Don’t Admit the Default

Kudos again to Jim Macklin for sitting in for me last night. Excellent job — but don’t get too comfortable in my chair :). Lots of stuff in another mini-seminar packed into 28 minutes of talk.

A big point made by the attorney guest Charles Marshall, with which I obviously agree, is don’t admit the default in a foreclosure unless that is really what you mean to do. I have been saying for 8 years that lawyers and pro se litigants and Petitioners in bankruptcy proceedings have been cutting their own throats by stating outright or implying that the default exists. It probably doesn’t exist, even though it SEEMS like it MUST exist since the borrower stopped paying.

There is not a default just because a borrower stops paying. The default occurs when the CREDITOR DOESN’T GET PAID. Until the false game of “securitization started” there was no difference between the two — i.e., when the borrower stopped paying the creditor didn’t get paid. But that is not the case in 96% of all residential loan transactions between 2001 and the present. Today there are multiple ways for the creditor to get paid besides the servicer receiving the borrower’s payment. the Courts are applying yesterday’s law without realizing that today’s facts are different.

Whether the creditor got paid and is still being paid is a question of fact that must be determined in a hearing where evidence is presented. All indications from the Pooling and Servicing Agreements, Distribution Reports, existing lawsuits from investors, insurers, counterparties in other hedge contracts like credit default swaps — they all indicate that there were multiple channels for payment that had little if anything to do with an individual borrower making payments to the servicer. Most Trust beneficiaries get paid regardless of whether the borrower makes payment, under provisions of the PSA for servicer advances, Trustee advances or some combination of those two plus the other co-obligors mentioned above.

Why would you admit a default on the part of the creditor’s account when you don’t have access to the money trail to identify the creditor? Why would you implicitly admit that the creditor has even been identified? Why would you admit a payment was due under a note and mortgage (or deed of trust) that were void front the start?

The banks have done a good job of getting courts to infer that the payment was due, to infer that the creditor is identified, to infer that the payment to the creditor wasn’t received by the creditor, and to infer that the balance shown by the servicer and the history of the creditor’s account can be shown by reference only to the servicer’s account. But that isn’t true. So why would you admit to something that isn’t true and why would you admit to something you know nothing about.

You don’t know because only the closing agent, originator and all the other “securitization” parties have any idea about the trail of money — the real transactions — and how the money was handled. And they are all suing the broker dealers and each other stating that fraud was committed and mismanagement of the multiple channels of payments received for, or on behalf of the trust or trust beneficiaries.

In the end it is exactly that point that will reach critical mass in the courts, when judges realize that the creditor has no default in its business records because it got paid — and the foreclosure by intermediaries in the false securitization scheme is a sham.

In California the issue they discussed last night about choice of remedies is also what I have been discussing for the last 8 years, but I must admit they said it better than I ever did. Either go for the money or go for the property — you can’t do both. And if you  elected a remedy or assumed a risk, you can’t back out of it later — which is why the point was made last night that the borrower was a third party beneficiary of the transaction with investors which is why it is a single transaction — if there is no borrower, there wold be no investment. If there was no investment, there would have been no borrower. The transaction could not exist without both the investor and the borrower.

Bravo to Jim Macklin, Dan Edstrom and Charles Marshall, Esq. And remember don’t act on these insights without consulting with a licensed attorney who knows about this area of the law.

Foreclosures on Nonexistent Mortgages

I have frequently commented that one of the first things I learned on Wall Street was the maxim that the more complicated the “product” the more the buyer is forced to rely on the seller for information. Michael Lewis, in his new book, focuses on high frequency trading — a term that is not understood by most people, even if they work on Wall Street. The way it works is that the computers are able to sort out buy or sell orders, aggregate them and very accurately predict an uptick or down-tick in a stock or bond.

Then the same investment bank that is taking your order to buy or sell submits its own order ahead of yours. They are virtually guaranteed a profit, at your expense, although the impact on individual investors is small. Aggregating those profits amounts to a private tax on large and small investors amounting to billions of dollars, according to Lewis and I agree.

As Lewis points out, the trader knows nothing about what happens after they place an order. And it is the complexity of technology and practices that makes Wall Street behavior so opaque — clouded in a veil of secrecy that is virtually impenetrable to even the regulators. That opacity first showed up decades ago as Wall Street started promoting increasing complex investments. Eventually they evolved to collateralized debt obligations (CDO’s) and those evolved into what became known as the mortgage crisis.

in the case of mortgage CDO’s, once again the investors knew nothing about what happened after they placed their order and paid for it. Once again, the Wall Street firms were one step ahead of them, claiming ownership of (1) the money that investors paid, (2) the mortgage bonds the investors thought they were buying and (3) the loans the investors thought were being financed through REMIC trusts that issued the mortgage bonds.

Like high frequency trading, the investor receives a report that is devoid of any of the details of what the investment bank actually did with their money, when they bought or originated a mortgage, through what entity,  for how much and what terms. The blending of millions of mortgages enabled the investment banks to create reports that looked good but completely hid the vulnerability of the investors, who were continuing to buy mortgage bonds based upon those reports.

The truth is that in most cases the investment banks took the investors money and didn’t follow any of the rules set forth in the CDO documents — but used those documents when it suited them to make even more money, creating the illusion that loans had been securitized when in fact the securitization vehicle (REMIC Trust) had been completely ignored.

There were several scenarios under which property and homeowners were made vulnerable to foreclosure even if they had no mortgage on their property. A recent story about an elderly couple coming “home” to find their door padlocked, possessions removed and then the devastating news that their home had been sold at foreclosure auction is an example of the extreme risk of this system to ALL homeowners, whether they have or had a mortgage or not. This particular couple had paid off their mortgage 15 years ago. The bank who foreclosed on the nonexistent mortgage and the recovery company that invaded their home said it was a mistake. Their will be a confidential settlement where once again the veil of secrecy will be raised.

That type of “mistake” was a once in a million possibility before Wall Street directly entered the mortgage loan business. So why have we read so many stories about foreclosures where there was no mortgage, or was no default, or where the mortgage loan was with someone other than the party who foreclosed?

The answer lies in how these properties enter the system. When a bank sells its portfolio of loans into the system of aggregation of loans, they might accidentally or intentionally include loans for which they had already received full payment. Maybe they issued a satisfaction maybe they didn’t. It might also include loans where life insurance or PMI paid off the loan.

Or, as is frequently the case, the “loan” was sold after the homeowner was merely investigating the possibility of a mortgage or reverse mortgage. As soon as they made application, since approval was certain, the “originator” entered the data into a platform maintained by the aggregator, like Countrywide, where it was included in some “securitization package.

If the loan closed then it was frequently sold again with the new dates and data, so it would like like a different loan. Then the investment banks, posing as the lenders, obtained insurance, TARP, guarantee proceeds and other payments from “co-obligors” on each version of the loan that was sold, thus essentially creating the equivalent of new sales on loans that were guaranteed to be foreclosed either because there was no mortgage or because the terms were impossible for the borrower to satisfy.

The LPS roulette wheel in Jacksonville is the hub where it is decided WHO will be the foreclosing party and for HOW MUCH they will claim is owed, without any allowance for the multiple sales, proceeds of insurance, FDIC loss sharing, actual ownership of the loans or anything else. Despite numerous studies by those in charge of property records and academic studies, the beat goes on, foreclosing by entities who are “strangers to the transaction” (San Francisco study), on documents that were intentionally destroyed (Catherine Ann Porter study at University of Iowa), against homeowners who had no idea what was going on, using the money of investors who had no idea what was going on, and all based upon a triple tiered documentary system where the contractual meeting of the minds could never occur.

The first tier was the Prospectus and Pooling and Servicing Agreement that was used to obtain money from investors under false pretenses.

The second tier consisted of a whole subset of agreements, contracts, insurance, guarantees all payable to the investment banks instead of the investors.

And the third tier was the “closing documents” in which the borrower, contrary to Federal (TILA), state and common law was as clueless as the investors as to what was really happening, the compensation to intermediaries and the claims of ownership that would later be revealed despite the borrower’s receipt of “disclosure” of the identity of his lender and the terms of compensation by all people associated with the origination of the loan.

The beauty of this plan for Wall Street is that nobody from any of the tiers could make direct claims to the benefits of any of the contracts. It has also enabled then to foreclose more than once on the same home in the name of different creditors, making double claims for guarantee from Fannie Mae, Freddie Mac, FDIC loss sharing, insurance and credit default swaps.

The ugly side of the plan is still veiled, for the most part in secrecy. even when the homeowner gets close in court, there is a confidential settlement, sometimes for millions of dollars to keep the lawyer and the homeowner from disclosing the terms or the reasons why millions of dollars was paid to a homeowner to keep his mouth shut on a loan that was only $200,000 at origination.

This is exactly why I tell people that most of the time their case will be settled either in discovery where a Judge agrees you are entitled to peak behind the curtain, or at trial where it becomes apparent that the witness who is “familiar” with the corporate records really knows nothing and ahs nothing about the the real history of the loan transaction.

Back to HOLDER and HOLDER IN DUE COURSE

When I first got into this mortgage mess I called counsel for Aurora on a foreclosure case pending in California. I asked him how the currently self-designated entity pursuing foreclosure could justify its actions. His answer was “we are the holder.” So I asked him again why a company that has no financial stake in the outcome and who clearly does not meet the definition of a creditor of this borrower could initiate a foreclosure proceeding. And he answered again “we are the holder.” So I asked him does this mean the entity that he is alleging is the holder is acting for or against the interest of the actual creditor? And he answered again “we are the holder.” So I asked him, whether he was asserting that the entity pursuing foreclosure was a holder in due course. And he answered again “we are the holder.” By the way, this was not some foreclosure mill newbie. This was the main guy in Chicago who had been the architect of the legal plan for foreclosures.

In the months after that I received a quick lesson. Everything I knew about bills and notes (commercial paper, negotiable instruments etc.) was going to be put to the test. And it became apparent that notwithstanding clear law to the contrary, the holder was going to be treated as a holder in due course regardless of the actual facts. The justification for this practice rested squarely on two assumptions that were considered to be axiomatically true:

(1) It was assumed that the borrower and received the loan and failed to pay it “back”
(2) It was inevitable that despite any technical defenses a borrower could raise, that the outcome would be foreclosure — which led to a disastrous public policy of rubber stamping millions of foreclosures without any requirement that the forecloser and its paperwork be subject to any scrutiny at all.

The millions of foreclosures had placed an impossible burden on the court system. Based upon the  above assumptions, the remedy was clear — get the cases pushed through to to the foreclosure auction as quickly as possible and thus clear the docket. The idea of retaining existing practices where a Judge would scrutinize the documents and allegations with or without the homeowner present, was set aside despite the fact that every state has declared that forfeiture is an extreme remedy.

Instead in non-judicial states, a trustee was installed and merely had to receive instructions from the beneficiary of a deed of trust. Anyone could and would do that. Some entity not on the loan and having no relationship with the originator of the loan would state that it was the beneficiary and was now executing a substitution of trustee under the powers vested in the beneficiary, and the new “trustee” was a controlled or contract entity that was created for the express purpose of foreclosing on the property — minding only the instructions of the new beneficiary — without any verification that the claimed beneficiary had any interest in the loan, the debt, the note or the deed of trust.

In judicial states Judges routinely ignored meritorious defenses treating these fictitious entities as though they were holders in due course and thus excluding nearly every potential defense. The same logic applied — since it was inevitable that the foreclosure would happen anyway, why hold it up? The idea that this was part of a vast scheme of financial fraud and that the perpetrators were being being rewarded with houses when they had already stolen the money that paid for the loans was mere poppycock, conspiracy theory. Even when the lawsuits and charges from investors, administrative agencies, law enforcement, insurers, guarantors and co-obligors stated that the basis of these transactions was rooted in financial fraud, Judges continued to rule based upon the public policy of clearing the docket of inevitable foreclosure sales.

But now, it appears as though some cases of mine are being transferred out of the foreclosure docket and into general litigation or even complex litigation where the old rules apply. Judges in the foreclosure docket are commenting about the shell game played where the servicers are suddenly changed right before trial, and where the elements of their cause of action don’t appear to be present. Judgments are being entered in favor of the borrower that are reciting that the Plaintiff failed to meet its burden of proof — still coming up short on the statement that this was part of a fraudulent scheme and that the perpetrators of such a scheme should not be allowed to profit from it.

So now that we are heading back into the territory where the rules of law, the rules of evidence and the rules of procedure apply again, it is important that you understand the essential nature of bills and notes (negotiable instruments). And we start with the proposition that there has been a legislative and judicial determination that negotiable cash equivalent instruments should be allowed to exist. This means that if you receive a negotiable instrument as a holder in due course, it is yours to use anyway you want the same as cash or to collect from the original maker, regardless of anything that happened between the original maker of the note and whoever he or she or they were dealing with at the time the negotiable instrument was created.

The first point is that a negotiable instrument can ONLY be a promise to pay that is NOT conditioned on anything. The maker is agreeing to pay regardless of any other dealings he has had with any other party at any time. A promissory note can be an unconditional promise to pay. A mortgage is not an unconditional promise to pay (there are not two notes for the same transaction). The mortgage is a collateral agreement for protection of the creditor in the event that the collection on the note does not satisfy the full debt. The mortgage is not a negotiable instrument. But in some jurisdictions it is treated as an attachment to the note such that the endorsement (“indorsement”) of the note also transfers ownership of the rights under the collateral mortgage or deed of trust. Those are called “mortgage follows the note jurisdictions.” In other jurisdictions the assignment of the mortgage gives rise to an implied assignment of the note. Those are called “note follows the mortgage” jurisdictions. Note that a mortgage cannot be endorsed — it is a legal agreement that requires assignment. And there are jurisdictions that do both.

