FEDS SUE ALLIED HOME MORTGAGE FOR LENDING FRAUD

In U.S. ex rel. Belli v. Allied Home Mortgage Capital Corp, U.S. District Court, Southern District of New York, No. 11-05443, the U.S., on Tuesday November 1, 2011, sued one of the largest U.S. mortgage brokers and two of its top executives for an alleged decade-long fraud that cost the government hundreds of millions of dollars on risky home loans. The lawsuit seeks triple damages and civil fines against Allied Home Mortgage Capital Corp., which billed itself as the largest privately held U.S. mortgage broker, Jim Hodge, its founder and chief executive, and Jeanne Stell, its executive vice president and compliance director.


The lawsuit contends that Allied violated the federal False Claims Act by misleading the government into believing its loans qualified for federal insurance, when its mortgages were so poor nearly one in three went into default.  This "reckless" lending cost the Department of Housing and Urban Development (HUD) $834 million in insurance claims and forced thousands of homeowners out of their homes.


In a Manhattan news conference, U.S. Attorney Preet Bharara stated that "The losers here were American taxpayers and thousands of families who faced foreclosure" because they could not make payments on mortgages that were "doomed to fail."  The government states that nearly 32 percent of the HUD-insured mortgage loans that Allied made from 2001 to 2010 defaulted.  The default rate reached a "staggering" 55 percent in 2006 and 2007, costing the U.S. taxpayers hundreds of millions.


The U.S. government is finally, yet selectively, cracking down on some lenders and executives it believes contributed to the housing crisis by originating risky home loans that should not have been made, insured or sold.  Six months ago, the U.S. government accused Deutsche Bank AG in a similar $1 billion fraud lawsuit of misleading the government into insuring risky mortgages. 


The Feds expect to bring more lawsuits of this type and may institute a criminal case- "If and when we have sufficient evidence to bring a criminal case, we will bring it," Bharara said.  In the complaint, the government also accused Allied of making many loans through hundreds of "shadow" branches that had not received HUD approval and had poor quality control.  It is seeking triple damages on a variety of defaulted loans and a permanent ban on FHA loans made through branches that lacked HUD approval. Allied was an FHA loan correspondent until HUD shut that program last year, the complaint said.


The government also accused Hodge of having encouraged a "culture of corruption" by eliminating other management, intimidation, and silencing former employees by suing them.  Its lawsuit included an email that the government said Stell sent to a former Allied employee soon after a February 2009 HUD audit report faulted Allied branches.  "Jim has to be the biggest target personally for his disregard for the regulations," Stell wrote, referring to Hodge. "Serves him right never listening and thinking he didn't have to play by the rules.”  The government said Hodge and his wife, Kathy, own 99 percent of the company, while their son Jamey owns 1 percent.

So there you have it, the Feds are ratcheting up their civil lawsuits against liable companies/executives in their shady mortgage lending practices.  However, their liability will only be monetary in such civil suits.  We hope to see more criminal complaints filed so that corruption and greed gets its due justice.

New York Appellate Division delivers major blow to MERS

In many foreclosure cases brought in New York, the previously discussed electronic mortgage registry, MERS (Mortgage Electronic Registration Systems, Inc.) executes an assignment document that allegedly transfers ownership of the mortgage to the foreclosing bank (the Plaintiff) sometime before the bank commences the foreclosure action. 

However, in a recent major decision, Bank of New York v. Silverberg (Appellate Division, 2nd Dept. 2011) a New York Appellate Judge, the Honorable John M. Leventhal, dismissed a foreclosure action on the basis that the assignment of the mortgage by MERS was invalid.  The court held that MERS did not have the right to assign the mortgage because MERS was not the actual owner or assignee of the underlying note, and therefore the plaintiff lacked standing.  

Background:

In a foreclosure action, the complaint must establish a chain of ownership of the note and mortgage from the original lender to the plaintiff instituting the foreclosure. 

Standing is an inquiry into whether a litigant has an interest in the lawsuit that the law will recognize as a sufficient predicate for determining the issue in question.

In a foreclosure action, standing is met when the Plaintiff is:

1)         Both the holder or assignee of the mortgage and

2)         The holder or assignee of the underlying promissory note at the time the action  

            is commenced.

Generally, one a note is properly assigned, the mortgage passes as an incident to the note (the security, or mortgage, does not have to be formally transferred in writing).  A mortgage is merely security for a debt and cannot exist independently of the debt.

The issue for the Court was:

Can MERS, as nominee and mortgagee for purposes of recording, assign the right to foreclose upon a mortgage to a Plaintiff, absent MERS right to, or possession of, the actual underlying promissory note?  No.

As nominee, MERS’ authority is limited to only those powers which were specifically conferred to it and authorized by the actual lender.  A nominee is a person or entity designated to act in place of another usually in a limited way.

In this case there was a consolidation agreement, which consolidated two previous loans taken out by the homeowner.  So instead of two loans, there was one debt obligation.  As such, the consolidation merged the two prior notes and mortgages.

Although the consolidation agreement gave MERS the right to assign mortgages, it did not specifically give MERS the right to assign the note, and therefore such assignment of notes was beyond MERS authority as nominee or agent of the lender.  A party who claims to be the agent of another bears the burden of proving the agency relationship by a preponderance of evidence.

Assuming the consolidation transformed MERS into a mortgagee for purposes of recording, the consolidation agreement never gave MERS title to the note, nor was the note physically delivered to MERS.  Therefore, the Plaintiff in this case, Bank of New York, stepped into the shoes of MERS, its assignor, and thus gained only that to which its assignor was entitled. See Uniform Commercial Code 3-201. 

