Quiet Title Action ~ What Florida Home Owners Need to Know

14 Wednesday Aug 2013

Posted by BNG in Affirmative Defenses, Appeal, Banks and Lenders, Federal Court, Foreclosure Crisis, Foreclosure Defense, Fraud, Judicial States, Litigation Strategies, Loan Modification, MERS, Mortgage Laws, Non-Judicial States, Pleadings, Pro Se Litigation, State Court, Trial Strategies, Your Legal Rights

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Center for Housing Policy, Florida, Foreclosure, MER, Mortgage Electronic Registration System, RealtyTrac, Securitization, United States

Quiet Title Actions: How to Force the Banks To Prove Up

The Foreclosure Crisis

I. THE FORECLOSURE CRISIS

• ISSUE ONE: Who Owns Your Note?

1. The Securitization Process:
– A. Originator Sells To Nominee (First Sale)
– B. The Nominee Sells To Depositor (Second Sale)
– C. The Depositor Sells to the REMIC Trust
• The REMIC Trust created to hold “pool” of mortgages and sell “shares” in
the REMIC Trust to investors.
• A Trustee is designated to operate the trust (typically a bank).
• The REMIC Trust operates through “Bylaws” and “Pooling and Servicing
Agreements”.
• The Pooling and Servicing Agreement outlines how the income from the
mortgages will be managed and the Servicing Agent who will collect income
and foreclose in the event of default.

The Foreclosure Crisis

• One in every 365 housing units in the United States was branded with a foreclosure notice recorded in December 2011, according to RealtyTrac.com. That means 850,000 Americans got a big lump of coal in their stocking from Uncle Scrooge.
• Over 2,076,764 American homes are now in foreclosure.
• One in every 165 housing units in California (more that twice the national average) received a foreclosure notice in December, for a total of 80,488 properties. In Nevada, the figure was one in every 93 houses.
• USA Today reports that almost 1 in 5 children in Nevada lived or live in owneroccupied homes that were lost to foreclosure or are at risk of being lost. The percentages are 15% in Florida, 14% for Arizona, and 12% for California. That’s about one in eight children in California. Five years into the foreclosure crisis, an estimated 2.3 million children have lived in homes lost to foreclosure.
• RealtyTrac reports that foreclosure and REO (real estate-owned) homes accounted for 24 percent of all residential sales during the fourth quarter of 2011.
• Here in relatively affluent Palm Beach County, homeowners are No. 1 in the state for the average number of loans in foreclosure that are delinquent. It has the fourth highest number of foreclosures, 45,829 with an average delinquency of 623 days.

Florida’s Foreclosure Statistics

• Florida is leading the country in foreclosure rates.
• Florida metro areas dominate the top 25 list for cities with the worst foreclosure rates — including the eight highest in the nation, according to a report released Tuesday.#
• In all, 17 of the top 25 cities with the highest foreclosure rates as of March are Florida cities, according to the Center for Housing Policy, the research arm of the Washington, D.C.-based National Housing Conference. #
• With a 10.9 percent foreclosure rate, Jacksonville is ranked 18th overall, but 14 other Florida cities had higher rates. Miami topped the list with the nation’s highest rate of 18.2 percent. #
• Miami’s conventional mortgage foreclosure rate in March was 14.2 percent, while its subprime rate was 39.1 percent. Jacksonville’s conventional foreclosure rate was 7.8 percent while its subprime rate was 29 percent.
• But given the fact that Florida cities made up 15 of the 25 cities with the highest “serious” mortgage delinquency rates — either behind by 90 days behind or more or now in foreclosure, there could be more foreclosures in the state’s future. And just like on the foreclosure list, Miami was also first, with a delinquency rate of 23.6 percent; and Jacksonville was 18th, with a rate of 15.6 percent.

Who Owns Your House?

• ISSUE ONE: WHO OWNS YOUR HOUSE?
– Promissory Note (the “Note”): Loan Agreement
– Mortgage/Deed of Trust: Power of Sale Document
– Grant Deed: You own until you breach the Promissory Note and
your Lender (or Others) use the Power of Sale Document to
Foreclose
– Before Securitization: Your Lender held your Note was always
the Foreclosing Entity.
– After Securitization: No One Knows Who Owns Your Note

Who Owns Your Note?

ISSUE TWO: Who Owns Your Note?
1. The Securitization Process:
– A. Originator Sells To Nominee (First Sale)
– B. The Nominee Sells To Depositor (Second Sale)
– C. The Depositor Sells to the REMIC Trust
• The REMIC Trust created to hold “pool” of mortgages and sell “shares” in
the REMIC Trust to investors.
• A Trustee is designated to operate the trust (typically a bank).
• The REMIC Trust operates through “Bylaws” and “Pooling and Servicing
Agreements”.
• The Pooling and Servicing Agreement outlines how the income from the
mortgages will be managed and the Servicing Agent who will collect income
and foreclose in the event of default.

• Why Is There a Question?
1. The Securitization Process: No One Knows Who Owns Your
Note
– The Original Lenders Failed to Properly Assign Your Note to
Subsequent Purchasers
– Incompetent Personnel
– No Training: No One Trained to Sell Notes Properly
– Never Occurred Before: Prior to Securitization Didn’t
Transfer or Sell Notes
– Thousands of Assignments Left Blank
– Remic Trusts Never Receive Assignments or Possession of
Notes: Current litigation

2. Mortgage Electronic Registration System, Inc
1. Created by over 44 Financial Institutions in 1998 to Avoid the
Registration of Securitized Mortgages : Saves Millions of
Dollars in Recordation fees;
2. Presently Being Sued in (5) States for Unlawfully failing to pay
Recording Fees on Securitized Mortgage Transactions
• WHAT IS MERS FUNCTION?
– TO CAMOUFLAGE THE SALE OF YOUR LOAN TO MULTIPLE
ENTITIES IN THE SECURITIZATION PROCESS;
– AVOID RECORDING FEES ON EVERY SALE OF YOUR LOAN
TO SUBSEQUENT PURCHASERS.
– ACT AS “BENEFICIARY” OF YOUR DEED OF TRUST OR
“NOMINEE” OF YOUR MORTGAGE

What is MERS?

• “MERS is a mortgage banking ‘utility’ that registers
mortgage loans in a book entry system so that … real
estate loans can be bought, sold and securitized (Similar
to Wall Street’s book entry utility for stocks and bonds is
the Depository Trust and Clearinghouse.”
• MERS is enormous. It originates thousands of loans
daily and is the mortgagee of record for at least 40
million mortgages and other security documents.
• MERS acts as agent for the owner of the note. Its
authority to act should be shown by an agency
agreement. Of course, if the owner is unknown, MERS
cannot show that it is an authorized agent of the owner.

Result: BANKS CAN’T PROVE THEY OWN YOUR LOAN

• The Wall Street Journal Picks Up the Scent
• An article by Nick Timiraos appeared in The Wall Street Journal on June 1, 2011 – “Banks Hit Hurdle to Foreclosures.”
• “Banks trying to foreclose on homeowners are hitting another roadblock,” Timiraos writes, “as some delinquent borrowers are successfully arguing that their mortgage companies can’t prove they own the loans and therefore don’t have the right to foreclose.”
• If you (or I) try to boot a homeowner into the street without any proof that we’re entitled to the property, the cops will lock us up. Stealing is stealing, whether it is somebody’s wallet or their 3-bedroom 2-bath in the suburbs with two dogs and a kid. When a bank tries to steal the bungalow without proof that they have a right to foreclose, it’s a “hurdle” or “another roadblock.”
• Semantics aside, this is good news for all people holding grant deeds. This year, the Journal reports, cases in California, North Carolina, Alabama, Florida, Maine, New York, New Jersey, Texas, Massachusetts and other states have raised questions about whether banks properly demonstrated ownership.
• In some cases, borrowers are showing courts that banks failed to properly assign ownership of mortgages after they were pooled into mortgage-backed securities. In other cases, borrowers say that lenders backdated or fabricated documents to fix those errors.
• “Flawed mortgage-banking processes have potentially infected millions of foreclosures, and the damages against these operations could be significant and take years to materialize,” said Sheila Bair, chairman of
the Federal Deposit Insurance Corp., in testimony to a Senate committee last month.
• In March, an Alabama court said J.P. Morgan Chase & Co. couldn’t foreclose on Phyllis Horace, a delinquent homeowner in Phenix City, Ala., because her loan hadn’t been properly assigned to its owners
– a trust that represents investors – when it was securitized by Bear Stearns Cos. The mortgage assignment showed that the loan hadn’t been transferred to the trust from the subprime lender that originated it.

The Problem With MERS

• Federal bankruptcy courts and state courts have found that MERS and its member banks often confused and misrepresented who owned mortgage notes. In thousands of cases, they apparently lost or mistakenly destroyed loan documents.
• The problems, at MERS and elsewhere, became so severe last fall that many banks temporarily suspended foreclosures.
• Not even the mortgage giant Fannie Mae, an investor in MERS, depends on it these days.
• “We would never rely on it to find ownership,” says Janis Smith, a Fannie Mae spokeswoman, noting it has its own records.
• Apparently with good reason. Alan M. White, a law professor at the Valparaiso University School of Law in Indiana, last year matched MERS’s ownership records against those in the public domain.
• The results were not encouraging. “Fewer than 30 percent of the mortgages had an accurate record in
MERS,” Mr. White says. “I kind of assumed that MERS at least kept an accurate list of current ownership.
They don’t. MERS is going to make solving the foreclosure problem vastly more expensive.”
• The Arkansas Supreme Court ruled last year that MERS could no longer file foreclosure proceedings there, because it does not actually make or service any loans. Last month in Utah, a local judge made the no-lessstriking decision to let a homeowner rip up his mortgage and walk away debt-free. MERS had claimed ownership of the mortgage, but the judge did not recognize its legal standing.
• And, on Long Island, a federal bankruptcy judge ruled in February that MERS could no longer act as an “agent” for the owners of mortgage notes. He acknowledged that his decision could erode the foundation of the mortgage business.
• But this, Judge Robert E Grossman said, was not his fault.
• “This court does not accept the argument that because MERS may be involved with 50 percent of all residential mortgages in the country,” he wrote, “that is reason enough for this court to turn a blind eye to
the fact that this process does not comply with the law.”

Legal Issues

1. SEPARATION OF THE NOTE AND THE DEED
• In the case of MERS, the Note and the Deed of Trust are held by separate entities. This can pose a unique problem dependent upon the court. The prevailing case law illustrates the issue:
• “The Deed of Trust is a mere incident of the debt it secures and an assignment of the debt carries with it the security instrument. Therefore, a Deed Of Trust is inseparable from the debt and always abides with the debt. It has no market or ascertainable value apart from the obligation it secures.
• A Deed of Trust has no assignable quality independent of the debt, it may not be assigned or transferred apart from the debt, and an attempt to assign the Deed Of Trust without a transfer of the debt is without effect. “
• This very “simple” statement poses major issues. To easily understand, if the Deed of Trust and the Note are not together with the same entity, then there can be no enforcement of the Note. The Deed of Trust enforces the Note. It provides the capability for the lender to foreclose on a property. If the Deed is separate from the Note, then enforcement, i.e. foreclosure cannot occur.
The following ruling summarizes this nicely.
• In Saxon vs Hillery, CA, Dec 2008, Contra Costa County Superior Court, an action by Saxon to foreclose on a property by lawsuit was dismissed due to lack of legal standing. This was because the Note and the Deed of Trust were “owned” by separate entities. The Court ruled that when the Note and Deed of Trust were separated, the enforceability of the Note was negated until rejoined.

2. MERS IS A NOMINEE AND NOT THE HOLDER OF THE NOTE
• The question now becomes as to whether a Note Endorsed in Blank and transferred to different entities does allow for foreclosure. If MERS is the foreclosing authority but has no entitlement to payment of the money, how could they foreclose? This is especially true if the true beneficiary
is not known. Why do I raise the question of who the true beneficiary is?
• THE MERS WEBSITE STATES…..
• “On MERS loans, MERS will show as the beneficiary of record. Foreclosures should be commenced in the name of MERS. To effectuate this process, MERS has allowed each servicer to choose a select number of its own employees to act as officers for MERS.
Through this process, appropriate documents may be executed at the servicer’s site on behalf of MERS by the same servicing employee that signs foreclosure documents for non-MERS loans. Until the time of sale, the foreclosure is handled in same manner as non-MERS foreclosures. At the time of sale, if the property reverts, the Trustee’s Deed Upon Sale will follow
a different procedure. Since MERS acts as nominee for the true beneficiary, it is important that the Trustee’s Deed Upon Sale be made in the name of the true beneficiary and not MERS. Your title company or MERS officer can easily determine the true beneficiary. Title companies have indicated that they will insure subsequent title when these procedures are followed.”

3. MERS IS THE NOMINEE AND NOT THE BENEFICIARY
• To further reinforce that MERS is not the true beneficiary of the loan, one need only look at the following Nevada Bankruptcy case, Hawkins, Case No. BK-S-07-13593-LBR (Bankr.Nev. 3/31/2009) (Bankr.Nev., 2009) – “A “beneficiary” is defined as “one designated to benefit from an appointment, disposition, or assignment . . . or to receive something as a result of
a legal arrangement or instrument.” BLACK’S LAW DICTIONARY 165 (8th ed. 2004). But it is obvious from the MERS’ “Terms and Conditions” that MERS is not a beneficiary as it has no rights whatsoever to any payments, to any servicing rights, or to any of the properties secured by the loans. To reverse an old adage, if it doesn’t walk like a duck, talk like a duck, and quack like a duck, then it’s not a duck.”
• When the initial Deed of Trust is made out in the name of MERS as Nominee for the Beneficiary and the Note is made to AB Lender, there should be no issues with MERS acting as an Agent for AB Lender. Hawkins even recognizes this as fact.
• The issue does arise when the Note transfers possession. Though the Deed of Trust states “beneficiary and/or successors”, the question can arise as to who the successor is, and whether Agency is any longer in effect. MERS makes the argument that the successor Trustee is a MERS
member and therefore Agency is still effective, and there does appear to be merit to the argument on the face of it.The original Note Holder, AB Lender, no longer holds the note, nor is entitled to payment. Therefore, that Agency relationship is terminated. However, the Note is endorsed in blank, and no Assignment has been made to any other entity, so who is the true
beneficiary? And without the Assignment of the Note, is the Agency relationship intact?

4. MERS FORECLOSURE PROCEDURES
• There, you have it. Direct from the MERS website. They admit that they
name people to sign documents in the name of MERS. Often, these are
Title Company employees or others that have no knowledge of the actual
loan and whether it is in default or not.
• Even worse, MERS admits that they are not the true beneficiary of the loan.
In fact, it is likely that MERS has no knowledge of the true beneficiary of the
loan for whom they are representing in an “Agency” relationship. They
admit to this when they say “Your title company or MERS officer can
easily determine the true beneficiary.
• Why are the Courts Accepting MERS as a Nominee or Agent of the
“Lenders”? The “beneficiary” term is erroneous. Even MERS states it
is not a “beneficiary”.
• If so, MERS cannot assign deeds of trust or mortgages to third parties
legally.

• ISSUE THREE: Does MERS have the Right to Participate in Your
Foreclosure?
– NO. According to the Majority of Federal Court Opinions and Every State Supreme Court decision which has addressed this Issue: Oregon and Washington Supreme Ct Decisions Pending
– Every Attorney General who has examined the legality of MERS has determined it is illegal business enterprise: New York; Delaware; Oregon, Washington, Idaho; with more to come.
_ Declared Unlawful Business Organization : ( In re: Agard, No. 10-77338, 2011 Bankr. LEXIS 488, at 58-59 (Bankr. E.D.N.Y. Feb 10, 2011)
_ In California, the federal court determined that MERS has to have a written contract with the new noteholder in order to have the authority to appoint or assign the beneficial interest in the note sufficient to foreclose (In re: Vargas: US Dist Ct, Central Dist of Calif; Case No LA 08-107036-SB).
– Judge Michael Simon of the Oregon Federal Court has found that MERS cannot assign its beneficiary status in a deed of trust to a third party for foreclosure purposes due to the fact that MERS does not under Oregon law have the legal authority to do so (James, et al v Reconstruct Trust, et al: US Dist Ct. Case No: 3:11-cv-00324-ST).

Solutions

QUIET TITLE ACTIONS: Definition
• quiet title action n. a lawsuit to establish a party’s title to real property
against anyone and everyone, and thus “quiet” any challenges or claims to
the title. Such a suit usually arises when there is some question about clear
title, there exists some recorded problem (such as an old lease or failure to
clear title after payment of a mortgage), an error in description which casts
doubt on the amount of property owned, or an easement used for years
without a recorded description. An action for quiet title requires description
of the property to be “quieted,” naming as defendants anyone who might
have an interest (including descendants—known or unknown—of prior
owners), and the factual and legal basis for the claim of title. Notice
must be given to all potentially interested parties, including known and
unknown, by publication. If the court is convinced title is in the plaintiff (the
plaintiff owns the title), a quiet title judgment will be granted which can be
recorded and thus provide legal “good title.“

• QUIET TITLE ACTIONS:
– Purpose: Require All Adverse Claims to Title to Prove to the Court the
Worthiness of Their Claim:
– Mortgages/Deeds Of Trust:
• Who is the Owner of Your Note? Prove It
• Who is the Beneficiary of Your Deed of Trust/Mortgage? The Owner of the
Note
• Who has the Legal Right to Foreclose?
– ONLY THE OWNER OF THE NOTE IS A TRUE BENEFICIARY
– ONLY THE BENEFICIARY OF THE MORTGAGE OR DEED OF
TRUST OR ITS LEGAL REPRESENTATIVE CAN FORECLOSE
– MERS IS NOT A BENEFICIARY-According to its own Website
– MERS IS NOT A LEGAL REPRESENTATIVE OF ANY REMIC TRUST
» No Contract
» At Best MERS has a Contractual Relationship with Original Lender

• FLORIDA QUIET TITLE STATUTES-Civil Practice and Procedure
• 65.061 Quieting title; additional remedy.—
• (1) JURISDICTION.–Chancery courts have jurisdiction of actions by any person or corporation claiming legal or equitable title to any land…. and shall determine the title of plaintiff and may enter judgment quieting the title and awarding possession to the party entitled thereto….
• (2) GROUNDS.–When a person or corporation not the rightful owner of land has any conveyance or other evidence of title thereto, or asserts any claim, or pretends to have any right or title thereto, any person or corporation is the true and equitable owner of land the record title to which is not in the person or corporation because of the defective execution of any deed or mortgage because of the omission of a seal thereon, the lack of witnesses, or any defect or omission in the wording of the acknowledgment of a party or parties thereto, when the person or corporation claims title thereto by the defective instrument and the defective instrument was apparently made and delivered by the grantor to convey or mortgage the real estate and was recorded in the county where the land lies which may cast a cloud on the title of the real owner….
• (4) JUDGMENT.–If it appears that plaintiff has legal title to the land or is the equitable owner thereof based on one or more of the grounds mentioned in subsection (2), or if a default is entered against defendant (in which case no evidence need be taken), the court shall enter judgment removing the alleged cloud from the title to the land and forever quieting the title in plaintiff and those claiming under him or her since the commencement of the action and adjudging plaintiff to have a good fee simple title to said land or the interest thereby cleared of cloud.

DECLARATORY RELIEF
• WHO OWNS THE NOTE? WHO IS ENTITLED TO FORECLOSE?
• FEDERAL RULES OF CIVIL PROCEDURE: RULE 57. DECLARATORY JUDGMENT
• 28 U.S.C. §2201. Rules 38 and 39 govern a demand for a jury trial. The existence of another adequate remedy does not preclude a declaratory judgment that is otherwise appropriate. The court may order a speedy hearing of a declaratory-judgment action.
• The fact that a declaratory judgment may be granted “whether or not further relief is or could be prayed” indicates that declaratory relief is alternative or cumulative and not exclusive or extraordinary. A declaratory judgment is appropriate when it will “terminate the controversy” giving rise to the proceeding. Inasmuch as it often involves only an issue of law
on undisputed or relatively undisputed facts, it operates frequently as a summary proceeding, justifying docketing the case for early hearing as on a motion, as provided for in California (Code Civ.Proc. (Deering, 1937) §1062a), Michigan (3 Comp.Laws (1929) §13904), and Kentucky
(Codes (Carroll, 1932) Civ.Pract. §639a–3).
• The “controversy” must necessarily be “of a justiciable nature, thus excluding an advisory decree upon a hypothetical state of facts.” Ashwander v. Tennessee Valley Authority, 297 U.S. 288, 325, 56 S.Ct. 466, 473, 80 L.Ed. 688, 699 (1936). The existence or nonexistence of any right, duty, power, liability, privilege, disability, or immunity or of any fact upon which such legal relations depend, or of a status, may be declared.

• WRONGFUL FORECLOSURE:
• What is a Wrongful Foreclosure Action?
• A wrongful foreclosure action typically occurs when the lender starts a
judicial foreclosure action when it simply has no legal cause. Wrongful
foreclosure actions are also brought when the service providers accept
partial payments after initiation of the wrongful foreclosure process, and
then continue on w i t h the f o r e c l o s u r e process. These
predatory lending strategies, as well as other forms of misleading
homeowners, are illegal.
• The borrower is the one that files a wrongful disclosure action with the court against the service provider, the holder of the note and if it is a non-judicial foreclosure, against the trustee complaining that there was an illegal, fraudulent or willfully oppressive sale of property under a power of sale contained in a mortgage or deed or court judicial proceeding. The borrower can also allege emotional distress and ask for punitive damages in a wrongful foreclosure action.

• FRAUD CLAIMS
• Mortgage Payments: Have you been paying mortgage payments to the
wrong financial institution?
• JP Morgan Chase: Bought “Assets” of WAMU from FDIC in 2008
– All Mortgage Loans from 2003-2008 were already sold to REMIC Trusts
– What Did Chase Bank Buy? Servicing Contracts?
– Can Chase Bank Foreclose on Notes It Does Not Own?
• One West Bank: Bought “Assets” of IndyMac from FDIC in 2008
– All Mortgage Loans from 2003-2008 were already sold to REMIC Trusts
– What did One West Bank Buy? Servicing Contracts?
– Can One West Foreclose on Notes It Does Not Own?
• Bank of America: Bought “Servicing Contracts” from Countrywide in 2008
– All Mortgage Loans from 2003-2008 were already sold to REMIC Trusts
– What Did Bank of America Buy? Servicing Contracts
– Can Bank of America Foreclose on Notes It Does Not Own?

• QUIET TITLE LITIGATION:
– Potential Outcomes:
• Actual Quiet Title: Removal of All Liens, Encumbrances,
Mortgages:
• Principal Reduction: Mediation or Arbitration Resulting in
Substantial Reduction in Your Mortgage Balance
• Damage Claims against Financial Institutions: Punitive Damages?
• TROS and Injunctions: Stopping the Foreclosure Process
• Did Default Insurance Pay Off My Mortgage
• Declaratory Relief:
– Who Do I Pay My Mortgage To?
– Who Can Foreclose on My House?

Credit Rehabilitation
• Credit Rehabilitation
• The Fair Credit Reporting Act (FCRA) gives you the right to contact credit bureaus directly and dispute items on your credit reports. You can dispute any and all items that are inaccurate, untimely, misleading, biased, incomplete or unverifiable (questionable items). If the bureaus cannot verify that the information on their reports is indeed correct, then those items must be deleted.
• PeabodyLaw has created the “Mortgage Audit Plan”:
– Obtain a Securitization Audit from Audit Pros, Inc.
– Peabody Law will utilize the results of your Securitization Audit to file a
court action seeking a court order removing all negative credit reporting
items from your credit history based upon the findings of the audit.
– Upon receipt of Court Judgment rendering the nullification of unlawful
and erroneous credit references, Peabody Law will send a Demand
Letter with the Judgment attachment to each Credit Reporting Agency
demanding retraction and removal of all negative credit references
relating to mortgage payments, foreclosures, short sales, etc.

For a Complete Pro Se “Do It Yourself” Foreclosure Defense Kit With Well Drafted Pleadings and Step By Step Guide For Saving Your Home Visit: http://www.fightforeclosure.net

What Homeowners Need to Know About Judicial Foreclosure Process

13 Tuesday Aug 2013

Posted by BNG in Appeal, Federal Court, Foreclosure Defense, Judicial States, Litigation Strategies, Pleadings, Pro Se Litigation, Trial Strategies, Your Legal Rights

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Foreclosure is the process by which the lender takes control of the property and sells it to raise money to pay the debt. The process varies depending on if your state is a judicial or nonjudicial state.

This post is designed to guide homeowners in Judicial foreclosure States as to how foreclosure process works.

1. The Foreclosure Process

Foreclosure is the process by which the lender takes control of the property which was pledged as collateral for the mortgage debt and sells the property to raise money to pay on the debt created by the Note. The sale extinguishes the borrower’s interest in the property although some states have redemption period after the sale. Other interests are also extinguished if the foreclosure is done properly, including the rights of other owners, spouses, junior mortgages, lienholders, and some taxes. The foreclosure process is very different depending on whether it is judicial or non-judicial. In the US, approximately half of the states permit non-judicial foreclosure. The rest of the states require judicial foreclosure. A few states allow both. However, the process is different in each state; accordingly the material here is intended as a general guide. It is for educational purposes only, and is not legal advice.

2. Interested Parties

In order for the interests of all parties who may have a claim to the property be extinguished, the foreclosure must be done properly, and all interested parties must be given proper notice as detailed by state law. The typical interested parties are other owners of the property, spouses, junior mortgages, lienholders, and some taxes. If the borrower is deceased, his or her heirs and estate are interested parties.

3. Judicial Foreclosure

Judicial foreclosure is a lawsuit, similar to other kinds of lawsuits. It is formal and much more complex, and generally takes longer than non-judicial foreclosure, although this varies by jurisdiction. The point of a judicial foreclosure is for the lender to obtain from the court a judgment in foreclosure, and the right to hold a sale of the mortgaged property. The court is involved in the foreclosure process all the way through. So, if a borrower feels there is something wrong or improper occurring, he or she can raise those issues within the judicial foreclosure proceeding.

4. Notice of Default and Acceleration

Most mortgage and most states’ laws require the lender to give a borrower advance notice that a foreclosure is about to start, and an opportunity to cure the default. The cure period is typically between 20 and 60 days, depending on the mortgage document and state law.

5. Service of Process

Lawsuits are begun by service of process. All states have laws that govern exactly how this has to work to be valid. In most states, it means that the Summons and Complaint (see below) must be handed directly to you or to an adult member of your household. However, all states have laws to cover situations where you avoid service of process or cannot be served personally. Service of process must be done properly in accordance with the law of the state in question to be valid. These days we see many examples of improper service of process. If process is not served properly, this issue MUST be raised before any other defensive pleadings or it is waived.

6. Summons and Complaint

This is usually the first evidence that a borrower in a judicial state sees that his or her property is being subjected to foreclosure. A Complaint is filed by the lender or its agent, the loan servicer, with the Clerk of the court having jurisdiction over foreclosures in that county. The Clerk issues a Summons, and that, with the Complaint, is then delivered personally to the borrower and any other interested parties (other property owners, spouses, junior mortgages and liens, condominium and homeowners’ associations). Service of the Summons and Complaint starts the clock ticking for the party served to defend if he, she or it is going to do so. The party suing is the Plaintiff, the parties being sued are Defendants. The Complaint asks that the court accelerate the obligation to pay the entire mortgage debt in full, with all accrued costs, fees, advances and expenses.

7. Response

If a borrower or other interested party has any reason to contest a foreclosure, he she or it needs to file a Response to the Complaint unless there is a defective process service issue (see above). There are many different kinds of responses, and it is critical that the right one be utilized at the right time. Motions and other objections normally deal with preliminary matters of some kind, including technical defects in the Complaint, technical defects in service of process, etc. There are various kinds of preliminary motions. Most applicable usually to foreclosure, depending on the facts, are Motions to Quash Service, Motions to Dismiss, Motions to Strike, and often there are others, depending on the specific law and procedure of the state in question.

8. Response – Answer

Answers fully address the allegations of the Complaint. In most cases, if issues exist which can be raised by Motion or Objection, this is waived if an Answer is filed first. Answers raise legal issues which are defenses to foreclosure (See Guide – Defenses to Foreclosure). The amount of time allowed for a Response is governed by state law, usually 20 or 30 days. Many people try to file their own “Answer”. This is normally a very dangerous move. The filing of an Answer generally extinguishes the right to file preliminary motions, which can be critical to the correct handling of a defense case. The only things which should be contained in an Answer are legal defenses to foreclosure. These are rarely what you would expect. Typically, the sorts of things people file talk about their financial difficulties, about the fact that they are trying to get the mortgage company to work with them, or trying to get a better job, and that they need more time.

