Under some states’ Construction Lien Acts, a contractor must record a construction lien within 90 days after the subcontractor last furnishes labor or material for an improvement. In Stock Building Supply, L.L.C. v. Parsley Homes of Mazuchet Harbor, L.L.C., No. 294098, the Michigan Court of Appeals held this year that performing “warranty work” to correct deficiencies in work that a subcontractor had already performed, or to correct defects in fixtures installed, does not constitute an “improvement” under the Michigan Construction Lien Act. The Court of Appeals determined that the distinguishing factor is whether the work conferred any value beyond the value furnished by the completion of the original work. Therefore, work performed to repair a leak in a whirlpool tub and to fix a toilet was warranty work, because it was necessary to provide what was originally contracted for – i.e., fully functioning plumbing fixtures.

In Oklahoma, the Court of Appeals recognized that “(t)he applicable time to serve pre-lien notice is not prior to performing labor or supplying materials; but rather, no later than seventy-five (75) days after the last date of work.”  The Court went on to state that under 42 O.S. §142.6(B), “the time period for pre-lien notice is not 75 days after the last date of work; it is 75 days after the lien claimant last supplied lienable services or materials on the job.”  Jones v. Purcell Investments, LLC, 2010 OK CIV APP 15, 231 P.3d 706 (2009).  While the language the Court used is different than that of the Michigan Court, it could very well be the case that an Oklahoma court would find that warranty work does not constitute supplying “lienable services or materials on the job.”

Sub-contractors would be well advised to not rely solely on warranty work to extend the ninety day deadline to file a lien under Oklahoma’s Mechanics and Materialmen’s Liens Act (or the 75 day deadline to serve the pre-lien notice).

Brian Huddleston

by: GERALD L. JACKSON

As housing markets struggle to rebound, a new wrinkle has been thrown into the mix by the Massachusetts Supreme Court, which voided several foreclosures because the banks involved could not demonstrate they had an interest in the mortgages at the time of the foreclosure sales. This much-anticipated ruling could have a spillover effect on the real estate markets everywhere – including Tulsa – because the problems it highlights could be widespread. In the case of U.S. Bank Association, Trustee vs. Antonio Ibanez, after the closing on the home loans, both mortgages were transferred through a series of assignments, many of which were executed “in blank,” ultimately ending up pooled and securitized into mortgage-backed securities.  However, the mortgages were not assigned to the banks that conducted the foreclosures until more than a year after the properties were foreclosed and sold.

Relying on well-recognized and long-standing Massachusetts law, the court held that the statutory power to foreclose can be exercised only by the mortgage holder, and any effort to foreclose by a party lacking such an interest is void. The banks could not produce any documents demonstrating that they were the actual mortgage holders by a proper assignment at the time foreclosure was initiated. The banks’ reliance on the securitization documents for a sufficient interest on which to base the foreclosures was rejected by the court. The court also rejected assignments made in blank and reliance on post-sale assignments as a customary practice in the industry.

The problems experienced by the banks in this case may be common – as mortgages often moved through many banks before being pooled and securitized during the heady days of the real estate boom, the assignment paperwork may not have kept up. Some industry insiders and analyst believe many securitized mortgages may suffer from the kind of paperwork defects as in Ibanez, and banks with these mortgages may not be able to prove a good chain of title. This ruling should not come as a surprise, and its rationale could very well be adopted in Oklahoma – it relied on basic property law concepts most lawyers learn in their first-year property class. With Tulsa leading the state in the number of foreclosures, this paperwork problem could disrupt the orderly disposition of residential properties in default and continue to hold back a local real estate recovery.

Before initiating foreclosure proceedings, banks need to carefully examine the documents to ensure that it is in fact the holder of the mortgage and has the legitimate right to foreclose. Banks may also want to give additional consideration to pre-foreclosure alternatives, such as modifications, short sales and deeds-in-lieu as a way to avoid these foreclosure issues.

Ultimately, Ibanez serves as a useful reminder that getting the paperwork right is like that old lawyer’s adage of wearing a belt and suspenders – you can never be too sure.

