Monthly Archives: February 2012

Foreclosure Audit Reveals Pervasive Fraud

Assessor-Recorder of San Francisco

The new $26 billion mortgage settlement agreement between state attorneys general and major banks will help make restitution to millions of homeowners defrauded and damaged by lenders. But justice requires more than compensating the past victims — we must protect Californians from future abuse, improve laws regulating foreclosure and ensure they are enforced.

While we all knew the problems in our housing markets were severe — just how severe had never been thoroughly quantified until my office in San Francisco released the results last week of an independent audit of nearly 400 foreclosures over the past three years.

The audit findings show that irregularities are not just frequent — they are pervasive.

Like just about everyone else involved in this issue, I knew there were widespread problems. But the independent audit commissioned by my office showed fully 84 percent of the foreclosure files contained at least one clear legal violation and more than 66 percent of the files contained multiple violations. Nearly 60 percent of documents were backdated in some fashion, which is significant in an environment in which documents are filed under penalty of perjury. As far as we know, this is the first comprehensive audit of foreclosure files.

Why does this matter so much? First of all, the widespread fraud in mortgage lending and documentation that led to the epidemic in foreclosures was abetted by lax legal and regulatory standards that failed to spot, stop and prevent abuse.

Here in California these lax standards are particularly damaging because lenders (and the subsequent mortgage holders who frequently acquire loans) do not need to seek a court order to force a foreclosure. With little direct court oversight, we must rely on the administrative procedures and state regulations to protect owners from fraud.

This matters because families facing foreclosures are entitled to know exactly who holds their loan and to see for certain that the foreclosure is justified. In one case, our audit showed a foreclosure initiated by a party that had no title to the property — and in a number of other cases, we found two competing claims to the title.

This new data matters to all of us because the wave of foreclosures that broke over California affected every single Californian, not just those losing their homes. The massive loss of housing value meant we lost billions in tax revenues needed to fund our schools, protect our communities and invest in our future. And the administrative and recovery costs alone are staggering — with some estimates showing that each foreclosure costs local cities up to $20,000 for each home.

And finally it matters because transparency matters. The state constitution created assessor-recorder offices like mine in every county because economic security and basic justice were advanced by creating clear and transparent property records.

Moving forward, it is clear that our laws and regulations need to be adapted to the new era in which mortgages are rapidly resold, split up and “securitized” to the point where it is actually hard to know who owns a home.

The attorneys general, led by our own Attorney General Kamala Harris, were the first to acknowledge that their hard-won settlement was only the first step in addressing the problem.

Criminal prosecutions are still a possibility. But legislative reforms are clearly required. As we take a look at these reforms, we now have hard data showing exactly how widespread the problem has become. This is not just some loans, or many loans. Our findings show the problem of fraud, muddled title or irregularities has spread in fact to nearly all loans.

Ohio To Use Foreclosure Settlement Funds Meant To Aid Homeowners To Demolish Homes

 By Pat Garofalo

Already, two states — Missouri and Wisconsin — have set out plans to use funds from the $26 billion foreclosure fraud settlement to balance their budgets, rather than their intended purpose of helping troubled homeowners avoid foreclosure or get out from beneath underwater mortgages. Now, Ohio is set to become the third state to divert the funds from foreclosure prevention, instead using the money to tear down old, vacant homes:

Ohio, which is receiving $97 million in its direct payment from last week’s settlement, plans to allocate $75 million to demolish vacant and dilapidated homes dragging down the values of neighboring properties, Attorney General Mike DeWine said Feb. 9.

At least 100,000 homes need to be demolished, DeWine said, and he is establishing a program to match funds that cities and land banks allocate for tearing down houses.

This is a slightly more justifiable use of the foreclosure fraud settlement money than that decided upon by Wisconsin or Missouri, as vacant homes drag down home values for entire neighborhoods, pushing homeowners further underwater, But the settlement money is supposed to aid homeowners directly, not in a roundabout way.

Bank foreclosure fraud to be rewarded at taxpayer expense

 By Andre Damon

Earlier this month, the White House announced that it reached an agreement with the five biggest US banks to settle lawsuits alleging that they forged mortgage documents in their rush to foreclose homes.

On paper, the banks agreed to pay a $5.9 billion cash payment to homeowners, and make mortgage modifications totaling $25 billion, in exchange for blanket immunity from further prosecution.

But last week, Shahien Nasiripour of the Financial Times reported that much of the $25 billion would in fact be subsidized by taxpayers through an earlier mortgage modification program.