The aim here under public policy that is centuries old, is to promote the free flow of commerce and leave disputes to the people involved in the dispute and not present a danger to an innocent third party who takes an apparently negotiable instrument as an unconditional promise to pay only to be confronted with the maker’s defenses of fraud in the original or subsequent transactions. This is an over-riding public doctrine. It is the reason why I have warned from the beginning that failure to dot an “i” or cross a “t” is going to get you nowhere in terms of winning your case. But if you can prove that the current “holder” is part of the fraud you can knock them down from their pedestal of being a holder in due course and thus just a holder or even less a possessor (bailment) holding no rights to enforce under any conditions. This is why the actual transaction documents and methods of payment at each stage of the “assignments”or “endorsements” of the instruments must be carefully examined starting with the origination. By actual transactions I mean — “SHOW ME THE MONEY.” The UCC says “for value” and so if someone claims to have received ownership of the note then in order for them to aspire to holder in due course status they must show they paid for it.

When you see a loan closing followed some hours later by an assignment followed a few minutes later by another assignment, you can assume that something was not disclosed to the borrower and that the actual lender was probably not stated on the loan papers, which means the basics of contract law apply — the borrower’s act of executing the loan papers, including the note (that would have otherwise been a negotiable instrument) was not counterbalanced by the named payee making the loan. Thus the contract is unexecuted and unenforceable unless the Payee and mortgagee can establish disclosure and an actual relationship with the true source of the loan, such that the Payee was the borrower in a transaction in which a third party actually made the loan.

But just because you have it and just because you claim to be a holder in due course doesn’t make it true. You might not have it, you might have forged or fabricated the original, and you might have actually known about problems and defenses of the maker when you took it, or the maker might not have known the true nature of the transaction and you did. In all those cases you are not a holder in due course and every action or defense that could be brought in a breach of contract action would apply to you as a holder (if you really have it) or mere possessor. AND THE KEY ELEMENT BEFORE ALL OTHER INQUIRIES IS WHETHER YOU RECEIVED THE NEGOTIABLE INSTRUMENT FOR VALUE, WHICH MEANS YOU PAID MONEY FOR THE SALE OF THAT INSTRUMENT. The banks that assert that their own self-serving allegation of holder or holder in due course ends the inquiry in terms of discovery are just plain wrong.

This is long enough. I will expand on these issues in upcoming articles. In the meanwhile read carefully the following cases, especially the KIND case, which shows how extraordinary the powers of a holder in due course can be.

See UCC 3-305

U.S. v Second National Bank of North Miami, 1974, 502 F. 2d 535, cert denied, 95 S Ct. 1567, 4221 U.S. 912, 43 L. ed. 777

Davis vs. West, App 2 d DCA 114 So. 2d, 703 (1959)

Daiwa Products, Inc. v Nationsbank, N.A. 885 So. 2d 884 (Fla 4th DCA 2004)

Kind v Gittman 889 So.2d 87 4th DCA (2004)

EDITOR’S NOTE: read the Kind case. see if you don’t agree that this case opens the door to appraisal fraud both as a counterclaim and set off. But the basis is that you must plead and prove that the property was worth something different at the time of the transaction that what the appraisal said. The action is against both the appraiser and the lender, because the appraisal is a representation of the lender. The resulting damages in interest and principal payments could produce the reduction in principal sought by so many homeowners in litigation.

Countrywide Found Guilty of Fraud, JPM Criminal Responsibility for Madoff PONZI Scheme

“The words PONZI SCHEME and FRAUD applied to the mortgage meltdown has been largely dismissed by policy makers, law enforcement and regulators. Instead we heard the terms RISKY BEHAVIOR and RECKLESSNESS. Now law enforcement has finally completed its investigation and determined that those who set the tone and culture of Wall Street were deeply involved in the Madoff PONZI scheme and were regularly committing FRAUD in the creation and sale of mortgage bonds and the underlying “DEFECTIVE” loans. The finding shows that these plans were not risky nor reckless. They were intentional and designed to deceive and cause damage to everyone relying upon their false representations. The complex plan of false claims of securitization is now being pierced making claims of “plausible deniability” RISKY and RECKLESS.

And if the loans were defective there is no reason to believe that this applies only to the loans claimed to be in default. It applies to all loans subject to false claims of securitization, false documentation for non existent transactions, and fraudulent collection practices by reporting and collecting on balances that were fraudulently stated in the first instance. At this point all loans are suspect, all loan balances stated are suspect, and all Foreclosures based on these loans were frauds upon the court, should be vacated and the homeowner reinstated to ownership of the property and possession of the property. All such loans should have the loan balance adjusted by the courts for appropriate set off in denying the borrowers the benefit of the bargain that was presented to them.

“It is now difficult to imagine a scenario where the finding of the intentional use and creation of defective mortgages will not trickle down to all mortgage litigation. The Countrywide decision is the first that expressly finds them guilty of creating defective loans. It is impossible to believe that Countrywide’s intentional acts of malfeasance won’t spread to the investment banks that used Countrywide as the aggregator of defective loans (using the proprietary desk top underwriting software for originators to get approval). The reality is coming up, front and center. And Judges who ignore the defenses of homeowners who were of course defrauded by the same defective mortgages are now on notice that bias towards the banks simply doesn’t work in the real world.” — Neil F Garfield,www.livinglies.me October 24, 2013

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By Neil F Garfield, Esq. Tallahassee, Florida October 24, 2013. If the mortgages were defective and were used fraudulently to gain illicit profits it is not possible to avoid the conclusions that homeowners are among the victims. By using false appraisals the huge banks created the illusion of rising prices. This was manipulation of market prices just as the banks were found guilty of manipulating stated market rates for interbank lending “LIBOR” and use of the manipulated pricing to trade for further benefit knowing that the reality was different. The banks have continued this pattern behavior and are still doing it, and laying fines as a cost of doing business in the manipulation and ownership of natural resources. They are a menace to all societies on the planet. The threat of that menace must be removed In the face of a clear and present danger posed by the real world knowledge that where an opportunity arises for “moral hazard” the banks will immediately use it causing further damage to government, taxpayers, consumers and investors.

None of it was disclosed or even referenced at the alleged loan closing with borrowers despite federal and state laws that require all such undisclosed profits and compensation to be disclosed or suffer the consequence of required payment to the borrower of all such undisclosed compensation. The borrowers are obviously entitled to offset for the false appraisals used by lenders to induce borrowers to accept defective loan products.

Further, borrowers have a clear right of action for treble damages for the pattern of conduct that constituted fraud as a way of doing business. In addition, borrowers can now be scene through a clear lens — that they are entitled to the benefit of the bargain that they reasonably thought they were getting. That they were deceived and coerced into accepting defective loans with undisclosed players and undisclosed compensation and undisclosed repayment terms raises the probability now that borrowers who present their case well, could well start getting punitive damages awards with regularity. It’s easy to imagine the closing argument for exemplary or punitive damages — “$10 billion wasn’t enough to stop them, $25 billion wasn’t enough to stop of them, so you, members of the jury, must decide what will get their attention without putting them out of business. You have heard evidence of the tens of billions of dollars in profits they have reported. It’s up to you to decide what will stop the banks from manipulating the marketplace, fraudulently selling defective loans to borrowers and pension funds alike with the intention of deceiving them and knowing that they would reasonably rely on their misrepresentations. You decide.”

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U.S. prepares to take action against JPMorgan over Madoff
In what would be an almost unheard of move when it comes to U.S. banks, the FBI and the U.S. attorney’s office are in talks with JPMorgan (JPM) about imposing a deferred prosecution agreement over allegations that the bank turned a blind eye to Bernie Madoff’s Ponzi scheme, the NYT reports.
Authorities would suspend criminal charges against JPMorgan but impose a fine and other concessions, and warn the bank that it will face indictments over any future misconduct.
However, the government has not decided to charge any current or former JPMorgan employees.
The report comes as the bank holds talks with various regulators over a $13B deal to settle claims about its mortgage practices.

Countrywide found guilty in U.S. mortgage suit
A federal jury has found Bank of America’s (BAC -2.1%) Countrywide unit liable for defrauding Fannie Mae (FNMA +22%) and Freddie Mac (FMCC +19.4%) by selling them thousands of defective mortgages.
The judge will determine the amount of the penalty – the U.S. has requested $848M, the gross loss to the GSEs as calculated by its expert witness.
The suit centered on Countrywide’s HSSL – High Speed Swim Lane – program instituted in August 2007, says the government, to keep the music playing as the property market was falling apart.

DOJ probes nine leading banks over sale of mortgage debt
The Department of Justice is reportedly investigating nine major banks over the sale of problematic mortgage bonds, although the probes are for civil infractions rather than criminal ones.
The banks are Bank of America (BAC), Citigroup (C), Credit Suisse (CS), Deutsche Bank (DB), Goldman Sachs (GS), Morgan Stanley (MS), RBS (RBS), UBS (UBS) and Wells Fargo (WFC).
The inquiries span U.S. attorney’s offices from California to Massachusetts, and come as JPMorgan tries to reach a multi-billion dollar settlement over the issue.

Appraisal Fraud: The Real Deal exposed in Declining Market

CHECK OUT OUR DECEMBER SPECIAL!

What’s the Next Step? Consult with Neil Garfield

For assistance with presenting a case for wrongful foreclosure, please call 520-405-1688, customer service, who will put you in touch with an attorney in the states of Florida, California, Ohio, and Nevada. (NOTE: Chapter 11 may be easier than you think).

Editor’s Comments and Analysis: There is little doubt that but for the rapid increase in housing prices, many buyers would have done nothing. The pressure was on to get on the train before it left the station. You might be stuck in the position of never being able to afford a home.

What buyers (and investors didn’t know was that the appraisals were faked. In 2005 8,000 appraisers signed a petition to Congress to intervene because they were under pressure to allow for super charged values in their appraisals that would not withstand the test of time. They warned that the results would be catastrophic. Of course, Congress and the Bush administration did nothing despite 8,000 upstanding appraisers concerned about whether they could ever work again under the intimidation of the banks.

For reasons that defy logic, both pro se litigants and attorneys have steered clear of this claim, apparently under the mistaken impression that because the borrower paid for the appraisal, they owned it and their reliance on it was their own problem. In fact, the story goes, the borrower liked seeing the high appraisals. It made them feel good about the “deal” they were getting. None of that is a proper defense against appraisal fraud against the originator and all those who pretend to take title to the loan all the way up to the top of the pyramid where the loans are claimed to be authentic (which they are not) and where the REMIC trusts allow intermediaries to use their names in foreclosure action claiming the REMIC owns the loan (which they do not).

The Truth in Lending Act, and most statutes restricting deceptive lending refer to verification of the value of the property being the lender’s responsibility. The industry standard Appraisal Independence Requirement (AIR) states that the order must be placed by the lender, that just because you paid for it doesn’t mean it is your or you can use it for any other purpose, and that ownership of the appraisal report is with the lender not the person who eventually paid for it (the borrower).

Reliance on those appraisals by the Buyer is a natural, reasonable and intended consequence which the banks laid out in front of the buyer. The typical appraisal came in $20,000+ higher than the refi or sale of the property making everyone feel warm and cuddly at the time. The appraiser reluctantly in most cases complied with demands from the bank and after being showed the number required to close the deal, complied or face never working again.

As many homeowners found out, the appraisals were not based upon fair market value by an independent examiner who believed that the price would hold and was therefore a fair estimate of the range of value of the property. In many cases, people found out days or weeks after they closed the deal that homes in their neighborhood were being sold for far less than the deal they just made with the bank, leaving them underwater in a fraction of time usually allocated to evaluate the accuracy of the appraisal.

The manipulation of the appraisers led to manipulation of the appraisals which led to large scale manipulation of whole regional markets, hiding the fact that the appraisals were inflated by comparison to other similarly inflated appraisals on nearby equivalent property. Developers of planned communities were raising prices monthly as much as 10%-20%, to support the appearance of a rapidly rising market. Wall Street knew that the prices were far out of line because the most reliable indicator of general market prices — the Case Schiller Index — clearly showed that at no point since the index began in the 1880′s was their such a variance between housing prices and the ability (median wages) to pay for them.

The reason for the inflation of “value” was simple — Wall Street was running out of people to sell on taking loans so they inflated the value of the homes in order for them to move more money around and continue selling bogus mortgage bonds. Had they not done so, the crash would have come around 2004-2006 rather than in 2007-2008-2009. Investors would have stopped the gush of money into mortgage bonds and the PONZI scheme would have collapsed then instead of a little later.

So you have “lenders” right along sellers, selling the borrower on the value of the property to complete the deal. Buyers and people refinancing their homes don’t know what appraisers and banks know about verifying values. So they reasonably rely upon representations from the “lender” as to the value of the property. Of course the lender isn’t really the lender and the value isn’t as stated.

This is one of the reasons the REMICs didn’t show up on the notes and mortgages. Wall Street inserted “bankruptcy remote” vehicles to sit as surrogates or nominees of the real lenders who were advancing money in order to insulate the investor lenders from potential liability and to insulate the banks from potential liability.

The homeowner is entitled to receive just compensation for a false appraisal and false representations that the appraisal has been verified by the lender. Neither representations contained in the appraisal nor the representations of verification by the “bank” lender were true. Had the borrower known this, and especially had the borrower known that the lender had an interest in only closing the loan without any risk of loss, the borrower would have an opportunity to ask questions about who he was really dealing with and then make a choice as to which lender he really wanted to do business with. This is fundamental guarantee of the Truth in Lending Act — to give the borrower enough information that they can make an informed choice of one deal over another.

To the extent that the borrower was injured by the failure to disclose the reality of the situation, the borrower should be able to receive the financial damage caused by the misrepresentation. tot he extent that the act was intentional by the “lender” and all the participants up the faked securitization chain, they should also be liable for punitive or exemplary damages under both common law, and state and Federal Statutes.

Below is an article written by Dione Spiteri who founded US Appraisal Group ten years ago “on the principle that everyone deserves to have a positive appraisal experience and to increase confidence in the appraisal management experience overall.” I suspect she might be an excellent referral source for expert appraisers to look at those appraisals from 2001-present and give their opinions as to whether industry standards were followed and if not, why not.