9. Default

If a Defendant does not file a response within the time allowed by law, the Plaintiff can cause default to be entered against that Defendant, which precludes his or her being able to raise defenses. In some states, it also allows the foreclosure to proceed without any further notice to defaulting defendants.

10. Counterclaim

If a borrower has been wronged by the mortgage lender or servicer, he or she may file a counterclaim. A counterclaim is just that – a suit within a suit, where the Borrower is suing the Lender or Servicer.

11. Discovery

Interrogatories, Requests for Production, Requests for Admission, Depositions – These are tools which can be used by any party to a lawsuit to obtain more information to prove or disprove his, her or its case. Interrogatories are written questions which one party serves on the other, demanding information. Requests for Production are requests for tangible things, such as documents, files, objects, etc. Requests for Admissions are used by attorneys to attempt to compel the other side to admit or deny issues. Depositions are in-person testimony, under oath, all of which is taken down by a court reporter. Cases may involve all or any combination of these, however each jurisdiction has specific rules as to when discovery can be propounded, how long the other side has to respond, and how to handle a failure to respond or to respond properly. Properly done discovery is usually the key to a successful outcome in a lawsuit.

12. Burden of Proof

Normally, whichever party raises an issue has the burden of proving it. This means that if I say you owe me money, I have to be able to prove it. If I say I own the mortgage on your home, I have to be able to prove it. As mentioned above, well-done discovery will allow your attorney to find out whether I can prove it or not. As an example, if you claim that the mortgage company did not apply payments correctly, you have to be able to prove it. You may be able to do this with your records, but it would also be of tremendous use to get the mortgage company’s records of what payments they applied to see if their records are right. So, in a Judicial Foreclosure, the Plaintiff has the burden of proving its right to foreclose, the amount of the debt and the existence and details of default. The defendant has the burden of proving any affirmative defenses he she or it raises.

13. Summary Judgment

Either party has the right to ask the court to grant summary judgment in its favor. Normally, the Motion for Summary Judgment is supported by affidavits from potential witnesses supporting their claims. If granted, that ends the case – it means the moving party wins. Summary judgment is the goal of foreclosure plaintiffs. Technically, it means that the court is convinced that there is no reason for a trial, that the pleadings and issues raised in the case by the parties demonstrate that the party requesting summary judgment does not have to do any more to prove its case. If a defendant does not raise issues which constitute defenses to foreclosure, and does not establish that there are issues that need to be sorted out at trial, the court is likely to grant summary judgment, since that removes one more case from the court’s swollen caseload.

14. Summary Judgement (Cont.)

If a defendant has been defaulted, the way to summary judgment for the Plaintiff is wide open. If a defendant has filed a homemade “answer” telling the court that he, she or it can’t pay right now, is trying to get a modification, is trying to get a better job, needs more time, likewise the way to summary judgment for the Plaintiff is wide open. If the defendant has properly raised legitimate issues, there is a chance of surviving summary judgment and if a summary judgment is improperly granted anyway, that may be a basis for appeal. The Order granting Summary Judgment normally itemizes the entire amount claimed to be due at that point – the entire mortgage debt in full, with all accrued costs, fees, advances and expenses. Once Summary Judgment is granted, the next step normally is the scheduling of a foreclosure sale.

15. Trial

If neither party is able to obtain Summary Judgment, and unless the dispute is settled by agreement, the next step is trial. Trial is a full scale proceeding. Some states allow for trial by jury, others do not, but most mortgage documents contain a jury trial waiver which the borrower consented to at closing. At trial a judge with or without a jury hears and rules on all the evidence presented, hears the arguments of counsel and makes a decision. If a Counterclaim has been filed and has not been disposed of via Summary Judgment, the counterclaim may allow for trial by jury. At the conclusion of the trial, if the Plaintiff wins, then it proceeds to set a sale (see below). If it loses, it will be unable to proceed any further with the foreclosure process. If it did lose, depending on the reason why, it may be possible for another Plaintiff to bring an action for foreclosure.

16. Foreclosure Sale

In order for a foreclosure sale to be held in a judicial foreclosure, the actual lawsuit must be over, either through Summary Judgment or after trial, and all that remains are the final details of getting the property sold. Again the process and details vary by state, but all entail setting a date for sale. Notice of the date is given to all interested parties and in many states also provided publicly in the newspaper and often now by posting on the web sites of Courts, Clerks of Court or other similar locations. The foreclosure sale is handled by a judicial officer – in some states it is the Sheriff, in some states it is the Clerk of Courts, in some states a referral is made to a court-appointed master. The date is set, notice is given, and then the actual sale occurs. It is generally in the form of an auction.

17. Foreclosure Sale (cont.)

The foreclosing lender sends a representative to bid. Its bid is usually the total amount due it, although sometimes if the property is underwater, the lender will reduce its bid in the hope that it will be outbid by a third party. If a junior lienholder or third party is the high bidder, it is the successful purchaser. However, in many places now, when the mortgage debt equals or exceeds the current value of the property, there are no other bidders, and so the mortgage company wind up as the high bidder. Normally the entire bid amount must be paid right away in full. There is some time period after the sale before the sale is confirmed. This varies by state. Once the sale is confirmed, a document is issued to the buyer conveying title. Depending on the state, it might be a Sheriff’s Deed, a Certificate of Title or some other instrument, but the practical effect is to convey title. Once the new buyer owns the property, they can do what they want, subject to right of redemption.

18. Deficiency Judgments

Many states provide a mechanism for a foreclosing Plaintiff to recover a deficiency judgment, usually consisting of the shortfall between the total owed by the borrower and the value of the property it recovers if it buys it at the foreclosure sale. In those states that permit this, a borrower is not done with the obligation simply because he she or it allows a foreclosure to be completed. It is very important to understand whether or not you may be exposed for a deficiency judgment before you decide whether to oppose foreclosure or to consider bankruptcy. For details of how deficiency judgments work in Florida, check my Legal Guide on deficiency judgments. While the guide is geared to Florida, the concept is similar in other states that permit it, although the details and time-frames vary. Some states do not allow deficiency judgments under some circumstances.

For Your Complete Judicial Foreclosure Kit With Well Structured Pleadings and Step by Step Guide For Your Wrongful Foreclosure Defense Visit:http://www.fightforeclosure.net

How Homeoweners Can Use Various Forms of Mortgage Fraud Schemes For Wrongful Foreclosure Defense

12 Monday Aug 2013

Posted by BNG in Affirmative Defenses, Appeal, Banks and Lenders, Federal Court, Foreclosure Defense, Fraud, Judicial States, Litigation Strategies, Loan Modification, Non-Judicial States, Notary, Note - Deed of Trust - Mortgage, Pleadings, Pro Se Litigation, Scam Artists, Title Companies, Your Legal Rights

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Business, Finance, Financial Services, Loan origination, mortgage, Mortgage fraud, Mortgage loan, United States

Over the past few years, mortgage fraud continues to result in significant losses for both financial institutions and homeowners.

Mortgage fraud has continued to increase over the past few years. Declining economic conditions, liberal underwriting standards, and declining housing values contributed to the increased level of fraud. Market participants are perpetrating mortgage fraud by modifying old schemes, such as property flip, builder-bailout, and short sale fraud, as well as employing newer schemes, such as buy and bail, reverse mortgage fraud, loan modification and refinance fraud, and mortgage servicing fraud.

It is imperative that homeowners understand the nature of the various schemes involving mortgage frauds as this will help you to build rock solid defense when fighting your wrongful foreclosure to save your home.

Various individuals participate in mortgage fraud schemes. The following list consists of common participants in such schemes.

Appraiser                                Processor
Borrower                              Real Estate Agent
Buyer                                       Seller
Closing/Settlement Agent    Title Agent
Loan Servicer Underwriter
Originator    Warehouse Lender

BASIC MORTGAGE TRANSACTIONS

Basic mortgage transactions are generally the same whether the purpose of the loan is to purchase a property, refinance an existing loan, or obtain a loan against a property that is unencumbered and may be offered through one of the channels described below:

Retail

In retail transactions, the borrower makes an application directly with a financial institution loan officer. These mortgage transactions are the most basic and involve the fewest number of third parties, which may include appraisers and closing agents. Usually, the application package consisting of financial information, credit report, a collateral valuation report such as an appraisal or evaluation, title information, and various other credit-related documents, is compiled and forwarded to an underwriter for a credit decision. Upon approval, the financial institution then releases funds to a closing agent, who disburses funds to the various parties. The loan package is returned to the financial institution and reviewed for quality and accuracy. The loan is either held on the financial institution’s books or sold into the secondary market. Retail originations only include loans closed in the financial institution’s name.

Broker Origination

A broker-originated loan is similar to the retail transaction, except that the borrower makes an application with a mortgage broker. A broker is a firm or individual, acting on behalf of either the financial institution or the borrower, who matches a borrower’s financing needs with an institution’s mortgage origination programs. Brokers are compensated by receiving a commission expressed as a percentage of the total loan amount (e.g., 1 percent origination fee) from the borrower or through a yield-spread premium from the lender when the loan closes.

Brokers have played a critical role in the wholesale loan origination process and have significant influence on the total loan transaction. Brokers have served as the point of contact for the borrower and the lender, and coordinated the involvement of other parties to complete the transaction. A broker can perform some or most of the loan processing functions including, but not limited to, taking loan applications; ordering credit and title reports; verifying a borrower’s income and employment; etc.

Once the broker has gathered the necessary information, the application is submitted along with supporting documentation to one or more financial institutions for underwriting. The financial institution’s underwriter reviews the information and makes a credit decision. The financial institution also may perform pre-funding quality assurance activities, such as re-verification of income and employment.

A copy of the loan approval package, with documents prepared in the name of the financial institution, is then returned to the broker. Once the loan has closed, the completed package should be returned directly to the financial institution. Again, the financial institution may review the loan for quality and either retain the loan in its own portfolio or sell it.

Mortgage Loan Purchased from a Correspondent

In this transaction, the borrower applies for and closes a loan with a correspondent of the financial institution, which can be a mortgage company, another depository institution, finance company, or credit union service organization. The correspondent can close the loan with internally-generated funds in its own name or with funds borrowed from a warehouse lender. Without the capacity or desire to hold the loan in its own portfolio, the correspondent sells the loan to a financial institution. The purchasing financial institution is frequently not involved in the origination aspects of the transaction, and relies upon the correspondent to comply with the financial institution’s approved underwriting, documentation, and loan delivery standards. The purchasing financial institution may perform a quality control review prior to purchase. Also, the purchasing financial institution must review the appraisal or evaluation report and determine conformity with the Agencies’ appraisal standards, regulations, and supervisory guidance, as well as the financial institution’s requirements.

The loan can be booked in the financial institution’s own portfolio or sold.

In “delegated underwriting” relationships, the financial institution grants approval to the correspondent to process, underwrite, and close loans according to the financial institution’s processing and underwriting requirements. Proper due diligence, internal controls, approvals, quality control audits, and ongoing monitoring are warranted for these higher-risk relationships.

Each of the Agencies has issued detailed guidance on a financial institution’s management of its arrangements with third parties, including brokers, and associated risk. Examiners are encouraged to review and consider the guidance issued by their Agency in evaluating broker arrangements. Additionally, the Secure and Fair Enforcement Mortgage Licensing Act of 2008 (S.A.F.E. Act) requires licensing and/or registration for all residential mortgage loan originators. The system is also used for state-licensed mortgage companies. More information is available at the website at http://www.stateregulatoryregistry.org and contains comprehensive licensing, registration, enforcement action that is expected to be made available to the public through the website in the near future.

COMMON MORTGAGE FRAUD SCHEMES

This post defines schemes as the big picture or secret plan of action used to perpetrate a fraud. There are a variety of “schemes” by which mortgage fraud can take place. These schemes can involve individuals inside the financial institution or third parties. Various combinations of these schemes may be implemented in a single fraud. The descriptions provided below are examples of traditional and emerging schemes that are used to facilitate mortgage fraud. Click on the link for each fraud scheme to learn more about that particular scheme.

Builder Bailout

This scheme is used when a builder, who has unsold units in a tract, subdivision, or condominium complex, employs various fraudulent schemes to sell the remaining properties.

Buy and Bail

Chunking

Chunking occurs when a third party convinces an uninformed borrower to invest in a property (or properties), with no money down and with the third party acting as the borrower’s agent. The third party is also typically the owner of the property or part of a larger group organizing the scheme. Without the borrower’s knowledge, the third party submits loan applications to multiple financial institutions for various properties. The third party retains the loan proceeds, leaving the borrower with multiple loans that cannot be repaid. The financial institutions are forced to foreclose on the properties.

Double Selling

Double selling occurs when a mortgage loan originator accepts a legitimate application and documentation from a buyer, reproduces or copies the loan file, and sends the loan package to separate warehouse lenders to each fund the loan.

Equity Skimming

Equity skimming is the use of a fraudulent appraisal that over-values a property, creating phantom equity, which is subsequently stripped out through various schemes.

Fictitious Loan

A fictitious loan is the fabrication of loan documents or use of a real person’s information to apply for a loan which the applicant typically has no intention of paying. A fictitious loan can be perpetrated by an insider of the financial institution or by external parties such as loan originators, real estate agents, title companies, and/or appraisers.

Loan Modification and Refinance Fraud

This scheme occurs when a borrower submits false income information and/or false credit reports to persuade the financial institution to modify or refinance the loan on more favorable terms.

Mortgage Servicing Fraud

This fraud is perpetrated by the loan servicer and generally involves the diversion or misuse of loan payments, proceeds from loan prepayments, and/or escrow funds for the benefit of the service provider.

Phantom Sale

This scheme generally involves an individual or individuals who falsely transfer title to a property or properties and fraudulently obtain funds via mortgage loans or sales to third parties.

Property Flip Fraud

A fraudulent property flip is a scheme in which individuals, businesses, and/or straw borrowers, buy and sell properties among themselves to artificially inflate the value of the property.

Reverse Mortgage Fraud

Reverse Mortgage Fraud involves a scheme using a reverse mortgage loan to defraud a financial institution by stripping legitimate or fictitious equity from the collateral property.

Short Sale Fraud

Fraud occurs in a short sale when a borrower purposely withholds mortgage payments, forcing the loan into default, so that an accomplice can submit a “straw” short-sale offer at a purchase price less than the borrower’s loan balance. Sometimes the borrower is truly having financial difficulty and is approached by a fraudster to commit the scheme. In all cases, a fraud is committed if the financial institution is misled into approving the short-sale offer, when the price is not reasonable and/or when conflicts of interest are not properly disclosed.

Two additional fraud schemes, which are briefly addressed below, are debt elimination and foreclosure rescue schemes. While these schemes are typically not perpetrated directly on financial institutions, and therefore not expanded upon to the same degree as the above-mentioned schemes, the end result of the scheme can have a negative impact on the financial institution.

DEBT ELIMINATION SCHEME

Debt elimination schemes are illegal schemes that offer to eliminate a borrower’s debt for an up-front fee. The organizers of these schemes create phony legal documents based on the borrower’s loan(s) for presentment to the borrower’s financial institution or other lending institution in an attempt to falsely satisfy the loans.

The threat this fraud scheme presents to a financial institution is the borrower’s cessation of loan payments. Financial institutions may find that the use of the false documents complicates the collection process and may temporarily prevent any final action against the borrower.

FORECLOSURE RESCUE SCHEME

Foreclosure rescue schemes prey upon homeowners in financial distress or facing foreclosure, with the promise to help save their home. There are multiple variations of this scheme, often charging up-front fees and/or convincing the homeowner to deed the property to the fraudster, with the premise that the homeowner can rent or buy the property back once the individual’s credit has improved. The goal of the fraudster is to collect fees or mortgage payments that are intended for the lender, but are not delivered, usually resulting in the loan going into default and ultimately foreclosure, causing loss to the financial institution.

COMMON MECHANISMS OF MORTGAGE FRAUD SCHEMES

This post defines mechanism as the process by which fraud is perpetrated. A single mortgage fraud scheme can often include one or more mechanisms and may involve collusion between two or more individuals working in unison to implement a fraud. Click on the links to learn more about that particular mechanism. The following is a list of common mechanisms used to perpetrate mortgage fraud schemes:

Asset Rental: Cash or other assets are temporarily placed in the borrower’s account/possession in order to qualify for a mortgage loan. The borrower usually pays a “rental” fee for the temporary “use” of the assets.

Fake Down Payment: In order to meet loan-to-value requirements, a fake down payment through fictitious, forged, falsified, or altered documents is used to mislead the lender.

Fraudulent Appraisal: Appraisal fraud can occur when an appraiser, for various reasons, falsifies information on an appraisal or falsely provides an inaccurate valuation on the appraisal with the intent to mislead a third party.

Fraudulent Documentation: Fraudulent documentation consists of any forged, falsified, incomplete, or altered document that the financial institution relied upon in making a credit decision.

Fraudulent Use of Shell Company: A business entity that typically has no physical presence, has nominal assets, and generates little or no income is a shell company. Shell companies in themselves are not illegal and may be formed by individuals or business for legitimate purposes. However, due to lack of transparency regarding beneficial ownership, ease of formation, and inconsistent reporting requirements from state to state, shell companies have become a preferred vehicle for financial fraud schemes.

Identify Theft: Identity theft can be defined as assuming the use of another person’s personal information (e.g., name, SSN, credit card number, etc.) without the person’s knowledge and the fraudulent use of such knowledge to obtain credit.

Straw/Nominee Borrower: An individual used to serve as a cover for a questionable loan transaction.

EXAMPLES OF MORTGAGE FRAUD SCHEMES

– – – – Builder Bailout – – – –

A builder bailout occurs when a builder, who has unsold units in a tract, subdivision, or condominium complex, employs various fraudulent schemes to sell the remaining properties. In stressed economic or financial conditions, a builder may be pressured to liquidate remaining inventory to cover financial obligations. To sell the remaining properties, the builder may use a variety of tools including, but not limited to, hidden down payment assistance or excessive seller concessions to elevate the sales price. As a result of the scheme, the unsuspecting financial institution is often left with a loan secured by inflated collateral value and the “real” loan-to-value is greater than 100 percent.

Examples:

– A builder convinces buyers to purchase property by offering to pay excessive incentives that are undisclosed to the lender, including down payments, “no money down promotions”, and/or closing cost assistance.

– In an effort to attract participants, a builder promises to manage properties as rentals and absorb any negative cash flow for the first 12 to 18 months.

– A builder forms one or more companies to purchase the builder’s inventory at inflated market values. The affiliated company finances 100 percent of the purchase amount and funnels the excess cash back to the builder. This scheme falsely inflates the property value, clouds the builder’s true ability to move the inventory, and disguises the fact that the builder is ultimately responsible for repayment of the loan.

– A builder forms a mortgage origination affiliate to originate fraudulent loans. The loan files contain credit discrepancies, fraudulent appraisals, and/or erroneous certificates of occupancy and completion.

– When the builder can no longer lure investors/speculators, the builder may employ straw buyers to purchase the properties.

Red Flags

A red flag is an indicator that calls for further scrutiny. One red flag by itself may not be significant; however, multiple red flags may indicate an operating environment that is conducive to fraud.
• Excessive or unsubstantiated down payment.
• Unexplained large or multiple deposits reflected on deposit account statements.
• Borrower states that the property will be owner-occupied, but the property is located in a market dominated by investment properties or second homes (beach properties, duplexes, apartment buildings).
• Use of gift funds or grant funds.
• The HUD-1 shows disbursements from the builder’s (as seller) funds to persons or entities not reflected as lien-holders or vendors on the title commitment.
• Robust condominium sales in a slow market.
• All comparable properties are from the same project.
• Many loans to one applicant (credit report).
• No-money-down sales pitch (noted in marketing brochures or website).
• Reference to secondary financing on purchase contract, but not on the loan application.

• Parties to the transaction appear affiliated based on file documentation (personally/professionally).
• Incentives that include pre-paid condominium fees, principal and interest payments for a year, buy-down, free furniture, automobiles, parking spaces, boat slips, etc.

Companion Frauds

• Straw/Nominee Borrower

• Documentation Fraud (associated with income and assets)

• Fraudulent Appraisal

– – – – Buy and Bail – – – –

This scheme typically involves a borrower who is current on a mortgage loan, but the value of the house has fallen below the amount owed. The borrower continues to make loan payments, while applying for a purchase money mortgage loan on a similar but less expensive house because its value has declined. Alternatively, the borrower currently has good credit, but pending events are such that the borrower will soon be unable to afford monthly payments on the existing loan (e.g. loan term adjustments, job loss, debt accumulation, etc.) or qualify for a new loan. In either case, after the new property has been obtained, the borrower “walks” or “bails” on the first loan.

Examples:

A self-employed child-care service provider is living in a house purchased for $500,000 two years ago that is now worth approximately $350,000. Monthly payments on the adjustable rate mortgage loan are $3,000. In a few months the payments will adjust upward, as a result of the rate change, to $3,700, an amount the homeowner cannot afford. The homeowner finds a home selling for $200,000 and obtains a loan on that property by falsely claiming to rent the existing property. After moving into the second house, the borrower defaults on the initial mortgage loan.

Red Flags

A red flag is an indicator that calls for further scrutiny. One red flag by itself may not be significant; however, multiple red flags may indicate an operating environment that is conducive to fraud.
• Second home is substantially less in value and/or loan amount than the existing home.
• Borrower has minimal or no equity.
• Borrower is a first-time landlord (renting out the original property).
• Limited documentation is available to validate lease terms with the purported tenant.
• Purported tenant has a pre-existing relationship with the homeowner.

• Rental agreement appears suspect or projected rental cash flows appear unreasonable.
• Borrower defaults on the original mortgage loan shortly after purchasing a second property (only likely to be detected if the same lender holds both mortgages and loans).

Companion Fraud

• Fraudulent Documentation

– – – – Chunking – – – –

A third party convinces an uninformed borrower to invest in a property (or properties), with no money down, with the third party acting as the borrower’s agent. The third party is also typically the owner of the property, or is part of a larger group organizing the scheme. Without the borrower’s knowledge, the third party submits loan applications on the borrower’s behalf to multiple financial institutions for various properties. These applications are submitted as owner-occupied or as an investment property with a falsified lease. The scheme usually requires the assistance of an appraiser, broker, and/or title company representative to ensure that the third party, as agent for the borrower, does not have to bring any money to the multiple closings. The third party retains the loan proceeds, leaving the borrower with multiple loans that cannot be repaid. The financial institutions are forced to foreclose on the properties and suffer sizable losses.

Examples:

A borrower attended a seminar that outlined how to get rich by investing in real estate with no money down. A third party, a presenter at the seminar, encouraged the borrower to invest in three real estate properties. Under the third party’s guidance, the borrower completed the required application and provided documentation for the loans. The borrower was unaware that the third party owned numerous properties in the name of a Limited Liability Company and submitted applications on not just the three properties known to the borrower, but on a total of 15 different properties. Each application was sent to a different lender, and all were scheduled to close within a one-week timeframe. The borrower attended three of the closings with a different representative of the LLC as the seller. The third party then acted as an agent for the borrower, with power of attorney, at the other 12 closings. The borrower ended up with 15 mortgage loans instead of the three for which he had knowledge, and the lenders were stuck with loans to a borrower without the ability to repay the debts and were forced to foreclose on the properties.

Fraudsters approached nominees (straw borrowers) and enticed the nominees into allowing the fraudsters to apply for mortgage loans in the nominees’ names in order to buy houses. The fraudsters paid the nominees a small amount for allowing the fraudsters to use the nominees’ names to apply for the mortgage loans. The fraudsters completed the loan application paperwork with falsified information in order for the nominees to qualify for the loans. The fraudsters then received inflated property appraisals and obtained two mortgages on each home, one for the purchase price and another for the balance of the appraisal value.

According to the fraudster, the nominee will have no involvement beyond the mortgage application and the fraudster will manage the properties, find tenants, collect monthly payments, and pay the mortgage loans. The tenants, with insufficient credit, are placed in the homes under proposed lease/option-to-buy contracts. The fraudster fails to make a majority of the nominee’s mortgage loan payments, causing many of the mortgage loans to go into default. In some instances, the fraudster steals the tenants’ deposit money. Ultimately, lenders foreclose on the properties.

Red Flags

A red flag is an indicator that calls for further scrutiny. One red flag by itself may not be significant; however, multiple red flags may indicate an operating environment that is conducive to fraud.
• Multiple mortgage applications by one borrower.
• Credit report that reflects numerous mortgage inquiries.
• Out-of-state borrower.
• Seller that is a corporation or LLC.
• Seller that owns property for a short period of time.
• Previous transfer price that is much lower than current contract price.
• Incomplete lease agreements.
• Payoffs from seller’s funds to non-lien holders and vendors on the title commitment.

Companion Frauds

• Fraudulent Documentation

• Fraudulent Appraisal
• Identity Theft
• Property Flip Fraud
• Double Selling

– – – – Double Selling – – – –

A mortgage loan originator accepts a legitimate application and related documentation from a borrower, reproduces or copies the loan file, and sends the loan package to separate warehouse lenders to each fund the same loan. In some instances, double selling is self-perpetuating because, to keep the scheme going, different loans must be substituted for the ones on which documents cannot be provided. Under this scheme, the broker has to make payments to the investor who received the copied documents or first payment default occurs.

Examples:

– A borrower colluded with a mortgage broker to use the borrower’s property as collateral for numerous home equity lines of credit (HELOCs) at different financial institutions. The scheme was executed by closing on multiple HELOCs in a short period of time to take advantage of the delay in recording the mortgages. In addition, the mortgage broker misrepresented the borrower’s financial information in order to increase the borrower’s debt capacity. The property with less than $125,000 in equity was used to obtain over $1 million in credit from several financial institutions.

– A mortgage company used a group of financial institutions (referred to as warehouse lenders) to temporarily fund mortgage loans, which were then sold to another group of financial institutions as long-term investments. The scheme was accomplished by reselling the same loans to multiple investors. Accumulated losses associated with this scheme were in the millions of dollars.

Red Flags

• Discrepancies between underwriting and closing instructions.
• Outstanding trailing documents (e.g., executed note, deed, truth-in-lending, settlement statement, etc.)
• Missing or illegible insured closing letter in the name of the originator from the title company.
• Recent and numerous changes in the wiring instructions.
• Incorrectly named insured and loss payee on the hazard insurance policy.
• Missing mortgage insurance or guaranty, certificate of eligibility.
• Missing purchase commitment from investor – investor lock.

Companion Frauds

• Fraudulent Documentation
• Identity Theft

– – – – Equity Skimming – – – –

The use of a fraudulent appraisal, unrecorded liens or other means to create phantom equity, which is subsequently stripped out through either of the following methods:

Purchase Money Transaction

An inflated appraisal and sales contract allows the purchaser to obtain property with little or no down payment. The parties agree to raise the selling price to cover the buyer’s closing costs and/or down payment, or to obtain cash back at closing. As a result, the loan amount is higher than what the house is worth, effectively skimming all of the phantom equity out of the property.

Cash-Out Refinance Transaction

In the case of a refinance, the inflated appraisal or lack of recordation allows the borrower to extract cash in an amount greater than the actual value of the property.

Examples:

– A good example of an equity skimming scheme required a two-step process. In the first step, a loan officer and real estate agent colluded to purchase houses using false information on applications to qualify for loans. The second stage required the collusion of an appraiser to overstate the value allowing equity to be skimmed through the cash-out refinance process. Once no more equity could be extracted, the houses were allowed to go into foreclosure.

– A skimmer/purchaser convinces a property seller to provide a second mortgage loan with payments to begin later, perhaps in 6-12 months. During this period, the skimmer makes no payments on either the first or the second mortgage loan. In situations where the second mortgage is unrecorded, the skimmer will obtain a home equity or closed-end second mortgage, causing a loss to the issuing financial institution. By the time the seller realizes that they will not receive payments, the first mortgagee has begun foreclosure proceedings.

Red Flags

A red flag is an indicator that calls for further scrutiny. One red flag by itself may not be significant; however, multiple red flags may indicate an operating environment that is conducive to fraud.
• Borrower receiving cash back at closing in a purchase transaction.
• Title to property recently transferred.
• Cash-out refinance shortly after the property has been purchased (reference application, appraisal, and title commitment).
• Purpose for cash-out is not well documented.

Companion Frauds

• Fraudulent Appraisal
• Fraudulent Documentation (employment and income)

– – – – Fictitious Loan – – – –

Examples:

A mortgage broker created loan applications by using names, addresses, and phone numbers out of the telephone book. These loans were subsequently funded by various financial institutions. As the loans were fabricated and no properties existed, the loans went into default and were charged off.