Conveniently for the banks, the settlement comes less than one month after this program, called the Home Affordable Modification Program (HAMP), tripled its subsidy to banks for lowering the principal on mortgages.

This means that taxpayers will be funding up to 63 percent of the $25 billion in mortgage modifications promised by the five banks.

Even without the government’s subsidies, the write-downs are often in the banks’ interests, as they prevent costly home repossessions and keep borrowers paying their monthly mortgages.

Thus, far from punishing the banks for their violations of securities law, the settlement is merely another means of handing taxpayer funds to the biggest banks.

Neil Barofsky, the former Special Inspector General of the Troubled Asset Relief Program, called the revelation “scandalous” in an interview with theFinancial Times last week, saying, “It turns the notion that this is about justice and accountability on its head.”

“If the banks are doing something under this settlement, and cash flows from taxpayers to the banks, that is fundamentally an upside-down result,” he added.

Despite the flagrancy of the revelation, the news went largely unreported in the US media, with neither the New York Times nor Wall Street Journalcarrying the story.

The settlement shuts down lawsuits in 49 states against the five banks: JPMorgan Chase, Wells Fargo, Citigroup, Bank of America (which bought mortgage firm Countrywide), and Ally Financial Inc. (formerly GMAC, the financial arm of General Motors).

As a result of the deal, the banks will be immune from future prosecution and investigation into fraudulent foreclosure practices such as robo-signing, a widespread practice in which bank employees swore that mortgage documents were sound despite never having seen them.

The banks resorted to these measures because, for hundreds of thousands of homes sold during the housing bubble, they and their collaborators never bothered to obtain documentation. This was partly attributable to the fact that the borrowers did not qualify for the mortgages they were conned into taking out, and partly because banks knew that the mortgages would be sold off to other investors, leaving none of the liability with the original issuer.

Even aside from the government subsidy, a portion of the losses from the write-downs will simply be passed on to pension funds and other investors who had nothing to do with the bankers’ fraudulent actions.

“This was a relatively cheap resolution for the banks,” Scott Simon, the head of the mortgage division at PIMCO, the world’s largest bond trader, told Bloomberg News. “A lot of the principal reductions would have happened on their loans anyway, and they’re using other people’s money to pay for a ton of this. Pension funds, 401(k)s and mutual funds are going to pick up a lot of the load.”

The Home Affordable Modification Program was created in 2009 as part of the bank bailout, nominally aiming to prevent foreclosures by lowering borrowers’ monthly payments.

The White House claimed that the program would keep four million people out of foreclosure. But so far only 750,000 homeowners have received permanent mortgage modifications. Of these, only 36,000 have had their principal lowered, with the vast majority of settlements leaving the amount that borrowers actually owe unchanged.

Barofsky, acting in his official capacity as inspector general for the bank bailout, last year called HAMP a “failure” whose results have been “nothing short of abysmal.”

Since 2006, nearly seven million homes have been foreclosed, and another four million homeowners are “seriously delinquent,” according to the Mortgage Bankers Association.



End Freddie Mac Policies Against the Private Market

 By John Grant

In addition to being a bet against homeowners and the Obama administration’s litany of struggling programs designed to save homeowners and Freddie, the inverse floaters are a bet against the private housing market. The bets fail not only if loan modifications work, but also if private buyers purchase Freddie’s inventory of distressed property. And here’s where Freddie has a problem.

For more than a year, Freddie Mac has adopted numerous policies designed to prevent the private purchase of toxic assets and forced servicers to enforce these policies. Demands for unreasonable offers on short sales, delays in processing short sales, affidavits preventing resale of their properties after being rehabbed and deed restrictions on real-estate-owned properties restricting resale price are among the myriad obstacles private buyers face in trying to buy Freddie’s inventory.

Besides delaying the unwinding of the troubled entity, several of these policies may in fact be illegal. Restricting the ability of private buyers to resell their properties and attempting to dictate resale value constitute unreasonable restraint on alienation. In plain English, once Freddie sells one of its toxic assets, it has no standing in future transactions related to the property.

Freddie has attempted to justify these policies through a taxpayer-funded media campaign arguing that the act of buying, rehabbing and reselling a property constitutes a crime and is inherently an act of fraud. Both Freddie and Fannie Mae have worked with enforcement officials to convince them of this lie. To the embarrassment of these enforcement officials, Freddie left out one important detail: Every time it stopped a short sale, Freddie made money.

Congress has known of Freddie’s anti-private-market agenda and done nothing to challenge it.

