Housing

FIGHTING MORTGAGE ASSIGNMENT FRAUD – IS FDCPA THE ONLY WEAPON?

Posted on April 6, 2010. Filed under: Banking, Case Law, Foreclosure Defense, Housing, Mortgage Audit, Mortgage Fraud, Mortgage Law, Securitization |

By Dean Mostofi

This article, in light of a recent filing of a class action complaint and news of an ongoing criminal investigation, examines the Fair Debt Collection Practices Act and its potential application by homeowners seeking damages against foreclosure trustees and mortgage default servicing companies involved in wholesale and systemic mortgage assignment fraud and other deceptive acts and practices.

The Wall Street Journal reported last Saturday that a unit of Lender Processing Services Inc (LPS), a U.S. provider of paperwork used by banks in the foreclosure process, is being investigated by federal prosecutors. Sources have indicated the investigation is criminal in nature and involves the production and recording of fraudulent mortgage assignments.

Although this may have been news to the WSJ and its readers, loan auditors and foreclosure defense lawyers have been complaining about rampant foreclosure fraud perpetuated by trustees and their attorneys for at least 18 months.

The Fraud

During the recent real estate boom between 2002 and 2007 millions of loans were originated and sold to securitization trusts without much attention to detail or regard for proper paperwork and as a result the majority of loan files are missing the required documentation proving chain of title and assignment of the mortgage and note from originator to the trust. In the event of default, in certain jurisdictions, the trustee cannot foreclose without evidence of a recorded mortgage assignment; but since they were never executed and many of the originators are no longer in business, to facilitate foreclosures the assignments are now being forged, backdated and recorded every time a foreclosure action is commenced.

The fraud was so widespread and blatant that in some instances mortgage assignments were notarized and recorded with the name “BOGUS ASSIGNEE” shown to be the official grantee of the mortgage and no one including the court clerks ever questioned the bogus assignments’ authenticity.

Class Action

On Feb 17, 2010 a putative class action complaint, styled as Schneider, Kenneth, et al. vs. Lender Processing Services, Inc., et al., was filed in the United States District Court for the Southern District of Florida. The complaint alleges violations of the FDCPA by US Bank, Deutsche Bank, LPS and its subsidiary Docx LLC.  Defendants are accused of:

  • Making false, deceptive and misleading representations concerning their standing to sue the plaintiffs for foreclosure;
  • Falsely representing the status of the debt in that it was due and owing to defendants at the time the foreclosure suit was filed;
  • Falsely representing or implying that the debt was owing to defendants as an innocent purchaser for value when in fact such an assignment had not taken place;
  • Threatening to take legal action and engaging in collection activities and foreclosure suits as trustee that could not legally be taken by them;
  • Obtaining access to state and federal courts to collect on notes and foreclosure on mortgages under false pretences;
  • Foreclosing without the ability to obtain and record an assignment of the mortgage and note;

FDCPA

This is a single count complaint that bets the house on FDCPA and its applicability to the named defendants who no doubt will move for dismissal claiming they are not debt collectors but trustees and document providers. As such a more careful analysis of the FDCPA is in order.

There are some gray areas in the applicability of the FDCPA, but it is generally accepted that a mortgage debt and those trying to collect on it are subject to the FDCPA. The Act applies only to debts that were incurred primarily for “personal, family or household purposes, whether or not [a debt] has been reduced to judgment.” This means that the character of the debt is determined by the use of the borrowed money and not by the type of property used for collateral. For example, monies loaned that are invested in a business or used to purchase a commercial building would represent a non-consumer debt and not be subject to the FDCPA. However, regardless of the type of property that is secured by the deed of trust, if the borrower used the money to purchase a boat, jewelry, clothing or for other personal expenses, the debt would be a consumer debt subject to the Act.

Debt Collector Defined

The FDCPA defines debt collector as any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another. 15 U.S.C.A. § 1692a(6)

Furthermore, the United States Supreme Court has held that lawyers who regularly collect consumer debts, even when their collection efforts are through litigation only, are debt collectors under FDCPA.  Heintz v. Jerkins 95 Daily Journal D.A.R. 7134 (1995). However, courts have held that lenders who foreclose on their own mortgage loans are not debt collectors. Olroyd v. Associates Consumer Discount Co., 863 F.2d 23 7 (D.C., E D. Penn 1994).

Assignment Before and After Default

Creditors who take an assignment of the debt while it is in default are generally subject to FDCPA as debt collectors. Therefore, mortgage servicers who obtained the loan while it was in default are subject to the FDCPA as debt collectors [Games v. Cavazas, 737 F.Supp. 1368 (D.C., D. Del. 1990)] but mortgage servicers who receive a loan prior to default are not covered as debt collectors (Penny v. Stewart Elk Co., 756 F.2d 1197 (5th Cir., 1985); rehearing granted on other grounds, 7611 F.2d 237).

The Fiduciary Exception

To make matters more complicated even when assignment takes place after default some trustees may fall under the exception to “debt collector” that covers “any person collecting or attempting to collect any debt … due another to the extent such activity … is incidental to a bona fide fiduciary obligation.” 15 U.S.C.A. § 1692a(6)(F)(i) (West 1998). As such, US Bank and Deutsche Bank may claim that, because they were acting as trustees foreclosing on a property pursuant to a deed of trust, they were fiduciaries benefitting from the exception of § 1692a(6)(F)(i).