Red Flags

A red flag is an indicator that calls for further scrutiny. One red flag by itself may not be significant; however, multiple red flags may indicate an operating environment that is conducive to fraud.
• Signatures are not consistent throughout the file.
• No real estate agent is employed.
• SSN was recently issued, or there is a death claim filed under SSN.
• Format of the passport number is not consistent with country of issuance.
• Employment and/or address on credit report do not match borrower’s application or there is an absence of credit history.
• Credit history is inconsistent with the borrower’s age.
• Returned mortgage loan payment coupons and/or monthly statements.
• Early payment default.

Companion Frauds
• Straw/Nominee Borrower
• Fraudulent Documentation
• Fraudulent Appraisal

– – – – Loan Modification and Refinance Fraud – – – –

Borrower submits false income information and/or false credit reports to persuade a financial institution to modify or refinance a loan on more favorable terms.

With respect to any mortgage loan, a loan modification is a revision to the contractual payment terms of the related of the related mortgage note, agreed to by the servicer and borrower, including, without limitation, the following:

1. Capitalization of any amounts owed by adding such amount to the outstanding principal balance.
2. Extension of the maturity.
3. Change in amortization schedule.
4. Reduction or other revision to the mortgage note interest rate.
5. Extension of the fixed-rate payment period of any adjustable rate mortgage loan.
6. Reduction or other revision to the note interest rate index, gross margin, initial or periodic interest rate cap, or maximum or minimum rate of any adjustable rate mortgage loan.
7. Forgiveness of any amount of interest and/or principal owed by the related borrower.
8. Forgiveness of any principal and/or interest advances that are reimbursed to the servicer from the securitization trust.

9. Forgiveness of any escrow advances of taxes and insurance and/or any other servicing advances that are reimbursed to the servicer from the securitization trust.
10. Forbearance of principal whereby the servicer “moves” a certain interest free portion of the principal to the “back-end” of the loan, lowering the amortizing balance and the monthly payment.

Refinancing is the process of paying off an existing loan by taking a new loan and using the same property as security. A homeowner may refinance for the following legitimate reasons:
• In a declining interest rate environment a refinance generally will lower monthly payments.
• In a rising interest rate environment a refinance to a fixed rate loan from an adjustable rate loan will generally allow the borrower to lock in the lower rate for the life of the loan.
• In a period of rising home prices the refinance allows the borrower to withdraw equity.

Examples:

– Two years after the origination of a mortgage loan, a borrower contacted the lender, claiming a need to modify the loan. In an attempt to deceive the lender into modifying the loan, the borrower stopped making loan payments. The borrower’s original loan application indicated that the borrower earned $7,500 per month; however, the borrower subsequently claimed income of only $1,200 per month. While evaluating the need for the modification, the bank reviewed the borrower’s credit report and determined that the customer’s supposed annual income of $14,400, was insufficient in comparison to the reported $40,000 per year servicing other debt, which was current. The bank stopped the modification process, as the borrower had intentionally understated income in an attempt to defraud the financial institution.

– A borrower contacted the lender claiming a reduction in income and trouble with making loan payments. The borrower provided the lender with a copy of his most recent tax return, which showed an adjusted gross income (AGI) of $45,000, down from the previous year’s $96,897. The borrower signed Form 4506-T, authorizing the lender to access tax returns filed with the IRS. In reviewing the tax information obtained from the IRS, the lender found that the borrower had recently amended the most recent return, lowering the AGI from $105,670 to $45,000. In this scenario, the borrower had purposely amended the return to reflect a lower AGI, possibly with the intent of amending it a second time to reflect the true amount of income.

– A borrower requests a loan modification for a property that he claims to occupy. Based on the various facts provided to the lender, it appears that the borrower is eligible for a modification. When underwriting the modification, the lender verifies the borrower’s income with the IRS. During the verification process, the lender recognizes two potential problems with the information provided. The address on the tax return is different than the address of the house collateralizing the loan, and the return reflects rental income from real property. After additional investigation, the lender concludes that the customer was trying to modify the loan on rental property and not on the primary residence.

Red Flags

A red flag is an indicator that calls for further scrutiny. One red flag by itself may not be significant; however, multiple red flags may indicate an operating environment that is conducive to fraud.
• Borrower states that the property is his primary residence and is therefore owner-occupied but the mailing address and telephone number are not for the subject property (e.g., property is located in North Carolina; mailing address and telephone number are in New York).
• Vague and/or unrealistic hardship (“the national economy”).
• No documented resolution of hardship.
• No or limited financial analysis in file.
• No employment/income verification.
• Credit Report inconsistent with borrower’s stated hardship.

• Financial reports that reflect low delinquencies that are inconsistent with local economic conditions or the bank’s loan portfolio composition.

Companion Frauds

• Fraudulent Documentation
• Fraudulent Appraisal (refinance)

– – – – Mortgage Servicing Fraud – – – –

Mortgage servicing typically includes, but is not limited to, billing the borrower; collecting principal, interest, and escrow payments; management of escrow accounts; disbursing funds from the escrow account to pay taxes and insurance premiums; and forwarding funds to an owner or investor (if the loan has been sold in the secondary market). A mortgage service provider is typically paid on a fee basis. Mortgage servicing can be performed by a financial institution or outsourced to a third party servicer or sub-servicer.

Mortgage servicing fraud generally involves the diversion or misuse of principal and interest payments, loan prepayments, and/or escrow funds for the benefit of the service provider. Mortgage servicing fraud can take many forms, including the following:

• A mortgage servicer sells a loan it services, but fails to forward funds to the owner of the loan following the sale. The servicer continues to make principal and interest payments on the loan so the owner is not aware that the loan had been sold.

• A mortgage servicer diverts escrow payments for taxes and insurance for its own use. This action would jeopardize a financial institution’s collateral protection.

• A mortgage servicer that fails to forward principal and interest payments to an institution that holds the note and mortgage, could report that loan as past due for a short period of time, and then use proceeds from other loans to bring that loan current. This would be similar to a lapping scheme involving accounts receivable. Deliberately failing to post payments in a timely manner causes late fees to increase which directly elevates the servicers’ income.

• A mortgage servicer makes payments on loans originated for or on behalf of a financial institution as a means to avoid repurchase pursuant to first payment default provisions.

Examples:

– Several insiders of a mortgage company fraudulently sold serviced loans belonging to other financial institutions and kept the proceeds. An insider modified data in the servicing system to make it appear the loans were still being serviced and were current.

– Two executive officers of a mortgage company took out personal mortgage loans in their names which were subsequently sold to an investor, with servicing retained by the mortgage company. The executives did not make any payments on their loans and suppressed delinquency reporting to the investor, allowing them to “live free” for a period of time until the investor performed a servicing audit and discovered the fraud.

Red Flags

• Failure of the financial institution to perform an on-site review of the servicer (loan documents, servicing records, etc.)
• A review of remittance reports provided to the financial institution by servicer finds a:
o Lack of detail within the remittance reports (principal reduction, interest paid, late fees charged and paid).
o Remittance reports that fail to reconcile with bank records.
• A review of delinquency reports provided to the financial institution by the servicer finds a:
o Lack of detail within delinquency reports.
o High volume of delinquent loans.
• A review of portfolio reports provided to the financial institution by the servicer finds a:
o Lack of detail within portfolio reports (listing of loans owned by the financial institution being serviced by the servicer including current balance).
o Portfolio reports that fail to reconcile with bank records.
• Annual review reveals detrimental information or deteriorating financial condition of the servicer.
• County records indicating lien holders are unknown to the financial institution.
• Excessive delay in a servicer’s remittance of principal and interest payments, escrow payments, or prepayments.
• Cancellation or reductions in coverage on servicer’s insurance policies, including errors and omissions policies.
• Failure of the servicer to maintain copies of original payment documents (e.g., loan payment checks) verifying borrower as the source of payments.
• Excessive errors related to payment calculations on adjustable rate loans or escrow calculations.

Companion Fraud
• Fraudulent Documentation

– – – – Phantom Sale – – – –

Phantom sales typically involve an individual or individuals who falsely transfer title to a property or properties and fraudulently obtain funds via mortgage loans or sales to third parties.

Examples:

– The perpetrator identifies an apparently abandoned or vacant property and records a fictitious quit claim deed to transfer the property into the perpetrator’s name. Once the perpetrator has recorded the necessary document, he has several options:

• Apply for and execute a loan secured by the property. He pockets the loan proceeds and disappears.
• Transfer the property to a co-conspirator. The new owner applies for a loan, splits the proceeds with the original perpetrator, and both disappear with the money.
• Transfer the property to a false name, apply for a loan in the false name, pocket the proceeds and disappear.
• Sell the property to an uninvolved third party, pocket the proceeds, and disappear.

In the first three scenarios the financial institution is left with a mortgage loan that has no payment source and is collateralized by fraudulently obtained property. This results in a 100 percent loss to the financial institution once the fraud is exposed. In the last example, both the purchaser and financial institution are defrauded.

Red Flags

• Title search reveals a recent ownership transfer via quit claim deed.
• Ownership transfers via quit claim deeds in an area where such is not normal.
• Quit claim deed owner is not from subject area.
• Quit claim deed owner is unrelated to former owner.

• Quick sale to third party after quit claim deed owner acquires property.

Companion Frauds

• Fraudulent Appraisal
• Identity Theft
• Straw/Nominee Borrower

– – – – Property Flip Fraud – – – –

A fraudulent property flip is a scheme in which individuals, businesses, and/or straw borrowers buy and sell properties amongst themselves, normally within a short time frame, to artificially inflate the value of the properties. This scheme is designed to extract as much cash as possible from the property, and the loan proceeds are often used for purposes not stated on the application.

There are a number of variations of the fraudulent property flip, some of which are more prevalent than others depending on the current economic conditions. Some schemes occur in geographic areas experiencing significant property value appreciation or in stagnant markets, where properties have been on the market for extended periods of time. An essential party in this scheme is a complicit appraiser, who fraudulently provides an inflated opinion of the property’s market value. The following are two variations of fraudulent property flips:

• A buyer purchases a property at market value and on the same day sells the property, at an inflated price in excess of the true market value to a straw buyer who has been paid to act as a buyer. The financial institution lending to the straw buyer typically is unaware of the prior purchase by the fraudster earlier that same day.

• A seller, whose property has been on the market for an extended period of time, is approached by a buyer/borrower who makes an offer on the property that is substantially higher than the market value. A financial institution funds the loan based on a fraudulent appraisal that inflates the value of the property. In some cases, the inflated value is supported by non-existent home improvements that were to be made. For example, a seller lists a property for $250,000 and a buyer/borrower offers $299,000. At closing, the seller receives the net proceeds of $250,000 on the original asking price of the home and the surplus of $49,000 is disbursed to the fraudsters through a payoff from the seller’s funds on the HUD-1 Settlement Statement at closing.

Examples:

– A group of individuals was organized by a real estate agent to flip properties. Each participant acquired a property with 100 percent financing, prior to the real estate market peak. The properties were then sold repeatedly amongst the individuals and /or their spouses to increase the market value. Title to some of the properties is held in trusts, obscuring ownership.

However, once the group obtained the requisite amount of cash, the loans were allowed to go into default. The participants split the loan proceeds in excess of the true market value for perpetrating the scheme.

Red Flags

• Property listed for extended period of time and sells for higher than list price.

• Property has been transferred or sold within the last six months.
• The property is advertised as “For Sale by Owner”.
• Value of the property has notably increased with no improvements or improvements are insufficient to justify the increase.
• Borrower has limited capacity to repay (e.g., high debt-to-income ratio)
• The property seller is not the owner of record.
• Purchase is disguised as refinances to circumvent down payment.
• Seller is an entity/corporation.
• Power of attorney used without explanation.
• Borrower owns excessive amount of real estate.
• Similarities on multiple applications received from a specific seller or broker.
• Notes in loan file suggest borrower pushed for a quick closing.
• Appraiser is not on list of approved appraisers.
• Appraisal was ordered by a party to the transaction or before the sales contract, or appraisal is a fax.
• Borrower named on the appraisal is different from applicant.
• Appreciation is noted in an area with stable or declining real estate prices.

• Comparables on the appraisal are unusual.
• Inconsistencies in VOE or VOD.
• Violation of the lender’s closing instructions.
• Same individuals involved as buyers and/or sellers in multiple transactions, which may be noted on the deed, title abstract, or other real estate documents found in file.
• Unusual credits or disbursements on settlement statements or discrepancies between the HUD-1 and escrow instructions.
• First payment default on loan.

Companion Frauds
• Fraudulent Appraisal
• Fraudulent Documentation
• Identity Theft
• Straw/Nominee Borrower

– – – – Reverse Mortgage Fraud – – – –

The rapid growth in and changes to the reverse mortgage market have created a lucrative environment for fraudulent activities. The vast majority of reverse mortgage loans are offered through HUD and are FHA-insured; the products are commonly referred to as Home Equity Conversion Mortgages (HECMs). According to data maintained by HUD and other sources, the reverse mortgage loan market increased over the last 5 years from approximately “$5.4 billion a year to more than $17.3 billion in 2008.”4
In addition, recent legislation increased the dollar amount of HECMs to $625,000, and purchase money transactions became effective in 2009. The primary requirements imposed by HUD are that the borrower has attained age 62 and that the collateral value supports the loan amount. There is no requirement to have owned the property for any minimum amount of time, and the loans do not require monthly repayment. Therefore, the loans are primarily underwritten based on the age of the youngest borrower and value of the home being used as collateral.

Reverse mortgage fraud is a scheme where legitimate or fictitious equity is stripped from the collateral. The lump-sum cash-out option will yield the greatest amount of loan proceeds, and likely will be where most fraud occurs. However, fraud may occur in other reverse mortgage loan products. For example, under the term program, where a borrower receives equal monthly payments for a fixed period of time, older borrowers will receive higher payments due to a shorter payment stream, creating a direct incentive to falsify age. Due to the structure of the HECMs, there are no warnings, such as past-due status or default, to raise suspicions, and possibly limit losses, as repayment is only required upon the borrower moving out of the property; upon death; default of property taxes or hazard insurance; or the property is in unreasonable disrepair.

Examples:

Property title is transferred into the perpetrator’s name and quickly re-titled into a straw buyer’s name. A lump-sum cash-out reverse mortgage loan is obtained and is premised on collusion of an appraiser who provides an “as if” renovated appraised value to fraudulently increase the market value. The perpetrator also places fictitious liens on the property to divert loan proceeds to himself.

Red Flags
A red flag is an indicator that calls for further scrutiny. One red flag by itself may not be significant; however, multiple red flags may indicate an operating environment that is conducive to fraud.

• No notes in loan file pertaining to how the proceeds will be used, or notes indicate that proceeds will be used for unspecified monthly living expenses, but the loan is a lump-sum cash-out option.
• File notes indicate that the borrower does not exhibit any knowledge of the property, such as location, number of rooms, etc.
• The property title may have been “abandoned” by the local government and then transferred into the perpetrator’s name. The property may then be re-titled into the borrower’s name via either a warranty deed or a quit claim deed.
• Files contain notices that property taxes are delinquent, indicating default under the terms.
• Files contain notices that property insurance has lapsed, indicating default under the terms.
• Loan file information shows mail as returned to sender, possibly indicating the “owner” is no longer occupying the property and did not provide a forwarding address. An event of default occurs, when the owner no longer lives in the property.
• The title search (if performed) showed that the property title recently transferred to the borrower’s name, following a very short ownership by the seller, indicating the possibility of a flip transaction.
• Lender search of public records for either assessed value or sales prices show that the neighborhood is valued at substantially less than the subject property.
• Problems with the appraisal report may include:

– The report was prepared for a third party and not ordered by the financial institution.

– Comparable properties are not in the same neighborhood.

– Prior sales history is inconsistent with title search results.

• Refer to Fraudulent Appraisal for further details on potential appraisal fraud red flags.

Companion Frauds

• Fraudulent Appraisal
• Fraudulent Documentation
• Property Flip Fraud

– – – – Short Sale Fraud – – – –

A short sale is a sale of real estate in which the proceeds from the sale are less than the balance owed on the loan. The borrower may claim to have financial hardship and offers to sell the property so the financial institution will not have to foreclose. The financial institution and all interested parties, including other lien holders and any mortgage insurer, must approve the transaction. Some institutions may be motivated to approve a short sale because it is faster, results in a smaller loss than the prospect of a foreclosure, and does not increase the level of Other Real Estate Owned. Depending on the settlement and the state where the property is located, the deficiency balance may be forgiven by the financial institution.

Not all short sales are fraudulent. However, fraud occurs when a borrower withholds mortgage loan payments, forcing the loan into default so that an accomplice can submit a “straw” short-sale offer at a purchase price less than the borrower’s loan balance. Sometimes the borrower is truly having financial difficulty and is approached by a fraudster to commit the scheme. In all cases, a fraud is committed if the financial institution is misled into approving the short-sale offer when the price is not reasonable and/or when conflicts of interest are not properly disclosed.

Examples:

– A fraudster uses a straw buyer to purchase a home for the purpose of defaulting on the mortgage loan. The straw buyer makes no payments on the loan and the property goes into default. Prior to foreclosure the fraudster makes an offer to purchase the property from the lender in a short sale agreement below market value. The lender agrees without knowing that the short sale was premeditated.

Red Flags

• Sudden default with no workout discussions and immediate request for short sale.
• Loan file documentation suggests ambiguous or conflicting reasons for default.
• Mortgage loan delinquency is inconsistent with the borrower’s spending, savings, and other credit patterns as indicated in the credit report.
• Short-sale offer is from a related party, which is sometimes not disclosed, or straw buyer.
• Short-sale offering price is less than current market value.
• HUD-1 Settlement statement shows cash-back at closing to the delinquent borrower, or other disbursements that have not been expressly approved by the servicer (sometimes disguised as “repairs” or other payouts).
• Fraudulent appraisal to support below market price.
• Seller intentionally lowers value of property by causing excessive, but cosmetic, damage or hiding dead animals to produce offensive odors. Adjustment to value is exaggerated downward even though costs for rehabilitation are low.
• Seller feigns financial hardship and hides assets – large volume of assets on original loan application have dissipated without explanation.
• County records show that the property was flipped soon after short sale with a higher price.
• County records show ownership is transferred back to the seller after short sale.
• Site visit or registered mail is not returned indicates seller continues to reside in the property.
• Real estate agent is in collusion with seller and withholds competitive/higher offers.
• Unusually high commission is paid to real estate agent.

Companion Fraud
• Fraudulent Documentation

*********** Fraud Mechanisms **********

Asset Rental

Asset rental is the rental of bank deposits or other assets, which are temporarily placed in a borrower’s account, in order for a borrower to qualify for a loan. The borrower usually pays some fee, such as a rental fee, for the temporary “use” of the asset. Asset rental programs have been generally described as tools to help borrowers whose financial condition poses a roadblock to being approved for a loan. Most often, the rental involves deposits or credit histories. Asset rental is a tool that can be used to commit mortgage fraud.

Deposit rental is a means to inflate an individual’s assets. An individual typically pays an origination fee of 5 percent of the amount of the deposit to be rented and a monthly fee of 1 percent to 1¾ percent of the deposit amount. The rented deposit can be owned by a third party that purports to be a financial institution or adds the borrower’s name to a real deposit account without granting access. The third party agrees to verify the deposit to any party authorized by the borrower. Written statements and verifications of deposit are available for an extra fee.

Credit histories are rented in an effort to raise an individual’s credit score. An individual typically pays a fee and is added to another individual’s credit card account as a non-user. The borrower has no access to or use of the credit card but benefits from the actual credit card holder’s timely payments.

In addition to asset rental, some companies also have advertised verification of employment and income services. Individuals fill out a form listing annual and monthly income and sources. Upon receipt of fees, the company verifies income and employment to lenders or others as authorized by the borrower.

Examples:

– A borrower would like to purchase a $450,000 house. Unfortunately, his $71,000 bookkeeper salary and $13,000 in a savings account do not meet the underwriting standards for the amount of the loan. The borrower, however, is certain that his salary will continue to increase at a minimum of 10 percent per year.

The borrower rented a $40,000 deposit account, for a fee of $2,000; the loan application reflected the $40,000 account as an asset. In addition, the borrower expected a raise the following year to $78,000, and enlisted an entity to verify that salary amount. The $78,000 was shown on the loan application as his current income. The loan file contained a verification of deposit for the $40,000 account, a verification of employment form verifying his job as an accountant, and a verification of income form for his $78,000 salary.

Red Flags

• Verification of Deposit (VOD), Verification of Employment (VOE) and Verification of Income (VOI) from a common source that is not the employer or the financial institution where the deposit is held.

• Information on credit report that is not consistent with information on VODs, VOEs and VOIs.
• Even numbers only appearing on the VODs and VOIs. Discrepancies between the deposit account establishment date and the date the borrower says it was established in the loan application process.

Fake Down Payment

In order to meet loan-to-value requirements, a fake down payment through fictitious, forged, falsified, or altered documents is used to mislead the lender. Collusion with a third party, such as a broker, closing agent, appraiser, etc. often exists to raise the purchase price and make it appear that the buyer is making a down payment to cover the difference between the purchase price and proposed loan. A fake down payment reduces the financial institution’s collateral position and in some cases, a financial institution may be financing over 100 percent of the purchase. Without the fake down payment, the financial institution would not have otherwise made the loan.

Examples:

A borrower wants to purchase property but does not have the money for a down payment. He offers the seller more than the asking price to give the appearance that the buyer is putting money down in order to get the loan. The seller agrees to amend the contract to reflect the increased price. The increase in sales price is not disbursed to the seller. Instead, a false payoff from the seller’s funds is reflected on the HUD-1 Settlement Statement when in reality, the seller provides the funds to the borrower for the down payment.

– A third party broker has a borrower interested in a loan to finance the purchase of a home. The borrower does not have sufficient funds available to meet the lender’s LTV requirements. Therefore, the broker loans the borrower $10,000 to use as a down payment, and the funds are represented to be a gift from family. The borrower and broker then enter into a loan agreement. The loan is to be secured by a lien against the house. Approximately ten days after closing of the purchase transaction, the broker records the second lien against the house to secure the down payment loan.

Red Flags

• Source of funds for down payment cannot be verified.
• Down payment appears to be accumulated suddenly instead of over time.
• Deposit is a rented account (refer to asset rental) or has a round dollar balance.
• Down payment source is held in a non-financial institution such as an escrow trust account, title company, etc.
• Market value of property is inflated.
• Property sells above asking price even though on the market for an extended period of time.

Fraudulent Appraisal

Appraisal fraud can occur when an appraiser for various reasons falsifies information on an appraisal or falsely provides an inaccurate valuation on the appraisal with the intent to mislead a third party. In addition, appraisal fraud occurs when a person falsely represents himself as a State-licensed or State-certified appraiser or uses the identity of an appraiser as his own.

One common form of appraisal fraud relies on overvalued or undervalued property values, also known as artificial inflation/deflation using one or more valuation approaches. A buyer and a real estate professional will use a willing appraiser to artificially modify the value of a property. The property’s false inflated value can be used to secure a second mortgage, place the property on the market at a greatly inflated price, or secure an initial mortgage loan that will be defaulted upon at a later time. An undervalued appraisal can be used to assist in a short sale or loan modification fraud scheme.

Examples:

– A couple obtains financing for the purchase of their first house, contingent upon the house value. The couple plan to use the $8,000 tax credit for the down payment and closing costs and only have nominal cash available, so there is no possibility that the couple could cover the difference if the house doesn’t appraise. The couple’s loan officer arranges for an appraisal of the property, but sends the appraiser the standardized form with the final market value section completed. The appraiser wants to continue his relationship with the mortgage broker, so he agrees to develop an appraisal report to support the value provided. The property is compared to properties outside of the general area where the subject house is located. Without knowledge of that area, it appears, to anyone reviewing the appraisal report, that the comparable properties provide support for the value. However, no adjustments have been made for the facts that the comparable properties are newer, larger, in better condition, and in a better location than the subject property.

– A house being appraised has materially less square footage than the comparable properties. To boost the square footage of the subject property, the appraiser doubles the square footage of the unheated out-building, that is used for lawn equipment, and adds that square footage to the square footage of the house. No adjustments are made to the comparable properties, since now the subject and comparable properties have similar square footage. A review of the square footage of the house and out-building clearly shows that the appraiser intentionally misrepresented the property value.

Red Flags

There are various red flag indicators that can be used to identify the possibility of appraisal fraud. The identification of red flags could suggest individual fraud activities or more complex fraud schemes. Such red flag indicators for appraisal fraud are subdivided into categories below:

Appraisal Engagement Letter/Appraisal Ordering

• There is no appraisal engagement letter in file or the appraisal does not correspond to the engagement letter.
• The appraisal was ordered or provided by the buyer, seller, or an unidentified third party to the transaction rather than the financial institution or its agent.
• The appraisal was order by the financial institution loan production staff rather than from an independent office within the institution.

The Appraiser/Appraiser Compensation

• Appraiser was not located in reasonable proximity of the subject property and it is unclear that the appraiser has appropriate knowledge of the local market.
• Appraiser licensing/certification information is missing or appraiser information is clouded in some way.
• Appraisal fee is based on market value of subject property.
• Appraiser has had enforcement action taken against him or is not otherwise eligible to perform appraisals for federally related transactions (www.ASC.gov).

Property Comparables

• Comparable properties are materially different from subject property.
• Comparable properties are outside a reasonable radius of the subject property (except for rural properties).
• Comparable property sales are stale without an explanation.
• Appraiser makes large value adjustments to comparable properties without adequate explanation.
• Recent and multiple sales for subject and/or comparables are shown in the appraisal without adequate explanation as to the circumstances.

Appraisal Information and Narrative

• The market value in the appraisal report is lower than purchase price.
• Listing rather than sales information was used to determine value.
• Evidence of appraisal tampering (e.g., different font style, handwritten changes).
• Refinance transaction shows property recently listed “for sale”.
• Market rent is significantly less than rent amounts indicated on lease agreement.
• Income approach is not used on a tenant-occupied, or rented single-family dwelling.
• Significant appreciation or devaluation in short period of time.
• Appraisal indicates transaction is a refinance when it is a purchase.
• Appraised value is contingent upon property improvements or curing of property defects.
• Abnormal capitalization or discount rates without explanation.
• Appraisal dated before loan application date.
• Significant variances in property value among the Cost, Income, and Sales approach.
• Appraisal excludes one or more valuation approaches when such an approach is pivotal to the loan underwriting decision.
• Owner is someone other than seller shown on sales contract.
• Unusual or frequent prior sales are listed for subject and/or comparables without adequate explanation.
• Occupant noted as “tenant” or “unknown” for owner-occupied refinances.

Appraisal Photographs and Mapping (Comparable and Subject)

• Photos missing, non-viewable, or blurry.

• A “For Rent” or “For Sale” sign shows in the photos of the subject property for an owner-occupied refinance.
• Photos do not match property description.
• Photo background image is inconsistent with the date or season of the appraisal.
• Photos of subject property taken from odd angles to mask unfavorable conditions.
• Negative valuation factors are not disclosed in appraisal (e.g., commercial property next door, railroad tracks, or another structure on premises).
• Photos for the subject property and comparables appear to be from different photo source (e.g., internet photos).
• Appraisal maps showing location of subject and comparables is either absent or shows wide geographical separation from subject property.

Other Appraisal Information

• Documentation in loan file suggests a re-appraisal due to appraisal results or the stated value of subject property without an explanation.
• Loan file contains more than one recent appraisal with significant variance in value without an explanation.
• House number of property in photo does not match the subject property address.
• A fax or an electronic version of the appraisal is used in lieu of the original containing signature and certification of appraiser.
• The appraisal was not reviewed prior to loan funding or appraisal was reviewed by loan production rather than an independent office within the institution.

Fraudulent Documentation

Documentation fraud occurs when any document relied upon by the financial institution to make a credit decision, is forged, falsified, or altered. Fraud can also occur if proper due diligence and verification practices are not consistently applied. Similarly, obtaining documents to satisfy a checklist is not the same as having verified the authenticity of the document.

Documentation Types

1. Sales Contract

Sales contracts may be falsified to reflect higher sales prices. These higher sales prices are intended to produce higher comparables for appraisal purposes and result in artificially inflated values. The inflated values result in a higher loan amount than would otherwise be justified. Additionally, falsified seller identity may be used to perpetrate frauds, such as transferring property via falsified deeds or listing property for sale that the seller does not legally own. The identity of the buyer and/or seller may also be falsified in order to disguise a flip transaction or the use of a straw borrower.

Red Flags

• Borrower is not listed as purchaser on the sales contract.
• Seller listed on contract is not the owner listed on title or appraisal.
• All parties did not sign the sales contract and/or addendum.
• Sales contract is not dated or dated after other file documents (unless it is a pre-qualification.)
• Sales contract is received at the last minute or has been changed from the previously submitted contract.

2. Loan Application

Parts of or the entire application may be falsified.

