Foreclosure Fraud: It's Worse Than You Think

There has been plenty of pontificating over the ramifications of foreclosure freezes on troubled borrowers, foreclosure buyers and the larger housing market, not to mention lawsuits, investor losses and bank write downs. There has been precious little talk of what the real legal issues are behind the robosigning scandal. Yes, you can't/shouldn't sign documents you never read, but that's just the tip of the iceberg. The real issue is ownership of these loans and who has the right to foreclose. By the way, despite various comments from the Obama administration, foreclosures are governed by state law. There is no real federal jurisdiction.

A source of mine pointed me to a recent conference call Citigroup had with investors/clients. It featured Adam Levitin, a Georgetown University Law professor who specializes in, among many other financial regulatory issues, mortgage finance. Levitin says the documentation problems involved in the mortgage mess have the potential "to cloud title on not just foreclosed mortgages but on performing mortgages."

The issues are securitization, modernization and a whole lot of cut corners. Real estate law requires real paper transfer of documents and titles, and a lot of the system went electronic without much regard to that persnickety rule. Mortgages and property titles are transferred several times in the process of a home purchase from originators to securitization sponsors to depositors to trusts. Trustees hold the note (which is the IOU on the mortgage), the mortgage (the security that says the house is collateral) and the assignment of the note and security instrument.

Again, all the issues are matters of which nameless bureaucrat signed which papers, the “right” nameless bureaucrat or the “wrong” one. In 23 states a notary is required (nice "mandated" income for notaries) and the rest of the states it is not required. Even so, the banks volunteered to pull back all their recent foreclosures with documents that weren't notarized, even though they were not required to do so in most states. Many of the other issues are germane to some states but not to all.

What NO ONE has shown is that in all the foreclosures in this current fiasco, were ANY in fact “fraudulent” because the buyers were NOT in fact in egregious default on their mortgage? From everything I have read so far, that answer is NO. So, was their paperwork errors? Yes. BUT, the financial grounds for foreclosure seem to be there in these cases. So, at the end of the day, at most, ALL the same foreclosures WILL BE refiled with all their I's dotted and t's crossed and NOTHING about the financial particulars - the heart of the issue in foreclosure, will have changed; other than the time wasted to get these houses back on the market.

People spouting your line - ie, “don’t know of any such cases” - it is because you’ve all been wandering around, deliberately ignorant. You haven’t seen the cases because you don’t want to pay attention.

So pay attention.

I’ll give you just two cases of foreclosure on paid-off properties.

In the first case, we have a man who bought a house that had previously been foreclosed. He paid CASH. Got that? There was NO mortgage on the property. He paid CASH.

Yet, guess what he gets? Foreclosed and the property sold.

http://www.sun-sentinel.com/business/fl-wrongful-foreclosure-0922-20100921,0,36776.story

Second case of foreclosure on a paid-off house, out of Arizona:

http://www.kvoa.com/news/bank-admits-mistake-on-willcox-home-foreclosure/

Here’s their legal complaint:

http://www.scribd.com/doc/37804326/Newman-v-Bank-of-America-N-A-Complaint

As you can see, BofA can’t find their ass with either or both hands. They have no clue what their doing with that property. Part of BofA wants to foreclose, the other part wants to assist. Neither can seem to get the clue that BofA has no interest in the property, nor any claim.

Next case: Another Florida case, this time a house going into foreclosure. The deadbeat is fighting it in court, as is their right. During this contest in court, the judge discovers that there is a second foreclosure claim being put forward in another court in Florida. Same bank, different law firm, same amount, different court.

Foreclosure claim #1:

http://www.scribd.com/doc/30586881/Note-One-See-4closurefraud-org-for-Details

Foreclosure claim #2:

http://www.scribd.com/doc/30586720/Note-Two-See-4closurefraud-org-for-Details

Both of these are for the same lender, but they’re being brought by different law firms for said lender (JP Morgan).

If the timeframes were slightly different, and one foreclosure succeeded and the property was sold while the other foreclosure action hung fire, you’d get a repeat of the case where a guy paid cash and then gets a foreclosure notice.

So-called “conservatives” who keep harping on the deadbeat, here’s a bit of advice:

Try and think just a little further than the possibility of someone getting a free house. Y’all have your veins standing up on your necks, thinking about the possibility of some deadbeat getting away with a free house by legal connivance. Get over yourselves. That’s the LEAST of our problems right now.

