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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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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MERS v. LISA MARIE CHONG

Posted on December 9, 2009. Filed under: bankruptcy, Case Law, Foreclosure Defense, Mortgage Law | Tags: , , , , , , |

UNITED STATES DISTRICT COURT

DISTRICT OF NEVADA

Dist. Ct. Case No. 2:09-CV-00661-KJD-LRL
Bankr. Ct. Case No. BK-S-07-16645-LBR

Presently before the Court is Appellant’s Appeal under 28 U.S.C. § 158(a) from the Bankruptcy Court’s Order Denying Motion to Lift Stay entered in the Adversary Proceeding No. BKS- 07-16645-LBR, docket no. 49, March 31, 2009.

Having considered the briefs and the record on appeal, including the arguments of parties at the consolidated hearing on November 10, 2009, the Court affirms the Order of the Bankruptcy Court

Procedural History and Facts

On April 14, 2009, Appellant Mortgage Electronic Registration Systems, Inc. (“MERS”) filed Notice of Appeal (#1) appealing the Bankruptcy Court’s order denying Appellant’s motion for relief from stay. This appeal is one of approximately eighteen (18) similar cases in which the Bankruptcy Court ruled that Appellant lacked standing to bring the motion.

In the underlying bankruptcy action, MERS filed its Motion for Relief from Stay (“the Motion”) pursuant to Federal Rule of Bankruptcy Practice (“Rule”) 4001 on January 14, 2008 seeking to have the automatic stay lifted so that MERS could conduct a non-judicial foreclosure saleon debtor’s real property because the debtor lacked the ability to make payments and could not provide adequate security. Trustee Lenard E. Schwartzer (“Trustee”) filed objections to the Motion claiming that MERS did not have standing as a real party in interest under the Rules to file the motion. (Appellant’s Appendix (“Appx.”) Doc. No. 12, p. 34).

In response, Appellant filed the Declaration of Faatima Straggans, an employee of Homecomings Financial, LLC the authorized servicing agent for MERS, attempting to authenticate a copy of the original Deed of Trust (“Deed”) and Note. (Appx. 36–38). The Deed described MERS as beneficiary and identified MERS as the nominee of the original lender, FMC Capital LLC. Id. However, the Declaration identified neither the current owner of the beneficial interest in the Note, nor any of the successors or assignees of the Deed of Trust. The Declaration also failed to assert that MERS, FMC Capital LLC or Homecomings Financial, LLC held the Note.

Due to the similar issues raised regarding motions for relief from stay in approximately twenty-seven (27) cases involving MERS, the Bankruptcy Court set a joint hearing for all twenty seven cases. (Appx. 113–18). The Bankruptcy Court also ordered consolidated briefing for all cases to be filed in Case No. 07-16226-LBR, In re Mitchell, the “lead case”. Id. In a majority of the cases, including the present case, Appellant attempted to withdraw the Motion but was procedurally unable to do so, because the Trustee would not consent. (Appx. 1383, 1902-1904, 1907-1909). MERS informed the Bankruptcy Court that it had attempted to withdraw the Motion, because it had been filed contrary to its own corporate procedures. (Appx. 432). Particularly in this case, MERS was unable to show that a MERS Certifying Officer was in physical possession of the Note at the time the Motion was filed. (Appx. 624).

A final hearing was held on August 19, 2008. (Appx. 650-729). On March 31, 2009, the Bankruptcy Court issued Memorandum Opinions and Orders denying MERS’ motions for relief from stay in Mitchell and two other cases. (Appx. 740-54, 1581-95, 1959-72). In the remaining cases, including the present case, the Bankruptcy Court denied the motions for relief from stay by incorporating the reasoning from the Mitchell Memorandum Opinion. (Appx.46). The Bankruptcy Court held that MERS lacked standing because it was not a real party in interest as required by the Rules. (Appx. 740-54). Specifically, the court found that “[w]hile MERS may have standing to prosecute the motion in the name of its Member as nominee, there is no evidence that the named nominee is entitled to enforce the note or that MERS is the agent of the note’s holder.” (Appx. 753).