Red Flags

• Application states purpose is for refinance, but the credit report and/or tax records do not indicate the borrower owns the property.
• Purchase amount of the property differs from the sales contract.
• Borrower claims the property will be owner-occupied, when the intent is for investment/rental purposes.
• Application shows all assets, but liabilities are inconsistent with those reported on the credit report.
• Assets are inconsistent with job position and income.
• Omission of some or all properties owned by the borrower in the real estate section of the application.
• Borrower declarations are inconsistent with credit report.
• Debt-to-Income ratios are exactly at maximum approval limits
• Misrepresentation of employment and income.

3. Credit Report

The credit report contains significant information reflective of the borrower’s ability and desire to repay debt obligations. Credit reports are sometimes altered so that a borrower can meet specific loan requirements. For example, credit scores can be changed (increased) through scanning and alteration of information.

Red Flags

• The absence of credit history indicating the possible use of an alias and/or multiple social security numbers.
• Borrower recently pays many or all accounts in full, possibly indicating an undisclosed debt consolidation loan.
• Indebtedness disclosed on the application differs from the credit report.
• The length of time trade lines were opened is inconsistent with the buyer’s age.
• The borrower claims substantial income but only has credit experience with finance companies.
• All trade lines opened at the same time with no explanation.
• Recent inquiries from other mortgage lenders are noted.
• AKA (also known as) or DBA (doing business as) are indicated.

4. Driver’s License

Government issued driver’s licenses can be partially verified through entities that can identify whether the licensing number sequence complies with the state’s system. However, state issued identification cards do not always have the same quality.

Red Flags

• No hologram.
• No photograph.
• Name, address, physical characteristics do not match.
• Expired driver’s license.
• Illegible driver’s license.

5. Social Security Number

The first five digits of a Social Security Number (SSN) signify the state and the date range in which it was issued. SSNs should be compared to numbers associated with deceased taxpayers. Identity alerts are also a useful tool if accessed via the credit reporting system.

Red Flags

• Credit report alert states that SSN has not been issued.
• Credit report alert states that SSN is on the master death index.
• Format and digits are not correct.
• Improper color and weight of the social security card.
• Highly unlikely series of digits (999-99-9999 or 123-45-6789).

• Ink smudges, poorly aligned, and odd fonts.

6. Bank Statement

Deposit account statements may include legitimate financial institution names and addresses, but can be fraudulently modified to include falsified telephone numbers that are answered by a party to the scheme.

Red Flags

• Altered copies.
• Missing pages.
• Application information (name and address) does not match the account holders.
• Inconsistency in the color of original bank statements.

7. Deposit Verification (VOD)

A party to the scheme may verify deposits held at a depository institution, even though no such financial institution, account, or deposits in that name exist.

Red Flags

• The VOD is completed on the same day it is ordered.
• Deletions or cross outs exist on the VOD.
• No date stamp receipt affixed to the VOD by the depository to indicate the date of receipt.
• The buyer has no deposit accounts, but a VOD is in the file.
• The deposit account is not in the borrower’s name or is a joint account with a third party.
• The borrower’s account balance at the financial institution is insufficient to close the transaction.
• The deposit account is new or has a round dollar balance.
• The closing check is drawn on a different financial institution.
• An illegible signature exists with no further identification provided.
• Significant balance changes are noted in depository accounts during the two months prior to the date of verification.
• The checking account’s average two-month balance exactly equals the present balance.
• Funds for the down payment are only on deposit for a short period.
• An IRA is shown as a source of down payment funds.
• Account balances are inconsistent with application information.
• The down payment source is held in a non-depository “depository,” such as an escrow trust account, title company, etc.
• An escrow receipt is used as verification which may have been from a personal check not yet cleared or a check returned due to insufficient funds.
• The VOD is not folded indicating it may have been hand carried.
• The VOD is not on original financial institution letterhead or a recognized form.

8. Employment Verification (VOE)

Fake employment verification can be used by those who collude in mortgage fraud. This is usually associated with an organized scheme.

Red Flags

• The seller and applicant have similar names.
• Borrower’s employer does not know borrower or borrower was terminated from employment prior to the closing date.
• The VOE is not on original letterhead or a standard Federal National Mortgage Association (FNMA)/Federal Home Loan Mortgage Corporation (FHLMC) form.
• The VOE is completed the same day it is ordered, indicating it may have been hand-carried or completed before the initial application date.
• An illegible signature exists with no further identification provided.
• The employer uses only a mail drop or post office box address.
• The business entity is not in good standing with the State or registered with applicable regulatory agencies.
• An overlap exists with current and prior employment.
• Excessive praise is noted in the remarks section of response.
• Round dollar amounts are used in year-to-date or past earnings.
• Income is not commensurate with stated employment, years of experience, or type of employment.
• Income is primarily commission based, although borrower claims he is a salaried employee.
• The borrower’s interest in the property is not reasonable given its distance from the place of employment.
• The borrower has a recent large increase in income or started a new job.
• Faxes are used in lieu of originals documents.
• CPA letter is used to validate employment.
• Leases are used to evidence additional income.

9. W-2 Statement or Paystub

Off-the-shelf software and internet sites make the creation of fake W-2 statements and paystubs relatively easy.

Red Flags

• Borrower income is inconsistent with type of employment.
• Social security number on W2 or paystub is invalid, differs from loan application, or has been recently issued.
• Name misspelled.
• Variances in employment data with other file documentation.
• Commission-type position with “base” salary only (and vice versa).
• Round dollar amounts for year-to-date or prior year’s earnings.
• Numbers that appear to be “squeezed in”.
• Document alterations, such as white-outs or cross-outs or inconsistent fonts.
• Not computer-generated, especially from large employer.
• W-2 is typed, but paystubs are computer-generated.
• Check numbers do not increase chronologically.
• Amounts withheld for Social Security, Medicare and other government programs are inconsistent with the level required.
• Debts reflected as deduction from pay (credit union loans, etc.) not disclosed on application.
• Year-to-date totals do not total accurately from paycheck to paycheck.
• An employer identification number that is not in the XX-XXXXXXX (two digits, hyphen, seven digits) format, or is not all numeric.
• Employer and employee names or addresses are inaccurate.

• Income reflected on W-2 statements is different than income reported on mortgage loan application, VOE, and tax returns.
• Federal Insurance Contribution Act (FICA) and Medicare wages/taxes and local taxes, where applicable, exceed ceilings/set percentages.
• Copy submitted is not “Employee’s Copy” (Copy C).

10. Tax Return/Amended Tax Return

Fake tax returns may be provided to the underwriter as the borrower believes that no verification will occur. In other instances, amendments to tax returns may be made to further the scheme, regardless of whether the income amount increases or decreases.

Red Flags

• Address and/or profession do not agree with other information submitted on the mortgage loan application.
• Type of handwriting varies within return.
• Evidence of “white-out” or other alterations.
• Unemployment compensation reported, but no gap in employment is disclosed.
• Estimated tax payments by self-employed borrower (Schedule SE required); or self-employment tax claimed, but self-employment not disclosed.
• Tax returns are not signed/dated by borrower.
• IRS Form 1040 – Schedule A:

– Real estate taxes and/or mortgage loan interest is paid but no property is owned, or vice versa.

– Tax preparation fee is deducted, yet prior year’s return is prepared by borrower.

– Minimal or no deductions for a high-income borrower.

• IRS Form 1040 – Schedule B:

– Borrower with substantial cash in the bank shows little or no related interest income.

– No dividends are earned on stocks owned.

– Amount or source of income does not agree with the information submitted on the mortgage loan application.

• IRS Form 1040 – Schedule C:

– Business code is inconsistent with type of business.

– Gross income does not agree with total income on Form 1099s.

– No “cost of goods sold” on retail or similar type of business.

– Borrower takes a depreciation deduction for investment real estate not disclosed, or vice versa.

– Borrower shows interest expense but no related loan, such as a business loan with personal liability.

– No deductions for taxes and licenses.

– Wages are paid, but no tax expense is claimed.

– Wages are paid, but there is no employer identification number.

– Salaries paid are inconsistent with the type of business.

– Business expenses are inconsistent with type of business (e.g., truck driver with no vehicle expense).

– Income significantly higher than previous years.

• IRS Form 1040 – Schedule E:

– Additional properties are listed, but not shown on the mortgage loan application.

– Mortgage loan interest is deducted but no mortgage is disclosed.

– Borrower shows partnership income (may be liable as a general partner for partnership’s debts).

11. Deed

Quit Claim and Warranty Deeds may be used by someone who is transferring the property’s title, but is not the owner or the owners’ representative. The purpose of such transactions is to sell the property outright or to refinance the debt in a cash-out transaction to collect loan proceeds. A fake Power of Attorney may be used as authorizing the deed transfer.

Red Flags

• Recent ownership transfer or multiple transfers in a short period of time via quit claim or warranty deed.
• Representative not local or from out of state.
• Deeds involving individuals not party to the transactions.
• Deeds where parties share common names/hyphenated names, suggesting family relationships.
• Obvious errors, such as misspelled names, or other items.

12. Title or Escrow Company/Title Commitment

Fraudulent loan schemes may involve the use of a fake title company or may involve an employee of the title company. The company appears to provide legitimate documentation, which was possibly stolen from a legitimate title company (such as a falsified closing protection letter). Employees of legitimate title companies may be part of a scheme, where they either fabricate title commitments or delete information that would help identify fraudulent activity, such as flipping.

Red Flags

• The seller either is not on the title or is not the same as shown on the appraisal or sales contract.
• The seller owned the property for a short time with cash out on sale.

• The buyer had a pre-existing financial interest in the property.
• The chain of title includes the buyer, real estate agent, or broker.
• The title insurance or opinion was prepared for and/or mailed to a party other than the lender.
• Income tax or similar liens are noted against the borrower on refinances.
• Non-lien holders are shown on HUD-l.
• The title policy is not issued on the property with the lien or on the whole property.
• Faxed documents are used rather than originals or certified copies.
• Title commitment and final title policy reflect two different title insurers.
• Closing instructions are not followed.
• Delinquent property tax exists and does not appear on the title commitment.
• A notice of default is recorded and does not appear on the title commitment.

13. Business License

Business licenses may be fabricated to show that a supposed self-employed borrower owns a business. In this instance, the borrower owns no such business. Others may actually formally incorporate with the state office to conceal the fact that no such business operates.

Red Flags

• No physical address (P.O. Box only) or physical address belongs to mail box rental company. Various search engines can help determine if disclosed physical address belongs to mail box rental.
• No telephone number or email address.
• No state franchise or other required annual filings.

14. Notary stamps

Notary stamps may be stolen and used in fraudulent transactions. In addition, notaries may be participants in furthering a scheme and receive funds for their participation. While e-notary will prevent stealing of physical stamps, it will not necessarily eliminate the coercion of notaries. Also, the fact that e-notary does not require the log to be downloaded daily to an impartial party that maintains a database of transactions, can allow for information to be changed after-the-fact. This would be the equivalent of changing the hand-written log.

Red Flags

• Seal is not embossed.
• Seal appears to be photocopied, rather than original.
• Notary is either related to or has a business relationship with a party to the transaction.

15. Power of Attorney

Powers of Attorney (POA) are legal documents authorizing another party to act on the first party’s behalf. POAs can be Limited, General, or Durable. Durable POAs have the longest duration, as they cease upon the death of the authorizing person, whereas General POAs cease upon a pre-established date, competency, or incapacitation. Limited POAs are identified with a specific timeframe or certain acts. Documents can be easily fabricated to show that one party has a legal right to enter into financial transactions on behalf of another. POAs may or may not be filed with the appropriate governmental office.

Red Flags

• A General or Durable POA is dated at approximately the same date as the transaction.
• Person, who supposedly authorized the Limited or General POA, is unaware of the document.
• In those areas where all POAs are recorded documents, the document is not recorded.
• The POA is not prepared by an attorney, but by using off-the-shelf software.
• POA is used in cash-out refinances or reverse mortgage loans.

16. HUD-1 Settlement Statement

The HUD-1 settlement statement is an accounting of the transaction from both the borrower’s and seller’s standpoint. This form is often falsified to withhold information from the lender, or there are often two distinctly different HUD-1 forms in fraudulent transactions.

Red Flags

• Borrower receives cash-back at closing.
• Payoff of non-lien holders typically reflected as marketing fees, payment for repairs, or renovations.
• Existence of multiple, different HUD-1’s.
• Items paid outside of closing (outside of normal appraisal and credit report fees).
• Overpayment of fees and commissions to realtor, broker, etc.
• Signatures on the HUD-1 do not match other signatures throughout the file.

Fraudulent Use of a Shell Company

A shell company is a business entity that typically has no physical presence, has nominal assets, and generates little or no income. Shell companies in themselves are not illegal and may be formed by individuals or businesses for legitimate purposes. However, due to lack of transparency regarding beneficial ownership, ease of formation, and inconsistent reporting requirements from state to state, shell companies have become a preferred vehicle for financial fraud schemes.

Both the U.S. Government Accountability Office (GAO) and FinCEN have reported on shell companies and their role in facilitating criminal activity. These reports have focused on limited liability corporations (LLCs) due to their dominance and growth in popularity. However, any type of business entity can be a shell company. To further obscure ownership and activity, there are numerous businesses that can provide a shell company with a registered agent and mail forwarding service, or offer nominee services, such as nominee officers, directors, shareholders, or nominee bank signatory. Other businesses sell established shell companies for the purpose of giving the appearance of longevity of a business, and a history of creditworthiness which may be required when obtaining leases, credit, or bank loans.

Examples:

– Several individuals with the intent of committing fraud formed a shell company as a way of disguising their identities. The individuals purchased properties in the name of the shell company and at the same time recruited straw borrowers to purchase the properties from the shell company at inflated prices. Owners of the shell company provided the straw borrowers with fake documents in order to qualify for the loans. The shell company owners profited from the difference between the original purchase price and the mortgage loan proceeds, less the fee paid to the straw borrower. The straw borrower defaulted on the loan, forcing the financial institutions to foreclose on the houses.

Red Flags

• Entity has no telephone number or email address.
• No physical address (P.O. Box only) or physical address belongs to mail box rental company.
• No company logo.
• No website, if one would be expected.
• No domestic address/contact if a foreign company.
• Newly-formed entity.
• Registered agent recently changed.
• Transacting businesses share the same address; provide only a registered agent’s address; or other address inconsistencies.
• Unusual cash withdrawals from business accounts.

Identity Theft

Identity theft can be defined as assuming the use of another person’s personal information (e.g., name, SSN, credit card number, etc.) without the person’s knowledge and the fraudulent use of such knowledge to obtain credit. Perpetrators commit identity theft to execute schemes using fake documents and false information to obtain mortgage loans. These individuals obtain someone’s legitimate personal information through various means, (e.g., obituaries, mail theft, pretext calling, employment or credit applications, computer hacking, trash retrieval, etc.) With this information, they are able to impersonate homebuyers and sellers using actual, verifiable identities that give the mortgage transactions the appearance of legitimacy.

Examples:

– A university student database, which included social security numbers and other personal identifying information, is compromised by a computer hacker. The investigation revealed that the hacker subsequently sold the personal identification information to a third party, who then proceeds to submit falsified mortgage loan applications to numerous financial institutions which resulted in approximately $5 million in losses to the financial institutions. Law enforcement stated that the third party, in collusion with a notary, appraiser, and other industry insiders, used the student information to purchase homes owned by the third party and other collaborators at highly inflated prices. In addition to identity theft, the loan files also included misrepresentations of employment, falsified down payments, and inflated appraisals.

Red Flags

A red flag is an indicator that calls for further scrutiny. One red flag by itself may not be significant; however, multiple red flags may indicate an operating environment that is conducive to fraud.
• Credit report contains a fraud alert or consumer-driven freeze on their credit report, which means no credit reports can be pulled until the consumer lifts the freeze.
• Credit report indicates that the social security number was not yet issued.
• Recently-opened accounts.
• Employment and residence history on the credit report and application do not match.
• Copy of driver’s license does not match profile on the application.
• Recently issued SSN.
• Current address on the application does not match other documents in the file (e.g., bank statements, W-2’s, utility bills, etc.)
• Additional red flags may be found in the FCRA under Appendix J of 12 CFR 41 (Subpart J – Identity Red Flags)

Straw Borrower / Nominee Borrower

A straw (nominee) borrower is an individual used to intentionally disguise the true beneficiary of the loan proceeds. Straws can be willing participants in the transaction or victims whose identity is being used without their knowledge. Often a willing straw borrower does not think the transaction is dishonest because they believe the recipient of the loan proceeds will make the payments. Reasons why a beneficiary of the loan proceeds may use a straw borrower are because the beneficiary:

• Does not qualify for the mortgage loan,
• Has no intent to occupy the property as a primary residence, or
• Is not eligible for a particular loan program.

Also straw borrower activities are commonly used with family members who step in for the purchase or refinance when the true home owner (family member) does not qualify for a loan.

Examples:

– A couple wanted to buy a home but did not qualify because their debt ratio was much too high. They also had very little cash to use as a down payment. To “help” them, one of their parents applied for the loan and was approved for a 97 percent LTV product. The couple moved into the house, and could not make the monthly payments. The servicer called the straw borrower, who informed the servicer that he did not live in the home and that his daughter and son-in-law were supposed to be making the payments. Despite, being contractually obligated, the straw borrower parent refused to bring the loan current. The lender was forced to foreclose and took a loss on the sale of the REO.

– A fraud ring acquired 25 properties, all of which were in various stages of disrepair. Some were even uninhabitable and slated for condemnation by the city. The ring then recruited individuals through their church, clubs, and other associations to each buy a property sight unseen. Each borrower was told they would not need to live in the property, and each borrower was also promised payment of $7500. The fraud ring arranged for inflated appraisals to be performed by promising the appraiser the job of appraising all 25 properties. The applications were submitted to several different lenders with numerous misrepresentations surrounding not only the true property values, but occupancy intent, borrower employment, income, and assets as well. The loans closed and resulted in first payment defaults, as the straw borrowers were told that their properties were passive investments that would not require any monthly payments due to tenants already being in the properties. A handful of the straw borrowers did receive their $7500 as promised, but most did not. Upon receiving collection calls, the straw borrowers determined they had been misled. The lenders ultimately foreclosed on the properties, discovered the true condition of the properties, and suffered losses upon the sale of the REO.

Red Flags

• The application is unsigned or undated.
• Borrower’s income is inconsistent with job or position.
• A quit claim deed was used either right before or soon after the loan was closed.
• Investment property is represented as owner-occupied on loan application.
• Loan documents show someone signed on the borrower’s behalf.
• Names were added to the purchase contract.
• Sale involves a relative or related party.
• No sales agent or realtor was involved.
• The name and address of borrower on credit report does not correspond with information on the loan application.
• Appraisal irregularities exist regarding property valuation and documentation. (See Fraudulent Appraisal.)
• Power of attorney was used in place of borrower.
• Good assets, but “gifting” was used as all or part of down payment.
• Repository alerts on credit report.

Glossary:

Appraisal Management Company (AMC): A business entity that administers a network of certified and licensed appraisers to fulfill real estate appraisal assignments on behalf of mortgage lending institutions and other entities. The company recruits, qualifies, verifies licensing, and negotiates fees and service-level expectations with a network of third-party appraisers. It also provides administrative duties like order entry and assignment, tracking and status updates, pre-delivery quality control, and preliminary and hard copy report delivery. Furthermore, the AMC oversees ongoing quality control, accounts payable and receivable, market value dispute resolution, warranty administration, and record retention.

Appraiser: One who is expected to perform valuation services competently and in a manner that is independent, impartial, and objective.

Borrower: One who receives funds in the form of a loan with the obligation of repaying the loan in full with interest. The borrower may be purchasing property, refinancing an existing mortgage loan, or borrowing against the equity of the property for other purposes.

Buyer: A buyer is a person who is acquiring property.

Closing: The culmination of any RE transaction in which the interested parties or their representatives meet to execute documents, exchange funds, and transfer title to a property.

Closing Costs: Moneys expended by a party in completing a RE transaction, over and above the purchase price, including: legal fees, taxes, origination fees, discount points, mortgage insurance premium, interest adjustments, registration fees, appraisal fees, title insurance premium, etc.

Closing/Settlement/Escrow Agent: An individual or company that oversees the consummation of a mortgage transaction at which the note and other legal documents are signed and the loan proceeds are disbursed. Title companies, attorneys, settlement agents, and escrow agents can perform this service. Local RE law may dictate the party conducting the closing.

Concessions: Benefits or discounts given by the seller or landlord of a property to help close a sale or lease. Common concessions include absorption of moving expenses, space remodeling, upgrades (also called “build-outs”), and reduced rent for the initial term of the lease.

Collusion: An agreement, usually secretive, which occurs between two or more persons to deceive, mislead, or defraud others of their legal rights, or to obtain an objective forbidden by law, typically involving fraud or gaining an unfair advantage.

Correspondent: A mortgage originator who underwrites and/or sells mortgage loans to other mortgage bankers or financial institutions.

Credit Report Fraud Alert: A notation at the bottom of a credit report indicating that some items of identification, i.e., Social Security number, address, etc., are associated with past fraudulent activities. For example, an address may be flagged because the previous occupant allegedly used the property for financial misbehavior. Each credit reporting agency has different names for these alerts: TransUnion – HAWK Alerts, Experian – Fraud Shield, and Equifax – Safescan.
Deed: The document by which title to real property is transferred or conveyed from one party to another. (See Quitclaim Deed and Warranty Deed.)

Deed of Trust: A type of security instrument in which the borrower conveys title to real property to a third party (trustee) to be held in trust as security for the lender, with the provision that the trustee shall re convey the title upon the payment of the debt. Conversely, the third party will sell the land and pay the debt in the event of default by the borrower. (See Mortgage.)

Developer: A person or entity, who prepares raw land for building sites, constructs buildings, creates residential subdivisions or commercial centers, rehabilitates existing buildings, or performs similar activities.

eNotary: An electronic notary that may include the use of a digital seal to notarize digital documents. (See also Notary.)

Escrow Instructions: Instructions prepared by a lender and/or underwriter to direct the progression of a mortgage closing transaction from start to finish.

Evaluation: A valuation required by the Agencies’ appraisal regulations for certain transactions that are exempt from the regulations.

Federal Home Loan Mortgage Corporation (Freddie Mac): Commonly used name for the Federal Home Loan Mortgage Corporation (FHLMC), a government sponsored entity that provides a secondary market for conforming conventional residential mortgage loans by purchasing them from primary lenders.

Federal Housing Administration (FHA): A federal agency established to advance homeownership opportunities. The FHA provides mortgage insurance to approved lending institutions.

Federal National Mortgage Association (Fannie Mae): A government sponsored entity that, as a secondary mortgage loan institution, is the largest single holder of residential mortgage loans in the United States. Fannie Mae primarily buys conforming conventional residential loans from primary lenders.

Federally related transaction: Means any real estate-related financial transactions entered into after the effective date hereof that:
(1) The FDIC or any regulated institution engages in or contracts for; and
(2) Requires the services of an appraiser.

Foreclosure: A legal proceeding following a default by a borrower in which real estate secured by a mortgage or deed of trust is sold to satisfy the underlying debt. Foreclosure statutes are enacted by state government.

Form 1003: The standardized loan application form used in residential mortgage loan transactions.

Form 4506T: An IRS form that taxpayers execute to authorize the IRS to release past tax returns to a third party. Many lenders require mortgage loan applicants to execute this form in order to verify income.

Fraud: A knowing misrepresentation of the truth or concealment of a material fact to induce another to act to their detriment.

Government National Mortgage Association (Ginnie Mae): A government-owned corporation that provides sources of funds for residential mortgage loans, insured or guaranteed by the FHA or VA.

HUD-l Form: A standardized form prescribed by the Department of Housing and Urban Development that provides an itemization listing of funds paid at closing. Items that appear on the statement include RE commissions, loan fees, points, taxes, initial escrow amounts, and other parties receiving distributions. The HUD-l statement is also known as the “closing statement” or “settlement sheet.”

Lapping: A fraud that involves stealing one customer’s payment and then crediting that customer’s account with a subsequent customer’s payment.

Loan Servicer: A loan servicer is a public or private entity or individual engaged to collect and process payments on mortgage loans.

Loan-to-Value Ratio (LTV): Relationship of loan amount to collateral value, expressed as a percentage.

Market Value: The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what they consider their own best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

Modification Agreement: A document that evidences a change in the terms of a mortgage loan, without refinancing the loan. Commonly, changes are made to the interest rate, repayment terms, guarantors, or property securing the loan.

Mortgage: A lien on the property that secures a loan. The borrower is the mortgagor; the lender is the mortgagee.

Mortgage Banker: An individual or firm that originates, purchases, sells, and/or services loans secured by mortgages on real property.

Mortgage Broker: An individual or firm that receives a commission for matching borrowers with lenders. Mortgage brokers typically do not fund the loans they help originate.

Mortgage Fraud: A knowing misrepresentation of the truth or concealment of a material fact in a mortgage loan application to induce another to approve the granting of a mortgage loan. For the purpose of this paper, mortgage fraud refers solely to fraudulent schemes pertaining to residential mortgage loans.

Nominee Loan: A loan made to one individual in which the proceeds of the loan benefit another individual without the knowledge of the lender.

Notary: A person who certifies the authenticity of required signatures on a document, by signing and stamping the document. (See also eNotary.)

Originator: The individual or entity that gathers application data from the borrower. Alternatively, a person or entity, such as a loan officer, broker, or correspondent, who assists a borrower with the loan application.

Power-of-Attorney: A legal document that authorizes a person to act on another’s behalf. A power-of-attorney can grant complete authority or can be limited to certain acts (closing on a property) or timeframes (from date granted until a termination date). A durable power-of-attorney continues until the grantor’s death.

Pretext Calling: A scheme associated with identity theft in which a fraudster, pretending to represent a legitimate entity, calls an unsuspecting party seeking personal identification data, such as social security numbers, passwords, or other forms of account information. The fraudster then uses this information to assume the identity of the unsuspecting victim. Among other things, the fraudster can obtain a mortgage loan in the name of the unsuspecting victim.

Processor: The processor is an individual who assembles all the necessary documents to be included in the loan package.

Quitclaim Deed: A deed that transfers without warranty whatever interest or title, if any, a grantor may have at the time the conveyance is made. A grantor need not have an interest in the property to execute a quitclaim deed.

Real Estate Agent: An individual or firm that receives a commission for representing the buyer or seller, in a RE purchase transaction.

Reverse Mortgage: A reverse mortgage loan converts the equity in the home into cash. Unlike a traditional loan, no repayment is required until the borrower no longer uses the house as a principal residence. To be eligible under FHA’s program, Home Equity Conversion Mortgage (HECM), the homeowner must be at least 62 years old, and live in the house. The program was expanded in 2009 so that HECMs can be used to purchase a primary residence.

Secure and Fair Enforcement Mortgage Licensing Act of 2008 (S.A.F.E. Act): Legislation designed to enhance consumer protection and reduce fraud by encouraging states to establish minimum standards for the licensing and registration of state-licensed mortgage loan originators and for the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators to establish and maintain a nationwide mortgage licensing system and registry for the residential mortgage industry. The S.A.F.E. Act further requires the federal agencies to establish similar requirements for the registration of depository institution loan originators.

Secondary Market: The buying and selling of existing mortgage loans, usually as part of a “pool” of loans.

Seller: Person offering to sell a piece of real estate.

Short Sale: Sale of the mortgaged property at a price that nets less than the total amount due on the mortgage loan. Servicers and borrowers negotiate repayment programs, forbearance, and/or forgiveness for any remaining deficiency on the debt to lessen the adverse impact on borrowers’ credit records.

Straw Buyer/Borrower: A person used to buy property or borrow against property in order to conceal the actual owner. The straw buyer does not intend to occupy the property or make payments and often deeds the property to the other individual immediately after closing. The straw buyer is usually compensated for use of his identity.

Third Party: The parties necessary to execute a residential mortgage transaction other than a financial institution and a legitimate borrower. Third parties include, but are not limited to, mortgage brokers, correspondents, RE appraisers, and settlement agents.

Title Agent: The title agent is a person or firm that is authorized on behalf of a title insurer to conduct a title search and issue a title insurance report or title insurance policy.

Title Company/Abstract Company: Entity that researches recorded ownership of and liens filed against real property and then issues a title insurance policy guaranteeing the lien position of the lender or provides a title opinion. Some states also require an attorney opinion supported by an abstract.

Title Insurance: An insurance policy that indemnifies the lien position of a lender against losses associated with property interests not disclosed in the title opinion. The borrower can also obtain this coverage by purchasing a separate policy.

Title Opinion/Commitment/Binder: An examination of public records, laws, and court decisions to ensure that no one except the seller has a valid claim to the property, and to disclose past and current facts regarding ownership of the subject property.