However, the fact that trustees foreclosing on a deed of trust are fiduciaries only partially answers the question. Rather, the critical inquiry is whether a trustee’s actions are incidental to a bona fide fiduciary obligation.

In Wilson v. Draper, 443 F.3d 373 (4th Circuit 2006) the court “concluded that a trustee’s actions to foreclose on a property pursuant to a deed of trust are not “incidental” to its fiduciary obligation. Rather, they are central to it.” Thus, to the extent the trustees use the foreclosure process to collect the alleged debt, they could not benefit from the exemption contained in § 1692a(6)(F)(i).

The court further noted that “the exemption (i) for bona fide fiduciary obligations or escrow arrangements applies to entities such as trust departments of banks, and escrow companies. It does not include a party who is named as a debtor’s trustee solely for the purpose of conducting a foreclosure sale (i.e., exercising a power of sale in the event of default on a loan).”

Debt Collector’s Duties

Once subject to the FDCPA, a debt collector must disclose clearly to the debtor that, “the debt collector is attempting to collect the debt,” and, “any information obtained will be used for that purpose.”

The FDCPA also requires that a statement be included in the initial communication with the debtor (or within 5 days of the initial communication), providing the debtor with written notice containing the following:

  • the amount of the debt;
  • the name of the creditor to whom the debt is owed;
  • the statement that, unless the consumer, within thirty (30) days after the receipt of the notice disputes the validity of the debt or any portion thereof, the debt will be assumed to be valid by the debt collector;
  • the statement that if the consumer notifies the debt collector in writing within the thirty-day period that the debt or any portion thereof is disputed, the debt collector will obtain a verification of the debt or a copy of the judgment will be mailed to the consumer by the debt collector;
  • a statement that upon the consumer’s written request within the thirty day period, a debt collector will provide the consumer with the name and address of the original creditor, if different from the current creditor

Prohibitions against False and Misleading Representation

Under §1692(e) a debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt. Without limiting the general application of the foregoing, the following conduct is a violation of this section:

(1) The false representation or implication that the debt collector is vouched for, bonded by, or affiliated with the United States or any State, including the use of any badge, uniform, or facsimile thereof.

(2) The false representation of—

(A) the character, amount, or legal status of any debt; or

(B) any services rendered or compensation which may be lawfully received by any debt collector for the collection of a debt.

(3) The false representation or implication that any individual is an attorney or that any communication is from an attorney.

(4) The representation or implication that nonpayment of any debt will result in the arrest or imprisonment of any person or the seizure, garnishment, attachment, or sale of any property or wages of any person unless such action is lawful and the debt collector or creditor intends to take such action.

(5) The threat to take any action that cannot legally be taken or that is not intended to be taken.

(6) The false representation or implication that a sale, referral, or other transfer of any interest in a debt shall cause the consumer to—

(A) lose any claim or defense to payment of the debt; or

(B) become subject to any practice prohibited by this subchapter.

(7) The false representation or implication that the consumer committed any crime or other conduct in order to disgrace the consumer.

(8) Communicating or threatening to communicate to any person credit information which is known or which should be known to be false, including the failure to communicate that a disputed debt is disputed.

(9) The use or distribution of any written communication which simulates or is falsely represented to be a document authorized, issued, or approved by any court, official, or agency of the United States or any State, or which creates a false impression as to its source, authorization, or approval.

(10) The use of any false representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a consumer.

(11) The failure to disclose in the initial written communication with the consumer and, in addition, if the initial communication with the consumer is oral, in that initial oral communication, that the debt collector is attempting to collect a debt and that any information obtained will be used for that purpose, and the failure to disclose in subsequent communications that the communication is from a debt collector, except that this paragraph shall not apply to a formal pleading made in connection with a legal action.

(12) The false representation or implication that accounts have been turned over to innocent purchasers for value.

(13) The false representation or implication that documents are legal process.

(14) The use of any business, company, or organization name other than the true name of the debt collector’s business, company, or organization.

(15) The false representation or implication that documents are not legal process forms or do not require action by the consumer.

(16) The false representation or implication that a debt collector operates or is employed by a consumer reporting agency as defined by section 1681a (f) of this title.

Remedies

If the debt collector is in violation of the FDCPA, he/she may be held liable for: (1) any actual damages sustained by the consumer (including damages for mental distress, loss of employment, etc.), and, (2) such additional damages as the court may allow, but not exceeding $ 1,000.

In the case of the class action, the court may award up to $500,000 or one percent of the debt collector’s net worth, whichever is less.

Conclusion

Evidently some advocates believe that without the FDCPA and its provisions which prohibit misrepresentation and deceitful conduct by debt collectors, homeowners as a class have little or no recourse against banks that choose to lie, cheat and defraud the court, while aided by judges who are complicit in the fraud for turning a blind eye and rubber stamping Orders.  However, borrowers may have various other causes of action individually, which may or may not be economically feasible to litigate. As always the best advice is to have the loan file audited by a skilled forensic loan auditor to detect violations of federal and state laws followed by consultation with a seasoned foreclosure defense attorney.