The court further held that MERS’ asserted interest as beneficiary under the contract terms did not confer standing because MERS had no actual beneficial interest in the note and, therefore, was not a beneficiary. (Appx. 745-48). MERS now appeals that order asserting that the Bankruptcy Court erred as a matter of law when it determined that MERS may not be a beneficiary under the deeds of trust at issue in the eighteen consolidated cases where the express language of the deeds of trust provide that MERS is the beneficiary. The Trustee continues to assert that MERS lacks standing because it is not a real party in interest. II. Standard of Review

This Court has jurisdiction pursuant to 28 U.S.C. § 158(a) and reviews the Bankruptcy Court’s findings under the same standard that the court of appeals would review a district court’s findings in a civil matter. 28 U.S.C. § 158(c)(2). Therefore, the Court reviews the Bankruptcy Court’s factual findings under a clearly erroneous standard, and conclusions of law de novo. See In re Healthcentral.com, 504 F.3d 775, 783 (9th Cir. 2007); In re First Magnus Fin. Corp., 403 B.R. 659, 663 (D. Ariz. 2009). III. Analysis This appeal arises from eighteen cases in which MERS filed motions for relief from stay in the Bankruptcy Court. In each case, either a party or the Bankruptcy Court raised the issue of whether MERS had standing to bring the motion.

In holding that MERS did not have standing as the real party in interest to bring the motion for relief from stay, the Bankruptcy Court determined that MERS was not a beneficiary in spite of language that designated MERS as such in the Deed of Trust at issue. MERS seeks to overturn the Bankruptcy Court’s determination that it is not a beneficiary. However, the Court must affirm the Bankruptcy Court’s order under the facts presented because MERS failed to present sufficient evidence demonstrating that it is a real party in interest.

A motion for relief from stay is a contested matter under the Bankruptcy Code. See Fed. R. Bankr. P. 4001(a); 9014(c). Bankruptcy Rule 7017 applies in contested matters. Rule 7017 incorporates Federal Rule of Civil Procedure 17(a)(1) which requires that “[a]n action must be prosecuted in the name of the real party in interest.” See also, In re Jacobson, 402 B.R. 359, 365-66 (Bankr. W.D. Wash. 2009); In re Hwang, 396 B.R. 757, 766-67 (Bankr. C.D. Cal. 2008). Thus, while MERS argues the bankruptcy court erred when it determined that MERS was not a beneficiary under the deeds of trust, MERS only has standing in the context of the motion to lift stay under the Rules if it is the real party in interest. See Fed. R. Bankr. P. 7017. Since MERS admits that it does not actually receive or forfeit money when borrowers fail to make their payments, MERS must at least provide evidence of its alleged agency relationship with the real party in interest in order to have standing to seek relief from stay. See Jacobson, 402 B.R. at 366, n.7 (quoting Hwang, 396 B.R. at 767 (“the right to enforce a note on behalf of a noteholder does not convert the noteholder’s agent into a real party in interest”)).

An agent for the purpose of bringing suit is “viewed as a nominal rather than a real party in interest and will be required to litigate in the name of his principal rather than his own name.” Hwang, 396 B.R. at 767. This is particularly important in the District of Nevada where the Local Rules of Bankruptcy Practice require parties to communicate in good faith regarding resolution of a motion for relief from stay before it is In other cases movant did not seek to withdraw the Motion, but similarly produced no evidence that it held the note or acted as the agent of the noteholder. filed. LR 4001(a)(3). The parties cannot come to a resolution if those with a beneficial interest in the note have not been identified and engaged in the communication.

In the context of a motion for relief from stay, the movant, MERS in this case, bears the burden of proving it is a real party in interest. In re Wilhelm, 407 B.R. 392, 400 (Bankr. D. Idaho 2009)(citing In re Hayes, 393 B.R. 259, 267 (Bankr. D.Mass. 2008)(“To have standing to seek relief from the automatic stay, [movant] was required to establish that it is a party in interest and that its rights are not those of another entity”)).

Initially, a movant seeking relief from stay may rely upon its motion. Id. However, if a trustee or debtor objects based upon standing, the movant must come forward with evidence of standing. Id.; Jacobson, 402 B.R. at 367 (requiring movant at least demonstrate who presently holds the note at issue or the source of movant’s authority). Instead of presenting the evidence to the Bankruptcy Court, MERS attempted to withdraw the Motion from the Bankruptcy Court’s consideration, citing the failure of a MERS Certifying Officer to demonstrate that a member was in physical possession of the promissory note at the time the motion was filed.1 The only evidence provided by MERS was a declaration that MERS had been identified as a beneficiary in the deed of trust and that it had been named nominee for the original lender.

