Panic Time for Banks: "Auction" Sales Were Faked — REO Title Invalid

EDITOR’S ANALYSIS: It has been the theme on these pages that the loan deals, if you look at the money trail, was strictly between the investors and the homeowners. The investors (pension funds etc.) were the lenders and the homeowners were the borrowers. Logically it follows that if there was a true default, the investors should make the claim.

A few years ago and even continuing into the present, the banks and servicers denied the existence or involvement of the investors. Most now concede that an investor group is the source of funding on nearly all the loans.

In 2008, when I asked a few hundred servicers to provide documentation as to ownership of the loan and a full accounting of the debt alleged to be due or in default, most of the answers were a complete denial that investors were in the mix. As “holder” of the loan, the banks and servicers claimed that they could foreclose in their own names. I contended that a stranger to the transaction could not go to an an auction of foreclosed property and submit a “credit bid” if they were not the creditor.

The defect in the argument of the banks and servicers was that they may have had a colorable right under some agency agreement to initiate foreclosure proceedings but ONLY the CREDITOR can submit a credit bid at the auction. Research your state statutes. They are all very clear. Instead these banks and servicers bid the properties in for themselves as though they were the mortgagee — when in fact they were not even mentioned in the mortgage.

I also asked a few hundred banks and servicers the same question, and found that they had no documentation at all unless the loan was already in foreclosure. I concluded that the paperwork that seem to arise when the case was in litigation, did not exist UNLESS there was litigation.

The documentation, the procedures for sales or securitization of a loan had not actually occurred and that the claims of securitization were a hoax perpetrated first on the investors whose money was used indiscriminately for bank fees and then dribbled out into funding toxic loans whose future was certain — foreclosure.

Looking at the myriad of cases in foreclosure, and especially at non-judicial states where court review was absent, it was apparent that the investors were not interested in pursuing the foreclosures because they did not want to get into a position where they asserted themselves to be holders in due course. Alleging HDC status would put them in the position of lying about the transfer of the loans, which never happened, and subjecting themselves to defenses, affirmative defenses, and counterclaims for predatory and deceptive lending. So the investors decided to go after the banks that sold them bogus mortgage bonds under false pretenses, alleging everything that borrowers were alleging — defective origination documentation and underwriting and the failure to follow the requirements of the pooling and servicing agreement, which in turn only followed the requirements of the Internal Revenue Code applied to Real Estate Mortgage Investment Conduits (if they wanted favorable tax treatment).

This left a void. A debt had been created by the acceptance of the loan. The debt was owed by the homeowner as borrower to the investors as lenders. But the lenders were not interested in seeking collection against homeowners. In many cases (more than 50%) the investor pool had been settled and scuttled anyway.

Thus arose the void in which anyone could pursue collection and foreclosure knowing that the borrower had allegedly failed to make payments, knowing that the investors would not cry foul, and knowing that the full accounting would show a very different picture of the status of the loans after credit was applied for payments  through servicers, insurers,  counterparties in credit default swaps, and the intermingling of money between tranches in the same pool.

Banks and servicers and other companies like MERS started collection and foreclosure procedures in their own name, submitting what are now known as false declarations contained in fabricated documents, forged by persons employed by the banks and servicers with no knowledge of the contents, or the truth of the contents of the documents they were signing. And of course there were the thousands of notary attestations that made it all look neat and proper.

The fact that the claims were total lies didn’t make a difference. The banks and servicers directed the narrative to the fact that the borrower had not made a payment (instead of whether a payment was due and if so, to whom). They further directed attention to the documents being submitted by these strangers to the mortgage transaction. They successfully inserted themselves into documents without permission from either the borrower or the lender based upon a ruse that escaped the attention of the courts. Many pro se borrowers and lawyers who represented borrowers missed the key factor of following the money trail. Thus they missed the fact that the documents were, by definition, false.

Now we have yet another audit which is being referred for criminal prosecution in San Francisco County. Here they did a survey of recent foreclosures which means that the parties involved had full knowledge that the documentation was false and the auction was faked.

More importantly, they found that 45% of 400 cases independently examined for the recording office, show that the property was sold on a credit bid without cash to a bidder who was not a creditor under the mortgage loan documents. That means the deeds issued in nearly half of the cases reviewed are invalid and that the homeowner who was supposedly foreclosed and evicted, still owns the home and is not subject to foreclosure unless the real creditor steps forward and the real debt is subject to a full accounting, after credits from payments from all parties.

