A Short Dissertation on the Potential Future Liability of the Lenders
This was originally composed as an email to a friend in South Florida. It is submitted here for our readers to mull over.
You asked me to briefly sketch for you the possibility of class-action remedies for homewoners in foreclosure cases. For that, I’m going to have to go into a history of what has happened so far. Sorry if you already know most of this stuff, but I just can’t assume it. Let’s start by dealing with the most common scenario I face.
Mortgages during the refi boom, bundled together and sold as mortgage-backed securities were red-hot on Wall Street. There was a rush to bundle mortgages into investment trusts (such as Argent Securities Series 2006-2, which I see alot) and sell them to investors. Here’s the problem. SEC and IRS pass-through tax regulations, as well as the pooling and servicing agreements for these trusts that have to be filed with the SEC, all require that the trust corpus (the notes and mortgages) be transferred to the trust within limited periods of time, usually 90-120 days. This was far beyond the realm of possibility. Some experts have theorized that as many as 50% of original notes and mortgages were actually destroyed in order to prevent proof that they were not properly transferred.
Scenario one. Now, we have banks such as Deutsche Bank, and US Bank NA, as trustees for the investment trusts, suing to foreclose on these mortgages. In virtually every case, there is no assignment of the mortgage in anybody’s favor, and frequently the notes filed in the case contain no endorsement. A year later, when they begin summary judgment, original notes comes forward, properly endorsed. Because the endorsements are not dated, the assignments are usually better evidence of fraud. They are always prepared by the foreclosure firms, and are almost always signed by employees of Nationwide Title Clearinghouse in St. Pete, as officers of the original mortgage company. Beyond that, the motions for summary judgment always contain an affidavit of some employee of the trustee who claims to have examined all the documents, verified the amounts due, etc. In my experience, all of these signatures are as phony as three-dollar bills. But as you well know, proving it is difficult, expensive, and most judges just don’t care, they won’t hold up a foreclosure just so you can conduct a deposition, frequently of someone out of town. So the trustees foreclose, and people lose their homes. Many of these, of course, are subsequently sold at foreclosure auctions by innocent purchasers for value.
To the best of my understanding, these are clear violationsof the Fair Debt Collections Practices Act, in that they have used legal process to enforce and collect a debt they had no right to collect. However, in scenario number one, we run into an enormous series of problems. First of all, the misdeeds need to be uncovered. Not too much trouble there, at least here in Florida the AG is investigating all of these companies and foreclosure chop-shops. It will all come out. So what? What next? Who do you hold liable? Who is ultimately responsible? Deutsche Bank, for one example, is acting in the capacity of trustee. The real liable parties of violating the FDCPA are technically the owners (or better, purported owners) of the debts. Of course, companies like Deutshce Bank would be liable for any intentional wrongdoing on their own part that exceeded their authority as trustees. But they, of course, are going to point the finger at the attorneys. Bottom line, a blinding melee of lawsuits (which will include homeowners, innocent purchasers for value, and of course the men, women, and retirement funds that own these trusts!) which in all probability while paralyze our federal court system and likely denude the entire pacific northwest of trees to print all the paper, with no clear liability or ability to collect in the end. This will make the Agent Orange and tobacco lawsuits look like small claims actions, and likely will not be resolved prior to 2105.
Scenario number two. A bank, 95% of the time Wells Fargo in my experience, bought the mortgages from Fly-By-Night Lenders, Inc., and are now seeking to foreclose. Wells Fargo very rarely has the assignments, and the companies that sold them the mortgage no longer legally exist. Wells Fargo has no doubt obtained summary judgment on thousands of homes without ever having or showing a valid assignment of the mortgage. But you can bet that all the documents they filed with the court claimed at the very least, “they now had the right to enforce and collect this debt” which is essentially the same thing. This scenario is the same as before. Affidavits are filed attesting to the vailidty of the debt and Wells Fargo’s right to collect, signed by people that sit at a desk and sign hundreds of these papers a day because they are valid employees of Wells Fargo, and those affidavits are the ONLY mortgage documents they have ever seen, or for that matter, cared about. It is this factory signature practice that has led to the national moratorium on foreclosure by many banks, but we’ll get to this in scenario three. Here, we have a different ballgame. No shadowy, unseen investors and complicated securities issues. A bank that bought loans, foreclosed on properties, and sold them to people who had no idea Wells Fargo had no right to foreclose in the first place. Here liability is clear (so long as the federal judge hearing the case agrees that making fraudulent representations to a state court is a FDCPA violation!), damages are astronomical, and aggrieved parties abound. 90% of Florida homeowners never asnwered the complaint, and just walked away, *assuming* the bank that sued them had the right to. Now, here, the good attorney in you should say, well, they slept on their rights, they lose. While true on a state level where the time limit for filing a motion for relief from judgment based on fraud has long come and gone, the statute of limitations to file for a FDCPA violation has not. The import of all this should be sinking in clearly by now.
Lastly, scenario three. The original lender, or its legitimate successors and assigns, sues to foreclose. Same as before, some trained chimp sits sitting affidavits all day long without reviewinga damned thing. Bottom line, fraud on the court. Remember, in Florida you cannot foreclose just with a mortgage and note. You have to prove “all conditions precedent” i.e., default, acceleration, etc. This done by affidavit. That are turning up more and more to be sworn statements containing very false allegations. (Not just failure to review pleadings and files, but even complience with notification conditions of mortgages.) The upshot of this is exactly the same as scenario two. Thousands of improperly lost homes, purchasers for value, the whole enchilada. These banks are furiously at work right now trying to figure out just how hard the hit is going to be. Obviously we’re talking billions. Whether ther US banking and financial institutions can stand this battering is anyone’s guess. It’s a bigger mess with far greater ramifications than the simple margin buying that torpedoed the stock market on Black Thursday. But one thing is for certain. If these banks survive they are going to be selling their rubber bands to pay out on all these claims.
One last thing. Second mortgage holders. The conventional wisdom was that all the second mortgage holders (typically smaller banks like Region) in this mess were just SOL. The houses had depreciated so badly that there wasn’t anywhere near enough to satisfy the first mortgages, let alone the seconds. But, if the first mortgages get tossed as invalid, now the second mortgage holders jump line to primary lien holders! “Curiouser and curiouser, said Alice…”
In summation, this should give you a very good idea of the enormity of the situation and show you where the successful class actions should (and will!) be filed by the saavy attorneys and firms that don’t want to get left behind in the potential killing of the century.
TDG
