Foreclosure Fraud For Dummies, 1: The Chains and the Stakes

Posted in Uncategorized by Mike on October 8, 2010

(This is a series giving a basic explanation of the current foreclosure fraud crisis: This is Part One. Here is Part Two, Part ThreePart Four, and Part Five.)

The current wave of foreclosure fraud and the consequences for the economy are difficult to follow. As such, I’m going to write a few posts to simplify what is going on so you can follow stories as they unfold.  This is very 101 level, and will include a reading list of blog posts and articles at each stage to help provide depth.   (Special thanks to Yves Smith and Tom Adams for walking me through much of this.)  Let’s make three charts of the chains involved in the process. The first is what is currently going on with foreclosure fraud (click through for larger).

As you can see, in judicial review states like Florida the courts require that servicers, or those who administer the bonds that are full of mortgages (securitization, residential mortgage backed securities, RMBS, are all phrases for them), say that they have everything necessary in order to have standing to bring a foreclosure. They need to have the note for a mortgage, which is supposed to be in the trust – part of the mortgage backed securities – that they administer.

What is breaking down here? In Florida, a judicial review state, it was found that one person was notarizing documents far faster than anyone could reasonably have. Forged documents necessary for the foreclosure process like the note were found. A separate court system was set up to resolve these foreclosures faster at the expense of allowing serious challenges to the documents. Here’s Smith on how kangaroo these courts look up close. Here’s WaPo on one individual and the nightmare of trying to challenge an invalid foreclosure. Keep him in mind when you hear about deadbeats and whatnot: the current system is designed to make it difficult for anyone to challenge their case.

Meet the robo-signer who kicked it off here at this WaPo story. I almost feel bad for this patsy; the real battle here is between junior and senior tranche holders, and this doofus could end up in jail in order to keep John Paulson rich. After reading about this guy I’m asking our elites to take care of their patsies better. (Can we get a Financial Patsy Fordism social contract movement going? If you are going to be a patsy for GMAC, you should be paid enough able to be able to buy GMAC’s services or something.)

Why would servicers do this? One story would be that the more foreclosures they process, the more fees they get, so there is an incentive to cut as many corners to speed through the process as possible. Hence the term foreclosure mills. You can read more about this from Andy Kroll’s excellent work for Mother Jones (start here).

There’s another problem though – what if servicers are behaving this way because the actual notes aren’t in the trust? Let’s go back to the creation of these instruments.

I take a mortgage out at Joe’s Lending, a mortgage originator. A mortgage consists of two parts. The first is the note, or the IOU, which is the borrower’s promise to pay. The second is the mortgage, which is the security, or the lien, or the actual interest.

Joe’s lending takes the mortgage note to a sponsor to turn these mortgages into a bond. The sponsor was often an investment bank like Bear Sterns. Now that investment bank puts an intermediary in between itself and the trust. This intermediary is usually called a depositor, and sometimes there are several of them in the chain.

What’s the worry here? Well many of these mortgage originators were fly-by-night shops, shady enterprises that collapsed the moment they hit trouble. And many of them cut corners and one of the corners they may have cut would have been to send the note to the trust. Specifically, there is worry that many mortgage originators never sent the notes to the depositors. Originators wanted volume to get fees and may not have done all the paperwork correctly. There are a lot of things that have to end up in the trust when I take out a mortgage, things like the note, title insurance, supporting documents. But the note is the most important.

Why is this important? Well the trustees usually sign several certificates saying that they have verified all the documentation in these trusts. Many of these trusts are under New York trust law which is particularly clear and strict when it comes to these matters. With this in mind, tackle these three posts by Yves Smith (one two three).

So connect the two together, and you can see why we might have a systemic crisis on our hands:

There are roughly $2.6 trillion dollars in mortgage backed securities. The Wall Street Journal starts to explain how this will be a battle between holders of junior and senior tranches of debt. It also exposes the servicers, which include the four largest banks, to extensive legal liabilities by those who bought these securitizations that were signed off as being properly administered and created.

One result is that this has lead homeowners to reasonably demand to see the proper documentation before they and their families are put out on the street. Read Ryan Grim and Shahien Nasiripour from June, Who Owns Your Mortgage? “Produce The Note” Movement Helps Stall Foreclosures.

Katie Porter is an expert who has done extensive research into this area and often blogs about it at credit slips. See the blog posts: How to Find the Owner of Your Mortgage and Produce the (Bogus?) Paper. Porter found that this was extensive in her research, see Misbehavior and Mistake in Bankruptcy Mortgage Claims (“A majority of mortgage claims are missing one or more of the required pieces of documentation for a bankruptcy claims. Fees and charges on claims often are poorly identified and do not appear to be reasonable. The bankruptcy data reinforce concerns about the overall reliability of the mortgage service industry to charge homeowners only the correct and legal amount of the debt and to comply with applicable consumer protection laws”).  By rushing the process, unreasonable and excessive foreclosure fees can get applied to homeowners when there may not even be the proper documentation to have the standing to bring foreclosure at all.

So keep these frameworks in mind when you see the debate unfold in the next weeks. It is a problem of systemic risk, and it is a problem for the currently cratered securitization market. It will need to be addressed, the sooner the better.  But how?

UPDATE:  I forgot to thank Tom Adams, a contributor to naked capitalism, for the help he gave me in understanding the topic in the original article.  It’s updated above.

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  1. retr2327 said, on October 8, 2010 at 9:55 am

    So glad to have you addressing this issue, and bringing all of these sources together in one spot; will try to get through them this weekend to improve my limited grasp of this mess.

    But here’s the question that’s been troubling me recently. If the root of this foreclosure problem is that the notes and the mortgages got separated during the securitization process, and then further got mislaid or otherwise not properly passed along as the mortgages bounced from one entity to another, what is the basis for believing that this problem is limited to foreclosures? If a buyer buys from another homeowner, with no foreclosure involved, prior mortgage paid off at the closing with proceeds from the new one, as is typical in my limited experience, is it possible to know that clear title is actually being conveyed?

    Why would that prior mortgage, and its accompanying note, be any more likely to have ended up in the same place and in the right hands?

    • destor23 said, on October 8, 2010 at 11:12 am

      And really, why think this is limited to mortgages? What about other forms of securitized debt? Who really owns all the credit card debt out there? Can they produce a signed loan agreement to back up their demand for payment?

      I actually got out of a cell phone contract with Sprint by demanding they produce a signed copy of the contract and refusing to pay an early termination fee until I saw one. They didn’t have it and finally just waived the fee.

    • Dan Spillane said, on October 9, 2010 at 3:14 pm

      This is a very good question. I’m told that the title company is responsible for insuring the state of the title.

      Is there some reason to think more paperwork is awry in this process? That is, the note associated with a prior mortgage may be in limbo?

      If this were the case, then wouldn’t the true ownership of many homes be unknown?

      • Ferret said, on October 10, 2010 at 3:16 pm

        I have been looking at this issue in detail, and talking with an attorney, who has dealt with foreclosures directly.

        During the housing bubble, and as described in the above article, actual required documents (particularly, the “note”) may have been lost or never generated. This, in theory, means some people who are going through foreclosure–or have already been pushed through–may have grounds for claim against the banks and other entities that they own their homes even without paying any outstanding mortgage balance.

        So with a missing note…

        Homeowners that have already been pushed out of their home (and someone else lives there), could in theory sue the bank or other entity for damages equal to the equity they had in their home–at least–and possibly to the full value of the home.

        Homeowners that have not already been pushed out of their home could have grounds to stay in their home, free and clear, and other entities (banks, bondholders, etc.) would have to eat the cost.

        For current or newly-acquired properties, as long as the financial paperwork is in order, and you get title from your county recorder (when they see a deed), you own a property.

        All this said…if people start going back over transactions which occurred during the bubble, and challenging them on the basis of missing notes or otherwise, there could be, in theory, a challenge to title, and hence, of true ownership. Imagine that on a massive scale.

      • Alessandro Machi said, on October 10, 2010 at 7:26 pm

        Ferret, I think home deposits could be another smoking gun. Due to duplicitious banking practices of reinvesting money that they have yet to receive from 30 year mortgage deals, why can’t homeowners apply their deposit towards a “rental” of their home. When the money dries up, they leave, but at least it buys them a few years time to resave money and try again.

  2. Daniel Lafave said, on October 8, 2010 at 10:00 am

    It’s a little staggering just how bad these entities were at basic paperwork. The reason seems pretty clear to me though. None of this paperwork matters in the least until a property is foreclosed. Most of the parties figured they would be long gone, bonuses already in hand before anyone had to look at any of this stuff. But you would think that someone would say, “Without the note and the mortgage we really don’t own anything other than an expectation that the homeowner will pay us.”

    • Jamey said, on October 10, 2010 at 11:53 am

      Gordon Gekko: “I create nothing. I own. Well, except for the documents proving what I own. That I create out of thin air.”

  3. destor23 said, on October 8, 2010 at 10:06 am

    This is awesome stuff. Now, just to be clear and I seriously have no agenda in asking this question… do you believe this is a technicality type issue that could basically be described as: “Yeah, you’re right. We don’t know where the note is but somebody did pay legitimate money to buy this mortgage as part of a security and the homeowner knows they borrowed the money, knew the terms and for whatever reason couldn’t meet them.”

