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Patrick Pulatie is the CEO of LFI Analytics. He can be reached at 925-522-0371, or 925-238-1221 for further information. www.LFI-Analytics.com, patrick@lfi-analytics.com

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Internet Foreclosure "Myths"

By Patrick Pulatie

Just over two and one half years ago, I began to work with homeowners facing foreclosure. At that time, there were two to three websites that had any information on foreclosure prevention, and any viable defenses to foreclosure. Since that time, starting in late 2008, and throughout 2009, there has been an explosion of websites featuring foreclosure information. This has been both good and bad for the homeowner facing foreclosure; good because homeowners have been able to learn much about their situation, and know that they were not alone, but bad because there is much “inaccurate” information about foreclosure defenses being presented. This article is intended to help the homeowner sort the good and the bad.

I write this knowing that I am going to receive significant negative feedback from many different sources. Some will be disputing what I write because they have heard of people with positive results. Some will argue because for them, the distribution of such information is part of their business model and the more people who know that what they “preach” is not effective, the less that they will make. Others will disagree because I am at direct odds with certain people that they follow, ones who have high visibility, but have not stepped into court rooms in years. More will even argue that I side with the lenders.

There is a particular motivation for writing this. I receive phone calls daily and weekly from homeowners who have read these from sites, and are thinking that if they just do one thing or another, their problems will “magically” disappear. Others are Pro Se litigants, doing their own lawsuits instead of hiring attorneys. They want me to review their filings, advise them where they are wrong, or do Predatory Lending Examinations. I refuse to do this because I will not work with a person who does not have an attorney, and I am not an attorney and cannot give legal advice. The sad part is that in their filings, I can immediately spot so many errors that it is obvious that they should just start packing to move.

The criteria for being considered a myth, is the probability of a desired outcome, and/or the factual basis of the representation. There will be people who claim to have had had positive outcomes from using these strategies. I don’t deny that a few people have had successes. But success must be measured in accordance with the following.

  • Was the success the result of a Trial Court ruling after a trial? Or was it simply a denial of a Demurrer or Request for Dismissal of the allegations by a judge?
  • Has the success held up at the Appellate Court level? Is it on appeal? Or has the lender completely given up?
  • Is the success being duplicated on a regular and consistent basis? Or is the success “random”, coming from just one judge, in one court?
  • Is the ruling appealable?

These are important considerations in whether the subject reaches myth status or not. As you read the myths, please read all that is written for each myth before jumping to conclusions. It is important that you understand the context that the myth is being propagated.

Myth #1: Rescission cancels the loan.

This myth is grounded in fact, but the facts have not been adequately disclosed. Many websites, especially “audit firms” will promote that certain violations will allow for Rescission, which will “cancel” the loan. Then they state that you can get back the money you have paid. It sounds good in theory, but here is what they omit.

Rescission means “turning back the clock” so that all parties are returned to where they were before the loan. This means that to make an effective “rescission”, you must be able to return the money borrowed, minus what you have paid. Since the homeowner is in foreclosure, there is no ability to tender. Therefore, rescission will not cancel the loan

Myth #2: HAMP requires a loan modification to be done.

Since the HAMP loan modification program was first announced just over a year ago, much has been written about it. Most of it has been to show that HAMP is not working, and loan modifications are not being done. As a result, there are now lawsuits being filed attacking the lack of loan modifications being done by HAMP lenders, the most recent of which is a filing against Bank of American in California and Washington.

The general thesis is that HAMP requires loan modifications be done. This is not true. The reality is that what is required to be done is a Net Present Value Test (NPVT), and if the loan passes the NPVT, then a modification should be offered. Herein lies where attorneys are missing the boat regarding Class Action suits against HAMP.

  • HAMP is only for Fannie Mae and Freddie Mac. It does not apply to privately securitized loan. Yet many of the litigants will have the privately securitized loans and those do not qualify.
  • HAMP requires a Net Present Value Test. If the person passes the test, then a modification is to be offered. The reality is that if one takes standard underwriting procedures into account, while disregarding credit scores ruined by the foreclosure, most homeowners will fail the NPVT anyway. So, any Class Action will have to account for that.
  • The lawsuits are being filed as Third Party Beneficiaries. Nowhere does it appear that there is a Private Right to Action for a Third Party Beneficiary, and some courts in the US have already ruled such.

These are just a few of the issues. But, it is not impossible to file Class Actions. It is just that the lawsuits must be filed with different tactics. I have been in discussions with law firms about just these different tactics, and they are being seriously considered right now.

Myth # 3: Prove the Note

I get more calls about this tactic than all others. The basic idea is for me to exam the Securitization of the loan so that they can show that the lender does not have the Note, or have the “Wet Signature” note, and therefore cannot foreclose for “lack of standing”.

This strategy first became prevalent in 2007 from a case in Ohio. Judge Boyko tossed a number of foreclosure cases due to lack of standing because the Note could not be found. Since then, it has been a common tactic to argue. Some courts in Judicial Foreclosure States have ruled the same in similar cases, but this is not the norm. Usually, it is only a certain type of judge doing so. Most judges do not except these arguments. (Some BK courts have been accepting these arguments as well, but only a few onverall.)
Furthermore, from what I understand, the Boyko Decision ended up with about 80% of the Notes being found, and the foreclosures completed. And with other cases across the country, the lenders are usually appealing the cases, and it can be expected that many will be overturned.