Dean Mostofi

National Loan Audits

301-867-3887

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Fannie Mae to rent out homes instead foreclosing

Posted on November 5, 2009. Filed under: Foreclosure Defense, Housing, Mortgage Law | Tags: , , , , , , |

Fannie Mae to rent out homes instead foreclosing

By ALAN ZIBEL (AP) – 4 hours ago

WASHINGTON — Thousands of borrowers on the verge of foreclosure will soon have the option of renting their homes from Fannie Mae, under a policy announced Thursday.

The government-controlled company, through its new “Deed for Lease” program, will allow borrowers to transfer ownership to Fannie Mae and sign a one-year lease, with month-to-month extensions after that.

The program will “eliminate some of the uncertainty of foreclosure, keeps families and tenants in their homes during a transitional period, and helps to stabilize neighborhoods and communities,” Jay Ryan, a Fannie Mae vice president, said in a statement.

But the effort is likely to affect a relatively small number of homeowners. In the first half of the year, Fannie Mae took back about 1,200 properties through this process, known as a deed-in-lieu of foreclosure. That pales in comparison to the 57,000 foreclosed properties the company repossessed in the period.

While neither option is particularly attractive for the homeowner, a deed-in-lieu does less harm to the borrower’s credit record.

The rental program is designed to help homeowners who don’t qualify for a loan modification under the Obama administration’s plan, but still want to remain in their homes. Fannie Mae is not planning to market the homes for sale during the one-year rental period.

Fannie Mae has hired an outside company, which officials declined to identify, to manage the properties.

To qualify, homeowners have to live in the home as their primary residence and prove that they can afford the market rent, which would be determined by the management company. The rent can’t be more than 31 percent of their pretax income.

Fannie Mae’s sibling company, Freddie Mac, launched a similar effort in March. That policy, however, requires the foreclosure to be complete and only allows month-to-month leases. A Freddie Mac spokesman declined to say how many borrowers have participated.

via The Associated Press: Fannie Mae to rent out homes instead foreclosing.

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Fair Game – If the Lender Can’t Find the Mortgage

Posted on October 25, 2009. Filed under: Banking, bankruptcy, Case Law, Foreclosure Defense, Housing, Loan Modification, Mortgage Law | Tags: , , , , , , , |

Published: October 24, 2009

FOR decades, when troubled homeowners and banks battled over delinquent mortgages, it wasn’t a contest. Homes went into foreclosure, and lenders took control of the property.

On top of that, courts rubber-stamped the array of foreclosure charges that lenders heaped onto borrowers and took banks at their word when the lenders said they owned the mortgage notes underlying troubled properties.

In other words, with lenders in the driver’s seat, borrowers were run over, more often than not. Of course, errant borrowers hardly deserve sympathy from bankers or anyone else, and banks are well within their rights to try to protect their financial interests.

But if our current financial crisis has taught us anything, it is that many borrowers entered into mortgage agreements without a clear understanding of the debt they were incurring. And banks often lacked a clear understanding of whether all those borrowers could really repay their loans.

Even so, banks and borrowers still do battle over foreclosures on an unlevel playing field that exists in far too many courtrooms. But some judges are starting to scrutinize the rules-don’t-matter methods used by lenders and their lawyers in the recent foreclosure wave. On occasion, lenders are even getting slapped around a bit.

One surprising smackdown occurred on Oct. 9 in federal bankruptcy court in the Southern District of New York. Ruling that a lender, PHH Mortgage, hadn’t proved its claim to a delinquent borrower’s home in White Plains, Judge Robert D. Drain wiped out a $461,263 mortgage debt on the property. That’s right: the mortgage debt disappeared, via a court order.

So the ruling may put a new dynamic in play in the foreclosure mess: If the lender can’t come forward with proof of ownership, and judges don’t look kindly on that, then borrowers may have a stronger hand to play in court and, apparently, may even be able to stay in their homes mortgage-free.

The reason that notes have gone missing is the huge mass of mortgage securitizations that occurred during the housing boom. Securitizations allowed for large pools of bank loans to be bundled and sold to legions of investors, but some of the nuts and bolts of the mortgage game — notes, for example — were never adequately tracked or recorded during the boom. In some cases, that means nobody truly knows who owns what.

To be sure, many legal hurdles mean that the initial outcome of the White Plains case may not be repeated elsewhere. Nevertheless, the ruling — by a federal judge, no less — is bound to bring a smile to anyone who has been subjected to rough treatment by a lender. Methinks a few of those people still exist.

More important, the case is an alert to lenders that dubious proof-of-ownership tactics may no longer be accepted practice. They may even be viewed as a fraud on the court.

The United States Trustee, a division of the Justice Department charged with monitoring the nation’s bankruptcy courts, has also taken an interest in the White Plains case. Its representative has attended hearings in the matter, and it has registered with the court as an interested party.

THE case involves a borrower, who declined to be named, living in a home with her daughter and son-in-law. According to court documents, the borrower bought the house in 2001 with a mortgage from Wells Fargo; four and a half years later she refinanced with Mortgage World Bankers Inc.

