Thursday, December 16, 2010

The real downside to the secondary mortgage market: consecutive mortgagees can't get their paperwork to insurer

WMC was the mortgagee of property in Athol, Massachusetts. (Reminder: the mortgagee is the entity such as a bank to whom the homeowner makes mortgage payments.) MPIUA issued a homeowners policy for the property which provided coverage to both the homeowner, Brohl, and WMC.

WMC transferred the mortgage note to UBS. UBS retained Ocwen to service the loan. The MPIUA policy was amended to add Ocwen as a mortgagee.

On January 25, 2007, Brohl notified MPIUA that the property had sustained water damage. On February 4, 2007, there was a fire at the property.

On June 12, 2007, Ocwen sent MPIUA a notice of claim seeking damages under the policy. The letter defined Ocwen as "the mortgagee." (Meanwhile, Brohl was being foreclosed upon.)

MPIUA requested documents from Ocwen. On July 16, 2007, the mortgage note was sold back to WMC, and Ocwen never provided MPIUA with the requested documents.

On December 20, 2007, WMC resold the mortgage loan to Credit Suisse. SPS serviced the loan for Credit Suisse.

On June 19, 2008, SPS submitted a claim to MPIUA on behalf of SPS "as the insured mortgagee under the policy." SPS enclosed with the letter a number of documents regarding the transfer of the loan. MPIUA responded with a request for documentation showing SPS' or Credit Suisse's status as proper claimants, including a paper trail from WMC to SPS. It also requested documents showing that SPS had notified MPIUA of its mortgagee status or any efforts to amend the declarations page of the policy.

SPS provided documentation regarding the mortgage transaction, and stated that it was unaware of notices to MPIUA regarding the change in mortgagees.

MPIUA responded to SPS that the documentation it provided was insufficient, and requested copies of the agreements assigning the mortgage from WMC to any subsequent mortgagee. SPS did not provide the requested information.

On September 28, 2008, WMC repurchased the loan from Credit Suisse.

WMC did not notify MPIUA that it had repurchased the mortgage. Instead, on March 23, 2009, it sued MPIUA, claiming that MPIUA breached its contract by failing to pay WMC’s mortgagee claim and had engaged in unfair settlement practices.

After the lawsuit was filed MPIUA continued to request evidence of WMC’s status as mortgagee. On September 22, 2009, WMC produced documents proving that it was now (again) the mortgagee. However, MPIUA did not pay the loss.

MPIUA argued that it was entitled to summary judgment because prior to filing suit WMC and its predecessors failed to provide satisfactory proof of their right and title as mortgagees. In WMC Mortgage Corp. v. Mass. Property Ins. Underwriting Ass’n, 2010 WL 3734120 (D. Mass.), the court held that MPIUA was entitled to summary judgment on the claim that it failed to act in good faith when it refused to provide coverage without additional documentation.

The court also held that MPIUA could not avoid coverage of the loss. Under Mass. Gen. Laws ch. 175 §97, a statute regulating fire insurance, MPIUA’s obligation to provide coverage to a mortgagee named in the policy arose upon satisfactory proof of the mortgagee’s rights and title as a mortgagee.

WMC was named as a mortgagee in the policy, and after the lawsuit commenced it provided sufficient evidence to establish its status as the current owner of the mortgage.

Finally, the court found that the various mortgagees breached the duty to cooperate when they failed to comply with MPIUA’s requests for information and that MPIUA was thereby prejudiced. The court held that the prejudice would be remedied by an order directing WMC to pay MPIUA’s attorney’s fees and costs incurred in the lawsuit.

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