Because MERS was never the lawful holder or assignee of the Note described in the consolidation agreement, the corrected assignment of mortgage by MERS is a nullity and MERS was without authority to assign the power to foreclose to Bank of New York (the plaintiff).    

The Judge went on to stress that proper procedural requirements must be followed to “ensure the reliability of the chain of ownership, to secure the dependable transfer of property, and to assure the enforcement of the rules that govern real property.”

This case stands for the proposition that:

1)  MERS did not actually own the promissory notes for the mortgage loans that it assigned to the bank that instituted the foreclosure.

2)  Only the owner (holder or assignee) of a promissory note may properly assign it to another party.

This case carries great importance because MERS hold about 60 million mortgage loans in its registry and is involved with about 60% of all mortgage loans in the U.S. today.

If your home is in New York and you are being sued in a foreclosure action, it is critical to your interests that you seek out a legal consultation. 

The Law Firm of Eran D. Grossman can help you stay in your home.

AIG sues Bank of America for 10 Billion Dollars

American International Group Inc. aka AIG said Monday it sued Bank of America Corp. (BOA) for more than $10 billion, claiming the BOA cheated it by selling residential mortgage-backed securities that were overvalued.  Thus claiming they were deceived through misrepresentation.  Bank of America denied the allegations, claiming AIG "recklessly" chased investments with high returns, and was sophisticated enough to know the risks involved in such purchases.  Banks have been hit by a series of suits over misrepresentations of mortgage-based securities.  As noted in earlier blogs, banks were pooling mortgages into a security instrument, a process known as securitization, and then sold it to investors, including AIG, for profit. 

AIG states Bank of America and two companies it took over, Countrywide Bank and Merrill Lynch, sold AIG $28 billion in securities backed by home mortgages between 2005 and 2007, during the peak of the housing boom.  AIG said it looked at more than 260,000 of the underlying mortgages, and found that the bank's "stated metrics" for 40 percent of the securities were false.  Surely, BOA will claim this is something AIG could have looked at before making any purchases, which is part of any due diligence process.

Bank of America spokesman Lawrence Grayson said the blame lies with AIG.  "AIG recklessly chased high yields and profits throughout the mortgage and structured finance markets.  It is the very definition of an informed, seasoned investor, with losses solely attributable to its own excesses and errors."

AIG spokesman Mark Herr argued back saying "It is disappointing but unsurprising that Bank of America continues to attempt to blame others for its own misconduct.  Investors, no matter how sophisticated, were entitled to rely on its numerous written representations about the securities it sold."

In June 2011, Bank of America agreed to pay $8.5 billion to a group of investors for selling them poor-quality mortgage securities.  AIG's current suit is separate, but the company is raising questions about whether the settlement went far enough.  Last week, New York Attorney General Eric Schneiderman urged the judge to reject the settlement, calling it unfair.

If you are a homeowner who is currently in a foreclosure lawsuit where the loan was originated by Bank of America, CountryWide or Washington Mutual, it is in your best interest to consult a qualified attorney in your locality to discuss your options. 

Contact the Law Firm of Eran D. Grossman for New York City foreclosure cases. 

Second Liens- How Are banks valuing them?

I am back from a small summer hiatus and have more Big Bank news:  They are making more money than previously forecasted due to the slow housing recovery.  In July 2011, JPMorgan Chase earned $5.4 billion during the second quarter. Citigroup earned $3.3 billion.  You would think this is good news to help stimulate the economy- meaning more lending.  But that may not be the case as bank profits continue to soar.  

Despite such good news for banks, many of them face a continuing challenge, and one federal regulators want to know more about:  the potential costs associated with mortgage lending during the great credit boon.  Still to be dealt with are potentially large legal bills and final settlements related to accusations that many banks acted improperly, in bundling loans into mortgage securities, and later in their foreclosure practices.  But while the SEC has been pressing banks to make comprehensive disclosures about potential pitfalls, regulators have been quiet on another concern for investors:  how banks are valuing their vast holdings of home equity lines of credit, or secondary liens.

A Second Lien is a type of loan with a security interest in the asset(s) that is second in ranking behind a traditional first lien.  A lien is a form of security interest granted over a property (security) to secure the payment of a debt (for example a mortgage).  The second lien lender will typically be required to agree contractually to subordinate its claims on the asset to the first lien secured lender.  If a borrower defaults, second lien debts stand behind the first lien debt in terms of rights to collect proceeds from the debt's underlying collateral.

The SEC has been pushing banks hard on this issue.  As regulators review banks’ annual reports, they are asking tough questions about how institutions are valuing their second liens.  The numbers are significant.  Banks held $624 billion of such loans in the first quarter, FDIC data shows.  Millions of these loans are deeply troubled.  According to recent statistics, almost 11 million of the nation’s mortgaged properties (which is about 23 percent of the total) were underwater at the end of March 2011.  Some 4.5 million of those properties carried home equity loans- second liens. 

When a first mortgage runs into trouble, second liens are at even greater peril, even if homeowners manage to keep up with their payments. That is because in a foreclosure, first mortgages are to be paid off first before second mortgages.

The Big Four Banks, JPMorgan, Citigroup, Bank of America and Wells Fargo, not only hold home equity lines (second mortgages) but also service first mortgages held by other lenders on the same properties.  Some regulators worry that these servicers are able to protect their own holdings of second-lien loans while foreclosing on the first liens, since they are the same entity.

The big four are pretending that the second liens are still good because many are still performing, meaning that borrowers are making payments on the second mortgage, even if only the minimum.  Many home equity lines require only the payment of interest for the first 10 years.