If you are in a Non-Judicial Foreclosure State, like California, courts refuse to accept any consideration of the Prove the Note argument, though Judge Buford in the BK courts in Southern California does appear to entertain such arguments. I have not seen any Trial Courts accept the argument, but if there are such cases, please send them to me.

The reason that Non-Judicial States are not entertaining the argument is that the Foreclosure Statutes for those states are considered “exhaustive”, and they control the entire foreclosure process. Hence such arguments go nowhere. (There are other specific lender arguments against Prove the Note, and specific tactics that they use, which I will not discuss at this time.)

Myth #4: The original lender was paid off, so the Note is void

This argument is based upon the fact that most Notes were sold. Once the Note was sold, the original lender was paid off, and therefore the debt is discharged. The theory is that whether “Aunt May” paid the Note off, or a “Wall Street Investor” bought the Note, it is all the same. The Note was paid, and the lender cannot foreclose.

The purveyors of such arguments are ignoring a central point. The Notes are negotiable instruments, and can be sold or traded. This is firmly rooted in Commercial Codes. The reality is that when “Aunt May” paid off your note, unless she transferred it to you, she is the “legal owner” and you owe her the debt. The same would go with the Trust who now holds the Note.

Myth #5: Securitization voids the Note

A variation of Myth 4, this strategy states that once a Note is securitized into a bond or certificate, it is no longer a foreclosable Note. Securitization has changed the “nature” of the instrument and voided any ability to foreclose. This argument is now being dismissed in many courts as soon as it is heard.

Myth #6: Credit Default Swap payments pays off the loan.

The “Aunt May” argument strikes again. In this case, when a Credit Default Swap related to a certain tranche was paid, the Note was paid off and there was no longer any liability. The people who argue this point have a poor and limited understanding of what a Credit Default Swap was, and who purchased them.

Credit Default Swaps and Credit Enhancements are separate contracts and agreements that are entered into between the Swap seller, and any person or entity who wants to buy such a contract. If the subject of the contract defaults, then the buyer receives a payout. The money does not go to pay off the loan, note or other security.

A simple explanation of this would be taking a trip to Vegas. You are watching a guy at the Craps table. He bets all on five. You bet for him to lose. He rolls a seven and loses. You get paid because he lost and you won, but he argues that he does not have to pay because you won. Want to bet what “Jimmy the Beast” is going to say or do to you? (Yes, very simplistic, but it gives people an idea of what swaps were about.)

A Virginia Court has stepped in on this, but the Florida websites who promote such strategies has not posted this case, since it is in opposition to what they promote.

Forez v. Goldman Sachs Mortgage, Lexis 35099 (E.D Va. 2010) “no provision in the U.S. or Virginia Codes supports [their] argument that credit enhancements or credit default swaps (“CDS”) are unlawful. No decision from any court in any jurisdiction supports such a claim.” “Plaintiffs’ double recovery theory ignores the fact that a CDS contract is a separate contract, distinct from Plaintiffs’ debt obligations under the reference credit (i.e. the Note). The CDS contract is a “bilateral financial contract” in which the protection buyer makes periodic payments to the protection seller. See Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co., 375 F.3d 168, 172 (2d Cir. 2004).”

Though this was a Virginia Court, the fact that the judge cites that no provision exists in US Code supports this argument being a myth, which brings us to another myth.

Myth #7: What happens in Florida is relevant in all States

Many websites, especially those in Florida, promote Florida rulings and lead to the impression that the case law is appropriate in all 50 states. This impression leads Pro Se litigants to file based upon that case law, and are then surprised when the charges are dismissed.

Foreclosure law is covered by the individual states. Each state has their own method or process for dealing with foreclosures. Even the Statutes will usually be different.

When a lawsuit is filed, the first place that the Court will look for precedent is prevailing case law and state statutes and law within the jurisdiction. If none exists, then the court will often consider other jurisdictional matters, but the court will still canadian healthcare viagra rule on what is most appropriate in its jurisdiction.

Many “high profile” websites are promoting the Florida case law, and by doing so, they leave the reader with the impression that the same arguments will work in their state. None appear to reveal that this is only applicable to Florida. As a result, the Pro Se litigant uses such arguments, and in the end, he is looking for new housing.

Myth #8 The Second Yield Spread Premium

This argument is heavily promoted by one of the Florida websites. The argument is that there are two, and perhaps three Yield Spread Premiums on loans. These consist of:

  • The first Yield Spread Premium is paid to the broker for putting the borrower into a loan that has a higher interest rate than what the borrower qualified for.
  • There is arguably a second Yield Spread Premium, known as a “Service Release Premium”, which would be what the lender receives when they sell the loan to the warehouse lender or other entity, usually 2 to 4 points.
  • The third Yield Spread Premium is what the lender receives when the interest rate adjusts.

Under TILA and RESPA, the first Yield Spread Premium payment to the broker is required to be disclosed, because this is a payment that is “guaranteed” to occur. It is readily calculated and entered into the Final Settlement Statement, and is usually readily identified.