Underwriting: The credit decision-making process which can be automated, manual or a combination of both. In an automated process, application information is entered into a decision-making model that makes a credit determination based on pre-determined criteria. In a manual process an individual underwriter, usually an employee of the financial institution, makes the credit decision after evaluating all of the information in the loan package, including the credit report, appraisal, and verifications of deposit, income, and employment. Financial institutions often use a combination of both, with the automated decision representing one element of the overall credit decision. In each case, the decision may include stipulations or conditions that must be met before the loan can close.

Verification of Deposit (VOD): Written document sent to the borrower’s depository institution to confirm the existence of a down payment or cash reserves.

Verification of Employment (VOE): Written document sent to the borrower’s employer to confirm employment/income. Employment is often reconfirmed by calling the employer prior to funding.

Verification of Income (VOI): Written documentation supporting the borrower’s income level and income stream.

Warehouse Lender: A short-term lender for mortgage bankers. Using mortgage loans as collateral, the warehouse lender provides interim financing until the loans are sold to a permanent investor.

Warehouse (Loan): In mortgage lending, warehouse loans are loans that are funded and awaiting sale or delivery to an investor.

Warehouse Financing: Short-term borrowing of funds by a mortgage banker based on the collateral of warehoused loans. This form of interim financing is used until the warehoused loans are sold to a permanent investor.

Warranty Deed: A deed warranting that the grantor has a title free and clear of all encumbrances and will defend the grantee against all claims against the property.

For More Information How Your Can Use Well Structured Litigation Pleadings Designed Around These Fraudulent Schemes In Order To Effectively Challenge Your Wrongful Foreclosure and Successfully Save Your “American Dream” Home Visit: http://www.fightforeclosure.net

What Homeowners Need to Know About Federal Laws that Govern Mortgage Origination and Servicing

10 Saturday Aug 2013

Posted by BNG in Affirmative Defenses, Banks and Lenders, Foreclosure Crisis, Foreclosure Defense, Fraud, Judicial States, Mortgage Laws, Non-Judicial States, Pleadings, Pro Se Litigation, RESPA, Your Legal Rights

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Adjustable-rate mortgage, Closed End Credit, Finance, Finance charge, Loan, Security interest, Statute of Limitations, Truth in Lending Act

There are eight (8) major federal laws pertinent to mortgage origination and servicing.

Truth-in-Lending Act (TILA); 15 U.S.C. § 1638.

Purpose. TILA is largely a disclosure statute that requires that lenders make certain disclosures to borrowers and potential borrowers. The Act is meant to insure that borrowers are informed of all of the terms of the loan before they take out the loan and can make an informed decision.

Scope. TILA applies to consumer credit – both closed end credit (like mortgages) and open ended credit (like credit cards) – extended by a creditor.

To constitute as “consumer credit” under the statute:
• The consumer must be a natural person.

• Credit is the right to defer payment of debt or to
incur debt and defer payment.

• The credit must be payable, by written agreement, by more than four
installments or subject to finance charges.

Under TILA, a “creditor” is:

• An entity that regularly extends consumer credit. Regularly means six or
more real estate secured loans, two or more high cost loans (or one or
more if made through a broker), or 26 or more in other cases per year.

• The creditor is the entity to which the obligation is payable to on its face.
Arrangers, like brokers, are not covered by TILA.

Exceptions.

• Business, agricultural, organizational and commercial credit.
• Credit over $25,000 unless secured by real estate or a dwelling.
• Public utility credit in some instances.
• Securities or commodities accounts.
• Certain student loans.
• Home fuel budget plans if no finance charge is imposed.

Protections.

Fundamentals. Lenders must disclose the following terms and conditions:

1. Amount Financed The amount financed is the amount of money that the borrower receives for his own benefit. Generally, this would include the proceeds of the loan, the purchase price of the goods/services being purchased, and the amount of pre-existing debts being paid off by consolidation or refinancing. Amount financed is roughly the same as the concept of “principle” but it is distinct from how principle is construed under state usury laws.

2. Finance Charge. Any charge that a consumer pays, directly or indirectly,
that is charged by the creditor, directly or indirectly, as incident to or a condition of the extension of credit. Examples include interest, service charges, points, origination fees, and many other costs associated with credit.

3. Annual Percentage Rate (APR). The cost of credit as a yearly rate.

Required Disclosures for Closed End Credit – Failure to disclose the following terms and conditions gives rise to Statutory Claims.

1. Total Finance Charge. Consists of all finance charges as defined above.

Exceptions
a. Under certain conditions, charges by third parties, closing agent fees,
debt cancellation coverage, and overdraft fees.
b.Application fees so long as they are charged to all applicants, whether or
not credit is extended.
c. Late fees.
d.Certain closing costs, so long as they are bona fide and reasonable.
e. Voluntary credit life, health, accident and loss of income insurance so
long as the voluntary nature, cost and term are disclosed and the consumer
separately agrees to the insurance in writing.
f. Credit property insurance premiums so long as the consumer is aware
that he can purchase insurance elsewhere.
g. Certain security interest related charges.
h.Annual fees or fees periodically charged as a condition to credit.
i. Seller’s points.
j. Interest reductions in time deposits.

2. Amount Financed. The principle part of the loan minus all charges
deemed to be finance charges.

3. Annual Percentage Rate.
4. Payment Schedule.
5. Total Number of Payments.
6. Security Interests.
7. Special Formatting Rules.

The disclosures must be clear, obvious, separate from other information and in a form that the borrower can keep. Disclosures must be provided in a timely manner, in a way that the borrower can keep before the consummation of the loan.

Lenders must also give the borrower a Notice of Right to Cancel, which informs the borrower of his right to rescind and contains the forms that the borrower needs to exercise that right.

Relief and Statute of Limitations. Under TILA, the borrower has an absolute right to rescind for three business days after the consummationof the loan. After three business days, a borrower may have the right to rescind up to three years if the disclosures were not made to the client. Damages and attorney’s fees are recoverable under the statute.

Home Ownership and Equity Protection Act (HOEPA); 15 U.S.C. § 1639

Purpose. HOEPA is designed to protect all borrowers, but especially
borrowers that apply for and take out high cost loans. HOPEA is
associated with TILA and is often considered a part of TILA.

Scope. Same as TILA.

Protections. Special Disclosures for Variable Rate Closed End Loans (like
ARMS)

1. The lender must disclose the maximum interest rate that could be charged over the life of the loan in the loan note.

2. The lender must give the borrower a copy of the ARM brochure that contains generic information about ARMs as well as more specific explanations of the aspects of each variable rate plan that the borrower is considering.

3. These disclosures must be given when the application is furnished
or before the payment of a nonrefundable fee, which ever is first.

4. During the life of the loan, the lender must send rate adjustment
or change notices before the loan rate will change.

HOEPA prohibits prepayment charges and balloon payments in a limited amount of cases, higher interest rates after default, negative amortization, more than two payments being made from the loan proceeds, pattern/practice of extending credit without taking into consideration the borrower’s ability to pay, and payments directly to home improvement contractors.

Relief and Statute of Limitations. A party can recover damages and rescind under HOEPA. Attorney’s fees and costs are also available. The Statutes of limitations for affirmative actions is one year. For rescission, the statutes of limitation is three years.

Equal Credit Opportunity Act (ECOA); 15 U.S.C. § 1691

Purpose. The purpose of the ECOA is to stop discrimination in the lending industry.

Protections. ECOA has three important aspects:

1. First, it prohibits discrimination in any aspect of credit based on race, color, religion, national origin, sex, marital status, age, assistance income.

2. Second, the ECOA requires creditors to take specific actions when approving or denying credit, prevents certain factors from being used to determine creditworthiness, mandates when an existing account may be closed, and restricts the ways that information is reported to credit reporting agencies concerning spouses.

3. Third, the Act imposes certain notice requirements on the credit issuer
when a loan application is approved or denied. If the creditor makes a counter offer (for more or less credit), then it must notify the borrower in writing of the new terms.

How ECOA Protection Can Be Applied to Foreclosure Fraud

Bait and switch tactics may give rise to a claim under the ECOA. If a creditor gives credit in a much larger amount than the borrower requested and never gives the borrower an opportunity to deny the additional amount, then the creditor violated the procedural terms of the ECOA by failing to provide the borrower with written notice of all action taken on the original loan application. This tactic is often used in predatory lending. A creditor will give more credit to pay borrower’s debts that the borrower expressed no interest in paying. The new amount is often disclosed too late in the process for the borrower to feel as if he can object.

Relief and Statute of Limitations. The ECOA allows home owners to pursue relief higher on the food chain than the original lender, and provides for actual and punitive damages (up to $10,000 in an individual action), equitable relief and attorney’s fees. The statute of limitations is one year.

Real Estate Settlement and Procedures Act (RESPA); 12 U.S.C. § 2601 et seq.

Purpose. The purpose of RESPA is to protect home buyers from
abusive practices in the residential real estate industry. The Act controls
the manner in which settlement services for a residential real estate loan are provided and compensated.

Scope. RESPA applies to federally related mortgages, meaning those made by federally-insured depository lenders, HUD-related loans, loans intendedto be sold on the secondary market to Fannie Mae or Freddie Mac or to creditors who make or invest more than a million dollars per year in residentially secured loans. Most home equity loans (as well as refinancings), mobile home purchase loans and construction loans are covered by RESPA. A loan for vacant land is excluded unless a structure will be constructed or a manufactured home will be placed on the property within two years of settlement of the loan. There are some exceptions to RESPA. If a lender makes a loan from its own funds, holds the loan for varying periods of time and then sells the loan on the open market, it is not covered. Also, certain lenders that originate loans through a computer system are generally exempt from RESPA’s requirements.

Protections. RESPA requires that no later than three business days after the application, the consumer must receive a “good faith estimate” of settlement costs (usually via the HUD-1 settlement statement) along with a booklet explaining the costs. At closing, all settlement agents must use the HUD-1 settlement kickbacks and unearned fees. No person shall give or accept any fee, kickback or gift for a referral of a settlement service. Additionally, RESPA requires servicers to notify consumers about the possibility that their mortgages may be transferred and when one is imminent, and to have a mechanism that allows borrowers to make inquiries about their account to a servicer and to have corrections made to
their accounts, if necessary. Servicers have a substantive duty to pay the property taxes, homeowner’s insurance and other escrowed monies to the appropriate recipients as long as the borrower is current. Further, RESPA limits the amount that a lender can require that a borrower place in escrow, and prohibits a lender or servicer from charging the borrower for the preparation of statements required by TILA, the HUD-1 settlement statement, or escrow account statement.

Statute of Limitations. The statute of limitations is one year except for servicer violations which has a 3 year limitation.

Fair Housing Act (FHA); 42 U.S.C. § 3605

Purpose. The FHA prohibits discrimination on the basis of race, color,
religion, sex, handicap, familial status, or national origin in the making of
or purchasing of residential real estate loans and any other related financial assistance.

Scope. The FHA applies to loan brokers, financing consultants and anyone else providing financial assistance related to the making of the loan as well as the secondary market in the purchasing of loans, debts or securities, thepooling or packaging of these instruments, and the marketing or the sale of securities issued on the basis of loans or debts.

Protection. To prove discrimination, the consumer must show that the defendants intentionally targeted on the basis of a protected class when trying to obtain credit or that there was a credit-grant policy that had a disparate impact on that basis.

Relief and Statute of Limitations. Under the FHA, the court can award actual and punitive damages, attorney’s fees and costs. The statute of limitations is two years from the occurrence or from the termination of the discriminatory practice for affirmative claims.

Federal Trade Commission “Holder” Rule

The FTC’s “Holder” rule, or the FTC Rule on Preservation of Consumers’ Claims and Defenses, allows a consumer to make a claim against a subsequent holder of a loan for the acts of the original lender. The original lender may be judgment proof, and it is unlikely that a consumer would effectively be able to defend against a collection action and bring an affirmative suit against the original lender. The rule creates an incentive for the lending industry to police itself and subsequent holders of a debt are in a better position to sue the original lender than the borrower.

Fair Debt Collection Practices Act (FDCPA); 15 U.S.C. § 1692 et seq.

Purpose. FDCPA restricts debt collector’s efforts to obtain payment and
to choose venue. The Act protects debtors from abusive or harassing
debt collection practices.

Scope. The Act is generally used in the non-mortgage context because mortgage servicers are exempt because they usually acquire servicing rights before the mortgage goes into default. A debt collector generally includes collection agencies, creditors using false names or collecting for other creditors, collection attorneys, purchasers of delinquent debts, repossession companies, and suppliers or designers of deceptive forms, but generally excludes companies collecting their own debts.

Protections. The Act protects the consumer from an invasion of privacy, harassment, abuse, false or deceptive representations, and unfair or unconscionable collection methods. Specific acts that are prohibited include late night or repetitive phone calls, false threats of legal action or criminal prosecution and communications with most third parties regarding the debt.

FDCPA provides the consumer the ability to stop all debt collection action with a letter, makes the collector deal with the consumer’s attorney if the consumer has one, and gives the consumer the right to dispute the existence, legality or amount of the disputed debt.

Relief and Statute of Limitations. The plaintiff can recover actual damages, statutory damages (up to $1000), attorney’s fees and costs and perhaps punitive damages and injunctive relief. Class actions are also authorized and the statute of limitations for all actions is one year for affirmative claims.

Racketeer Influence and Corrupt Organizations Act (RICO); 18 U.S.C. §§ 1961-1968

Purpose. RICO can be used to provide a civil remedy to abusive
consumer credit practices.

Scope. Any cause of action under RICO must have the following elements: the existence of an enterprise, the enterprise is engaged in interstate or foreign commerce, the defendant has engaged in one or more of four prohibited activities in section 1962, and the prohibited conduct cased injury to the plaintiff’s business or property.

Protections. Every RICO violation involves a collection of an unlawful debt (gambling debts or usury under state or federal law, at a rate at least twice the enforceable usury rate) or a pattern of racketeering activity. RICO can provide a remedy when a lender misrepresents that its rates are better than other lenders’ rates or that its loan will pay off other debts when it will
not. A well-plead allegation may state a claim for mail fraud in a loan flipping case under RICO. A borrower may also successfully plead a claim under RICO when there is a spread premium case where the payment of the premium is not revealed and the cost of the premium is passed onto the borrower in the form of a higher interest rate and where the broker represented that it would provide the lowest available rate, money was exchanged between the broker, the assignee, the funding lender and the title company and mail was used in furtherance of the scheme.

Remedy and Statute of Limitations. A person injured in his business or property can sue for treble damages but no physical or emotional damage claim can be made. The statute of limitations is four years in affirmative cases.

For More Information on How You Can Effectively Use Solid Arguments that are Structured on Your Lender’s Violations of Federal Laws, Which to Your Advantage, Will Subsequently Reduce Your Mortgage Payments and Save Your Home from Foreclosure Visit: http://www.fightforeclosure.net

Who Has Standing To Foreclose? – A Review of Massachusettes Case & Other Jurisdictions

09 Friday Aug 2013

Posted by BNG in Affirmative Defenses, Appeal, Banks and Lenders, Case Laws, Case Study, Federal Court, Foreclosure Defense, Fraud, Judicial States, Legal Research, Litigation Strategies, MERS, Mortgage Laws, Non-Judicial States, Note - Deed of Trust - Mortgage, Pleadings, Pro Se Litigation, Securitization, State Court, Your Legal Rights

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Fannie Mae, Foreclosure, Ibanez, Massachusetts, Massachusetts Supreme Judicial Court, U.S. Bancorp, Uniform Commercial Code, US Bank

Introduction

As a result of the collapse of the housing market in this country in or around 2008, the number of residential foreclosures has increased exponentially, putting unprecedented strains on the system.

Although most foreclosures are uncontested, since there is rarely any doubt that the borrower has defaulted in repayment of the debt, in the past several years a cottage industry has developed challenging the creditor’s “standing” to foreclose, sometimes colloquially known as the “show me the Note” defense.

The Commonwealth of Massachusetts has seen its share of this phenomenon, maybe more than its share.

This post will briefly review the string of Massachusetts judicial decisions over the past several years addressing various aspects of the foreclosure standing question, and will use those cases to “issue-spot” and frame questions that practitioners in every state should consider and perhaps need to answer before moving ahead with foreclosures or to defend past foreclosures in litigation, whether in defense of borrowers’ lawsuits or in eviction proceedings. Other notables decisions will also be surveyed to flesh out the issues and arguments further, without attempting to be exhaustive of the subject or to present the proverbial 50-State survey.

The Massachusetts Story

We begin with the Massachusetts foreclosure story. In early 2009, a judge on Massachusetts specialized Land Court called into question a title standard of the State’s Real Estate Bar Association that had been relied upon by the Massachusetts foreclosure Bar. REBA Title Standard No. 58 said that a foreclosure was not defective so long as an assignment of the mortgage was obtained at any time before or after the foreclosure. In other words, the title could be cleared by obtaining an assignment even after the conduct of the foreclosure auction sale. Land Court Judge Keith Long in U.S. Bank, N.A. v. Ibanez, 2009 WL 795201 (Mass. Land Ct. Mar. 26, 2009), held that the title standard did not correctly state Massachusetts law, and that under the Massachusetts foreclosure statute, M.G.L. c. 244, a creditor had to be the mortgagee to foreclose. In 2011, the Massachusetts Supreme Judicial Court in U.S. Bank, N.A. v. Ibanez, 458 Mass. 637 (2011), affirmed, holding that a foreclosing entity, if not the original mortgagee, must hold an assignment of the mortgage at the time it first published the notice of sale.

If the assignment of the mortgage was obtained after publication of the notice, a subsequently-completed foreclosure is unlawful and void.

Because Massachusetts is a non-judicial foreclosure jurisdiction, the foreclosing creditor does not have available ares judicata defense to a post-foreclosure challenge to title or possession.

Thus, the Massachusetts Court has held that a borrower or other defendant in an eviction action can defend by contesting the validity of a purchaser’s title if it stems from an invalid foreclosure, even if the mortgagor had done nothing to contest the foreclosure itself. Bank of New York v. Bailey, 460 Mass. 327 (2011).

The plaintiffs in Ibanez were securitization trustees and while the evidence in the record was incomplete, contributing to the result, the trustees were presumed to have held the notes in the respective loan pools, including the defendants’ notes, for the benefit of the investors. The Ibanez Court required the mortgagee to hold an assignment, and implicitly found that it would not be sufficient to confer standing to foreclose to hold the note without also holding the mortgage or obtaining an assignment, but nothing in the decision presaged a requirement that the mortgagee possess the note.

The argument that the mortgagee must also hold the note to foreclose was pressed to the Massachusetts high court almost immediately in the wake of Ibanez. This issue arises in Massachusetts because, contrary to the majority and longstanding American rule that the mortgage is mere security for the note and follows the note as a matter of law, Carpenter v. Longan, 83 U.S. 271 (1872), Massachusetts is a title-theory state that allows for the note and mortgage to be held separately. Under Article 3 of the Uniform Commercial Code (“UCC”), a note can be transferred by delivery of possession of an endorsed note, but Massachusetts, as a title theory state, requires a signed instrument to convey a mortgage, “which represents legal title to someone’s home.” Ibanez, 458 Mass. at 649. Comparable to the equity of redemption residing in the mortgagor, to reclaim legal title by repaying the debt and redeeming the mortgage, the owner of the note under Massachusetts law holds beneficial ownership of the mortgage and has the right to compel an assignment of the mortgage by the mortgagee, who holds the mortgage in trust for the holder of the note, in what has been described as a resulting trust implied by law. Id. at 652.

In Eaton v. Fannie Mae, 462 Mass. 569 (2012), the Court laid down a new rule that foreclosing mortgagees must either (a) hold the note, or (b) be acting on behalf of the note holder. In other words, the Court held that “one who, although not the note holder himself, acts as the authorized agent of the note holder,” may exercise the power of sale. Id. at 586. Notably, unlike in Ibanez where the Court rejected entreaties for prospective application of its decision, the Eaton court chose to apply its holding prospectively only to foreclosures noticed after the date of the decision out of “concern for litigants and others who have relied on existing precedents,” this being a “new rule.” Id. at 588.

Massachusetts courts, like courts elsewhere, have also considered the standing of Mortgage Electronic Registration Systems, Inc. (“MERS”) to foreclose mortgages and to assign mortgages for foreclosure. MERS, discussed in greater detail below, holds title to mortgages as nominee for MERS Members. The Eaton court discussed MERS in several footnotes, see 462 Mass. 569 nn. 5, 7, 27 & 29, and implicitly accepted MERS’ pre-foreclosure assignment of the mortgage to the mortgage servicer.

In a federal court appeal earlier this year, the First Circuit Court of Appeals in Boston held expressly that MERS has the authority to assign mortgages it holds as nominee. Culhane v. Aurora Loan Services, — F.3d —-, 2013 WL 563374 (1st Cir., Feb. 15, 2013). Indeed, in the District Court decision the Court of Appeals affirmed, District Judge William Young remarked that “the MERS system fits perfectly into the Massachusetts model for the separation of legal and beneficial ownership of mortgages.” Culhane v. Aurora Loan Services, 826 F. Supp. 2d 352, 371 (D. Mass. 2011).

The recent Massachusetts mortgage foreclosure decisions were surprising, bordering on shocking, both to lenders and the Massachusetts real estate and foreclosure bars. In Ibanez, the Court disapproved a title standard of the well-respected statewide real estate bar group that conveyancers and others looked to for guidance, and in Eaton the Massachusetts Court for the first time announced a requirement that a foreclosing mortgagee be able to demonstrate its relationship to the mortgage note notwithstanding that there is no requirement under Massachusetts law to record or file notes or note transfers. 462 Mass. at 586;see also Wells Fargo Bank, N.A. v. McKenna , 2011 WL 6153419, at *2 n.1 (Mass. Land Ct. Dec. 8, 2011) (“There never has been recording of notes at the registries of deeds at any time. Notes are never recorded—not (as they may be in some other states) when the initial mortgage is recorded, nor at any time after that, including at the time, following the auction sale, when the foreclosure deed and

affidavit are put on at the registry.”). Whether the greater numbers of foreclosures and the perceived financial excesses and highly publicized alleged “sloppiness” of the mortgage industry have caused some courts to be more “pro-consumer,” or it is only that some of the legal doctrines underlying foreclosure standing had not been closely examined in a century or more, the rulings were unexpected. In part, they may represent the challenge of adapting historical, and in some cases ancient, property law to modern commerce, or vice versa. But they point out the critical need to understand state law, and to not take for granted that traditional custom and practice will be upheld, or that courts will not struggle applying that law or those established customs and practice to non-traditional modern mortgage ownership structures.

Mortgage notes, representing the debt for which the mortgages are collateral, will generally qualify as negotiable instruments whose ownership and transfer is governed by the principles of Article 3 of the UCC, adopted largely intact in most American jurisdictions. But despite the efforts of the UCC Commissioners to harmonize the law of security interests, including in some respects in real property, mortgage law and mortgage foreclosure in particular remains predominantly a creature of local state law. Thus, for mortgage foreclosure purposes, where the foreclosing creditor stands, in the legal vernacular, may depend on where the house sits. The discussion below frames some of the key standing inquiries suggested by the Massachusetts experience, and surveys some recent case law from across the country addressing the same or similar questions, and compares and contrasts the judicial precedents.

Although subsidiary questions such as whether the state is a title theory or lien theory jurisdiction, and whether the mortgage is deemed to follow the note as a matter of law, may affect how the questions are answered in any particular state, the core questions remain the same and can generally be framed in the following terms:

1. What relationship must the foreclosing entity have to the mortgage (or to the corresponding deed of trust in jurisdictions that know the security instrument by that terminology), and at what time must it hold or have it?

2. What relationship, if any, must the foreclosing entity have to the promissory note secured by the mortgage (or by the deed of trust), and at what time?

3. Does MERS when it holds the mortgage as nominee (or when it is named as beneficiary under a deed of trust) have standing to foreclose, or the ability to assign the mortgage (or deed of trust) to the lender, trustee or servicer for foreclosure?

4. Who has standing to foreclose in the securitization context, given the legal relationships under the standard Pooling and Servicing Agreement between and among the securitization trustee, the mortgage servicer and, where applicable, MERS as nominee under the mortgage (or deed of trust)?

There is a large body of case law nationwide on all of these questions, with additional decisions being handed down on virtually a daily basis; what follows below is only a representative sampling intended to illustrate the more significant issues and arguments, to inform the analysis of applicable local state law.

1. Relationship Between Foreclosing Entity and Mortgage.

In U.S. Bank, N.A. v. Ibanez, 458 Mass. 637 (2011), as discussed above, the Massachusetts Supreme Judicial Court held that a foreclosing entity must hold an assignment of the mortgage at the time of the publication of the notice of sale. Other states differ on whether they require a foreclosing party to hold the mortgage either at the time of the foreclosure sale itself or when notice is issued.

In considering any question of a party’s status in the foreclosure process, it is first important to note whether jurisdictions are judicial or non-judicial jurisdictions:

– Judicial foreclosure states require the foreclosing party to initiate a court proceeding in order to foreclose. The foreclosure complaint seeks permission from the court to foreclose on the secured property.

– Non-judicial foreclosure jurisdictions do not require court involvement. Instead, the foreclosing entity must follow certain practices as set by state statute, such as mailing notices of acceleration and default, and publishing notice in the local papers. That entity often is the deed of trust trustee, under state law. If the borrower wishes to contest the sale, he or she may seek to enjoin it before the sale occurs.

Twenty-two states are considered judicial foreclosure jurisdictions, whereas 28 are deemed non-judicial.

In New York, where foreclosures are conducted judicially, one court recently stated that “a plaintiff has standing where it is both the holder or assignee of the subject mortgage and the holder or assignee of the underlying note at the time the action is commenced.” Wells Fargo Bank, N.A. v Wine, 90 A.D.3d 1216, 1217 (N.Y. App. Div. 3d Dep’t 2011).

To a similar effect, one Florida court has said a party must “present evidence that it owns and holds the note and mortgage in question in order to proceed with a foreclosure action.” Gee v. U.S. Bank N.A., 72 So. 3d 211, 213 (Fla. Dist. Ct. App. 5th Dist. 2011). But a different Florida appellate court has held that an assignment of the mortgage may not be necessary at the time a complaint is filed. Standing to bring a judicial foreclosure requires “either an assignment or an equitable transfer of the mortgage prior to the filing of the complaint.” McLean v. JP Morgan Chase Bank N.A., 79 So. 3d 170, 172 (Fla. Dist. Ct. App. 4th Dist. 2012). Because ownership of a mortgage follows an assignment of the debt under that case, the mortgage does not need to be assigned to the plaintiff before the Complaint is filed if it proves ownership of the note at that time.

New Jersey, also a judicial state, has said that if a foreclosing creditor bases standing to foreclose on assignment of the mortgage, the assignment must precede filing of the foreclosure complaint; however, if the foreclosing creditor held the note at the time of filing the complaint, assignment of the mortgage is unnecessary to establish standing to foreclose. Deutsche Bank Nat’l Trust Co. v. Mitchell, 422 N.J. Super. 214, 222-25 (App. Div. 2011). There, although Deutsche Bank had not proved its standing because the mortgage assignment it relied on was executed a day after it filed its complaint, the Court remanded to allow Deutsche Bank to demonstrate standing by proving that it possessed the note prior to filing the complaint. Contrast state filing rules with the law of a non-judicial state like Michigan, which allows a foreclosing party to be “either the owner of the indebtedness or of an interest in the indebtedness secured by the mortgage or the servicing agent of the mortgage.” MCL 600.3204(1)(d)). Thus, under the statute, a loan servicer is expressly authorized to foreclose regardless of whether it holds the note or mortgage. However, by the date of the foreclosure sale, the mortgage must be assigned to the foreclosing party if it is not the original mortgagee. MCL 600.3204(3).

Where an assignment of the mortgage may be required in order to foreclose, there are differences regarding whether the assignment of mortgage is required to be recorded.

– Massachusetts: In U.S. Bank, N.A. v. Ibanez, 458 Mass. 637 (2011), although the Court required the foreclosing entity to hold the mortgage, it notably did not require the assignment of mortgage be recorded – or even be in recordable form.

– California, likewise, does not require that assignments of a deed of trust be recorded prior to foreclosure, despite a statutory pre-foreclosure recording requirement for mortgage assignments (mortgages are uncommon in California). Calvo v. HSBC Bank USA, N.A., 199 Cal. App. 4th 118, 122-2 (Cal. App. 2d Dist. 2011).

– New York, recording is also not required. See, e.g., Bank of NY v. Silverberg, 86 A.D.3d 274, 280 (N.Y. App. Div. 2nd Dep’t 2011) (rejecting contention that absence of recorded assignment allowed inference that plaintiff did not own the note and mortgage; “an assignment of a note and mortgage need not be in writing and can be effectuated by physical delivery”).