Since MERS provided no evidence that it was the agent or nominee for the current owner of the beneficial interest in the note, it has failed to meet its burden of establishing that it is a real party in interest with standing. Accordingly, the order of the Bankruptcy Court must be affirmed. This holding is limited to the specific facts and procedural posture of the instant case. Since the Bankruptcy Court denied the Motion without prejudice nothing prevents Appellant from refilling the Motion in Bankruptcy Court providing the evidence it admits should be readily available in its system. The Court makes no finding that MERS would not be able to establish itself as a real party in interest had it identified the holder of the note or provided sufficient evidence of the source of its authority. IV.

Conclusion

Accordingly, IT IS HEREBY ORDERED that the Order of the Bankruptcy Court entered March 31, 2009 is AFFIRMED. DATED this 4th day of December 2009.

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Indymac Bank F.S.B. v. Yano-Horoski

Posted on November 21, 2009. Filed under: Case Law, Foreclosure Defense, Mortgage Law | Tags: , , , , , , , |

Mortgage and Note voided, cancelled and nullified by the court because lender had acted in bad faith, refusing to negotiate a reasonable loan modification.

______________________________________________________________________________________________

Indymac Bank F.S.B. v Yano-Horoski
2009 NY Slip Op 52333(U)
Decided on November 19, 2009
Supreme Court, Suffolk County
Spinner, J.
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on November 19, 2009

Supreme Court, Suffolk County

Indymac Bank F.S.B., Plaintiff

against

Diana Yano-Horoski, Wells Fargo Bank Minnesota National Association as Trustee for Soundview Home Equity Loan Trust 2001-1 and Kimberly Horoski, Defendants.

2005-17926

Steven J. Baum P.C.

Attorney for Plaintiff

P.O. Box 1291

Buffalo, New York 14240

Diana Yano-Horoski

Defendant Pro Se

8 Oakland Street

East Patchogue, New York 11772-5767

Jeffrey Arlen Spinner, J.

This is an action wherein the Plaintiff claims foreclosure of a mortgage dated August 4, 2004 in the original principal amount of $ 292,500.00 recorded with the Clerk of Suffolk County, New York in Liber 20826 of Mortgages at Page 285. The mortgage secures an adjustable rate note of the same amount with an initial interest rate of 10.375%. The mortgage encumbers real property commonly known as 8 Oakland Street, East Patchogue, Town of Brookhaven, New York and described as District 0200 Section 979.50 Block 05.00 Lot 001.000 on the Tax Map of Suffolk County. Plaintiff commenced this action by filing a Summons, Verified Complaint and Notice of Pendency on July 27, 2005. The Notice of Pendency was extended by Order dated April 28, 2008 and a Judgment of Foreclosure & Sale was granted on January 12, 2009.

Thereafter and in accordance with the Laws of 2008, Ch. 472, Sec. 3-a and in view of the fact that the loan at issue was deemed to be “sub-prime” or “high cost” in nature, Defendant seasonably requested that the Court convene a settlement conference. That request was granted and a conference was commenced on February 24, 2009 which was continued five times in a series of unsuccessful attempts by the Court to obtain meaningful cooperation from Plaintiff. In view of Plaintiff’s intransigence in its continuing failure and refusal to cooperate, both with the Court and with Defendant’s multiple and reasonable requests, the Court directed that Plaintiff produce an officer of the bank at the adjourned conference scheduled for September 22, 2009.