The arguable second Yield Spread Premium, aka “Service Release Premium”, is paid to the lender when the loan is sold is not so easily quantifiable. It can take place within days, weeks, or months are the loan is closed. Amounts received are not readily apparent at closing. As a result, these payments are not required to be disclosed on the Settlement Statement.
The amount of SRP paid is based on the market value of the mortgage note, influenced by several key variables, such as interest rate, loan type, margin (for ARM loans), and the inclusion or exclusion of other items such as prepayment penalties. Also considered are the loan’s LTV (loan to value), the borrower’s credit score, the presence of Private Mortgage Insurance (PMI), pre-payment risk of the borrower and other factors. As a result, this could not be reasonably called a Yield Spread Premium, so the argument for it is certainly questionable.

The third Yield Spread Premium is a point of contention that I cannot accept. The arguments for being a Premium are simply absurd and show a lack of understanding of the Securitization Process, or of Risk Analysis, or of Adjustable Rate Mortgages.

The Adjustable Rate Mortgage was offered to borrowers as an alternative to a Fixed Rate mortgage. The benefit was a lower mortgage payment in the beginning of the loan, with a Risk of the payment increasing later, or the luck of the payment decreasing later. The risk was shared equally by both the lender and the borrower.

Those who promote these arguments claim that the increase in the Interest Rate and the resulting increase in payments should be considered a Yield Spread Premium, and in the opinion of the major promoter of this idea, to be recoverable to the borrower. So, any increase in the payments would be due back to the borrower.

If one follows this logic, then when the payment drops, the amount should be due the investor from the homeowner, but he conveniently ignores that fact. (When I have mentioned this on his website, people have complained that I don’t see the “big picture”.)

Furthermore, the arguments suggest that the lender reaps the profit, which is further from the truth. When the loan is securitized, there are Credit Enhancements and Over-Collateralization clauses. All excess payments, like increases in the interest rate and payment are used to Over-Collateralize the Tranche, so that losses are covered from the excess. It is not used as profit for the lenders. Hence, the “Yield Spread Premium” is a “bogus misrepresentation” that will only get thrown out in court.

Myth #9 Note and Deed are Separated

I place this in the Myth category because I honestly don’t know where this argument will end. I say this because in California, I have done examinations where the judge has accepted the arguments, and yet other judges have tossed the arguments. This is a highly complex argument which likely deserves an article written just covering it alone.

The basic idea is that when the Note is transferred to another party, usually through securitization, unless the Deed is assigned, then the Note and Deed are separated. Therefore, foreclosure cannot occur unless the two are reunited, since the Deed enforces the Note.

Courts in Florida have been in both camps on this subject. Some judges accept it as valid and other judges in Florida ignore it. In California, the judges most ignore the arguments.

What must be remembered is that many different courts across the US have ruled that the Deed is incidental to the Debt. The Deed has no assignable quality outside of the Debt. Assign the Deed, but the Debt does not follow.
However, when the Note is transferred, then according to the same rulings, the Deed automatically follows the Debt. If this argument is used, then the Deed and Note cannot become separated.

The same Virginia Court, as referenced above, addressed this issue. “The court further noted “federal law explicitly allows for the creation of mortgage-related securities, such as the Securities Act of 1933 and the Secondary Mortgage Market Enhancement Act of 1984. Indeed, pursuant to 15 U.S.C. § 77r-1, “[a]ny person, trust, corporation, partnership, association, business trust, or business entity . . . shall be authorized to purchase, hold, and invest in securities that are . . . mortgage related securities.” Id. § 77r-1(a)(1)(B). Foreclosures are routinely and justifiably conducted by trustees of securitized mortgages. Therefore, the court held “Plaintiffs arguments for declaratory judgment and quiet title based on the so-called “splitting” theory fail as a matter of law.”

I expect this to become more common for rulings in the future.

Myth #10 Banks have a Fiduciary Duty to a borrower

Any person or attorney who makes this allegation in a complaint should be tarred and feathered and then run out of town. For years, courts have consistently ruled that lenders have NO fiduciary duty to a borrower.

Myth# 11 An audit is the answer to all your problems

Large numbers of people call up, thinking that an audit is going to make the lender “roll over” and give the borrower what they want. This cannot be farther from the truth.

An audit, even mine, is only as good as the attorney using it. It is a “roadmap” for litigation, pointing out various issues with the loan, the origination of the loan, State and Federal Statutes, and other potential issues. The attorney must be able to take the audit and then determine the proper strategy to achieve the desired results.

One must also consider the type of audit being done. A low level audit, one that uses just TILA and RESPA violations, which is 90% of those done, will achieve even worse results than a Predatory Lending Exam, which few people know how to do.

Myth #12 Qualified Written Request

Most websites will mention the requirement for a Qualified Written Request to be demanded by the borrower. The QWR is a RESPA requirement that mandates the Servicer provide you the Servicing History of the loan.

I will often receive QWR requests that run to 20 or 30 pages. These requests call for every type of document one could conceive. Not only is the Servicing History asked for, but there will be demands for any BPO’s done, Title issues, Securitization issues, insurance and almost any conceivable document one could think of. The general response from lenders, if they do reply, is to offer the Servicing History, Note, Deed of Trust and Settlement Statement. Any other documents will be denied delivery because it is “not mandated” under RESPA.

The truth is that only the Servicing History is required disclosure. Other documents are not required to be disclosed. The reason that such QWR requests developed is that in California in 2008, a cottage industry of “foreclosure consultants” developed in which the QWR’s were sold to borrowers for $3,500 per request.

