Mortgage Fraud

Audit Reveals Putative Lender Did Not Exist And Hence The Promissory Note Is Void Ab Initio.

Posted on January 27, 2011. Filed under: Foreclosure Defense, Fraud, Mortgage Audit, Mortgage Fraud, Mortgage Law |

I thought I had seen it all but this case must take top prize for the most abhorrent attempt at foreclosure fraud perpetuated by a federal savings bank.

A client hired me to audit his loan documents in preparation for an upcoming motion hearing in Miami-Dade County, Florida. Flagstar Bank is trying to foreclose on a mortgage originated back in 2008. The putative lender on the promissory note and mortgage is “Manhattan Mortgage Services, a Florida Sole Proprietor” and, of course, MERS is named as the lender’s nominee and beneficiary under the mortgage.

The first red flag for me was the assertion that Manhattan Mortgage Services was a “Sole Proprietor” because only a natural person can be a sole proprietor. A business may be a “sole proprietorship” (as opposed to a “sole proprietor”) meaning that an individual is doing business under a fictitious business name provided the name is registered and the true owner is identified to the public. There is no legal distinction between a sole proprietor and his/her business. According to the Florida Department of State Manhattan Mortgage Services had been registered as a business back on 5/20/1998, but the registration had expired on 12/31/2003. I then looked for evidence that this entity had a license to lend money in Florida and learned that a Mortgage Broker’s license had been issued to this entity in June 1998 but revoked only two months later. So at the time this loan was originated, in March 2008, there was no active lending license on record for this entity, nor for the individual who had registered the fictitious business name.

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Maryland Foreclosure Defense Seminar For Attorneys

Posted on October 21, 2010. Filed under: Banking, Finance, Foreclosure Defense, Mortgage Audit, Mortgage Fraud, Mortgage Law, Predatory Lending, Securitization, Truth in Lending Act |

If you are a Maryland lawyer looking to get into the foreclosure defense field, or a practicing lawyer already handling cases in

this area, this seminar should be of significant value to you.

Learn the latest tips, tricks and strategies; and obtain copies of foreclosure materials used against lenders and servicers by

experts in the field. The goal of this seminar is to help you better understand the legal issues facing your clients, and help you more

effectively advocate on their behalf.

The seminar will cover the following topics:

  • How to Scrutinize Loan Documents for RESPA and TILA Compliance Violations
  • Loan Rescission under the Truth in Lending Act
  • How to Detect a Predatory Loan
  • Understanding the Mortgage Securitization Process
  • Securitization Parties and the Requisite Chain of Title
  • Credit Default Swaps
  • Everything You Need to Know about Mortgage Electronic Registration Systems (MERS)
  • Detecting Fraudulent Assignments of Mortgage/Deed of Trust
  • Detecting False Affidavits of Note Ownership or Lost Note
  • How to Spot a False and/or Defective Allonge
  • Produce the Note Theory

Cost: $1,495.00 ($1,349.00 if reserved before November 1, 2010)

Location: Rockville

Date: Friday November 12, 2010

Time: 9:00 AM to 5:00 PM

For reservations contact: dean@lenderaudits.com


Foreclosure-Defense-Seminar

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JUDGE RESCINDS 5-YEAR OLD LOAN AND AMORTIZES TENDER OVER 30 YEARS

Posted on May 23, 2010. Filed under: bankruptcy, Case Law, FHA, Foreclosure Defense, Fraud, Loan Modification, Mortgage Fraud, Mortgage Law, Predatory Lending, Refinance, right to rescind, Truth in Lending Act |

This is proof positive that the outcome of your case depends entirely on the judge’s disposition and sensibilities. When there is clear and convincing evidence of predatory lending and fraud, the court can use its equitable powers to remediate the inequities.

In Re McGee v. Gregory Funding LLC, Dist. Court, D. Oregon 2010, on September 22, 2005 Plaintiff refinanced his home for $174,900 at 7.54% with a one year balloon payment of $175,999.66. Defendant received $9,800 as a loan origination fee and Plaintiff signed an option to extend the loan for an additional fee of $6980. TILA and HOEPA disclosures were not provided at settlement and the balloon rider was never signed by Plaintiff.

The following year Plaintiff tried obtaining a conventional loan but since Defendant did not report the payment history on Plaintiffs loan, he could not qualify for a refinance with any other lender. As such Plaintiff had to extend his loan with Defendant for another year and in the process ended up paying Defendant additional $9500 in fees. Again no material disclosures were provided.

On December 19, 2007 Plaintiff entered in to a third transaction with Defendant by signing an amendment for $216,216 at 7.54% that included advances for property taxes, legal fees and a modification fee totaling $14,320.68. Again Defendant failed to provide disclosures.

Plaintiff filed for bankruptcy protection in the District of Oregon on September 22, 2008, which was confirmed on April 16, 2009. The Bankruptcy Court ordered relief from the automatic stay on September 2, 2009.

Plaintiff filed a motion for temporary restraining order/preliminary injunction (“TRO/PI”). The court granted plaintiff’s motion for a TRO on November 10, 2010, prohibiting defendants from executing its proposed sale of plaintiff’s property on the Multnomah County Courthouse steps scheduled November 10, 2010 at 10:00 a.m.

Judge Ann Aiken found it troubling that Plaintiff was charged a total of $36, 418.81 in loan origination fees for three transactions over a four-year period, stating that considering the FHA recently announced a limitation of loan origination fees charged to borrowers as no more than 1% of the loan amount, Plaintiff’s loan fees of 5% and 7%, even considering the increased risk associated with a sub-prime loan, runs counter to 12 C.F.R. section 226.23(f)’s comment that fees must be bona fide and reasonable.

The court stated that HOEPA rescission does not have a statute of limitations subject to tolling, but a statute of repose that creates a substantive right not subject to tolling. Notwithstanding the foregoing the judge held that pursuant to King v. State of California, 784 F.2d 910.915 (9th Cir. 1986, cert denied, 486 U.S. 802 (1987), there was authority to allow Plaintiff to rescind the first transaction under the doctrine of equitable tolling. “Pursuant to the Ninth Circuit’s ruling in King, supra, it is permissible for district courts to evaluate specific claims of fraudulent concealment and equitable tolling to determine if the general rule would be unjust or frustrate the purpose of the Act”. The court found those circumstances existed here and therefore warranted tolling.

Finally to overcome Plaintiffs inability to obtain new financing for tender purposes, the court ordered Defendant to file an amended proof of claim with the bankruptcy court using the tender amount as the secured debt payable at 7.547% interest over 30 years.

In re: James P. McGee, Plaintiff,

v.

GREGORY FUNDING, LLC, an Oregon limited liability company, and RANDAL SUTHERLIN, Defendants.

Civil No. 09-1258-AA.

United States District Court, D. Oregon.

February 20, 2010.

Tami F. Bishop, M. Caroline Cantrell, M. Caroline Cantrell & Assoc. PC, Portland, Oregon, Attorneys for Debtor/Plaintiff.

Kathryn P. Salyer, Farleigh Wada Witt, Portland, Oregon, Attorney for Defendants.

OPINION AND ORDER

ANN AIKEN, District Judge.

Plaintiff filed a motion for temporary restraining order/preliminary injunction (“TRO/PI”). The court granted plaintiff’s motion for a TRO on November 10, 2010, prohibiting defendants from executing its proposed sale of plaintiff’s property on the Multnomah County Courthouse steps scheduled November 10, 2010 at 10:00 a.m. On November 23, 2010, the date scheduled to hear plaintiff’s motion for a preliminary injunction, the parties elected to forego oral argument and submit the matter to the court on the briefs. Plaintiff’s motion for a preliminary injunction is granted.