At the conference held on September 22, 2009, Karen Dickinson, Regional Manager of [*2]Loss Mitigation for IndyMac Mortgage Services, division of OneWest Bank F.S.B. (“IndyMac”) appeared on behalf of Plaintiff. IndyMac purports to be the servicer of the loan for the benefit of Deutsche Bank who, it is claimed, is the owner and holder of the note and mortgage (though the record holder is IndyMac Bank F.S.B., an entity which no longer is in existence). At that conference, it was celeritously made clear to the Court that Plaintiff had no good faith intention whatsoever of resolving this matter in any manner other than a complete and forcible devolution of title from Defendant. Although IndyMac had prepared a two page document entitled “Mediation Yano-Horoski” which contained what purported to be a financial analysis, Ms. Dickinson’s affirmative statements made it abundantly clear that no form of mediation, resolution or settlement would be acceptable to Plaintiff. IndyMac asserts the total amount due it to be in excess of $ 525,000.00 and freely concedes that the property securing the loan is worth no more than $ 275,000.00. Although Ms. Dickinson insisted that Ms. Yano-Horoski had been offered a “Forbearance Agreement” in the recent past upon which she quickly defaulted, it was only after substantial prodding by the Court that Ms. Dickinson conceded, with great reluctance, that it had not been sent to Defendant until after its stated first payment due date and hence, Defendant could not have consummated it under any circumstances (Defendant, through Plaintiff’s duplicity, found herself to be in the unique and uncomfortable position of being placed in default of the “agreement” even before she had received it). Plaintiff flatly rejected an offer by Plaintiff’s daughter to purchase the house for its fair market value (a so-called “short sale”) with third party financing. Plaintiff refused to consider a loan modification utilizing any more than 25% of the income of Plaintiff’s husband and daughter (both of whom reside in the premises with her), the excuse being that “We can’t control what non-obligors do with their money” (the logical follow up to this statement is how does the bank control what the obligor does with her money?). The Court found IndyMac’s position to be deeply troubling, especially since a plethora of sub-prime loans in this County’s Foreclosure Conference Part have been successfully modified with the lender’s reliance upon the income of non-obligors who reside in the premises under foreclosure. The Plaintiff also summarily rejected an offer by both Plaintiff’s husband and daughter to voluntarily obligate themselves for payment upon the full indebtedness, thus committing their individual incomes expressly to the purpose of a loan modification. It should be noted here that Defendant did not even request any waiver or “forgiveness” of the indebtedness aside from some tinkering with the interest rate, just a modification of terms so as to enable her to repay the same. It was evident from Ms. Dickinson’s opprobrious demeanor and condescending attitude that no proffer by Defendant (short of consent to foreclosure and ejectment of Defendant and her family) would be acceptable to Plaintiff. Even a final and desperate offer of a deed in lieu of foreclosure was met with bland equivocation. In short, each and every proposal by Defendant, no matter how reasonable, was soundly rebuffed by Plaintiff. Viewed objectively, it is apparent that Plaintiff’s conduct in this matter falls within the definitions set forth in 22 NYCRR § 130-1.1( c)(2), which might well warrant the imposition of monetary sanctions.

On the Court’s own motion, a hearing was held on November 18, 2009 in order to explore the issues herein. At the hearing, Ms. Dickinson appeared as well as Mr. Horoski. IndyMac claimed a balance due, as of September 22, 2009 of $ 527,437.73 which included an escrow overdraft of $ 46,627.88 for taxes advanced since the date of default but did not include attorney’s fees and costs.. Plaintiff was unable to tell the Court the amount of the principal [*3]balance owed. Mr. Horoski advised the Court that according to two letters received from Plaintiff, the principal balance was said to be $ 285,381.70 as of February 9, 2009 and $ 283,992.48 as of August 10, 2009. Plaintiff stated was that Defendant must have made payments though it was conceded that in fact no payment had been made.Plaintiff insisted that it had remained in regular contact with Defendant in an effort to reach an amicable resolution, that it had extended two modification offers to Defendant which she did not accept and further, that due to her financial status she was not qualified for any modification, even under the Federal HAMP guidelines. Plaintiff denied that it had “singled out” Defendants, simply stating that her status was such that she fell outside applicable guidelines. All of these assertions were disputed by Defendant.