Homebuyers who take the risk to buy Freddie’s toxic inventory and turn its mistakes into quality homes deserve better. These entrepreneurs are the job creators; their sweat rebuilds struggling communities, generates local and state tax revenues and increases home prices in the areas most affected by the housing crash. For their contributions, they have been criminalized by an entity that has lost and continues to lose billions of taxpayer dollars and has essentially made a bet against a housing recovery.

The inverse floater transactions are the smoking gun evidence of what is really going on inside Freddie Mac. Freddie’s policies toward purchasers of its distressed assets have been nothing more than a business decision cloaked in feigned and false concerns over fraud and taxpayer interests. Their multibillion-dollar bet makes that crystal clear.

Since placement in conservatorship, Freddie Mac has made fools of many: enforcement officials on a snipe hunt for “fraud” perpetrated by people who are simply rebuilding our communities; the Obama administration, which rolled out program after program while all along Freddie bet against those programs; Congress, which surrendered its oversight to the Federal Housing Finance Agency; and the FHFA, which believes a new program designed to sell Freddie’s assets to hedge fund managers will actually bring in more revenue than selling to local investors.

But most of all, Freddie has made fools of American homeowners.

Anyone who works in finance knows that the real test for what an investor thinks, what an investor believes, is found by watching where that investor puts its money. Freddie Mac’s policies have denied distressed homeowners the right to vacate their homes without a foreclosure. And its investment vehicle has found a way to profit from the misfortune of others.

Solutions to this are simple, but they take political courage.

Congress and the Obama administration must work together to end all the anti-private-market policies in place at Freddie. This will allow for an orderly, organic and fair unwinding of the failed institution.

To the extent that government programs are working, keep them in place to help homeowners. But let there be no doubt that recovery and rebuilding American communities means private investment and local boots on the ground. That is a prescription for recovery no one should bet against.

JPMorgan Chase Charged with Faking Documents in Bankruptcy Cases

February 8, 2012 By Keith Ecker

A federal class action lawsuit alleging massive and systemic fraud on the part of JPMorgan Chase has the potential to send the entire nation’s bankruptcy system into a tailspin, according to legal experts. The lawsuit, filed in January, claims that the banking giant knowingly produced falsified documents during consumer bankruptcy proceedings to collect on debts that it otherwise should not have been able to collect. According to the complaint, the documents often represent that JPMorgan Chase is the rightful lender, even when the actual lender is unknown.

“I can’t say who is manufacturing the documents, but the issue is it starts with the principal, which in this case is JPMorgan Chase,” says J. Arthur Roberts, the attorney who is representing the class of California debtors. “We’re planning on filing similar suits against other lenders.”

The case comes at a time when the financial industry is under exceptional scrutiny for a series of questionable and downright illegal practices. For instance, some of the country’s largest banks are working with a number of states’ attorneys general to come to a settlement over robo-signing foreclosure documents. Robo-signing occurs when the bank signs off on foreclosure documents without thoroughly reviewing the content for accuracy. There have also been recent allegations that errors in JPMorgan Chase’s computer system have resulted in wrongful foreclosures.

The allegations in the California class action are some of the most serious yet. The plaintiffs are accusing the bank of deceiving tens of thousands of consumers as well as bankruptcy judges, Chapter 7 trustees, Chapter 11 trustees, Chapter 13 trustees, the Office of the United States Trustee, creditors, creditor attorneys and debtors attorneys.
“If JPMorgan is wrongfully filing proof of claims in these bankruptcies and is receiving payments from the bankruptcy court, I don’t even know what that does to the system,” says Scott Dillon, a lawyer at Tully & Rinckey. “It is a total circumvention of the whole intent of bankruptcy. It is craziness to me.”

Falsifying Proof of Claims
At issue in the case is the filing of a document known as a proof of claim. The proof of claim is filed by creditors that are owed in a bankruptcy to prove their entitlement to payment and the debt amount.

“When a person files for bankruptcy, you have to list all of your creditors, but those creditors listed on the bankruptcy petition have the burden of proving that they are actually owed and what is actually owed to them,” Dillon says.
Evidence used to prove a claim varies, but it can include the original lending agreement as well as any assignment records. Assignment records are paperwork that serves to establish a chain-of-custody as to what entities transferred the loan and to whom.
The suit alleges that JPMorgan did not have the proper records to establish proof of claim. Instead, the bank relied on vendors to fabricate evidence that allowed the bank to falsely assert its rights to the debt. Other times, such as in bankruptcies involving Washington Mutual loans, JPMorgan simply showed that it had absorbed the lender rather than providing evidence that ownership of the loan had transferred.
“The reason they use these tactics is because they don’t want to pay the cost of doing the full legal work to prove each claim.,” Roberts says. “It’s almost arrogant.”