BACKGROUND

Plaintiff brings this action for injunctive relief, actual damages, statutory damages, attorney fees and costs against defendants for violation of the Truth in Lending Act, 15 U.S.C. sections 1601 et seq. and 1640(a) (“TILA”), among others.

Plaintiff, an African-American male, alleges this is a “residential predatory lending case” arising from a “fraudulent” home mortgage refinance transaction originated by defendant Gregory Funding, LLC with defendant Randal Sutherlin as the loan interviewer. Defendants originated a series of three loan transactions with plaintiff signed on September 12, 2005, September 26, 2006, and December 19, 2007. Plaintiff alleges those loans “stripped plaintiff of his home equity and put him at risk of losing his home.” Plaintiff alleges that he failed to receive accurate, material disclosures required by TILA and the Home Ownership and Equity Protection Act of 1994 (“HOEPA”) at the closing of both his second and third loans. As a result, plaintiff exercised his right to rescind the 2006 and 2007 loans under TILA, and filed the action at bar to enforce those rights.

Plaintiff filed for bankruptcy protection in the District of Oregon on September 22, 2008, which was confirmed on April 16, 2008. The Bankruptcy Court ordered relief from the automatic stay on September 2, 2009.

In September 2005, plaintiff contacted defendant Gregory Funding, LLC (“Gregory”) to request information regarding refinancing his home. At that time there was a pending foreclosure sale on plaintiff’s home. Plaintiff had recently started a new job. Defendant Sutherlin visited plaintiff’s home to discuss refinancing and spent about fifteen minutes with plaintiff. Later that day, Sutherlin phoned plaintiff to inform him that the loan was approved and the closing would take place within a couple of weeks. Plaintiff was not asked to provide tax returns, pay stubs, or complete a credit application at any point during the refinance. There is no record of a real estate appraisal completed at any point to determine the value of plaintiff’s home. On September 12, 2005, plaintiff signed the closing documents and refinanced his home for $174,900 at 7.54% interest with a one-year balloon payment of $175,999.66. A fixed rate balloon note was signed setting forth 12 principal and interest payments of $1,100 with the first payment due November 1, 2005, and a late payment fee of $55. Defendant Gregory received $9,800 as a loan origination fee from the transaction. Plaintiff signed an option to extend the loan for a fee of $6,980. The loan maturity date was October 1, 2006.

The material disclosures required by HOEPA for a high cost loan were not provided to plaintiff prior to or at the closing. Plaintiff did not sign and receive his two copies of his right to cancel under TILA and the balloon rider to the deed of trust was unsigned at closing.

In August 2006, plaintiff began shopping for a conventional loan; however, due to defendant Gregory not reporting the payment history on plaintiff’s loan, he was unable to qualify for a refinance with another lender. Plaintiff therefore entered into a second loan transaction with defendants on September 21, 2006. Plaintiff signed a document titled First Amendment to Promissory Note at defendants’ office on September 21, 2006. The transaction was for $184,400 at 7.54% interest with a one-year balloon payment of $185,559.72. The first amendment set forth 12 principal and interest payments of $1,159.72 and a late payment fee of $57.99 with the first payment due November 1, 2006. Defendant Gregory received $9,500 as a loan fee from the transaction. The loan maturity date was October 1, 2007. Again, the material disclosures required by HOEPA for a high cost loan were not provided to plaintiff prior to or at the closing including the HUD H-8 form (explaining a limited right to cancel for same lender refinancing).

Plaintiff made the November and December 2006 and January 2007, payments and did not make another payment until November 2007. He made a payment of $2,500 on November 15, 2007, and another payment of $3,500 on November 29, 2007. On December 1, 2007, plaintiff was an estimated $6,177.26 in arrears. In early December 2007, plaintiff discussed his refinancing options with defendant Sutherlin. On December 19, 2007, plaintiff believed he was entering into a 30-year principle and interest conventional mortgage when he entered into the third loan transaction with defendants.

Plaintiff alleges that Sutherlin failed to inform him that the loan was an interest only loan with a balloon payment due in 30 years of an amount higher than the original loan amount. Plaintiff was not asked to provide proof of his income or ability to repay the loan prior to signing the second amendment. This transaction was for $216,216 at 7.54% interest with a loan maturity date of December 31, 2007 under the second amendment to the note. According to the second amendment, Gregory advanced an additional $21,406.46 to borrower as 1) property insurance ($450); 2) property taxes (46,223.23); 3) lender attorney fees ($360); 4) one-day interest ($52.55); and 5) extension and modification fee ($14,320.68). The first amendment was $14,400 plus $21,406.46 in lender advances under the second amendment for a total of $205,806.46. The second amendment is for an explained difference of $10,409.54. Plaintiff was not provided a good faith estimate prior to closing or a HUD statement at closing detailing the loan fees and costs paid to defendant. The additional loan fee under the second amendment was $16,216. Gregory advanced all but $1,895.32 of the fee. Plaintiff paid the balance at closing of the second transaction.

Again, defendants failed to provide any material disclosures required by HOEPA for a high cost loan including the HUD H-8 form. The limited right to cancel provided on the H-8 form for same lender refinancing was not provided to plaintiff when he signed the first amendment to the promissory note. Plaintiff did not make any payments under the second amendment to the note. Defendant charged plaintiff $30,906.46 in fees for the 2006 and 2008 loans and an additional $9,840 for the original loan in 2005, for a total of $40,746.46 in fees for the three transactions. Plaintiff alleges these fees are excessive and unreasonable. Further, plaintiff alleges that defendants’ actions in refinancing plaintiff’s loan three times within a two year period without regard to the best interest of plaintiff establishes an egregious pattern or practice of making loans in violation of 12 C.F.R. section 226.32.

Gregory set a foreclosure sale date for September 23, 2008, in the interior foyer of the Multnomah County Courthouse. Plaintiff filed for bankruptcy protection under Chapter 13 on September 22, 2008.

The sale of plaintiff’s home was held on October 27, 2009, with defendant as the sole bidder. Defendant now moves to execute its proposed sale of plaintiff’s home.

STANDARDS

The party seeking a preliminary injunction must demonstrate that he is (1) likely to succeed on the merits; (2) likely to suffer irreparable harm in the absence of preliminary relief; (3) the balance of equities tips in his favor; and (4) an injunction is in the public interest. Winter v. Natural Res. Def. Council, Inc., 129 S. Ct. 365, 374 (2008).

“Under either formulation, the moving party must demonstrate a significant threat of irreparable injury. . . .” Id. “A plaintiff must do more than merely allege imminent harm sufficient to establish standing; a plaintiff must demonstrate immediate threatened injury as a prerequisite to preliminary injunctive relief.” Caribbean Marine Services Co. v. Baldridge, 844 F.2d 668, 674 (9th Cir. 1988) (emphasis in original). “Speculative injury does not constitute irreparable injury.” Goldie’s Book Store v. Super. Ct. of State of Cal., 739 F.2d 466, 472 (9th Cir. 1984). If the party seeking the injunction cannot demonstrate irreparable injury, then the district court need not address the merits and may deny the motion for an injunction. Oakland Tribune, Inc. v. Chronicle Pub. Co., 762 F.2d 1374, 1376 (9th Cir. 1985).

DISCUSSION

Defendants assert that plaintiff is not entitled to enjoin the foreclosure sale because (1) the issue is moot because the foreclosure sale was completed by delivery and recording of a Trustee’s Deed, prior to this court’s entry of the TRO on November 10, 2009; and (2) plaintiff’s preliminary injunction claim fails on the merits because plaintiff’s rescission claim is time barred.