Banks have written off about $500 billion in assets since 2008.  Most of those assets were related to housing, but write-downs on second liens have been pretty meager so far.  As of the first quarter of this year, Bank of America carried $136 billion of second liens on its books.  During 2010, it wrote down $6.8 billion. Wells Fargo held $108 billion in such loans in the first quarter, it wrote down only $4.7 billion last year.

A write-down is reducing the book value of an asset because it is overvalued compared to its market value.  This is then reflected in the banks’ income statement as an expense, thereby reducing its net income.

JPMorgan Chase’s exposure to second liens stood at $60 billion at the end of the second quarter. The bank wrote off $1.3 billion in the first half of 2011 and $3.44 billion in 2010.  Citibank’s home equity lines of credit totaled $46 billion last March; $6.2 billion belonged to borrowers with credit scores below 660, which is risky, and consisted of loan amounts that were greater than the values of the underlying properties.

The trouble in the housing market does not appear to be reflected fully on bank balance sheets yet.

If average home prices do not stabilize and hopefully recover, then banks are likely to feel pressure to begin wholesale write-downs of first and second liens.  There is probably as much loss prospectively facing the banking industry as a whole on residential real estate exposures as have already been written off.

This story will be continuing in the next several quarters.

Fight Your Foreclosure Case

A New Jersey couple fought a bank foreclosure lawsuit and ended up keeping their home.  George and Mona Elghossain successfully defended against a mortgage loan servicer that tried to foreclose on their NJ home.  The April 4, 2011 court decision set a precedent for other homeowners in the state who can now cite this case as precedent for other foreclosure cases.

Mr. Elghossain, a real estate broker, used his industry knowledge to fight the case in court after he noticed that the servicer of the loan was not the lender that owned his loan.

According to New Jersey state law, the homeowner is supposed to be notified of various items, including the name of the lender that owns the loan and its contact information.

In its paperwork, the loan servicer, Bank of America, failed to include the names of the lender and the lender's representative in its notice of intent to foreclose, therefore violating New Jersey's Fair Foreclosure Act, which was enacted in 1995 and has been updated several times.

"The Fair Foreclosure Act is clear, unambiguous, and readily comprehensibly (especially to a sophisticated lender)," according to the opinion written by Judge Glenn Berman of Middlesex County.

Bank of America wanted the judge to expand the meaning of who is a lender so that it would include any "mortgage lender, mortgage investor or mortgage loan servicer that owns ... or is authorized to negotiate the terms of the homeowner's mortgage." Berman said the bank's argument "is misplaced."

The Elghossain’s purchased the home in 1985 and refinanced in 2004 with a local bank named New Millenium Bank for $260,000 at a 6.25 percent interest rate for 30 years.  About a month after the refinancing, New Millenium sold the loan to Countrywide Document Custody Services, which shortly transferred it to Countrywide Home Loans, Inc.  Countrywide sold it to the Bank of New York, but maintained a servicing agreement, which was recorded on December 7, 2006.  When Countrywide was purchased by Bank of America, they became the servicer, but Bank of New York remained the holder of the mortgage.

Bank of New York was one of 24 lenders to file 200 or more foreclosure actions in New Jersey in 2010, reported the New Jersey Law Journal.

"Homeowners in New Jersey don't contest their foreclosures, and they should," said Mr. Elghossain. "With all the forgery and fraud, people should contest their foreclosures. That's my advice. If they can't do it themselves, they should consult an attorney to make sure the lenders have complied with the rules."
 
"Before Bank of America filed its lawsuit, I wrote them a certified letter saying I'd like to start making my payments again. Instead of taking that with open arms, they never responded and they filed for foreclosure."

Although the family is holding on to the property, Bank of America does have the right to come back and serve the Elghossain’s with a proper notice of intent to foreclose.

For others facing similarly situations, Elghossain repeats, "Fight your foreclosures.”

The point being- do not allow lender’s to foreclose on your home without a legal fight. 

NY Federal Judge rules MERS has no right to transfer mortgages

Merscorp Inc. (MERS), operator of the electronic-registration system that contains about half of all U.S. home mortgages, has no right to transfer the mortgages under its membership rules, a judge held.   In the case, In re Agard, 10-77338, U.S. Bankruptcy Court, Eastern District of New York Central Islip), U.S. Bankruptcy Judge Robert E. Grossman, wrote in a decision that he knows would have “significant impact,” stated that the membership rules of MERS does not make it an agent of the banks that own the mortgages.

“MERS’s theory that it can act as a ‘common agent’ for undisclosed principals is not supported by the law,” Grossman wrote in his February 10 opinion. “MERS did not have authority, as ‘nominee’ or agent, to assign the mortgage absent a showing that it was given specific written directions by its principal.”

As indicated in a previous article here, MERS was created in 1995 to improve servicing after county offices couldn’t deal with the flood of mortgage transfers nationally.  The company tracks servicing rights and ownership interests in mortgage loans on its electronic registry, allowing banks to buy and sell the loans without having to record the transfer with the county, as required by local law.  It played a major role in Wall Street’s ability to quickly bundle mortgages together in securitized trusts.

 “MERS and its partners made the decision to create and operate under a business model that was designed in large part to avoid the requirements of the traditional mortgage-recording process,” Grossman wrote.  “The court does not accept the argument that because MERS may be involved with 50 percent of all residential mortgages in the country, that is reason enough for this court to turn a blind eye to the fact that this process does not comply with the law.”

In the case, Select Portfolio Servicing, a mortgage servicer, sought to bypass the automatic shield against legal claims triggered by Ferrel L. Agard’s filing for personal bankruptcy in September.