Lift of Stay
Besides cutting corners to reduce legal costs, the reason JPMorgan allegedly falsified proofs of claim is because it allowed the bank to file a motion to lift the bankruptcy stay. When you file for Chapter 13 bankruptcy, a stay, or hold, is put on all your outstanding debts. This means that creditors are barred from making attempts to collect on that debt.

“When someone files for bankruptcy, they may do a plan of reorganization in Chapter 13,” Dillon says. “For instance, you are six months behind on your mortgage payments. You might strike an agreement to take five years to pay off the arrears while promising to stay current on your payments going forward.”

If the consumer defaults on their payment agreement after the reorganization plan is implemented, the creditor may file a motion to lift the stay. This means that they can once again pursue the consumer for what they are owed in state court, which typically results in a foreclosure.

A Chapter 7 case is usually much simpler. The consumer files for Chapter 7 bankruptcy and, if approved, is released from his or her debt obligation. The lender can file for a lift of stay immediately after the bankruptcy filing in order to seize any property.
Roberts is seeking a reversal of the wrongful lifts of stay among the class of consumers he represents. If he wins, the ramifications for consumers could be monumental.
“In the case, the plaintiffs are asking the court to throw out every bankruptcy that could be related to JPMorgan,” Dillon says. “What’s going to happen? Will everything that occurred after the lift of stay be moot? Does that mean that some foreclosures may be reversed?”

Challenging the Banks
Although bankruptcy often leaves people feeling powerless, debtors are not helpless against giant creditors and mortgage lenders. First, consumers who are going through the bankruptcy process should seek out a knowledgeable bankruptcy attorney who will take a proactive approach with your bankruptcy case.

“In this day and age with the economy being what it is, a lot of general practitioners are trying to do bankruptcy work,” Dillon says. “But I’d recommend you hire someone whose primary focus is bankruptcy. And if you can a lawyer who also works as a bankruptcy trustee, that’s even better.”

Next, if a creditor does file a motion to lift the stay, consumers and their attorneys have 21 days to file an answer to the motion. In this answer, consumers can request documentary evidence that proves the lender has the right to file the motion. You can also file a claim objection, which forces the lending entity to prove it is the legal lender.

“Bankruptcy is really emotional because it deals with houses and families,” Dillon says. “You have a lot of tools to use in the fight, but you have to use them. If you don’t, you’ve waived your rights.”

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Robo-Mortgages Could Be Just The Beginning Of A Much Bigger Scandal In The Mortgage Industry

 Bruce Judson

Yesterday, I wrote an article titled The Proposed Robo-Mortgage Settlement Might Give Banks A Free Pass. At the time the deadline for states Attorney’s General to sign on to the settlement was today. It has now been pushed back to February 6.

 

In the article, I wrote that while the banks have insisted for the past several years that the robo-mortgage violations represented minor technical issues, which harmed no one. Recently, a far more grave explanation has emerged: The possibility that the scandal was the back-end of activities that appear to represent tax evasion, the failure to comply with basic rules in securitizing mortgages, and massive fraud on the purchasers of the securitized mortgage bonds.

Now, I have received numerous requests to clarify this extraordinary alternative explanation.

It’s complex, but here goes: First, as Yves Smith at Naked Capitalism explains, it appears the specific mortgages which were the assets comprising the securitized bonds were never actually transferred to the bonds, within the required time period (90 days under New York law).

“By way of background: remember that the big concern about the release was that it would go beyond robosigning and waive other types of liability. The ones observers were most concerned about were what we called chain of title issues, namely that the parties that had put mortgage securitizations together had failed on a widespread basis to take the steps stipulated in their own contracts to transfer the notes (and in lien theory states, to assign the lien) properly. The securitization agreements were rigid, requiring that the transfers through multiple parties be completed by a date certain, typically 90 days after the closing of the trust. Most deals elected New York law as the governing law for the trusts, and New York law allows them to operate only as stipulated. Since the notes were supposed to be transferred in by a particular date, trying to move them in later is a “void act” having no legal effect. That makes attempts to make transfers legally at this juncture a non-starter. Having realized somewhat late in the game that their failure to do what they promised could interfere with trusts’ ability to foreclose and create tons of liability, servicers and their various agents have relied on not just robosiging, but widespread document fabrication and forgeries to fix their transfer problem when judges have taken notice. Anyone who has been on this beat knows of numerous cases where foreclosure documents are challenged, say for being too late, not having the right transfers, etc, that new versions of supposedly original documents that tell the right story miraculously show up in court.”

