Skin in the Game

Posted by kevin on August 5, 2016 under Foreclosure Blog | Be the First to Comment

I read an article in Bloomberg about new waves of regulations on mortgage backed securitizations in the EU. One recent proposal requires that the sponsor of a securitized trust must retain up to 20% of the offering. My experts have uncovered some offerings in the US from 2006-2007 where the sponsor is holding a much smaller precentage- known as the residual tranche.

So, what does this mean? In Europe, it appears that the regulators believe that if the sponsor has “skin in the game”, there is less chance that it will try to foist unduly risky investments onto the public. But the article set me to thinking. Looking at retaining an interest in the securitization from a litigation standpoint, such a regulation may open up new defenses for the borrower.

The object of most mortgaged backed securities (MBS) offering is that the trustee is buying the pool of mortgage loans from the sponsor through the depositor. On closing day, the sponsor through the depositor is selling the notes and mortgages to the trustee. The note, they claim and the courts have agreed, is a negotiable instrument. As the buyer of the note, the trustee can become a holder under Article 3 of the Uniform Commercial Code (UCC). A holder is the first step to becoming a holder in due course (HDC). The trustee wants to be an HDC because you take the note free and clear of most defenses to the note. It is like laundering the transaction.

So, if you had a subprime loan for 450K on income of 30K given to a person who did not speak or read or write English with a 500 FICO , you probably have a good case under predatory lending and consumer fraud. However, if the originator of that loan sold it to a securitized trust, the foreclosing trustee could argue that it is an HDC. The borrower may be able sue the originator, but vis-a-vis the trustee (who is foreclosing on the house), the borrower is usually SOL.. Not good for the borrower.

But, perhaps an argument could be made that the transaction is not a sale because the originator is keeping a portion of the loans. It is more akin to a security interest under Article 9 of the UCC. If Article 9 controls, the there can be no HDC and the trustee takes subject to all the bad things that the originator may have done.

NJ has take the approach, for the most part, that a borrower lacks standing to argue that the note is not in the securitized trust because it was not transferred in accordance with the terms of the Pooling and Servicing Agreement. I disagree with these holdings, and so does the Supreme Court of California and courts in other states. But so far, my argument plus $23 gets me a parking space at Citi Field.

Perhaps the argument that may get some traction is that because of the residual tranche, the transaction is not a sale of notes and mortgages but a secured transaction covered by Article 9. If that argument prevails, we might see more case law in NJ where the banksters get tagged for treble damanges and attorneys fees under the Consumer Fraud Act.

Let’s Get Realistic

Posted by kevin on September 13, 2015 under Foreclosure Blog | Comments are off for this article

If you have read my blog over the last few years, you know that I represent borrowers. You know that I have pointed out forcefully what lenders and servicers have done wrong. Moreover, I have pointed out my frustrations with the courts, servicers, and government.

We are in the latter stages of the mortgage crisis. It is not clear that the federal government will continue the MHA- HAMP programs for much longer. However, there are still hundreds of thousands of mortgages that are in default and those cases need to be resolved.

So, you are a borrower. You may have gone into default when your option arm mortgage had an interest rate change. You could not afford the $3500 per month new payment You may have been in default for 2 or 2 1/2 years. Then, you were able to get a modification at $2800. Not a great deal, but it was better than being thrown out on the streets. You paid that for a year, but have not made any mortgage payments or real estate tax payments or insurance payments since the beginning of 2012. That comes out to more than $200,000 of payments that you have not made over the years and you still have a roof over your head.

Whoa! That does not sound too empathetic. But that is how most chancery judges in NJ are going to look at you. Chancery is the old equity court. Equity, they tell us, tries to balance the pro’s and con’s of a case to come out with a just decision. On the one hand, you, the borrower, took 200K, 400K, 600K and did not pay it back. On the other hand, the bank has shoddy paperwork or fudged your income (usually with the borrower’s knowledge). Does that mean you get a free house? That is tough for a judge to swallow.