    Or are these people really not in violation of their mortgage contracts and lenders are forging documents to steal from them?

    • pelham said, on October 9, 2010 at 12:10 pm

      It’s a technicality issue. But it doesn’t matter. If they can’t produce the note, they shouldn’t be able to foreclose. But that, in the end, won’t stop them.

      As for how it’s all going to be sorted out, I think we can all see the pattern: the kangaroo courts in Florida, the dead-of-night legislative effort this past week by the Democratically controlled Senate (preceded by the Democratically controlled House) to rush into law a bid to allow forged documents in the place of legit notes to speed foreclosures (all in in honor of Calvin Coolidge — that’s their honest to God excuse). It was reluctantly vetoed by Obama only after barely being exposed by some sharp reporting by Reuters.

      Expect more along these lines, minus the eagle-eyed reporting. Eventually the lenders and banks will have their way.

    • john F Kellmer said, on October 9, 2010 at 7:18 pm


    • Redwood Rhiadra said, on October 10, 2010 at 1:37 pm

      There is at least one known case of a bank (Bank of America) foreclosing on a homeowner who paid *cash*, and didn’t have a mortgage at all. That goes beyond a mere technicality.

  4. Midwest Lawyer said, on October 8, 2010 at 10:09 am

    The other potential pressure point on this are the lawyers who sign the complaints. These complaints have to make specific allegations that the plaintiff is the holder of the mortgage and has the legal right to initiate the foreclosure. These are I’m sure forms with spaces for putting in the name of the entity but still, they have to be signed by the lawyer and in some states verified by the mortgage holder. If these claims are false the lawyer faces a potential ethics claim with the bar association and potential disbarment if the lawyer knowingly signed off on a false complaint. Similarlry, the person signing the verification faces criminal perjury charges if they know the claim is false.

  5. [...] Mike Konczal is starting a series of explainers on the foreclosure scandal — Rortybomb [...]

  6. Barbara Ann Jackson said, on October 8, 2010 at 11:01 am

    The foreclosure mill lawyer used a defunct lender’s identity to carry out a ‘simulated’ auction (in my absence); and a “straw” buyer purchase of my home occurred. I paid my NON-SUBPRIME mortgage for 7 years prior to abusive marriage. The foreclosure lawyer also filed false Bankruptcy “lift stay” motions and “proof of claim” documents under Wells Fargo’s name. After his unlawful auction, he had the property deed recorded into the name of the non-existent lender. Three months later, the local newspaper showed Freddie Mac as paying the non-existent lender over $86,000. At the end of the year, when the IRS mailed to me a tax bill, I discovered that Wells Fargo had also gotten in on that sham foreclosure by filing for my property, a false IRS form 1099-A.

    It’s not simply loss of my home that ‘eats my lunch’, it’s such things as horrible, horrible YEARS of judicial abuses, privacy invasions, danger for my safety, blackballed from LAW employment, and other reprisals to which I am yet subjected, due to APPALLING LAND GRAB racketeering (AKA) foreclosure. And, it is similar appalling injustices of which I know have happened to other people, merely because they also lawfully sought their rights to DUE PROCESS OF LAW. I will not cease speaking out / I’m not an Internet troll. I am doing every lawful thing I know, because I simply want MY LIFE BACK. *

    • walterrhett said, on October 9, 2010 at 5:57 am

      Best wishes . .

  7. Enojon said, on October 8, 2010 at 11:23 am

    I have discovered that by paying my bills I have avoided all of these kind of issues

    • BugMeNot said, on October 8, 2010 at 6:38 pm

      You really believe that? If some fraudulent bankster gets ahold of any debt in your name and starts slicing it up as a security, or forging false documents to make claims against you, you’ll find out pretty quick that just having a good credit rating is worth squat.

    • hetherjw said, on October 9, 2010 at 5:46 am

      Are you actually saying that the paperwork should not matter? That banks and other parties should be able to foreclose without having standing or properly filling out the paperwork?

    • CaitlinO said, on October 9, 2010 at 9:23 am

      Yep. All the way up until you decide to sell your house. Then you’ll find out that your buyer can’t close on the contract because their lender and title insurer discover that you don’t have clear title to the home you’ve made payments on for decades.

      Oooops. Only the people who sold you the mortgage are long gone and you’re left with a completely unmarketable piece of real estate that you can’t prove is yours.

    • lxlxlxl said, on October 9, 2010 at 10:01 am

      prove it.

    • Griton said, on October 9, 2010 at 10:04 am

      This is the best response I have seen yet and really gets to the bottom line of the issue. Pay your bills, pay your mortgage and better yet, pay it on time and guess what, you won’t have to worry about law firms/banks screwing up the paperwork on a property you will no longer live in anyway. I would venture to say that if mistakes have been made and corners have been cut by these so-called “foreclosure mills,” so what! They ARE NOT initiating foreclosure proceedures on those that understand they signed a contract to buy a house, and they are standing up for what they agreed upon. Furthermore, do any of you really think these banks like having to forclose to begin with?? Do you really think the banks are winning here? “Smell the coffee” people! Banks do well when they lend to responsible people that pay their bills. It’s about interest, not about having to slug it in the foreclosure process and ultimately dumping the house for so much less than the originally amount loaned.
      The only ones that are going to get hurt in this new mess are those with strong credit, you know, the responsible ones that didn’t buy way above their means in 2005? People like ME!!!! What kind of mess am I going to run into now if I want to buy a house that has been foreclosed upon?

      • noana said, on October 9, 2010 at 2:10 pm

        usually I don’t reply to people capitalizing “me”, but I will make an exception for YOU.

        You might get hurt when, after having diligently paid everything you owe, you have no
        sufficient documentation to legaly prove your ownership, so you might have a hard time trying to sell your house. Plus the Damocles sword of some day, somebody unrelated to the guys you paid turns up with the note and wants you to pay or leave.

      • patrick said, on October 9, 2010 at 2:44 pm

        Well your wrong that no one paying their mortgage on time is being foreclosed on, there have been several incidents where this has happened. In some cases where people owned their homes outright, the banks have mistakenly foreclosed. Something is very wrong in the system when this can be allowed to happen. Even one occurance of this is too much. In these cases the homeowners involved were no different from you, which means, hey buddy, it could happen to you too.
        The big issue that should concern you, regardless of your financial prowess, is in the property rights of citizens, assuming you are a citizen. Do you know who holds your note? If you sell your house, are you sure you have a clean title?

      • Westcoastliberal said, on October 9, 2010 at 5:27 pm

        Are you friggin’ kidding here? These godawful banksters are foreclosing on property they don’t own and have no legal right to, period. They’ve also been known to foreclose on property that DOESN’T EVEN HAVE A MORTGAGE!
        The previous post by CaitlinO is something to think about too. No one is exempt from the wrath of these banksters!

      • pebird said, on October 10, 2010 at 9:38 am

        Or sell the one you currently own (or at least you own a mortgage). Just because originating documentation is what we hear about, doesn’t mean that other documentation when your mortgage is sold isn’t also messed up.

        There are people who own their homes free and clear who have had foreclosure actions started – oops, so much for playing by the rules.

  8. retr2327 said, on October 8, 2010 at 11:26 am


    There have been sufficient published incidents of foreclosures and home invasions where the homeowner was not in default to establish that the “flaws in the paperwork” are a real problem for that reason alone. And it’s also worth pointing out that one of the reasons for requiring strict proof that the noteholder is the entity foreclosing on the note is to ensure that the claim that the homeowner is in default is valid.

    But even apart from the homeowners who are wrongly foreclosed upon, these fraudulent paperwork foreclosures may have other victims aside from the homeowners who are in default. Consider the new homeowner who buys the property after it’s been foreclosed, upon only to wake up one morning and find the actual noteholder claiming that the note’s never been satisfied; then what happens? Even if the new homeowner bought title insurance to cover himself as well as the new mortgageholder (and many don’t), it’s still a disaster trying to straighten things out.

    So yeah, paperwork matters.

    • destor23 said, on October 8, 2010 at 1:51 pm

      You’ve definitely convinced me that it matters. I’m bracing myself for the inevitable here though. At some point, and we’ve seen signs already, the financial lobby is going to want Congress to end this in their favor. To do so they’ll argue that people who legitimately defaulted are merely looking for a technical out. They’ll say all of this business with the note is an archaic throwback to the bygone days of stock certificates and bearer bonds.

      I do think we have to be prepared to face those arguments. Heck, we need a whole lot more transparency in this industry. I think a mortgage holder should be able to know when their debt as been bought and sold, by whom, and at what price. With that knowledge people could actually contact the ultimate owners and negotiate their debts. “Hey, you paid 50 cents on the dollar for this. I’ll pay you 75 cents on the dollar a s a lump sum, what do you say?”

      Why is this market not transparent?

      • CathyG said, on October 9, 2010 at 9:26 am

        The lenders can, and I’m sure will try, to go to Congress for relief. The problem they’ll face is that real estate law is not at the federal level. It’s governed by every state and the states are very invested in seeing that proper land law is followed. Among other reasons, they get a lot of their revenues from property taxes.