It has recently come to light that a number of mortgage loan servicers have submitted affidavits or signed other documents in support of either a judicial or non-judicial foreclosure that appear to have procedural defects. In particular, it appears affidavits and other documents have been signed by persons who did not have personal knowledge of the facts asserted in the documents. In addition, it appears that many affidavits were signed outside of the presence of a notary public, contrary to state law. This process of signing documents without confirming their accuracy has come to be known as “robo-signing.” We believe such a process may constitute a deceptive act and/or an unfair practice or otherwise violate state laws.

In order to handle this issue in the most efficient and consistent manner possible, the states have formed a bi-partisan multistate group to address issues common to a large number of states. The group is comprised of both state Attorneys General and the state bank and mortgage regulators. Fifty state Attorneys General have joined this coordinated multistate effort. State bank and mortgage regulators are participating both individually and through their Multistate Mortgage Committee, which represents mortgage regulators from all 50 states. Through this process, the states will attempt to speak with one voice to the greatest extent possible. At the end of this statement is a list of the participating states.

Our multistate group has begun inquiring whether or not individual mortgage servicers have improperly submitted affidavits or other documents in support of foreclosures in our states. The facts uncovered in our review will dictate the scope of our inquiry. The Executive Committee is comprised of the following Attorneys General Offices: Arizona, California, Colorado, Connecticut, Florida, Illinois, Iowa, New York, North Carolina, Ohio, Texas, and Washington; and the following state banking regulators: Maryland Office of the Commissioner of Financial Regulation, New York State Banking Department, and the Pennsylvania Department of Banking.

“The banks involved in this, e.g., BOA, GMAC, OneWest, Wells Fargo, etc., need to negotiate settlements with their borrowers in all the cases where they’ve created exposure for themselves by committing fraud upon the courts.  In Oklahoma, if you think you have been a victim of lender foreclosure fraud, in addition to contacting an attorney, you can file a consumer complaint with the Oklahoma Attorney General at http://www.oag.ok.gov/consumer/complt.nsf/complaint.html” – Brian Huddleston

The Home Affordable Modification Program (HAMP) is a program designed to boost the economy and to get the struggling housing market moving in the right direction again. HAMP may be used to modify first and second mortgages in order to keep a distressed homeowner in their home and to make their monthly mortgage payments more affordable.

The Home Affordable Refinance Program (HARP) was created for the same reasons as HAMP. HARP allows homeowners who are current on their mortgages to refinance their mortgages with today’s lower interest rates. Prior to this program, many homeowners were unable to take advantage of these lower interest rates due to the fact that their homes had substantially decreased in value and were “upside down” or “underwater.”

The Home Affordable Foreclosure Alternatives (HAFA) program was created for homeowners that do not qualify for mortgage modification under HAMP or those that fail to successfully complete the HAMP trial period. HAFA provides the homeowner with additional foreclosure avoidance options, including a Short Sale or a Deed-in-Lieu of foreclosure.

In these tough economic times, borrowers need to know the available options:

• Reinstatement: Reimbursement of installments that are past due, including additional fees and costs incurred by the lender because of the loan default.

• Payoff: Repayment of amount due on promissory note (principal plus interest and all fees and costs) which gives full discharge of the debt and satisfies the mortgage.

• Forbearance Agreement / Repayment Plan: Agreement between the lender and borrower wherein the lender agrees to stop the foreclosure and the borrower agrees to a payment plan that will bring the loan current over a specific period of time.

• Loan Modification: A permanent change to the existing delinquent mortgage and/or promissory note.  Lender may reduce the interest rate, term of loan, payment options, or other loan provisions to resolve the default.

• Deed in Lieu of Foreclosure: Release of the borrower from the note and mortgage obligations in exchange for a deed to the property.

• Short Sale: Lender’s acceptance of a purchase offer on the mortgaged property that is less than the full amount due on the loan.

The opinion in BONY v Raftogianis, contains the trial court’s detailed discussion of the assignments occurring in a securitization of loans, and the role of MERS with respect to residential loans.  The technical ruling of this NJ Court is that, in order to commence a foreclosure action in NJ, the foreclosing plaintiff must be a holder of the underlying Note at the time the action is commenced [and cannot cure that by becoming the holder after the action is commenced], and must be able to produce the original note upon request.