She fell behind in her payments, and David B. Shaev, a consumer bankruptcy lawyer in Manhattan, filed a Chapter 13 bankruptcy plan on her behalf in late February in an effort to save her home from foreclosure.

A proof of claim to the debt was filed in March by PHH, a company based in Mount Laurel, N.J. The $461,263 that PHH said was owed included $33,545 in arrears.

Mr. Shaev said that when he filed the case, he had simply hoped to persuade PHH to modify his client’s loan. But after months of what he described as foot-dragging by PHH and its lawyers, he asked for proof of PHH’s standing in the case.

“If you want to take someone’s house away, you’d better make sure you have the right to do it,” Mr. Shaev said in an interview last week.

via Fair Game – If the Lender Can’t Find the Mortgage – NYTimes.com.

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Foreclosures Are More Profitable Than Loan Modifications, According To New Report

Posted on October 23, 2009. Filed under: Foreclosure Defense, Housing, Mortgage Law | Tags: , , , , , , |

Mortgage companies are more likely to foreclose on homeowners than modify their loans because they make more money off foreclosures, argues a new report by a consumer advocacy group.

While homeowners, lenders and investors typically lose money on a foreclosure, mortgage servicers do not, says report author Diane E. Thompson, of counsel at the National Consumer Law Center. Servicers are the companies that manage the mortgages and collect payments.

“Servicers may even make money on a foreclosure,” she writes. “And, usually, a loan modification will cost the servicer something. A servicer deciding between a foreclosure and a loan modification faces the prospect of near certain loss if the loan is modified and no penalty, but potential profit, if the home is foreclosed.”

Thompson attributes this to a system of perverse incentives created by lawmakers and rulemakers in the market, like credit rating agencies and bond issuers. The private rulemakers typically dictate how a servicer can account for potential losses and profits. They hold enormous sway over securitized mortgages, which are owned by investors. More than two-thirds of mortgages issued since 2005 have been securitized, notes the report, using data from the industry publication Inside Mortgage Finance.

via Foreclosures Are More Profitable Than Loan Modifications, According To New Report.

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The next financial tsunami unleashed by toxic mortgages

Posted on October 23, 2009. Filed under: Banking, Foreclosure Defense, Fraud, Housing, Mortgage Audit, Mortgage Fraud, Mortgage Law, Predatory Lending | Tags: , , , , , , , , , , , |

By PAM MARTENS

The financial tsunami unleashed by Wall Street’s esurient alchemy of spinning toxic home mortgages into triple-A bonds, a process known as securitization, has set off its second round of financial tremors.

After leaving mortgage investors, bank shareholders, and pension fiduciaries awash in losses and a large chunk of Wall Street feeding at the public trough, the full threat of this vast securitization machine and its unseen masters who push the levers behind a tightly drawn curtain is playing out in courtrooms across America.

Three plain talking judges, in state courts in Massachusetts and Kansas, and a Federal Court in Ohio, have drilled down to the “straw man” aspect of securitization. The judges’ decisions have raised serious questions as to the legality of hundreds of thousands of foreclosures that have transpired as well as the legal standing of the subsequent purchasers of those homes, who are more and more frequently the Wall Street banks themselves.

Adding to the chaos, the Financial Accounting Standards Board (FASB) has made rule changes that will force hundreds of billions of dollars of these securitizations back onto the Wall Street banks balance sheets, necessitating the need to raise capital just as the unseemly courtroom dramas are playing out.

The problems grew out of the steps required to structure a mortgage securitization. In order to meet the test of an arm’s length transaction, pass muster with regulators, conform to accounting rules and to qualify as an actual sale of the securities in order to be removed from the bank’s balance sheet, the mortgages get transferred a number of times before being sold to investors. Typically, the original lender (or a sponsor who has purchased the mortgages in the secondary market) will transfer the mortgages to a limited purpose entity called a depositor. The depositor will then transfer the mortgages to a trust which sells certificates to investors based on the various risk-rated tranches of the mortgage pool. (Theoretically, the lower rated tranches were to absorb the losses of defaults first with the top triple-A tiers being safe. In reality, many of the triple-A tiers have received ratings downgrades along with all the other tranches.)

Because of the expense, time and paperwork it would take to record each of the assignments of the thousands of mortgages in each securitization, Wall Street firms decided to just issue blank mortgage assignments all along the channel of transfers, skipping the actual physical recording of the mortgage at the county registry of deeds.

Astonishingly, representatives for the trusts have been foreclosing on homes across the country, evicting the families, then auctioning the homes, without a proper paper trail on the mortgage assignments or proof that they had legal standing. In some cases, the courts have allowed the representatives to foreclose and evict despite their admission that the original mortgage note is lost. (This raises the question as to whether these mortgage notes are really lost or might have been fraudulently used in multiple securitizations, a concern raised by some Wall Street veterans.)

