The banking crisis of the past five years has led to an almost unparalleled number of bank failures and subsequent receiverships by the Federal Deposit Insurance Corporation (FDIC).
In fact, the FDIC reports that it has served as receiver of almost 500 failed banks since July 2008, including heavyweights like Washington Mutual Bank and IndyMac Bank. To put that in context, from October 2000 through June 2008, the FDIC served as receiver for only 31 failed banks, and did not need to see a single bank failure between June 2004 and February 2007.
In order to ensure the continuity of banking services, and for the protection of the institution’s depositors and creditors, the FDIC will often move immediately to sell the assets, including mortgage loans, held by the failed bank to another bank. However, as one can imagine, a transaction of that size, entered into and finalized as quickly as it is, makes it impossible to formally assign each and every mortgage of the failed bank. This creates an issue in states like Massachusetts and Rhode Island which require the existence of a specific assignment of mortgage prior to initiating a foreclosure sale.
Luckily, during the last banking crisis of the late 1980s, the U.S. Congress recognized that a bank acquiring a failed bank’s assets would hardly be in a position to comply with state-specific laws governing the transfer of mortgages. As such, when Congress passed the Financial Institutions Reform and Recovery Enforcement Act (FIRREA) in 1989, which allowed for the appointment of the FDIC as conservator or receiver of a failing or failed insured institution, it provided the FDIC with broad powers. In that regard, FIRREA provides that “[t]he [FDIC] may, as conservator or receiver . . . transfer any asset . . . without any approval, assignment, or consent with respect to such transfer.” Importantly, to the extent state law conflicts with FIRREA generally, and section 1821 specifically, it is preempted.
Despite the language above, some state courts and title insurers in Massachusetts and Rhode Island have proven themselves extremely hesitant to ignore state law requirements governing the assignment of mortgages when dealing with an FDIC transfer. The recent decision of Demelo v. U.S. Bank Nat’l Ass’n, 12-2485, 2013 WL 4306747 (1st Cir. Aug. 16, 2013) by the U.S. Court of Appeals for the First Circuit could change that.
In December 2004, Edimara Demelo and her husband, Edilson Demelo, refinanced their home in Stoneham by means of a new $388,000 loan from Downey Savings and Loan Assoc. In November of 2008, Downey Savings was closed by the Office of Thrift Supervision and the FDIC was appointed receiver. The FDIC as receiver entered into a purchase and assumption agreement and a loan sale agreement with U.S. Bank National Association. Under these agreements, U.S. Bank acquired all of Downey Savings’ loans and mortgages, including the Demelos’ loan and mortgage. In keeping with its usual practice, the FDIC as receiver did not formally assign each and every mortgage.
The Demelos defaulted and U.S. Bank initiated foreclosure proceedings. In July 2011, U.S. Bank foreclosed and later recorded a foreclosure deed. The Demelos ultimately filed suit alleging, among other things, that U.S. Bank was not the mortgagee at the time it gave notice of the foreclosure sale. Under the landmark Massachusetts Supreme Judicial Court decision of U.S. Bank Nat’l Ass’n v. Ibanez, foreclosing entities in Massachusetts must possess a valid assignment of mortgage prior to giving notice of a foreclosure sale. The Demelos argued that U.S. Bank violated that decision when it foreclosed without an assignment. The court disagreed and entered summary judgment in favor of the bank; the Demelos appealed.
The First Circuit Court of Appeals quickly threw cold water on the borrowers’ argument, calling it “all sizzle and no steak.” The court held that “a transfer of a mortgage, authorized by federal law, obviates the need for the specific written assignment that state law would otherwise require.” Although, given the language of the relevant federal statute, the decision should not be surprising, it is often difficult to persuade a court that state law has been preempted. Moreover, purchasers of properties foreclosed by a transferee of the FDIC as receiver can sometimes find it difficult to obtain title insurance where there is no recorded assignment of mortgage prior to the sale.
Hopefully, the First Circuit’s decision will make it easier for acquiring banks to enforce their rights under mortgages they obtain after a bank has failed. The failure of a bank can have damaging consequences for its creditors, borrowers, and depositors that can often only be eased by a quick transfer of its assets. Forcing acquiring banks to comply with each state’s laws governing the transfer of mortgages will disincentivize potential acquiring banks and reduce the likelihood of immediate and orderly asset transfers. The First Circuit seems to have recognized this, and hopefully its decision in Demelo will assist courts and title insurers in recognizing this as well.
Thomas J. Enright is an associate at Partridge Snow & Hahn LLP in Providence.