So, if you send out a QWR requesting more than the Servicing History, expect to be declined.

Myth # 13 You can get your home for free or a principal reduction to fair market value

It seems that everyone I speak with is looking for a principal reduction to fair market value or getting a home for free. This is so common, it gets boring.
People, get over it. This does not happen, except in very rare situations. I have heard of only a few principle reductions, usually no more than 25%, and getting homes for free seldom exist, except what you hear about in Florida and New York, and those are exceedingly rare circumstances.

At this point, it is probably advisable to wrap this up and plan on doing a “Part 2” in the near future. There are many more “Myths”, but hopefully, the ones presented above will serve to alert the reader to be cautious of what is presented. “If it sounds too good to be true, it probably is.”

I do expect that what I write will be met with derision and controversy, as I mentioned above. But I welcome such controversy because these issues must be aired for better understanding of what is to be expected when you are fighting foreclosure, and what you should not expect to happen is most important of all.

(Patrick Pulatie is the CEO of Loan Fraud Investigations. He can be reached at 925-238-1221, patrick@loanfraudinvestigations.com. His website is www.loanfraudinvestigations.com. Articles written by him can be viewed on www.iamfacingforeclosure.com and http://blog.ml-implode.com/ . Patrick is not an attorney and does not give legal advice.)

There Are 30 Responses So Far. »

  1. Well done. Sums it pretty well. I think an very good add on to this would to discuss the issues of fraud and is it the lender or the borrower who has committed fraud.

  2. Another myth is working with a loan modification co. Time was wasted with a company that even ML and many others had recommended. They ended up taking my money, closing down, doing nothing and never refunding my money(although some defenders out there would like to say they helped SOME people. If you take one dime and deliver nothing, your a scam..ask Madoff’s investors!)

    The best thing is do to the work yourself as a homeowner. Be diligent and non emotional. Get EVERY communication in writing. Discover who the higher ups are and contact them. If the lender reports to the FDIC or OTS contact them, contact your local senator don’t give up easily. That is exactly what they want.

    After taking on the task myself, 8 months later I got my loan mod. No one else to pat on the back but ME!

  3. This is a much-needed piece. As a practitioner in this area, I am in court regularly in front of judges, and am usually on opposing sides from about 2 dozen or so attorneys who handle 90%-plus of foreclosure and lender representation. A lot of popular “tricks” don’t work at all, are plainly unethical or sanctionable (purposeful delaying tactics, broadly put), or work once, until the outcome is appealed, is reversed by the ordering judge on reconsideration, or is now anticipated by the other side. Overly aggressive “gotcha” procedural tactics tend to be rewarded in kind and I avoid them if I think they will limit my effectiveness with other clients. Since most cases are ultimately losers, often the best I can do for a client is get them more favorable move-out terms.

    I practice solo and I can help SOME borrowers who have defective foreclosures. A very few defects are significant (ineffective service, approved loan mods in writing where foreclosure happens anyway), but they are few. Most errors by the lender, servicer or the law firm doing the foreclosure are fixable by them and will rarely void the foreclosure and nearly never void the underlying mortgage (buy a PowerBall ticket for better odds). TiLA rescission, it’s worth repeating endlessly, sooner-or-later, requires tender, before the security interest is dissolved. (If you don’t believe, point me to a title company that will close your new mortgage on your “free-and clear” property, without a court order, and I’ll gladly stand corrected). This is not a practical or sensible strategy for upside-down borrowers – why wouldn’t a lender want to be paid more than it is secured for the foreseeable future.

    I barely pay attention to cases in other states (except to see how narrow the facts usually are), and trial court judges here never pay attention to them. Courts everywhere are swamped with these cases, and my anecdotal experience is that I better have at least one issue that has a flicker of flame, and not just a lot of smoke.

    The worst call I make in this practice is when people have lost their home and are facing imminent eviction. I try to make sure clients understand that this call is probable outcome. Oddly, plenty of people will charge you more to tell you the rosey scenario, until the Sheriff is standing outside.

    This gets to my biggest issue: I think all distressed homeowners should be represented by a lawyer, even though it’s rarely going to change the outcome in huge ways (big punitive damage awards, free-and-clear property). The lenders and their agents need to be kept accountable, and represented homeowners help make the entire system more fair and efficient. This type of representation is affordable and helps all of the parties recognize their losses in the least disruptive manner to society at large.

    Thanks for the article. This is worth a lot more discussion.

  4. Could you explain what a predatory loan exam looks for? And do you try to identify common personnel to patterns of practices? (Not just some MERS flunky “officer” executing assignments, but actual management and third-party vendor structures around large-volume originators with high default rates).

    Or, if a predatory loan exam is not that useful, what is? This was the only thing that was not very clear here – “even worse results than a Predatory Lending Exam.”

  5. David,

    I will be doing an article on fraud and posting within the next few days. It is time for such an article, since everyone points fingers at everyone else. It should be interesting reading.

  6. DIY,

    Congrats to you on achieving the loan modification by DIY. You are one of the lucky ones who were able to achieve such a result.

    Personally, I find that most loan mod companies are not worth the time or money. The mod companies haven’t near the results that they claim. I cannot tell you the number of times that I calls from such companies who can’t help the homeowner, but want an audit thinking that all they need to do is present the findings, and the lender will just roll over. This just does not happen.