Moot, Not Likely to Succeed on Merits and No Irreparable Harm

Defendants argue plaintiff’s claim for injunction is moot. The property at issue was sold at a foreclosure sale on October 27, 2009, and a Trustee’s Deed was recorded on November 6, 2009. This court entered a TRO on November 10, 2009. Justiciability requires the existence of an actual case or controversy. Plaintiff must meet the “case or controversy” requirements at all stages of the litigation and “not merely at the time” the lawsuit is instituted. Roe v. Wade, 410 U.S. 113, 125 (1973). A case becomes moot “if, at some time after the institution of the action, the parties no longer have a legally cognizable stake in the outcome.” Goodwin v. C.N.J., Inc., 436 F.3d 44, 49 (1st Cir. 2006).

Defendants also argue that plaintiff is not likely to succeed on the merits. Plaintiff agrees that the only claim supporting his motion for injunction is the rescission claim under TILA. Pursuant to 15 U.S.C. section 1635(f), “an obligor’s right of rescission . . . expires three years after the date of consummation of the transaction, . . . notwithstanding the fact that the information and forms required under this section or any other disclosures required under this chapter have not been delivered to the obligor.” Section 1635(f) represents an absolute limitation on rescission actions which bars any claim filed more than three years after consummation of the transaction. Miguel v. Country Funding Corp., 309 F.3d 1161 (9th Cir. 2002). This remains true regardless of a foreclosure. 15 U.S.C. section 1635(I); Beach v. Ocwen Federal Bank, 523 U.S. 410, 417-18 (1998).

The loan to plaintiff occurred on September 12, 2005. Defendants argue that any right to rescind that loan, including the trust deed given to secure it, timed out as of September 11, 2008.

Finally, defendants argue that there is no irreparable harm to plaintiff. Defendants assert that plaintiff will not suffer irreparable harm and instead will suffer only monetary injury. Monetary injury is not normally considered irreparable. LA Mem’l Coliseum Comm’n v. NFL, 634 F.2d 1197, 1202 (9th Cir. 1980). Defendants assert that the foreclosure is complete, therefore, the only possible remedy remaining is monetary damages.

I disagree and grant plaintiff’s motion for preliminary injunction. There is no dispute that the right of rescission on subsequent transactions applies only to the extent that the lender advances new funds to the obligor. 12 C.F.R. 226.23(f)(2). That section provides as follows:

(f) Exempt Transactions. The right to rescind does not apply to the following:

(2) A refinancing or consolidation by the same creditor of an extension of credit already secured by the consumer’s principal dwelling. The right of rescission shall apply, however, to the extent the new amount financed exceeds the unpaid principal balance, any earned unpaid finance charge on the existing debt, and amounts attributed solely to the costs of the refinancing or consolidation.

Therefore, for purposes of rescission, a new advance does not include amounts solely attributed to the cost of refinancing, including finance charges on the new transaction such as an extension fee.

Defendants argue that the only additional “credit” advanced in the first extension was for the extension fee, which is a finance charge and not part of the “amount financed” for purposes of Regulation Z.

Similarly, defendants argue that the Second Amendment also did not include any advances which gave rise to the right of rescission. In the second extension, $6,673.23 was advanced to pay insurance premiums and property taxes both due. Defendants assert that these amounts are considered advances to protect the collateral, and could have been made by defendants under the existing trust deed without further action by plaintiff. Therefore, defendants assert, these amounts would also be considered part of the “costs” of refinancing. Further, the second extension included advances for $360 in attorney’s fees, $52.55 in prepaid interest, and $14,320.68 toward the extension fee. Defendants assert that all of these amounts are finance charges for the purposes of Regulation Z, and therefore, excluded from the amount financed in determining whether “new funds” have been advanced for rescission purposes.

Section 1635(e)(2), however, provides an express exemption for a “refinancing or consolidation (with no new advances) of the principal balance then due and any accrued and unpaid finance charges of an existing extension of credit by the same creditor secured by an interest in the same property.” 12 C.F.R. section 226.23(f). The regulation states that the right to rescind applies “to the extent the new amount financed exceeds the unpaid principal balance, any earned unpaid finance charge on the existing debt, and amount attributed solely to the costs of refinancing or consolidation.” Here, plaintiff’s refinancing of his original loan (second transaction) with defendant was exempt from rescission, except “to the extent the new amount financed exceeded the unpaid principal balance, any earned unpaid finance charge on the existing debt, and amounts attributed solely to the costs of refinancing or consolidation.” The second transaction signed on September 21, 2006, was for $184,400 and included $9,500 as an additional amount paid to defendants. The amount financed, $184,400, exceeded the balance of the first loan ($174,900); therefore, plaintiff had a right to rescind the second transaction (the First Amendment to the Promissory Note). Similarly, the third transaction also falls under the exemption as it was for the amount of $216,216 with finance charges of $17,078.81. The amount financed, $216,216 exceeded the balance of the second transaction ($184,400), and therefore plaintiff had a right to rescind the third transaction.

While true that section 1635(e)(2) limits a rescission of a refinance with no new advances, the Board’s regulation clearly states that new amounts financed that exceed the unpaid principal balance, any earned unpaid finance charge on the existing debt, and amounts attributed solely to the costs of refinancing or consolidation are rescindable under the TILA. The Board’s construction of section 1635(d)(2) is entitled to deference. See Household Credit Services, Inc. v. Pfennig, 541 U.S. 232 (2004) (recognizing the Board and its staff are designed by Congress as the primary source of interpretation of truth-in-lending law). Therefore, pursuant to section 12 C.F.R. 226.23(f)(2), the refinancing exemption applies to the additional amounts financed and renders both the second and third transactions subject to rescission under 15 U.S.C. section 1635.

Moreover, Official Staff Comment 4 to 12 C.F.R. section 226.23(f), holds that for purposes of the right of rescission, generally “a new advance does not include amounts attributed solely to the costs of refinancing[,]” however, those fees allocated to the borrower must be “bona fide and reasonable in nature.” Plaintiff paid lender fees in the amount of 5.63% of the loan amount in his first transaction with defendants. In his second transaction, he paid 5.15% of the loan amount in lender fees; and finally, in his third transaction, plaintiff paid 7.9% of the loan amount in lender fees. Plaintiff was charged a total of $36,418.81 in loan origination fees for three transactions. In a little over four years, from September 12, 2005, to October 27, 2009, plaintiff’s debt to defendants increased from $174,900 to $253,945.92, or $79,045.92. Given that the Federal Housing Administration (“FHA”) recently announced a limitation on loan origination fees charged to a borrower as no more than 1% of the loan, plaintiff’s loan fees of 5% and 7%, even considering the increased risk associated with a sub-prime loan, seems “unreasonable,” and runs counter to section 226.23(f)’s comment that borrower fees must be “bona fide and reasonable.”

Finally, due to the lack of disclosures including a Good Faith Estimate of costs, it is difficult to discern whether the fees paid by plaintiff were bona fide and reasonable real estate related fees that are nonrescindable as a new advance, or a finance charge that is rescindable under 15 U.S.C. section 1635; 12 C.F.R. section 226.23(f)(2). Given these circumstances, the court will construe the statute in the light most favorable to plaintiff, deeming the fees unreasonable finance charges, and therefore allowing plaintiff to rescind the second and third loan transactions.

The Home Ownership and Equity Protection Act, (“HOEPA”), an amendment to TILA, created a special class of regulated closed end loans made at high annual percentage rates or with excessive costs and fees. HOEPA prohibits balloon payments and early financing unless it is in the best interests of the borrower. The lender is required to verify the borrower’s ability to repay the loan before extending credit. 15 U.S.C. section 1639. Mandatory compliance for creditors began on October 1, 2002, and if creditors fail to comply with the HOEPA required disclosures and prohibitions, the consequence is rescission under section 1635. HOEPA rescission does not have a statute of limitations subject to tolling, but a statute of repose that creates a substantive right not subject to tolling. TILA section 130(e).