        Will the banksters go to every state to have land law overturned?

  9. Altoid said, on October 8, 2010 at 11:46 am

    Am I understanding correctly that the note is the real issue here, in the sense that if you don’t have the note, what you really have is a signature loan to the homeowner and no legal right to the house or any other collateral in the event of a default?

    If that’s the case, what a complete cockup. And the courts simply must enforce property rights on the lenders, at whatever level, and insist on presentation of actual notes. No legal process can happen just on the presumption that there has to be a note somewhere, even if that might be a completely legitimate assumption. Even if one is presumed to exist, if it can’t be located, which of the interested parties has the right to the premises? Only the note-holder can get the collateral.

    In any case, it doesn’t seem to me that any homeowner has the least obligation to surrender premises to anyone who can’t actually produce the note. Possession is supposed to be nine points of the law, right?

    • pebird said, on October 10, 2010 at 9:39 am

      You actually only possess a mortgage. You occupy a house which is possessed by a bank.

    • The Reasonable Curmudgeon said, on October 13, 2010 at 7:42 am

      It’s actually worse than, “what you really have is a signature loan to the homeowner…” The bank doesn’t even have that, The note IS the signature part of the loan. Without the note the mortgage is worthless. It has nothing behind it to provide collateral.

  10. Ron Alley said, on October 8, 2010 at 12:01 pm

    Midwest Lawyer makes an excellent point. Bar association ethics committees clearly have the authority to discipline lawyers. I suspect that a small number of law firms account for a very high percentage of all foreclosures in any state. Complaints can be made not only by the homeowner but by the Justice Department as well. It surely would be interesting to see the Attorney General set up a shop in the Justice Department to pursue fraudulent foreclosures and the corporate employees and officers and their lawyers who filed false statements. I’m confident that a few FBI inquiries would expose the truth about fraudulent filings.

    In addition, lawyers who learn that they have filed fraudulent documents in a court have an ethical obligation to disclose the fraud to the court. They also can be disciplined for failure to make the required disclosures.

    The unfortunate truth is that courts and bar associations are reluctant to pursue claims against debt collectors.

  11. save_the_rustbelt said, on October 8, 2010 at 12:04 pm

    As of today, would any agency write title insurance on the sale of a foreclosed home?

  12. retr2327 said, on October 8, 2010 at 12:30 pm

    Midwest Lawyer does raise an interesting point. From what I’ve read, the overwhelming majority of the foreclosure cases in Fla. are being handled by 3-4 law firms. While bar associations may be reluctant to penalize att’ys for conduct engaged in by large numbers of lawyers, it’s not clear to me that similar disincentives would be operable when the targets of such enforcement actions are so sharply limited, and the public outrage against such practices is so potentially high. Maybe we could get a few Fla. lawyers to start filing complaints to the Fla. disciplinary committee?

    • CathyG said, on October 9, 2010 at 10:41 am

      If you want to have your hair catch on fire read the deposition from an employee of one of the largest Florida foreclosure mills. Fraud up and down the entire process. The entire deposition is available at:

      This is an excerpt:

      2 A Well, I’m using the main defendant’s social
      3 security number on somebody else’s name, not his name.
      4 John Doe and the main defendant was James, I was taking
      5 James’ social security number and putting John Doe’s
      6 name in there. I wasn’t but that’s what the practice
      7 was. The judges started saying we’re not going to
      8 consider service completed until –
      9 Q There’s a miliary search?
      10 A Correct.
      11 Q So why wouldn’t they use the right social
      12 security number for the right person?
      13 A Because you don’t have a social for an NKA or
      14 unknown tenant. They wouldn’t enter a final judgement
      15 unless the military doc was there.
      16 Q So you just used anybody’s?
      17 A Correct.

      9 A So what we had to do from that point, again
      10 the affidavits were still split in two pages, at that
      11 point we were supposed to be sending them back to the
      12 banks to be signed now. The problem being that a lot of
      13 times we wouldn’t get them back or executed in time for
      14 the hearings. So we had what they called signature
      15 pages that Tammie Sweat or someone else would have in
      16 their possession. If we couldn’t get it back from the
      17 bank executed in time we would just take a signature
      18 page and put it on the affidavit.
      19 Q What was on the signature page?
      20 A The signature and notary from the bank.
      21 Q Were these documents photocopied or were they
      22 original documents?
      23 A Some were photocopied.
      24 Q How would you get that many from a bank
      25 original? The bank supplied them to you.
      1 A Well, what would happen would be like if I had
      2 file A and that one didn’t go to hearing because there
      3 was something wrong with it and file B was going to
      4 hearing but it was the same bank, I would take the
      5 signature page from A and give it to B.
      6 Q Oh give it to another file?
      7 A And just re-execute this file.
      8 Q Okay. That was common practice?
      9 A Yes, after Cheryl couldn’t sign.
      10 Q Did Cheryl know?
      11 A Yes.

  13. Alessandro Machi said, on October 8, 2010 at 12:41 pm

    These two guys are usually interesting, but in this instance, boy are they on the wrong side.

  14. [...] What does Foreclosure Fraud mean? Looky-see. [...]

  15. Brian said, on October 8, 2010 at 2:42 pm

    I am not in foreclosure or default on my loan but am interested to find out if the owner of my loan can produce the correct paperwork. How do I find this out, and if I find problems with the paperwork what do I do next?

    • ipsedixit said, on October 10, 2010 at 7:27 am

      Send a Qualified Written Request (QWR) to your servicer asking who is the owner and holder of your note. They are required to acknowledge the request within 20 days and respond within 60 (those time frames just changed and I might have them wrong). They probably won’t physically produce the note, but it will give you an idea.

  16. [...] For a detailed but clear explanation of the various liabilities, see Mike Konczal’s description of who owns what and who stands to lose — and an explanation of why this might create a new [...]

  17. Barry Ritholtz said, on October 8, 2010 at 3:47 pm

    Nicely done

    The graphic explains this so anyone can grasp the chain

  18. [...] UPDATE: Thanks to a reader, here’s a link to an article explaining all this. [...]

  19. ryan said, on October 8, 2010 at 4:51 pm

    stupid question but doesn’t title ensure proper delivery of notes from tpo’s to lender – who then ensures notes are delivered to MBS during the sale to companies like bear stearns? (at least in title states)

    as someone who used to sell mortgages on the
    secondary market I find this line of argument dubious. no lender paid commissions without the actual note that I know of.

  20. Gary D said, on October 8, 2010 at 6:05 pm

    The latest disposition in Florida reveals a pattern of massive fraud by the lawyers and para-legals handling the documentation for the financial institutions. Whatever the court wants make it up, back date it, lose the record of payments the homeowner has made, forge government documents, use whatever notary public seal we have lying around, forge signatures, just get them out the door.
    There are two issues here 1) the massive fraud now revealed to have been used to provide the courts with seemingly legal documents, 2) establishing the real ownership and title of the homes in foreclosure. This mess started when it was revealed that often the banks foreclosing weren’t the ones who actually owned the titles which could have been bundled and fractionalized around the world. As that was being investigated the practices of the legal offices of the financial institutions were discovered.

  21. Foreclosure-Gate! | Icliks Incoming said, on October 8, 2010 at 7:36 pm

    [...] details on the foreclosure crisis, see this, this, this and this. [...]

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  23. Links 10/9/10 « naked capitalism said, on October 8, 2010 at 11:08 pm

    [...] Foreclosure Fraud For Dummies, 1: The Chains and the Stakes Mike Konczal. Our Tom Adams also walked Mike through this….. [...]

  24. [...] Link [...]

  25. gotoL, Chicago atty said, on October 9, 2010 at 1:59 am

    Actually, I have another, more intriguing question. If you’ve ever seen one of these Securitization agreements, usually called a Pooling and Servicing Agreement, or PSA (they’re available on the SEC website), a particular piece of property is identified only by town and zipcode, e.g., Itasca, 60143. I often wondered–and I practice in this area–what would prevent an unscrupulous originator from placing ONE property in more than one securitized instrument, thus doubling the commissions? They have this MERS system to prevent the duplicative filing of foreclosure actions.

    Remember this comment, because I think you’re going to see this in the upcoming months.

    • pebird said, on October 10, 2010 at 9:46 am

      I think you bring up the crux of the matter.

      If title is not unclear, then there is the possibility of the same property being used to secure multiple “first” claims.

      This happens in the “old-normal’ life occasionally, due to error or individual fraud, that is why there is title insurance.

      But when it become systematic – I don’t believe the “things were moving too fast for us to process correctly” line – then there is new game that can be played.

      No wonder no one wants to foreclose – who wants to find out that the same property has been pledged for multiple trusts.

      Although Congress will find a way to retroactively make that legal.

  26. Publius said, on October 9, 2010 at 4:29 am

    Florida has already set up an outside “court” system to process foreclosures en masse, without looking at the paperwork. They use retired judges, who are processing the requests for foreclusure at the rate of hundreds a day. I’m surprised we haven’t heard calls for “second amendment remedies” from there yet.

  27. The Mortgage Morass - said, on October 9, 2010 at 4:50 am

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  29. Arun said, on October 9, 2010 at 6:23 am

    1. How do mortgage payments reach the right destination if the paperwork is messed up? E.g., what prevents a servicer from pocketing the money if the Trust doesn’t have good documents?