    Many homeowners have loans that were securitized with agreements whereby a loan modification is just not possible. The terms do not allow for it. For those people, the alternative is litigation, or moving.

    I shall be writing more about this. In fact, I have written about such issues and they are presented on my website.

  7. John,

    The Predatory Lending Exam is completely different than any exam that you have seen. There are only a few people in the country who will take the time to learn what is needed, and then to do it.

    The Exam covers the loan process from start to finish. First, I like to examine everything that happened with the broker. How contact was made, the representations made regarding the loan, how the decision for stated income was made, and just about every factor involved in the origination. Disclosures, costs, fees, loan representations are all reviewed. The unfortunate part for me is that most borrowers haven’t kept good records, or can’t remember what happened. As a result, there are many potential allegations left on the table.

    Next, the lender actions are covered. Initial disclosures are reviewed, primarily for what was disclosed in fees and the loan programs. This is because I am looking to see if the broker has changed fees or the loan program and as such, certain allegations can be made.

    I will look at compliance issues, but the truth is that with initial disclosures, nothing can really be argued on compliance, because that is corrected by issuing the final disclosures.

    Next I review the entire underwriting process, as can be deduced. I am looking for the appropriateness of the decision. Appraisal issues are noted. The previous loan may be looked at. All potential factors are reviewed, including credit score, loan to value, Debt Ratios at the initial rate and the fully amortized rate, negative amortization payments. I even created a “Real Income” analysis, based upon 1980’s underwriting standards, to show an inability to repay the loan.

    The results of this section, as well as other sections, are backed up by OCC and FDIC Guidance Letters, and then possible allegations are referred to, with case law if available.

    Next, the Closing is looked at, with available information at hand. Presence of the notary, whether the loan was signed at home, or in an office. Representations made, etc. TILA and RESPA is reviewed. Right to Cancel documents. Fees are reviewed for appropriateness. I compare fees to original fees quoted, etc.

    Then I review the YSP paid. I developed some basic arguments never used before to both show the effect of YSP on the borrower in real terms, and to argue that the fees are unreasonable under the HUD 2 Part Test. ECOA violations and Fair Housing Act violations can be alleged based upon the YSP arguments, which has surprised many attorneys.

    I review the loan program and representations, and how it affects the borrower financially. This is actually a simple process to do, but no one else has thought of it before. The results can be used for Unjust Enrichment, Predatory Lending, UDAP violations, etc. (I am a big supporter of UDAP arguments.) I also do a “unique” analysis of the Option ARM loan documents to show the “fraudulent misrepresentation” of loan terms.

    Next, I argue about the Borrower/Broker/Lender relationship. Even though a lender has no fiduciary duty to a borrower, there can be certain allegations brought that can tie the broker and the lender in a “quasi agency” relationship. Cases are cited in CA to support this.

    I also tie FTC Section 5 into the lender actions. Though there is no Private Right of Action under Section 5, most state UDAP codes were modeled on it, and with OCC letters to back me up, UDAP can be used against banks without fear of Federal Preemption in many cases.

    After this, I try and follow the Securitization Trail. I will link or provide the documents for securitization. I check to see if the loan is in the Trust, even to see if the Trust actually exists. (The PSA can actually be used to argue assignee liability.)

    I have a new Section that I have used for a couple of months, and an introducing it formally tomorrow. Predatory Loan Modifications. I can make the argument that most Modifications are predatory in nature. I can also with some lenders show that they have engaged in modification negotiations with “No Intent” to actually do the mod. I even present case law to support the arguments. No one else has even thought of this plan of attack.

    Next I check into 2923.5 compliance to see if modification negotiation attempts and notification comply with state law.

    I review the foreclosure process, looking for issues with timing of filings, signatures etc. I found one set of assignments a month ago where the AHL employee signed the documents as VP for a mortgage banker who was not a member of MERS. A phone call to the broker confirmed this, and the attorney got an affidavit saying that the person never worked for him. So this shall have interesting consequences.

    I am also introducing another new section to the exam, causation. After reviewing literally hundreds of court filings, I realized that attorneys were making a fundamental mistake. When they argue fraud, there is no specificity and no causation. As a result, the allegations are dismissed.

    I realized that I had assumed that attorneys would automatically understand the causation and argue it, but since they were not in the business, they could not generally understand. I will now be attempting to show causation for attorneys to back up the fraud arguments.

    As to patterns of practice or common personnel or third party vendors, the time and effort so far has not warranted it. However, two Class Actions that I have proposed to attorneys may incorporate some limited elements into the actions.

    These actions have be proposed based upon very specific characteristics, designed to avoid issues that a lender can argue against. Federal Preemption should not apply. The class members are very specific, and the allegations are easily understood and approved. My problem is that the firms need to have an ability to truly finance the actions, which can pose a problem. When the “right” firm comes along, then the “fun” begins.

  8. As a general rule, I don’t like doing fraud claims, unless I make the fraud determination myself. That is to say, just because someone says something is fraud doesn’t mean I would say it is. Fraud is, and should be pretty difficult to prove, and I greatly prefer the “just the facts” approach to client intake. Convincing clients that their facts don’t support a fraud claim takes an inordinate amount of time away from more supportable (and modest but useful) claims.

