Peeling the Onion: Morgan Stanley Forced to Produce Documents Corroborating Illegal Acts

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Editor’s Comment and Practice Tips: There are two things you should know going into foreclosure defense. One is that the best decisions on the trial and appellate level came from cases where both sides were institutional in nature. So if the adversaries were both banks, or one was a managed fund, or perhaps a Homeowners or Condominium Association, the Court was a lot more receptive to the same arguments they routinely rejected from Borrowers. That alone suggests some strategies both for investors and homeowners (particularly those hard hit by the mortgage meltdown). The second is that an increasing number of courts are, in the words of one judge who WAS ruling routinely against borrowers, “getting tired of the sloppiness” with which the loan deals were originated, allegedly transferred and claimed as owned by one of a number of parties. They are entering more orders requiring proof of loss, proof of payment and proof that any financial transaction took place in which the forecloser was either the recipient (payee) or the payor of actual money that exchanged hands.

We have seen how the same homeowner with the same property has been assaulted by two completely different “holders”, neither of whom were creditors, each claiming to be producing the original note — and there it was in all its glory, two “original” notes both of which had been printed the previous day on a very good printer. We have seen how the appraisals went further and further off the reservation under pressure from the banks and how the applications were changed under pressure from the banks to close the deal regardless of outcome or viability of the loan.

Strategically I have been encouraging practicing attorneys to pay close attention to the dozens of lawsuits filed against the banks by institutional plaintiffs — pension funds that bought bogus mortgage bonds, government agencies whose findings might be incorporated as fact in your case (especially if the case settled), HOA’s and banks fighting over priority of liens. The facts alleged are fairly uniform — all leading to the conclusion that the loans were neither underwritten in conformity with industry standards (leading to fraud or breach of contract actions) nor supported by documentation that is enforceable (i.e., the mortgage lien was never perfected and the note was incorrectly fabricated and executed without consideration from the named payees or nominees.

The latest rumble over the lack of prosecution on this mortgage mess has produced the resignation of the guy at DOJ who was supposed to be prosecuting these cases. Maybe the change will come. But by this time int he Savings and Loan scandal of the 1980″s there were more than 800 people sitting behind bars with others on probation. The PBS piece “Untouchables” has kicked up a fore storm over the issue of criminal prosecution. Those cases too should be watched carefully and your wording in your pleading ought to be as close to their wording in their lawsuits especially where they have already survived the usual motion to dismiss.

Robert Schiller the economist who created the black letter basis for measuring economic data relating to the housing industry says we are far from done with the damages and debris left by the mortgage meltdown. And out of 105 economists who participated in an independent survey very few had anything good to say about housing or the economy — with the two inextricably entwined. Fixing housing is not merely about stopping foreclosures or increasing modifications. At the heart of the mortgage meltdown was fraud.

And fraud comes in two flavors — civil and criminal. Both require receivers and restitution if prosecuted properly. Investors and homeowners alike are entitled to receive as much restitution as possible that can be clawed back by properly appointed court receivers. Both were decided by appraisal fraud, by deceptive disclosures in which the actual lender was intentionally concealed so that the investment bank could claim ownership and buy insurance payable to the bank instead of the investors, buy credit default swaps with the same result, and apply for Federal bailout with the same result.

Housing won’t be fixed until the corruption of title caused by a nominee on the mortgage and nominee on the note is fixed and settled. The economy won’t be fixed until investors get their share of the insurance and bailouts. The consumer sector won’t be fixed until all that is done, because it is only after the money is allocated to the investors that we can know the actual balance due, if any, on any of the loans.

One thing we know at this point is that most foreclosures (at least 65% according to the San Francisco study) are initiated by “strangers to the transaction” who were not creditors, holders or anything else that would entitle them to enforce the closing documents on a loan that came not from the named payee but from another source entirely. We know that the “credit bid” submitted at auction was pure fiction and fraud and should be corrected in the property records. And we know that the the proceeds of insurance, credit default swaps and federal bailout should be applied to the receivables owed to the investors. Lastly, we know that when those monies are allocated the balance due on those receivables will be far less than what has been or will be demanded from borrowers in past, present and future foreclosures.

 

NY Times: Morgan Stanley Forced to Reveal Truth

Local Governments Weigh Eminent Domain to Stop Foreclosures

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Editor’s Comment:  

Picking up on a thought from Schiller, San Bernardino County is taking a long hard look at invoking the government’s power of eminent domain to seize mortgages, sell them to investors at market value and provide a basis for the homeowners to stay in the home based upon the reality of the marketplace without the corruption of data created by the Wall Street banks.