But some non-judicial states require that assignments of deeds of trusts or mortgages be recorded before a foreclosure can occur:

– Oregon: Ore. Rev. Stat. § 86.735(1)

– Idaho: Idaho Stat. § 45-1505(1)

– Minnesota: Minn. Stat. § 580.02(3)

– Montana: Mont. Code Ann. § 71-1-313(1)

– Wyoming: Wyo. Stat. § 34-4-103(a)(iii)

Regardless of any requirement, assignees typically record mortgage assignments to put the world on notice of their interest. See MetLife Home Loans v. Hansen, 48 Kan. App. 2d 213 (Kan. Ct. App. 2012) (“The assignment of the Mortgage was merely recorded notice of a formal transfer of the title to the instrument as required by recording statutes, which are primarily designed to protect the mortgagee against other creditors of the mortgagor for lien-priority purposes, not to establish the rights of the mortgagee vis-à-vis the mortgagor.”

Need for Correct Corporate Names

When an assignment of mortgage is required, it must also be assigned to the correct corporate entity. Confusion over corporate names can impede foreclosures.

For example, the servicer of a loan filed a judicial foreclosure action alleging that it was the assignee of the original lender. Bayview Loan Servicing, L.L.C. v. Nelson, 382 Ill. App. 3d 1184 (Ill. App. Ct. 5th Dist. 2008). Reversing the trial court’s judgment in favor of the servicer (Bayview Loan Servicing, L.L.C.), the Court of Appeals held that the servicer was not allowed to foreclose because the mortgage was not assigned to it. Rather, the mortgage had been assigned to an affiliated entity, Bayview Financial Trading Group, L.P. Id. at 1187. Without any evidence that the foreclosing entity held the note or mortgage, the fact that it was servicer was insufficient to allow it to foreclose. Id. at 1188.

But the situation was different in a judicial foreclosure filed in the same state by Standard Bank, which was the successor to the originator of the loan as a result of several mergers and name changes. Std. Bank & Trust Co. v. Madonia, 964 N.E.2d 118 (Ill. App. Ct. 1st Dist. 2011). The mortgagors argued that the plaintiff bank was required to show a mortgage assignment or endorsement of the note to it. Rejecting that argument, the Court held that the plaintiff bank retained all of the interests of the originator, including those under the note and mortgage, as a result of the mergers. Id. at 123.

A court may require proof of a merger. The note and mortgage in this case were assigned to Wells Fargo Home Mortgage, Inc. Wells Fargo Bank, N.A. v. deBree, 2012 ME 34 (Me. 2012). Upon the borrowers’ default, Wells Fargo Bank, N.A. filed a complaint as “Successor by Merger to Wells Fargo Home Mortgage, Inc.” The trial court granted summary judgment for Wells Fargo Bank. On appeal, the Maine Supreme Judicial Court held that Wells Fargo Bank had not proved its ownership of the mortgage note and mortgage because there was no evidence that it, as opposed to Wells Fargo Home Mortgage, Inc., owned the instruments. Id. at ¶ 9. The Court rejected the Bank’s arguments that the borrowers had waived their argument, and it declined to take judicial notice that Wells Fargo Home Mortgage had merged into Wells Fargo Bank. Id.at ¶¶ 9-10. The showing of ownership was necessary for the Bank to prevail on summary judgment, so the foreclosure judgment was vacated. Id. at ¶ 11.

2. Relationship Between Foreclosing Entity and Note

In Eaton v. Fannie Mae, 462 Mass. 569 (2012), discussed above, the Massachusetts Supreme Judicial Court announced a new rule, applicable to foreclosures noticed after June 22, 2012 (the date of the decision), requiring that foreclosing mortgagees must either (a) hold the note; or (b) be acting on behalf of the noteholder, at the time of foreclosure. In other words, the Court held that “one who, although not the note holder himself, acts as the authorized agent of the note holder” may exercise the power of sale.

Various courts in other states are split as to whether a foreclosing entity must hold the note.

California, for example, allows by statute non-judicial foreclosure by the “trustee, mortgagee, or beneficiary, or any of their authorized agents.” Debrunner v. Deutsche Bank National Trust Co., 204 Cal. App. 4th 433, 440 (Cal. App. 6th Dist. 2012) (quoting Cal. Civ. Code § 2924(a)(1)). The party foreclosing need not have possession of or a beneficial interest in the note because no such prerequisite appears in comprehensive statutory framework. Id. at 440-42.

In Idaho, a non-judicial foreclosure state, the state supreme court expressly rejected the idea that a party must have ownership of the note and mortgage. Trotter v. Bank of N.Y. Mellon, 152 Idaho 842, 861-62 (2012). Rather, “the plain language of the [deed of trust foreclosure] statute makes it clear that the trustee may foreclose on a deed of trust if it complies with the requirements contained within the Act.” Id. at 862.

Despite these states’ rejections of any requirement to hold the note, some courts in other jurisdictions do seem to require the foreclosing party to also be the noteholder, for example, or perhaps at least an agent or authorized person:

– New York: According to this intermediate appellate division, judicial foreclosure plaintiff must both hold the note and the mortgage at the time the action is commenced. Wells Fargo Bank, N.A. v Wine, 90 A.D.3d 1216, 1217 (N.Y. App. Div. 3d Dep’t 2011).

– Florida: In Florida, the holder of a note, or its representative, may foreclose. Gee v. U.S. Bank N.A., 72 So. 3d 211, 213 (Fla. Dist. Ct. App. 5th Dist. 2011). If the plaintiff is not the payee of the note, it must be endorsed to the plaintiff or in blank. Id.

– Maryland: The transferee of an unendorsed promissory note has the burden of establishing its rights under the note by proving the note’s prior transfer history, especially where the mortgagor requests an injunction to stop foreclosure. Anderson v. Burson, 424 Md. 232, 245 (2011). Thus, the Court held that although the agent of the substitute trustee under the mortgage had physical possession of the note, it was not a holder of the note because there was no valid endorsement; it could nevertheless still enforce the note based on concessions from the mortgagors. Id. at 251-52.

– Oklahoma: “To commence a foreclosure action in Oklahoma, a plaintiff must demonstrate it has a right to enforce the note and, absent a showing of ownership, the plaintiff lacks standing.” Wells Fargo Bank, N.A. v. Heath, 2012 OK 54, ¶ 9 (Okla. 2012).

– Washington: Under Washington’s non-judicial foreclosure statute, the trustee is required to “have proof that the beneficiary is the owner of any promissory note or other obligation secured by the deed of trust.” RCW61.24.030(7)(a). Note, however, that borrowers cannot bring a judicial action based on a beneficiary or trustee’s failure to prove to the borrower that the beneficiary owns the note. Frazer v. Deutsche Bank Nat. Trust Co., 2012 WL 1821386, at *2 (W.D. Wash. May 18, 2012) (“[T]he Washington Deed of Trust Act requires that a foreclosing lender demonstrate its ownership of the underlying note to the trustee, not the borrower.”).

Some jurisdictions more clearly take an either/or approach to foreclosing. In Michigan, for example, the foreclosing entity must be “either the owner of the indebtedness or of an interest in the indebtedness secured by the mortgage or the servicing agent of the mortgage.” Residential Funding Co., LLC v. Saurman, 490 Mich. 909 (2011) (quoting MCL 600.3204(1)(d)). The question in Saurman was whether foreclosures by MERS, as a mortgagee that did not hold the note, were proper. The Michigan Supreme Court upheld the foreclosures because the mortgagee’s interest in the note—even though not an ownership interest—was a sufficient interest in the indebtedness to allow it to foreclose.

There are other state courts that follow the either/or approach as well, for example:

– Ohio: In CitiMortgage, Inc. v. Patterson, 2012 Ohio 5894 (Ohio Ct. App., Cuyahoga County Dec. 13, 2012), the Ohio Court of Appeals held that a party has standing if “at the time it files its complaint of foreclosure, it either (1) has had a mortgage assigned or (2) is the holder of the note.” Id. at ¶ 21. Thus, the plaintiff in Patterson had standing because it possessed the note when it filed its complaint, even though the mortgagewas not assigned until later. Id. at ¶ 22.

– Alabama: In Sturdivant v. BAC Home Loans Servicing, LP, — So.3d —-, 2011 Ala. Civ. App. LEXIS 361 (Ala. Civ. App. Dec. 16, 2011), the Alabama Court of Civil Appeals ruled that a party lacked standing to foreclose because it was not yet the assignee of a mortgage when it initiated foreclosure. In Perry v. Fannie Mae, 100 So. 3d 1090 (Ala. Civ. App. 2012), the Court explained that the mortgage need not be assigned to a foreclosing party at the time it initiates foreclosure if it is a holder of the note. Because the evidence showed that the foreclosing party held the note at the time it initiated foreclosure proceedings, the foreclosure was proper. Id. at 1094-96.

– New Jersey: As noted in the preceding section, New Jersey recognizes standing to file a complaint to foreclose based on either assignment of the mortgage or possession of the note. Deutsche Bank Nat’l Trust Co. v. Mitchell, 422 N.J. Super. 214, 222 (App. Div. 2011).

3. Standing of MERS

What is MERS?

MERS is a system for electronically tracking interests in mortgages that are traded on the secondary market. MERS members (approximately 6,000) agree that MERS serves as mortgagee or beneficiary, and when loan ownership or servicing rights are sold from one MERS member to another, MERS remains the titleholder to the security instrument as nominee on behalf of whomever owns the loan. MERS is modeled on the “book entry system” used to track ownership in stock exchanges.

The use of nominees predates MERS: “The use of a nominee in real estate transactions, and as mortgagee in a recorded mortgage, has long been sanctioned as a legitimate practice.” In re Cushman Bakery, 526 F. 2d 23, 30 (1st Cir. 1975) (collecting cases). However, the concept of a nominee serving as agent for one member of a group of possible principals—where the principal may change in a way not reflected in the public record—has fostered arange of reactions, from commendation to criticism to confusion, but ultimately MERS (and its members) have repeatedly prevailed in foreclosure challenge litigation.

Authority of MERS to Foreclose

Most courts to consider the issue have ruled that MERS may serve as mortgagee or beneficiary and foreclose, for example:

– Texas: Athey v. MERS, 314 S.W. 3d 161, 166 (Tex. App. 2010) (MERS could foreclose, though it never held the note).

– Utah: Burnett v. MERS, 2009 WL 3582294 (D. Utah Oct. 27, 2009) (“MERS had authority under the Deed of Trust to initiate foreclosure proceedings”).

– Nevada: Croce v. Trinity Mortg. Assurance Corp. 2009 WL 3172119, at 3 (D. Nev. Sept. 28, 2009) (collecting cases from Georgia, California, Florida, and Colorado rejecting argument “that MERS does not have standing as a beneficiary under the Note and Deed of Trust, and therefore, is not authorized to participate in the foreclosure proceedings.”); see also Edelstein v. Bank of N.Y. Mellon,286 P.3d 249, 254 (Nev. 2012) (“The deed of trust also expressly designated MERS as the beneficiary… it is an express part of the contract that we are not at liberty to disregard, and it is not repugnant to the remainder of the contract.”).

– Michigan: Residential Funding Corp. v. Saurman, 805 N.W. 2d 183 (Mich. 2011) held that MERS had a sufficient interest to foreclose because it owned “legal title to a security lien whose existence is wholly contingent on the satisfaction of the indebtedness.”

In addition, at least two states—Minnesota (Minn. Stat. § 507.413) and Texas (Tex. Prop. Code § 51.0001)—have enacted statutes recognizing that MERS can foreclose.

Some state courts, nevertheless, have raised various questions about MERS’s role as it relates to foreclosures.

– Oregon: In Niday v. GMAC Mortg., 284 P. 3d 1157 (Or. App. 2012), the Oregon Court of Appeals ruled that MERS did not meet Oregon’s statutory definition of “beneficiary,” disagreeing with the majority of trial court rulings that had ruled MERS could serve as beneficiary.

Niday is on appeal to the Supreme Court of Oregon; oral argument was heard January 8, 2013.

– Maine: The Maine Supreme Court has ruled that MERS cannot meet its definition of “mortgagee,” and thus had no standing to foreclose judicially. MERS v. Saunders, 2 A. 3d 289 (Me. 2010) (“MERS is not in fact a ‘mortgagee’ within the meaning of our foreclosure statute”).

– Washington: Bain v. Metro. Mortg. Group, Inc., 285 P.3d 34, 46 (Wash. 2012) ruled that MERS did not meet the statutory definition of deed of trust beneficiary, though Bain did not explain whether this impaired foreclosure proceedings.

Nearly two years ago, MERS changed its rules of membership to provide that the noteholder must arrange for an assignment to be executed from MERS to the foreclosing entity prior to commencement of any foreclosure proceeding, judicial or non-judicial. So, this issue may be a legacy question after all.

Authority of MERS to Assign Mortgage

Even before the change in the membership rules, MERS often assigned mortgages to the foreclosing entity so that entity could foreclose. Some borrowers have argued that, as nominee, MERS does not have the power to assign the mortgage. These challenges have been almost universally rejected, as the security instruments expressly authorize MERS, as nominee, to take any action required of its principal and refer to the mortgagee or beneficiary as MERS and its “successors and assigns.” Indeed the First Circuit recently rejected this very argument. See Culhane v. Aurora Loan Services, — F.3d —-, 2013 WL 563374 (1st Cir., Feb. 15, 2013).

Likewise, the fact that an assignment of the security instrument may occur after the transfer of the note is not problematic, and makes sense under the MERS model: “[MERS] members often wait until a default or bankruptcy case is filed to have a mortgage or deed of trust assigned to them so that they can take steps necessary to seek stay relief and/or to foreclose…. [T]he reason they wait is that, if a note is paid off eventually, as most presumably are, MERS is authorized to release the [deed of trust] without going to the expense of ever recording any assignments.”Edelstein, 286 P.3d at 254.

Borrowers have also claimed that MERS lacks authority to assign the note. Since MERS typically does not hold notes, language in MERS assignments referencing the note in addition to the mortgage likely reflects a lack of precision. Insofar as MERS did not hold a note the issue is immaterial.

Splitting” the Note and Mortgage

Some borrowers have alleged that the naming of MERS as holder of title to the mortgage, while the lender holds title to the note, separates the note from the security instrument thereby rendering assignments void and the security instrument unenforceable. As one court has colorfully described it, the debt is the cow, and the mortgage the cow’s tail—while the debt can survive without the security instrument, the instrument has no independent vitality without the debt. See Commonwealth Prop. Advocates, LLC v. MERS, 263 p.3d 397, 403 (Utah App. 2011).

As noted, in Massachusetts, those arguments have been squarely rejected as Massachusetts permits the note and mortgage to be held separately. Indeed the District of Massachusetts remarked that the “MERS system fits perfectly into the Massachusetts model for the separation of legal and beneficial ownership of mortgages.” Culhane v. Aurora Loan Services, 826 F. Supp. 2d 352, 371 (D. Mass. 2011), aff’d — F.3d —-, 2013 WL 563374 (1st Cir. Feb. 15, 2013).

This theory has typically been rejected elsewhere as well, as, if successful, it would “confer[] an unwarranted windfall on the mortgagor.” Id. (citing Restatement (Third) of Prop.: Mortgages § 5.4 cmt. a). In Edelstein, 286 P.3d 249, 255 (Nev. 2012), for example, the court held that in Nevada, “to have standing to foreclose, the current beneficiary of the deed of trust and the current holder of the promissory note must be the same.” However, under the MERS system, the parties agree that MERS holds the security instrument while the note is transferred among its members—as long as the two instruments are united in the foreclosing entity prior to foreclosure, the Nevada court held, the foreclosing entity has standing to foreclose in that state.

Along similar lines, some borrowers allege that operation of MERS makes it impossible to identify who the proper noteholder is, because only the security instrument (not the note) was assigned by MERS. “A ‘show me the note’ plaintiff typically alleges a foreclosure is invalid unless the foreclosing entity produces the original note.” Stein v. Chase Home Fin., LLC, 662 F. 3d 976, 978 (8th Cir. 2011). Of course, when the foreclosing entity is able to produce the note, the claim is typically defeated on summary judgment, id., and many courts considering “show me the note” arguments in the MERS context have dismissed them as a matter of law without any inquiry into note ownership. E.g., Diessner v. MERS, 618 F. Supp. 2d 1184, 1187 (D. Ariz. 2009) (“district courts have routinely held that Plaintiff’s ‘show me the note’ argument lacks merit”) (collecting cases from California, Nevada, and Arizona) (internal quotations omitted).

Unrecorded Assignment Theories

Some states (including Massachusetts after November 1, 2012)statutorily require that, in order to bring a non-judicial foreclosure, all assignments of thesecurity instrument must be recorded. E.g., ORS 86.735(1) (Oregon) (trustee sale may proceed only if “any assignments of the trust deed by the trustee or the beneficiary … are recorded”). In Oregon, a few borrowers have successfully argued that, because the security follows the debt as a matter of law, transfers of the debt while MERS remains lienholder of record result in assignments that go unrecorded, precluding non-judicial foreclosure. See Niday, 284 P. 3d at 1169 (“any assignments” language in ORS 86.735(1) includes “assignment by transfer of the note, ” and that all such assignments from the initial lender to subsequent lenders must be recorded prior to commencement of a non-judicial foreclosure proceeding). Niday is under review by the Supreme Court of Oregon, which heard oral argument on January 8, 2013.

Other courts considering the same argument have rejected it. For instance, Minnesota, Idaho, and Arizona have the same statutory requirement that assignments must be recorded, but have not found note transfers to trigger an obligation to create and record an assignment of the corresponding security instrument. E.g., Jackson v. MERS, 770 N.W.2d 487 (Minn. 2009) (answering “no” to certified question: “Where an entity, such as defendant MERS, serves as mortgagee of record as nominee for a lender and that lender’s successors and assigns and there has been no assignment of the mortgage itself, is an assignment of the ownership of the underlying indebtedness for which the mortgage serves as security an assignment that must be recorded prior to the commencement of a mortgage foreclosure by advertisement under Minn. Stat. ch. 580?”); Homeyer v. Bank of America, N.A.,2012 WL 4105132, at *4 (D. Idaho Aug. 27, 2012) (“Idaho law does not require recording each assignment of a trust deed based upon transfer of the underlying note.”); Ciardi v. Lending Co., Inc., 2010 WL 2079735, at *3 (D. Ariz. May 24, 2010) (“Plaintiffs have failed to cite any Arizona statute that requires the recording of a promissory note or even the assignment of a promissory note.”). These cases ruled that a transfer of a promissory note does not create an “assignment” for purposes of those statutes.

4. Securitization Standing

What is Securitization?

Securitization is the packaging of debt into instruments broadly referred to as “mortgage-backed securities”; one court has described it with analogies: “One could analogize this process to taking raw ingredients and combining them to make bread then selling the slices individually, or putting different kinds of meat into a sausage grinder then selling the individual sausages. What is born from this process are new debt instruments, sold on the open market, that have pooled-and-sliced home loans as their ingredients. Different debt instruments work in different ways, but the basic concept is that home loan debt gets repackaged and sold to other investors rather than being held by the bank that originated the loan.” Bisson v. Bank of America, N.A., — F.Supp.2d —-, 2013 WL 325262, at *1 (W.D. Wash. Jan. 15, 2013). The securitization market emerged to facilitate the inflow of capital to fund home loans, and it “allows banks to spread mortgage risk across the financial system rather than hold it all themselves.” Id.

Although securitization has fallen well off its peak of approximately $1 trillion in originations in 2006, it is projected to rise from $4 billion in 2012 to $25-30 billion in 2013.

There are several parties to a securitization agreement, but the borrower is not one of them. A typical securitization arrangement involves the following parties:

· Originator: The originator is the party identified as “lender” on note and mortgage (or deed of trust).

· Depositor: The depositor is either the originator or someone that buys loans from originators and pools them into securities pursuant to a Pooling and Servicing Agreement (“PSA”) to which the depositor, trustee, and master servicer are parties.

· Trust: Entity into which loans are pooled (e.g., “Structured Asset Securities Corp. Mortgage Pass-Through Certificates, Series 2006-Z”). Sometimes referred to as a “Special Purpose Vehicle,” “Real Estate Mortgage Investment Conduit” or “REMIC,” orsimply a “Mortgage-Backed Security.”

· Trustee/Custodian: The trustee of the securitization trust (not to be confused with the trustee of a deed of trust, which conducts non-judicial foreclosure sales in deed of trust states) holds loans on behalf of the individual security holders, receiving the borrower’s payments from the loan servicer.

· Individual Investors: Shares of mortgage-backed securities are purchased by investors who, when loans are paid on schedule, ultimately benefit from borrowers’ mortgage payments.

· Master Servicer: The master servicer under the PSA services the individual loans in the pool, interfacing with borrowers, collecting loan payments and transferring them to the trust, and often handling foreclosures and post-foreclosure property management.

The Effect of Securitization on Foreclosure

Securitization adds complexity to chain of title to the mortgage, and chain of ownership of the note. See, e.g., In re Almeida, 417 B.R. 140, 142-45 (Bankr. D. Mass. 2009) (describing chain of title to a mortgage securing a securitized note); In re Samuels, 415 B.R. 8, 16-22 (considering challenge to direct assignment of mortgage from originator to trustee, not including an intervening assignment to the trust).

Some borrowers have claimed that insurance contracts or credit default swap agreements preclude default—i.e., the trust was insured against loss, collected the insurance when the borrower defaulted, and should not be allowed to foreclose as well because such foreclosure would grant a “double recovery.” Larota-Florez v. Goldman Sachs Mortg. Co., 719 F. Supp. 2d 636, 642 (E.D. Va. 2010). These arguments have not gained traction. Horvath v. Bank of N.Y., N.A., 641 F.3d 617, 626 n.2 (4th Cir. 2011) (rejecting argument that trustee of securitization trust “should not have been able to foreclose on his property because they did not suffer any losses from his default,” because “that defense does not allow individuals in default on a mortgage to offset their outstanding obligations by pointing to the mortgagee’s unrelated investment income”); Commonwealth, 2011 UT App 232 ¶¶ 3, 10 (rejecting argument “that defendants, having been paid off in the sale of the loan, could not seek a second payoff by foreclosure of the Trust Deed” as a “mere conclusory allegation” that could not sustain a viable claim).

Other borrowers have commissioned “securitization audits,” which purportedly trace the history of the loan in an attempt to cast doubt upon whether the foreclosing entity has standing. These arguments have also generally failed. E.g., Norwood v. Bank of America, 2010 WL 4642447 (Bankr. N.D. Ga. Oct. 25, 2010); Dye v. BAC Home Loans Servicing, LP, 2012 WL 1340220 (D. Or. Apr. 17, 2012) (granting motion to dismiss despite findings of “Mortgage Securitization Audit”). Still other borrowers have challenged the foreclosing entity’s compliance with the PSA. As noted above, borrowers are not parties to these agreements; as such, courts have generally found that borrowers do not have standing to challenge the foreclosing entity’s compliance or lack thereof with it. See, e.g., In re Correia, 452 B.R. 319, 324 (1st Cir. B.A.P. 2011) (stating that debtors, who were not parties to the PSA or third-party beneficiaries thereof, lacked standing to challenge defendants’ compliance with PSA); Sami v. Wells Fargo Bank, 2012 WL 967051, at *5-6 (N.D. Cal. Mar. 21, 2012) (rejecting claim “that Wells Fargo failed to transfer or assign the note or Deed of Trust to the Securitized Trust by the ‘closing date,’ and that therefore, ‘under the PSA, any alleged assignment beyond the specified closing date’ is void”).

Which Securitization Parties May Foreclose?

As discussed above, there are several parties to a securitization. The parties most likely to be involved in a foreclosure are the trustee and servicer. On occasion, foreclosures have been conducted in the name of MERS.

As the party interfacing with the borrowers on a day-to-day basis, the servicer is often in best practical position to handle foreclosure proceedings, but may be required, under some states’ laws, to demonstrate its entitlement to foreclose on behalf of the securitization trustee. So, for example, in Maine, a judicial foreclosure state, the servicer must show its authority to enforce the note. See Bank of America, N.A. v. Cloutier, 2013 WL 453976, at *3 (Me. Feb. 7, 2013) (foreclosure plaintiff must “identify the owner or economic beneficiary of the note and, if the plaintiff is not the owner, to indicate the basis for the plaintiff’s authority to enforce the note pursuant to Article 3-A of the UCC”).

Most non-judicial states do not apply special requirements to loan servicers; the only significant inquiry is whether the trustee of the deed of trust was properly appointed by the beneficiary of record. In Utah, for example, “the statute governing non-judicial foreclosure in Utah does not contain any requirement that the trustee demonstrate his or her authority in order to foreclose. The court declines to create a requirement where the legislature chose not to include one. Therefore, the court holds that, under the terms of the relevant documents and the current statute, [a trustee] is not required to demonstrate its authority to foreclose before initiating a foreclosure proceeding.” Hoverman v. CitiMortgage, Inc., 2011 U.S. Dist. LEXIS 86968, at *16-17 (D. Utah Aug. 4, 2011); see also Trotter, 275 P.3d at 861 (Idaho 2012) (“A trustee is not required to prove it has standing before foreclosing on a deed of trust” as long as “the Appointment of Successor Trustee, Notice of Default, and Notice of Trustee’s Sale complied with the statutoryrequirements and were recorded as specified in the statute”).

The situation can change, however, if the loan becomes involved in a judicial proceeding, such as a bankruptcy. To move for relief from stay in bankruptcy—even in a deed of trust state—a servicer must somehow show authority to enforce the note, though assignment of the security instrument may not be necessary. E.g., In re Tucker, 441 B.R. 638, 645 (Bankr. W.D. Mo. 2010) (“even if, as here, the deed of trust is recorded in the name of the original lender…, the holder of the note, whoever it is, would be entitled to foreclose, even if the deed of trust had not been assigned to it.”). And, conversely, failure to show authority to enforce the note can lead to denial of motions for relief from stay. E.g., In re Wilhelm, 407 B.R. 392 (Bankr. D. Idaho 2009) (denying relief from stay to group of movants that included both servicers and securitization trustees because they presented insufficient proof that they owned the notes in question); In re Mims, 438 B.R. 52, 57 (Bankr. S.D.N.Y. 2010) (servicer that held title to themortgage but did not show it had been assigned the note was not a “real party in interest” in proceeding to lift stay).

In addition to the servicer, the trustee is often the foreclosing party. As the party holding title to the loan on behalf of the loan investors, the trustee is certainly a proper party to foreclose—if it has the right to do so under state law, which may require that it have been formally assigned the mortgage.

In Massachusetts, for instance—and as discussed more above—the trustee must also hold an assignment of the mortgage. In Ibanez, the trustee commenced foreclosures before they had been assigned the mortgages, and did not record assignments until after the foreclosure was completed. The trustee argued it had already received the note when the loan had been securitized years earlier, and that gave it all it needed to foreclose. The court rejected that argument—Massachusetts, as a “title theory” state, requires assignment of mortgage to foreclose. Securitization may have showed intent to assign mortgages, but was not an actual assignment.

Lien-theory states often take a different position, and do not require a trustee to also hold the mortgage, which is nothing more than the right to enforce a lien. See, e.g., Edelstein v. Bank of N.Y. Mellon, 286 P.3d 249, 254 (Nev. 2012);KCB Equities, Inc. v. HSBC Bank USA, N.A. , 2012 Tex. App. LEXIS 4418, at *4-5 (Tex. App.—Dallas).

Conclusion

The recent Massachusetts foreclosure case law is likely some what atypical, driven as it has been by some relatively unusual aspects of Massachusetts law.

But the questions the Massachusetts Supreme Judicial Court has been called upon to answer, concerning the necessary relationship between the lien of the security interest, the debt and the foreclosing creditor, are universal and have been the subject of considerable litigation across the country during the recent “foreclosure crisis.” And the questions are controlled for the most part by state law, and state property and foreclosure law are much less uniform than the law governing the notes themselves as negotiable instruments. This paper has identified the principal issues and arguments so practitioners can ask the right questions and try to determine the law in their particular jurisdiction before proceeding.

For More Information How You Can Use Solid Augments To Effective Challenge and Save Your Home Visit: http://www.fightforeclosure.net

Understanding Mortgage Fraud ~ A Comprehensive Guide For Homeowners

31 Wednesday Jul 2013

Posted by BNG in Affirmative Defenses, Appeal, Banks and Lenders, Federal Court, Foreclosure Defense, Fraud, Judicial States, MERS, Mortgage Laws, Non-Judicial States, Notary, Note - Deed of Trust - Mortgage, Pro Se Litigation, Scam Artists, Securitization, State Court, Your Legal Rights

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Blank endorsement, Business, MER, mortgage, Mortgage loan, Negotiable instrument, Real estate, Securitization

How Homeowners Can Effectively Determine Various Forms of Fraud in their Mortgage Loan With Defective mortgage documents.

A) Why Titles of Home Foreclosure Sale To Buyers Are Often Defective.