That having been said, the Court is greatly disturbed by Plaintiff’s assertions of the amount claimed to be due from Defendant. The Referee’s Report dated June 30, 2008, which has its genesis in a sworn affidavit by a representative of Plaintiff (presumably one with knowledge of the account), reflects a total amount due and owing of $ 392,983.42. The principal balance is reported to be $ 290,687.85 with interest computed at the rates of 10.375% from November 1, 2005 through August 31, 2006 ($ 25,118.62), 12.50% from September 1, 2006 to February 28, 2007 ($ 18,018.66), 12.375% from March 1, 2007 to March 31, 2008 ($ 39,126.39) and 11.375% from April 1, 2008 to June 24, 2008 ($ 7,700.24) totalling $ 89,963.91. Plaintiff also claims $ 20.00 in non-sufficient funds charges, $ 295.00 in property inspection fees and $ 12,016.66 for tax and insurance advances. The Judgment of Foreclosure & Sale dated January 12, 2009 was granted in the amount of $ 392,983.42 with interest at the contract rate from June 24, 2008 through January 12, 2009 and at the statutory rate thereafter plus attorney’s fees of $ 2,300.00 and a bill of costs in the amount of $ 1,705.00. Even computing the accrual of pre-judgment interest of $ 18,299.18 (using Plaintiff’s per diem rate in the Referee’s Report) together with post-judgment interest at a statutory 9% through November 19, 2009 (an additional $ 31,740.90), the application of simple addition yields a total amount due of $ 447,028.50. This figure is $ 80,409.23 less than the $ 527,437.73 asserted by Plaintiff to be due and owing from Defendant. The Court is astounded that Plaintiff now claims to be owed an escrow advance amount of $ 46,627.88 when, under oath, its officer swore that as of June 24, 2008 that amount was actually $ 34,611.22 less. Moreover, it now appears that the elusive principal balance is either $ 290,687.85, $ 285,381.70 or $ 283,992.48.

It is the province and indeed the obligation of the trial court to assess and to determine issues regarding credibility, Morgan v. McCaffrey 14 AD3d 670 (2nd Dept. 2005). In the matter before the Court, the pendulum of credibility swings heavily in favor of Defendant. When the conduct of Plaintiff in this proceeding is viewed in its entirety, it compels the Court to invoke the ancient and venerable principle of “Falsus in uno, falsus in omni” (Latin; “false in one, false in all”) upon Defendant which, after review, is wholly appropriate in the context presented, Deering v. Metcalf 74 NY 501 (1878). Regrettably, the Court has been unable to find even so much as a scintilla of good faith on the part of Plaintiff. Plaintiff comes before this Court with unclean hands yet has the insufferable temerity to demand equitable relief against Defendant.

The Court, over the course of some six substantive appearances in seven months, has been afforded more than ample opportunity to assess the demeanor, credibility and general state [*4]of relevant affairs of Defendant and Plaintiff. Although not actually relevant to the disposition of this matter, the Court is constrained to note that Defendant is afflicted with multiple health problems which outwardly manifest in her experiencing great difficulty in ambulation, necessitating the use of mechanical supports. Moreover, Defendant’s husband, Mr. Gregory Horoski, suffers from a myriad of serious medical conditions which greatly impede most aspects of his daily existence. Nonetheless, both of these persons, together with their adult daughter who resides with them and who is substantially and gainfully employed, receive income which they are more than willing to commit, in good faith, toward repayment of the debt to Plaintiff and indeed, despite their physical challenges, they have appeared at each and every scheduled conference before this Court. At each appearance, they have assiduously attempted to resolve this controversy in an amicable fashion, only to be callously and arbitrarily turned away by Plaintiff. This has been so even in spite of the Court’s continuing albeit futile endeavors at brokering a settlement.

As a relevant aside, the scenario presented here raises the specter of a much greater social problem, that of housing those persons whose homes are foreclosed and who are thereafter dispossessed. It is certainly no secret that Suffolk County is in the yawning abyss of a deep mortgage and housing crisis with foreclosure filings at a record high rate and a corresponding paucity of emergency housing. While foreclosure and its attendant eviction are clearly the inevitable (and in some cases, proper) result in a number of these situations, the Court is persuaded that this need not be the case here. In this matter, Defendant is plainly willing to make arrangements for repayment and both her husband and daughter are likewise willing to allocate their respective incomes in order to reach the same end. Were Plaintiff amenable, she would presumably continue to maintain the property’s physical plant, pay taxes thereon and the property would retain or perhaps increase its market value. Plaintiff would receive a regular income stream, albeit with a reduced rate of interest and without sustaining a loss of several hundred thousand dollars. In addition, no neighborhood blight would occur from the boarding of the property after foreclosure which would, in turn, avert problems of litter, dumping, vagrancy and vandalism as well as a corresponding decline in the property values in the immediate area. In short, a loan modification would result in a proverbial “win-win” for all parties involved. To do otherwise would result in virtually certain undomiciled status for two physically unhealthy persons and their daughter, leading to an additional level of problems, both for them and for society.