I did a little research on this idea and while it is a bit of a stretch it does not appear to be excluded from the power of eminent domain to claim the right to purchase the loans at fair market value and resell them to investors. Many properties have been seized by local government only to allow private developers to build highrise luxury towers on the same property.

All this does is force the issue of an open fair free market system and take away the power of the banks to manipulate the market for mortgages and housing. As it stands, these mortgages are blighting hundreds of neighborhoods in hundreds of cities. The basis of invoking the power is classic and permissible. Whether it can be or will be allowed by the courts is another matter.

One way of looking at it is to presume to know the defense: that eminent domain is not used for mortgages and then split hairs as to whether a mortgage is an interest in property that could be subject to eminent domain. That fails because nearly all properties taken by eminent domain have mortgages on them and the mortgages get paid in the same way — fair market value. What happens to the rest of the mortgage balance claimed by the lender? Well that remains to be seen.

If many local governments start invoking this power, it will gain momentum.

San Bernardino County Weighs Eminent Domain to Fight Foreclosures

The county, along with Ontario and Fontana, wants to use eminent domain to seize underwater mortgages from investors and restructure them to help borrowers keep the homes.

By Alejandro Lazo

A plan by San Bernardino County to seize mortgages and restructure them for underwater homeowners using eminent domain is perhaps the most aggressive example of how local governments are seeking new ways to combat foreclosure.

The cities of Ontario and Fontana are partnering with the county to create a Homeownership Protection Program that would use private funds to acquire underwater mortgages from investors. The county and the two cities have created a joint authority to explore and possibly enact the plan, and the first public meeting of that authority will be held next week.

David Wert, a spokesman for the county, said the program is worth exploring because it could offer a solution to one of the region’s most entrenched problems: the vast number of loans that are stuck underwater, with more money owed than the property is worth. If the program were to go countywide, it could benefit 20,000 to 30,000 homeowners, he said.

“The only thing we are doing at this point is conducting a conversation,” Wert said. “But the reason the county is interested in talking about this is because this is a proposal that could — if everything checks out — address the problem on a fairly large scale.”

Although still in its initial stages, the aggressive proposal has attracted controversy. A number of banking, financial and business groups oppose it, contending that seizing mortgages would raise constitutional issues and could increase lending costs in those cities.

The California Mortgage Bankers Assn., the American Bankers Assn. and the American Securitziation Forum, along with several other financial groups, sent a letter of opposition to the county and the two cities.

“We believe that the contemplated use of eminent domain raises very serious legal and constitutional issues,” the letter read. “It would also be immensely destructive to U.S. mortgage markets by undermining the sanctity of the contractual relationship between a borrower and creditor, and similarly undermining existing securitization transactions.”

Dustin Hobbs, a spokesman for the California Mortgage Bankers Assn., said the program also could hurt the local housing market.

“It could be devastating,” Hobbs said. “If investors are unsure as to the disposition of mortgages in San Bernardino County and in Fontana and Ontario, it could really curtail lending in the area, and if not curtail, certainly increase costs for new loans.”

San Bernardino County’s plan is the latest of several measures by local governments to fight foreclosures and the problems often associated with resulting neglect: crime and blight.

Chicago passed an ordinance last year that requires banks and other financial institutions to maintain vacant properties that have been foreclosed upon.

Oakland has instituted a blight program that would require banks to register, inspect and maintain homes that are in foreclosure. Cleveland has been using a land bank program to tear down foreclosed homes.

Legal experts said the San Bernardino County proposal was one of the first initiatives to try to strike at the problem before a home is in the foreclosure process.

At this point in the planning, only homeowners who are current on their mortgage payments would be allowed to participate in the program, which would target mortgages that have been securitized and sold to private investors. That would exclude loans owned or backed by mortgage titans Fannie Mae and Freddie Mac. The acquired loans would be restructured, lowering the amount owed, with the intent of helping the owner keep the home.

The plan was first proposed to the county by a San Francisco firm named Mortgage Resolution Partners. The firm has employed investment banks Evercore Partners and Westwood Capital to raise money for the initiative from private investors.

Kurt Eggert, a professor of law at Chapman University, said a sticking point could be whether the investors are able to make a profit on the transactions. He said he liked that the plan, unlike efforts elsewhere, was an attempt to get ahead of the problem.

“The alternatives too often are just cities cleaning up afterward, and getting stuck with the mess, and getting stuck with the foreclosures and the abandoned buildings,” he said. “It is good to see cities trying to do something proactive.”

Cornell Law Professor Robert C. Hockett advised Mortgage Resolution Partners on the design of the proposal. The initiative should pass muster in courts because they have had a long tradition of upholding cities’ eminent domain powers as long as the valuation methods used to acquire properties are sound, Hockett said.