Select Portfolio wanted permission to foreclose on Agard’s home in Westbury, New York, on behalf of U.S. Bancorp’s U.S. Bank unit, the trustee for the mortgage-backed trust the home loan was in. The house is worth about $350,000 and the mortgage amount was $536,921, according to the decision.

The Judge addressed whether a mortgage transfer by MERS is valid, because “MERS’s role in the ownership and transfer of real-property notes and mortgages is at issue in dozens of cases before this court,” including those where “there have been no prior dispositive state-court decisions,” he wrote.

Select Portfolio argued in part that MERS’s February 2008 assignment of the mortgage to U.S. Bank was valid because Agard agreed that MERS would hold title to it for the original lender, Bank of America Corp.’s First Franklin, and for whichever banks it was further assigned to.  First Franklin transferred the promissory note to Lehman Brothers Holdings Inc.’s Aurora Bank and then Aurora Bank to U.S. Bank, according to the decision.  “An adverse ruling regarding MERS’s authority to assign mortgages or act on behalf of its member/lenders could have a significant impact on MERS and upon the lenders which do business with MERS throughout the United States,” Grossman wrote. “It is up to the legislative branch, if it chooses, to amend the current statutes to confer upon MERS the requisite authority to assign mortgages under its current business practices.”

MERS intervened in the case and argued that Agard’s mortgage, the terms of its membership agreement and New York state law gave it the authority to assign the mortgage. MERS says it holds title to mortgages for its members as both “nominee” and “mortgagee of record.”

Judge Grossman said Select Portfolio had to show that U.S. Bank owned both the note and the mortgage, and there was no evidence that it held the note. Judge Grossman disagreed with Select Portfolio’s argument that U.S. Bank held the note because the note “follows” the mortgage, which it said U.S. Bank owned.

“By MERS’s own account, the note in this case was transferred among its members, while the mortgage remained in MERS’s name,” Grossman wrote. “MERS admits that the very foundation of its business model as described herein requires that the note and mortgage travel on divergent paths.”

The judge said that the membership agreement wasn’t enough to assign the mortgage and that to do so the lender would have to give power of attorney or similar authority to MERS.

MERS’s membership rules don’t create “an agency or nominee relationship” and clearly do not grant MERS authority to take any action with respect to mortgages, including transferring them, Grossman wrote. Because the interests at issue concern “real property” -- land and buildings -- under state law, any transfer has to be in writing, which isn’t done under the MERS system, he said.

“Without more, this court finds that MERS’s ‘nominee’ status and the rights bestowed upon MERS within the mortgage itself, are insufficient to empower MERS to effectuate a valid assignment of mortgage,” the judge wrote. “MERS’s position that it can be both the mortgagee and an agent of the mortgagee is absurd, at best.”

Grossman said parties coming to him to seek to lift the automatic ban on legal claims in cases involving MERS will have to show they own both the mortgage and the note.

We will follow the case on appeal, and whether the decision is upheld.

By: Eran D. Grossman, Esq.

Banks lose important case in Massachusetts High Court

In U.S. Bank v. Ibanez, 10694, the Supreme Judicial Court of Massachusetts (Boston), upheld a lower court's decision that said two foreclosure actions were invalid because the banks, US Bancorp and Wells Fargo & Co., did not prove that they owned the mortgages in question because they were improperly transferred into two mortgage-backed trusts.  The plaintiff's in this case were not the original mortgagees and failed to prove that they were in fact holders of the mortgages at the time the forecosure case was initiated.

This case deals a devastating blow to banks because they allegedly own hundreds of thousands of mortgages in the same exact fashion as this case illustrates.  The case will also guide lower courts in Massachusetts and will be persuasive in other states since the methodology in alleged mortgage ownership is conducted similarly as part of the securitization process. 

This case also provides a further glimps into bank practices and deepends the divide between their practices and state law.   

What is HAMP and why is the program not working as contemplated?

HAMP is a program introduced in February 2009 by the Obama Administration’s comprehensive Financial Stability Plan during the housing market collapse to help homeowners modify and/or refinance their existing mortgage.  HAMP is an acronym for Home Affordable Modification Program.  It is designed to help those homeowners with an economic hardship modify the terms of their mortgage so that it becomes more affordable, manageable and thereby helps avoids a foreclosure.

To qualify for the program the following criteria must be met:

1)  The mortgage is for your primary residence.

2)  The amount of your first mortgage is equal to or less than $729,750.

3)  You have a qualified hardship.

4)  The Mortgage was obtained before January 1, 2009.

5)  The payment on your first mortgage (including principal, interest, taxes, insurance and   

     homeowner's association dues, if applicable) is more than 31% of your current gross

     household income.

 

Trial Period vs. Permanent Modification

Permanent mortgage modification rose to about 31,000 in November, up from about 26,000 in October.  That brings the total active permanent modifications to just over 500,000 since the programs inception.  Considering how slow new modifications are being offered, it is clear that the program designed to prevent three to four million foreclosures will be lucky to hit even 25% of its target.
Let's look at trial modifications.  A trial modification is when the lender provides a temporary trial periods in which modified payments are to be made for several month (usually 4-6), and if paid timely, should be made permanent.  Trial modifications peaked at nearly 160,000 in October 2009, but have declined ever since.  The number of new trial modifications increased to about 30,000 in November, up from about 24,000 in October. 

With so few active and new trial modifications, it will be harder for this number to increase in the future.  18,000 modifications were cancelled in November 2010.  This is mostly due to loan servicers finally having worked through most of their backlog of "aged trial modifications" which were modifications that were active for an extended period without being cancelled or made permanent.  Many were ultimately cancelled, which is why there was a flood of cancellations from March through July 2010.