Following are top tips consumers should know about appraisals:

  1. The person ordering the appraisal, not the person paying for the appraisal, owns the appraisal report.
  2. Research sales in the market area and consult with local realtors. Feel free to give the information to the appraiser and understand that the appraiser will always consider the data, but may use different data in the report if it is deemed to be more relevant or recent.
  3. Understand that appraisers cannot communicate values, fees, or discuss the appraisal with you at any time when the order was placed by your lender.
  4. Understand that if there are foreclosures and short sales in your market area, your home may compete with them for buyers in an open market, and they can affect the value of your home.
  5. Don’t expect the appraiser to give the exact same amount of dollar value to improvements in your home as what you spent on them.
  6. Do expect the appraiser to have competence in your market area and access to local MLS data.
  7. Do understand that a professional appraisal is a supportable opinion of value. It is not the feelings of the appraiser but rather a supportable prediction of what your home would sell for if offered on the marketplace for a reasonable amount of time.
  8. The inspection portion of a real estate appraisal is just one small portion of the appraisal process. Substantial work must be done before the appraiser inspects the property to research market information and neighborhood trends. Once the inspection is complete, the appraiser may spend hours analyzing the data to produce a credible report.
  9. Educate yourself on the components that determine value in your property. Homes tend to be an extension of personal tastes, but the appraiser’s responsibility is to determine which of those tastes translate into a higher market value for your property.

See the full article here

1.5 Million Seniors Foreclosed — Most Illegally

What’s the Next Step? Consult with Neil Garfield

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For assistance with presenting a case for wrongful foreclosure, please call 520-405-1688, customer service, who will put you in touch with an attorney in the states of Florida, California, Ohio, and Nevada. (NOTE: Chapter 11 may be easier than you think).

Editor’s Comment and Analysis: As I predicted (along with many others), the foreclosure scam is reaching further and further to all segments of the population. With more than half of all homeowners under 40 being “underwater” and the release of information showing that widows are being hit hardest, the statistics showing 1.5 million foreclosures on people over 50 are hardly surprising. But they don’t tell the whole human story of grief, confusion and disbelief that the banks would engage in large-scale fraud.

It is ironic that many of the millions who were hit with foreclosure were the same people who joined the public outcry against mortgage relief because they were playing by the rules, making their payments, and also losing money. They failed to educate themselves and their naive belief that the debts were legitimate and the borrowers were deadbeats led the public, the media, and those who pull the levers of power in Federal and State government to conclude that the debts were legitimate and the market simply went sour.

To call these debts legitimate in the face of absolutely incontrovertible facts regarding appraisal fraud, forgery, robo-signing, and lies told in in court is akin to drawing the distinction between rape and legitimate rape. You can argue all you want about what a woman should look for to “detect” a possible criminal and and argue circumstances when she “asked for it” but rape is rape.

And you can argue all you want about how homeowners should have read a pile of papers 6 inches thick to determine what was really going to happen to their lives if they signed those papers and that they should have investigated who was behind the easy money, but in the end they were the victims, just like many investors were the victims.

And until we agree that the money the banks received should have been allocated to the investors on whose behalf they received the money we won’t know the amount of the debt of the homeowner, if any, that is remaining. Allowing foreclosures to start, foreclosure “sales” to be conducted, foreclosure deeds to be issued “for cash received” when they accepted a credit bid from a non-creditor, and then allowing evictions was and remains wrong.

In fact, while I have not seen a study analyzing this, I’ll bet you will find that the same people who were foreclosed were on pensions paid by managed funds that bought the bogus mortgage bonds that enabled the mortgage meltdown in the first place.

So the same people were both losers in investing in mortgages and then losers when their own money was used against them in deals that were impossible to be viable.

The tragic irony here is that most borrowers still don’t get it. They also think the debts are legitimate and that any claims of fraud or predatory loan practices are just ways of delaying the inevitable foreclosure and eviction.

Precious few homeowners have any idea that they have legitimate defenses and remedies that would lead to a mortgage-free house or a modification that uses fair market value as a basis for the loan balance and applies the payments received by creditors from insurance, credit default swaps and federal bailouts.

In what I have called Deny and Discover, lawyers following this blog or who have arrived at the same conclusions on their own are winning case after case. Mark Stopa published an article about 14 cases in Florida in which 14 different judges entered summary final judgment FOR THE BORROWER!

As the banks plant articles warning against strategic defaults, ultimately, there is no debtor’s prison in this country and they can’t do a thing about it. And widows, pensioners and others who are on fixed incomes and facing rising medical and living expenses are forced into default. This mess will take decades to clear up unless government does its job of governing and applying the same set of rules to everyone. If you commit fraud, you owe restitution and you are punished either civilly or criminally.

Appraisers Reverse — Now Going Low

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“We can account for small to reasonable increases in values,” Mr. McKinnon said. “We cannot account for $20,000 jumps in a month.”

Editor’s Comment: An amazing quote from someone who obviously is NOW stressing the fundamental elements of an appraisal, especially where there is a loan involved. During the meltdown $20,000 price jumps were taken seriously by appraisers to justify the ever-increasing values they put on property. In some cases you can see jumps much higher than $20,000 within a few months or perhaps a year after the last financing on the same property.

No lender would lend more than the property is worth if they were doing a legitimate loan. In fact, in most cases they require 10%-20% down payment so that their loan to value ratio (LTV) builds in a buffer if the market goes down. So the big question for the sages of appraisal standards, is “where were you and what standards did you apply during the mortgage meltdown?”

And no lender would accept an appraisal report based upon price jumps that were out of character and recent in time. Like before the mortgage meltdown, the lender is responsible for the value used in the deal for a loan — not the borrower.

Any appraiser who had similar views when the securitization scam from Wall Street was in full swing was squashed. Everyone was just making too much money to confront the banks’ demands for higher appraisals — including jumps in prices that were as little as one month ago.

Now appraisers are showing us the way it would have been if the loan originator was actually at risk. Most originators are still not at risk but the threat of litigation from the managed funds that supply the cash for these deals is keeping most players within the normal rules of the game. By keeping appraisals within the realm of reason, they are protecting both the borrower and the investors putting up money for the deal.

When the market was going up, realtors were cheering the appraisers on so that the market would look like it was going up higher and higher and would continue forever. “Better buy now or you miss the boat and you’ll never be able to buy a home the way prices are going.” (Remember that?). Now the realtors are complaining that appraisals are too low and that those low appraisals are killing their deals.

When litigating Appraisal Fraud, it is not only the appraiser that is sued, it is everyone who participated in the securitization “chain” to nowhere. The very comments that appraisers are using to justify their behavior now can be used as the standard by which to judge them (and the banks that hired the appraisers) and their past behavior. I wouldn’t be too surprised if the same appraiser could be put on the stand to justify his current low appraisal reports using industry standards and to show how those standards were ignored in the mortgage meltdown period.

Meanwhile, banks in Spain are finally relenting and lowering the stated value of their real estate assets, which is causing an uptick in the market activity. That can’t happen here until the mega banks finally admit that the “assets” they are holding and reporting on their balance sheet are either fictitious or incredibly over-valued.

But the real jolt that will take us back to economic recovery is only going to be achieved when the millions of people who participated in tens of millions of real estate transactions are given relief in the form of restitution for appraisal fraud and other bad behavior on the part of the banks.

Scrutiny for Home Appraisers as the Market Struggles

By SHAILA DEWAN

When Justin Olson put his Southwestern-style ranch house outside Phoenix on the market, he got what he was expecting: an immediate batch of offers, virtually all above his asking price, which was set intentionally low, at $197,500, to attract interest. He chose an offer of $210,000.

But then came an unpleasant surprise. An appraiser for the buyer’s bank said the house was worth only $195,000. That limited the amount that the bank would lend, forcing the buyer to come up with more cash or negotiate a lower price.

“There was just no way I was selling that house for less than $200,000,” Mr. Olson said. His broker, Brett Barry of Homesmart, advised him that there was little chance of changing the appraiser’s mind. Mr. Olson said, “The part that blows me away — the appraisal can be such an arbitrary, personal decision and there is no appeals process.”

Adding to his indignation, a similar house two doors away was appraised at and sold for $225,000.

Appraisals are generally ordered by banks so they can verify the value of collateral before granting a mortgage. Before the housing crash, when home values seemed only to rise, appraisals were almost an afterthought. But now, with banks far more cautious about lending, a low appraisal can torpedo a deal.

The problem is so widespread that this week the National Association of Realtors blamed faulty appraisals for holding back the housing recovery, saying its members had reported that more than a third of all deals were canceled, delayed or renegotiated to a lower price because of a low appraisal. Several real estate agents said they were starting to include appraisal contingencies in their contracts, spelling out how much a buyer would be willing to pay in cash if the appraisal fell short.

Appraisers use previous sales of comparable houses to help value a home. If prices are just starting to climb, and sales take two or three months to close, there can be a lag before the change in prices is observed.

The Realtors report said appraisers were improperly using foreclosures and neglected properties as comparable homes, failing to account for market conditions like scarce inventory and bidding wars, and working in areas where they lack local expertise. The report faulted banks for using inexperienced appraisers, and for creating unrealistic requirements, like six comparable sales instead of three, at a time of few sales.

“It’s holding sellers off the market,” said Jed Smith, the managing director of quantitative research for the Realtors group. “Sales volume could probably be an additional 10 to 15 percent higher if we had normal lending practices and if we had normal appraisal practices.” That in turn, he said, would create more jobs.

Appraisers and real estate brokers agreed that a ban, imposed since the housing crash, on loan originators’ handpicking appraisers had led to the use of appraisal management companies that take a healthy cut of the consumer’s fee and hire inexperienced, low-cost appraisers.

But appraisers took issue with the complaints and pointed out that unlike real estate agents, they have no bias or incentive to help complete a deal.

“Appraisers don’t set the market, they reflect what’s happening in the market,” said Ken Chitester, a spokesman for the Appraisal Institute, a professional association. “So don’t shoot the messenger. Blaming the appraiser for a bad housing market is like blaming the weatherman because you don’t like the weather.”

Mr. Olson and his buyer compromised on a price of $205,000, less than initially offered and therefore, some might say, less than the house was worth.

But any transaction involving a mortgage is limited by the appraisal — an assessment that is part science and part art and is based on a variety of factors like location and square footage.

Though Mr. Olson’s house was in good condition, the house nearby that sold for more had at least $30,000 worth of upgrades, said Craig Young, the broker who represented the seller. But Mr. Young said appraisals could still be unpredictable, pointing out that a home across the street sold for even more, $239,000.

Some appraisers said agents misunderstand the way homes were valued. For example, although bank-owned homes generally sell at a discount, that is not true in every neighborhood, said Dan McKinnon, who runs an appraisal company with his wife in Phoenix. Appraisers, therefore, do not automatically make adjustments if they are using such sales for comparison. Some bank-owned homes are in good condition, and in some neighborhoods bank-owned sales dominate the market, and thus determine prices.

“If that property is in similar condition to your subject, it is direct competition,” Mr. McKinnon said.

R. James Girardot, an appraiser in Seattle, said appraisers could protect buyers — particularly those from out of town who might think a home sounds like a great deal because prices are much higher where they live.

He said he recently did an appraisal in a desirable subdivision where the contract price was head and shoulders above other recent sales.

“I was told by all the agents I talked to that there’s a real shortage out here, and this house is the sharpest house that has ever come on the market,” Mr. Girardot said. Then he found six other houses in the area for sale, and not one was close in price to the house in question.

Still, in some areas the light sales activity can cause legitimate worries. This week Shannon Moore, a real estate agent on Florida’s west coast, said she had written a contract for more than $1 million for a house on a barrier island. There had been no recent sales on the island, but one was set to close soon, meaning that a single price could affect her deal. “Everybody holds their breath until the appraisal comes in,” she said.

In some cases, agents use appraisals to convince sellers that their expectations are too high and that they should accept a lower offer. But in other cases, sellers know that traditional buyers are competing with cash investors who will pay more.

Afra Mendes Newell, a Florida agent, said one of her clients recently bid $150,000 on a home that was appraised for $135,000. The deal fell through, but another buyer stepped in with $150,000 cash. The good news, she said, was that the next appraisal in the neighborhood would take that price into account.

Agents can try to head off low valuations by arming the appraiser with relevant comparable sales and information about renovations or upgrades that are not readily visible, like insulation. Buyers who disagree with an appraisal can ask the bank to review it, ask for a second appraisal, pay for their own appraisal, or file a complaint with the state, though agents said the chances of salvaging a sale were slim.

Appraisers see some irony in the accusation that, so soon after a housing bubble, they are being accused of holding prices down. They said buyers should not be too eager to make a purchase that is far above recent sales in a neighborhood.

“We can account for small to reasonable increases in values,” Mr. McKinnon said. “We cannot account for $20,000 jumps in a month.”

Appraisal Fraud and Facts: Essential to Securitization Scam

The REMICS are mirror images of the NINJA loans — no income, no assets, no job

the borrower did not realize that the false appraisal and other deficiencies in underwriting had shifted the risk of loss to the homeowner and the investors

Editor’s Notes: Our economy and the economic structure in other countries is stuck because of the false appraisal reports that supported funding of at least $13 trillion (U.S. only) of loans that were so complex that the Chairman of the Federal Reserve, Alan Greenspan didn’t understand them nor his staff of more than 100 PhDs. They were intentionally opaque because complexity is the way you get the other side of the “deal” (the buyer) to accept your explanation of the transaction. It also is designed to avoid criminal penalties even when the scheme unravels. Getting a Judge or Jury to understand what really happened is a challenge that has been insurmountable in both civil and criminal cases and investigations.

As stated in the 2005 petition to Congress from 8,000 appraisers who did not want to “play ball” with the banks, the appraisers were faced with a choice: either they submit appraisal reports $20,000 higher than contract and earn more money for each appraisal and earn  more money through volume, OR they won’t work at all.

