Oversight, Reform and Ethics Committee.

The law is intended to overturn a judgment related to an unpaid loan on a Traverse City mall that was controlled by the Livonia-based real estate firm Schostak Bros. That judgment was upheld by the Michigan Court of Appeals.

The new law also could impact at least one other case recently decided on similar grounds in federal court in Michigan, though attorneys and legal scholars say the new state law may violate the U.S. Constitution.

“We fully expect to challenge the constitutionality of this law on a number of grounds,” said Troy attorney James Allen of Miller Canfield, who represents Wells Fargo, the bank that says it is owed the money.

 Our analysis of the two cases can be found here (subscribers only).

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Realtors hope $25B foreclosure settlement will spark housing revival

The following post was written by John Stodder, The Dolan Company National Affairs Correspondent. Dolan is the parent company of Michigan Lawyers Weekly.

With the residential real estate industry shell-shocked from years of a moribund market, its spokespeople can be forgiven for taking a cautious attitude toward this week’s announcement of a $25 billion settlement with five of the nation’s biggest mortgage lenders over flawed and fraudulent foreclosure practices.

The money in the settlement will mostly go to borrowers and homeowners who are underwater. According to the Washington Post, the settlement “will force lenders to revamp how they interact with troubled homeowners and bar them from trying to foreclose on borrowers while simultaneously negotiating mortgage modifications.”

But could the settlement help get the residential market moving again, even in the face of historic low interest rates and plummeting prices?

“We do hope that the resolution will help more lenders with the certainty they need to kick loose more loans,” said Walter Molony, a spokesman for the National Association of Realtors inWashington,D.C. He cautioned, however, that the impact will be limited because the settlement doesn’t help the millions of borrowers with loans owned by Fannie Mae or Freddie Mac.

Eric Berman, communications director for the Massachusetts Association of Realtors, was pleased that the settlement was designed to help more homeowners stay in their homes because that kind of stability slows the ongoing descent of home values in many markets – though the market isn’t as bad, he hastened to add, inMassachusetts as it is in many other areas.

But even there, he said, “Distress sales impact values of homes of people who are not in a distress situation.”

Realtors also hope the settlement “can give lenders the confidence to start up with loan modifications, short sales and principal write-downs,” Berman said. “We’re going to have to wait and see. From our members’ point of view, short sales take forever. The only thing short about a short sale is the definition.”

While realtors continue to ruminate, the blogosphere reacted quickly:

 

  • Financial blogger Yves Smith at Naked Capitalism gives “The Top Twelve Reasons Why You Should Hate the Mortgage Settlement.”  She is scathing. “We’ve now set a price for forgeries and fabricating documents: It’s $2,000 per loan,” which, as she points out, for an average loan is “less than the price of the title insurance that banks failed to get when they transferred the loans to the trust.”
  • Writing at the Huffington Post, financial reform activist Dennis Kelleher calls the deal a “criminal sell-out,” because the $20 billion in loan forgiveness, though impressive at first blush, only adds up to $20,000 per 1 million homes. According to a Zillow report in November, some 14.6 million home borrowers have fallen into a negative equity position.
  • Reuters’ financial blogger Felix Salmon likes the deal because the attorneys general didn’t give up too much and the banks didn’t get too much. Banks only got immunity from suits over the practice of robosigning, but can still be sued over a range of other alleged misdeeds that contributed to the mortgage default crisis.

 

– John Stodder