    2. Suppose I pay off my mortgage. How do I know I am now clear of debt and in full title of my property, if the paperwork is in a mess?

    • Chris T. said, on October 9, 2010 at 4:00 pm

      1. Sometimes it doesn’t.

      2. You don’t.

      This is precisely the problem, and why those who never did anything wrong need to be concerned.

  30. [...] David Dayen also has an informative read up at FDL called “Foreclosure Fraud Destroys Claim of TARP Success.” It has good links in there, including to the Ezra interview with Tavakoli and to Mike Konczal’s “Foreclosure Fraud for Dummies.” [...]

  31. [...] David Dayen also has an informative read up at FDL called “Foreclosure Fraud Destroys Claim of TARP Success.” It has good links in there, including to the Ezra interview with Tavakoli and to Mike Konczal’s “Foreclosure Fraud for Dummies.“ [...]

  32. Mike said, on October 9, 2010 at 8:51 am

    UPDATE: I forgot to thank Tom Adams, a contributor to naked capitalism, for the help he gave me in understanding the topic in the original article. It’s updated above.

    Thanks everyone for the excellent comments. Please stay tuned for parts 2 and 3, which will discuss what a “note” is and why it is so important as well as start to sketch out solutions out of this mess.

  33. Bill Levy said, on October 9, 2010 at 9:00 am

    Well folks, the lenders may not be able to show a note but on the other hand the house holder wouldn’t be in trouble of loosing his home if he was paying his note. There is plenty of wrong going around for all sides and I think that Congress should stay out of it and let the lawyers, mortgagee and mortgagor work it out.

    Until these homes are cleared up title wise there can be no recovery in housing prices.

    • noana said, on October 9, 2010 at 2:00 pm

      @Bill Levy:

      Well, I guess your point was already addressed above by Gary D:

      > Whatever the court wants make it up, back date it, lose the record of payments the homeowner has made, forge government documents, use whatever notary public seal we have lying around, forge signatures, just get them out the door.

  34. [...] current foreclosure fraud issue is a major systemic risk for the financial system should check out Mike Konczal’s new post for the Roosevelt Institute. I’m going to try and simplify it even further here, and present the only serious avenue [...]

  35. ITDog09 said, on October 9, 2010 at 9:20 am

    I’m an idiot, but a curious idiot. I’ve always wondered why banks were allowing millions of mortgages to be months and months behind in payments. The conventional wisdom was that it costs the bank too much to process the foreclosure, so banks were just letting folks more or less squat in their homes.

    But this analysis leads me to a different conclusion. Do the banks know they lack the proper paper work to legally process a foreclosure in the majority of cases?

    • Publius said, on October 9, 2010 at 5:23 pm

      I’m still educating myself on this, but from what I read the problem is that since 2000 or so the structure of the system has changed, with the addition of “servicers” of the mortgages. These companies are the ones that collect the mortgage payments and are supposed to:

      1. Credit the mortgagee
      2. Pass payment on to the holder of the MBS.
      3. take their fee out of the remainder.
      4. handle the foreclosure if the debtor falls behind.

      They get a commission on every foreclosure they process. This is why HAMP was a failure — the commissions they offered were less than what the servicers were paid for foreclosing, but the servicers found a way to collect both by “negotiating” with the debtor, processing the ap0plication for HAMP relief, denying relief, and foreclosing. These guys are shown on the chart above as the entity just after the Trust.

      This is something Tanta wrote about a couple of years ago at Calculated Risk. Her opinion was that it was the result of the banks and servicers laying off people to improve their bottom line and as a result getting incredibly sloppy about handling the paper work.

  36. Lori said, on October 9, 2010 at 9:54 am

    If you think Lehman could brink down the whole banking matrix, think about what this could do

  37. lxlxlxl said, on October 9, 2010 at 10:08 am

    can someone take a step back and explain to me what this all means for home values? if banks are able to derive profits from every step in the chain of giving out a mortgage (from signing costs, interest, to securitization and foreclosure) then they sort of have an incentive to push home values up depending on what poor middle class schmucks want to pay. everyone wants to believe they are succesful and their house and car values are their only material and real expression of that.

    tack on a loan based on home value and the owners are even more tied to that house, its value…

    i might be way out of base here…but obviously it seems as though americans are willing to pay outrageous costs for property and complain about taxes…

    • pebird said, on October 10, 2010 at 9:49 am

      It means you need to price in a discount for the possibility you might pay for a property with unclear title, and also read your title insurance policy very carefully.

  38. Max Rockbin said, on October 9, 2010 at 10:32 am

    Many of these mortgages were actually inside FNMA or FHLMC pooled issues. Shouldn’t FNMA & FHLMC have the documentation? Or their own sad story of why they don’t?

    It seems to me that the Trustee for the pools is really the failed entity here. It’s their job to handle the admin stuff for the bond holders of the issue. Where are they in all this?

    Also, someone is being paid for servicing these mortgages. There’s a little bit of the interest peeled off and given to the servicer who collects the mortgage payments and deposits them with the trustee. Usually the service is the originator of the documentation. They are the first place to look if the Trustee never got the docs.

  39. Jeff said, on October 9, 2010 at 11:25 am

    Your charts here say that the ONLY Sponsor is Bear Stearns. I think you mean that Bear Stearns is one EXAMPLE of a Sponsor. I.e., you mean “e.g.,” not “i.e.” You might want to learn that distinction, since otherwise you’re confusing the issue, and obviously that’s not your intent.

  40. [...] Closing: Could you pass the citizenship test?; People other than me are calling the foreclosure mess fraud (perhaps the BAMTOR Principle will crumble and people will go to prison?); if everybody eats [...]

  41. [...] From Rortybomb [...]

  42. robby said, on October 9, 2010 at 1:16 pm

    So, assume that we are a society of laws and that the banks don’t legally have the right to foreclose on these houses, (I know this is a big assumption) who takes the loss? Is this Banking Crisis Part Two and we (finally) have to nationalize these corrupt institutions? Do millions of homeowners get their houses for free? I know, they shouldn’t have taken loans they couldn’t repay etc., etc., but it might be the stimulus that the economy needs. Where will the losses be concentrated if no one can legally foreclose? Didn’t the banks trade off a lot of these bad MBSs to the Fed? It is hard to see any solution to this.

    • Westcoastliberal said, on October 9, 2010 at 5:34 pm

      Unless Congress intervenes with some sort of blanket insane law (which just could be the powder to set off a revolution), I think property will need to be “cured” back to the point prior to MERS securitization. For newer properties this could be the builder, other properties it could be the owner just prior to whichever bank decided to securitize it. Anyway, this could go back 10 years and could involve reversals, paybacks, severe tax consequences, etc.

    • pebird said, on October 10, 2010 at 9:57 am

      First of all, millions of homeowners are NOT going to get their houses for free, so we can eliminate that possibility.

      The problem is not with who is occupying the property – although they get to feel the brunt of the problem. The problem is: were 1 million properties used to securitize bonds backed by 1 million plus properties? In other words, are there bonds out there with multiple claims on the same property.

      It gets complicated, because a single property can be sliced up – but in any event, has more than 100% of the property been securitized?

      If so, how big is the problem? Well, no one wants to know, because just like the entire neighborhood goes down in value when a property defaults, the entire bond market will sink like a rock if we find out this is a big problem.

      Of course, no one gamed the system to sell the same property twice – we were living in high ethical times during the last boom, right?

      You think the banks stopped foreclosing because they want to clean this up?

  43. Crash Random said, on October 9, 2010 at 2:40 pm

    Here’s WaPo on one individual and the nightmare of trying to challenge an invalid foreclosure. Keep him in mind when you hear about deadbeats and whatnot: the current system is designed to make it difficult for anyone to challenge their case.

    Okay, I read the article and it seems to me that guy was a deadbeat.

    * He did not make several mortgage payments.

    * Instead of catching up with his payments, he wanted the bank to “tap into” his “$50,000 of equity.” However, the market value of his house was $79K, down from the $180K that he paid. In reality, he had no equity to tap into.

    * He challenged the foreclosure, but lost because he missed his court date. Yes, it is indeed “difficult for anyone to challenge their case” if they cannot be bothered to show up.

    Of course, this doesn’t make forgery by the banks okay, but your wording suggested that this individual was not a deadbeat, and he was. If a person who doesn’t pay their bills and doesn’t show at their court hearing is not a deadbeat, who does qualify as a deadbeat?

    • Alessandro Machi said, on October 9, 2010 at 9:23 pm

      So the house is “worth 180,000″ when it comes to what is owed on it, but it has no available equity because the home has lowered in value to 79K . lol, I think I know who pays your salary.

      If the home has a 180,000 mortgage on it because it was worth that at one point, then the equity availability should be calculated based on the 2/3 value of the home formula that the banks were using as of a year ago.

  44. stopGOVTwaste said, on October 9, 2010 at 4:58 pm

    Rule 10b-5 — Employment of Manipulative and Deceptive Devices

    It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

    1. To employ any device, scheme, or artifice to defraud,

    2. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

    3. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

    in connection with the purchase or sale of any security.