But, at last, some astute judges have done more than take a cursory look and render a shrug. In a decision handed down on October 14, 2009, Judge Keith Long of the Massachusetts Land Court wrote:

“The blank mortgage assignments they possessed transferred nothing…in Massachusetts, a mortgage is a conveyance of land. Nothing is conveyed unless and until it is validly conveyed. The various agreements between the securitization entities stating that each had a right to an assignment of the mortgage are not themselves an assignment and they are certainly not in recordable form…The issues in this case are not merely problems with paperwork or a matter of dotting i’s and crossing t’s. Instead, they lie at the heart of the protections given to homeowners and borrowers by the Massachusetts legislature. To accept the plaintiffs’ arguments is to allow them to take someone’s home without any demonstrable right to do so, based upon the assumption that they ultimately will be able to show that they have that right and the further assumption that potential bidders will be undeterred by the lack of a demonstrable legal foundation for the sale and will nonetheless bid full value in the expectation that that foundation will ultimately be produced, even if it takes a year or more. The law recognizes the troubling nature of these assumptions, the harm caused if those assumptions prove erroneous, and commands otherwise.” [Italic emphasis in original.] (U.S. Bank National Association v. Ibanez/Wells Fargo v. Larace)

A month and a half before, on August 28, 2009, Judge Eric S. Rosen of the Kansas Supreme Court took an intensive look at a “straw man” some Wall Street firms had set up to handle the dirty work of foreclosure and serve as the “nominee” as the mortgages flipped between the various entities. Called MERS (Mortgage Electronic Registration Systems, Inc.) it’s a bankruptcy-remote subsidiary of MERSCORP, which in turn is owned by units of Citigroup, JPMorgan Chase, Bank of America, the Mortgage Bankers Association and assorted mortgage and title companies. According to the MERSCORP web site, these “shareholders played a critical role in the development of MERS. Through their capital support, MERS was able to fund expenses related to development and initial start-up.”

In recent years, MERS has become less of an electronic registration system and more of a serial defendant in courts across the land. In a May 2009 document titled “The Building Blocks of MERS,” the company concedes that “Recently there has been a wave of lawsuits filed by homeowners facing foreclosure which challenge MERS standing…” and then proceeds over the next 30 pages to describe the lawsuits state by state, putting a decidedly optimistic spin on the situation.

MERS doesn’t have a big roster of employees or lawyers running around the country foreclosing and defending itself in lawsuits. It simply deputizes employees of the banks and mortgage companies that use it as a nominee. It calls these deputies a “certifying officer.” Here’s how they explain this on their web site: “A certifying officer is an officer of the Member [mortgage company or bank] who is appointed a MERS officer by the Corporate Secretary of MERS by the issuance of a MERS Corporate Resolution. The Resolution authorizes the certifying officer to execute documents as a MERS officer.”

Kansas Supreme Court Judge Rosen wasn’t buying MERS’ story. In fact, Wall Street was probably not too happy to land before Judge Rosen. In January 2002, Judge Rosen had received the Martin Luther King “Living the Dream” Humanitarian Award; he previously served as Associate General Counsel for the Kansas Securities Commissioner, and as Assistant District Attorney in Shawnee County, Kansas. Judge Rosen wrote:

“The relationship that MERS has to Sovereign [Bank] is more akin to that of a straw man than to a party possessing all the rights given a buyer… What meaning is this court to attach to MERS’s designation as nominee for Millennia [Mortgage Corp.]? The parties appear to have defined the word in much the same way that the blind men of Indian legend described an elephant — their description depended on which part they were touching at any given time. Counsel for Sovereign stated to the trial court that MERS holds the mortgage ‘in street name, if you will, and our client the bank and other banks transfer these mortgages and rely on MERS to provide them with notice of foreclosures and what not.’ ” (Landmark National Bank v. Boyd A. Kesler)

Lawyers for homeowners see a darker agenda to MERS. Timothy McCandless, a California lawyer, wrote on his blog as follows:

“…all across the country, MERS now brings foreclosure proceedings in its own name — even though it is not the financial party in interest. This is problematic because MERS is not prepared for or equipped to provide responses to consumers’ discovery requests with respect to predatory lending claims and defenses. In effect, the securitization conduit attempts to use a faceless and seemingly innocent proxy with no knowledge of predatory origination or servicing behavior to do the dirty work of seizing the consumer’s home. While up against the wall of foreclosure, consumers that try to assert predatory lending defenses are often forced to join the party — usually an investment trust — that actually will benefit from the foreclosure. As a simple matter of logistics this can be difficult, since the investment trust is even more faceless and seemingly innocent than MERS itself. The investment trust has no customer service personnel and has probably not even retained counsel. Inquiries to the trustee — if it can be identified — are typically referred to the servicer, who will then direct counsel back to MERS. This pattern of non-response gives the securitization conduit significant leverage in forcing consumers out of their homes. The prospect of waging a protracted discovery battle with all of these well funded parties in hopes of uncovering evidence of predatory lending can be too daunting even for those victims who know such evidence exists. So imposing is this opaque corporate wall, that in a ‘vast’ number of foreclosures, MERS actually succeeds in foreclosing without producing the original note — the legal sine qua non of foreclosure — much less documentation that could support predatory lending defenses.”