The rest of the San Francisco loans were “suspicious” which means that if you scratch the surface, you will find that the rest of the loans suffered from the same same fatal defect. And all of this means that those who either purchased or loaned money on the purchase of REO homes were buying thin air and if they look carefully at their title policies they will see language that absolves the title company of liability for claims by the homeowner to reclaim title and possession of the property. This scenario is identical across the country.

That this is criminal behavior and should be punished as such goes without saying. My concern is how do we fix the massive title problem created by this widespread fraud? It isn’t enough that the victims of this fraud be compensated in money. Unless the homeowner actually ratifies the transaction in a recordable instrument, the foreclosure sale is void. Any new buyer owns nothing. Any new lender has no collateral. And nobody taking title from such an REO buyer or REO lender is getting actual title — a fatal defect that strips the buyer of any right to claim title or possession of the home they just paid good money for.

Which brings us to the narrative that these are victimless crimes because the foreclosure should have happened anyway. That is a flat out lie.

If proper procedures had been followed, the borrower would have been informed of all the parties that were involved in the funding of the loan, that the loan origination documents contained material misstatements of fact and material omissions of fact, the knowledge of which would have led any reasonable person to reject the deal.Even after the deal, the average homeowner seeking modification or settlement would have had a strong hand to play thus making it more likely that the millions of foreclosures would and still should be converted into modifications and settlements.

Certainly the investors would also have rejected the deal if they knew the facts and they certainly do not ratify the “sale”or “transfer” of toxic loans in default into pools where only a performing loan underwritten in accordance with industry standards was acceptable, and where the loans must be in the pool within the 90 day cut-off period. The investors were not sold high risk investments. They were sold Triple A rated insured investments. They just didn’t know the insurance was paid to the banks and servicers instead of the creditors (investors) who actually advanced the money for the loans.

None of this means that you can use news reports to show the Judge and expect a Judge a throw out the foreclosure, declare you the winner and invalidate the mortgage, the note and the obligation. You still must prove your case. But it is now easier to do so. By pointing to multiple incidents and indictments in the public domain, the job of convincing the Judge that you should be permitted to inquire as to whether the right party is suing for the right amount and you should be permitted to inquire into whether the foreclosure “sale” was a legal sale. If it wasn’t a legal sale, then title didn’t change hands. And if title didn’t change hands, the eviction that happened, or that is threatened must be thrown out.

There is very little discretion on the part of the trial judge to prevent you from proving claims that have at least some credibility. Once the process of discovery starts, the banks and servicers back off 100% of the time unless they think you will quit from exhaustion or lack of money. Beware of the settlements that will become easier and easier to get. You are settling with thieves who have no interest in the loan — but if they are offering something that is irresistible, by all means get court approval for the settlements that includes quieting title so that the homeowner is not subject to multiple liability. After all, we don’t know how many times and under how many guises the same loan was sold, insured or the subject of third party payments.

Quelle Surprise! San Francisco Assessor Finds Pervasive Fraud in Foreclosure Exam (and Paul Jackson Defends His Meal Tickets Yet Again)

by Yves Smith, NakedCapitalism.com

One of our big beefs about the pending mortgage settlement has been the failure of prosecutors and regulators to do anything remotely resembling serious investigations. You don’t settle on known, easy to prove abuses (particularly when you choose not to know their extent) and leave yourself with a grab bag of mainly more difficult to ferret out ones to consider going after later.

We’ve seen repeatedly that small scale investigations in the servicing and foreclosure arena have found widespread problems. For instance, one by Abigail Field of foreclosures in two counties in New York found a complete fail by Countrywide of transferring notes to trusts in its own securitizations. Registers of deeds Jeff Thingpen in Guiford County, North Carolina found widespread evidence of robosigning. John O’Brien of Southern Essex County, Massachusetts, conducted an audit and found, per Dave Dayen:

‘• Only 16% of assignments of mortgage are valid
• 75% of assignments of mortgage are invalid.
• 9% of assignments of mortgage are questionable
• 27% of the invalid assignments are fraudulent, 35% are “robo-signed” and 10% violate the Massachusetts Mortgage Fraud Statute.
• The identity of financial institutions that are current owners of the mortgages could only be determined for 287 out of 473 (60%)
• There are 683 missing assignments for the 287 traced mortgages, representing approximately $180,000 in lost recording fees per 1,000 mortgages whose current ownership can be traced.