Developers, mortgage brokers, and the “originators” (sales organization that pretended to be the lender), sellers and homeowners needing cash in an economy where there wages and earnings were not keeping up with the cost of living —- all reacted with glee when this system went into action. As “prices” rose by leaps and bounds — fed by a flood of money and demands for more mortgages — everyone except the banks ended up crashing when the money stopped flowing. That is how we know that it was the money that made prices rise, rather than demand.

So most appraisers were both stuck and pleasantly enjoying incomes 4-10 times what they had previously received, and obediently submitted appraisal reports that were in fact unsupportable by industry standards or any other standards that a reasonable and rational lender would use — if they were lending their own money. By lending money from investors the risk of loss was entirely removed. The originators got paid regardless of whether the mortgage was paid, or went underwater or caused the homeowner to execute a strategic default.

By using the originators as surrogates at the closing, the appraisal report was accepted without the required due diligence and confirmation that would be present if you went to the old style community bank loan department. The fact is that there was NO UNDERWRITING involved as we knew it before the securitization scam. The “extra” interest charged to No DOC loans (usually 3/4%-1.5%) and the premium interest charged on NINJA (No income, no assets, no job) loans was sold to borrowers on the premise that the “lender” was taking a higher risk. But the truth is they didn’t do any due diligence or underwriting of the loans regardless of whether or not the borrower was submitting information that confirmed their income, assets and ability to pay.  Thus the premium for the “extra risk” was based upon a false premise (like all the other premises of the securitization PONZI scheme).

The normal way of judging the price of a loan (the interest rate) was the perceived risk composed of two elements: ability to repay the loan, and the value of the property if the loan is not repaid. The banks that foisted the securitization scam upon the world got rid of both: they did nothing to confirm the ability to repay because they didn’t care if the borrower could repay. And they intentionally hyped the “value” of the property far above any supportable level as is easily shown in the Case Schiller index.

This is where PRICE and VALUE became entirely different concepts. By confusing the homeowner and hoodwinking the investors with false appraisals, they were able to move more money into the PONZI Scheme, as long as investors were buying the bogus mortgage bonds issued by fictitious entities that had no assets, no income and no prospects of either one. The REMICS are a mirror image of NINJA loans.

The value of the property was not the same as the prices supported by the false appraisal reports. The prices were going up because of the sales efforts of the banks to get homeowners giddy over the the numbers, making them feel, for a few moments as though they were more wealthy than they were in reality. But median income was flat or declining, which means that the value was flat or declining.

Thus prices went up while values of the homes were going down not only because of the median income factor but because of the oversold crash that was coming. Thus the PONZI scheme left the homeowner with property that would most likely be valued at less than any value that was known during the time the homeowner owned the property, while the contract price and appraisal report “valued” the property at 2-4 times the actual value.

The outcome was obvious: when all was said and done, the banks would be holding all the money and property while the investors, taxpayers, and homeowners were all dispensable pawns whose losses came under the category of “tough luck.”

While this might seem complex, the proof of appraisal fraud is not nearly as difficult as the explanation of why the banks wanted false appraisals. In the civil actions for wrongful lending or wrongful foreclosure, the homeowner need only show that the lender intentionally deceived the borrower as to the value of the property.

And the lack of actual underwriting committees and confirmations is essentially the proof, but you would be wise to have an appraiser who can testify as an expert as to what standards apply in issuing an appraisal report, to whom the appraisal report is addressed (i.e., the “originator”). Then using the foundation for the standards apply it to the property at hand at the time the original appraisal report was issued. It might also help if you catch the “originator” getting a part of the appraisal fee (like Cornerstone Appraisals, owned by Quicken Loans).

The borrower testifies that they were relying upon the “lender” representation that the loan had been carefully reviewed, underwritten, confirmed and approved based upon market conditions, ability of the borrower to repay and the value of the property. After all it was the “lender” who was taking the risk.

Thus the borrower did not realize that the false appraisal and other deficiencies in underwriting had shifted the risk of loss to the homeowner and the investors whose money was used to fund the loan — albeit not in the way it was presented in the prospectus where the REMIC was the supposed vehicle for the funding of the loans or the purchase of the loans.

Everyone in the securitization PONZI Scheme got paid. When you look at it from the perspective described above then you probably arrive at the same conclusion I did — all that money that was made and paid and not disclosed to the borrower changes the dynamics of the deal and the undisclosed compensation and profits should be paid to the borrower who was the party with the real risk of loss.

And in fact, if you look at the Truth in Lending Act, THAT is exactly what it says — all undisclosed compensation (which is broadly defined by the Act) is refundable with treble damages. Why lawyers have not taken action on this highly lucrative and relatively easy case to prosecute is a mystery to me.

Because of the statute of limitations applied in TILA cases, the TILA cause of action might not survive, especially in today’s climate, although more and more  judges are starting to see just how badly the banks acted. I therefore recommend to attorneys to use alternative pleading and add counts under other federal statutes (RICO, etc) and state statutes of deceptive lending, and common law fraud. The action for common law fraud, is the easiest to prosecute as I see it.

The interesting aspect of this that will lead to early settlement is that the pleading is simple as to the elements of the cause of action and can easily survive a motion to dismiss, the facts are clearly going to be in dispute which makes survival on a motion for summary judgment a much higher probability, and in discovery you have a nuclear option: since your cause of action is for return or sharing of the unlawful booty that was paid, plus treble, punitive or exemplary damages, discovery into all the different parties who made money in the chain is far easier to argue than the usual defensive foreclosure case.

The other thing you have is the possibility of stating a cause of action to force the retention of the property, to protect the homeowner in the collection of damages rendered by the final verdict. A lis pendens might be appropriate, and the bond need not be much more than nominal because unless the bank or servicer has a BFP to buy the property, you can easily show that your client is already posting bond every month they pay the utilities and maintain the property.

The compensatory damages would be a measure of the difference between the actual value of the deal and the deal that was offered to the homeowner. In simple terms, it could be that the appraisal report was $250,000 higher than the actual value of the property. As a result, the damages include the $250,000 plus the interest paid on that $250,000 and where appropriate, the loss of the house in foreclosure, plus interest from the date of the fraud (i.e. the closing), attorney fees, and costs of the action.

This action might also have special applications in commercial property cases where the appraisals are known to have come in much higher than the owner or buyer had ever expected. In some cases the “appraisal” actually changed the terms of the contract on the assumption that the property was worth much more than the original offer.

Ireland Joining Iceland for Mortgage Principal Corrections

Editor’s Note: It’s not final but it looks like Ireland is going to do pretty much the same thing that Iceland did, except this one is based upon the heart of the crisis — housing and bad mortgages, falsely presented to lenders and borrowers alike. The answer? Reduction in the balance due on mortgages that were falsely presented in the first place.

It is the obvious answer. Homeowners and lenders were BOTH fooled into believing that normal underwriting practices were at work. The originators even charged more for no-doc loans because they were taking a higher risk than the usual requirements of tax returns, confirmation of employment and income, and verification of the value of the property and the ability of the borrower to repay the loan.

The banks took the money from investors, promising to deposit those funds into a “trust” account for funding mortgages or acquiring mortgages within the prescribed period of time (90 days). The banks didn’t deposit the funds in any such account and instead commingled all the investor money to intentionally obscure the theft and the nature of the Ponzi scheme they were running.

The homeowner is said to be at fault for borrowing more money than they could afford to repay, but the bank sales machine expanded the offering of mortgages from 4-5 different types to over 450 different types of loans, along with assurances that the bank had reviewed the loan, and was satisfied that the loan could be repaid and that was because of rising prices in real estate fueled mostly by a flood of money and the boom in new house building where builders were only too happy to raise their prices as much as 20% per month, for appraisers to “use” in comparing property values. The truth is that the appraisers were under threat of either coming in with an appraisal at least over $20,000 more than the contract price, or they would never work again.

Yet somehow in the mind of policy makers and bankers (and the courts)  it was cheating when they gave those appraisals (indirectly) to investors but stupid on the part of borrowers who accepted the approvals. So the borrowers, who were cheated out of the deal they they were getting are stuck and the investors who are cheated out of the deal they thought they were getting, are getting settlements.

As Iceland has shown, the issue isn’t blame anymore. It is survival. And as Iceland as shown, the issue is whether the economy can be re-started and become robust once again. The answer is yes, as long as we turn a deaf ear to the bankers whose information and data is used by policy makers.

6 Years I ago I proposed that the answer to this problem was amnesty for everyone, with everyone taking a share of the loss. That still seems like a good idea. Iceland is putting bankers in jail and maybe that is where they belong. But I am more concerned with the health of our society, not the revenge against individual bankers.

Ireland Plans Bold Measures to Lift Housing

By PETER EAVIS, NY Times

DUBLIN – With its economy still reeling from the housing crash, Ireland is making a bold move to help tens of thousands of struggling homeowners.

The Irish government expects to pass a law this year that could encourage banks to substantially cut the amount that borrowers owe on their mortgages, a step that no major country has been willing to take on a broad scale.

The initiative, which would lower a borrower’s monthly payment, could prevent a tide of foreclosures, an uncertainty that has been hanging over the Irish housing market for years. If it works, the plan could provide a road map for other troubled countries.

Without the proposed law, Laura Crowley, a nurse who lives in a village 30 miles west of Dublin, figures she will lose her home. In 2007, Ms. Crowley and her husband bought a small home for the equivalent of $420,000. But they can no longer afford the $1,400 monthly payment. Her husband, a construction worker, is earning far less and her take-home pay has been cut by the country’s new austerity measures, which include new taxes. “This bill is the only light at the end of the tunnel for us,” she said.

Most countries that have suffered housing busts, including the United States, have made limited use of so-called mortgage write-downs, the process of forgiving a portion of the principal on the loan. The worry has been that some borrowers who can afford their mortgages will stop making payments to take advantage of a bailout. Banks have also been reluctant since they could face unexpected losses.

Ireland is different from the United States and most countries. During the financial crisis, Ireland bailed out the banks, and the government still has large ownership stakes in some of the biggest mortgage lenders. So taxpayers are already responsible for mortgage losses. In other countries, the burden of principal forgiveness would largely fall on privately owned banks.

But the debate is the same: whether to push lenders to take losses now, in hopes that things will get better faster, or wait for the housing market to heal on its own, which could cloud the economy for years to come.

Countries suffering from a housing hangover will most likely be watching Ireland closely to see how the law works. Spain, swamped with mortgage defaults, introduced a measure in March that allows for debt forgiveness, though under strict conditions.

In many ways, Ireland has to try something audacious. House prices are still 50 percent below their peak, compared with 30 percent in the United States. And more than half of Irish mortgages are underwater, meaning the house is worth less than the outstanding debt. While some of those borrowers can afford to keep making payments, more than a quarter of mortgage debt on first homes, roughly $39 billion, is in default or has been modified by lenders.

The housing market is now in a state of limbo as the government and the banks have made little effort to clean up the mortgage mess.

Unlike in the United States, Irish banks have foreclosed on very few borrowers. While Ireland’s leaders have considered it socially unacceptable for banks to seize large numbers of homes, they also feared the fiscal cost of foreclosures.

This approach creates doubt about the true level of bad mortgages at Irish banks. And borrowers, unsure of whether they will keep their homes, remain in a state of financial paralysis.

The new law aims to end this stalemate by overhauling Ireland’s consumer debt and bankruptcy laws.

While banks aren’t required to reduce the mortgage debt, the legislation gives them a powerful incentive to write down mortgages for troubled borrowers. Under the new rules, it will be less onerous to declare bankruptcy, making it easier for people to walk away from their homes altogether. As the threat rises, banks are more likely to reduce homeowners’ debt, rather than risk losing the monthly income and getting stuck with the property.

“For the banks, where there are losses, they have to be recognized,” said Alan Shatter, Ireland’s justice minister, who has sponsored the new law, called the Personal Insolvency Bill. “This legislation gives homeowners hope for their future.”

The legislation is intended, in part, to reach homeowners who are on the verge of running into trouble, as Geraldine Daly is.

A health care worker, Ms. Daly bought a home in 2009 in Belmayne, a new development in northern Dublin. Until last month, Ms. Daly said, she has been making her $1,200 payment. Then she fell behind after some unexpected expenses, including a car repair.

Ms. Daly estimates that her finances would become manageable if her monthly mortgage payments were cut to around $900. “Right now, I am a slave to this dog box.”

Critics contend the law could have unintended consequences.

One fear is that banks won’t have the money to absorb the potential losses on the mortgages. A big mystery is the level of defaults on so-called buy-to-let mortgages, loans that many Irish people took out to buy second homes to rent. In theory, the insolvency bill allows for write-offs on this type of mortgage, and analysts expect defaults on such loans to be higher than on first homes. Ireland’s central bank is expected to release the data soon.

To qualify, borrowers will have to prove that they are in a precarious financial position and cannot afford to pay. Analysts are concerned that the bill may actually be too restrictive and homeowners will continue to default. “There are so many layers that borrowers have to go through to get a write-down,” said Paul Joyce, senior policy researcher at Free Legal Advice Centers, a legal rights group that has supported moves to make Irish bankruptcy law more lenient. For instance, borrowers will most likely have to pay a big fee upfront to the person who handles their case.

John Chubb, a former construction worker who lives on a quiet cul-de-sac on the outskirts of Dublin, isn’t too worried about the process right now. He just wants to save his home.

Since having an operation for colon cancer in 2004, Mr. Chubb has lived primarily on government disability payments, and the bank has allowed him to pay only mortgage interest. But the lender is in the process of deciding whether to foreclose.

“I am expecting the word any day now,” he said. “I don’t know if I will be out on the front path before the bill passes.”

Why Hasn’t De Marco Been Fired?

Editor’s Notes: It is already well -established that write-down of principal is the only sane thing to do in these circumstances. De Marco standing as head of of the GSE’s refuses to consider that and even refuses to push for modifications, preferring foreclosures instead. Foreclosures are what is killing the economy, destroying lives and providing windfall upon windfall profits to Wall Street. Who is in charge — De Marco or Obama?