    As for class actions, that is a highly specialized area. Getting the certification and being able to make it stick is everything and highly nuanced. Firms that do this typically do nothing else but try to sift through the ones that can stick.

    Overall, you’re points are sound and I will give you a call. There are issues and strategies that I don’t want to discuss on a public board for now.

  9. Please call. We can discuss different things that could help each other.

    I an understand your concern about fraud issues, and you are correct in your feelings. The problem is that most attorneys do not have your wisdom and as a result, they do need guidance.

    Had an interesting talk a short time ago with an attorney preparing to open his own office. He was a former PA in Hawaii, and has moved to CA. Since he was used to filing complaints in criminal cases arguing Intent, I think that he will do great with this.

  10. I assume you take into account the statute of limitations on all of this:

    TILA 1 year / 3 yrs. rescission
    RESPA 1 yr.
    UCL 4 yrs.
    Fraud 3 yrs.
    Written Contracts 4 yrs.

    However, the SOL for mortgage fraud was extended last year from 5 years to 10.

    Much of this is a very complex game and sometimes you start pointing fingers in these audits only to find the finger is turned around pointed at you. I know that I have acted as an expert in cases in which many of these wrongdoings have been pointed at the lender or appraiser in a lawsuit to have someone like me review simply the 1003 and find that the consumer stated their income was 10k per month when it was only 5k. Had the truth been told by the consumer, the loan would have never closed.

  11. I absolutely do take into account SOL. However, under limited circumstances, some can be tolled for various reasons, although TILA/RESPA would find it most unusual for that to occur outside of foreclosure.

    I have seen what you refer to concerning the 1003 and stated income. In fact, I even address that issue, and I alert the attorney to the likelihood of such happening. It is one of the reasons I hate doing exams for investors, loan officers, realtors and other lending professionals who knew what was going on.

    That said, I can usually make convincing arguments that a large number of borrowers either were not aware of the stated income issues,(yes, this is so), or I can argue that the loan officer induced the action. In fact, I quote case law whereby “unclean hands” is not a defense, since the event occurred at the instigation of the loan officer.

    Also, the totally of the circumstances must be taken into consideration. An otherwise “perfect loan” with the only issue being stated income is not likely to result in meaningful action.

    However, if there is a loan with unsophisticated borrowers, 1632 or elder abuse violations, then the Unclean Hands defense will mean little.

    The new attorney I gained yesterday is going to be great at this, since he was a PA. He fully understands how to argue intent, and to write up complaints that are meaningful and tell the full story. Of course, in the end, it all depends upon the court.

    (One thing that makes me different is that I could function just as easily for the lender in these cases. I have been offered such work, but have chosen not to take any on. That is also why I advise attorneys that they do not want me as an expert witness. I know too much of what went on, and if asked the right questions, I can easily implicate the borrower as well.)

  12. Well written and, sadly, quite accurate. I wholly agree with your focus on “bait and switch” tactics used heavily during the years leading up to the meltdown. In fact, it is my view that the CA Supreme Court’s decision in Rosenthal v. Great Western underscores analyzing the loan origination and closing processes closely. In that case the CA Supreme Court made clear that where “essential” or “material” terms of a contract are misrepresented to or concealed from the signer AND the signer has no “reasonable” opportunity to discover the misrepresentation or concealment – the instruments are void ab initio. Obviously this is an over-simplification of the case and the facts however the fundamental legal theory it notes is sound.

  13. One of the things that always puzzled me was having a “final 1003” signed at closing. If there is a regulatory basis for this practice, I suppose I should know it. It always seemed like file fixing to me, but the loan instructions said to do it. In my experience, the closing/signing is the worst place to have borrowers attest to the accuracy of the 1003. Mobile (kitchen table) notaries were hand-picked by originators specifically because they would fly through the 1003 part of the signing, in particular, doing the “initial here, and here, and here, and sign and date here” trying their best to avoid the borrower[s] asking questions.

    That said, that still probably doesn’t amount to an SOL-tolling fraudulent concealment in my jurisdictions (Minnesota and the 8th Cir.).

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  15. Very Deceptive about “produce the note”.
    I ‘ll ask a simple question. How do you find out who endorsed the note and who the party liable to pay and the party that is entitled to payment is without the note?

    Answer .. you can’t tell without the instrument.

    I would also like to see some evidence that Boyko found 80% of the notes. When I know for a fact he didn’t.
    The notes where monetized by the Federal Reserve here’s the autority to print money from mortgage notes

    Public Law 106–122
    106th Congress
    An Act
    To amend the Federal Reserve Act to broaden the range of discount window loans which may be used as collateral for Federal reserve notes.

    Be it enacted by the Senate and House of Representatives of
    the United States of America in Congress assembled, That the
    third sentence of the second undesignated paragraph of section
    16 of the Federal Reserve Act (12 U.S.C. 412) is amended by
    striking ‘‘acceptances acquired under the provisions of section 13
    of this Act’’ and inserting ‘‘acceptances acquired under section 10A,10B, 13, or 13A of this Act’’
    Approved December 6, 1999.
    from 10 B of the federal reserve act

    may make advances to any member bank on its time notes having such maturities as the Board may prescribe and which are secured by mortgage loans covering a one-to-four family residence.