So what’s next in 2011 for the program? 
All indications are that foreclosures are expected to rise, even though HAMP appears to be winding down and comprehensively not having the teeth to compel lender compliance as envisioned. 
As of December 2010, more troubled homeowners are dropping out of the Obama Administration's HAMP program, which has been widely criticized for failing to help more homeowners keep their homes and modify “bad loans” to more traditional long- term fixed-rate mortgages.

On December 22, 2010, the Treasury Department said that about 774,000 homeowners have dropped out of the program as of last month.  That's about 54 percent of the more than 1.4 million people who applied for a modification.  As noted, this program is intended to help those at risk of foreclosure by lowering their monthly payments. Borrowers start with lower payments on a trial basis, but for reasons not made very clear or public, lenders have not converted them into permanent loan modifications, causing trouble for the program as a whole.

Foreclosure filings fell by 21 percent last month, their largest monthly decrease since 2005.  However, the government warned that this decrease is only temporary.  Lenders are expected to revise and resubmit paperwork in the coming months to reignite their foreclosures. 
Borrowers applying for HAMP relief are faced with a bureaucratic black hole, with banks losing documents, failing to return phone calls, and simply not keeping track of all documents submitted. 
Lenders are blaming homeowners for failing to submit needed and requested documentation.  Lenders are often times operating on a dual track, where on one hand they are attempting to modify a loan, and on the other hand prosecuting a foreclosure on that property.

A homeoner should be extremely careful when entering into a trial modification.  There is no guarantee that the terms will become permanent.  Thus the bank is collecting payments for several months (from thousands of borrowers) and then for frivolous reasons is not making that modification permanent.  At the same time, continues to prosecute the foreclosure lawsuit.  Such behavior can be classified as violating the lenders obligation to operate in good faith and conduct fair dealings with the borrowing public.        

Homeowners accepted into HAMP can receive lower interest rates and can repay their loans over a longer period of time.  Those who remain in the program on a permanent basis see their monthly payments cut on an average of about $500.

If you or someone you know is dealing with a potential foreclosure of their mortgage, it is in your best interest to speak to a competent lawyer in your specific jurisdiction.

By: Eran D. Grossman, Esq. (212) 227-6755

New laws in New York affecting foreclosure lawsuits

On October 22, 2010, Governor David Paterson of New York signed into law the Access to Justice in Lending Act.  This law makes attorney-fee provisions in mortgages reciprocal, thereby allowing homeowners (defendants in foreclosure lawsuits) to get attorney's fees if and when they prevail in foreclosure actions.

Currently in New York State, it is standard for a mortgage agreement to contain language giving the lender the right to collect attorneys' fees if it is successful in a foreclosure action.  However, there is no requirement that the borrower have the same right to collect if he or she is successful in defending the foreclosure action.  This new piece of legislation will benefit homeowners defending a foreclosure in several important respects.  First, it will level the playing field for borrowers facing foreclosure by clarifying that the obligation to pay attorneys' fees and costs is mutual.  Moreover, it will allow a greater number of borrowers to obtain legal representation.  By authorizing borrowers with meritorious defenses to recover attorneys' fees from their lender, it will increase access to legal representation for borrowers who cannot otherwise afford an attorney.  Finally, it should create an incentive for lenders to resolve cases earlier in the foreclosure process.

Rick Wagner, the longtime Brooklyn Legal Services Corporation Director of Litigation who passed away last year, was well known for his advocacy on behalf of homeowners.  He once wrote, "For far too long, plaintiff banks have benefitted from a huge number of default judgments in foreclosure actions and/or proceedings. Perhaps the single most important tool in the avoidance of default judgments is legal representation...Those of us in the legal services community—including those of us who are presently prohibited from seeking attorneys' fees— can make a sizable contribution toward leveling the foreclosure playing field by establishing this right for homeowners and, hopefully, generating a private foreclosure defense bar fueled by a substantial revenue stream in the form of recoverable attorneys fees."

New York State Assemblyman Rory Lancman (D-Queens) and Senate Deputy Majority Leader Jeff Klein (D-Bronx) announce passage of the “Access to Justice in Lending Act” by both houses of the legislature.  Almost all mortgage agreements require borrowers to pay attorneys fees to lenders who foreclose on their mortgage, but borrowers are not given the same contractual right.  As a result, few homeowners are able to retain attorneys in foreclosure proceedings – most default or try to represent themselves.  Many homeowners have valid defenses to foreclosure and could save their homes with adequate legal representation.  To add insult to injury, these homeowners then have the lenders' attorneys fees tacked on to the overall amount they owe the bank, pushing desperate homeowners further into debt.  This new law creates a reciprocal right to attorneys’ fees for borrowers who successfully defend against foreclosure where the mortgage agreement gives such a right only to the lender.

“We cannot let people with valid defenses to foreclosure lose their homes merely for lack of legal representation, particularly when the mortgage agreement written by the bank tilts the legal playing field in the bank’s favor,” said Assemblyman Lancman (D-Queens).  “If homeowners had the money to pay for a lawyer to represent them in foreclosure, they probably wouldn’t be in foreclosure in the first place.  This legislation will allow lawyers to take on meritorious foreclosure cases with the fair and reasonable expectation that they will be compensated if they succeed.  We know that many of the families that we see being foreclosed upon today entered into their mortgages due to predatory lending. These are the very people who should have the best defenses to foreclosure, but lose their homes simply because they could not secure counsel to defend them.  Today, we have put homeowners on even playing ground with the lenders that are foreclosing on them, and given them a fighting chance to stay in their homes," said State Senator and Deputy Majority Leader Jeffrey D. Klein (D-Bronx/Westchester).