He is still talking as though there are deserving homeowners and undeserving homeowners. In any PONZI scheme, there are people whose greed is more than other “investors.” But they are all treated the same when it comes to getting restitution. It’s time to level the playing field. Fire DeMarco and start forcing modifications and settlements where people can pay some reasonable amount of monthly payment on a reasonable balance that does not carry forward the appraisal fraud at origination of the loan.

AND by the way, when will Obama or Romney address the criticism that they are not talking about foreclosure, which is the elephant in the living room?

occupy-homes-others-demand-foreclosure-action-freddie-mac-chicago-headquarters

Fraudulent Appraisals: The Centerpiece of Securitization PONZI Scheme

Editor’s comment: There are two “good” reasons why Wall Street wanted the appraisals inflated. The first was that the higher the appraisals (the real values be damned) the more money they could show that was moving, and the more sure they  could be that even good loans would be defaulted strategically by people unwilling to pay. The second was to create the frenetic bubble where consumers were led to believe that the rising prices represented rising values and that they better get on the train before it leaves the station.

Without investors and borrowers feeling like they were on a speeding train under the masterful control of Wall Street banks with 100+ year histories, there would have been no mortgage mess. Investors would not have been looking at the mortgage bonds as something not only safe, but with growth potential. Borrowers would have stayed away from homes or financing packages they could not afford.

Now, as the facts seep out of leaking seals, the investor side and the borrower side are realizing that real estate prices DO go down, especially when the prices are so far over any reasonable valuation. With investors, there is no deal. Without borrowers, there is no deal. It is that simple.

So now we have a new term: FRAFing — Field Review Appraisal Fraud in which Quality Mortgage Service and others are being hired to show that the appraisals were faked. This shouldn’t be hard.

Collect up a hundred random appraisers who were working during that period, and they will tell you that they were shown the contract, and directed to use the broadest possible range of comparables to come up with the highest possible appraisal, even though by industry standards, the appraisal should have been much lower.

The facts bear out these allegations. As soon as the money stopped, the home prices collapsed. Why is that? If they were really worth the price paid or financed, then homes should have been a safe place to keep your money while their were wild currency gyrations and the banks were teetering on collapse and actually still are on the edge of ending their long reign of terror over the US economy and political landscape.

The short answer is unavoidable: the homes were not worth what the sham lenders were certifying in their loan packages. remember that the appraisal is from the lender not the borrower, so don’t go blaming borrowers for setting up this mess. In 2005, 8,000 appraisers signed a petition to Congress to warn of these practices. They were ignored. Now it will take decades to clear out the mess that could have been avoided by a quick nip in the bud.

The effect on borrowers is that they were victims of the fraud and if properly presented the liability goes all the way up the fake securitization chain leading, like the bridge to nowhere, to no loan pool that actually owns the obligation, note or mortgage. Investors (pension funds etc) bought faked mortgage-backed bonds that were neither bonds nor mortgage-backed and the borrowers bought homes or loan packages (refinance was 50% of the market) based upon a contract whose premise was that the market was rising and the value of their homes was rising with spectacular results and would never come down.

BOTH investors and borrowers deserve better treatment than they are getting. It is like the veterans coming back from combat tours. Whether or not you agree with the policies that sent these brave men and women to war they should be treated like heroes, and not victimized by a society that no longer has any use for them. When do we reach the point of outrage where the people march on government and the banks and take back their power?

The reason that homeowners didn’t get the benefit of the bargain they made when they bought these sham loan products, is because the deal was never there. That is the essence of fraud. The banks. media and regulators will tell you that the market went down. No. It actually didn’t “go down” it crashed back to the real value of the property as soon as the scam was over.

HousingWire.com by Justin T Hilley

Audits by Quality Mortgage Service indicate that many demands by financial institutions that lenders buy back mortgages are based on fraudulent appraisal schemes in an attempt to increase the success of repurchase claims.

The Brentwood, Tenn.-based quality control and assurance company believes some appraisers are systematically being pressured to use a subset of market data that skews the calculated market value of the property backing the disputed mortgage.

QMS says the scheme, which it calls FRAFing, or field review appraisal fraud, is often found in appraisals when mortgage repurchase demands are pushed backed to lenders for a claim based on a field review appraisal value.

“The appraiser or someone is manipulating data and/or information in sections of the appraisal to obtain a targeted value result,” QMS President Tommy A. Duncan says. “They are ignoring the higher value of comparable so that a lower value is supported in the appraisal.”

The data used to compare to the property is nearly always restricted to the bottom 20% to 30% of sale prices in the market area, Duncan says.

“What we are finding, when supporting repurchase defenses, is a concerted effort to base an opinion of market value on the lower one-third of market data that produces erroneous estimates for approximately 65% of the properties appraised — assuming equal market distribution,” he adds.

Financial institutions are FRAFing because of intense pressure to successfully push back loans for repurchase, Duncan claims. “It is a conclusion I am making because it does not make sense for an appraiser to overlook the obvious,” Duncan says. “Therefore, the act must be based on pressure and not sloppy work.”

The QMS repurchase defense audit compares the information contained in mortgage loans and supported material in the claim usually at the lender’s second attempt to defend. QMS employs human analytics and asymmetrical methodology in its review to ensure that the document has been prepared correctly and that the information reported is accurate.

Duncan recommends mortgage lenders perform the highest level of due diligence when field review appraisals are used to support a repurchase claim in order to combat FRAFing.

jhilley@housingwire.com

@JustinHilley

Empty Paper Bags: Loans Never Entered Pools

Hat Tip to Ken McLeod, private investigator serving livinglies

LIVINGLIES VINDICATED!!!

99% of the Loans Never Were Transferred into Trusts

Editor’s Comment: The truth is coming out piece by piece. In this complaint a thorough examination revealed what we have been saying all along — the loans were NOT pooled, bundled or put into any trust. That means the entire securitization chain is a scam, supporting a Ponzi scheme that should result in criminal prosecutions.

What effect is there on mortgage documentation? Well for starters we already know that the payee, lender and secured parties were acting as sham entities even when they were otherwise real entities, like Wells Fargo.

The banks had to make some OTHER connection between the so-called pools that were in actuality unfunded trusts — and that explains why instead of producing real, accurate, truthful documentation they resorted to fabricated, robo-signed, robo-notarized documents executed by $10 per hour people whose only purpose was to act as “authorized signor” or “assistant secretary” neither of which designations is recognized by law. If you went to the bank to open an account or take a loan and insisted on signing with those designation they would refuse to open the account and rightfully so. But in millions of foreclosures, the reverse was NOT the case — they relied upon such bogus documents in order to sell bogus mortgage bonds backed by unfunded pools, SPVs, Trusts, REMICS or whatever else you want to call them.

The investors are clearly taking up the cause of homeowners and they have more clout, credibility and now the proof that their money was channeled in ways neither contemplated nor agreed as per the false pooling and servicing agreements and false prospectuses that were offered by Wall Street.

We are left with defective instruments that in the end bear no connection with those pools but which have documentation fraudulently obtained from homeowner borrowers in order to get money fraudulently obtained from investor lenders. They siphoned off the money using a variety or ruses and paid the investors as though the pools were real and funded with money or assets when in fact they were empty paper sacks.

They they traded on the loans pretending that they, the banks were the owners, and they sold them multiple times. Then they foreclosed on the properties alleging they were authorized agents of the pools when the pools did not exists. No trust exists if it is unfunded. When they were done, they took the profits and put it into their own pockets, leaving both the investors high and dry and doing the same for homeowner borrowers.

They took the losses and tried to throw them at the investors and used the losses in trading to beg for Federal bailout claiming that they were on the verge of collapse, which was true as to many of them, since they were reporting assets on their balance sheet that did not exist, and they were therefore both overvalued in the stock market, over-rated in the bond market, and always on the tip of collapse. This isn’t the final nail in the coffin of the mega banks but it certainly ties things down.

For homeowner borrowers, it is just as I said — the money was never channeled through trusts and instead of was kept by the banks to use for reporting trading profits in which the left hand sold to the right hand, plus fees, expenses and various other charges. They paid the investors out of continuing sales of bogus mortgage bonds — the classic signature of a PONZI scheme.

Thus the homeowner borrower attorneys take note: the origination documents are 99% invalid, the foreclosures are 99% invalid, and that means that the secured part of the obligation was never perfected and is fatally defective so that it can never be perfected without a signature of the homeowner borrower. That makes the obligation unsecured — money potentially owed to unknown creditors who were not disclosed contrary to the requirements of TILA, RESPA and state deceptive lending laws.

The obligation remains, but there are no creditors who are making the claim because they could subject themselves to predatory lending claims, fraud and other charges resulting in treble damages. The note is a recital of a transaction that never existed. It recites a loan from the payee or lender when neither of them funded or even purchased the loan. Make the allegation and ask for the discovery. They will collapse.

http://www.labaton.com/en/cases/upload/HSH-v-Barclays-Consolidated-Complaint.pdf

Salient Quotes from Complaint

1. This action arises out of Defendants’ conduct in connection with the offer and sale to Plaintiffs of certain residential mortgage-backed securities (“RMBS”). Plaintiffs purchased approximately $46 million in RMBS certificates (the “Certificates”) in connection with three securitizations issued and/or underwritten by Defendants. These three securitizations are commonly known by their abbreviated names, SABR 2005-FR4, SABR 2006-FR1 and SABR 2007-NC2 (collectively, the “Securitizations”). Plaintiffs’ holdings in the Securitizations, including purchase dates and amounts invested, are detailed in Table 1, infra Section I.

3. Through investigation of a large sample of publicly recorded mortgage documents, Plaintiffs have discovered that more than 99% of the mortgages in each of the three Securitizations were improperly or never assigned. In particular, many of these mortgages remain in the name of the loan’s originator or its nominee, and have never been assigned to the Trusts. While others were purportedly assigned to the Trusts, this was long after the securities were issued, contrary to the representations in the Offering Documents. Similarly, the promissory notes were not properly assigned in approximately 81.9% of the sampled loans.

9. By reviewing a large sample of loans in the Securitizations and comparing the representations made about them in the Offering Documents to publicly available data concerning those same loans, Plaintiffs have discovered that the Offering Documents understated CLTV by more than 10 percent in approximately 37% of the loans, based on the sampled loans.

Plaintiffs’ investigation has also revealed that the Offering Documents overstated owner occupancy rates by approximately 14.3% – 19.2%, based on the sampled loans.

14. Prior to their issuance of the Certificates, the Issuer Defendants were specifically informed that large numbers of loans in the Securitizations did not conform to the underwriting guidelines of the originators, including with respect to CLTV ratios and owner-occupancy rates, in reports from their due diligence vendor, Clayton Services Inc. (“Clayton”), and had no compensating factors. Despite having been expressly advised that many of the loans failed to comply with underwriting guidelines, the Issuer Defendants nevertheless included large percentages of these non-compliant loans in the Securitizations, and falsely represented their quality and characteristics to Plaintiffs and other investors.

32. HSH is the subrogee of both Carrera and of Rasmus as to their rights and claims relating to their purchases of certain of the Certificates. At all relevant times, a majority of the credit risk associated with the Certificates was borne by HSH, because Rasmus’s and Carrera’s ability to repay their debts was dependant on the value of, and/or cashflow expectancy from, the assets each held, which included the Certificates. HSH’s rights of subrogation flow from its acquisition of Certificates from Rasmus and Carrera at or near par value subsequent to the losses.

This acquisition was necessary in order to protect HSH’s economic interests, which were at risk due to HSH’s contractual obligation in their role as Liquidity Provider, Capital Noteholder and/or Letter of Credit Provider to cover certain debts, and/or absorb certain losses, of Rasmus and Carrera.

53. Through investigation of publicly recorded mortgage documents, Plaintiffs have discovered that, contrary to the Issuer Defendants’ statements in the Offering Documents, virtually all of the mortgages and promissory notes that were represented to have been assigned to the Trusts were not in fact assigned to the Trusts at the time the Certificates were issued.

Plaintiffs have conducted two separate investigations, with a combined sample size of more than 2,000 mortgages from the Securitizations, and have found that not one of the sampled mortgages, which were all represented to have been assigned into the Trusts prior to issuance of the Certificates, was in fact timely assigned to the Trust.

55. This belief was an essential part of the contracts to sell the Certificates. Plaintiffs would not have purchased so-called “mortgage-backed” securities that were not actually backed by the mortgages represented to be in the pool, for at least two reasons: (1) when these securities are not backed by actual mortgages or notes, the Trust is left without any recourse against a borrower that ceases to make payments; and (2) valid and timely assignments of the notes and mortgages are essential to the Trusts’ tax status as REMICs, and therefore are necessary to avoid highly punitive tax consequences.

60. Plaintiffs have investigated and analyzed loan-level information for each of the Securitizations to determine the accuracy of certain representations made in the Prospectus Supplement, including the assignment of mortgages and notes to the Trusts.

61. In two separate investigations, Plaintiffs have conducted a review of publicly available mortgage documents at county clerk’s offices across the country for the mortgages and/or notes that were represented to have been deposited into the Trusts.

62. Both investigations have independently revealed that over 99% of the mortgages and notes were not properly and/or timely assigned to the RMBS Trusts.

64. This investigation revealed that of the 987 total mortgages sampled, none were assigned to the Trusts at the time of the issuance, as was represented in the Offering Documents, and only seven were assigned to the Trusts within three months thereafter, as is required by REMIC tax laws. Thus, over 99% of the sampled mortgages were either improperly assigned to the Trusts more than three months after issuance or were never assigned at all – in direct contradiction to the representations in the Offering Documents provided by Defendants and relied upon by Plaintiffs.

65. Specifically, approximately 38% to 61% of the mortgages sampled have never been assigned to the Trusts. Moreover, based on the sampled loans, approximately 38% to 61% of the mortgages were assigned to the Trusts more than three months after the Securitization closed. The overwhelmingly large percentages of mortgages for each of the Securitizations that were never assigned to the Trusts, and those that were not assigned at or three months after issuance, are set forth below in Table 2.