One of the first judges to hand Wall Street a serious slap down was Christopher A. Boyko of U.S. District Court in the Northern District of Ohio. In an opinion dated October 31, 2007, Judge Boyko dismissed 14 foreclosures that had been brought on behalf of investors in securitizations. Judge Boyko delivered the following harsh rebuke in a footnote:

“Plaintiff’s ‘Judge, you just don’t understand how things work,’ argument reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process…There is no doubt every decision made by a financial institution in the foreclosure is driven by money. And the legal work which flows from winning the financial institution’s favor is highly lucrative. There is nothing improper or wrong with financial institutions or law firms making a profit – to the contrary, they should be rewarded for sound business and legal practices. However, unchallenged by underfinanced opponents, the institutions worry less about jurisdictional requirements and more about maximizing returns. Unlike the focus of financial institutions, the federal courts must act as gatekeepers…” (In Re Foreclosure Cases)

While the illegal foreclosure filings, investor lawsuits over securitization improprieties, and predatory lending challenges play out in courts across the country, a few sentences buried deep in Citigroup’s 10Q filing for the quarter ended June 30, 2009 signals that we’ve seen merely a few warts on the head of the securitization monster thus far and the massive torso remains well hidden in murky water.

Citigroup tells us that the Financial Accounting Standards Board (FASB) has issued a new rule, SFAS No. 166, and this is going to have a significant impact on Citigroup’s Consolidated Financial Statements “as the Company will lose sales treatment for certain assets previously sold to QSPEs [Qualifying Special Purpose Entities], as well as for certain future sales, and for certain transfers of portions of assets that do not meet the definition of participating interests. Just when might we expect this new land mine to go off? “SFAS 166 is effective for fiscal years that begin after November 15, 2009.” There’s more bad news. The FASB has also issued SFAS 167 and, long story short, more of those off balance sheet assets are going to move back onto Citi’s books.

Bottom line says Citi:

“… the cumulative effect of adopting these new accounting standards as of January 1, 2010, based on financial information as of June 30, 2009, would result in an estimated aggregate after-tax charge to Retained earnings of approximately $8.3 billion, reflecting the net effect of an overall pretax charge to Retained earnings (primarily relating to the establishment of loan loss reserves and the reversal of residual interests held) of approximately $13.3 billion and the recognition of related deferred tax assets amounting to approximately $5.0 billion….” [Emphasis in original.]

I’m trying to imagine how the American taxpayer is going to be asked to put more money into Citigroup as it continues to bleed into infinity.

Citigroup is far from alone in financial hits that will be coming from the Qualifying Special Purpose Entities. Regulators are receiving letters from Citigroup and other Wall Street firms pressing hard to rethink when this change will take effect.

Putting aside for the moment the massive predatory lending frauds bundled into mortgage securitizations, inadequate debate has occurred on whether securitization of home mortgages (other than those of government sponsored enterprises) should be resuscitated or allowed to die a welcome death. If we understand the true function of Wall Street, to efficiently allocate capital, the answer must be a resounding no to this racket.

Trillions of dollars of bundled home mortgage loans and derivative side bets tied to those loans were being manufactured by Wall Street without any one asking the basic question: why is all this capital being invested in a dormant structure? Houses don’t think and innovate. Houses don’t spawn new technologies, patents, new industries. Houses don’t create the jobs of tomorrow.

Also, by acting as wholesale lenders to the unscrupulous mortgage firms (some in house at Wall Street firms), Wall Street was not responding to legitimate consumer demand, it was creating an artificial demand simply to create mortgage product to feed its securitization machine and generate big fees for itself. Now we see the aftermath of that inefficient allocation of capital: a massive glut of condos and homes pulling down asset prices in neighborhoods as well as in those ill-conceived securitizations whose triple-A ratings have been downgraded to junk.

There’s no doubt that one of the contributing factors to the depression of the 30s and the intractable unemployment today stem from a massive misallocation of capital to both bad ideas and fraud. Today’s Wall Street, it turns out, is just another straw man for a rigged wealth transfer system.

Pam Martens worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article other than that which the U.S. Treasury has thrust upon her and fellow Americans involuntarily through TARP. She writes on public interest issues from New Hampshire. She can be reached at pamk741@aol.com

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New law denies homeowners access to legal representation

Posted on October 23, 2009. Filed under: Banking, Case Law, Foreclosure Defense, Housing, Legislation, Loan Modification, Mortgage Law, Politics | Tags: , , , , , , , , , , , , , , , , |

California has a new law on the books that bans collection of advance fees from firms that provide loan modification services to people struggling to avoid foreclosure.

Other real estate related bills signed into law this month by Gov. Arnold Schwarzenegger aim to crack down on abusive lending practices by mortgage brokers; provide more safeguards for seniors taking out reverse mortgages; and require lenders to provide a summary translation of loan papers to non-English speakers.

Effective Oct. 11, Senate Bill 94 made it illegal for anyone to collect advance fees from consumers seeking a loan modification. The legislation closed a loophole that previously allowed state- licensed real estate brokers and attorneys to collect advance payments for loan modification services provided a client signed off on forms approved by the state Department of Real Estate.

SB 94 was written by state Sen. Ron Calderon, D-Montebello.

“Over the past two years, unscrupulous attorneys and real estate brokers have abused their trusted roles and exploited desperate homeowners seeking to avoid foreclosure. The loophole that allowed this abusive practice has now been closed, and homeowners should avoid any person charging upfront fees for foreclosure relief services,” state Attorney General Jerry Brown said in a statement.

