Securitization

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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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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Buying a Cow and Selling Hamburgers- A Closer Look at Mortgage Securitization

Posted on April 2, 2010. Filed under: Banking, Foreclosure Defense, Mortgage Law, Securitization | Tags: , , , , , , |

Our legal system is extremely difficult to understand and maneuver by a non attorney, partly because there is no single source or authority for answering complicated legal questions. For example how do you know if your mortgage was eviscerated through the securitization process? Did securitization of the note and mortgage constitute conversion of the asset thereby rendering the mortgage unenforceable? This question has not been answered by a high court yet but there is no shortage of legal scholars and practitioners analyzing the securitization process and its impact on the housing market and the economy as a whole.

Most agree that securitization changes the traditional debtor creditor relationship and interferes with contractual rights derived from a mortgage transaction. When two parties enter in to a contract they normally have the right to modify the terms of their agreement as long as there is mutual assent. When a contractual relationship is ongoing, as is the case with a mortgage contract, it is not uncommon for the parties to amend their agreement as and when unforeseen events occur or circumstances change. The main reason for doing so is to mitigate losses when modification is in the best interest of both parties and no better alternative is available.

Securitization, because of its complex structure and infusion of additional parties into the mortgage transaction, militates to an entirely different and unique set of priorities, obligations and interests that often conflict and compete with one another. In many instances, although it may be economically feasible for both the borrower and note holder to modify the loan, the rules of the securitization agreement prohibit or limit change of loan terms, thereby forcing the servicer to foreclose rather than negotiate. Securitization interferes with the mortgagee’s and mortgagor’s rights to freely engage in loss mitigation negotiations in order to mitigate their own losses, without having to be concerned with losses that may be incurred by a third party, who was not a party to the original mortgage contract.

One practitioner, Richard Kessler Esq., has compared securitization to buying a cow and selling hamburgers – “The people who buy hamburgers have paid for and are legally entitled to the hamburger but do not thereby become owners of or acquire an ownership interest in the cow… It [securitization] renders the mortgage note used to generate income unenforceable by eliminating the status of note holder.”

More than 60% of all mortgages are securitized representing in excess of seven trillion dollars in outstanding mortgage debt. (Source: Wikepedia, Mortgage-Backed-Securities) Once a mortgage loan has been funded by the originating lender the loan (note and mortgage) is sold to a sponsor who forms a pool of hundreds of loans and transfers them to a pass-through/conduit trust (REMIC), which issues certificates backed by the cash flow generated from the mortgage notes. The certificates are simultaneously sold to a broker/underwriter who subsequently sells them to investors. Additionally a trustee is appointed to manage the trust, who in turn appoints a servicer for collecting payments from borrowers, managing the escrow accounts, forwarding the payments to investors and when necessary initiating and processing foreclosures.

In order to qualify for a REMIC status which allows the cash to flow to certificate holders without taxation at the trust/conduit level (investors will still pay income tax individually) Mr. Kessler states that all legal and beneficial interest in the mortgage loans must be transferred to certificate holders, rendering the trust effectively asset free. “Therefore, neither the trustee nor the servicing agent can have any legal or equitable interest in the mortgages”. The investors are the purported owners and holders of the notes but the terms of the pooling and servicing agreement (PSA) do not allow them to foreclose or participate in controlling the mortgage notes. “The certificate holders bear the losses but do not control the mortgages. As such the moral hazard is severed from command and control thereby restructuring the debtor creditor relationship created by the original note and mortgage”. Richard Kessler, MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF DEFENDANTS MOTION TO DISMISS.

“The certificate holders, therefore, cannot be [note]holders because they lack the necessary rights and powers conferred by holding the note: the right to payment, the right to sell or transfer the note, the right to foreclose and the right to modify the terms and conditions of the note or mortgage with the consent of the mortgagor.” id

In the event of default ordinarily the trustee initiates foreclosure proceedings claiming the secured party is the conduit trust, but one can argue this is legally impossible since the trust, in order to qualify for a REMIC status, cannot own a legal or equitable interest in the mortgage loans. Further, the investors cannot appoint the trustee as their agent to foreclose on the mortgage since as demonstrated above they are not the holders of the note. A principal cannot convey rights to an agent which the principal lacks. The rights of certificate holders are created by and derive from contractual obligations granted by and pursuant to the PSA as opposed to those conferred to holders of the notes.

Some practitioners argue that because the pooling and servicing agreement restricts the mortgagee’s ability to modify the loan and since the mortgagor was never notified of or consented to such restrictions, this amounts to a unilateral and illegal modification of the mortgage contract, thereby rendering it null and void. I, however, don’t understand this theory, since modification is not an express right or obligation under the terms of the mortgage contract and thus restricting it cannot be considered a unilateral amendment and hence a breach of contract. Further, even if we assume arguendo that the mortgage has been illegally modified, I am not so sure voiding the contract will be the proper remedy.

Others proffer that securitization interferes with a mortgagors right of redemption since he/she is restricted from negotiating directly with the mortgagee who may have been willing to accept a reasonable settlement offer but cannot do so because such decisions are no longer made by the actual note holder and not predicated on the mutual interests of mortgagee and mortgagor. For example often the competing interests of junior and senior tranches within a securitized pool of mortgages makes it impossible to negotiate a loan modification that under normal circumstances would have been beneficial to both the debtor and creditor. One can also argue “this constitutes either a breach of contract or a tortious interference with a contract, or both.” George Beckus Esq, blog.floridaforeclosurelawyer.org

The only conclusion I can draw with any certainty from the above analysis is that securitization and its legal and economic implications are difficult to understand or measure and even harder to explain. Imagine trying to explain all this to a judge with the cow and hamburger analogy. Judges are not always as smart as they are proclaimed to be and they resist novel legal theories, specially when they can hurt the banks. At the end of the day, regardless of how persuasive a theory may sound or how passionately it is argued by its proponents, until it becomes law it is just a theory.

Dean Mostofi

National Loan Audits

301-867-3887

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