It particularly makes sense to use eminent domain to seize underwater mortgages that have been securitized, he said, because often those mortgages can’t be sold at market value for legal reasons. Often, those loans must be sold at face value — a higher price — because of the contracts governing them, he said.

“The fact they can’t be marketed is the reason we are using eminent domain,” Hockett said. “This is actually a pro-market solution.”


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Szymoniak: Honesty Pays $46.5 Million in Whistleblower Suit

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Editor’s Comment and Analysis:  

It was and remains a big lie — the securitization the loans, the origination of the loans, the assignments, alleges and endorsements. $46.5 million sounds like a lot and these whistleblowers will get a “windfall” as a result of it. But it is a drop in the bucket and we need to fill the bucket. And our bucket list should include taking down the big banks, removing money from politics, and getting back to government by the people and for the people.

Schiller, the scholar who has been leading the way in economic analysis of the housing market, has offered an audacious plan that is the last possible way for government intervention to save the economy, which is heavily dependent upon consumer spending, particularly in the housing market. Eminent domain has long been sustain as the right of government to take private property and convert it to public use. Whether it is a highway, downtown redevelopment or other reasons, eminent domain has been played by the banks and developers as a way to get land they need, at a price that could not be achieved using the power of the government behind them. 

While seemingly unusual and audacious, Schiller’s proposition has many precedents in history and should be considered as the last great hope after the 50 attorney generals agreed in the 50 state settlement that now prevents them from further investigation and prosecution against the banks. Schiller’s, the originator of the case-Schiller index showing that median income and income disparity is harmful to the economy and deadly to the housing market, proposes that we use the power of eminent domain to seize the remaining mortgages, and perhaps the property that has already been foreclosed, and remake the deals so that they make sense. Translating that means that the homeowners will get the deal that they should have received when they bought o refinanced their house. And it capitalizes on the inconvenient truth that it was the banks who created risks that neither the investors nor the homeowners signed up for.

By paying the value of the remaining mortgages — more than 30% are reported still under water and when carefully analyzed the figure is closer to 60%, the banks get no more and no less than they should, the investors still get their money — 100 cents on the dollar if they insist on payback from the banks in addition to the money from the new mortgages on the old property, and the homeowner is back in charge of his own home paying principal, interest, costs, fees and insurance and taxes that are fair market value indicators. It is better than the proceeds of foreclosures, so the banks now must argue that they have a right to take less money in order to get the foreclosure.

The banks want the foreclosure because they lied. And with the foreclosure it adds to the illusion that they funded or paid for loans in which they do not have a nickel invested. The fact that the balance sheets of the mega banks are going to take a giant hit is only an admission that the assets they are reporting are either not worth anything or are worth far less than the value shown on their public financial statements. They are still lying about that to investors, the SEC and other regulatory agencies.

So whistleblowers must pave the way and show the lies, show the inequality, show the inflated appraisals that could not stand the test of time and force government to act as it should. The chief law enforcement of the country and the chief law enforcement of each state owes his/her citizens at least that much and more. They must find ways to clear up the corruption of title records that are irretrievably lost. 

And the lawyers who keep turning down these cases because they are too complex or too weak should take a close look at these whistleblower  cases. The settlement, as always, comes before the trial because the fact remains that the banks are o the hook for  their bets on the mortgages and not the mortgages themselves. Lawyers need to show a little guts and seek some glory and wealth from these cases, while at the same time doing their country a service.

We are turning the corner and the banks are starting to lose. Keep up the fight and your effort will probably go well-rewarded.

Whistleblowers win $46.5 million in foreclosure settlement

By James O’Toole

NEW YORK (CNNMoney) — Getting served with foreclosure papers made Lynn Szymoniak rich.

While she couldn’t have known it at the time, that day in 2008 led to her uncovering widespread fraud on the part of some of the country’s biggest banks, and ultimately taking home $18 million as a result of her lawsuits against them. Szymoniak is one of six Americans who won big in the national foreclosure settlement, finalized earlier this year, as a result of whistleblower suits. In total, they collected $46.5 million, according to the Justice Department.

In the settlement, the nation’s five largest mortgage lenders –Bank of America (BAC, Fortune 500), Wells Fargo (WFC, Fortune 500), J.P. Morgan Chase (JPM, Fortune 500), Citigroup (C, Fortune 500) and Ally Financial — agreed to pay $5 billion in fines and committed to roughly $20 billion more in refinancing and mortgage modifications for borrowers.

A judge signed off on the agreement in April, and in May — Szymoniak received her cut.

“I recognize that mine’s a very, very happy ending,” she said. “I know there are plenty of people who have tried as hard as I have and won’t see these kinds of results.”