Since an action claiming foreclosure of a mortgage is one sounding in equity, Jamaica Savings Bank v. M.S. Investing Co. 274 NY 215 (1937), the very commencement of the action by Plaintiff invokes the Court’s equity jurisdiction. While it must be noted that the formal distinctions between an action at law and a suit in equity have long since been abolished in New York (see CPLR 103, Field Code Of 1848 §§ 2, 3, 4, 69), the Supreme Court nevertheless has equity jurisdiction and distinct rules regarding equity are still extant, Carroll v. Bullock 207 NY 567, 101 NE 438 (1913). Speaking generally and broadly, it is settled law that “Stability of contract obligations must not be undermined by judicial sympathy…” Graf v. Hope Building Corporation 254 NY 1 (1930). However, it is true with equal force and effect that equity must not and cannot slavishly and blindly follow the law, Hedges v. Dixon County 150 US 182, 192 (1893). Moreover, as succinctly decreed by our Court of Appeals in the matter of Noyes v. [*5]Anderson 124 NY 175 (1890) “A party having a legal right shall not be permitted to avail himself of it for the purposes of injustice or oppression…” 124 NY at 179.

In the matter of Eastman Kodak Co. v. Schwartz 133 NYS2d 908 (Sup. Ct., New York County, 1954), Special Term stated that “The maxim of “clean hands” fundamentally was conceived in equity jurisprudence to refuse to lend its aid in any manner to one seeking its active interposition who has been guilty of unlawful, unconscionable or inequitable conduct in the matter with relation to which he seeks relief.” 133 NYS2d at 925, citing First Trust & Savings Bank v. Iowa-Wisconsin Bridge Co. 98 F 2d 416 (8th Cir. 1938), cert. denied 305 US 650, 59 S. Ct. 243, 83 L. Ed. 240 (1938), reh. denied 305 US 676, 59 S Ct. 356 83 L. Ed. 437 (1939); General Excavator Co. v. Keystone Driller Co. 65 F 2d 39 (6th Cir. 1933), cert. granted 289 US 721, 53 S. Ct. 791, 77 L. Ed. 1472 (1933), aff’d 290 US 240, 54 S. Ct. 146, 78 L. Ed. 793 (1934).

In attempting to arrive at a determination as to whether or not equity should properly intervene in this matter so as to permit foreclosure of the mortgage, the Court is required to look at the situattion in toto, giving due and careful consideration as to whether the remedy sought by Plaintiff would be repugnant to the public interest when seen from the point of view of public morality, see, for example, 55 NY Jur. Equity § 113, Molinas v. Podloff 133 NYS2d 743 (Sup. Ct., New York County, 1954). Equitable relief will not lie in favor of one who acts in a manner which is shocking to the conscience, Duggan v. Platz 238 AD 197, 264 NYS 403 (3rd Dept. 1933), mod. on other grounds 263 NY 505, 189 NE 566 (1934), neither will equity be available to one who acts in a manner that is oppressive or unjust or whose conduct is sufficiently egregious so as to prohibit the party from asserting its legal rights against a defaulting adversary, In Re Foreclosure Of Tax Liens 117 NYS2d 725 (Sup. Ct. Kings County, 1952), aff’d on other grounds 286 AD 1027, 145 NYS2d 97 (2nd Dept. 1955), mod. on other grounds on reargument 1 AD2d 95, 148 NYS2d 173 (2nd Dept. 1955), appeal granted 7 AD2d 784, 149 NYS2d 227 (2nd Dept. 1956). The compass by which the questioned conduct must be measured is a moral one and the acts complained of (those that are sufficient so as to prevent equity’s intervention) need not be criminal nor actionable at law but must merely be willful and unconscionable or be of such a nature that honest and fair minded folk would roundly denounce such actions as being morally and ethically wrong, Pecorella v. Greater Buffalo Press Inc. 107 AD2d 1064, 468 NYS2d 562 (4th Dept. 1985). Thus, where a party acts in a manner that is offensive to good conscience and justice, he will be completely without recourse in a court of equity, regardless of what his legal rights may be, Eastman Kodak Co. v. Schwartz 133 NYS2d 908 (Sup. Ct., New York County, 1954), York v. Searles 97 AD 331, 90 NYS 37 (2nd Dept. 1904), aff’d 189 NY 573, 82 NE 1134 (1907).