How Can We Deal With the Problem?

Securitization Flow Chart and Structure

B) Transfer of Promissory Note

– – Negotiable instrument under Article 3 of the UCC

– Transferred by:

• Endorsement

• Delivery of the instrument

• Acceptance of delivery

• Negotiation = Endorsement + Delivery + Acceptance

C) Transfer of Mortgage

– – Mortgage is a real estate instrument

Subject to the statute of frauds

Must comply local real estate law

– Transferred by:

• Written assignment

• Delivery of the instrument

• Acceptance of delivery

• Recording of transferred mortgage

• “Assignment” = Written Transfer/Assignment + Delivery + Acceptance + Recording

D) Notarization Requirements

• Most state laws require “strict” compliance

• Signer must admit, by oath or affirmation, in the PRESENCE of notary to having voluntarily signed the document, and signer’s capacity

• Signer must make the OATH or AFFIRMATION before signing

• Must identify the signer by a federal or state issued photographic ID

• Penalties include civil and criminal

• Felony in most states to take a false acknowledgement

• Document is invalid with improper notarization

E) The Alphabet Problem With Securitized Transfers

• The loan closed in the name of the Broker/Lender

• Broker is funded by Warehouse Line of Credit
Warehouse Lender then sells paper to a Special Investment Vehicle (SIV)

• SIV then sells paper the Sponsor/Depositor

• Sponsor or Depositor then transfers to Trust

F) How Many Transfers

• A-Transfer: Consumer to Broker

• B-Transfer: Broker to Warehouse Lender

• C-Transfer: Warehouse Lender to SIV

• D-Transfer: SIV to the Depositor or Sponsor

• E-Transfer: Depositor or Sponsor to Trust

G) How Many Documents

• Four assignments and deliveries and acceptances of the Mortgage

• Four endorsements and deliveries of the Note

• Eight separate notarizations

• Eight UCC-1 financing statements

• Four recordings

• Four filing and transfer fees

H) The Allonge

• A paper attached to a negotiable note

• Purpose is to provide written endorsement

• Only used when back of negotiable instrument is FULL (no room)

• No need for notarization

• Simple signature and title sufficient,as with endorsement on note

I) Similar ABCDE Problem With the Mortgage Instrument

• A. Consumer must sign and deliver to Broker

• B. Broker must assign and deliver to the Warehouse Lender

• C. Warehouse Lender must assign and deliver to the SIV

• D. SIV must assign and deliver to the Depositor

• E. Depositor must assign and deliver to the Trust

• And all these assignments must be recorded!

J) Who Holds the Bearer Paper and Mortgages for the Trust?

• Normally a third-party bank that provides document custody services to the trust

• Provides trailing document filings

• Provides custody chambers for all members

• Executes assignments for members

• Execute endorsements for members

• Executes deliveries and acceptances

• Provide on-line document status certifications

K) What Does Trust Really Hold?

• Electronic data with loan numbers & collateral descriptions

• Electronic image of the original deed of trust

• Electronic image of the original mortgage note

• Rights in the documents by way of UCC-1 financing statements and the pooling & servicing agreements

L) The 3d-PartyOutsource Providers

• Fidelity National Default Services

• First American National Default Services

• National Default Exchange, LP(Barrett Burke Owned Entity

• Promiss Default Solutions(McCalla Raymer Owned Entity)

• National Trustee Services(Morris Schneider Owned Entity)

• LOGS Financial Services(Gerald Shapiro Owned Entity)

M) What Do the Outsource Providers Do for the Servicers?

• Create Assignments

• Create Allonges

• Create Endorsements

• Sign documents as if they were the VP or Secretary of a Bank, SIV, Depositor, Sponsor or the Trust

• Notarize these documents

• Create Lost Note Affidavits

• Create Lost Assignment Affidavits

• Create Lost Allonge Affidavits

• Draft court pleadings and notices

• Draft default correspondence, reports, etc.

N) How to Identify a Defective Endorsement or Allonge

• Allonge can never be used to transfer a mortgage

• Allonge can never be used if there is enough room on the original mortgage note for the written endorsement

• Note is endorsed and not assigned

• Date of the endorsement is before or after the date of the registration of trust

• And much more …

O) Defective Endorsements

• Notary is from Dakota County, Minnesota

• Notary is from Hennepin County, Minnesota

• Notary is from Jacksonville, Florida

• Signor’s company has no offices in notary’s state

• Date of endorsement and date of notarization are different

• Signor’s name is stamped –not written in script

• Signor claims to have signing authority but no authority attached

P) What About the Mortgages?

• Assignments and delivery follow same model as with the notes

• MERS is used to avoid registration of each assignment with local register of deeds

• MERS claims no beneficial interest in the note

• MERS claims no ownership rights in note or mortgage

• MERS claims it is nominee for true owner

• MERS delegates signing authority to all MERS members to sign documents as officers of MERS

• MERS does not supervise any of it’s designated signors

• MERS is not registered as a foreign corporation in most states

Q) How Does Trust Establish Lawful Ownership?

• Unbroken chain of note endorsements and acceptances from A to B, B to C, C to D, and D to E

• Unbroken chain of mortgage assignments and deliveries and acceptances from A to B, B to C, C to D, and D to E

• Unbroken chain of UCC-1 financing filings throughout the chain

• Unbroken chain of recorded mortgage assignments

R) But What Is Filed In a Typical Foreclosure?

• Complaint alleging that the borrower (A) executed a note and mortgage in favor of the plaintiff (E)

• Note and mortgage from borrower (A) to originating lender (B) attached

• Sometimes a purported mortgage assignment from (B) to (E) attached, also purporting to assign the note

• This assignment always defective, often not recorded

S) The Paper Trail and The Lack of Truth in Labeling

• Electronic data

• Fake dates & forged signatures

• False notarization

• False assignments

• Fake endorsements

• Fraudulent lost note affidavits

• Recreated documents & records

• Allonges and more

T) Is the Trust Really Secured?

• MAYBE –But it would be very difficult for any securitized trust to produce a valid set of original and unbroken assignments and endorsements

• Even if the trust produces ALLof the required documents, there is still the issue of the legality of the role of MERS on all required documents for recording

To Learn How You Can Effectively Use Some of These As Solid Arguments to Effectively Defend and Save Your Home Visit: http://www.fightforeclosure.net

How Pro Se Foreclosure Defense Litigants Can Effectively Defend & Save Their Homes

25 Thursday Jul 2013

Posted by BNG in Affirmative Defenses, Appeal, Case Laws, Case Study, Discovery Strategies, Federal Court, Foreclosure Defense, Judicial States, Legal Research, Litigation Strategies, MERS, Mortgage Laws, Non-Judicial States, Note - Deed of Trust - Mortgage, Pleadings, Pro Se Litigation, State Court, Trial Strategies, Your Legal Rights

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Courts of New York, HSBC Bank USA, Law, Mortgage loan, New York, Plaintiff, Pro se legal representation in the United States, standing, United States

I General Answer Issues

• Be sure to raise lack of standing as a defense in the homeowner’s answer if the plaintiff’s ownership of the note and mortgage is questionable. Standing/capacity to sue may be waived if not raised in the answer.

• Late Answers:

• Pro se homeowners often do not file answers and do not seek attorneys until they receive notice of the settlement conference. In these circumstances, homeowner attorneys should serve and file a late answer. If the plaintiff rejects the answer, file a motion to compel acceptance of the late answer.

• A court may permit a defendant to file a late answer “upon a showing of reasonable excuse for delay or default.” CPLR § 3012(d); Cirillo v.Macy’s, Inc., 61 A.D.3d 538, 540, 877 N.Y.S.2d 281, 283 (1st Dep’t 2009).

• Mortgagor’s belief that foreclosure action was stayed during ongoing settlement negotiations with mortgagee was reasonable excuse for filing late answer. HSBC Bank USA, N.A. v. Cayo, 2011, 34 Misc.3d 850, 934 N.Y.S.2d 792.

• Courts have routinely permitted service of a late answer where the delay was not willful, the defendant has meritorious defenses, and service of the answer does not unfairly prejudice the plaintiff. See, e.g., Nickell v. Pathmark Stores, Inc., 44 A.D.3d 631, 632, 843 N.Y.S.2d 177, 178 (2d Dep’t 2007); Jolkovsky v. Legeman, 32 A.D.3d 418, 419, 819 N.Y.S.2d 561, 562 (2d Dep’t 2006); Watson v. Pollacchi, 32 A.D.3d 565, 565-66, 819 N.Y.S.2d 612, 613 (3d Dep’t 2006); Nason v. Fisher, 309 A.D.2d 526, 526, 765 N.Y.S.2d 32, 33 (1st Dep’t 2003)

• Allowance of a late answer is consistent with New York’s strong public policy in favor of a determination of controversies on the merits. See, e.g., Jones v. 414 Equities LLC, 57 A.D.3d 65, 81, 866 N.Y.S.2d 165, 178 (1st Dep’t 2008);Hosten v. Oladapo, 52 A.D.3d 658, 658-59, 858 N.Y.S.2d 915, 916 (2d Dep’t 2008); Kaiser v. Delaney, 255 A.D.2d 362, 362, 679N.Y.S.2d 686, 687 (2d Dep’t 1998).

Where the defendant has answered but not asserted a standing defense, a motion for leave to amend to assert a standing defense should be granted if such amendment causes no prejudice to plaintiff. U.S. Bank Natl. Assn. v. Sharif, 89 A.D.3d 723, 933 N.Y.S.2d 293, 2011 N.Y. Slip Op. 07835 (2d Dep’t Nov. 1, 2011) (motions for leave to amend should be freely granted absent prejudice or surprise from the delay in seeking leave; reversing denial of leave and holding that trial court should have dismissed for lack of standing upon plaintiff’s failure to submit either written assignment of note or evidence of physical delivery).

• New York law permits reciprocal attorney’s fees for homeowner’s attorney in defending against foreclosure on residential mortgages: RPL § 282.

II. Affirmative Defenses and Counter Claims

A. Standing and Capacity To Sue

• Many documents needed to establish standing were “robo-signed”

• Sloppiness in assigning mortgages to mortgage securitization trusts often makes it difficult for plaintiff trusts (or servicers) to establish standing.

1. The Difference Between Standing and Capacity to Sue

a. Standing Is Jurisdictional

• U.S. Constitution Article III – Case and Controversy Requirement

• Siegel on New York Practice: “It is the law’s policy to allow only an aggrieved person to bring a lawsuit. One not affected by anything a would-be defendant has done or threatens to do ordinarily has no business suing, and a suit of that kind can be dismissed at the threshold for want of jurisdiction without reaching the merits. When one without the requisite grievance does bring suit, and it’s dismissed, the plaintiff is described as lacking “standing to sue” and the dismissal as one for lack of subject matter jurisdiction.”

• “Standing to sue is critical to the proper functioning of the judicial system. It is a threshold issue. If standing is denied, the pathway to the courthouse is blocked. The plaintiff who has standing, however, may cross the threshold and seek judicial redress….The rules governing standing help courts separate the tangible from the abstract or speculative injury, and the genuinely aggrieved from the judicial dilettante or amorphous claimant.” Saratoga County Chamber of Commerce, Inc. v. Pataki, 100 N.Y. 801, 766 N.Y.S.2d 654, 798 N.E.2d 1047 (2003)

• New York courts have treated standing as a common law concept, in contrast to federal approach, where it rests on constitutional and prudential grounds. New York case law tends to blend standing with capacity to sue.

b. Capacity to Sue v. Standing

• Capacity to sue goes to the litigant’s status, i.e., its power to appear and bring its grievance before the court. For example, a foreign corporation or LLC may not bring an action unless it is registered with the Secretary of State; minors lack legal capacity, etc.

• Standing requires an inquiry into whether the litigant has an interest in the claim at issue that the law will recognize as a sufficient predicate for determining the issue at the litigant’s request. Is the relief sought in the case properly sought by this plaintiff?

2. Standing in a Foreclosure Case

• Foreclosing plaintiff must own the note and the mortgage at the inception of the action. Deutsche Bank National Trust Co. v. Barnett, 88, A.D. 3d 636, 931 N.Y.S. 2d 630, 2011 WL 4600619 (2d Dep’t Oct. 4, 2011); Kluge v. Fugazy ,145 A.D. 2d 537, 536 N.Y. S. 2d 92 (2d Dep’t 1988)

• Note: represents contractual debt obligation Mortgage: represents collateral security for debt

• Assignment of the mortgage without assignment of the debt, i.e. the note, is a nullity.

• Assignment must be complete before foreclosure is commenced

• Assignment can be by written assignment or by physical delivery of note and mortgage.

• An indorsed note (to the plaintiff or in blank) is not sufficient: the plaintiff must prove physical delivery before the foreclosure was commenced.

• If a written assignment involved and has a date, the execution date generally controls.

• Back dated assignment are ineffective absent proof of prior physical delivery. Wells Fargo v. Marchione, 69 A.D. 3d 204, 887 N.Y. S. 2d 615 (2d Dep’t 2009)

3. Common Assignment Red Flags in Foreclosure Cases

Assignments that jump over links in the chain of title, including timing.

• Suspicious or contradictory endorsements and allonges.

• Assignments from MERS as nominee

• Robo-signing of assignment documents

• Mortgage-Backed Securities Investment Vehicles: Pooling and Servicing Agreements and non-compliance with trust closing dates and other terms

4. MERS and Standing

• Second Department: assignment from MERS when MERS is designated merely as nominee of lender, and never owned note, is ineffective to confer standing on its assignee.

Bank of New York v. Silverberg, 86 A.D. 3d 274, 926 N.Y.S. 2d 532 (2d Dep’t 2011). See also In re Lippold, 2011 WL 3890540 (SDNY Bkrtcy 2011)(MERS, as assignor, could not legally assign the note as prior holder of note and mortgage only conferred legal rights with respect to the mortgage); In re Agard, 444 B.R. 231 (SDNY Bkrtcy 2011) (mortgage naming MERS as nominee did not authorize it to assign)

• Issues concerning who executes assignments on behalf of MERS (plaintiff’s counsel, robo-signing servicer employees?)

5. Waiver of Standing Defenses

• CPLR 3211(e) only provides that capacity to sue is waived; no mention of standing.

• Wells Fargo Bank v. Mastropaolo, 42 A.D. 3d 239, 837 N.Y.S. 2d 247 (2d Dep’t 2007); HSBC v. Dammond, 59 A.D. 3d 679, 875 N.Y.S. 2d 490, 875 N.Y. S. 2d 490, (2d Dep’t 2009); Countrywide v. Delphonse, 64 A.D. 3d 624, 883 N.Y. S. 2d 135 (2d Dep’t 2009).

• Cf. Security Pacific Nat’l Bank v. Evans, 31 A.D. 2d 278, 820 N.Y.S. 2d 2 (1stDep’t 2006) (plaintiff lender commenced action after merging with anotherbank; lack of legal capacity waived; not an issue of standing)

• Some trial courts have held there is no waiver of standing defense where plaintiff had not appeared or answered altogether. Deutsche Bank v. McRae, 894 N.Y. S. 2d 720 (Allegheny Cty. 2010); Citigroup v. Bowling, 25 Misc. 3d 1244A, 906 N.Y. S. 2d 778 (Kings Cty. 2009).

6.Leave to Amend Answer to Assert Standing Defense

U. S. Bank, Natl. Assn. v. Sharif, 89 A.D. 3d 723,933 N.Y.S. 2d 293, 2011 NY Slip Op 07835 (2d Dep’t Nov. 1, 2011) (reversing denial of leave to amend to assert standing and denial of motion to dismiss for lack of standing where plaintiff demonstrated no prejudice and failed to establish its standing to foreclose). Aurora v. Thomas, 70 A.D. 3d 986, 897 N.Y.S.2d 140 (2d Dep’t 2010) (affirming grant of motion for leave to amend to assert standing and capacity to sue, finding no waiver where documents relied upon were revealed during discovery); HSBC v. Enobakhare, 2010 Slip Op 31925 (U) (Richmond Cty. 2010) (granting motion for leave to amend answer; amended answer could assert defenses that were arguably waived by failure to assert originally)

• Deutsche Bank v. Ramotar, 30 Misc. 3d 1208(A), 2011 WL 66041 (Kings Cty. 2011) (denying summary judgment and order of reference, granting defendant who had previously answered pro se leave to file amended answer asserting standing and robo-signing defenses)

7. Standing as a Meritorious Defense to Vacate Default Judgments/Plaintiff’s Motions for Default/Summary Judgment/Order of Reference and Absence of Standing

• Prima facie case in a foreclosure case requires showing of ownership of note and mortgage. Campaign v. Barba, 23 A.D. 3d 327, 805 N.Y.S. 86 ( 2d Dep’t 2005)

• Distinction between moving to dismiss for lack of standing when defense has arguably been waived and opposition to plaintiff’s motion for summary judgment and order of reference for failure to establish ownership of note (prima facie case)

8. Sua Sponte Dismissals on Standing Grounds/Robo-signing Concerns

• Financial Freedom v. Slinkosky, 28 Misc. 3d 1209(a) (Suffolk Cty. 2010) (denying summary judgment where plaintiff failed to submit note and mortgage and failed to demonstrate standing) HSBC Bank USA, N.A. v Taher, NY Slip Op 51208(U) (Sup. Ct. Kings Cty., July 1, 2011) (denying order of reference, making detailed analysis of robo-signed assignments and affidavits of merit and amounts due, questioning employment histories of individuals who signed papers on behalf of different entities, determining that plaintiff lacked standing to foreclose because, among other reasons, assignment of mortgage from MERS as nominee, which never owned note, was ineffective, and dismissing with prejudice. In light of frivolous motion for order of reference by HSBC and its counsel, court scheduled hearing on sanctions and ordered chief executive officer of HSBC to personally appear at hearing)

9. Standing as Meritorious Defense (for leave to file untimely answer or to vacate default)

• Deutsche Bank National Trust Co. v. Ibaiyo, 20910-08 (Queens Ct. 2009) (meritorious defense criteria for CPLR § 3012 motion to extend defendant’s time to answer)

• Maspeth Federal Av. & Loan Ass’n v. McGown, 77 A.D. 3d 890, 909 N.Y. S. 2d 642 (2d Dep’t 2010) (trial court has considerable discretion on applications to vacate default and extend time to answer when determining existence of meritorious defense and reasonable excuse for default)

10. True Capacity to Sue Issues

• BCL §1372 (prohibits lawsuits by foreign corporations not authorized to do business in NY)

• Exception for foreign banking corporations via BCL § 103(a) and Banking Law § 200(4).

• Sutton Funding LLC v. Parris, 24 Misc. 3d 889, 878 N.Y.S.2d 610 (Kings Cty. 2009) (dismissing foreclosure where plaintiff was not a foreign bank and was not authorized to do business in NY)

B. Federal Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692-1692p

1. Scope of FDCPA Coverage

a. Who is covered

• Applies to debt collectors. § 1692a(6)

• Debt collector is any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts

• For §1692f(6) purposes it also includes any business the principal purpose of which is the enforcement of security interests.

• Or, any person who regularly collects, directly or indirectly, debts owed or due or asserted to be owed or due another.

• Includes debt buyers

• Includes attorneys who regularly collect consumer debts.

• There used to be an exemption for attorneys collecting on behalf of and in the name of a client. In 1986, Congress repealed this exemption.

b. Who is not covered

• Original creditors. § 1692a(6)(F)(ii)

• It does include any creditor who, in the process of collecting his own debts, uses any name other than his own which would indicate that a third person is collecting or attempting to collect such debts. § 1692a(6)

• Creditors employees or agents collecting in the name of the creditor. § §692a(6)(A)

• State and federal officials performing their duties, such as the IRS or U.S. Dept. of Education. § 1692a(6)(C)

• Persons collecting debts not in default, such as some servicers. §1692a(6)(F)(iii)

• Process servers. §1692a(6)(D)

• At least one court has held that they are covered if they are engaging in sewer service Mel Harris v. Sykes, 757 F.Supp.2d 413 (2010)

c. What transactions are covered Consumer debts

• Consumer is defined in § 1692a(3) as “any natural person obligated or allegedly obligated to pay any debt”

• Does not apply to artificial entities, such as corporations Debts are defined in § 1692a(5) as any obligation of a consumer to pay money

• underlying transaction must be for money, property, insurance, or services

• must be primarily for personal, family or household purposes

• no business debts or fines Communications – § 1692a(2)

• Means the conveying of information regarding a debt directly or indirectly to any person through any medium

• Also applies to statements and activities during the course of litigation. Heintz v. Jenkins , 514 U.S. 291 (1995)

• Recent amendments to FDCPA clarify that a legal pleading

cannot be considered an “initial communication” under FDCPA.

• Note that this is a narrow amendment; other provisions of FDCPA still apply.

2. Substantive Consumer Protections

• Cease communications. § 1692c

• Dispute/verification. § 1692g

• Notice within 5 days of initial communication

• Right to dispute within 30 days of receiving notice

• Once debt collector receives dispute in writing, must stop all debt collection activity (including filing a lawsuit) until it provides “verification” of the debt.

• NOTE: Local NYC law expands these dispute rights. Under local law, consumers can request verification at any time. NYC Admin Code § 20-493.2.

• Verification must include (1) copy of the contract or other agreement creating the obligation to pay (2) copy of final account statement (3) an accounting itemizing the total amount do, specifying principal, interest, and other charges.

For each additional charge, the debt collection must state the date and basis for the charge. See § 2-190 of the Rules of the City of New York.

3. Prohibited Activities

• Communications. §§1692b & 1692c

• Contacting consumer after consumer sends cease communication letter

• Contacting consumer who is represented by counsel

• Contacting third parties about a consumer’s debt

• Contacting consumer at work if debt collector has reason to know that consumer’s employer prohibits such communication

• Common scenario: Debt collector can’t reach consumer, so calls consumer’s neighbor/family member/employer and leaves telephone number and message for the consumer to call back about an important matter. This is a violation.

• Harassment or Abuse. § 1692d

• Debt collector may not engage in conduct the natural consequence of which is to harass, oppress, or abuse any person in connection with collection of debt

• Includes: threats of violence, use of profanity, repeated telephone calls for purpose of harassment, calling without disclosure of identity (e.g. threats to repossess property)

• False or Misleading Representations. § 1692e

• False representation of character, amount, or legal status of any debt (e.g., suing for more interest and fees than is actually owed)

• Threat to take any action that cannot legally be taken or is not intended to be taken

• Implying that consumer could be arrested or children taken away for nonpayment of debt

• Pretending to be attorney, marshal

• Making false or inaccurate reports to credit reporting agencies

• Unfair Practices. § 1692f

• Using unfair or unconscionable means to collect a debt

• Collection of any amount (including interest and fees) that is not actually owed

• Threatening to take or repossess property (a) without the right; (b) without the intent; (c) if property is exempt

4. FDCPA Litigation and Remedies

a. Statute of limitations

• one year from the date on which the violation occurs – § 1692k(d)

• No continuing violations doctrine

b. Jurisdiction

• May bring in either state or federal court

• May also bring as a counterclaim in a debt collection suit

c. Construction

• Strict liability statute – proof of the debt collector’s intent is not required

• intent is a factor that can be used when calculating damages

• Courts apply a “least sophisticated consumer” standard to analyze violations

d. Remedies

• Up to $1000 statutory damages

• A majority of courts hold that capped at $1,000 per action no matter how many violations are joined in the lawsuit

• Per Plaintiff

• Sometimes per Defendant, depending on the violation

• Factors used by courts in determining statutory awards:

• Intent to commit the violation or evade the protections

• Repetition of the violations

• Timely correction of the violations

• Multiple consumers affected by the violations

• Prior violations by the collector for similar acts

• Actual damages

• Attorney’s fees

• Declaratory relief

• No Injunctive relief

C. NYS Banking Law Defenses

1. Banking Law § 6-l

• Applies to loans made after April 1, 2003.

• Covers “high – cost home loans”: a first lien residential mortgage loan, not exceeding conforming loan size for a comparable dwelling as established by the Federal National Mortgage Association in which (1) the APR exceeds eight percentage points over the yield on Treasury securities having comparable periods of maturity; or (2) total points and fees exceed 5% of the total loan amount, excluding certain bona fide discount points if total loan is $50,000 or more.

• Prohibits, inter alia, (1) lending without regard to a borrower’s ability to repay; (2) points and fees in excess of 3% of the loan; (3) loan flipping; (4) kickbacks to mortgage brokers; (5) points and fees when lender refinances its own high-cost loan; (6) balloon payments, negative amortization, and default interest rates.

• Provides private right of action with 6-year statute of limitations (from origination); actual and statutory damages; attorney fees; possible rescission of the loan.

• Intentional violation may result in voiding of the loan.

2. Banking Law § 6-m

• Covers “sub-prime home loan”: a loan where the fully indexed APR for the first-lien loan exceeds by more than 1.75, or for a subordinate loan by more than 3.75, the average commitment rate for loans in the northeast region with a comparable duration as published in the Freddie Mac Primary Mortgage Market Survey (PMMS) in the week prior to the week in which the lender received a completed loan application.

• Lenders must take reasonable steps to verify that the borrower has the ability to repay the loan, including taxes and insurance.

• Prohibitions similar to those in Banking Law §6-l.

• Lenders must disclose charges for taxes and insurance and must escrow such payments after July 1, 2010.

If you are ready to take the battle to these interlopers, in order to defend and save the home that is rightfully yours, visit http://www.fightforeclosure.net

How Pro Se Litigants Can Effectively Conduct Discovery for Their Court Cases

16 Tuesday Jul 2013

Posted by BNG in Discovery Strategies, Fed, Federal Court, Foreclosure Defense, Judicial States, Litigation Strategies, Non-Judicial States, Pro Se Litigation, State Court, Trial Strategies

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Deposition (law), Discovery, Expert witness, Interrogatories, Law, Lawsuit, Legal case, Request for admissions

Discovery is the pre-trial phase in a court case during which each party can use certain methods to obtain information and facts and gather evidence about the case in preparation for trial. It is the principal fact-finding method in the litigation process.

Almost all trial courts allow a wide scope for discovery, the theory being that all parties should go to trial with as much knowledge as possible, and that the parties should not be able to keep secrets from each other. This broad right can involve the discovery of any material relevant to the case excepting privileged information that is privileged or information that is the work product of the lawyers for the other side.

This is different from what you’ve seen on television and in the movies where there is a surprise witness or a missing document is found. The goal of discovery is to avoid surprises and for all parties to go to trial with as much information as possible. Not surprisingly, many cases will settle during the discovery phase as a result of what is discovered and what would be unwise to disclose in discovery.

In practice, the majority of civil cases settle after or during discovery. After discovery, both sides usually are in agreement about the strength and weaknesses of their cases, which may lead to a settlement that eliminates the expense and risks of a trial. The use of discovery is sometimes criticized as favoring the wealthier side as one tactic is to make requests of information that are expensive and time-consuming for the other side to fulfill.

Types of Discovery
The most common types of discovery include:

Required Disclosures. Parties are required to disclose certain information regarding four kinds of core information without a discovery request that concerns witnesses, documents, damages, and insurance. Parties must also disclose information about any expert witnesses who may be used at trial to present evidence. Any report written by an expert retained to give testimony must also be disclosed. Before trial, the parties must disclose witnesses who will be called at trial and those who may be called at trial including those witnesses who will be presented through depositions. In addition, the parties must disclose a list of exhibits that will be presented at trial and exhibits that may be presented at trial.
Depositions. A device by which one party asks oral questions of the other party or of a witness for the other party. The deposition is taken under oath outside of the courtroom, usually in one of the attorney’s offices. The deposition is transcribed by a court reporter and a copy of the transcript is provided to both parties. The transcript of a deposition may be used as evidence at trial.
Written interrogatories. A set of written questions about the case submitted by one party to the other party, witness, or other person having information of interest which must be answered under oath, and the answers to which must be provided to the requesting party within a set period of time.
Production of documents and tangible things. A written request asking the other party to produce specified documents or things relevant to the case. An early request to view documents and other evidence allow for a viewing of evidence that might deteriorate over time. It will also prevent many instances of the disposing of such evidence.
Physical and mental examinations. A written request submitted to the other party requesting that a physical and/or mental examination be made of a party.
Requests for admission. Written statements of facts concerning the case that are submitted to the other party that the party is required to admit or deny. Statements that are admitted will be treated by the court as having been established and need not be proven at trial.

All discovery requests must be reasonably complied with, answered, or objected to in the proper amount of time. If discovery requests are not answered or objected to, and sometimes if they are improperly answered or an improper objection is made, the side requesting the discovery may ask the court to compel proper responses, including the production of the requested discovery. The court may assess sanctions against a party not responding properly to discovery requests.