Second, Ellen Brown, the President of The Public Banking Institute, explains the implications of this failure to abide by the 90 day deadline:

“Since 1986, mortgage-backed securities have been issued to investors through SPVs [Special Purpose Vehicles] called REMICs (Real Estate Mortgage Investment Conduits). REMICs are designed as tax shelters; but to qualify for that status, they must be “static.” Mortgages can’t be transferred in and out once the closing date has occurred. The REMIC Pooling and Servicing Agreement typically states that any transfer significantly after the closing date is invalid. Yet the newly robo-signed documents, which are required to begin foreclosure proceedings, are almost always executed long after the trust’s closing date.”

Third, as Brown also notes, the liabilities associated with a failure to transfer the documents on time came to head when:

“Fannie Mae sent out a memo telling servicers that in order to be reimbursed under HAMP–a government loan modification program designed to help at-risk homeowners meet their mortgage payments–the servicers would have to produce the paperwork showing the loan had been assigned to the trust.”

Brown believes that, as a result,

“The hasty solution was a rash of assignments signed by an army of “robosigners,” to be filed in the public records…”

This explains why, as noted by Brown above, “the newly filed robo-signed documents” are “almost always executed long after the trusts closing date.”

All of this is undoubtedly highly complex. And, I am not in a position to investigate whether it is true. However, the implications of these assertions are grave. If the mortgages were knowingly assigned to the REMICS after the closing date, then the tax benefits of the REMICS appear to be invalid. If so, these transfers (as I understand the law) represent tax evasion by the banks. As part of an ongoing scheme, they also constitute, in all likelihood, conspiracy and fraud on the bond purchasers.

With regard to the bond purchasers, as Yves Smith notes above, the failure to adequately establish the trusts created “tons of liability” for the banks to these purchasers; since the banks then effectively misrepresented the nature of the bonds they were selling.

At the moment, the important question here is not whether these allegations are true. What’s important is that their appears to be enough evidence to warrant at least a minimal investigation of these astounding assertions: The possibility that for years the banks have been knowingly misleading the public and the government on the extent to which robo-mortgage scandal activities were merely technical violations versus the back-end of potentially serious criminal activities and an attempt to evade enormous liabilities.

If we are a nation where justice is blind, should we not investigate this possibility before we give the offending financial institutions another free pass?

The essence of an effective capitalist system is rules and accountability. For markets, and our larger economy to work, important players cannot be permitted to make up their own rules. In all likelihood, a settlement next week means these serious questions will never be answered.

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NY’s Schneiderman sues banks in foreclosure effort

ALBANY, N.Y. — New York’s attorney general on Friday accused some of the nation’s largest banks of deceit and fraud in using an electronic mortgage registry that he said puts homeowners at a disadvantage in foreclosures.

Democrat Eric Schneiderman sued Bank of America, J.P. Morgan Chase and Wells Fargo over their use of the Mortgage Electronic Registration Systems Inc., or MERS, claiming the banks submitted court documents containing false and misleading information that appeared to provide the authority for foreclosures when there was none.

The lawsuit also names the registry operator, MERSCORP Inc. of Virginia.

Schneiderman claims the MERS system has eliminated homeowners’ ability to track property transfers through traditional public records. He said the electronic system now stores that data and is plagued by inaccuracies.

There was no immediate comment from the banks.

“The banks created the MERS system as an end-run around the property recording system, to facilitate the rapid securitization and sale of mortgages,” Schneiderman said Friday. “Once the mortgages went sour, these same banks brought foreclosure proceedings en masse based on deceptive and fraudulent court submissions, seeking to take homes away from people with little regard for basic legal requirements or the rule of law.”

Last month, President Barack Obama announced a new Justice Department fraud-fighting unit to bring together 55 prosecutors and federal and state investigators focusing on one of the contributing causes behind the financial crisis — the collapse of residential mortgage-backed securities. Obama named Schneiderman as co-chairman to pull together state and federal probes into the bubble that led to the market crash.

Delaware officials have said MERS has sown confusion among consumers, investors and other stakeholders in the mortgage finance system. Officials claim the company has damaged the integrity of Delaware’s land records system and lead to unlawful foreclosure practices.

MERS was set up by banks to rapidly package and sell mortgages as securities without recording each transaction in county records offices. Complaints allege among other things that homeowners have trouble responding to foreclosure actions and mortgage inaccuracies because MERS makes it difficult to find out who owns the mortgages.