Advance payments previously collected before Oct. 11 are not impacted by the law but no additional fees can be collected going forward,


said Tom Pool, a Department spokesman.

About 1,000 real estate brokers had previously submitted the required paperwork to collect advance payments before the law became effective, he said. More than 1,300 consumers have contacted the department with complaints about foreclosure rescue firms, most of which involved paying advance fees and not getting the loan modification assistance that was promised, he said. In many cases, the fees were collected by people who were not even licensed to offer loan modifications.

SB 94 only allows fees to be collected after the promised services are provided. Consumers must also be told that similar services are available from nonprofit housing counseling agencies approved by the federal Department of Housing and Urban Development. Consumers must also be told they have the option of calling their lender directly to request a change in loan terms.

Effective Jan. 1, three other laws will kick in to provide more protections to consumer who take out home loans:

  • Assembly Bill 260, written by state Assemblyman Ted Lieu, D-Torrance, extends federal mortgage lending laws to state-regulated mortgage brokers. Among other things, mortgage brokers would be prohibited from steering borrowers into higher-priced, subprime loans in cases where they could qualify for a lower-interest, fixed-rate loan.AB 260 restricts the type of home loans that consumers have access to, said John Holmgren, an Oakland-based mortgage broker and spokesman for the California Association of Mortgage Brokers, which opposed the legislation.

    For now, subprime loans have pretty much gone away in response to tougher lending standards but Holmgren expects that demand for such products will eventually return when the economy improves.

    “It would be wonderful if every consumer had perfect credit” but that is not the case, Holmgren said. “It’s bad for those consumers (with poor credit scores) because it restricts their choice and that’s what this does … In this troubled economy, there is a number of people whose credit has suffered.”

    Mortgage brokers would also be banned from offering negative amortization loans, which results in a growing loan balance the longer the borrower holds the loan. Strict caps would also be placed on prepayment penalties.

  • Assembly Bill 329 adds existing consumer protections for reverse mortgages, which allow seniors to convert equity held in a home into tax-free income or a lump-sum payment while continuing to live in the home. Among other things, the law extends counseling requirements that apply to Federal Housing Administration-backed reverse mortgages to all lenders who offer reverse mortgages. The bill was written by state Assemblyman Mike Feuer, D-Los Angeles.n”‚Assembly Bill 1160 requires mortgage lenders to provide a translated summary document in the language in which it was originally verbally negotiated with a borrower whose primary language is not English. The translation requirement applies to Spanish, Chinese, Tagalog, Vietnamese and Korean languages. The law, written by state Assemblyman Paul Fong, D-Cupertino, extends translation requirements that already apply to mortgage brokers.

    Contra Costa Times

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    Entire Finance Industry Filled With Massive, Pernicious Fraud

    Posted on October 18, 2009. Filed under: Banking, Finance, Fraud, Housing | Tags: , , , |

    The entire finance and real-estate “industry” is filled with massive, pernicious fraud, and we now have only one question remaining – will The Government do its lawful and mandated job, that of prosecuting the bad actors, or has it joined with the fraudsters, become one with them, and thus, declare itself as a gang of mobsters rather than a legitimate government? The latter, of course will beg only the question of what should be an ordinary American’s response.

    Let’s start with what may be one of the most outrageous yet least-actionable examples: Alan Greenspan.

    Alan Greenspan, the former Federal Reserve chairman, said Thursday that banking regulators should consider breaking up large financial institutions considered “too big to fail.”

    Those banks have an implicit subsidy allowing them to borrow at lower cost because lenders believe the government will always back them up. That squeezes out competition and creates a danger to the financial system, Mr. Greenspan told the Council on Foreign Relations in New York, according to Bloomberg News.

    This is the “former Fed President” who winked and nodded at what he knew was an unlawful merger of Citibank and Travelers, then personally advocated and lobbied for the passage of Gramm-Leach-Bliley – the law that not only tore down Glass-Steagall but retroactively made that merger legal.

    More….

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    US Senate: STOP BEING STUPID

    Posted on October 2, 2009. Filed under: Banking, Foreclosure Defense, Housing, Loan Modification, Mortgage Audit, Mortgage Fraud, Mortgage Law, Politics | Tags: , , , , , , |

    The legislation, introduced today by Senator Jack Reed of Rhode Island, would require lenders to evaluate all borrowers for affordable loan modifications before initiating foreclosure. It would also require banks to offer and approve a loan modification if the restructured mortgage returns more money, the so-called net-present value, to investors than would foreclosure.

    The proposal would establish new penalties and would let borrowers overturn foreclosures if lenders fail to comply. It would also place new limits on fees charged in foreclosure.

    The reason we have this crap going on is quite simple, and fixing it is also quite simple:

    Banks are holding homes back and foreclosing when they should be modifying as a direct consequence of the policies and actions of the government.

    As just one example the “loss share” agreement made with the buyers of IndyMac has set up a perverse incentive system where the usual incentives to modify loans have been intentionally and wantonly destroyed.