On October 22, 2010, in response to the robo-signing crisis affecting the nation, New York's office of Court Administration issued a new rule requiring that in all residential foreclosure actions plaintiff's attorneys file an affirmation certifying that counsel has taken reasonable steps to verify the accuracy of the documents filed.  In all new cases, the affirmation must accompany the Request for Judicial Intervention.  In pending cases, the affirmation must be submitted with either the proposed order of reference or the proposed judgment of foreclosure.  In cases where a foreclosure judgment has been entered but the property has not yet been sold at auction, the affirmation must be submitted to the court referee and a copy filed with the court five business days before the scheduled auction.  Plaintiff's counsel must also file an amended version of the affirmation if new facts emerge after the initial filing. 


 

MERS on the hot seat?

On December 2, 2010, the House Judiciary Committee held a hearing on the mortgage crisis affecting the American homeowner.  Disturbing testimony came from Christopher Peterson, associate dean for academic affairs and law professor at the University of Utah.  He indicated in his written submission how big banks basically destroyed America’s land-recording system, which is a method of tracking property titles changing hands since colonial times and the founding of this Republic.

What big banks did was create a company called MERS (Mortgage Electronic Registration Systems, Inc.).  This company was purposely designed to get around physically recording mortgages upon transfer or sale of the note and mortgage.  As shown below, the way they prepare their documents is legally questionable, and makes tracking mortgage ownership extremely difficult, from a consumer’s perspective, since nothing is publicly recorded upon sale/transfer of the note.  Ownership of the note, however, is something that must be proven in court during a foreclosure action.  This creates confusion.   

MERS states on its website that “MERS is an innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked.  Created by the real estate finance industry, MERS eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans.”

So let’s examine this statement.  MERS was created by the real estate finance industry, meaning those big banks that produce home mortgages.  They also eliminate the need to prepare and record assignments, which is contrary to the way mortgage ownership has been recorded since the founding of this country.

MERS was created by banks, for banks, to satisfy their interests and also to limit their liability since MERS is on the original mortgage and note as “nominee” only.  What this actually means is really contentious and there is no definitive answer, yet, since courts are now faced with this issue. 

In addition to tracking ownership and servicing rights, MERS has taken on another more aggressive legal role.  When closing on a home, the lender (example Wells Fargo) lists MERS as the mortgagee of record on the actual paper mortgage, rather than the lender who funded the loan.  When recorded, the mortgage is under MERS, even though MERS does not solicit, fund, service or actually own any of the mortgages.  MERS continues to be the mortgagee for the life of the mortgage even after the original lender (Wells Fargo) or a subsequent assignee transfers the loan into a pool of loans that are then sold to investors- a process known as securitization.  MERS is legally involved in the origination of about 60% of all mortgage loans in the U.S. 

MERS justifies its role by explaining that it is acting as “the mortgagee of record in nominee capacity.”  This allows for 2 things: 1) MERS does not have to record any subsequent assignments since it is the mortgagee, thus avoiding county recording fees on millions of mortgages- this amounts to millions in savings for the banking industry. 2)  MERS brings foreclosure proceedings in its own name, rather than the actual owner of the loan, which is often a trust owned by investors.  This eliminates the need for the trust to foreclose in its own name or reassign the loan to a servicing company to bring the foreclosure suit.  This does create a host of legal problems.  For example, does MERS have standing to bring a foreclosure action?  Is MERS considered a debt collector under the federal Fair Debt Collection Practices Act?  

Why is this important?

Million of foreclosure documents produced by MERS may have been signed in MERS’s name by people without the power to do so.  A lack of authority to sign these crucial documents calls into question their validity.  While the full scope of its ramifications continues to remain uncertain, this creates more uncertainly in the already murky swamp of foreclosures.

MERS tracks and holds mortgages in a huge electronic database that is created, financed and maintained by its “members” who are the giants in the residential mortgage business.  This database simplifies securitization and makes it cheaper by foregoing the requirement that every change in ownership of a mortgage be recorded in the county where the mortgaged property is located.

Instead of recording the documents as required by law and has been the rule for countless decades, the mortgage is recorded in the name of MERS one time only, and all other transfers of ownership of the note and mortgage in the future, are tracked by the MERS system.  However, entering data into the MERS database is optional for its members.  MERS Chief Executive R.K. Arnold told Congress that “members tend to register only loans they plan to sell.”

The land registering system in each county is losing tens of thousands of dollars since MERS is helping banks bypass the recording process.  In fact MERS boasts of saving the “industry up to $200 million annually by creating an electronic clearinghouse for mortgage ownership rights and information.”

What’s more interesting is that MERS has no employees.  MERS members upload and manage their own data, and whenever a MERS member wants MERS to do something for it, the member just tells a MERS “certifying officer,” roughly 20,000 of them, to do whatever that member wants.  These certifying officers who have a traditional corporate title like vice president do not report to anyone at MERS and do not get paid by MERS.  The only link to MERS is a corporate resolution signed by MERS Secretary Hultman appointing them as officers of MERS.  How and who is appointed a certifying officer has come under attack.  When Hultman was deposed last April, he pointed to a 1998 corporate resolution giving him the power to approve certifying officers.  However, the resolution appears to say that only member employees can be certifying officers.  MERS CEO Arnold told Congress that “MERS relies on specifically designated employees of its members, called certifying officers.”  Regardless of this, Hultman has made numerous attorneys at law firms initiating foreclosure lawsuits for MERS member banks certifying officers.  Further, the resolution that authorizes Hultman to approve certifying officers was originally adopted by an earlier incarnation of MERS, and it may not have been ratified by the current version of MERS.  So unless the current MERS ratified the authorizing resolution or replaced it with a new one, that authority ended by January 1, 1999, when the current MERS was established.  During his deposition, Hultman said he did not know if the current MERS ratified his appointing power.  However, as corporate secretary he is in the best position to know this information.  Mark Malone, the former New Jersey assistant U.S attorney and former New Jersey deputy attorney general who took Hultman’s deposition in April, indicated that Hultman has not turned over evidence that MERS had ratified his power.  Lastly, Hultman’s power to appoint is rooted in MERS’s bylaws, which gives only the board of directors the power to choose officers.  A board of directors cannot pass resolutions that violate their company’s bylaws.  So even if MERS did ratify his power to appoint, it may be invalid anyway.