Many of the procedural defenses such as standing in securitized trusts and violations of the Fair Foreclosure Act are no longer bases for relief. Potential clients call all the time and tell me that they were the victims of predatory lending because they were given a mortgage that they could not afford except by looking to the collateral. That is a primary definition of predatory lending under the federal regs and OCC guidelines, but it generally falls on deaf ears in court. In NJ, we have three published opinions (and a few more unpublished opinions) dealing with predatory lending and consumer fraud violations. One deals with a black family in Newark. The other deals with a Hispanic person on a modification. The third deals with an 83 year old woman who lost her house in a scam involving a contractor that took back a mortgage on her property to finance the installation of new aluminum siding.

What do these cases have in common? They all involve taking advantage of unsophisticated people who did not have a lawyer. Moreover, those unsophisticated people were either minorities or old people. In other words, in practical terms, it appears there is a demographic element to the way the law of predatory lending/consumer fraud is applied in NJ. Now, I do not believe that is a proper interpretation of what predatory lending is, but that is how it applied in NJ.

Each week, I have people call me and state that they are victims of predatory lending and/or they were jerked around by servicers in modification applications or they were scammed by a Florida or California outfit in the modification. They want me to guarantee that if I take their case, they will not be foreclosed on, or guarantee that there will not be a sale after judgment, or guarantee that they will get a modification that they deem affordable. And while you are at it, could you keep your fees low because money is an issue.

Neither I nor any other attorney can make such assurances except as follows: if you repay all arrearages before final judgment, your mortgage will be reinstated. Moreover, if you file bankruptcy, the foreclosure action will be stayed for a limited period of time in a Chapter 7 and could be effectively stayed for 5 years in a Chapter 13 if you make all required payments going forward including your current mortgage payments and all arrearages. Short of that, no guarantees.

What we can do is explain to you your defenses and come up with a strategy to defend the case through trial and possibly appeal. We can review your modification applications or put together a new one. We can analyze whether there are any violations of the Dodd-Frank regulations. We can analyze whether Chapter 13 makes sense for you. And we can tell you the approximate cost for each type of service. But we cannot pull rabbits out of hats no matter how much we would like to.

So, be realistic when you seek legal counsel.

Round and Round We Go

Posted by kevin on December 2, 2014 under Foreclosure Blog | Comments are off for this article

Prior to 2008, I viewed many appraisals with a bit a disbelief. The economy was growing at 3-4% but real estate prices in NJ were going up by 20%. Something had to give and it sure did.

When I started doing foreclosure defense work, I was shocked to see the mortgages that were being given out based on highly questionable income. How could a guy that worked as a manager at Home Depot get a $500,000 mortgage? Moreover, who, in their right mind, could believe that that person was making $10,000 per month? Welcome to the world of stated income loans.

Any sane person would conclude that the manager at Home Depot was not making $120,000 per year. One would think that an underwriter would come to that same conclusion. How, then, could the employer of that underwriter lend a half million dollars to that manager. If not based on income, it had to be based on the value of the collateral. Enter the appraiser.

More than a few appraisers were fudging their appraisals. The problem that I found was that it was difficult to get an expert to testify that another appraiser was playing games. A tight little group. At any rate, I was not able to go after any appraiser in my 5 years of foreclosure defense litigation.

That brings us up to an article in today’s WSJ about inflated appraisals. Banks are auditing loan applications, or so they say, and are seeing more and more questionable appraisals. As prices have leveled, appraisers are claiming that loan officers and real estate brokers are putting the heat on them to come up with values to justify the loans. Isn’t that fraud??? or predatory lending?? or both. The OCC and Freddie Mac are investigating.

The article goes on to say that surveys of real estate agents show that 31% lost deals because of low appraisals in March, 2012; 29% lost deals in March, 2013, but only 24% lost deals in March, 2014. Those numbers indicate that more and more appraisers are playing ball, but at the same time complaining that the real estate agents and bank officers are squeezing them

Finally, the article says that banks are turning to AMC’s (appraisal management companies) to assign appraisal work. This gets the loan officer (a source of pressure on the appraiser) out of the loop. However, appraisers now are complaining that the AMC’s are twisting their arms to come up with more favorable appraisals.