Further, home equity loans that exceed either an APR trigger of 8% or a points and fees trigger of 8% are subject to additional consumer protections, including: three day advance disclosures regarding the high cost of the loan; and prohibitions on abusive loan terms and creditor practices. As calculated by plaintiff, the September 12, 2005, transaction has an APR rate spread of 9.06% and a 6.45% points and fees. The second transaction from September 21, 2006, has an APR rate spread of 8.021% and 5.43% points and fees. The final transaction from December 19, 2009 has an APR rate spread of 4.475% and 8.12% points and fees. All three transactions fall under HOEPA as high rate loans that required additional disclosures to plaintiff not less than three business days before closing the loan. Plaintiff maintains the required disclosures were never provided to him by defendants.

Besides regulating the cost of a home loan, HOEPA prohibits balloon payments, early refinancing also knows as “loan flipping,” and making unaffordable loans without verifying the borrower’s ability to repay the loan. All three transactions at issue here contained balloon payments in violation of HOEPA. The first two transactions contained a term of five years or less along with a balloon payment.

HOEPA and TILA. provide the authority for this court to allow plaintiff to rescind both the second and third transactions with defendant. Pursuant to King v. State of California, 784 F.2d 910, 915 (9th Cir. 1986), cert. denied, 484 U.S. 802 (1987), this court also has authority to allow plaintiff to rescind the first transaction under the doctrine of equitable tolling. King held, “the doctrine of equitable tolling may, in the appropriate circumstances, suspend the limitations period until the borrower discovers or had reasonable opportunity to discover the fraud or nondisclosures that form the basis of the TILA action[.]” Pursuant to the Ninth Circuit’s ruling in King, supra, it is permissible for district courts to evaluate specific claims of fraudulent concealment and equitable tolling to determine if the general rule would be unjust or frustrate the purpose of the Act. I find those circumstances exist here and therefore adjust the Limitations period accordingly to allow plaintiff to rescind the first transaction.

Finally, defendants argue that regardless of plaintiff’s ability to rescind the transactions, plaintiff is still not likely to succeed on the merits of his recession claim because plaintiff is unable to repay the loan proceeds. Plaintiff’s loan has been in default status for several years. He obtained protection of the bankruptcy court and then defaulted on the Loan post-petition, thus causing the bankruptcy court to order relief from the stay. The burden of proof that plaintiff can repay the loan proceeds rests with plaintiff, without such a showing, plaintiff cannot prove that he is likely to succeed on the merits. See Yamamoto v. Bank of New York, 329 F.3d 1167, 1172 (9th Cir. 2003)(when lender contests notice of rescission, the security interest is not extinguished upon giving the notice and instead occurs only when the court so orders, and upon terms the court deems just, including conditioning rescission on the repayment of the loan proceeds).

Plaintiff represents to this court that he intends to modify his current bankruptcy plan to make monthly adequate protection payments toward tender through his Chapter 13 plan in a manner similar to making payments on secured personal property under 11 U.S.C. section 11326. The tender, including the interest rate of 7.547%, would be amortized over 30 years. Defendant would file an amended proof of claim using the tender amounts as the secured debt. Brian Lynch, the Chapter 13 trustee, is agreeable to working with plaintiff in putting together a proposal to pay the tender requirement. A comparative market analysis of the property estimates the property’s current value ranging from $200,000 to $225,000 considering the economy, sales, and market trends. Plaintiff is currently residing in his home with his children. He intends to make a monthly payment through his chapter 13 bankruptcy plan as adequate protection to defendants. Plaintiff has current homeowner’s insurance and he will be responsible for maintaining the property taxes with the county. Further, I find that plaintiff will suffer irreparable harm if he and his children are rendered homeless by the sale of his home. I find that plaintiff is likely to succeed on the merits, he is likely to suffer irreparable harm in the absence of the injunction; the balance of equities tip in his favor; and an injunction is in the public interest.

CONCLUSION

Plaintiff’s motion for a preliminary injunction (doc. 5) is granted. Defendants’ motion to strike plaintiff’s exhibits (doc. 27) is denied.

IT IS SO ORDERED.

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Court denies Motion to Dismiss and holds backdated mortgage assignments may be invalid

Posted on April 7, 2010. Filed under: Banking, Case Law, Foreclosure Defense, Fraud, Mortgage Audit, Mortgage Fraud, Mortgage Law |

On March 30, 2010, in the case of Ohlendorf v. Am. Home Mortg. Servicing, (2010 U.S. Dist. LEXIS 31098) on Defendants’ 12(B)(6) Motion, United States District Court for the Eastern District of California denied the motion to dismiss Plaintiffs wrongful foreclosure claim on grounds that the assignment of mortgage was backdated and thus may have been invalid.

“On or about June 23, 2009, defendant T.D. Service Company [(a foreclosure processing service)] filed a notice of default in Placer County, identifying Deutsche Bank as beneficiary and AHMSI as trustee. In an assignment of deed of trust dated July 15, 2009, MERS assigned the deed of trust to AHMSI. This assignment of deed of trust purports to be effective as of June 9, 2009. A second assignment of deed of trust was executed on the same date as the first, July 15, 2009, but the time mark placed on the second assignment of deed of trust by the Placer County Recorder indicates that it was recorded eleven seconds after the first. In this second assignment of deed of trust, AHMSI assigned the deed of trust to Deutsche.  This assignment indicates that it was effective as of June 22, 2009. Both assignments were signed by Korell Harp. The assignment purportedly effective June 9, 2009, lists Harp as vice president of MERS and the assignment purportedly effective June 22, 2009, lists him as vice president of AHMSI. Six days later, on July 21, 2009, plaintiff recorded a notice of pendency of action with the Placer County Recorder.  In a substitution of trustee recorded on July 29, 2009, Deutsche, as present beneficiary, substituted ADSI as trustee.”

The court stated that “while California law does not require beneficiaries to record assignments, see California Civil Code Section 2934, the process of recording assignments with backdated effective dates may be improper, and thereby taint the notice of default.”

Plaintiff’s argument was interpreted by the court to be that the backdated assignments were not valid or at least were not valid on June 23, 2009, when the notice of default was recorded. As such the court assumed Plaintiff argued that MERS remained the beneficiary on that date and therefore was the only party who could enforce the default.

Judge Lawrence K. Karlton invited Defendants to file a motion to dismiss as to plaintiff’s wrongful foreclosure claim insofar as it is premised on the backdated assignments of the mortgage. You can read the full Opinion here.

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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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Would you like a bag of chips with your frozen loan audit?

Posted on March 23, 2010. Filed under: Banking, Case Law, Foreclosure Defense, Mortgage Audit, Mortgage Fraud, Mortgage Law, Truth in Lending Act | Tags: , , , , , , , |

Every day I get calls from attorneys or people facing foreclosure asking about my services as a forensic loan auditor and expert witness. Generally the callers are reasonably well informed about my work and know what they can and cannot expect from an audit. But yesterday a nice lady from Ohio called and asked for information on a frozen loan audit! And increasingly I am getting calls from people who begin by asking what I charge, immediately followed by how many pages long my audits are! Maybe I am getting a little sensitive as I am nearing my 49th birthday but I become irritated when I am made to feel like a server at a fast food joint. Not that there is anything wrong with being a server, but what would be an appropriate response to such a dumb question?  Today’s special is all you can read for $299 and a bag of chips at no extra cost. Will that be for here or to go?

What is this fascination with size and quantity that drives the average consumer? He wants a McMansion, a Big Mac, an Extra Large Latte, a Jumbo Dog, a Super Sized Pizza, and a Voluminous Frozen Audit. Or is it forensic? Who cares, as long as you get a lot of pages and one of them money back guarantees. Oh yes, we love a money back guarantee.  But seriously, why would someone facing foreclosure or having difficulty making mortgage payments care about the size of an audit? Are they calling five auditors and going with the cheapest who offers the most words for the money? Is that how you hire a professional these days?