An objective and painstaking examination of the totality of the facts and circumstances herein leads this Court to the inescapable conclusion that the affirmative conduct exhibited by Plaintiff at least since since February 24, 2009 (and perhaps earlier) has been and is inequitable, unconscionable, vexatious and opprobrious. The Court is constrained, solely as a result of Plaintiff’s affirmative acts, to conclude that Plaintiff’s conduct is wholly unsupportable at law or in equity, greatly egregious and so completely devoid of good faith that equity cannot be permitted to intervene on its behalf. Indeed, Plaintiff’s actions toward Defendant in this matter have been harsh, repugnant, shocking and repulsive to the extent that it must be appropriately [*6]sanctioned so as to deter it from imposing further mortifying abuse against Defendant. The Court cannot be assured that Plaintiff will not repeat this course of conduct if this action is merely dismissed and hence, dismissal standing alone is not a reasonable option. Likewise, the imposition of monetary sanctions under 22 NYCRR § 130-1.1 et. seq. is not likely to have a salubrious or remedial effect on these proceedings and certainly would not inure to Defendant’s benefit. This Court is of the opinion that cancellation of the indebtedness and discharge of the mortgage, when taken together, constitute the appropriate equitable disposition under the unique facts and circumstances presented herein.

After careful consideration, it is the determination of this Court that the indebtedness evidenced by the Adjustable Rate Note dated August 4, 2004 in the original principal amount of $ 292,500.00 made by Diana J. Yano-Horoski in favor of IndyMac Bank F.S.B. should be cancelled, voided and set aside. In addition, the Mortgage which secures the Adjustable Rate Note, given to Mortgage Electronic Registration Systems Inc. As Nominee For IndyMac Bank F.S.B. dated August 4, 2004 and recorded with the Clerk of Suffolk County on August 16, 2004 in Liber 20826 of Mortgages at Page 285, as assigned by Assignment recorded with the Clerk of Suffolk County in Liber 21273 of Mortgages at Page 808 should be cancelled and discharged of record. Further, Plaintiff, its successors and assigns should be forever barred and prohibited from any action to collect upon the Adjustable Rate Note. In addition, the Judgment of Foreclosure & Sale granted on January 12, 2009 and entered on January 23, 2009 should be vacated and set aside and the Notice of Pendency should be cancelled and discharged of record. For this Court to decree anything less than the foregoing would be for the Court to be wholly derelict in the performance of its obligations.

Upon the Court’s own motion, it is

ORDERED that the Adjustable Rate Note in the amount of $ 292,500.00 dated August 4, 2004 made by Diana J. Yano-Horoski in favor of IndyMac Bank F.S.B. shall be and the same is hereby cancelled, voided, avoided, nullified, set aside and is of no further force and effect; and it is further

ORDERED that the Mortgage in the amount of $ 292,500.00 which secures said Adjustable Rate Note given by Diana J. Yano-Horoski to Mortgage Electronic Registration Systems Inc. As Nominee For IndyMac Bank F.S.B. dated August 4, 2004 and recorded with the Clerk of Suffolk County on August 16, 2004 in Liber 20826 of Mortgages as Page 285, as assigned to IndyMac Bank F.S.B. by Assignment recorded with the Clerk of Suffolk County in Liber 21273 of Mortgages at Page 808 shall be and the same is hereby vacated, cancelled, released and discharged of record; and it is further

ORDERED that the Plaintiff, its successors and assigns are hereby barred, prohibited and foreclosed from attempting, in any manner, directly or indirectly, to enforce any provision of the [*7]aforesaid Adjustable Rate Note and Mortgage or any portion thereof as against Defendant, her heirs or successors; and it is further

ORDERED that the Judgment of Foreclosure & Sale granted under this index number on January 12, 2009 and entered in the Office of the Clerk of Suffolk County on January 23, 2009 shall be and the same is hereby vacated and set aside; and it is further

ORDERED that the Notice of Pendency filed with the Clerk of Suffolk County on July 27, 2005 under sequence no. 172456, which was extended by Order dated September 2, 2008 shall be and the same is hereby cancelled, vacated and set aside; and it is further