It’s funny. The appraiser blame loans officers, real estate agents and AMC for their own illegal activity. Sort of reminds me of my sons when they were little. Whenever I caught them doing something wrong, it was always someone else’s fault. More importantly, the question is what did the banking industry and their agents and the government learn from the 2008 meltdown. Looks like not much.

Follow Up- Fannie and Freddie

Posted by kevin on October 22, 2014 under Foreclosure Blog | Comments are off for this article

Well, on Tuesday (10/21), most newspapers indicated that the FHFA and major mortgage lenders had entered into an agreement in principal to loosen lending requirements. The announcement was made by FHFA boss, Mel Watt, at a speech before mortgage bankers in Las Vegas.

Las Vegas, that is precious. John Stewart’s writers could not have come up with a funnier story line.

To increase access to credit for lower income borrowers, Watt called for loan to value ratios of 95-97%. With only 3-5% down, borrowers have little skin in the game. If housing prices decline, they will be underwater. How is that different from 2008? One way it will not be different is Fannie and Freddie will insure the loans, therefore, the taxpayer will be bailing out lenders on defaulted loans.

The devil is in the detail as they say. So, we will see in the next few months what safe harbors are given to lenders.

When Dodd-Frank was promulgated, it included a specific provision that stated, in general terms, that a lender must grant a mortgage loan based primarily on the ability of the borrower to repay and not on the value of the collateral. The analysts railed on that such an onerous standard would kill the housing market. Well, my research indicates that the Dodd Frank standard is the fundamental definition of predatory lending, and has been around in Interagency guidelines, regulations, and OCC Advisory Letters since the mid 1990’s.

History has a tendency to repeat itself. I just did not think that it would happen so soon.

Even Playing Field for Borrowers- Don’t Bet On It

Posted by kevin on April 14, 2013 under Foreclosure Blog | Comments are off for this article

http://www.youtube.com/watch?v=Xvi7RNr8s4A.

Check out the You Tube. It’s only about 4 minutes. Elizabeth Warren takes two federal bank regulators to task for waffling on whether their agencies will provide evidence of illegal activity of the banks to families who were victimized so the families could bring lawsuits against the banks.

Bank regulators are supposed to serve the public by regulating the banks. Instead it appears that they are protecting the banks. Why? Well, when I was an intern at the SEC many years ago, my boss told me that the only to get to the bottom of a complex factual/legal scenario was to follow the money. The great criminal of the early 20th century, Willie Sutton, was asked why he robbed banks. Sutton reply because that is where the money is. Regulators know that one day, they will leave government service. Then, they would need to get a job. Ponder the choices. Get a job with a large bank where the money is and where you have made friends, or go to work for a consumer group? You got a mortgage and two kids to educate. Not a real tough choice. No wonder why some of regulators appear more interested in not pissing off their prospective employers than in protecting the public.

It is no different on the state level. Clearly, there has been an overabundance of predatory lending. Yet, I have not seen any reported decisions in NJ finding predatory lending since the mortgage crisis. Is that because the borrowers’ attorneys never raise this issue? No. Or could it be that Countrywide, WAMU, New Century and the like made sure that their loans were clean as the driven snow because of the fear of swift and definite punishment for violation of the law in NJ? I don’t think so.

The Romans had a phrase that summed up their view of business. It was “Caveat Emptor” Let the buyer beware. In other words, it was assumed that the seller of a product or service would try to rip you off. So, it was up to the buyer to defend himself and family from the predatory seller. Over the centuries, however, the courts realized that a large seller and a buyer were not on equal footing. In the mid-twentieth century, consumer laws were enacted to protect the little guy. Our leading law is the Consumer Fraud Act which applies to mortgages. Isn’t it about time that the courts turn to the CFA big time to level the playing field. If it is done, 30-40-50 times, the banks will get the message, settlements will miraculously appear, and the housing crisis will end much sooner than it will under the present course.