Of course, I can’t place the entire blame on consumers who are simply trying to find the most affordable solution for perhaps the biggest problem they have had to face – losing their home. Understandably they are trying to find a method to measure the value of such an esoteric service as a forensic loan audit, which no one had even heard about until a few months ago. You can’t blame them for wanting to shop and compare products before buying and parting with their hard earned money. It is the service providers who are misleading the public and selling them a thick pile of worthless junk packaged as a forensic loan audit with a guarantee that if no violations are discovered a refund will be issued with no questions asked. I wonder how many refunds on these fake audits have been issued.

There are even law firms now peddling these audits for up to $2500 a pop but delivering nothing more than a standardized list of technical violations with some added legalese and fictitious causes of action thrown in for good measure (such as Rescission and Breach of the Covenant of Good Faith and Fair Dealing, none of which are valid or independent causes of action but they sound good). After all, how can you justify charging $2500 for a template audit, if you don’t embellish it with a few Latin words no one can pronounce or omit citations to inapposite case law inserted to fill space for lack of meaningful research.

This industry has been flooded with unprofessional ex loan officers and underemployed ambulance chasing lawyers who have setup shop as auditors with cheap copycat websites and a subscription to compliance software, representing themselves as experts offering hope to distressed homeowners, who in their desperation for keeping their homes and stopping foreclosure are easy prey.

What these unsavory characters are selling is essentially overpriced data entry and a template report purporting to be a legal analysis of the homeowner’s rights and remedies for alleged violations of the Truth in Lending Act (TILA), Real Estate Settlement Procedures Act (RESPA), Fair Credit Reporting Act, Predatory Lending, Breach of Fiduciary Duty, Negligence, Fraud and Unfair or Deceptive Acts or Practices to name a few. After completion of the audit the borrower is usually encouraged to demand a response from the lender via a Qualified Written Request (QWR), which the auditor/lawyer sometimes offers to draft and submit as an added bonus with the assurance that as soon as the lender is served with their masterfully prepared QWR and sees the auditor’s impressive findings, its lawyers begin trembling with fear of being sued and offer to settle for pennies on the dollar. All that for $399 and a money back guarantee! How can anyone turn down such an offer? Yes please, I will have one audit and a bag of chips to munch on while laying back on my couch watching the bank get on its knees and beg for my forgiveness. I want to watch them grovel before they rescind my predatory loan and hand over the deed to my house free and clear. After all this is America.

TILA/RESPA

Of course the reality is markedly different than what is purported by these overenthusiastic yet incompetent advocates. I have seen hundreds of audits and they all have one thing in common – they are worthless. First, many of the so called violations these audits uncover, such as failure to issue a good faith estimate within three days of application, or failure to issue a HUD-1 one day prior to settlement, provide for no private right of action, so their only value may lie in establishing a pattern and practice of misrepresentation, deception or on rare occasions fraud. But even if sufficient facts exist for allegations of broker or loan officer misconduct, liability for such conduct ordinarily remains with the original tortfeasor and not the assignee of the loan, who in all likelihood is a holder in due course, unless you can show, for example, that the holder had notice of your claims prior to purchasing the Note or that the Note was not properly negotiated or for various reasons it does not qualify as a negotiable instrument.

As mentioned ordinarily the holder in due course is not liable for disputes or claims you may have against the originator or mortgage broker who sold you the loan unless certain conditions pursuant to HOEPA have been met, or the TILA violation is apparent on the face of the loan documents, or you are using the claim as a defense in a collection action, or if you can state with particularity facts that would make the note and mortgage void under other legal theories. Some courts, however, have held that you cannot use certain claims in nature of recoupment in non judicial foreclosure proceedings in states such as California, while, on the other hand,  a West Virginia court has said: “Securitization model – a system wherein parties that provide the money for loans and drive the entire origination process from afar and behind the scenes – does nothing to abolish the basic right of a borrower to assert a defense to the enforcement of a fraudulent loan, regardless of whether it was induced by another party involved in the origination of the loan transaction, be it a broker, appraiser, closing agent, or another”. Generally a fraudulent loan is not enforceable regardless of the holder in due course status of the party with the right to enforce. The trick is in providing sufficient facts to prove fraud, which, under normal circumstances is not an easy task to accomplish.

Fiduciary Duty

A popular finding proffered by some practitioners is an alleged violation of fiduciary duty by the lender. In general, however, a lender does not owe a fiduciary duty to a borrower. “A commercial lender is entitled to pursue its own economic interests in a loan transaction. This right is inconsistent with the obligations of a fiduciary which require that the fiduciary knowingly agree to subordinate its interests to act on behalf of and for the benefit of another.” Nymark v. Heart Fed. Savings & Loan Assn., 231 Cal. App. 3d 1089, 1093 n.1, 283 Cal. Rptr. 53 (1991). “[A]bsent special circumstances . . . a loan transaction is at arm’s length and there is no fiduciary relationship between the borrower and lender.” Oaks Management Corporation v. Superior Court, 145 Cal. App. 4th 453, 466, 51 Cal. Rptr. 3d 561 (2006).

Determining the existence of a fiduciary relationship involves a highly individualized inquiry into whether the facts of a given transaction establish that there has been a special confidence reposed in one who, in equity and good conscience, is bound to act in good faith and with due regard to the interests of the one reposing the confidence. Mulligan v. Choice Mortg. Corp. USA, 1998 U.S. Dist. LEXIS 13248 (D.N.H. Aug. 11, 1998).

As such, an audit must inquire in to the circumstances surrounding the borrower’s initial introduction to and meeting with the lender’s agent and the content of all verbal and written communications between them. It is important for the auditor to determine the level and extent of trust and confidence reposed by borrower in the lender’s agent. A lender may owe to a borrower a duty of care sounding in negligence when the lender’s activities exceed those of a conventional lender. For example if it can be shown the appraisal was intended to induce borrower to enter into the loan transaction or to assure him that his collateral was sound the lender may have a duty to exercise due care in preparing the appraisal. See Wagner v. Benson, 101 Cal. App. 3d 27, 35, 161 Cal. Rptr. 516 (1980) (“Liability to a borrower for negligence arises only when the lender actively participates in the financed enterprise beyond the domain of the usual money lender.”).

Vicarious Liability

A lender may be secondarily liable through the actions of a mortgage broker, who may have a fiduciary duty to its borrower-client, but only if there is an agency relationship between the lender and the broker. See Plata v. Long Beach Mortg. Co., 2005 U.S. Dist. Lexis 38807, at *23 (N.D. Cal. Dec. 13, 2005); Keen v. American Home Mortgage Servicing, Inc., 2009 U.S. Dist. LEXIS 100803, 2009 WL 3380454, at *21 (E.D. Cal. Oct. 21, 2009).

Therefore, the audit must propound sufficient facts to establish an agency relationship between lender and broker. An agency relationship exists where a principal authorizes an agent to represent and bind the principal. Although lenders offer the brokers incentives to act in ways that further their interests, there needs to be a showing that a lender gave the broker authority to represent or bind it, or that a lender took some action that would have given borrower the impression that such a relationship existed. I have yet to see an audit that provided facts for such a conclusion but instead they are filled with conclusory allegations unsupported by facts. It is not enough to merely state that lender is vicariously liable through the broker or that broker is lender’s authorized agent without specific facts to support such conclusions.