70. Additionally, in a separate investigation Plaintiffs analyzed a different sample of 600 mortgages from SABR 2005-FR4, 600 mortgages from SABR 2006-FR1, and 400 mortgages from SABR 2007-NC2. This investigation independently confirmed that the vast majority of the mortgages in the pools underlying the Securitizations were never assigned to the Trusts. Moreover, this second investigation also showed that of the mortgages that were eventually assigned to the Trusts, none were assigned prior to the issuance of the Certificates, as was represented in the Offering Documents, or within three months thereof, as is required by the REMIC tax laws. The results of this additional investigation and analysis are shown in Table 4 below.

74. The assignment of the mortgages and notes into the Trust is perhaps the single most essential part of the mortgage-backed securitization process. Without these assignments, the securities are not truly “mortgage-backed” at all.

76. Moreover, apart from foreclosure, the only other remedy available to the Trust to collect on the obligation where a borrower ceases to make payments is to bring an action in contract under the promissory note. However, the Issuer Defendants’ failure to transfer the notes into the Trusts prevents the Trusts from pursuing this remedy, meaning that where the mortgage and note have not been assigned, the Trusts have no legal recourse if a borrower ceases to make payments to the Trust and must incur a significant loss.

103. Accurate appraisals are crucial to the accuracy of CLTV ratios, as the value of the property (i.e., the denominator of the CLTV ratio) is the lower of either the purchase price or the appraised value of the property. If an appraisal is inflated, it will change the CLTV ratio such that the credit risk of the loan is understated.

104. As with owner-occupancy data, even small inaccuracies in CLTV ratios are material to investors, such as Plaintiffs, because they can have a significant impact on the risk of investing in the Certificates.

110. Apparent from this data is the fact that the appraised values reported in the Offering Documents for the pooled properties were significantly higher than the actual property values. These overstatements led to a material understatement of the CLTV ratios, and a corresponding understatement of the investment risk.

117. Clayton scored each loan it reviewed on a scale of 1 to 3. A score of “1” meant that the loan complied with the underwriting guidelines of the originator. A score of “2” meant that the loan did not comply with the originator’s underwriting guidelines, but had unspecified “compensating factors.” A score of “3” meant that the loan failed to comply with the originator’s underwriting guidelines and did not possess any compensating factors.

118. Approximately 27.3% of the loan files Clayton reviewed for the Issuer Defendants received a score of 3. Clayton provided detailed reports to the Issuer Defendants containing the scores of the reviewed loans prior to and during the preparation of the Offering Documents.

125. All of the loans in the three Securitizations came from two originators: Fremont and New Century. SABR 2005-FR4 and SABR 2006-FR1 were both entirely comprised of loans originated by Fremont and SABR 2007-NC2 was populated solely with loans originated by New Century.

131. The U.S. Senate Permanent Subcommittee on Investigations issued a 646-page report entitled “Wall Street and the Financial Crisis” (the “Levin Report”) which found that Fremont and New Century, in particular, were both “well known within the industry for issuing poor quality loans.”

133. New Century ranks number one on the Office of the Comptroller of the Currency’s (the “OCC”) “Worst Ten in the Worst Ten” list of the nation’s most egregious originators. This means that more foreclosures were instituted on mortgages originated by New Century in 2005 through 2007 in the ten cities with the highest foreclosure rates than any other originator in the country. This is the result of New Century’s dramatic departure from its own underwriting guidelines, which were supposed to prevent loans from being made to borrowers who clearly did not have the ability to repay them.

138. Ms. Lindsay further testified that appraisers faced extreme pressure from their superiors, and deliberately distorted data “…that would help support the needed value rather than using the best comparables….”

see HSH-v-Barclays-Consolidated-Complaint

Appraisal Fraud: Triaxx Inching Toward the Truth

Editor’s Comment: At the heart of the entire scam called securitization was the abandonment — in fact the avoidance of repayment of the loans. The idea was to make bigger and bigger loans without due any evidence of due diligence, so that the “lender” could claim plausible deniability and more importantly, make a claim for losses that were insured many times over. It was the perfect storm. Banks were using investor money to make bad loans on which the banks were raking in huge profits through multiple sales or insurance of the same loan portfolio. The only way the plan could fail was if the loans performed and the loan was in fact repaid.

For years, I have been pounding on the fact that the root of the method used was appraisal fraud, which as far as I can tell was present in nearly 100% of all loans subject to securitization, where loans were NOT bundled, and the securitization documents were ignored.

Now ICP Capital managing a vehicle called Triaxx, has countered the mountain of documents with real data sifted through algorithms on computers and they have come to the conclusion that loans were far outside the 80% LTV ratio that was presented to investors, that loans were never paid from the start (not even the first payment) and that probability of repayment was about zero on many loans. Soon, with some tweaking and investigation they will discover that repayment was never in the equation.

Thanks again to the learning curve of Gretchen Morgenson of the New York Times and her excellent investigations and articulation of her findings, we are all catching up with the BIG LIE. Banks made loans to lose money because they the money they were losing was the money of investors — pension funds etc. And at the same time they bet against the loans that were guaranteed to fail and put the money in their own pockets.

In classic PONZI scheme methodology, they used the continuing sales of false mortgage bonds to pay investors until the inevitable collapse.

Once this is established 2 things are inevitable — the investors will prove their case that they the mortgage bonds were fabricated and based upon lies, deceit and cheating.

And the other inevitable conclusion is that the money came from the investors and not from the named payee, lender or secured party on the notes and mortgages that were executed in the tens of millions during the mortgage meltdown decade.

But did the investor money come to the closing through the REMIC? The answer appears to be a big fat “NO” based upon a big fat LIE. And THAT is where the problem is that caused the banks and servicer to fabricate, forge, robo-sign, lie, cheat and steal in court the same way they did when they sold the investors and sold the borrowers on a deal doomed from inception.

Legally and practically all that means that the borrowers were equally defrauded by the false appraisals that are legally the representation of the “lender” not the borrower. But even more importantly it means that Wall Street cannot show that the money for funding or purchase of the loans ever actually came from the investment pools.

It turns out that the Wall Street was telling the truth when it denied the existence of the pools and the switched to a lie which we forced on them because it never occurred to us that they would blatantly cheat huge institutions that could do their own digging and litigating. 

The legal and accounting effect of all this is enormous. The Payees, Lenders and Secured Parties named in the closing were not the source of funding and therefore the documents that were signed must be construed as referring to a transaction that has never been completed because it was never funded.

The deception was complete when Wall Street investment bankers sent money down to closing agents without regard to any pool, REMIC, SPV or other specific collection of investors. The funding arrived from Wall Street a the same time as the papers were signed.

But in order to prevent allegations of false appraisals and predatory and deceptive lending from moving up the ladder, Wall Street made sure that there was NO CONNECTION between the PAYEE, LENDER or SECURED PARTY and either the investment bank or the so-called unfunded pool into which no assets were placed other than the occasional purchase or sale of a credit default swap.

FREE HOUSE?: As Arthur Meyer is fond of pointing out in his history of banking every 5 years, bankers always manage to step on a rake. The banks had severed the connection between the funding and the documents.

If the court follows the documents a windfall goes to someone in the alleged securitization documents WHO HAS ALREADY BEEN PAID.

If he follows the money, the loan is not secured by a perfected mortgage lien, which means that (1) the unsecured debt can be wiped out in its entirety by bankruptcy AND/or (2) with investors slow on the uptake, there might not be a creditor left to make a claim.

THE ULTIMATE AND RIGHT APPROACH TO PRINCIPAL REDUCTION: But as pointed out previously, there is a Tax liability that would put the federal, state and local budgets back in balance due from homeowners who got their “free house.” It would be a small fraction of the balance claimed on the original loan, but it would reflect the real valuation of the house, the real terms that should have applied, and a deduction for the predatory and deceptive lending practices employed.

BOA ET AL DEATHWATCH: The political third rail here is that 5-6 million homeowners might well have a right to return to their old homes with no mortgage — an event that would put our economy on steroids, end joblessness and crush the mega banks whose accounting and reporting to the SEC and shareholders has omitted the huge contingent liability to pay back the ill-gotten funds from reselling the same portfolio AS THEIR OWN  loans dozens of times.

Too Big to Fail may well be amended to “Too Fat to Jail”, a notion with historical traction even in our own society corrupted by money, influence peddling and lying politicians.

See Gretchen Morgenson’s Article at How to Find the Weeds in the Mortgage Pool

How to Find Weeds in a Mortgage Pool
By GRETCHEN MORGENSON, NY Times

IT sounds like the Domesday Book of the housing bust. In fact, it is a computerized compendium of millions of housing transactions — a decade’s worth from across the country — that could finally help us get to the bottom of troubled mortgage investments.

The system is an outgrowth of work done by a New York investment manager, Thomas Priore. In the boom years, his investment firm, ICP Capital, navigated the dangerous waters of collateralized debt obligations via an investment vehicle called Triaxx. Buyers of Triaxx C.D.O.’s did better than most, but Triaxx still incurred losses when the bottom fell out.

Now Triaxx’s database could help its managers and other investors identify bad mortgages and, perhaps, learn who snookered whom when questionable home loans were bundled into investments that later went bad.

Triaxx’s technology came to light only last month, in court documents filed in connection with the bankruptcy of Residential Capital. ResCap was the mortgage lending unit of GMAC, now known as Ally Financial. As an investor in mortgage securities, Triaxx gained access to a lot of information about loans that were pooled, including when those loans were made, where the properties are and how big the mortgage was, relative to the property’s value. After Triaxx fed such details into its system, dubious loans popped out.

Granted, Mr. Priore is no stranger to controversy. He and ICP spent two years defending themselves against a lawsuit by the Securities and Exchange Commission, which accused them of improperly generating “tens of millions of dollars in fees and undisclosed profits at the expense of clients and investors.” On Friday, ICP and Mr. Priore settled the matter. As is typical in such cases, they neither admitted nor denied the accusations. Mr. Priore paid $1.5 million. He declined to discuss the settlement.

But he did say that, looking ahead, he believed that Triaxx’s technology would help its investors recover money they deserved. Many other investors, unable or unwilling to dig through such data, have settled for pennies on the dollar.

“Our hope is that the technology will level the playing field for mortgage-backed investors and provide a superior method to manage residential mortgage risk in the future,” Mr. Priore said.

A step in that direction is Triaxx’s recent objection to a proposed settlement struck last May between ResCap and a group of large mortgage investors. Triaxx, which invested in mortgage loans originated by ResCap, criticized that settlement because it was based in part on estimated losses. Triaxx said the estimates had assumed that all the trusts that invested in ResCap paper were the same. Triaxx argued that a settlement based on estimated losses, rather than one based on an analysis of actual misrepresentations, unfairly rewards investors who bought ResCap’s riskier mortgages.

ResCap replied that it would be a herculean task to examine the loans in the trusts to determine the validity of each investor’s claims. But Triaxx noted that it took only seven weeks or so to do a forensic analysis of the roughly 20,000 loans held by the trusts in which it is an investor. Of its investments in loans with an original balance of $12.8 billion, Triaxx has identified approximately $2.17 billion with likely breaches. A lawyer for ResCap did not return a phone call on Friday seeking comment about problem loans.

John G. Moon, a lawyer at Miller & Wrubel who represents Mr. Priore’s firm, said: “Large institutions have been able to hide behind the expense of loan file review to evade responsibility for this very important national problem that we now have. Using years of data and cross-referencing it, Triaxx has figured out where the bad loans are.”

Triaxx, for example, said it had found loans that probably involved inflated appraisals. Those appraisals led to mortgages far exceeding the values of the underlying properties. As a result, investors who thought they were buying mortgages that didn’t exceed 80 percent of the properties’ value were instead buying highly risky loans that totaled well over 100 percent of the value.

Triaxx identifies these loans by analyzing 50 property sales in the same vicinity during the same period that the original mortgage was given. Then it compares the specific mortgage to 10 others that are most similar. The comparable transactions must involve the same type of property — a single-family home, for example — of roughly the same size. They must also be within a 5.5-mile radius. If the appraisal appears excessive, the system flags it.

Phony appraisals in its ResCap loans likely resulted in $1.29 billion in breaches, Triaxx told the court. Triaxx cited 50 possible cases; one involved a mortgage written in November 2006 on a home in Miami. It was a 1,036-square-foot single-family residence, and was appraised at $495,000. That appraisal supported a $396,000 mortgage, reflecting a relatively conservative 80 percent loan-to-value ratio.

But an analysis of 10 similar sales around that time suggested that the property was actually worth about $279,000. If that was indeed the case, that $396,000 mortgage represented a 142 percent loan-to-value ratio.

Perhaps the home had gold-plated bathroom fixtures and diamond-encrusted appliances. Probably not.

Triaxx’s system also points to loans on properties that were not owner-occupied, a breach of what investors were told would be in the pool when they bought it, Triaxx’s filing said. Such misrepresentations in loans underwritten by ResCap amounted to $352 million, Triaxx said.

The technology also kicks out mortgages on which borrowers failed to make even their first payments, loans that should never have wound up in the pools to begin with.

Although Triaxx is using its technology to try to recover losses, that system could also help investors looking to buy privately issued mortgage securities. After all, investors’ inability to analyze the loans in these pools during the mania led to enormous losses in the collapse. Now, deeply mistrustful of such securities, investors have pretty much abandoned the market.

Lenders and packagers of mortgage securities will undoubtedly fight the use of any technology like Triaxx’s to identify questionable loans. That battle will be interesting to watch. But investors should certainly welcome anything that brings transparency to this dysfunctional market.

Fraud in the Factum: The Core of the Securitization Myth

Dan Edstrom, our senior securitization analyst who will be one of the presenters in both the San Francisco (Emeryville) seminar and the Anaheim Seminar, ran across some material that should assist many homeowners and attorneys representing homeowners. Remember that part of the seminar is devoted to the business model for making money — a lot of it — in representing homeowners in challenges to the pretender lenders. Call Customer Service 520-405-1688.