  45. drfrank said, on October 9, 2010 at 5:49 pm

    If you borrow money and give the lender security for the debt, and if you fail to make the agreed payments, you should reasonably expect that the lender will eventually seek to recover its capital from a forced liquidation of your security.

    The fact that the lender did or did not do this or that , was or was not the beneficiary of a bailout, etc., or sold a loan to a packager who wholesaled it to a retailers, or originated loans with the intention of providing raw material to a manufacturer of mortgage backed securities, has no bearing on the obligation of the borrower.

    But given the enormous, asymmetrical power granted to the lender in this arrangement, there have to be laws and procedures to protect the borrower from an unlawful taking. Go to any bookstore with law textbooks and you find a rather thick one entitled, “Debtor’s Rights and Creditor’s Remedies.” You can’t just go into someone’s house and take the TV because you claim they didn’t make the installments any more than you can take the house.

    At a minimum, a creditor has to show proof of having loaned the money under a contract that the borrower has failed to perform. This is the Note. In addition, the lender has to have a valid grant of security interest and where real property is concerned that security interest has to be recorded in the public records.

    If there is no Note, perhaps some sworn testimony can be enough to prove the existence of the loan and a breach of the payment contract.

    If there is no grant of security interest, then there is no security for the loan.

    If there is a grant of security interest, but it was not properly recorded in the public records, or “perfected,” then there is not security interest.

    Note that there has to be a public register of claims against property, voluntarily granted and involuntary as well, or else there can be no way of buying something “free and clear” of claims, and consequently no way of selling property.

    Now, if there are two loans supported by the same security,by a security interest in a single property, then the first recorded security interest gets the first proceeds in a forced liquidation up to the amount that is owed and anything that is left over goes to the later recorded security interests.

    If the first recorded mortgage can’t provide proof that money is owed to it, or that there is a default, this is good for the later recorded security interests, which move up in order of priority.

    And similarly, if there is a flaw in the paperwork granting the security interest or if the security interest is not properly perfected, the right of the first recorded lien to proceeds of a forced liquidation may be “primed” by the later recorded interests. The second in line moves into first place, for example.

    It is hardly uncommon for lenders to find flaws in documentation when the time comes to rely on them to take property by force of law to settle a debt after a default. It is hardly uncommon for lenders who are aware of flaws in their documentation to try to cover up or fix it in some way consistent with the intention of the original contract. This is as true of lenders who originate to hold as it is of those who originate to sell. And it happens even though there are lawyers and compliance officers supposedly checking. Talk about the devil in the details.

    As between lenders, first and second, or more generally, senior and junior in standing or priority, the fight can be pretty intense.

    In some measure, bankruptcy proceedings are a forum in which challenges to the order or priority of security interests is adjudicated, with the court to some degree acting on behalf of creditors who don’t have security interests, that is to say, protecting the unsecured creditors from unsubstantiated or imperfect claims of security interests.

    If you are wondering where the owner of the property comes in, remember this. There would be no foreclosure if there was any value left in the property for the owner after the debts were paid. A borrower who defaults due to an inability to make the contractual payments would logically sell the property if something could be salvaged after paying off the debts.

    By the same logic, there would be no rationale for a bankruptcy filing unless there was not enough cash flow or asset value to cover all the claims.

    This is pretty basic and, I believe, more or less widely understood at a fairly primitive or intuitive level. Although foreclosure fraud appears perhaps to be a question of justice, at bottom it is really a matter of fairness. At stake is far more than the suffering of those put out of their homes, justly or unjustly, or the harm that would follow widespread bank failures. What is at stake is the basic trust in economic transactions with strangers without which a society cannot function.

    In some parts of the world today, and at some times in the past, people have not been willing to borrow money for fear of lenders, even if that means some loss of economic wherewithal and opportunity. I mean, in some parts of the world, ownership of real estate free and clear of liens and loans is considered to be a repository of wealth, the only defense against inflation and the only real thing that survives deflation. At least you can live in it or on it on pass it on to your heirs.

    • Alessandro Machi said, on October 9, 2010 at 9:18 pm

      Dr. Frank said…”The fact that the lender did or did not do this or that , was or was not the beneficiary of a bailout, etc., or sold a loan to a packager who wholesaled it to a retailers, or originated loans with the intention of providing raw material to a manufacturer of mortgage backed securities, has no bearing on the obligation of the borrower.”——-

      I absolutely DISAGREE with the above statement. If the bank leveraged my FUTURE mortgage profits and IMMEDIATELY reinvested that commodity in foreign countries with corporations that then produced product with slave wages and labor that reduced my ability to make a living COMMENSURATE with the deal we had already agreed to, then SCREW THE BANKS.

      The banks NEEDED TO WAIT until they had MORE of the money from all of these mortgages BEFORE they used it to lower our own standard of living.

      • ace said, on October 11, 2010 at 8:33 am

        If you had read just one more sentence of Dr Frank’s post (if not the whole thing), you would have, perhaps, quieted down.

  46. Ed Dolan said, on October 9, 2010 at 8:54 pm

    What interests me here is that after all the failures of government programs to help underwater homeowners get workouts, here we have nongovernmental actions like “get the note” that spring to life and force workouts. Can it be that all this is not evidence that “the system” is broken, but that it works?

  47. Mindrayge said, on October 10, 2010 at 3:16 am

    Mike, the problem goes beyond foreclosures. The only party that has the right to foreclose is the party that is lawfully entitled to the payments. If the party doesn’t have the right to foreclose that party was never lawfully entitled to any of the payments made by the borrower. The borrower is entitled to receive a refund of all the principal and interest payments they made as those payments were made to the wrong party. If the entity that is the last valid holder of the note no longer exists then the borrower not only would have their home but their monies spent. If the entity that is the last valid holder of the note still exists then that refund of principal and interest should be applied as a lump sum principal payment on the original note and the term remaining would be the remaining months starting at the point that entity stopped receiving payments – some years ago. I am sure that many people wouldn’t like this outcome but how else can there be any other outcome unless an act by Congress or collectively by the state legislature retroactively harm their own citizens while abrogating their rights at the same time.

    This would, of course, destroy the largest of our banks so you don’t have to imagine that Congress will be trying to invent a way to push all of this on the homeowner and making the banks whole in the process.

    • Ferret said, on October 10, 2010 at 2:26 pm

      Interesting (possibly speculative) analysis. In short, homeowners in cases where notes were missing would experience a windfall…and the big banks or other parties would likely collapse?

      There is a claim above that a QWR request for a note must be answered in 60 days. That would apply to homes in foreclosure or good standing.

      And yes, this would be all the more complicated because it would be subject to state law.

    • closingguyinpittsburgh said, on October 11, 2010 at 10:32 am

      There are some really badly mistaken assumptions here. Whether a lender or servicer still exists or not, a Note is an asset and doesn’t disappear because the servicer did. The servicer would have wound up its affairs by either being taken over by a successor, by selling its assets (usually in a bankruptcy) in an attempt to pay as much of its debts as possible or by distributing any assets it had to its creditors. In any case, the Note continues to exist and the borrower would have to pay the same amount under the same terms as specified in the original Note.

      Second, if a payment goes to the wrong servicer, the relief that the borrower is entitled to will depend on whether or not the loan had been assigned and, it it had, whether proper notices were given to the borrower. In any event, the borrower is obligated to pay the correct servicer. They don’t just get their money back and get to keep it.

  48. [...] more, see – > Foreclosure Fraud For Dummies: 101. All this, coming months from the holiday season and the onset of winter. Speaking of winter, [...]

  49. Jack Straw said, on October 10, 2010 at 9:02 am

    While I am in the “screw the lenders” camp, I try avoid over-heated rhetoric, tendentious arguments about “systemic fraud” that aren’t even remotely proved yet* and the war-like triumphalism that accompanies even the most modest “pro-borrower” event (e.g. citing “anti-MERS” cases that are actually exceedingly narrow rulings). Anti-lender partisans have been ignoring one very large problem for many defaulted borrowers: an exceedingly large number of loans have loan applications, signed by the borrowers, that misstate the borrowers’ income, assets and employment. This will be true of almost all WaMu (now JPMC) loans, Countrywide (now BOA) loans originated after 2005, GMAC loans (particularly those done by DiTech and HomeComings), and Alt-A loans held by Wells, Citi and USBank.

    Whether the misstatement was done by the borrowers or the originator isn’t going to matter that much initially, because borrowers are going to have to prove 1) that the originator did it; 2) that they themselves weren’t complicit in the missatements; and 3) that there was excusable neglect in having signed and attested to the accuracy of the application themselves. This will be a rather nasty turnabout version of borrowers’ “produce-the-note” strategy – it will be up to the borrowers to “produce the lying originator.” I have no doubt that the originators often (or even most of the time) initiated the falsification, but borrowers are going to have to prove it and prove that they themselves were innocent. Good luck with that.

    It’s important to understand that this is an option for lenders regardless of whether the borrowers are behind on their payments or not. Misstatements on loan application, in and of themselves, are “events” allowing the lender to declare default. Lenders won’t necessarily have to limit themselves to going after underwater, defaulted borrowers, but rather ANYONE who signed an inaccurate application.