Civil Conspiracy

Under the conspiracy theory a party may be vicariously liable for another’s tort in a civil conspiracy where the plaintiff shows “(1) formation and operation of the conspiracy and (2) damage resulting to plaintiff (3) from a wrongful act done in furtherance of the common design.” Rusheen v. Cohen, 37 Cal. 4th 1048, 1062, 39 Cal. Rptr. 3d 516, 128 P.3d 713 (2006) (citing Doctors’ Co. v. Superior Court, 49 Cal.3d 39, 44, 260 Cal. Rptr. 183, 775 P.2d 508 (1989)), see also Applied Equipment Corp. v. Litton Saudi Arabia Ltd., 7 Cal. 4th 503, 511, 28 Cal. Rptr. 2d 475, 869 P.2d 454 (1994). The California Supreme Court has held that even when these elements are shown, however, a conspirator cannot be liable unless he personally owed the duty that was breached. Applied Equipment, 7 Cal. 4th at 511, 514.

Civil conspiracy “cannot create a duty . . . . [i]t allows tort recovery only against a party who already owes the duty.” Courts have specifically held that civil conspiracy cannot impose liability for breach of fiduciary duty on a party that does not already owe such a duty. Everest Investors 8 v. Whitehall Real Estate Ltd. Partnership XI, 100 Cal. App. 4th 1102, 1107, 123 Cal. Rptr. 2d 297 (2002) (citing Doctors’ Co., 49 Cal. 3d at 41-42, 44 and Applied Equipment, 7 Cal. 4th at 510-512).

Thus, civil conspiracy allows imposition of vicarious liability on a party who owes a tort duty, but who did not personally breach that duty. Doctors’ Co., 49 Cal. 3d at 44 (A party may be liable “irrespective of whether or not he was a direct actor and regardless of the degree of his activity.”).

Joint Venture

Participation in a joint venture with a broker or other party in a predatory lending context gives rise to liability for such claims under a claim of joint venture. See Short v. Wells Fargo Bank Minnesota, N.A., 401 F. Supp. 2d 549, 2005 U.S. Dist. LEXIS 28612, available in 2005 WL 3091873, at 14-15 (S.D.W.Va. Nov. 18, 2005); see also generally Armor v. Lantz, 207 W. Va. 672, 677-78, 535 S.E.2d 737, 742-43 (2000); Sipple v. Starr, 205 W. Va. 717, 725, 520 S.E.2d 884, 892 (1999); Price v. Halstead, 177 W.Va. 592, 594, 355 S.E.2d 380, 384 (1987).

Similarly, if one party is directing or exercising control over loan origination in the circumstance of securitized lending, it is a factual question as to whether there is a principal/agency relationship sufficient to impose such liability on all the participants. See Short v. Wells Fargo Bank Minnesota, N.A., supra, 2005 U.S. Dist. LEXIS 28612, 2005 WL 3091873, at 14-15; England v. MG Investments, Inc., 93 F. Supp. 2d 718, 723 (S.D.W.Va. 2000); Arnold, 204 W.Va. at 240, 511 S.E.2d at 865.

An audit must inquire in to the relationships between parties involved in the joint venture and determine the level of control exercised by one party over another. Again, it is not sufficient to merely recite legal conclusions such as “Crooked Funding LLC controlled Scam Brokers Inc.”.

Fraud and Deceit

In most jurisdictions, “[t]he elements of fraud, which give rise to the tort action for deceit, are (a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or scienter); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.” Small v. Fritz Companies, Inc., 30 Cal. 4th 167, 173, 132 Cal. Rptr. 2d 490, 65 P.3d 1255 (2003).

To prove mail fraud, as an example, the auditor must propound facts with particularity as follows:

Johnny Crookland, Crooked Broker’s President, misrepresented his intention to get borrowers the best rate available at their initial meeting in March 2006. The audit should also contain the date and content of all mailings and communications between the Crooked Broker and the borrowers through which the broker with the aid of a warehouse lender (Scam Fundings LLC) effectuated its scheme to defraud: (1) direct mail advertisement from Crooked Broker showing a teaser interest rate of 6.75% with zero broker fees or points (2) a “good faith estimate” of the loan terms mailed by Crooked Broker on March 26 which did not mention anything about a $5,890 fee for origination, (3) the first (rejected) loan document, with an interest rate of 7% which included a $ 5,890 fee, presented to the borrowers on April 13 at the first closing (though presumably mailed or faxed from the warehouse lender’s office in New York shortly before that date) (4) borrowers refusal to sign the closing documents because of the unauthorized fee that appeared on the HUD-1 on closing day, (5) a second good faith estimate mailed by Crooked Broker on April 16, showing 7% interest but this time without the unauthorized fee; and the second (accepted) loan document, which was presented in Baltimore on April 19 but at a higher rate of 7.125% and now subject to a yield spread premium that was never disclosed or explained  as to how it may impact total finance charges over the length of the loan. (6) Crooked Broker’s statement in response to borrowers’ inquiry about the yield spread premium that it was standard practice and paid by lender with no impact on total finance charges payable by borrowers.

Show Me the Note

The template audits invariably omit a detailed inquiry in to the securitization process after the loan was funded by the Originator and sold to investors through securitization. Often the only theory proffered by incompetent auditors revolves around the “show me the note” defense, which has been shot down by almost every court in every jurisdiction because it lacks merit. A lost note affidavit can easily overcome this argument, so by itself as a foreclosure defense strategy this does nothing but cast doubt on a borrower’s credibility.

A skilled auditor will carefully examine all documents including the Note, Mortgage/DOT, Mortgage/DOT Assignment, Note Endorsement/Allonge, Notice of Default and the Pooling and Servicing Agreement to determine the identity of all parties involved in the chain of securitization and their respective interests in the Note and Mortgage.

Once settlement occurs the Note and Mortgage are normally transferred to a document custodian (e.g. Wells Fargo), while numerous book entries record their movement through the securitization chain which normally begins with the Originator (e.g. Mason Mortgage) who then sells them to an aggregator (e.g. Countrywide Home Loans) who then sells them with a thousand other loans to a Depositor (e.g. Asset Securities Inc.) who then deposits them with a Trustee (e.g Wells Fargo) for the benefit of the securitization trust (e.g Asset Securities Trust IV-290989 – 2003) which issues securities backed with the pool of mortgages (MBS).  The trustee also selects a Servicer (e.g Countrywide Home Loans) to collect borrower payments and process foreclosures/short sales on behalf of the investors who own the MBS.

When there is default and in order to effectuate foreclosure, the Servicer asks the document custodian for the collateral file that pursuant to the PSA should contain the original Note indorsed by the Originator (e.g. Mason Mortgage), usually in blank thereby converting it in to a bearer instrument, and the Mortgage/DOT with an executed assignment either already recorded or in recordable form. Usually this is where everything can fall apart for the secured party attempting to foreclose and where the best defense opportunities may be uncovered by a skilled examiner.  Without giving away too much proprietary information here is a list of some questions a diligent auditor should be asking:

  1. Was the execution of the Mortgage/DOT by the borrower properly witnessed and acknowledged?
  2. Was the Note legally negotiated and formally transferred from the Originator to the Aggregator, from the Aggregator to the Depositor and from the Depositor to the Trustee?
  3. Was the Note indorsed by an authorized agent of its holder before each transfer?
  4. Is the Indorsement evidenced by an Allonge while there is room for an Indorsement on the original Note?
  5. Was the Note negotiated to its current holder prior to the date of default?
  6. Did the Mortgage travel with the Note through the chain of securitization?
  7. Is the Mortgage held by MERS?
  8. Has the Mortgage assignment been properly recorded?
  9. Was the Mortgage and Note assigned to the Trustee by MERS?
  10. Was MERS authorized or allowed to assign the Mortgage?
  11. Who signed the assignment on behalf of MERS?

MERS and Splitting the DOT from the Note

The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation.  The mortgage loan becomes ineffectual when the note holder did not also hold the deed of trust.”  Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 619, 623 (Mo. App. 2009).