Michigan AG asked not to sign on to foreclosure fraud deal with feds

 Top Network News:

Michigan AG asked not to sign on to foreclosure fraud deal with feds
By Todd Heywood
Tuesday, January 31, 2012 at 2:48 pm

Ingham County Register of Deeds Curtis Hertel, Jr., sent a letter to Michigan
Attorney General Bill Schuette on Tuesday asking him not to sign on to a
rumored foreclosure fraud deal brokered by the U.S. Department of Justice
with all 50 states and two of the nation’s largest banks.

The proposed deal has to be approved by Feb. 3, reports Bloomberg News
Service. Hertel is urging the state’s top law-enforcement officer to talk to the
Michigan people about the deal, which he says has been “shrouded in
secrecy.” Hertel says the deal is rumored to include immunity from criminal
prosecution for executives and employees of JP Morgan Chase and CitiGroup
— something he vehemently opposes.

“If a person committed this kind of widespread forgery and fraud, they
would go to jail,” Hertel told The American Independent in a phone
interview. “Therefore, we believe the banks should meet the same fates.”
In Michigan, Hertel has been a leading voice in ferreting out robo-signing
foreclosure fraud. Robo-signing is a term used to describe the mass
production of forged signatures on legal documents related to mortgage
foreclosures and other matters.

Hertel has had a close working relationship with Schuette’s office and has
referred several cases for criminal investigation. He is also suing several
banks and foreclosure firms for allegedly failing to pay millions of dollars in
property title transfer taxes. He is also suing the Mortgage Electronic
Registration System alleging the same tax dodges.

In his letter, delivered to Schuette’s office Tuesday morning, Hertel wrote
the attorney general:

I am writing to ask that you stand firm, and refuse to add Michigan to any
settlement that would give criminal immunity to the defendants. Our
ongoing investigations have demonstrated that the major banks in this
settlement, and their hired document mills, were engaged in the practice of
robo-signing. Hundreds of residents here in Ingham County, and thousands
of residents across the state, were illegally foreclosed upon because of this
practice.

These illegalities have stolen due process from our own citizens, and robbed
them of precious time that could have been used to recover and resume
their mortgages, or obtain a modification. A family who is facing a

foreclosure is already vulnerable; this practice insured that they could not
possibly reclaim their home.

The full letter is embedded below.

“Those crimes were committed in our offices and essentially destroyed our
land property records,” Hertel says of the alleged frauds. “You shouldn’t be
able to buy your way out of criminal investigations.”
The Attorney General’s office did not immediately respond to an inquiry.

AN OPEN LETTER TO BILL SCHUETTE

The Honorable Bill Schuette
Attorney General of Michigan

Mr. Schuette –

I have the utmost respect for you and your office, and I wish to commend your hard work
on the recent mortgage robo-signing crisis. The challenges we have faced in Michigan
concerning property fraud have been unlike anything we have ever seen before, and you have been actively engaged in this fight with myself and the other Michigan Registers of Deeds.

As you know, the deadline for Michigan to sign on to the 50-state mortgage fraud
settlement is February 3rd. I recognize that this is a difficult decision, and that there
are many factors to consider.

I am writing to ask that you stand firm, and refuse to add Michigan to any settlement
that would give criminal immunity to the defendants. Our ongoing investigations have
demonstrated that the major banks in this settlement, and their hired document mills,
were engaged in the practice of robo-signing. Hundreds of residents here in Ingham
County, and thousands of residents across the state, were illegally foreclosed upon
because of this practice.

These illegalities have stolen due process from our own citizens, and robbed them of
precious time that could have been used to recover and resume their mortgages, or obtain a modification. A family who is facing a foreclosure is already vulnerable; this
practice insured that they could not possibly reclaim their home.

We have even received information in recent days that shows LPS, a document mill included in the proposed settlement, specifically requested to have this criminal investigation converted to a civil lawsuit. It seems clear that they are aware of their vulnerability to these charges, and are attempting to save their company’s stock price by avoiding responsibility.

All I am asking is that we treat the banks in the same way we would treat our own
citizens. If a person in Michigan were to commit fraud and forgery, and use these
practices to take someone’s property, that person would go to jail. I respectfully
request that we leave that same possibility open for the banks and corporations that have committed those same crimes here in our state.