    I would call this the lenders’ “nuclear option” or the “Empire Strikes Back” option where they start getting very aggressive in making mortgage fraud claims against borrowers. Lenders tend to be a vindictive lot and if their foreclosure remedy is off the table, they are still far from being disarmed, and now even more dangerous. While lender “standing” as plaintiffs for foreclosure can be fairly strict, standing for parties claiming borrower fraud is likely to be less strict insofar as a colorable and sufficient fraud claim will allow the lender/plaintiff much more procedural flexibility in asserting that it is a proper party-in-interest plaintiff. The allegation of a falsified 1003 loan application will be sufficient and colorable under the typical state Rule 9 and well as Rule 9 of the Federal Rules.

    Furthermore, lenders will not have to pursue many of these cases and its going to be their turn to cherry-pick the ones that will be their version of “high-impact” litigation. They are going to be able to get some high-profile judgments that won’t be dischargeable in bankruptcy. They will also get important “message” victories out of these cases – “if you (the public) wanna screw with us over sloppy paperwork, you better make sure your none of your loan files have material misstatements.” “You want to go after us for not reading the documents? We’ll payback is a bitch, isn’t it.”

    Stay tuned. And for borrowers ready to enjoy their free-and-clear house, I wouldn’t go spending that saved mortgage payment yet. You may need that money for a lawyer. Legal Aid’s not going to take this one (in fact, I’m pretty sure they are statutorily barred from doing so), and you’re not going to get contingency representation. You may get a free consultation, but after that it’s going to be a five-figure retainer. And needless to say, civil lawsuits may not be your only problem.

    * e.g. this piece, numerous NakedCap pieces,, LivingLies, etc., where I am supposed to be persuaded by a very complicated daisy-chained argument where the failure of any one link in the relevant law, the relevant facts and the reasoning may be fatal to the entire theory. The echo-chamber of self-interested commenters doesn’t make the arguments any more persuasive. NB: I am referring specifically to the “securitization-is-fraud” arguments, and NOT the falsified affidavits (where, like title insurers, I have a high degree of confidence that judgments supported solely by evidence admitted via falsified foundational affidavits are void), where determining the wrong-doing is about as straightforward as it gets.

    • gotoL, Chicago atty said, on October 10, 2010 at 2:37 pm

      I don’t know if you’re considering this quite correctly. First, the reason why there are so many homeowners in default is that the economy took a turn for the worse. Many, if not most, owners accuately stated their income on their applications, only to lose jobs, have their hours cut, or lose a business. No fraud there.

      Second, where the homeowner was encouraged to inflate income by the originator, there is an estoppel argument that is bolstered by the lack of submitted documentation that the lender will be able to produce.

      Third, I whole-heartedly agree with one point you make: lawyer up. This is not a do it yourself area of the law.

    • Ferret said, on October 10, 2010 at 2:55 pm

      Interesting take on trying to focus the blame back on the borrower. I see no overlap between these two issues–the integrity of originating documents, and whether the note exists. Shouldn’t the originator have done due diligence in verifying the originating documents? If there is a note, there is a note. If not, well…

      There is a claim above that a QWR request for a note must be answered in 60 days.That would apply to homes in foreclosure or good standing.

      Hence, there could be huge liabilities at the bank and bondholder end if many notes are missing. Some folks complicate this further by bringing up the issue of whether there were multiple (possibly bogus) paperwork shenanigans during the bubble for a particular piece of property (i.e., if many sales were made during the bubble, are there old transactions with missing notes?) Not sure what to make of that.

      Anyway, there could be a new crisis in the making, given the exposure of the big banks and other parties.

      p.s. In reading all these comments, I also see no evidence that MBS are being properly handled in terms of life cycle.

    • Alessandro Machi said, on October 10, 2010 at 10:21 pm

      I recently wrote two articles about this very issue on Swarm the Banks, that BIG Media like Sixty Minutes could come down on the side of the banks and make the home foreclosure activist look foolish by focusing on the shadiest of those who are fighting home foreclosures.

      It’s kind of like over celebrating scoring a touchdown when your team is still losing 35-6. The grittiest examples of what has gone wrong should be chronicled and made available to the national media so they don’t go and cherry pick the story to favor the banksters.

  50. [...] Explaination of the foreclosure robo signer problem By markbrian Amplify’d from [...]

  51. [...] Fraud In The History Of Capital Markets" Factbox: Foreclosure problems snowball Foreclosure Fraud For Dummies, 1: The Chains and the Stakes __________________ I went to buy a toaster and they gave me a [...]

  52. mike said, on October 10, 2010 at 4:52 pm

    funny how some of these jerks on their soapbox like to preach. when a giant corporation doesn’t pay it’s bills and goes into chapter 11, etc… it’s a “business decision” and everybody nods in agreement….”tough, but it had to be done.”

    when some poor sap makes the strategic decision to stop paying the mortgage on a home he’s upside down $200K on and the bank refuses to work with them to modify the interest rate/payment, it’s a moral failure and the guy is a dirt-bag.

    i’ve only met two kinds of republicans, millionaires and morons.

  53. Jack Straw said, on October 10, 2010 at 6:22 pm

    “Many, if not most, owners accuately stated their income on their applications, only to lose jobs, have their hours cut, or lose a business. No fraud there.”

    I agree that it’s only misrepresentation if it is known at the time of the application. It used to be common to claim or “state” income from side-jobs and/or businesses that were non-existent. My comment applies mostly to stated income or low-doc loans, but is not necessarily limited to them. My theory is that the big no-doc funders went that direction precisely because they knew much of the documentation was obviously phony anyway and ended up hurting them more than it helped. No doc was simply more efficient by cutting out the dog-and-pony of the cut ‘n paste photoshop era. I was told this by two senior managers at two different national lenders, who added that productivity went up, and discovery produced a lot fewer smoking guns to try to explain away in depositions.

    “Second, where the homeowner was encouraged to inflate income by the originator, there is an estoppel argument that is bolstered by the lack of submitted documentation that the lender will be able to produce.”

    This is going to be a challenge to prove, even though I am certain it happened frequently. But, it will be very much up to the borrower to prove it. Right now, lenders are having trouble if and when they are forced to meet their burden of going forward with the original, properly endorsed note, for example. While an estoppel argument might ultimately work, the burden of going forward will dramatically shift onto the borrower to get past “unclean hands” arguments to get the aid of equity. Good luck finding Justin I-don’t remember-his-last-name, the loan officer who “told me not to worry about my loan application.”

    My overall point is that the foreclosure defense bar has chipped away at the one remedy the foreclosure mills are set up to process. The lenders have 100 pages of loan documents to start their own search for novel theories to make the borrower’s life miserable.

    For example, the Fannie MAE standard mortgage has this gem in paragraph 24:

    “24. Waiver of Homestead. Borrower waives all right of homestead exemption in the Property.”

    I’ve tried to figure this one out for years and no one has ever given me a good explanation of what this means, or why it’s there. In my jurisdiction, it means at least 4 entirely distinct things. I see that the Illinois Housing Authority uses the same language in its mortgages, too. (But note, while Illinois “allows” – sort of – a spousal homestead waiver, my jurisdiction does not. A mortgage on a marital homestead without the signature of both spouses is entirely void.

    But back to my point. People are deluding themselves if they don’t think that the “lenders,” “pretender” or otherwise haven’t been busy the last few weeks determining their “now what?” plans. I am betting they are going to pursue as harsh a counter-attack as they can to get the public to be compliant; they certainly don’t have to worry about Congress, Treasury or HUD.

    • gotoL, Chicago atty said, on October 11, 2010 at 12:28 am

      We are pretty much in agreement. One thing I would stress is that many homeowners were being “economically rational” when they bought the homes they are now losing. This is how they were sold to them: in a rising market, they would be offered an interest only loan, and told “sure, the house looks too big for your needs, but it’s appreciating fast. If you sell it before the requirement to pay the principal kicks in, it’s like you lived there three years rent free!” I’ve heard this again and again.

      However, I don’t think the serious action will occur vis-a-vis homeowner/defendant v. Assignee/plaintiff. There’s more going on here, I suspect. Check out the flow chart above, where the originator and/or depositor doesn’t get the loan docs to the trust. Then google “DocX Get Net Document Recovery” and you will find a price list where for $35 plus costs, they will “create” documents necessary for a foreclosure. Now check out this gem from Atrios yesterday:

      “The Association of Mortgage Investors, a trade association, has called on trustees, who oversee loan pools on behalf of investors, to demand that loans be repurchased by their originators if required documents are missing. Typically, sellers have 90 days to fix such problems or buy back the loan. The group has also asked trustees to audit and hold servicers accountable for any losses due to improper servicer practices.

      “It’s very hard to see how the servicers can avoid reimbursing the trusts for losses caused by taking short cuts,” said David J. Grais, an attorney in New York who represents investors. Investors could press trustees to investigate servicer conduct, sue the servicers to recoup damages or replace a servicer, he said.”

      My point is that there is reason to fear that orginators placed a single piece of property in more than one trust. My comment above states in part: “If you’ve ever seen one of these Securitization agreements, usually called a Pooling and Servicing Agreement, or PSA (they’re available on the SEC website), a particular piece of property is identified only by town and zipcode, e.g., Itasca, 60143. I often wondered–and I practice in this area–what would prevent an unscrupulous originator from placing ONE property in more than one securitized instrument, thus doubling the commissions? They have this MERS system to prevent the duplicative filing of foreclosure actions.”