    This is why all these deed’s and notes where split. Here’s what the law says about splitting the note from the deed.

    When the note is split from the deed of trust, “the note becomes, as a practical matter, unsecured.” RESTATEMENT (THIRD) OF
    PROPERTY (MORTGAGES) § 5.4 cmt. a (1997).
    A person holding only a note lacks the power to foreclose because it lacks the security, and a person holding only a deed of trust suffers no
    default because only the holder of the note is entitled to payment on it. See RESTATEMENT
    (THIRD) OF PROPERTY (MORTGAGES) § 5.4 cmt. e (1997).
    “Where the mortgagee has ‘transferred’ only the mortgage, the transaction is a nullity and his ‘assignee,’ having received no
    interest in the underlying debt or obligation, has a worthless piece of paper.” 4 RICHARD R.
    POWELL, POWELL ON REAL PROPERTY, § 37.27[2] (2000).

    You doing a disservice by attempting to say requiring the other party to prove up the debt is still secured. When each instrument is sold separately. Did you believe in unjust enrichment?

  16. John,

    The purpose of the final 1003 is the following.

    1003’s were originally handwritten, with the borrower being interviewed by the broker. There would be plenty of errors. A final and correct 1003 would always be needed, and that established the practice of having the final 1003 at closing.

    Also, changes in a 1003 could occur up the final day. So it was just to ensure that the final terms of the loan were consistent with the loan.

  17. Indio077,

    Produce the Note arguments in Ca are not accepted, as you should know being in Indio. 2924 is exhaustive, in court rulings. Bringing up a Produce the Note argument gets dismissed, except in the rare occasion.

    Plus, all one needs to do is to look up the PSA and see if the Note is in the Trust. That simple.

    You talk about endorsements, but Notes can be endorsed in blank. Check Commercial Code on that.

    Actually, with the Boyko decision, the foreclosures were taken back into State Court, where the foreclosures did go through. This is per Steve Dibert of MFI-Miami, who was told this in person by Brad Kasier.

    As to the Restatements, I see that you have been visiting the Living Lies website over the past few days, where that has been brought up.

    You fail to mention the other part I write about the Deed following the Note. There is plenty of case law on that.

    Also, you do not reply to the Virginia decision either.

    If you remember, I am writing about what is the common outcome. Sure there are some people who do get lucky, but those are very few and far between. Most everyone who goes into court with these arguments will get slammed, and that is fact.

    CA law has been very strong on the part of the lender. The rulings are consistent, and those who get rulings on their side will almost always be the result of some technical deficiency that will only get a delay of the foreclosure.

    (BTW, Walter Hackett who is one of the few attorneys who might intimidate me, agreed with the article and what I wrote. I can think of no better endorsement.)

    The Fed and the monetarization argument. Try and take that into court and see where it stands.

    Also, take the Credit Default Argument into court. If the PSA agreement has nothing about CDS for insurance purposes, then any outside CDS contract will not have a chance of succeeding.

    My concerns are how the courts rule, and how to make arguments that courts can understand in light of current law. To argue elements that courts are not accepting, and that each time is the same argument with no different set of circumstances is folly.

    Yes, I believe in Unjust Enrichment, but yit cannot be proved in an easy and simple manner by just saying that the lender was unjustly enriched.

    BTW, how is the weather in Indio?

  18. I am aware the note can be endorsed in blank but they aren’t. These note’s are typically endorsed “without recourse”. That makes the transaction a sale of the paper without guarantee as to the value thereof.
    Many authorities say that the transfer of a note or bill without recourse is a sale.
    Brittin v. Freeman, 17 N. J. Law (2 Har.) 191, 227.
    This would make it a discount of the paper and not a loan.

    This is an issue of banks trying to have it both ways. they want to separate the instruments get paid full value for each but they want to keep the debt secured.Too bad.

    My point about the FED was that the note can’t be produced because in my opinion it was monetized and the deed of trust/mortgage was monetized into a RMBS separately for the same value. It’s not an argument to prevent a foreclosure it’s my opinion on why original’s can’t be authenticated or produced.

    Also if another party endorsed the note without the restrictive endorsement they are liable on the instrument prior to the maker. You need the note to verify whether there are other endorsements.
    There might be joint liability on the debt. A homeowner has a right to know.
    If people are demanding the note and it is getting dismissed then the are either being betrayed by their lawyer or the pleading is defective.

    BTW i didn’t get the restatement from livinglies it comes from

    The lift-stay motions in Dart and Hawkins are denied. MERS may not enforce the
    notes as the alleged beneficiary. While MERS may have standing to prosecute the motion in the
    name of its Member as a nominee, there is no evidence that the named nominee is entitled to
    enforce the note or that MERS is the agent of the note’s holder. Indeed, the evidence is to the
    contrary, the note has been sold, and the named nominee no longer has any interest in the note.

    there is massive fraud (and I mean MASSIVE)taking place in the courts

    i have actually compiled a good amount of cases pointing out MERS as no standing.
    Where is the equity in someone taking out a promissory note and a several corporations repeatedly hypothecate it to enrich themselves but don’t take any liability nor add any value? You might say the FRN’s where the value but if the FRN’s were printed on the basis of the promissory note in the first instance who really gave the value?
    I don’t have a mortgage I have no horse in the race other than fundamental justice.