Sincerely,

Curtis Hertel
Ingham County Register of Deeds
 

Seven Questions Begging to Be Answered Before a Foreclosure Settlement Is Reached

 Bruce Judson

Tomorrow is the deadline for state attorneys general to sign on to a joint federal and multi-state $25 billion settlement of the robo-mortgage scandal. The settlement will involve Ally Financial Inc. (formerly GMAC), Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co., and Wells Fargo & Co. The details of the proposed settlement have not been released. However, one thing is clear: This settlement puts the nation at further risk of another systematic financial crisis and runs counter to any notion that the actions of the Obama administration will reflect the president’s newly energized populist rhetoric.

As a nation, we need to ask several questions. As a participatory democracy, we also have the right to the answers before any settlement is inked:

1. In his State of the Union Address, President Obama announced a new financial crimes taskforce, yet the administration is rushing to finalize this settlement before the taskforce begins its work. Why?

2. What is the public interest in releasing banks that have openly admitted they broke the law by signing false affidavits in tens of thousands of separate instances from liability?

3. The bank narrative has been that the robo-mortgage scandal reflected technical issues which harmed no one. Recently, new allegations have emerged that suggest these activities were actually the back-end of even greater malfeasance involving tax evasion, the failure to comply with basic rules in securitizing mortgages, and an attempt to avoid high liabilities on the part of the banks to the purchasers of the mortgage bonds.

These allegations operate as follows. First, as Yves Smith at Naked Capitalism explains, it appears the specific mortgages which were the assets comprising the securitized bonds were never actually transferred to the bonds, within the required time period (90 days under New York law).

By way of background: remember that the big concern about the release was that it would go beyond robosigning and waive other types of liability. The ones observers were most concerned about were what we called chain of title issues, namely that the parties that had put mortgage securitizations together had failed on a widespread basis to take the steps stipulated in their own contracts to transfer the notes (and in lien theory states, to assign the lien) properly.



The securitization agreements were rigid, requiring that the transfers through multiple parties be completed by a date certain, typically 90 days after the closing of the trust. Most deals elected New York law as the governing law for the trusts, and New York law allows them to operate only as stipulated. Since the notes were supposed to be transferred in by a particular date, trying to move them in later is a “void act” having no legal effect. That makes attempts to make transfers legally at this juncture a non-starter.

Having realized somewhat late in the game that their failure to do what they promised could interfere with trusts’ ability to foreclose and create tons of liability, servicers and their various agents have relied on not just robosiging, but widespread document fabrication and forgeries to fix their transfer problem when judges have taken notice. Anyone who has been on this beat knows of numerous cases where foreclosure documents are challenged, say for being too late, not having the right transfers, etc, that new versions of supposedly original documents that tell the right story miraculously show up in court.

 

Second, Ellen Brown, the President of The Public Banking Institute, explains the implications of this failure to abide by the 90 day deadline:

Since 1986, mortgage-backed securities have been issued to investors through SPVs [Special Purpose Vehicles] called REMICs (Real Estate Mortgage Investment Conduits). REMICs are designed as tax shelters; but to qualify for that status, they must be “static.” Mortgages can’t be transferred in and out once the closing date has occurred. The REMIC Pooling and Servicing Agreement typically states that any transfer significantly after the closing date is invalid. Yet the newly robo-signed documents, which are required to begin foreclosure proceedings, are almost always executed long after the trust’s closing date.

Third, as Brown also notes, the liabilities associated with a failure to transfer the documents on time came to head when:

Fannie Mae sent out a memo telling servicers that in order to be reimbursed under HAMP–a government loan modification program designed to help at-risk homeowners meet their mortgage payments–the servicers would have to produce the paperwork showing the loan had been assigned to the trust.

Brown believes that, as a result,

The hasty solution was a rash of assignments signed by an army of “robosigners,” to be filed in the public records

This explains why, as noted by Brown above, “the newly filed robo-signed documents” are “almost always executed long after the trusts closing date.”

All of this is undoubtedly highly complex. And, I am not in a position to investigate whether it is true. However, the implications of these assertions are grave. If the mortgages were knowingly assigned to the REMICS after the closing date, then the tax benefits of the REMICS appear to be invalid. If so, these transfers appear to represent tax evasion by the banks. As part of an ongoing scheme, they also constitute, in all likelihood, conspiracy and fraud on the bond purchasers.

With regard to the bond purchasers, as Yves Smith notes above, the failure to adequately establish the trusts created “tons of liability” for the banks to these purchasers; since the banks then effectively misrepresented the nature of the bonds they were selling.

At the moment, the important question here is not whether these allegations are true. What’s important is that their appears to be enough evidence to warrant at least a minimal investigation of these astounding assertions–which suggests that a large part of the robo-mortgage scandal was the back-end of potentially serious criminal activities and an attempt to evade enormous liabilities.