      As for the homeowner/defendant v. assignee/plaintiff, those problems are solved by producing the one and only original Note. After all, there is only one house to lose. But if there is more than one “Note”–copies can be indistinguishable nowadays–or the Trust sold securities when it never had the Note, and if this problem is systemic, now we are in danger of market meltdown.

      All that you need to posit is that 1) greed was rampant; 2) that the originators/depositors thought that the housing market would never depreciate and that people would do anything to stay in there homes, so there would be few defaults. See paragraph one.

      • Ferret said, on October 11, 2010 at 2:26 pm

        You mean multiple pieces of property were pooled with only two (obviously non-unique) identifiers–the town and zipcode–during origination?!? This is shocking.

        What are the implications of this? Obviously, a piece of property can’t be bound back to a particular security, or vice versa.

        Could this fact be a lynchpin upon which the securitization model (and our mortage system) falls apart?

        That is, if I can’t prove the existence of an underlying security corresponding to a property, does this make my mortgage and title claim invalid?

        On the other side of the coin, does it say the whole securitization system is bad, from an investment standpoint–since my security can’t be proven to represent an actual property?

      • Ferret said, on October 11, 2010 at 4:13 pm

        p.s. Anyone know what portion of mortgage securities are guaranteed?

  54. The Newest Game In Town — Why Now? said, on October 10, 2010 at 9:05 pm

    [...] Konczal is running a series with graphics to explain what is happening. He calls it: Foreclosure Fraud For Dummies. [You can read it even if you aren't a [...]

  55. Steve Smith said, on October 10, 2010 at 10:28 pm

    Don’t think for a moment that this is limited to states where the judiciary administers foreclosures. In California, a non-judicial foreclosure state, the same robosigners are involved in approving affidavits that claim the lender/servicer has contacted the borrower about alternatives to foreclosure, such as loan modifications, which is a requirement before they can record any notice of default.

  56. Jack Straw said, on October 11, 2010 at 7:04 am

    ‘They have this MERS system to prevent the duplicative filing of foreclosure actions.”

    I don’t think this is true. I used the MERS system nearly daily for 6 years to determine who the current servicer was for a given mortgagee of record – that is, the current mortgagee of record was of only limited usefulness in determining what I really needed to know. For a given MERS Mortgage Identification Number (19-digit MIN), there would only be one servicer. If there were two parties claiming identical interests in an identical note, I think that would have surfaced by now in a number of different ways. For example, credit reports showing identical debts held by different parties should be a common one. Unlike a lot of defense attorneys, I don’t see MERS as a problem, or at least THE problem – in fact, I’m pretty sure it prevented double-booking, except for the very dumbest and careless investors (evidence of whom I have yet to see in this particular manifestation). That is, if I’m following you? Although I have to agree that there is a certain type of originator – the relatively large regional correspondent in the last gasps of operation trying to fill a shortage in its line of credit – where this could have been the case. In any case, I have yet to hear of a case where a note-holder is saying “WTF? Dude, where’s my security?” (Note: as I said earlier, I do have one case where a note was sold off to collection after it was paid off, debt entirely forgiven, in a short sale. The collector, however, wasn’t trying to get the whole amount, just the shortage. I do think there was some guy in the lender’s short sale office who sold these accounts off “on the side.”)

    As for the danger of a melt-down, I have to say we’re well past the “danger” mark. I’m familiar with the Chicago area and it seemed to be about 2 years behind where my home market was, that is, a place like Hoffman Estates didn’t really seem to start skidding until about two years after similar suburbs in my area started taking a beating.

    As for the PSAs, REMICs and the New York trusts, I follow the argument, but I have too many unanswered questions to drink the Kool-Aid here yet. The bottom line argument seems to be that IRS rules and NY trust law make conveyances outside the very narrow timeline void. Maybe, but I don’t know that yet. What I do know is a lot of folks talking about this are wrong about basic real estate law, for example, the use of corrective and supplementary conveyance documents, and seem entirely unaware that states have extensive curative acts for defective documents. I do have one very large question about whether borrowers have standing to challenge the validity of assignments of mortgage, or transfers of notes in transactions where they are not parties, that is, the borrower is neither the assignor nor transferor, nor the assignee or transferee. One the one hand, they are potentially affected third-parties. But on the other hand, in the absence of actual competing claims to the note or security from transferees/assignees, it’s not clear to me what the problem is for the borrower. By the way, I would love to defend borrowers with these cases.

    Back to the Securitized New York trust/REMIC trust issue: if these trusts are unqualified to make or accept conveyances after the window closes, the lawyers who designed them truly created the legal equivalent of the Pinto, chosing a particularly poor vehicle for what was nearly certain to happen. Even more common than rear-end collisions for automobiles is the problem of trailing documents and late delivery in real estate. Too many people get paid at the time of closing and back office/back-end processing is frequently under-funded and understaffed where revenue is generated at clsoing. While late delivery penalties provide a disincentive for letting trailing problems linger, they fail to work at exactly the wrong time – when the affected vendors go out of business.

    Pintos were on the market, so this type of thing does happen. But here, the equivalent of the gas tank exploding would be multiple transferees/assignees coming forward claiming identical interests. Why isn’t this happening?

    Don’t get me wrong. I want to understand this, but I tend to work piece by piece rather than starting with a grand theory of everything.

    Another note: I have yet to find good authorities who grasp the nuances of both mortgage law (real estate) and (modern) debt instruments. My background is title law and the concerns with debt instruments were pretty much limited to custody at origination and delivery to the payee, and the broader question of whether an old lien was supported by a live debt. As a litigator now, I have learned that, as much of a mess as real estate law and practice is, it is a model of clarity compared to the law governing and the actual practice surrounding notes/debts. The issue of whether the typical note is a negotiable instrument, for example, doesn’t seem to have been the slightest concern for lenders. Some are, some aren’t, and some are indecipherable as to which they are. Is this what lender attorneys get paid to produce?


    “The Association of Mortgage Investors, a trade association, has called on trustees, who oversee loan pools on behalf of investors, to demand that loans be repurchased by their originators if required documents are missing.”

    Good luck with that investors. As I said above, this is a remedy that fails as soon as you need it. What will be interesting to see if this comes to pass is who among the originators can make good on this. The brokers are all gone. The regional correspondents are almost all gone, and can only handle a nominal repurchase in any case. The net branches can’t repurchase. The retail bank lenders will have to feast on each other.

    • gotoL said, on October 11, 2010 at 7:45 am

      I guess I didn’t explain it clearly enough. The problem is not with there being more than one obligation, but with there being one property pledged multiple times as security in the event of default.

      Compliance Lawyer, below, is correct, follow the Note and you can straighten that mess out, but what of the investors in the MBS? As you say, good luck with those, as many of the originators are out of business; however, that still would impact market integrety (I wasn’t talking about the real estate market, as you suppose, but the shadow banking system.)

      BTW, great, great conversation here! Smart people renew my faith in democracy.

  57. Compliance Lawyer said, on October 11, 2010 at 7:09 am

    All of these bright people and great comments … missing the point. In All states (judicial or non-jud foreclosures), the NOTE is the single Prima Facie evidence of the debt. Not the mtge doc, or an affidavit … THE NOTE.
    Most judicial foreclosure states used to require that the forerclosing plaintiff (lender) physically produce the original note at the foreclosure hearing before a judgment of foreclosure could be entered. Then MERS was created and everyone assumed that they would track the loan dox and notes correctly. Looks like they did not.
    Unless Congress is willing to intervene, and spend another $ 2T, about 5 million homeowners and many large banks and investors will be embroiled in this mess for years. Forget the new DFA – this one is a sleeping giant. There will be no quick or easy way to fix it, either. Sorry, but I think that is the reality here.

  58. [...] mentioned the issue last week, as does Mike Konzcal over at Rortybomb in his excellent ‘Foreclosure Fraud for Dummies’ [...]

  59. [...] Foreclosure Fraud For Dummies, 1: The Chains and the Stakes Mike Konczal RortyBomb, October 8, 2010 [...]

  60. [...] Foreclosure Fraud For Dummies, 1: The Chains and the Stakes The current wave of foreclosure fraud and the consequences for the economy are difficult to follow. As such, I’m going to write a few posts to simplify what is going on so you can follow stories as they unfold.  Source: Rortybomb [...]

  61. [...] leave a comment « Foreclosure Fraud For Dummies, 1: The Chains and the Stakes [...]

  62. closingguyinpittsburgh said, on October 11, 2010 at 10:55 am

    Here’s something that I’d like to point out: This country has an overabundance of lawyers. They’re everywhere. Big firms, solo practitioners, boutique shops, specialists, multinational firms. They aren’t hard to find.