Some courts have found that, because MERS is not the original holder of the promissory note and because there is no evidence that the original holder of the note authorized MERS to transfer the note, the language of the assignment purporting to transfer the promissory note is ineffective. “MERS never held the promissory note, thus its assignment of the deed of trust to Ocwen separate from the note had no force.” 284 S.W.3d at 624; see also In re Wilhelm, 407 B.R. 392 (Bankr. D. Idaho 2009) (standard mortgage note language does not expressly or implicitly authorize MERS to transfer the note); In re Vargas, 396 B.R. 511, 517 (Bankr. C.D. Cal. 2008) (“[I]f FHM has transferred the note, MERS is no longer an authorized agent of the holder unless it has a separate agency contract with the new undisclosed principal. MERS presents no evidence as to who owns the note, or of any authorization to act on behalf of the present owner.”); Saxon Mortgage Services, Inc. v. Hillery, 2008 U.S. Dist. LEXIS 100056, 2008 WL 5170180 (N.D. Cal. 2008) (unpublished opinion) (“[F]or there to be a valid assignment, there must be more than just assignment of the deed alone; the note must also be assigned. . . . MERS purportedly assigned both the deed of trust and the promissory note. . . . However, there is no evidence of record that establishes that MERS either held the promissory note or was given the authority . . . to assign the note.”).

IN CONCLUSION, the value of a forensic loan audit lies not in its word count, size or thickness but rather in the knowledge and expertise of the individual performing the work and examining the documents. Many of the worthless template audits produced by scammers consist of more than 100 pages of garbage and pointless recitations of statutes you can find online or in any library. Moreover, finding a technical violation in loan documents is a virtual certainty, so a money back guarantee is merely a marketing gimmick offered by unscrupulous con artists to gain your trust and to distract you from what really counts. If you are worried about word count and a money back guarantee you are missing the point. And if you are looking for the least expensive audit advertised on the web, you will certainly get what you pay for. An authentic audit done right takes at least 3 hours to complete (a more detailed analysis can take over 8 hours) and a skilled auditor charges between $250 to $300 per hour, so do the math.

Remember an audit is merely a tool that should be handled with care by a seasoned attorney. It does not magically stop foreclosure while you lay back on the couch with a bag of chips. A lengthy template audit attached to a lengthy QWR sent to a lender’s loss mitigation department will most likely end up in the trash. The best way to measure the quality and value of an auditor’s work, short of a referral, is by picking up the phone, speaking to him and making sure he knows what he is talking about. Surround yourself with smart and skilled advocates and you will be a step or two ahead of the bank trying to take your home away.  That I can guarantee.

Dean Mostofi, President

National Loan Audits

Tel: 301-867-3887

E-mail: dean@lenderaudits.com

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Lenders Increasingly Facing Forensic Loan Audits

Posted on February 4, 2010. Filed under: Foreclosure Defense, Loan Modification, Mortgage Audit, Mortgage Fraud, Mortgage Law, Predatory Lending, Refinance, RESPA, right to rescind, Truth in Lending Act | Tags: , , , , , , , , , |

For the past couple of years, it has become a fairly common practice for lenders and servicers to employ forensic loan audits on pools of mortgages, with the goal of uncovering patterns of noncompliance with federal and local regulations, the presence of fraud and/or the testing of high fee violations. Unfortunately, for these same lenders, the practice of forensic loan auditing has slipped over to the consumer side of the market and is now being used against the lenders themselves.

Homeowners, many of whom are facing foreclosures, have begun hiring forensic loan auditors to review their loan documents, and if violations are found, they are hiring attorneys to bring their case against the lenders. What do they hope to gain? At the very least, the homeowners are trying to forestall a foreclosure, push for a loan modification or, at the end of continuum, try to get the loan rescinded.

“The forensic loan review as we know it today came about two years ago, when the mortgage market started to melt down,” explains Jeffrey Taylor, co-founder and managing director for Orlando-based Digital Risk LLC. “The idea of the forensic review was to look for a breach of representations and warranties so the investor or servicer could put the loan back to the originator. This is when you had all the big banks reviewing nonperforming assets to see if there was any fraud material or breaches so as to put them back to the entity that sold the loan.”

Originally, and still today, most forensic loan reviews are done by institutions on nonconforming assets. Starting in about 2008, the concept morphed into a kind of consumer protection program. Forensic loan auditing companies have since sprouted up like weeds, and many advisors are now advocating the program as a best practice and the first step before bringing a lawsuit against the lender to get a “bad” mortgage rescinded or force a loan modification.

“Every constituent along the way is looking for their own get-out-of-jail-free card,” observes Frank Pallotta, a principal with Loan Value Group LLC of Rumson, N.J. “I’ve been seeing this for the last two years. It started with banks that bought loans from small correspondents, and when those loans were going down, they would look for anything in the loan documentss to put it back to the person they bought the loan from. Fannie and Freddie are doing it, too. Now you have borrowers going to the banks to see if they have all their documents in place; they want their own get-out-of-jail-free card.”

Litigation-a-go-go

In some regards, lenders should be worried, as a swarm of potential lawsuits could fly in their direction. These might not always be hefty lawsuits, considering they mostly represent individual loan amounts, but they are annoying and the fees to defend the institution from these efforts can mount up very quickly. In addition, if homeowners are successful in the bids to rescind a loan, the lender has to pay back all closing costs and finance charges.
The industry should also be concerned because experts in mortgage loan rescissions say it is very hard for a bank to mount an effective defense against people who can prove that their loan contained violations.

“It is extremely difficult for lenders to defend against a lawsuit when they face a bona fide rescission claim,” says Seth Leventhal, an attorney with Fafinski Mark & Johnson PA in Eden Prairie, Minn., who often works with banks.

Additionally, in this age of securitization, many banks don’t own the loans they originated, but, says Leventhal, this is not a defense. “If they don’t own the loan anymore, they are going to have to get in touch with the servicer who does,” he says.

On the other hand, the homeowner’s cost to arrange a loan audit and hire an attorney can be prohibitive, so there is some balance.
Jon Maddux, principal and founder of Carlsbad, Calif.-based You Walk Away LLC, started one of the first companies offering forensic home loan audits for homeowners back in January 2008.

“We found that about 80% of the loans we audited had some type of violation,” he says. “And we thought it was going to be a great new tactic to help the distressed homeowner.”

However, it wasn’t. Homeowners would take the audit findings to their lender or servicer, only to find themselves pretty much as ignored as they were before they made the investment in the audit.

“We found lenders weren’t really reacting to an audit,” says Maddux, adding that lenders and servicers would only react to lawsuits based on audit information.

An audit by itself is not some magical way to make everything go away; it’s just the beginning, adds Dean Mostofi, the founder of National Loan Audits in Rockville, Md.

“Borrowers who contact lenders with an audit don’t get too far,” he says. “It’s in their best interest to go in with an attorney.”

The problem is, Mostofi states, that the first point of contact is the loss mitigation department, and “those people typically have no idea what you are talking about. To get past them sometimes requires lawsuits.”

Paper chase

The forensic loan audit lets the homeowner know if the closing documents contain any violations of the Truth In Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA), or if there was any kind of fraud or misrepresentation.

“We go through the important documents – in particular, the applications – TILA disclosure, Department of Housing and Urban Development forms, the note, etc., making sure that everything was disclosed properly to the borrower and that borrowers knew what they were getting into,” says Mostofi. “We also look at the borrower’s income to see if everything was properly disclosed. If the lender didn’t care about the borrower’s income, then we look further for other signs that it might be a predatory loan.”

According to August Blass, CEO and president of Walnut Creek, Calif.-based National Loan Auditors, a forensic loan audit is a thorough risk assessment audit performed by professionals who have industry and legal qualifications to review loan documents and portfolios for potential compliance or underwriting violations, and provide an informative, accurate loan auditing report detailing errors or misrepresentations.