The basic fact pattern is that through dual tracking (see the last post), the players in this game were playing a shell game that resulted in repeated windfalls to the players while delivering multiple financial body blows to the only two parties in the transaction that counted: the lender and the borrower.

By inducing the borrower to sign documents that recited transactions that never existed nor were they expected to take place, the borrower finds himself owing a third party to whom an obligation is owed while at the same time having executed papers allowing the securitization players to claim that they were the owners of the loan for trading, insurance and bailouts purposes.

The essence of this is agreement and consent. The fact that an offer has been made does not mean the other party concentrated to the terms presented. And if the terms presented are untrue, the asset is as invalid as if assent had never been given.

These are voidable, not void, transactions. As with all foreclosure litigation, the pleading and proof is tricky. If you deny that the document is true and that the signature on it is true, you are denying that you assented to its terms and that your signature was fraudulently induced. It is also highly probable if not definite that most of the so-called promissory notes were destroyed or “lost”, putting the burden on the the party who wishes to use a copy to tell the story of how it was lost or destroyed and proving that an actual financial transaction took place between the pretender lender and the borrower — a fact that cannot be proved without fabricated documents based upon perjury for its foundation.

Pretender lenders get around this impossible burden of proof by producing “the original” which is anything but the original (see Photoshop) and without proper foundation from a competent witness who can testify as to the foundation and introduce documents proving that the payee on the note, the secured party on the note, were each involved in a financial transaction with the homeowner — and that therefore these documents are accurate depictions or evidence of the terms of the transaction.

The trick was simple: present a note that looks like a note and present a mortgage that looks like a mortgage even if they are not the originals, lift the signature of the homeowner from some other document and affix it to the the documentes in quesstion. 9 out of 10 times the homeowner will concede that those are the the documents presented him at closing, that the signature is his and so it goes through the loan, default etc.

By the time the illicit proffer of evidence is completed by opposing counsel (without a single stitch of evidence introduced into the record) the borrower is seen as admitting the loan, the note, the mortgage, the default etc. and thus trying to find some gimmick to get out of the perfectly “legal” obligation.

The perfectly “legal” obligation took place between the homeowner and the lender (Pension Fund) — but here is the rub: there are no documents to show that except for wire transfer instructions. Hence, the mortgage, note and other closing documents are completely fictitious, even without the obvious elephant in the living room — appraisal fraud.

The position of the pretender lenders is simple: even if the actual transaction was between the homeowner and the actual lender, they still own the note and mortgage to the exclusion of the actual lender, until such time as the loan goes into default, is sold in foreclosure and the homeowner is evicted. While it it might be true that they own the pieces of paper depicted as the note, mortgage and HUD closing statement, they certainly did not comply with the disclosure requirements of TILA and RESPA.

They ignore the elements of the PSA and prospectus that certainly imply that the proceeds of insurance, credit default swaps etc should be paid to or credited to the the actual lenders, but they ignore that, thus maintaining a liability to the actual lender from the pretender lender and creating the holographic image of an obligation from the homeowner created on paper but without any factual foundation where money exchanged hands.

Most of all they ignore the time limits placed on the transaction in which the loan must be transferred to the actual lender — 90 days, according to the PSA and the REMIC provisions of the IRC. And worst of all, they ignore the essential premise of the transaction with the lender to wit: “We promise to give you interest and principal based upon payments from borrowers of interest and principal, guaranteed by the subservicer and Master Servicer, who are insured by Triple A rated insurance companies (AIG) on securities that have also been examined and awarded a Triple A rating. These loans will only be funded after being subject to the stringent requirements of the industry standard underwriting practices.” None of it was true, of course.

But more importantly, they are NOW trying to throw the loss of a bad loan over the fence at the investor where the closeout date was years prior to the “assignment” and the loan is already in default thus preventing the manager of any pool from accepting the defective loan without violating every aspect of his authority to act on behalf of the pool.

In short, the players in the myth of securitization (it never happened, none of it) borrowed the ownership as long as it was convenient to do so in trading and purchasing insurance and other hedge products and borrowed the loss of the actual lenders (Pension Funds) in order to receive TARP and other bailouts amounting to more than $17 trillion (which happens to be 5-6 times the actual defaulted loans and 12 times the actual losses on even the toxic loans) and 130% of ALL loans funded during the mortgage meltdown.

And that is why I say ALL the mortgages have been paid — interest and principal and that anyone paying on a mortgage is probably overpaying the creditor — who has been paid in full directly or indirectly multiple times.

Where’s the law on this, is the common question. Here it is, backed up by hundreds of years of common law and case decisions:

Fraud In the Factum

Sen. Merkley (Ore) Proposes Principal Correction for 75% of Underwater Homeowners

CREDITORS CAN ONLY GET PAID ONCE

Editor’s Note: If you are news junkie like I am and watch and read everything about the financial markets it is absolutely amazing how everyone seem to be in agreement that we are headed for a financial cliff and nobody wants to do anything about it.

Sen Merkley, with help from local organizers, is proposing a new bill that will require reductions in the principal due on residential loans. This isn’t hard folks, it just takes the guts to say the banks lied and they are still lying to us about the status of the loans, the origination of the loans and the money that has come and gone relating to these loans.

There are two basic reasons  why loan balances should be corrected: (1) simple arithmetic in an accounting and (2) the reality that people are simply not going to make a decision to keep their families enslaved to a mortgage (real or void) that will never justify itself in the marketplace because the original appraisal was artificially and fraudulently inflated.

In the first instance, the banks and servicers must be virtually removed from the equation because they never funded or bought any of these loans but they engaged in selling them as if they were owned by the banks. By taking out insurance, receiving bailouts, receiving proceeds from credit default swaps, just for a few examples, the banks were acting as agents for the investor lenders who were the only actual people to put up cash dollars. All the rest was paper pretending to be worth something.

An accounting from BOTH the Master Servicer and all subservicers will clear up all the money that came in from investors, borrowers and other parties and all the money that went out. We can then determine how much was paid or should have been paid by the banks as fiduciaries or agents of the investors. My analysis of hundreds of loans indicates that the total payments received on behalf of the real creditors was actually more than the obligation owed to that creditor which means that for that creditor, the loan proceeds should be corresponding reduced. That means the notice of default, notice of sale, foreclosure lawsuit are all based upon fake figures that at the very least should be reduced.

Under our laws, if a borrower has been defrauded under these facts, he is entitled to restitution under civil or criminal proceedings, which means that payments of actual money to actual recipients who may or may not have turned the money over to actual investors should be credited to the investor and therefore correspondingly reduce the principal due on loans funded by that creditor. They can only get paid once. If there are excesses that are legal, then I agree that it is an entirely separate matter as to whom that money should go, but to foreclose on a homeowner where the creditor has been entirely or mostly paid is absurd.

The second reason is equally simple as the mere adding and subtraction of a proper accounting. Nobody expects a businessman to languish without income in a failing business. He will walk from it, declaring bankruptcy or otherwise making arrangements with creditors. Somehow this basic principle has been warped, most recently by the renegade DeMarco in a moral hazard if a homeowner reaches the same conclusion. Whether you agree with the moral hazard argument or not, it is a simple fact that people WILL walk from the homes or stay as long as possible without paying a dime to get some of their equity back, if they find themselves in a failed investment that can never recover. It’s going to happen whether you like the idea or not. Better to manage the situation than have homes go without ANY bidding because the value is just too low but the people were kicked out anyway without accepting a loan modification. Those homes are the ones being bulldozed by the tens of thousands across the country.
If any of this makes sense to you, then you work for a bank and you are getting paid very well and expect bonuses despite an economy that is driving toward an economic cliff. You want as much money as possible before catastrophe hits, which is driven almost solely by the financial crisis caused by the use of deriviaties, especially in the mortgage markets — false and faked derivatives that are every bit as fraudulent as the robo-signed, forged and fabricated documents used in foreclosure.

Se. Merkley has cleverly gone the route of securitization to accomplish it so that it might incite the banks to agree and see this as a way of getting out of millions of lawsuits and criminal investigations. But perhaps we give the banks too much credit.

Merkley refi plan could reach 75% of private underwater mortgages

by John Prior, http://www.housingwire.com

Roughly 75% of underwater mortgages securitized into private-label bonds could be eligible for a refinance under the new plan from Sen. Jeff Merkley, D-Ore., according to analysts at JPMorgan Chase ($35.05 -0.95%).

The proposal would allow a Rebuilding American Homeownership Trust buy underwater mortgages with revenue from government bonds. The trust would be assembled either in the Federal Housing Administration, the Federal Home Loan Banks system or the Federal Reserve.

Principal would be reduced, and the loans would be refinanced into FHA-backed mortgages. The trust would profit off the difference between the interest earned on the new loan and the cost of borrowing money through the bonds, according to the plan.

While Merkley said the program would target roughly 8 million borrowers, bank analysts anticipate less participation.

Roughly 1.2 million nonagency mortgages with loan-to-value ratios above 100% could benefit from the program, according to Chase analysts.

Borrowers would be able to refinance into either a 15-year 4% mortgage, a 30-year fixed-rate mortgage at 5%. Borrowers could also split the new loan into a 30-year fixed on 95% of the property’s value and a “soft second” on the remaining balance, which the borrower wouldn’t have to pay on for five years.

More than three-fourths of these borrowers would choose to split the refinanced loan into a “soft second,” according to analysts.

“Of course there are a lot of details that would need to be ironed out. After all, this is effectively forming (or building upon) another GSE,” Chase analysts said. “While we can see clear benefits for both borrowers and investors, the devil is in the details.”

Banks with large amounts of underwater mortgages would be unlikely to participate. Refinances aren’t like modifications. They must be offered to all borrowers who qualify, and many banks and servicers have been reluctant to write down principal for delinquent underwater borrowers, let alone current ones.

Borrowers with severely underwater mortgages would likely be shut out. Servicers must reduce principal to at least 140% LTV. In the analysts’ example, a borrower with a $340,000 mortgage at 170 LTV (owes 70% more on the loan than the house is worth) would need $60,000 reduced. Along with an $18,000 risk-transfer fee, the lender would likely lose $78,000 on the deal, and the risk of default would still remain.

Treasury Department Secretary Timothy Geithner testified before the Senate Banking Committee last week that he thought the Merkley plan was a good one and would work with the senator on possibly producing a pilot program, maybe even using unspent Hardest Hit Funds.

Chase analysts estimated that more than 525,000 borrowers with private-label loans could refinance into full 30-year fixed mortgages and save an average $207 per month or $1.3 billion total every year.

Celia Chen, senior director at Moody’s Analytics, said the program would also help borrowers rebuild equity faster and significantly reduce the risk of default.

“Moreover, it would benefit the broader economy, as refinancing frees up cash for consumer spending and generates business for mortgage originators and servicers,” Chen said.

But other questions remain such as selecting a servicer for the RAH Trust loans. It also remains unclear if trusts could participate in the program.

“Clearly, bonds with the highest concentration of current borrowers will benefit the most if this program will reach nonagency trusts,” Chase analysts said. “We expect any pilot program to target bank loans first.”

jprior@housingwire.com

@JonAPrior

Message on the Forensic TILA Analysis — It’s a Lot More Than it Appears

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No doubt some of you know that we have had some challenges regarding the Forensic TILA analysis. It’s my fault. I decided that the plain TILA analysis was insufficient for courtroom use based upon the feedback that I was getting from lawyers across the country. Yet I believed then as I believe now that the only law that will actually give real help to the homeowners — past, present and future — is TILA, REG Z and RESPA. Once it dawns on more people that there were two closings, one that was hidden from the borrower which included the real money funding his loan and the other being a fake closing purporting to loan money to the homeowner in a transaction that never happened, the gates will start to open. But I am ahead of the curve on that.

For those patiently waiting for the revisions, I appreciate your words of kindness. And your words of wisdom regarding the content of the report which I have been wrestling with. I especially appreciate your willingness to continue doing business with us despite the lack of organizational skills and foresight that might have prevented this situation. I guess the problem boils down to the fact that when I started the blog in 2007 I never intended it to be a business. But as it evolved and demands grew we were unable to handle it without help from the outside. If I had known I was starting a business at the beginning I would have done things much differently.

At the moment I am wrestling with exactly how I want to portray the impact of the appraisal fraud on the APR and the impact on “reset” payments have on the life of the loan, which in turn obviously effects the APR. I underestimated the computations required to do both the standard TILA Audit and the extended version which I think is the only thing of value. The standard TILA audit simply doesn’t tell the story although there is some meat in there by which a borrower could recover some money. There is also the standard issue of steering the borrower into a more expensive loan than that which he qualified for.

The other thing I am wrestling with is the computational structure of the HAMP presentation so that we can show that we are using reasonable figures and producing a reasonable offer. This needs to be credible so that when the rejection comes, the borrower is able to say that the offer was NOT considered by the banks and servicers because of the obvious asymmetry of results — the “investor” getting a lot less money from the proceeds of foreclosure.

And THAT in turn results in the ability of the homeowner to demand proof (a) that they considered it (b) that it was communicated to the investor (with copies) and (c) that there was a reasonable basis for rejection — meaning that the servicer must SHOW the analysis that was used to determine whether to accept or reject the HAMP proposal. Limited anecdotal evidence shows that like that point in discovery when the other side has “lost” in procedural attempts to block the borrower, the settlement is achieved within hours of the entry of the order.

So I have approached the analysis from the standpoint of another way to force disclosure and discovery as to exactly what money the investor actually lost, whether the investor still exists and whether there were payments received by agents of the creditor (participants in the securitization chain) that were perhaps never credited to the account of the bond holder and therefore which never reduced the amount due to the creditor from the homeowner. My goal here is to get to the point where we can say, based upon admissions of the banks and servicers that there is either nobody who qualifies as a creditor to submit a “credit bid” at auction or that such a party might exist but is different than the party who was permitted to initiate the foreclosure proceedings.