    I look at the title search for a few foreclosed properties a week. Do you know what I rarely, if ever, see? A person who was sued in a foreclosure that gets a lawyer and fights it. As much as people want to howl about the defects, from my experience in what I do every day, as my profession, that I’ve been doing for the last 10+ years, the vast, vast, vast, vast, vast majority (like 99+%) of the persons who were intended to be protected by the judicial foreclosure process don’t even lift a finger to contest because they know they’re in default and on the way out. That’s what I see, not based on what I read in the news or what some expert is spouting, I see it directly from the courthouse. Foreclosures are filed and, one after another, it results in a default judgment, default judgment, default judgment, default judgment and on and on and on.

    If somebody is a good borrower and they get mistreated by a servicer, I hope the servicer pays big $$$ in damages, gets hit with disclipinary penalties and possibly even has criminal charges filed against them. But don’t be deluded in to thinking that even a fraction of the people being foreclosed are trying to fight the foreclosures and the system is railroading them.

    • Alessandro Machi said, on October 11, 2010 at 12:36 pm

      Excellent premise, incorrect conclusion. Lawyers don’t like foreclosure cases and the homeowners can’t afford their upfront fee.

      I happened to be in a courtroom when someone who DID sue Chase Bank had their case MOVED from a superior court to a FEDERAL COURT. Yeah, I’m sure that move favored the homeowner (snark alert).

  63. Jack Straw said, on October 11, 2010 at 11:08 am

    I should have also said that securitized trusts/REMICs that can only accept assets within the 90 day window is a “Pinto,” as well. See reference to trailing document problem where late delivery is a certainty, not just a possibility.

    In part 2, Mike talks about the tax treatment, and yes, I was aware of that. My question has been, late entries into the trust might be ugly taxable events (which may lead to big incentives for tax evasion), but I’m not seeing why such an event can’t happen. And furthmore, tax evasion doesn’t equal a void transfer or conveyance, as far as I know. But, this what is frequently being said, “That it just can’t happen.”

  64. [...] This creates legal liabilities for the banks that can push them into failure. A lot of these securities were packed with fraudulent mortgages–loans where banks falsified borrower information in order to push them into predatory loans. Investors who bought these mortgages have been trying to force banks to repurchase the fraudulent loans. But now that banks cannot even document which loans they own, the entire fraudulent mortgage securitization framework may land on the banks’ doorstep. If that happens, we’re going to see some very big banks go under. [...]

  65. bill keels said, on October 11, 2010 at 1:26 pm

    to get these tranches of sub par mortgages up to investment grade, some mortgage aggregators or investment banks bought insurance, or insured that the homebuyer had bought PMI private mortgage insurance AND SOMEBODY PAID THE PREMIUM….with this insurance in place, the rating agencies bestowed an investment grade rating on the tranche, and money and happiness was passed all round, except for the poor mortgagor…

    some of the pmi folks layed off some of their risk on aig, swiss re, etc……but most didn’t and they are long gone in the system now….

    we will be 100 years cleaning up the title clouds from this foolish expedition…..everyone who owns a house with a mortgage should file an affidavit with a court, or clerk of the court, that they are starting the clock on adverse possession, even if the affidavit states that the adverse possession is being initiated is against any and all parties, known or unknown…..this way, in 7 years of open and hostile possession title passes….terrible state of affairs, but great american greed knows no bound…

  66. Lance Winslow said, on October 11, 2010 at 4:01 pm

    This sort of thing is nothing new, it’s been going on for decades, it’s just worse now because of all the mortgage shuffling, bundling, trading, and layoffs in mortgage divisions of banks, busy courts due to budget cuts and layoffs. The reality is that this is business as usual only this time it’s exaserbated and on steroids due to all the other circumstances.

  67. [...] diagram below from the RortyBomb blog outlines the proper foreclosure steps in a [...]

  68. [...] week, Rortybomb posted a nice explanation of of the foreclosure fraud crisis and why it is a systematic problem, not one of a few “bad apples.” The graphic below [...]

  69. Richard DelPorte said, on October 12, 2010 at 7:54 am

    You are all just pissing in the wind; merely prolonging the inevitable.
    At the end of the day, these borrowers aren’t making their payments.
    They are in violation of the covenants in the note.
    Despite the shoddy record keeping and associated misdeeds by the servicers.
    This ruse is a headfake to distract from the real issue – delinquent borrowers.
    The quicker they are foreclosed on the better – for everyone.

  70. Angela said, on October 12, 2010 at 8:42 am

    FOOD FOR THOUGHT – I’ve been in banking for almost 30 years and there IS NOT A BANK ON THE PLANET that has a handle on their security documents. Doesn’t exist – I speak from experience. I’ve been laid off several times and each new bank I join suffers from the same syndrome. Too much consolidation/acquisitions of the banks/servicers, and a complete absence of sufficient staff, to manage the heaps and hordes of documentation. Most big banks are just now scanning documents to create electronic files – This is how they’re finding out they don’t have the legal documentation to perfect their lien positions.

    AMERICANS – If you’re going through a foreclosure and your lender CANNOT physically produce the original Note, they CANNOT foreclose on you. Ask your Lender to evidence (not represent) their possession of your mortgage documents.

    The absence of original mortgage documents during the CDO craze is the single biggest fraud perpetuated against consumers and you can bet the Obama administration will not do ONE DAMN thing to protect consumers.

    • Ferret said, on October 12, 2010 at 2:54 pm

      Hmmm, your comment raises significant concern.

  71. Angela said, on October 12, 2010 at 8:51 am

    PS – Could this also be why banks’ are so reluctant to renegotiate. They don’t have the original documents.

  72. [...] flowcharts posted by Barry Ritholtz (sourced from  Foreclosure Fraud for Dummies Part 1,  Part Two, Part Three, and Part Four) show the process as it should occur.  The news [...]

  73. The foreclosure scandal « Jim’s Blog said, on October 12, 2010 at 11:24 am

    [...] any great sensation of outrage and pity, but yes, there is a scandal here and it is really bad.  Also very, very [...]

  74. [...] Meet the robo-signer who kicked it off here at this WaPo story. I almost feel bad for this patsy; the real battle here is between junior and senior tranche holders, and this doofus could end up in jail in order to keep John Paulson rich. After reading about this guy I’m asking our elites to take care of their patsies better. (Can we get a Financial Patsy Fordism social contract movement going? If you are going to be a patsy for GMAC, you should be paid enough able to be able to buy GMAC’s services or something.) The full article can be found at Rortybomb. [...]

  75. Albin said, on October 12, 2010 at 3:56 pm

    Missing boxes seem to be Fannie or Freddie and then the Treasury or Fed as ultimate backstops, with taxpayers as the ultimate losers.

  76. Barbara Ann Jackson said, on October 13, 2010 at 12:30 am

    The ELEPHANT IN THE ROOM (hiding in plain sight)

    Because for more than 5 years, I have been sounding the alarm about FORECLOSURE DEBT COLLECTION abuses, I’m glad the fantastic occasion to expose the NUTS & BOLTS of the most ominous element of foreclosure fraud has finally come! I call it “the ELEPHANT IN THE ROOM! I hope the Florida’s Attorney General prevails in investigating foreclosure mill firms who CLEARLY fabricate foreclosure documents!!

    It is imperative that MILLS are investigated for INTENTIONALLY FABRICATING court documents because certain lawyers are engaged in SELF-DEALING FORECLOSURES. Most definitely, it is NOT A WASTE OF TAX PAYER MONEY to probe awful, underhanded illegalities surrounding foreclosures which have caused thousands of people to be UNLAWFULLY evicted and homeless –while unscrupulous lawyers became CRIMINALLY ENRICHED.

    LONGSTANDING foreclosure frauds incorporate false CIVIL as well as BANKRUPTCY court pleadings; repetitive and illegal property flipping (thus blighted neighborhoods); “simulated auctions” and “straw buyers”; FALSE “lift stay” motions and FALSE “proof of claims;” and “fee-splitting.” Certain lawyers achieve extra benefits from litigating foreclosure defense lawsuits, and MISREPRESENT to their mortgage-clients that homeowners are delaying foreclosures, but actually its continual deceptive lawyers’ activities –while billing $$$$ to clients and actually committing MALPRACTICE + fraud upon the courts + fraud & illegal exploitation of homeowners!

    Because fraudulent foreclosures include many facets, culmination can take years while arranging cash cow “PAWNS” needed for big pay-offs. [Super Future Equities Inc. v. Wells Fargo, et al., @

    LIKE AMERICA NEED JOBS, FORECLOSURE MILLS NEED INVESTIGATION. State Attorneys General everywhere now need to recognize the ELEPHANT IN THE ROOM –which has been for a long time, hiding in plain sight: foreclosure mill fraud! *

  77. As the World Spins…. « Out Of My Mind said, on October 13, 2010 at 2:52 am

    [...] (If he cares, he can read about the problem here and here.) [...]

  78. [...] not stop at the mortgage originator but stretch all the way through the process. (For more on this, see RortyBomb’s excellent discussion of the securitization process, complete with nifty and highly informative [...]

  79. [...] the making of the market in mortgage backed securities affected by flawed documentaton — see this excellent series for more), the confidence expressed by the CFO in question, Mr. Douglas Braunstein, reminds me of [...]

  80. C. Peereboom said, on October 13, 2010 at 2:22 pm

    As a European, I am curious to see this stuff developing and I just want to ask you :
    is Capitalism still working out for you guys ? Could this thing become the new, and bigger, banking crisis ?

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