Some elements of a forensic loan audit, says Blass, should include: a compliance analysis report based on data from the actual file; post-closing underwriting review and analysis; and summary of applicable statutes, prevailing case law and action steps that the attorney or loss mitigation group may chose to act upon.

TILA’s statute of limitations extends back three years, so most people who end up on their lender’s doorsteps are people who financed or refinanced during the boom period of 2005 through early 2007. If serious violations are discovered, the borrower can move to have the mortgage rescinded.

Not everyone appreciates the efforts of the forensic loan auditors working the homeowner side of the business.

“It began with a bunch of entrepreneurial, ex-mortgage brokers who learned how to game the system the first time, then started offering services to consumers to teach them the game,” Digital Risk’s Taylor says.

A year ago, most people didn’t know what a forensic audit was, but “now almost everyone knows,” says Mostofi. “The problem that we are having is that the banks are coming back and telling borrowers that everyone who is offering some kind of service to help them is a crook because they are charging a fee.”

Indeed, fees for a forensic audit often fall into the $2,000 to $5,000 range – but a hefty sum for someone facing foreclosure.
This could all be a desperate attempt to get a loan rescinded, but in regard to loan rescissions, there’s bad news and good news.

“Yes, it’s tough for lenders to defend themselves,” says James Thompson, an attorney in the Chicago office of Jenner & Block LLP who represents banks and finance companies. But, he adds, there is an exception: the plaintiff in this kind of lawsuit has to essentially buy back the loan, which means the plaintive (borrower) has to get new financing.

“The borrower has to be able to repay the amount he borrowed,” explains Thompson. “If the property is underwater, as many of these are, the borrower can’t go out and get a replacement mortgage that would give him the entire amount he would need to repay the lender.”

In some court cases, as part of the initial lawsuit, the plaintiff needs to prove that he or she is capable of getting a refinancing. What happens if the court grants a rescission but the consumer can’t find financing? Oddly, no one knows, because court cases haven’t gotten that far.

“Every one of these cases gets resolved,” says Thompson. “The borrowers are struggling to get the attention of the overworked loan servicers, who are scrambling with as many loan modifications and workouts they can come up with. You can get to the head of the line sometimes if you show up with an attorney and forensic loan examination, saying, ‘Here is a TILA violation; we want to rescind.'”

“I don’t see very many of these litigating,” National Loan Auditors’ Blass concurs. “It brings the settlement offer to the table a little faster. It’s not as if the lender would not have brought an offer to the table without the audit. It just seems to fast-track the process a little bit more.”

Forensic loan audits expose mistakes and unscrupulous lending practices that will assist the borrower in negotiation efforts, Blass adds. “Federal-, state- or county-specific lending violations and the legal guidelines for remedy, can pave the way to successful and expedient modification.”

Perhaps, the bigger nightmare of all is not the lawsuits brought by individual homeowners, but the big law firms finding all these individuals and bringing them together for a class action suit.

“The plaintiff bar is as active as ever. They have these big dragnets, trying to capture all the misdeeds of mortgage bankers, going after them with class-action lawsuits,” says David Lykken, president of Mortgage Banking Solutions in Austin, Texas.

This just aggravates the situation, adds Lykken. “I have not seen one class-action lawsuit bring about any positive change. Punitive damages just drain the cash-out of already cash-strapped companies.”

Steve Bergsman is a freelance writer based in Mesa, Ariz., and author of “After The Fall: Opportunities & Strategies for Real Estate Investing in the Coming Decade,” published by John Wiley & Sons.

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Mortgage Assignment & Affidavit Fraud

Posted on October 27, 2009. Filed under: Banking, Finance, Foreclosure Defense, Mortgage Audit, Mortgage Fraud, Mortgage Law, Predatory Lending | Tags: , , , , , , , , , , , , , |

In bankruptcy and government takeovers of financial institutions, missing collateral is a major obstacle for trustees and regulators to overcome. The missing assignment problem is an extension of not carelessness or sloppiness as many have claimed, but of overt acts of fraud.

Skilled attorneys and forensic accounting experts could expose this fraud and as such, the effects and implications are more far reaching than a borrower, simply having their debt extinguished. Debt extinguishment or dismissal of foreclosure actions could be obtained if it can be shown that the entity filing the foreclosure:

• Does not own the note;
• Made false representations to the court in pleadings;
• Does not have proper authority to foreclose;
• Does not have possession of the note; and/or
• All indispensable parties (the actual owners) are not before the
court or represented in the pending foreclosure action.

To circumvent these issues, mortgage servicers and the secondary market have created and maintained a number of practices and procedures. MERS was briefly discussed and will be the sole subject of a major fraud report in the future.

Another common trade practice is to create pre-dated, backdated, and fraudulent assignments of mortgages and endorsements before or after the fact to support the allegations being made by the foreclosing party. Foreclosing parties are most often the servicer or MERS acting on the servicer’s behalf, not the owners of the actual promissory note. Often, they assist in concealing known frauds and abuses by originators, prior servicers, and mortgage brokers from both the borrowers and investors by the utilization of concealing the true chain of ownership of a borrower’s loan.
Ocwen-Anderson-Report-Sue-First-Ask-Questions-Later

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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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Marcy Kaptur to Banks: “Produce The Note”

Posted on October 12, 2009. Filed under: Foreclosure Defense, Fraud, Loan Modification, Mortgage Audit, Mortgage Fraud, Mortgage Law, Politics, Predatory Lending, right to rescind, Truth in Lending Act | Tags: , , , , , , , , , , , , , , , , |

Fight Club entered popular culture in 1999 when director David Fincher adapted Chuck Palahniuk’s novel into a film that reflected the zeitgeist of modern America with its empty culture, obsession with aesthetic beauty, and slavish under and middle classes.

Warning: Decade-old spoiler coming up.

The film ends with the agents of “Project Mayhem,” protagonist Tyler Durden’s followers, destroying the headquarters of the major credit card companies with many tons of explosives. Durden’s theory is that without the records of debt, everyone gets a fresh start. They are no longer slaves to the banks, and they are free.

This concept resonated hugely with Americans, and not just the douche bag frat boys who taped Brad Pitt’s six-pack to their dorm walls. Citizens are working harder for less these days, and the American ennui originating from Reagan’s tyrannical reign of deregulation, union busting, and middle-class rape has now exploded into severe disillusionment and anger. Americans are being crushed by debt, can’t afford health care, and have less job security than ever.

Even the dimmest Americans know they’re getting screwed by Wall Street fat cats, and nothing could have made that reality clearer than the bailouts: $1 trillion dollars of taxpayer money that went to line the pockets of the guys and gals who crashed the economy.

And if that wasn’t bad enough, once the fat cats and credit card companies’ armies of Repo Men were through collecting the contents of the houses, they came back for the houses themselves. The banks tried to sell the old, familiar lie that “irresponsible people” i.e. “black people” went and got themselves into a mess they couldn’t dig themselves out of, which was almost always a lie. Subprime lenders issued mortgages in a predatory fashion, frequently lied, and used creative math to convince people they could afford mortgages with hidden, adjustable interest rates.

Those that can afford to play Capitalism: The Game prosper, while the rest of society suffers. Of course, those of us who don’t work for the Big 4 banks in the Too Big To Fail gang, wither and die. Today, The New York Times announced the 100th small bank failure of 2009. Don’t expect any mourning. The bank isn’t named “JPMorgan Chase.”

It’s projected that by 2012, there will be eight million home foreclosures in the United States. Lots of politicians are siding with the banks during the foreclosure epidemic, but a few brave souls are standing up to the Wall Street criminals.

More…

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