The complexity of all this was vastly underestimated and I overestimated the ability of outside analysts to absorb what I was talking about, take the ball and run with it. Frankly I am wondering if the analysis should be worked up by the people who do our securitization work, whose ability to pierce through the numerous veils has established a proven track record. In the meantime, I will plug along until I am satisfied that I have it right, since I am actually signing off on the analysis, and thus be able to confidently defend the positions taken on the analytical report (Excel Spreadsheet) etc.

People Have Answers, Will Anyone Listen?

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Editor’s Comment: 

Thanks to Home Preservation Network for alerting us to John Griffith’s Statement before the Congressional Progressive Caucus U.S. House of Representatives.  See his statement below.  

People who know the systemic flaws caused by Wall Street are getting closer to the microphone. The Banks are hoping it is too late — but I don’t think we are even close to the point where the blame shifts solidly to their illegal activities. The testimony is clear, well-balanced, and based on facts. 

On the high costs of foreclosure John Griffith proves the point that there is an “invisible hand” pushing homes into foreclosure when they should be settled modified under HAMP. There can be no doubt nor any need for interpretation — even the smiliest analysis shows that investors would be better off accepting modification proposals to a huge degree. Yet most people, especially those that fail to add tacit procuration language in their proposal and who fail to include an economic analysis, submit proposals that provide proceeds to investors that are at least 50% higher than the projected return from foreclosure. And that is the most liberal estimate. Think about all those tens of thousands of homes being bull-dozed. What return did the investor get on those?

That is why we now include a HAMP analysis in support of proposals as part of our forensic analysis. We were given the idea by Martin Andelman (Mandelman Matters). When we performed the analysis the results were startling and clearly showed, as some judges around the country have pointed out, that the HAMP loan modification proposals were NOT considered. In those cases where the burden if proof was placed on the pretender lender, it was clear that they never had any intention other than foreclosure. Upon findings like that, the cases settled just like every case where the pretender loses the battle on discovery.

Despite clear predictions of increased strategic defaults based upon data that shows that strategic defaults are increasing at an exponential level, the Bank narrative is that if they let homeowners modify mortgages, it will hurt the Market and encourage more deadbeats to do the same. The risk of strategic defaults comes not from people delinquent in their payments but from businesspeople who look at the principal due, see no hope that the value of the home will rise substantially for decades, and see that the home is worth less than half the mortgage claimed. No reasonable business person would maintain the status quo. 

The case for principal reductions (corrections) is made clear by the one simple fact that the homes are not worth and never were worth the value of the used in true loans. The failure of the financial industry to perform simple, long-standing underwriting duties — like verifying the value of the collateral created a risk for the “lenders” (whoever they are) that did not exist and was present without any input from the borrower who was relying on the same appraisals that the Banks intentionally cooked up so they could move the money and earn their fees.

Many people are suggesting paths forward. Those that are serious and not just positioning in an election year, recognize that the station becomes more muddled each day, the false foreclosures on fatally defective documents must stop, but that the buying and selling and refinancing of properties presents still more problems and risks. In the end the solution must hold the perpetrators to account and deliver relief to homeowners who have an opportunity to maintain possession and ownership of their homes and who may have the right to recapture fraudulently foreclosed homes with illegal evictions. The homes have been stolen. It is time to catch the thief, return the purse and seize the property of the thief to recapture ill-gotten gains.

Statement of John Griffith Policy Analyst Center for American Progress Action Fund

Before

The Congressional Progressive Caucus U.S. House of Representatives

Hearing On

Turning the Tide: Preventing More Foreclosures and Holding Wrong-Doers Accountable

Good afternoon Co-Chairman Grijalva, Co-Chairman Ellison, and members of the caucus. I am John Griffith, an Economic Policy Analyst at the Center for American Progress Action Fund, where my work focuses on housing policy.

It is an honor to be here today to discuss ways to soften the blow of the ongoing foreclosure crisis. It’s clear that lenders, investors, and policymakers—particularly the government-controlled mortgage giants Fannie Mae and Freddie Mac—must do all they can to avoid another wave of costly and economy-crushing foreclosures. Today I will discuss why principal reduction—lowering the amount the borrower actually owes on a loan in exchange for a higher likelihood of repayment—is a critical tool in that effort.

Specifically, I will discuss the following:

1      First, the high cost of foreclosure. Foreclosure is typically the worst outcome for every party involved, since it results in extraordinarily high costs to borrowers, lenders, and investors, not to mention the carry-on effects for the surrounding community.

2      Second, the economic case for principal reduction. Research shows that equity is an important predictor of default. Since principal reduction is the only way to permanently improve a struggling borrower’s equity position, it is often the most effective way to help a deeply underwater borrower avoid foreclosure.

3      Third, the business case for Fannie and Freddie to embrace principal reduction. By refusing to offer write-downs on the loans they own or guarantee, Fannie, Freddie, and their regulator, the Federal Housing Finance Agency, or FHFA, are significantly lagging behind the private sector. And FHFA’s own analysis shows that it can be a money-saver: Principal reductions would save the enterprises about $10 billion compared to doing nothing, and $1.7 billion compared to alternative foreclosure mitigation tools, according to data released earlier this month.

4      Fourth, a possible path forward. In a recent report my former colleague Jordan Eizenga and I propose a principal-reduction pilot at Fannie and Freddie that focuses on deeply underwater borrowers facing long-term economic hardships. The pilot would include special rules to maximize returns to Fannie, Freddie, and the taxpayers supporting them without creating skewed incentives for borrowers.

Fifth, a bit of perspective. To adequately meet the challenge before us, any principal-reduction initiative must be part of a multipronged

To read John Griffith’s entire testimony go to: http://www.americanprogressaction.org/issues/2012/04/pdf/griffith_testimony.pdf


ANOTHER VICTORY IN OKLAHOMA

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Editor’s Comment: 

There is no doubt that the tide is turning and that Judges are increasingly uncomfortable with the presence of forged, fabricated documents containing fraudulent statements of fact on transactions that never actually occurred. As this article explains, in Oklahoma — a very conservative red state — they are beginning to realize that it isn’t the borrower seeking the free house it is the foreclosing party who has no financial stake in the outcome except a windfall if they get the house on a “credit bid.”

by Brian Mahany

We have been saying for several months that the tide is beginning to turn against big banks and mortgage lenders. Many courts are beginning to get fed up with the abusive practices of lenders. Recently several state supreme courts have been weighing in on a wide variety issues including missing paperwork, forged affidavits, questionable title and abusive foreclosure or loan modification practices.

When a state supreme court decides a case, the decision takes on considerable weight. As the highest court in the land, a state supreme court decision is generally binding on all trial courts in that state. We were happy to learn that the Oklahoma Supreme Court decided 7 cases this month in favor of homeowners.

The facts in each of the cases were similar. In each case, the court ruled that in order to bring a foreclosure action, the plaintiff must prove that it has the right to enforce the promissory note. No note means no standing to bring the complaint.

It’s in the details that the Oklahoma cases become important.

Many lenders have problems producing the note and mortgage. In recent years, most lenders sell the mortgage shortly after the closing. Banks rarely hold their own paper any more. The mortgages are often packaged, securitized and sold several times. In that process, paperworks frequently is lost. The lost or incomplete paperwork issue was addressed by the court.

The Oklahoma Supreme Court opinion is helpful to homeowners in several ways.

First, the court reaffirmed that the plaintiff must prove it has the right to enforce the note. Courts shouldn’t simply rely on an affidavit from a lawyer saying the bank or servicer has the right to enforce the note. They must prove it.

Next, the court said that the foreclosing party needs to have the note. Just having an assignment of mortgage is not enough. (Often the servicing bank will draft an assignment of mortgage. That requires the lender’s signature. The note, obviously, contains the borrowers signature. If documents are missing it is much easier for a lender to forge a mortgage assignment than to forge a homeowners signature.)

FInally, the court said that the lack of standing (missing note) can be raised at any time. That can be extremely important in foreclosure cases. Often borrowers seek legal counsel after a judgment of foreclosure has issued. Many folks don’t seek legal help until well into the foreclosure process. By the time a lawyer gets the case, discovery periods have elapsed and often there is already a judgment of foreclosure. The Oklahoma court said as long as the case isn’t closed, its not too late to challenge jurisdiction.

Postscript- There are tens of millions of homeowners under water. Many are facing foreclosure. Unfortunately, there are few lawyers that truly understand how to fight big lenders and even fewer actually willing to do so. If you are facing foreclosure, seek professional assistance as soon as possible. Don’t settle for a bankruptcy lawyer or a fly by night foreclosure “rescue” consultant. Foreclosures can be won but it’s not easy.

The average cost for a lawyer to file an answer and defend a foreclosure action is between $2500 and $5000. While there are some highly qualified lawyers that do this work, we think the only thing big banks understand is a counterclaim and aggressive lawyer.

Everyday we receive calls from homeowners across the U.S. Although we write about foreclosure defense, we rarely take such cases. Our primary purpose in writing is to provide general information and offer hope. The cases we do take are lawsuits against banks and lenders for illegal lending, loan modification and foreclosure practices. If you sufered a particularly bad experience, we certainly want to listen.

Our mortgage fraud team is currently co-counsel in the largest federal false claims act case in the nation, the $2.4 billion action on behalf of HUD against Allied Home Mortgage. Large or small, suing banks and getting justice for victims of predatory lending and foreclosure practices is what we enjoy.

Mahany & Ertl, America’s Fraud Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine & Minneapolis, Minnesota. Services available in many jurisdictions.

Current Bank Plan Is Same as $10 million Interest Free Loan for Every American

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“I wonder how many audience members know that Bair’s plan is more or less exactly the revenue model for all of America’s biggest banks. You go to the Fed, get a buttload of free money, lend it out at interest (perversely enough, including loans right back to the U.S. government), then pocket the profit.” Matt Taibbi

From Rolling Stone’s Matt Taibbi on Sheila Bair’s Sarcastic Piece

I hope everyone saw ex-Federal Deposit Insurance Corporation chief Sheila Bair’s editorial in the Washington Post, entitled, “Fix Income Inequality with $10 million Loans for Everyone!” The piece might have set a world record for public bitter sarcasm by a former top regulatory official.

In it, Bair points out that since we’ve been giving zero-interest loans to all of the big banks, why don’t we do the same thing for actual people, to solve the income inequality program? If the Fed handed out $10 million to every person, and then got each of those people to invest, say, in foreign debt, we could all be back on our feet in no time:

Under my plan, each American household could borrow $10 million from the Fed at zero interest. The more conservative among us can take that money and buy 10-year Treasury bonds. At the current 2 percent annual interest rate, we can pocket a nice $200,000 a year to live on. The more adventuresome can buy 10-year Greek debt at 21 percent, for an annual income of $2.1 million. Or if Greece is a little too risky for you, go with Portugal, at about 12 percent, or $1.2 million dollars a year. (No sense in getting greedy.)

Every time I watch a Republican debate, and hear these supposedly anti-welfare crowds booing the idea of stiffer regulation of Wall Street, I wonder how many audience members know that Bair’s plan is more or less exactly the revenue model for all of America’s biggest banks. You go to the Fed, get a buttload of free money, lend it out at interest (perversely enough, including loans right back to the U.S. government), then pocket the profit.

Considering that we now know that the Fed gave out something like $16 trillion in secret emergency loans to big banks on top of the bailouts we actually knew about, you might ask yourself: How are these guys in financial trouble? How can they not be making mountains of money, risk-free? But they are in financial trouble:

• We’re about to see yet another big blow to all of the usual suspects – Goldman, Citi, Bank of America, and especially Morgan Stanley, all of whom face potential downgrades by Moody’s in the near future.

We’ve known this was coming for some time, but the news this week is that the giant money-managing firm BlackRock is talking about moving its business elsewhere. Laurence Fink, BlackRock’s CEO, told the New York Times: “If Moody’s does indeed downgrade these institutions, we may have a need to move some business around to higher-rated institutions.”

It’s one thing when Zero Hedge, William Black, myself, or some rogue Fed officers in Dallas decide to point fingers at the big banks. But when big money players stop trading with those firms, that’s when the death spirals begin.

Morgan Stanley in particular should be sweating. They’re apparently going to be downgraded three notches, where they’ll be joining Citi and Bank of America at a level just above junk. But no worries: Bank CFO Ruth Porat announced that a three-level downgrade was “manageable” and that only losers rely totally on agencies like Moody’s to judge creditworthiness. “A lot of clients are doing their own credit work,” she said.

• Meanwhile, Bank of America reported its first-quarter results yesterday. Despite that massive ongoing support from the Fed, it earned just $653 million in the first quarter, but astonishingly the results were hailed by most of the financial media as good news. Its home-turf paper, the San Francisco Chronicle, crowed that BOA “Posts Higher Profits As Trading Results Rebound.” Bloomberg, meanwhile, summed up results this way: “Bank of America Beats Analyst Estimates As Trading Jumps.”

But the New York Times noted that BOA’s first-quarter profit of $653 million was down from $2 billion a year ago, and paled compared to results of more successful banks like Chase and Wells Fargo.

Zero Hedge, meanwhile, posted an amusing commentary on BOA’s results, pointing out that the bank quietly reclassified nearly two billion dollars’ worth of real estate loans. This is from BOA’s report:

During 1Q12, the bank regulatory agencies jointly issued interagency supervisory guidance on nonaccrual policies for junior-lien consumer real estate loans. In accordance with this new guidance, beginning in 1Q12, we classify junior-lien home equity loans as nonperforming when the first-lien loan becomes 90 days past due even if the junior-lien loan is performing. As a result of this change, we reclassified $1.85B of performing home equity loans to nonperforming.

In other words, Bank of America described nearly two billion dollars of crap on their books as performing loans, until the government this year forced them to admit it was crap.

ZH and others also noted that BOA wildly underestimated its exposure to litigation, but that’s nothing new. Anyway, despite the inconsistencies in its report, and despite the fact that it’s about to be downgraded – again – Bank of America’s shares are up again, pushing $9 today.

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