What Hultman states in the resolution he signs is false according to Malone.  Hultman is not saying he is signing according to the power delegated to him by the board, but rather the board met and adopted a resolution, and what he is signing is a true copy of that resolution.  Malone says this is also false since there is no original resolution that it is a true copy of. 

MERS had 66 million mortgages in its database at one point, and currently has about 31 million.  So this begs the question… how many foreclosures were achieved throughout the Unites States using documents that these “certifying officers” signed and how many pending foreclosures are based on these fraudulent documents?

Homeowners facing a foreclosure lawsuit in New York and elsewhere must be aware this is going on and must consult an attorney so that they can challenge any MERS signed documents.  This is a growing problem that must be addressed by the borrowing public, state and federal authorities.

By: Eran D. Grossman, Esq.

New York attorney files class action lawsuit against Steven J. Baum and Merscorp, Inc.

Attorney Susan Chana Lask filed a Federal class action lawsuiton on behalf of thousands of New York homeowners who lost their homes to an alleged foreclosure fraud orchestrated for many years by “foreclosure mill” attorney Steven J. Baum and major mortgage companies that they do business with.  The case is filed in the United States District Court, Eastern District of New York, captioned Campbell and Miller vs. Steven J. Baum, Esq., Steven J. Baum, P.C., Merscorp., Inc., et al., case number 10-3800. It alleges among other things, Racketeer Influenced and Corrupt Organizations Act (RICO) civil racketeering violations, wire fraud, fraud and deceipt, false oaths, unjust enrichment, RESPA violations, Fair Debt Collection Practices Act (FDCPA) violations and that homeowners paid inflated foreclosure and other fees fictionalized by Steven J. Baum and/or his agents and/or employees who profited from the scheme since about 2005.  The complaint seeks punitive damages.


The lead attorney, Susan Chana Lask, discovered the alleged scheme after a foreclosure suit was filed by attorney Steven J. Baum, P.C., representing the lender HSBC, against her clients Caroll Gardens home located in Brooklyn, New York. 


The court filings in the case were allegedly false as filed in HSBC v. Concepcion Campbell, New York Supreme Court, Kings County, index number 20393/07.  Baum’s complaint was HSBC against Campbell.  However, it admited the loan was never assigned to HSBC, yet Baum sued representing HSBC anyway.  A satisfaction of mortgage was not filed for HSBC but for Mortgage Electronic Registrations Systems, Inc. (MERS) thus admitting HSBC never owned the loan- meaning the foreclosure lawsuit should have never been filed in the first place.  The original mortgage was in MERS’s name and never assigned as required in a foreclosure lawsuit in New York.  Potenitally thousands of homeoowners were foreclosed upon in New York in similar fashion, specifically those homeowers who were not represented by a lawyer in their case.  The class action complaint alleges that Baum did this knowlingly and intentionally.


Wait there more.  The documents filed in court are signed by attorneys working for Steven Baum’s law office under penalty of perjury that the filings are with knowledge of the transaction and/or documents.  In reality though, they had no knowledge as they admit they do not have the documents in their possession that they attest to in the court filings.


In the underlying foreclosure case, Susan Chana Lask subpoenaed Baum’s firm for the original note, to wit, Baum’s office responded in an email that the original note is not required in the State of New York and “we do not have the original note” implying they never had it, yet they swore they reviewed it in their court filings under penalty of perjury.  Moreover, Baum filed documents signed by an alleged officer of MERS named Rebecca A. Cosgrove and witnessed by a notary public from Erie County, New York.  MERS is located in Virginia and Erie County is in Buffalo, New York where Steven Baum’s office is located.  It’s thus suspicious that  Cosgrove is even an officer of MERS, no less that she flew all the way to Buffalo New York that day just to sign a document before a notary public in Erie county, new York.   The class action alleges that Cosgrove is not an officer of MERS and that the notary is a fraud. 


The false foreclosure filings potentially affect thousands of New Yorkers who were foreclosed upon by Baum’ office and those like it.  The Manhattan U.S. Trustees office started an investigation of Steven Baum months ago.


People are being victimized by the economic crisis who do not know how to defend themselves nor have the means to hire a qualified attorney.  People are losing their properties although these filings are false and known to be false by those instituting the foreclosure process.


The MERS system basically allows banks to avoid recording loans in the proper owners name, which saves the banks recording fees and allows them to resell the mortgage under different names that are harded to trace if not recorded in the county where the property is located.  Banks profit at every turn through the mortgage maze, starting with fees charged at a closing (origination), then reselling the mortgage on the secondary market to investors, then foreclosing to take the property and selling it at fair market value.


The borrowing public must be informed of developments in the foreclosure crisis in New York and elsewhere.  Do not let banks walk all over you during the foreclosure lawsuit.  Make sure you speak to a qualified lawyer so that your rights are fully protected.


By: Eran D. Grossman, Esq.   

What is at the core of residential Foreclosure Defense in 2011?