So the latest report from San Francisco county should come as no surprise. From Gretchen Morgenson of the New York Times, emphasis ours:

An audit by San Francisco county officials of about 400 recent foreclosures there determined that almost all involved either legal violations or suspicious documentation, according to a report released Wednesday….

The improprieties range from the basic — a failure to warn borrowers that they were in default on their loans as required by law — to the arcane. For example, transfers of many loans in the foreclosure files were made by entities that had no right to assign them and institutions took back properties in auctions even though they had not proved ownership.

Yves here. I wish Morgenson had not deemed the latter abuses as “arcane”. They are actually pretty basic to lawyers – you can’t assign rights you don’t possess or sell what you don’t own. And these are concepts that laypeople can grasp readily. Back to the article, which makes clear the state attorney general Kamala Harris, who was doing a victory lap over the mortgage settlement, had nothing to do with this probe:

Commissioned by Phil Ting, the San Francisco assessor-recorder, the report examined files of properties subject to foreclosure sales in the county from January 2009 to November 2011. About 84 percent of the files contained what appear to be clear violations of law, it said, and fully two-thirds had at least four violations or irregularities…

As the San Francisco analysis points out, “the settlement does not resolve most of the issues this report identifies nor immunizes lenders and servicers from a host of potential liabilities.” For example, it is a felony to knowingly file false documents with any public office in California.

In an interview late Tuesday, Mr. Ting said he would forward his findings and foreclosure files to the attorney general’s office and to local law enforcement officials. Kamala D. Harris, the California attorney general, announced a joint investigation into foreclosure abuses last December with the Nevada attorney general, Catherine Cortez Masto. The joint investigation spans both civil and criminal matters.

The depth of the problem raises questions about whether at least some foreclosures should be considered void, Mr. Ting said. “We’re not saying that every consumer should not have been foreclosed on or every lender is a bad actor, but there are significant and troubling issues,” he said…

In a significant number of cases — 85 percent — documents recording the transfer of a defaulted property to a new trustee were not filed properly or on time, the report found. And in 45 percent of the foreclosures, properties were sold at auction to entities improperly claiming to be the beneficiary of the deeds of trust. In other words, the report said, “a ‘stranger’ to the deed of trust,” gained ownership of the property; as a result, the sale may be invalid, it said.

In 6 percent of cases, the same deed of trust to a property was assigned to two or more different entities, raising questions about which of them actually had the right to foreclose. Many of the foreclosures that were scrutinized showed gaps in the chain of title, the report said, indicating that written transfers from the original owner to the entity currently claiming to own the deed of trust have disappeared.

While Phil Ting is optimistic that there will be follow through and action, one can easily reach the opposite conclusion. First, the intent of the settlement is to collect money, impose new servicing standards, which like past servicing standards will not be met, and also go after some additional cases with great fanfare to create the impression that the officialdom is Doing Something. The goal is to preserve the system, based on the deeply flawed premise that all that is needed is yet another consent decree and more serious looking fines and servicers will toe the line.

But look at the report findings. Almost no foreclosures were conducted properly. One cause is the issue we have been writing about for nearly two years: the failure of the parties to the original securitization to convey notes properly to the securitization trusts. That failure can’t be remedied at this late date, so the only way to create the appearance that the trust has the right to foreclose is either by filing improper documents and hoping no one notices, or document fabrication and forgeries.

The second is that servicers can’t afford to meet the servicing standards set forth in the consent decrees. They’d go bankrupt. Various regulators have been promulgating the same standards since the FTC consent decree with Fairbanks in 2003, and the industry has NEVER been able to meet them. Enforcement is lax, and violations are simply rolled into new consent decrees. See this, for example, this announcement from the Office of the Comptroller of the Currency last week:

In the agreements in principle struck by the OCC with these mortgage servicers, the servicers do not contest the OCC’s ability to impose penalties aggregating $394 million, and the OCC agrees to hold in abeyance imposition of such penalties provided the servicers make payments and take other actions under the federal-state settlement with a value equal to at least the penalty amounts that each servicer acknowledges that the OCC could impose.

I also have to note that Paul Jackson of Housing Wire has attacked the Morgenson piece on Twitter, attempting to smear the authors of the underlying report and accusing Morgenson of sloppy fact checking. Jackson (pjackson) has put up a manic 17 tweets. That’s a cowardly way to take issue with a piece, but this approach allows him to make various ad hominem salvos when a putting them in a more conventional format would expose that he has no substantive argument. His efforts to attack the report’s authors don’t really land a blow.