Related: 30% of borrowers underwater

Whistleblower suits stem from the False Claims Act, which allows private citizens to file lawsuits on behalf of the U.S. when they have knowledge that the government is being defrauded. These citizens are then entitled to collect a portion of any penalties assessed in their case.

The act was originally passed in 1863, during a time when government officials were concerned that suppliers to the Union Army during the Civil War could be defrauding them.

In 1986, Congress modified the law to make it easier for whistleblowers to bring cases and giving them a larger share of any penalties collected. Whistleblowers can now take home between 15% and 30% of the sums collected in their cases. In the cases addressed in the foreclosure settlement, the whistleblowers revealed that banks were gaming federal housing programs by failing to comply with their terms or submitting fraudulent documents.

In Szymoniak’s case alone, the government collected $95 million based on her allegations that the banks had been using false documents to prove ownership of defaulted mortgages for which they were submitting insurance claims to the Federal Housing Administration.

The FHA is a self-funded government agency that offers insurance on qualifying mortgages to encourage home ownership. In the event of a default on an FHA-insured mortgage, the FHA pays out a claim to the lender.

Szymoniak’s case was only partially resolved by the foreclosure settlement, and she could be in line for an even larger payout when all is said and done.

As an attorney specializing in white-collar crime, the 63-year-old Floridian was well-placed to spot an apparent forgery on one of the documents in her foreclosure case, one she saw repeated in dozens of others she examined later.

“At this point, the banks are incredibly powerful in this country, but you just have to get up every morning and do what you can,” she said.

The other five whistleblowers in the settlement came from the industry side, putting their careers at risk by flagging the banks’ questionable practices.

Kyle Lagow, who won $14.6 million in the settlement, worked as a home appraiser in Texas for LandSafe, a subsidiary of Countrywide Financial. He accused the company in a lawsuit of deliberately inflating home appraisals in order to collect higher claims from the FHA, and said he was fired after making complaints internally.

Gregory Mackler, who won $1 million, worked for a company subcontracted by Bank of America to assist homeowners pursuing modifications through the government’s Home Affordable Modification Program, or HAMP. Under HAMP, the government offers banks incentive payments to support modifications.

Mackler said Bank of America violated its agreement with the government by deliberately preventing qualified borrowers from securing HAMP modifications, steering them toward foreclosure or more costly modifications from which it could make more money. He, too, claims to have been fired after complaining internally.

There’s also Victor Bibby and Brian Donnelly, executives from a Georgia mortgage services firm who accused the banks of overcharging veterans whose mortgages were guaranteed by the Department of Veterans Affairs, thereby increasing their default risk. Bibby and Donnelly won $11.7 million in the settlement; their attorneys did not respond to requests for comment.

Shayne Stevenson, an attorney who represented both Lagow and Mackler, said the two weren’t aware of possible rewards when they first brought their evidence to his firm.

“The reality of it is that most of the time, whistleblowers don’t even know about the False Claims Act — they don’t know they can make money,” Stevenson said. Both his clients, Stevenson added, “just wanted the government to know about this fraud, so they deserve every penny that they got.”

A Bank of America spokesman declined to comment on individual cases, but said the national settlement was “part of our ongoing strategy to put these issues, particularly these legacy issues with Countrywide, behind us.” BofA acquired mortgage lender Countrywide in 2008, thereby incurring the firm’s legal liabilities.

The other banks involved either declined to comment or did not respond to requests for comment.

Related: Foreclosures spike 9%

While the whistleblowers in the settlement scored big paydays in the end, the road wasn’t easy. Stevenson said his clients “were pushed to the brink” after raising their concerns, struggling to find work and beset by financial problems.

“They were facing evictions, foreclosure, running away from bills, trying to deal with creditors that were coming after them,” Stevenson said. “This went on and on and on, and this is part and parcel of what happens to whistleblowers.”

For Robert Harris, a former assistant vice president in JPMorgan’s Chase Prime division, the experience was similar.

Harris accused the bank of failing to assist borrowers seeking HAMP modifications and knowingly submitting false claims for government insurance based on wrongful foreclosures. He was stymied when he tried to complain internally, and says he was fired for speaking out.

While Harris ended up with a $1.2 million payout in the settlement, the father of five says he’s been blacklisted within the industry and exhausted by the ordeal.

“It completely turned my life upside down,” he said. “I’m trying to raise my kids, recover from a divorce, recover from the loss of my career — it just comes to down to surviving and putting this to an end.”

“I guarantee the other whistleblowers, too, have sacrificed a lot,” he added. “But to be able to sit back and sleep at night is worth it.”


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