This excellent opinion clarifies many important foreclosure issues that are vital to the plaintiff’s standing in a judicial foreclosure.  The assignment of the mortgage by MERS is not the transfer of the note.  But MERS, as nominee, is not the actual owner of the mortgage – that status remains with the payee and transferees of the note.  Assignment of the mortgage by MERS is not necessarily the transfer of ownership, but just the documentation of it.

As more standing challenges are made to residential foreclosure actions with respect to securitized loans, the ability of a foreclosing party, when challenged, to establish that it holds the underlying Note and has the right to foreclose, may actually get seriously scrutinized by more trial courts.  Most foreclosure complaints that are commenced for securitized loans contain the necessary perfunctory and conclusory allegations, but they may nevertheless fail if trial courts will require lenders to meet their burden of proof by producing admissible evidence that traces the true ownership trail of the Note or the loan.

The underlying standing rules vary from state to state, and it is difficult for borrowers to challenge their lenders and stop their foreclosures.  But a foreclosing trustee may find that there are serious legal consequences (e.g., bad faith, breach of contract, attorney fees, costs, etc) if a standing challenge is asserted, and the trustee proceeds with the foreclosure without being the holder of the underlying Note at the time the action is commenced.

DIY Homeowners

If you are a homeowner performing a DIY renovation, repair, or painting work in your own home, EPA’s RRP rule does not cover your project.  However, you have the ultimate responsibility for the safety of your family or children in your care.  If you are living in a pre-1978 home and planning to do painting or repairs, please read a copy of EPA’s Renovate Right Brochure lead hazard information pamphlet. You may also want to call the National Lead Information Center at 1-800-424-LEAD (5323) and ask for more information on how to work safely in a home with lead-based paint.

Contractors

Renovations and repairs of pre-1978 housing must now be conducted under new lead-safe practices mandated by the U.S. Environmental Protection Agency’s new Lead Renovation, Repair and Painting Rule.  The Rule requires contractors working in pre-1978 housing and child-occupied facilities to follow a number of prescribed procedures to reduce potential exposure associated with the disturbance of lead-based paint. These include:

• Minimizing dust
• Containing the work area
• Conducting a thorough cleanup

In addition to these work practices, the Rule also includes increased training and certification requirements for firms and individual employees, as well as new verification and record-keeping requirements.  The EPA’s sample pre-renovation disclosure form may be used for this purpose. Violations of the Rule are punishable by fines of $32,500 per violation, per day.

As originally proposed in 2008, the lead-based paint rule included a provision allowing a contractor to opt out of the requirements by obtaining certification from a property owner residing at the work site that no child under age six or pregnant woman resides in the home, and the home is not a child-occupied facility.  This opt-out provision has been eliminated and, there are no exceptions to the new requirements for renovation or repair of any covered structure built before 1978.

With the elimination of the “opt-out” provision, the RRP Rules require that anyone who receives compensation for renovation work at single family homes, multi-family housing and child-occupied facilities (such as day care facilities and schools) built before 1978 must use a certified firm or individual to perform this work. Essentially, this now means that anyone other than the DIY owner/occupant of a single family home is subject to the RRP Rules.

An estimated 80 million homes built before 1978 contain some lead-based paint. The National Association of Home Builders estimates that the new rule could add $500 to $1,500 to the cost of a project estimated at $5,000 or more.

Realtors and Property Management Firms

Realtors and property managers should make themselves aware of the requirements in the Lead Renovation, Repair and Painting (RRP) Rule. The EPA is working with the National Association of Realtors to make realtors and property managers aware of the hazards of lead paint poisoning and ways to prevent it, and the association has developed a series of guidance videos aimed at realtors and property managers:

• View the National Association of Realtors lead paint renovation rule compliance guide overview
• View the National Association of Realtors lead renovation rule guide for real estate agents and brokers
• View the National Association of Realtors frequently asked questions for realtors
• View the National Association of Realtors lead renovation rule guide for property managers
• View the National Association of Realtors frequently asked questions for property managers

New Proposals

In addition, on May 6, 2010 the EPA published two more proposals for the lead-based paint program.  The agency proposes to require dust-wipe testing after most renovations and delivery of wipe test results to the owners and occupants of the building. EPA rules for lead-safe work practices to renovations on public and commercial buildings are on the way for industrial and office buildings, government-owned buildings, colleges, museums, airports, hospitals, churches, stores, warehouses and factories.