Think about the consequences of hundreds of thousands of compromised titles, or buyers buying property without title insurance as the title insurers back away from this mess. Old Republic has already refused to write new policies on foreclosures by GMAC/Ally as of two weeks ago.

THAT is the biggest issue I see going forward. That’s an example of what happens when the paperwork has been so completely bungled that the banks cannot issue a quiet title on a property. If there is a real possibility of non-quiet title, investors back the hell away from foreclosed properties in a hurry. All it takes is a legal dispute over the claims to the property, or some lender comes forward with a claim of an unpaid debt attached to the property, and an investor can go into the tank hiring lawyers to get this crap straightened out.

The reason why the banks are doing this is because they’re trying to save their own skins. They know they didn’t property assign the paperwork on properties. They know (quietly, amongst themselves) that they’ve in effect turned a whole bunch of asset-backed securities into unsecured debt... and as soon as the lawyers representing the buyers of said now-unsecured debt get traction, the banks are going to have to take back truckloads of that compromised debt. This will sink their books. They can’t afford to take back that paper. And there’s some very powerful forces out there on the other end of this now-unsecured paper: Fannie/Freddie (ie, Uncle Sam) and the Federal Reserve.

If the Fed decides that there’s losses in the $1.2 Trillion of residential mortgage backed securities that are now on the Fed’s balance sheet that are the result of shoddy paperwork, do we think that the Fed is going to put up with it?

Heh. Heh.

No.

If the Fed wants, they can bring forces to bear on an offending bank that Uncle Sugar can only dream of. The Fed will get their way.

Hence the pell-mell rush to ram these foreclosures through.

Well, too bad, so sad, the jig is now up. The turds are hitting the turbine blades, and the result isn’t pretty.

The biggest problem they have isn’t the foreclosure. The deadbeats can be foreclosed upon today, tomorrow or next week. Most of them ain’t gonna start paying anytime soon, so they’ll keep.

The issue of what the investors in the crap paper are finding out is the most serious issue, followed by the frauds committed upon the courts. The investors are going to discover that they’ve been scammed, and not a little bit, and the put-backs will start. The banks don’t have the money to survive a large number of put-backs.

Who is going to demand these put-backs? FHA, Fannie/Freddie, pension funds, other banks. In other words, people with money. How big is the issue?

It ain’t a few isolated cases:

http://www.businessinsider.com/bank-of-america-mortgage-report-2010-10

That’s just BofA.

Then there’s the fraud issue. The numbers of fraudulent affidavits is not small. JP Morgan is reviewing over 110,000 foreclosure affidavits. We’re talking 10’s of thousands of fraudulent affidavits that will have to be withdrawn, and then, if the courts and AG’s decide to do so, they’ll go back and examine foreclosures already done based on fraudulent affidavits. A judicial decision of foreclosure can be vacated upon appeal if the appellant has evidence that the judge was making a decision based upon a fraudulent affidavit. There’s plenty of fraudulent affidavits around. This means that people who are buying previously foreclosed properties might have titles that need remediation to quiet them. That will cost investors in foreclosed properties some money.

That the majority of these cases involve a person who has defaulted on the loan isn’t in doubt. But that’s the small issue now. That’s simple, straightforward and easy to fix: produce the correct documentation, with true affidavits and proceed with a foreclosure. You can’t foreclose with a fraudulent affidavit and expect it to stick when appealed.

The missing paperwork may not be that easy to fix, however. The banks have, in some cases, destroyed the paper that they need to foreclose. Deliberately. They wanted only one “copy” of a mortgage in their system, so they made an electronic copy in MERS and destroyed the original(s).

Trouble is, in some states they needed those original documents. That’s what the state law requires. Should they have read the state law before creating MERS? Of course. DId they? From what I’m seeing, they obviously didn’t. And to top this off, now many county clerks are realizing they’ve been gypped out of a ton of recording fees by MERS (and this avoidance of recording on physical paper and the required fees was sold as one of MERS’ benefits)... and guess what most counties in the US would like right now? More money. I’m guessing that some county clerks and recorders start to go after banks to do physical recording and pay the fees. They should.

JP Morgan was one of the founders, if you will, of MERS. They’ve let it slip that they’ve ceased to use it - because it simply leads to more problems.

As to the RMBS securities: There are types of securities into which residential mortgages are put that you cannot clear up these types of paperwork mistakes (or more likely, outright omissions) easily. eg, REMICs.

What most people here are just not “getting” is that this is a two or three-sided problem. There are deadbeat homeowners... that’s seems to be the only part that too many conservatives want to understand.

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