Conducting Discovery Once an answer to a lawsuit is filed, the time for conducting discovery begins. The timing and methods for conducting discovery will vary from state to state and from court to court. There are substantial and numerous rules governing discovery in each case. You should check your state rules and court rules for conducting discovery. Although there is a broad scope of what may be requested in discovery, there are strict deadlines for requesting discovery and responding to discovery requests. It is very important to be aware of and follow the deadlines because of the potentially serious consequences for non-compliance.

Discovery is conducted by sending written requests in a proscribed form to the opposing party specifically listing the type of discovery sought, the manner in which it will be obtained, and the time for complying with the request. Check your state and local rules for the required form of these requests.

Each state’s rules will include versions of the following rules:

Written Interrogatories
Demands for Inspection
Requests for Admission
Propounding Party (party making the discovery request)
- Format of the discovery request;
- On whom the request should be served;
- Which party retains custody of the original discovery request; and
- Filing requirement (most discovery is not required to be filed with the court unless pertinent to a motion heard before the court).

Responding Party
- Format of written response;
- Effect of failure to respond in timely fashion;
- Objections to the discovery request;
- Verification (responding party must sign the responses under oath);
- On whom the responses should be served; and
- Filing requirement (most discovery is not required to be filed with the court unless pertinent to a motion heard before the court).
Each state will have its own rules as to when a plaintiff and when a defendant may serve notice of taking a deposition that is initiated by serving notice on the other party in the required format. The notice will indicate whose deposition will be taken, when it will be taken, and where it will be taken. There will also be rules concerning compelling a person or party to be deposed and steps to take to compel attendance at a deposition.

Each state will have its own rules as to the production of documents and tangible things. The party requesting the production must serve notice of the request in the required format. The notice will indicate which documents and things are to be produced, and when and where they are to be produced. There will also be rules for steps to take to compel production.

It is a general rule that all parties involved in civil litigation, whether represented by an attorney or not, should be civil to each other. One of the things encompassed within this requirement for civility is the accommodation of each other’s schedules within reason and is particularly important with discovery because of the tremendous amount of information being obtained and exchanged. If either party reasonably requests to change a time for a deposition or the time for exchange of documents, the other party should be accommodating. If the other party seems to make a practice of requesting changes, not complying with discovery requests, or only partially complying, it might be time to go to court and request sanctions.
For More Information How You Can Effectively Use Correct Discovery Procedures To Your Advantage in Winning Your Wrongful Foreclosure Litigation Visit http://www.fightforeclosure.net

How Backdated Mortgage Assignment Came Back To Haunt Foreclosure Lender

08 Monday Jul 2013

Posted by BNG in Appeal, Case Laws, Case Study, Foreclosure Defense, Judicial States, Legal Research, MERS, Non-Judicial States

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Foreclosure, Ibanez, Juarez, Loan, Massachusetts, Mortgage loan, U.S. Bancorp, US Bank

(1st Cir. Feb. 12, 2013)

U.S. First Circuit Court of Appeals Reinstates Borrower’s Wrongful Foreclosure Claim. (What Makes This Case Appealing is the Ibanez Ruling As Earlier Published on this Blog).

In a rare victory for a wrongful foreclosure claimant at the U.S. Court of Appeals for the First Circuit in Boston, the court reversed a dismissal of the borrower’s claims, ruling that a back-‐dated mortgage assignment rendered a foreclosure void.

The case is Juarez v. Select Portfolio Servicing, Inc. (11-‐2431)

Backdated Mortgage Assignment Proves Fatal

Melissa Juárez purchased a home in Dorchester, Massachusetts on August 5, 2005, financing it with reputed sub-‐prime lender New Century Mortgage.
The mortgage was packaged and bundled into a real estate mortgage investment conduit (“REMIC”), a special type of trust that receives favorable tax treatment, ultimately being held by U.S. Bank, as trustee.

Juárez could not afford the payments on the mortgage and defaulted.
Foreclosure proceedings began in the summer of 2008, culminating in the sale of her home at an auction in October 22,2008.

She claims, however, that lender did not hold the note and the mortgage at the time they began the foreclosure proceedings against her, and that the foreclosure was therefore illegal under Massachusetts mortgage law.

The problem in the case centered around the mortgage assignment into U.S. Bank, as trustee — the same problem the same bank faced in the landmark U.S. Bank v. Ibanez case.
The “Corporate Assignment of Mortgage,” appears to have been back-‐dated. It was dated October 16, 2008 and recorded in the corresponding registry of deeds on October 29, 2008, after the foreclosure had been completed. However, at the top of the document, it stated: “Date of Assignment: June 13, 2007,” in an obvious attempt to date it back prior to the foreclosure.

First Circuit Reinstates Borrower’s Wrongful Foreclosure Claims

After federal judge Denise Casper dismissed Juarez’s claims entirely on a motion to dismiss, the First Circuit reinstated the majority of Juarez’s claims.

U.S. Bank claimed that the back–‐dated mortgage assignment was merely a confirmatory assignment in compliance with the Ibanez ruling, but the appeals Court concluded otherwise:

Nothing in the document indicates that it is confirmatory of an assignment executed in 2007. Nowhere does the document even mention the phrase “confirmatory assignment.” Neither does it establish that it confirms a previous assignment or, for that matter, even make any reference to a previous assignment in its body.

Lacking a valid mortgage assignment in place as of the foreclosure, U.S. Bank lacked the authority to foreclose, the court ruled, following the Ibanez decision. Ms. Juarez will now get the opportunity to litigate her claims in the lower court.

Will Lenders Learn Their Lesson?

The take–‐away from this case is that courts are finally beginning to scrutinize the problematic mortgage assignments in wrongful foreclosure cases.

This ruling may also affect how title examiners and title insurance companies analyze the risk of back titles with potential back–‐dated mortgage assignments.

If a lender records a true confirmatory assignment, it must do much better than simply state an effective date.

To learn how you can use similar invalid assignment arguments to effectively challenge and reverse your wrongful foreclosure, visit http://www.fightforeclosure.net

What California Residents Needs To Know When Faced With Foreclosure Challenges

01 Monday Jul 2013

Posted by BNG in Affirmative Defenses, Appeal, Foreclosure Defense, Judicial States, Non-Judicial States, Your Legal Rights

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Business, Deed in lieu of foreclosure, Foreclosure, Lien, Mortgage loan, Real estate, Trust deed (real estate), Trustee

What is a foreclosure?
“Foreclosure” is a common term used to describe a trustee’s sale proceeding- the correct terminology to use when describing the procedure for enforcing a lender’s rights once an obligation secured by a Deed Of Trust (or similar instrument) is in default.

What constitutes a breach or a default?
A breach exists when the borrower fails to make the payments of principal and interest when due pursuant to the note secured by deed of trust. If the balance of the note is due, the breach would be the failure to make the principal payment due plus interest, by the maturity date. Most deeds of trust have provisions for default being declared when a senior lien, insurance, taxes and assessments have not been paid, or if the property is transferred without the lenders approval.

Should I forego a foreclosure and take a deed in lieu?
Before you can even consider an alternative, the borrower must be willing to offer a deed in lieu. There are advantages to taking a deed in lieu. It could save you time and money. You should order a preliminary title report and review it carefully to determine if there are any junior liens that would survive the deed in lieu. If you are satisfied with the title report, you would take the deed in lieu subject to a title insurance policy being issued in your favor as reflected in the preliminary report. This procedure would take a lot less time than the approximate four months of foreclosure. The main disadvantages to taking a deed in lieu of foreclosure are the junior liens will not be extinguished and that the borrower may later have a change of heart and seek to have the courts set the deed in lieu aside.

Must the original trustee process a non-judicial foreclosure?
No. The beneficiary may substitute trustees anytime.

Should I notify a senior lender of the existence of my junior lien? Yes. A senior lender may have a provision in his deed of trust that provides for senior priority for additional advances to the borrower. When advances are “obligatory” to protect the lender’s security interest, they are so secured. However, if the advances are “optional” and the senior lender has knowledge of a junior lien, the advances may not be senior to the junior lien of trust. A junior lender, therefore, should give the senior lender notice of their lien. Many lenders would like to reduce their collection efforts by having the junior lienholder advance to their loan. Send the senior lender a notice which tells them that you are willing to reinstate their loan.

Must I give notice of delinquency to a junior lienholder even if I don’t file an NOD?
No. Junior lienholders may request status of senior lien by doing the following:
Under the California civil code section 2924e, a lender is required to send a notice to a junior lienholder within 15 days after the delinquency reaches four months, when certain conditions exist: the borrower must consent; the junior lienholder must submit the request in writing by certified mail along with $40; the property must contain one to four residential units; the request shall be recorded in the county in which the property is situated; and it has not been longer than five years since the original request, unless a renewal payment of $15 has been made.
Junior lenders who acquire interest by assignment, now have the same rights as the original beneficiary to require senior lenders to provide information regarding delinquencies of four months. The new junior beneficiary must pay a processing fee of $15 to the senior beneficiary. See section 2924e(b).

If my loan is in a senior position, when should I start my foreclosure?
You may have to consider various constraints before you can file a notice of default. Is this a standard Fannie Mae/Freddie Mac document? If it is, you must send the borrower a notice of intent to foreclose 30 days prior to the filing of the NOD. You may have sold the loan to some other lender; they may have certain procedures and standards that you must adhere to, such as asking their permission to foreclose after a suitable effort has been made to work with the borrower to encourage repayment. If your loan is insured, you have be required to follow certain steps in order to be allowed to file a claim with the insurer.
The most important consideration when deciding to start a foreclosure is “Am I well secured if I wait?” If there is adequate protection between the value of your loan and the value of the property, delay should cause no loss. If there is inadequate protection, then every day delayed will cost you money. Choose a trustee who will record your NOD without any unnecessary delays and will stand behind their work.

If my loan is in a junior position, when should I start my foreclosure?
If you service a loan for someone else, if it is insured, or it is a standard FNMA/FHLMC document, then you have the same constraints mentioned in the previous question. Being in junior position adds one other very important dimension for your consideration. The senior lender can foreclose you out of your security or certainly diminish your protection as their loan interest balance grows.
If the senior lender begins foreclosure, and neither you nor the borrower bring them current, the lender could very well go to sale and eliminate your security. It is much better for you to initiate foreclosure early, go to auction, acquire the property and sell it, before the senior lender can complete the foreclosure. Of course, if necessary, you may have to reinstate the first lender to allow enough time for you to complete your foreclosure.

Should I reinstate the senior loan which is in foreclosure, or bid at its sale?
Reinstating the senior loan should require considerably less cash than bidding at its sale. If the loan has matured, then you may pay off the loan prior to the sale or bid at the sale.

If the senior lender filed a notice of default several months earlier, you may be able to save time by bidding at the senior’s sale. However there are some pitfalls to this strategy. The senior may delay his foreclosure; you have no control over when they may go to sale. File your own notice of default as soon as possible so that at least you are proceeding to your own sale. If you intend to bid at the senior’s sale, come to the sale early, bring sufficient certified funds to bid the amount of the debt plus your lien. You cannot credit bid the amount owed to you under your deed of trust; your standing as a bidder is the same as any others. If you fail to arrive on time for the sale, your lien may be eliminated.

Do I need the borrower’s permission to foreclose?
No. You already have their permission; they gave it when they signed the note and deed of trust.

What documents do I need to foreclose?
You will need to provide the trustee with the note and deed of trust, any modification or extension agreements, additional notes and any assignments. If an original document is lost, it may be necessary to provide a lost instrument bond. Consult with your trustee. You also need to provide the trustee with certain essential information, such as the unpaid balance of the note, the date to which the interest is paid, the reason for the default (such as failure to make the payment which became due on a certain date), information regarding any advances you have made, the last known residence or business address of the last known owner, and the property address. If you are not using the original trustee, a substitution of trustee must be signed and notarized by the beneficiary.

Why is an accurate “last known address” of the last known owner vital?
Failure to send notice to an accurate business or residence address of the last known owners may invalidate the foreclosure. Search all your records completely and carefully. If the borrower has more than one loan with your firm, review all sets of records. If the borrowers are married and you receive word from one of them that (s)he is no longer residing at the property address and you are provided with a new address, be sure to communicate that information to the trustee as soon as possible.

How long does it take to foreclose?
If there are no delays, a foreclosure will be completed in about four months. After the recording of the NOD there is a mandatory three-month waiting period before the trustee can publish the notice of trustee’s sale. Generally the sale will take place four weeks after the pre-publication period has ended. The date of the sale is influenced by the county where the property is located, the regular schedule of sales for that county and by the frequency of publication of the newspaper in which the trustee is required to publish. The trustee must also consider the newspaper deadlines for advertising and the time-necessary for preparation of the notice of sale and its delivery to the newspaper. The California Civil Code also requires that the notice of sale be posted on the property and a public place at least 20 days prior to the sale; adequate time must be allowed for this to be completed. If the IRS has recorded a federal tax lien at least 30 days before the sale, they require notification at least 25 days before the sale. If the loan is insured by the Veterans Administration, the sale date must be set to allow time enough for them to provide bid instructions.

Who pays the foreclosure fee and costs?
If the borrower brings the loan current or pays it off, the borrower is responsible to the lender for the foreclosure fee and costs. Since the lender is obligated to pay the trustee, the lender should be sure to not overlook these foreclosure expenses. If the property is sold to an outside bidder at the foreclosure auction, the foreclosure expenses will be paid by the bidder. Only when the lender is the successful bidder at the sale will the lender not be able to look to someone else to recover the trustee’s fee and costs. Hopefully, when the property is resold, the lender can expect to recover their foreclosure expenses.

Do all trustees charge the same?
No. The California Civil Code sets the maximum fee that is deemed to be valid and lawful. A trustee need not charge that maximum amount. The quality of service and the trustee’s financial strength should be of primary concern when selecting a trustee.

What is a Declaration of Default?
This document contains the official written instruction from the beneficiary to the trustee. Most deeds of trust require the beneficiary to furnish the trustee with a Declaration of Default. It identifies the deed of trust to be foreclosed, states the breach, and directs the trustee to sell the property to satisfy the indebtedness.

What is the fastest way to record the NOD? You may send the trustee a pre-signed substitution along with the other documents, or the trustee can prepare one and return it to you for your signature. If you are to be regularly using a trustee, you might consider giving the trustee a limited power of attorney authorizing them to sign the substitution of trustee and the notice of default. Sending pre-signed substitutions or giving a limited power of attorney reduces the time between your decision to foreclose and the actual recording of the notice of default to as little as 24 to 48 hours.

What are the most common delays to the foreclosure process?

The most common delay comes from the filing of bankruptcy.
A temporary restraining order (TRO) is used to preserve the status quo pending a court hearing for a preliminary injunction.
A preliminary injunction is used to preserve the status quo pending a final determination of the action on the merits.
The beneficiary or his servicer doesn’t send the trustee the most current assignment. The trustee prepares the NOD and the substitution with the wrong beneficiary shown. Several days after the documents are recorded the title company discovers the error. The trustee now must rescind the original NOD and re-record new documents. If there is uncertainty regarding the current beneficiary, ask the trustee handling the foreclosure to check with the title company for current information.
The recording information on the deed of trust was incorrect. A copy of the deed of trust has the recording information written incorrectly or the original deed of trust was re-recorded later.
The paid-to-date was incorrect.
The unpaid balance was incorrect.
The last known address was incorrect or incomplete.
Money (partial payment) is accidentally accepted from the borrower.
Instructions are misunderstood. The beneficiary instructs the trustee to cancel the sale rather than postpone, or postpone rather than sell.
The NOD is re-recorded (start-over) because of failure to notify someone.
Correspondence requiring response is accidentally filed rather than handled.
Opening bid information given to the trustee too late to order a date down of the trustee’s sale guarantee.

What law authorizes foreclosures through a trustee’s power of sale?
There is no law that authorizes a trustee’s non-judicial foreclosure; that power is created by the borrower when he signs that deed to trust, pledging the real property as security. The words used in the deed of trust are; “with power of sale.” There are, however, many laws that regulate the trustee. See California Civil Code section 2924.

How does bankruptcy of the borrower affect the foreclosure?
The filing of a petition of bankruptcy by the borrower, by a lessee (tenant) who has a recorded lease, or by the beneficiary of a junior deed of trust, immediately stops the foreclosure, with or without notice. The trustee may not proceed in any way; he may, however, postpone an already scheduled and noticed sale. If the trustee conducts a sale after a bankruptcy is filed, but without any knowledge of it, the sale is void or voidable depending on circumstances. See section 2924j. Before the trustee can continue the foreclosure, the lender must obtain relief from the bankruptcy court. You should seek legal advice immediately from an attorney who specializes in bankruptcy. Relief must terminate the stay against the property of the debtor and the property of the estate in bankruptcy. Relief as to the debtor is not relief as to the estate. The trustee’s sale cannot be held within seven days after the expiration of the stay in bankruptcy unless the court order so provides. See Civil Code section 2924g(d). Attorneys representing lenders in bankruptcy should include as part of their relief orders a statement that a foreclosure sale may occur immediately upon entry of the bankruptcy relief order.

Could a senior lender get relief from the bankruptcy stay and go to sale while the junior lender is still stayed?
Yes. If you are a junior lienholder, notify your attorney as soon as you get word of a bankruptcy. Assist them in every way to get relief before the senior lender does.

Who is entitled to receive a copy of the Notice of Default?
Within ten business days after the NOD records, notice must be mailed by certified/registered mail to the original trustors at the address shown on the deed of trust; the current owners,if known, at their last known business or residence mailing addresses, and to those who have recorded a request for a copy of a Notice of Default. In addition to the required certified/registered mailings, simultaneous mailings must be made by regular, first class mail to the trustors and current owners. See section 2924b(B)(1).
Within one month after the notice of default is recorded, a copy of the NOD must be mailed certified/registered to those entitled to notice under the California Civil Code section 2924b(c)(1), including the current owner of record and those lienholders with a recorded interest.

Does the borrower need actual notice to have a valid foreclosure?
No. The non-judicial foreclosure sections of the California Civil Code were designed to balance the needs of the borrower and lender. The procedure is supposed to be clear and easy to follow so that there is little reason to go into court to argue issues. The notification procedure provides many opportunities for the borrower to receive notice. If they do not make the effort to keep the lender of the trustee informed, they may lose their property without notice. The trustee has no obligation to search for a lost borrower. The borrower can give constructive notice with their current address. See I.E. Assocs., v. Safeco Title Ins. Co. (1985) 39 C3d 281, 216 CR 438.

What is a Trustee’s Sale Guarantee report?
The Trustee’s Sale Guarantee (TSG) report provides the foreclosing trustee with the information necessary to process your foreclosure and guarantees the correctness of that information. It sets forth the record owners and lists all exceptions of record against the secured property. It provides the names of those who are to receive notices and the name of the newspaper in which the trustee must publish. The TSG is provided by a title company in the county where the property is located. When you receive your copy from the trustee, you should be alert to certain items:

New Owners.
Delinquent real estate taxes.
Notice of defaultrecorded by a senior deed of trust. You should contact the senior beneficiary to determine if their loan is still delinquent.
Federal (IRS) tax liens recorded.
Bankruptcy.
Lis Pendens. This provides constructive notice of pending litigation, the outcome of which will not be affected by the foreclosure.
Notice of substandard dwelling.
Any irregularities noted therein.

Who should record a request for a copy of a Notice of Default?
If you are a junior lienholder and have changed you address from that shown on the upper left hand corner of your recorded deed of trust, you should record a request for notice pursuant to Civil Code section 2924b(a) showing your current address. Failure to do this may prevent you from receiving notice of a pending foreclosure on a senior deed of trust. Additionally, if you want a copy of a Notice of Default mailed to you within ten business days of its recording, record a request.

When can I refuse reinstatement?
For NOD’s recorded prior to January 1, 1986, reinstatement is allowed by law (unless the loan has reached full maturity) during the first three months; after the first three months you can refuse reinstatement. For Nod’s recorded after January 1,1986, you may not refuse reinstatement until five business days before the date set for sale or a postponed sale; after that you may refuse reinstatement. See Civil Code section 2924c(e). The standard FNMA/FHLMC deed of trust allows reinstatement by the borrower up to five calendar days before the sale date.

Who is entitled to reinstate the loan?
The trustor and any junior lienholder of record have the right to reinstate the loan. The reinstatement amount should be enough to restore the entire loan to its original installment basis and include attorney fee and costs which were necessary to protect the security, foreclosure fee and costs, late charges, and advances. Contact the trustee for updated fees and costs before accepting reinstatement. A partial payment may not cure the default. Accepting partial payment may invalidate the foreclosure. If you believe it is in your best interest to accept partial payments, consult your attorney regarding a written agreement between you and the borrower.

What costs can be included in the reinstatement or payoff amount?
Money advanced to protect the lender’s security, other than improvement of the property, are allowable. For instance, repairing a leaking roof, that would result in damage and decrease the value of the property, would be allowable. Replacing the whole roof would not be allowable. The costs of collection letters and advice from an attorney in certain instances now appear allowable. See Buck v. Barb 147 CA 3rd 920. Additionally, attorney fees and costs incurred while defending yourself in court or seeking relief from bankruptcy are allowable. Check with your attorney before including any questionable items. Also there are regularly allowable trustee’s costs for recording, mailing, publishing, posting, trustee’s sale guarantee, and one postponement fee of $50 upon the written request of the trustor pursuant to section 2924c(c).

How long does the publication period last?
After the three month pre-publication period has ended, a notice of trustee’s sale is prepared and sent to the newspaper for publication. The first ad must run at least 20 days before the scheduled sale date. The time between the first ad and the sale date is the publication period.

Where is the Notice of Sale published and how often?
The Notice of Sale is published in an adjudicated newspaper of general circulation in the city where the property is located.If there is not a paper adjudicated to run legal notices in that city; then a newspaper in the judicial district may be used.
The Notice of Sale must publish once a week for three weeks with the first ad running no later than 20 days before the sale.

Who is entitled to receive the notice of trustee’s sale?
All parties pursuant to Civil Code section 2924b and (b3).

What should the beneficiary do during the publication period?
During this period the lender should assess their equity position in the property to determine if they should bid less than their total debt.

Am I limited to only three postponements?
The lender or the trustee is limited to three discretionary postponements, after which it is necessary to republish the Notice of Sale. The lender may agree with the borrower to any number of postponements; it is best to get this agreement in writing and signed by the borrower. The sale can be postponed any number of times “by operation of law” or one time only for bankruptcy determination. See section 2924g(c). A Notice of Sale is generally considered stale after one year. It would then be best to re-notice the trustee’s sale.

Must I bid the full indebtedness, plus advances and costs?
No. It is not required and there may be good reasons not to. For instance, it you would like to encourage outside bidders, set the opening bid low and credit bid price upward until you reach your total indebtedness. Another reason that you might want to bid less than the full amount would be to allow for a claim to an insurance company for a casualty loss against the property. If you had bid the full indebtedness, the insurance company could claim that your debt had been fully satisfied. There may also be some tax consequences to consider.

Are the trustee’s sales really held on the steps of the county courthouse?
Yes. Most trustees use the same place to conduct their sales. The most common spot is the front entrance to the county courthouse, city hall, or hall or records. The only requirement by law is that it be conducted in a public place.

Is the trustee’s sale conducted orally or by sealed bid?
The sale is conducted verbally. The trustee will essentially announce that they are offering to sell at public auction to the highest bidder all right, title and interest conveyed to and now held by the described deed of trust. The sale will be made, but without covenant or warranty, express or implied, regarding title, possession or encumbrances. After the auctioneer makes an announcement, they will ask if there are any bidders who wish to qualify. If there are, each must show the auctioneer funds in excess of the opening bid. A junior lienholder must qualify as any other bidder and cannot use their lien for bidding purposes. Nomellini Const. Co. v. Modesto Savings & Loan Assoc. (1969) 275CA2d 114,79 CR 717. The auctioneer will note the total amount of funds each bidder possesses, so that they know when a bidder is no longer qualified to enter a bid. If a bidder tries to enter a bid that exceeds their funds, the auctioneer will ask them to requalify. Each bid is an irrevocable bid and replaces the previous bid. If a bidder reneges, they may be liable to the trustee for damages and subject to criminal prosecution and penalties. The successful bidder is the one who enters the final bid that is accepted by the auctioneer. See sections 2924g and 2924h.

Must I attend the sale and enter my own bid?
No. The trustee’s auctioneer will enter your opening bid on your behalf. However, you may attend the sale and enter your own bid. If you wish to bid more than your total debt due you, it would be necessary for you to appear at the sale with certified funds to cover any bids you make over the amount of your debt.

When am I entitled to possession of the property?
The title a successful bidder receives through a trustee’s deed entitles them to immediate possession. The purchaser may allow the previous owners or tenants to stay or they may bring an unlawful detainer action (eviction) to remove them. However, a lease recorded prior to the recording date of the deed of trust entitles the lease to priority over the title received through the foreclosure. A unrecorded lease, where it was reasonable to assume that a lease existed at the same time the deed of trust was recorded, may provide the same priority as a prior recorded lease. Alternately, if the lease is unrecorded and it was not reasonable to assume that a lease existed at the time the deed of trust was recorded or if the lease was recorded subsequent to the deed of trust which has been foreclosed, the purchaser at the foreclosure sale may choose to evict the tenants or allow the tenants to stay.

Is there a redemption period after the sale?
In a non-judicial sale there is no redemption period for the previous owner or junior lienholders. The Internal Revenue Service (IRS) has a 120-day right of redemption, if it had a properly recorded notice of a federal tax lien subsequent to your deed of trust.

What liens or rights may survive the trustee’s sale?
Failure of the trustee to notify a junior lienholder of record (absent his actual knowledge of the sale) may allow the junior lien to survive. It is as yet unclear under California law whether the buyer can claim “bona fide purchase” status to defeat the junior lien’s attachment. In any event, the junior lien could sue for damages if a BFP’s interest eliminated the junior. An IRS tax lien will not be extinguished for 120 days; during that time the IRS has the right to redeem the property. The rights of a plaintiff in a legal action, who has a properly recorded lis pendens, will survive the trustee’s sale. City and county liens, easements, homeowner’s association assessments, and mechanic’s liens, where the work was begun before the foreclosing deed of trust was recorded, may survive the trustee’s sale. Leases that were recorded prior to the foreclosing deed of trust will survive. An unrecorded lease where it was reasonable to assume that a lease existed may survive. If the foreclosing lender subordinated to a subsequent deed of trust, it will survive. Any liens that were recorded prior to the foreclosing deed of trust (which has not subordinated itself to the foreclosing deed of trust) will survive.

Who gets the over bid surplus?
Any moneys that exceed the foreclosing lender’s total indebtedness, including advances and expenses, will go to junior lienholders of record in the order of priority, and finally to the previous owner of record. If the trustee has doubts about where the moneys should be paid, they should commence an action for interpleader to avoid potential liability.

What happens if I feel sorry for the sold out borrower and deed the property back to them?
If your intent is to replace your original deed of trust with a new one having the same priority…BEWARE. The extinguished junior liens will revive; your new deed of trust will be subordinate. See Jensen v. Duke (1925) 71 Cal. App. 210.

When is the trustee’s sale complete?
The sale is final upon the auctioneer saying “sold” and the sale is deemed perfected as of 8am on the day of sale provided the Trustee’s Deed Upon Sale is recorded within 15 days of the actual sale date.

To find out how you can effectively challenge and save your home when faced with foreclosure challenges visit http://www.fightforeclosure.net

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Category Archives: Judicial States

Quiet Title Action ~ What Florida Home Owners Need to Know

What Homeowners Need to Know About Judicial Foreclosure Process

1. The Foreclosure Process

2. Interested Parties

3. Judicial Foreclosure

4. Notice of Default and Acceleration

7. Response

8. Response – Answer

9. Default

10. Counterclaim

11. Discovery

13. Summary Judgment

16. Foreclosure Sale

17. Foreclosure Sale (cont.)

18. Deficiency Judgments

How Homeoweners Can Use Various Forms of Mortgage Fraud Schemes For Wrongful Foreclosure Defense

What Homeowners Need to Know About Federal Laws that Govern Mortgage Origination and Servicing

Who Has Standing To Foreclose? – A Review of Massachusettes Case & Other Jurisdictions

Understanding Mortgage Fraud ~ A Comprehensive Guide For Homeowners

How Pro Se Foreclosure Defense Litigants Can Effectively Defend & Save Their Homes

How Pro Se Litigants Can Effectively Conduct Discovery for Their Court Cases

How Backdated Mortgage Assignment Came Back To Haunt Foreclosure Lender

What California Residents Needs To Know When Faced With Foreclosure Challenges

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1. The Foreclosure Process

2. Interested Parties

3. Judicial Foreclosure

4. Notice of Default and Acceleration

7. Response

8. Response – Answer

9. Default

10. Counterclaim

11. Discovery

13. Summary Judgment

16. Foreclosure Sale

17. Foreclosure Sale (cont.)

18. Deficiency Judgments

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