ORDERED that the Notice of Pendency filed with the Clerk of Suffolk County on August 29, 2008 under sequence no. 199616, shall be and the same is hereby cancelled, vacated and set aside; and it is further

ORDERED that the Clerk of Suffolk County shall cause a copy of this Order & Judgment to be filed in the Land Records so as to effectuate of record each and every one of the provisions hereinabove set forth with respect to cancellation of the instruments and items of record; and it is further

ORDERED that Plaintiff shall pay to the Clerk of Suffolk County, within ten (10) days from the date of entry hereof, any and all fees and costs required to effect cancellation of record of the Mortgage, Notices of Pendency and any other fees so levied; and it is further

ORDERED that within ten (10) days of the date of entry hereof, Plaintiff’s counsel shall serve a copy of this Order upon the Clerk of Suffolk County and the Defendant.

This shall constitute the Decision, Judgment and Order of this Court.

Dated: November 19, 2009

Riverhead, New York

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FDIC Says Mortgages Retain Risk-Weight After HAMP

Posted on November 13, 2009. Filed under: Bailout, Legislation, Loan Modification | Tags: , , |

The federal bank and thrift regulatory agencies issued a final rule that mortgage loans modified under the Home Affordable Modification Program (HAMP) retain the risk weight appropriate to the loan before modification.

Under HAMP, the US Treasury Department allocates funds to participating servicers for the modification of loans on the verge of foreclosure.

The final rule (available to download here) clarifies loans currently in the HAMP three-month trial period before reaching permanency qualify for the risk-based capital treatment.

Under the agencies’ general risk-based capital rules, loans that are fully secured by first liens and meet certain criteria are risk-weighted at 50%, referring to how much a risk a bank takes on and ultimately how much it could get back if the loan defaults.

After comments from banking organizations, the agencies modified the rule to specify that a mortgage originally risk weighted at 50% and has either entered a HAMP trial or even reached a permanent modification will keep the 50% risk weight.

And past due and nonaccrual loans that receive a 100% risk weight can return to a 50% risk weight if the borrower demonstrates he or she can make the new payments over a “sustained period of time.” However, the agencies have not established the specific time frame because of varying borrower characteristics.

via FDIC Says Mortgages Retain Risk-Weight After HAMP : HousingWire || financial news for the mortgage market.

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Fannie Mae to rent out homes instead foreclosing

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

Fannie Mae to rent out homes instead foreclosing

By ALAN ZIBEL (AP) – 4 hours ago

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

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

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

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

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

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

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

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

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

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

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

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

Published: October 24, 2009

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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IN RE DARRELL ROYCE SHERIDAN, SHERRY ANN SHERIDAN, Chapter 7 Debtors.

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

Sheridan_decision

In this Chapter 7 case, the trustee, Ford Elsaesser (“Trustee”), objects to amotion under § 362(d) for relief from the § 362(a) automatic stay.1 Motions under § 362(d) are common in bankruptcy cases.2 Most stay relief requests proceed promptly to entry of an order, after proper notice, without any objection.

However, changes in mortgage practices over the past several years have created a number of new issues. The one highlighted in this case is the standing of the moving creditor. Serial assignments of the mortgagee’s interest(s) and the securitization of mortgages have complicated what was previously a generally straight-forward standing analysis. Though many creditors provide in their motions adequate explanation and documentation of their standing to seek relief on real estate secured debts, Trustee challenges the adequacy of the subject motion in this case.

Following hearing and consideration of the arguments of the parties, the Court determines that Trustee’s objection is well taken and the same will be sustained. The motion for stay relief will be denied.

BACKGROUND AND FACTS

On June 24, 2008, Darrell and Sherry Ann Sheridan (“Debtors”) filed their joint chapter 7 bankruptcy petition, schedules and statements. They scheduled a fee ownership interest in a residence located in Post Falls, Idaho. See Doc. No. 1 at sched. A (the “Property”). Debtors asserted the Property’s value was $225,000.00. Id. They indicated secured claims existed in favor of “Litton Loan Servicing” ($197,000.00) and “Citimortgage” ($34,000.00). Id. at sched. D.

While this left no apparent equity in the Property, Debtors nevertheless claimed the benefit of an Idaho homestead exemption. Id. at sched. C.4

Sheridan_decision

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