  19. […] Internet Foreclosure “Myths” […]

  20. […] Internet Foreclosure “Myths” […]

  21. I remember the old days of the hand-written 1003, and should have mentioned that in my question. What I still don’t get though is that the loan is already approved (and “applied for”) when this final 1003 signed by the borrower. I’m just saying it is one of many things about the closing process that is illogical, that not one-in-ten notaries can adequately explain. In fact, as I said earlier, “good” notaries are not the ones who can explain, but the ones who don’t, won’t and will present the documents in such a way as to eliminate questions altogether. I define “good” as the ones who will get repeat business for precisely this reason.

  22. John,

    Here is the problem with what you mention about notaries. We are living in the time of mobile notaries. They do not work for the title companies, but are technically “employees” of the Secretary of State, at least in California.

    The purpose of the notary is simply to affirm that the person signing the documents is who they say they are. Anything else, it can be argued that they are “signing agents”, and at that point, liability becomes an issue beyond that of just verifying identity.

    That is why documents were never explained by the notary and the borrower usually did not know what was being signed, since seldom did a loan officer ever go to the signing. I was one of the few who went. I missed three signings in 12 years.

    BTW, thank you for the comment. Thanks to you, I will be adding new descriptions to the exam clarifying signing agent v notary. (Often I forget that attorneys don’t understand the loan process like I do. And I have forgotten more than I care to remember, until someone like you brings up a point.

  23. #3 is fundmantally valid. The key is that it’s valid in cases where there’s *genuninely a lack of clarity* as to who the note is owed to. If there’s no real question about it, it doesn’t go anywhere in the long run; but if the borrower cannot figure out who to negotiate with for a loan modification, or who to pay off the balance of the loan to, or who is authorized to cancel the mortgage…. *that*’s when it works.

    What does it work for? Finding out who holds the actual interest in the property, so that you can raise any other valid objections to foreclosure you may have.

    If you don’t have any other complaints, finding out who you owe the money to doesn’t help much, but it’s quite frequent for fraud victims to be subject to a revolving circus where all the financial firms claim that someone else has the documentaiton. In fact people are sometimes being foreclosed on who never took out mortgages at *all*, and this turns out to be absolutely crucial for them (because the process will prove that they didn’t take out a mortgage).

  24. “Plus, all one needs to do is to look up the PSA and see if the Note is in the Trust. That simple. ”

    (1) it often isn’t!
    (2) the lenders don’t always want to show the PSA to the court!
    (3) occasionally the documentation for it is fraudulently manufactured after the fact!

    See, the *entire basis* of #3 is that a lot of the financial companies were incredibly, unforgivably sloppy with their paperwork. They’re now being sued from both ends (investors are suing as well); I recently read that the same loan has been found in multiple trusts. Hmmm.

    If they did the paperwork even vaguely right on yours, then #3 doesn’t work. If they didn’t, well, you have a real question of fact: “Is this even the person I owe?!?”

  25. As I was reading this blog and comments I saw David P commented. Finger pointing is rude and as we all assume and think the best in people, my advice is beware of anyone who tries to lead you on with promises and lies.

  26. Determining whom the holder in due course is, is not always easy or conclusive.

    Assignments have been filed 4 and 5 years after the fact, and 3 years after lenders have gone the way of the do-do. Signed by individuals whom apparently worked for 3 different companies all on the same day.

    This gets especially interesting when there are missing assignments, even though the servicer tried to back door them in, they still missed steps.

    You may argue that this is a technicality, but the application of law is in whole a technicality. Laws are there for a reason, if the banks, lenders, servicers, trusts etc did not conform to the laws of the state and fed, then too bad for them.

    They purposefully perpetrated fraud and some servicers still are (AHMSI) in the name of exuberant profit.

    it’s about time they start being held to some standard of real law, however ‘technical’ it may be.

  27. Well what about companies that mislead you and tell you not to make payment (while in a loan mod) and then you get a foreclosure letter in the mail. What can you do about it what defence do you have?

  28. You are accurate about the fiduciary responsibility of the bank. Your argument holds water till the holes of what the individual was promised by the banker break the chains supporting your argument. If the Banker makes no assurances then you are correct. If on the other hand they make assurances they do not keep that is a lie. They are enforceable if they encouraged you to make the decision you made.

    You sound like a child with the line “its my job to lie its your job to catch me. May the best person win. I, without any real means of doing so, must figure out if you are lying or not and without any real tools to do so but do so I must and before the contract is signed. This done by relying on another attorney whom it appears is going through the motions without reading what they are telling the client and particularly when they are representing both the seller and the buyer.

    After the contract is signed there of course are no arguments for Void ab initio or anything like that those are just neat arguments in Latin for bossy people trying to sound like cool people….right?

    You sound as if Bankers are honest and that these idiots, the people that in some cases have had the worst of representation, are simply a different set of thieves in the same vein as bank robbers and such. This is what could be derived from what you posted.

    I understand myths but is there anything after the signing of the contract that could void it in your opinion or are all arguments invalid in your eyes?

  29. I made a semantic error that would leave people under the impression you said the line “you sound like a child with the line…” that did not represent what I meant so sorry if I sounded like I quoted you.

  30. I actually misunderstood something you said so you can forget most of the argument. Sorry

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