In all likelihood, tomorrow’s settlement means these serious questions will never be answered.

If we are a nation where justice is blind, should we not investigate the full truth before we give the offending financial institutions another free pass?

4. Why are the terms of this settlement secret? Prosecutorial negotiations are normally secret in order to prevent the disclosure of evidence that might or might not be relevant to a later trial if the negotiations collapse. This concern does not apply here.

5. This settlement has far more of the characteristics of legislation than of prosecutorial activities. The offending banks have destroyed the wealth, livelihood, and dreams of millions of Americans. Shouldn’t the public at least have two weeks to view the proposed terms of the settlement and make their views known to their state’s attorney general? And at a time when trust in government is at historic lows, isn’t secrecy for this type of activity the wrong way to build the much-needed confidence of the American people?

6. The press also has a constitutionally guaranteed role in our system of governance. In these unusual circumstances, isn’t this precisely the type of situation where the nation would benefit from careful scrutiny of the intended settlement by the press?

7. Officials have indicated that the settlement will require banks to write down the principal on homeowner loans. Unfortunately, a portion of the $25 billion allocated for this purpose is far too little, spread across a large number of homeowners, for any write-downs to make an effective difference. So either these statements are effectively meaningless, or the settlement is based on promises of future activities by banks. To date, the nation has witnessed repeated and egregiousfailures by the banks to live up to promises of future behavior, with no subsequent penalties for such failures. For any release from liabilities to be effective, shouldn’t it be contingent on the banks actually delivering on these promises?

Since the start of the economic crisis, none of the administration’s housing policies have succeeded. Each policy initiative has been fatally flawed. As a consequence, there’s no reason to believe that the policy pursued in the current settlement will aid, rather than hurt, the housing market. Meanwhile, the secrecy surrounding this policy initiative makes its potential positive contribution to the crisis even more suspect.

A month ago, I wrote that we were a nation in denial with regard to housing prices and the impact of ongoing foreclosures. Despite a favorable rent to buy ratio, ultra-low interest rates and an “all time low cost of owning a home,” housing prices are continuing downward. There is a simple explanation. With foreclosures and the so-called shadow inventory of homes, our housing supply will overshadow demand for many years to come.

With 29 percent of homeowners already underwater, this creates a massive risk for the economy. Some analysts predict that home prices will drop another 10 to 20 percent, which will put many borrowers deeply underwater. With additional price declines, underwater homeowners may start to simply walk away in droves. This will create havoc for our economy, the mortgage securities markets, and it will destroy solvency of the banks as they are forced to write-down their portfolios. The nation will be plunged into another economic crisis.

Unfortunately, all indications over the past several weeks are that this risk is continuing to grow. Indeed, the most recent reports on housing prices showed larger than expected declines in November. This reflected the third month in a row of declines. “The trend is down and there are few, if any, signs in the numbers that a turning point is close at hand,” said David M. Blitzer, chairman of the S&P’s home price index committee.

In his State of the Union speech, President Obama stressed assistance for “responsible homeowners.” Yet the current definition of a responsible homeowner is someone with a job. (Although yesterday the president did say, “We’re working to make sure people don’t lose their homes just because they lost their job.” ) So, at least for the moment, continued unemployment woes will keep this vicious cycle going.

Here’s how this relates to the proposed settlement: All of the activities covered by the settlement took place after the crisis began. They were not unforeseen effects of once-in-a-lifetime systematic risk. They reflected willful and knowing disrespect for the rule of law. To date, documents provided by the banks to the Courts, as well as accompanying testimony, demonstrate that laws were broken on a massive scale. The essence of capitalism is responsibility and accountability. The settlement ignores both. (See the letter below from a Michigan County official asking the Michigan Attorney General to “refuse” to join the settlement)

In 2010, Richard Cordray, then Ohio Attorney General, sued GMAC seeking a $25,000 fine for each false affidavit filed. Now, the open question is what is the potential liability of the banks, absent a settlement, for the robo-mortgage activities. The banks desire to settle at $25 billion is one indicator that their actual liability is probably far higher. My suspicion is that the total liability, including all punitive damages for criminal and civil malfeasance, would be sufficient to make the banks insolvent. This means that, because of the banks’ malfeasance and greed, the nation has the leverage to bargain for a massive write-down of mortgages — thereby preventing an economic catastrophe. I am not advocating this option, nor am I saying it is good policy. But I do believe it would be a scandal to limit whatever leverage we have to save our economy by once again permitting gross malfeasance.