A person’s shelter is connected to his core, its necessity for survival can be compared to the need to eat or sleep.  It represents a sense of security and independence in a world filled with challenges and danger.  Shelter is what is under attack when the bank is trying to foreclose on your primary residence. The good news is that the massive banking institutions that are paying big bucks to law firms to foreclose on the American homeowner are rotten to the core with ethical, legal, and often criminal taint.   

A very reasonable argument could be made that the massive securitization fraud run by the upper echelons of the banking institutions artificially inflated and then crashed the real estate markets, and the American economy with it. The securitization system allowed for the creation of easy money by offering debt without limit.  Everybody could get a mortgage, and even if you have no income, no problem!  It was a free for all, that brought with it massive greed, fraud, and criminal activity.  Often in that order.  Once the mortgages are signed, the banks now become the owners of the promissory note- which to them is just as good as cash. 

With millions of promissory notes created by the American peoples’ sweat and brow, commercial and investment banks created fancy securitization and financing products that allowed them to sell the aggregated promissory notes for exponentially greater values then on their face.  Thanks to convenient accommodations from the insurance companies (i.e. AIG) insuring these transactions and investment ratings agencies grading them AAA.

Because of the billions of dollars in sales being generated from the sale of these mortgage backed securities, word was put out on the street that they need as many of these mortgages as possible, and artificially created money flooded the system.  This was indeed aided by government laws, regulations and de-regulation going back to Clinton with the HUD, FANNIE and FREDDIE- which in time created spreadsheets filled with “exotic loans.”   Of course the only thing fancy about these loans was how fraudulent they were.

For example, homebuyers’ Earnest and Joy needed a 400k mortgage to buy a modest home. Since they were making 60k per year would have to pay ~$2,400 monthly in principle and interest (at 6%). When we compare that to Obama’s HAMP program, quite glaring in classic self-destructive form, fraud once again shoots itself in the foot. HAMP says that such an individual, under the Making Home Affordable should pay a monthly PITIA payment (principle+interest+insurance+taxes) of close to $1,500, which is what our couple budgeted as affordable.  Clearly there is this obstacle between Joy’s goal of owning this home:  however, the broker from SCAMS Mortgages saves the day.  He tells them about an exotic mortgage where they only pay $1,500 per month for five years.  They jump on it, Earnest is confident he will increase his salary, and Joy also has good prospects.

After five years of struggling to make payments, poor Earnest and Joy started defaulting because they could not afford $2,400. Especially since Joy is now living off of unemployment and Earnest’s company halted all raises and bonuses.  After 60 months of paying $1,500 interest only payments ($90,000 total), the bank files for foreclosure on them and they face the risk of losing their shelter, their down payment and all the improvements they made. The fanciness of the mortgage they signed induced them to give away equity in their property under the false pretense of stability, though temporary.

The only business model that would sanction such mortgage instruments is one that wants to collect as much money as possible from homeowners’ and then take their properties from them and sell them for full value. I would venture to say that this model may possibly be the main reason such mortgage fanciness ran rancid.  Throw in all the major players like Lehman Brothers, Bear Stearns, Washington Mutual, Merrill Lynch, IndyMac Bank, Countrywide, AIG, Fannee Mae, Freddie Mac, MERS, and on and on.  Add also the victors, Chase Bank, Citibank, Bank of America, Wells Fargo, and others.  As if things didn’t start rotting yet, give these foreclosures to lawyers to serve their interest by serving people with papers and take them to court.  What you get is a mess so bad and so deep that an attorney armed with the laws of this country should wreak a lot of havoc in court.  Foreclosure defense with these types of loans in its simplest form is letting the superwealthy crooks know that you know what skeletons they have in their closets.

By: Alexander Levkovich, Esq.

Elements lender must establish in a foreclosure case.

Usually the suing party is the lender, servicer, company or entity stating that they own the note and are the party seeking foreclosure against the homeowner.  The lender is the plaintiff and the homeowner/borrower is the defendant in the case.

The plaintiff must establish that:

1) Establish the existence of the mortgage and note;

2) Prove it was the owner or holder of the note and mortgage at the time that it commenced the foreclosure action;

3) Prove that the defendant defaulted.

A plaintiff may prove ownership of the note by demonstrating that it was the assignee of the mortgage and the underlying note or the assignee of the mortgage and by endorsement the holder of the note at the time that the action was commenced.

This is called Standing.  Standing requires an inquiry into whether the plaintiff litigant has an interest in the claim at issue in the lawsuit that the law will recognize as sufficient predicate for determining the issue at the litigant’s request. Where standing is raised as an issue by a defendant’s answer, the plaintiff must prove it has standing if it is to be entitled to relief.  Standing is an aspect of justiciability which, if challenged, must be considered at the outset of any case.  Standing is critical to move forward in the case and is a threshold question.  If standing is denied by the Court, the pathyway to sue is blocked, and therefore the case cannot go forward. 

A foreclosure of a mortgage cannot be brought by one who has no title to it, and an assignee of such mortgage does not have standing to sue unless the assignment is legally complete at the time the action was initiated.

The Court is the decider of whether or not standing exists when the suit was filed as a matter of law. Without the above elements, a plaintiff cannot proceed in a foreclosure action. 

If you or anyone you know is a defendant in a foreclosure lawsuit, be fully informed about your legal rights.  The more knowledge you have the more leverage you will gain in trying to work out a mutually agreeable resolution.  Without knowing your legal rights, the lender may skip some steps, and without calling them on it, you may waive crucial rights in defending your home. 

Should you have any questions in a New York foreclosure, do no hesitate to call

Eran D. Grossman, Esq. at 212-227-6755.