    If you remember this was the deal announced:

    As part of the deal, the FDIC entered into a loss-sharing agreement with IMB HoldCo. IndyMac will assume the first 20 percent of losses on a portfolio of “qualifying loans,” after which the FDIC will assume 80 percent on the next 10 percent of losses, and 95 percent on losses thereafter.

    Ok, so we have a maximum loss that the investors (which include George Soros and Michael Dell, by the way) can take which is:

    20% + 2% (80% of 10%) + 3.5% or about 25% of the total is theirs – but note that “theirs” is all at the top – once you get into the “meat” of the losses only 5% of whatever is left is theirs.

    via US Senate: STOP BEING STUPID – The Market Ticker.

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    Loan modifications growing

    Posted on September 11, 2009. Filed under: Foreclosure Defense, Housing, Loan Modification, Mortgage Audit | Tags: , , , , , , , |

    The Obama administration said Wednesday it is on track to secure 500,000 trial loan modifications for struggling homeowners by Nov. 1, as both the number of participating mortgage companies and the number of offers extended under the Home Affordable Modification Program increased last month.The second report from the Treasury Department on its $75 billion mortgage relief program showed modest improvement, but officials said they planned more initiatives to increase the program’s success.The results: Nineteen percent of the almost 3 million eligible borrowers who were 60 days or more delinquent were offered three-month trial modifications and 12 percent of them, about 360,000 homeowners, have begun them.”We are certainly seeing more resolutions happening out in the field, and we are seeing it more routinely with the biggest servicers,” said Bruce Dorpalen, Acorn Housing Corp.’s national director of housing counseling.Some of the largest servicers say they continue to work on loan modifications through their own internal programs as well as the government’s effort.Two of the banks that did not fare well in last month’s report, Bank of America and Wells Fargo Bank, both reported improved results but still lagged behind other industry heavyweights like JPMorgan Chase Bank, CitiMortgage, Saxon Mortgage Servicing and Aurora Home Services.”HAMP is just a piece of the overall story,” said Mike Heid, co-president of Wells Fargo Home Mortgage. “We’re very pleased with a 64 percent increase” in modifications made during the past 30 days.The concern: Some consumers are being told to submit all their financial data again as the trial period ends and others aren’t because there’s no uniformity in how the different servicers administer the program, housing counselors say. Also, some homeowners are reluctant to sign trial modifications without knowing the terms of a permanent change that would take effect when the three-month trial period ends.

    More…

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    Minnesota Supreme Court Upholds MERS

    Posted on August 14, 2009. Filed under: Banking, Case Law, Foreclosure Defense, Housing, Loan Modification, Mortgage Law | Tags: , , , , , , , , , |

    St. Paul, Minn. — The Minnesota Supreme Court today ruled against five Hennepin County homeowners who said an electronic mortgage registration system made it virtually impossible to defend themselves against home foreclosures.

    The system, called Mortgage Electronic Registration Systems, or MERS, is a registry involved in 40 percent of all foreclosures in the Twin Cities.

    MERS was created by the nation’s largest mortgage lenders, such as Chase, Citigroup, and Countrywide, to streamline the foreclosure process after the 1993 savings and loan crisis. MERS essentially privatized part of the mortgage recording system.

    But some legal aid lawyers argued the process kept homeowners in the dark about which institutions actually held their mortgages.

    The Hennepin County homeowners in the case contended that state law required MERS to identify which institutions held the mortgages, and list them in a published foreclosure notice.

    They wanted to know details of the mortgage sales — including who held promissory notes to the property and who held legal title.

    Writing for the 6-1 Supreme Court majority, Justice Paul Anderson wrote that Minnesota law requires MERS to record who’s assigned legal title, but not who’s assigned the promissory notes.

    He also made a reference to the movie “It’s a Wonderful Life,” writing that it’s not hard to have nostalgia for earlier times, but that in many mortgage transactions, “a George Bailey no longer sits in the corner office of the Building and Loan Association in Bedford Falls.”

    Anderson said the mortgage banking industry has changed, and with it certain problems have become evident. But he said to remedy those shortcomings goes beyond the court’s authority.

    Legal Aid attorney Amber Hawkins, who brought the case, says the decision is disappointing for homeowners facing foreclosure and makes it harder to avoid the same problems again.

    “The public will never know the chain of ownership in these bad loans,” said Hawkins. “We will never be able to go back and figure out who were the players. Who had interest in these loans? Who benefitted from these foreclosures?”

    William Hultman, a senior vice president at MERS, would not answer questions but did release a short statement.

    “We are pleased with the justices’ decision in this case. Now that the ruling has been issued, we are moving forward and continuing to focus on meeting the needs of the homeowners by lowering the cost of purchasing a home.”

    Justice Alan Page was the lone dissenter in the court’s decision. He said the Legislature could not have been more clear in requiring that all assignments of a mortgage be recorded before a mortgage can be foreclosed upon.

    He said by allowing the identities of promissory note-holders to remain hidden, the court essentially eliminates a homeowner’s ability to assert a wide range of defenses to foreclosure. And as a result, neither borrowers nor lenders will ever be able to hold anyone accountable in the chain of transfers.

    http://minnesota.publicradio.org/display/web/2009/08/13/mers-ruling/

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