US sues Wells Fargo

Posted by kevin on October 10, 2012 under Foreclosure Blog | Comments are off for this article

Yesterday, the feds filed suit in Manhattan against Wells Fargo for bilking the Federal Housing Administration out of hundreds of millions of dollars. The complaint alleges misconduct going back to 2001 whereby WF recklessly issued mortgages and made false certifications about their condition to FHA which then insured the loans. Many of these loans went bad and FHA was left “holding the bag”.

I love the quote from Preet Bharara, the US attorney who said.”Yet another major bank has engaged in a longstanding and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance”.

Banks need a license from the State or federal government to do business. That license comes with strings attached. The bank has to follow the law, including the directives of its regulators. One for the fundamental regulations involving mortage loans is that the lender is required to make a mortgage loan based primarily on the ability of the borrower to repay the loan and not on the value of the collateral. Deficient underwriting (or no underwriting standards) leads to making loans that people cannot afford to repay. This not only hurts the borrower, but his or her community, the people who bought the loans and the government which insured those loans.

So what the government is alleging is that WF hired a lot of incompetent people who ignored the basic tenets of mortgage lending, lent money to people who could not afford to pay it back (definition of a predatory loan), and lied to the FHA about it. Frankly, it appears that the US attorney is giving WF the benefit of the doubt in his statement by inferring that WF was just negligent or reckless. Many believe that WF and the other ‘too big to fail banks’ knew exactly what they were doing – they were making lots of money and passing the bad paper on to investors and the government (= taxpayers= you and me) who got stuck with the loses.

We are seeing a slew of activity by prosecutors on the eve of the Presidential election. One must wonder why it took so long. I hope that when the election is over and the dust has cleared, these lawsuits do not evaporate.

Predatory Lending- Some thoughts

Posted by kevin on October 1, 2012 under Foreclosure Blog | Comments are off for this article

Predatory lending is sort of a catch all phrase dealing with lender impropriety. Last week, I was speaking with a judge whom I have known for years. He was assigned a mortgage foreclosure case because of the overflow calendar in his county. He said that the borrower’s attorney was claiming that the loan was predatory but the rationale for that conclusion was lacking in the judge’s opinion. I was asked how I would define a predatory loan. My response was that it could entail false advertising, a bait and switch, taking advantage of unsophisticated borrowers, equity stripping and the like. However, the definition which makes the most sense, and is consistently mentioned in OCC Advisory Letters is that a predatory loan is a mortgage loan that is based primarily on the value of the collateral and not primarily on the ability of the borrower to repay the loan.

Now, using that definition, we see that the vast majority of predatory loans happen with no-doc loans or stated income loans. No doc is self explanatory- the lender does not even require the borrower to list an income on the application. A stated income loan (sometimes called a liar loan) has an income stated in the application but the lender does nothing to verify the amount of income. In other words, the lender abdicates its due diligence role and then blames the mortgage broker and/or borrower when things go bad. However, the lender is the licensed entity and it is bound by bank regulations to check things like income and the ability to repay.

The judge then asked a pertinent question. Assuming that the loan is predatory, how do you assess damages? I told the judge that is the $64 dollar question. In thinking about that simple but compelling question, I think that I have come up with a simple, and hopefully, compelling argument. If the basis for lending is to put the borrower in a loan that he or she can afford, the appropriate damage is to give the borrower a loan that he or she could afford based on his current income or based on his actual income at the time of the loan. In other words, compel a modification that is affordable. That is what the loan was supposed to look like from the beginning according to OCC guidelines. Of course, lenders will say that such a remedy is too harsh. In selling that theory, the fundamental question to the court should be, why should the lender be obtaining a benefit by its violation of the law.

Consumer Protection?

Posted by kevin on July 20, 2012 under Foreclosure Blog | Comments are off for this article

Over the last 25 years, there has been both Federal and New Jersey legislation that is to protect the consumer. Although such legislation is “on the books”, does it really protect the borrowers in mortgage related situations?

I am not so sure. Why? Because it is not enough to have a law on the books. The consumer protection law must be vigorously pursued by the appropriate enforcement agencies. That has not happened.

Last week, the Wall St. Journal ran an article that said that the SEC (which is supposed to regulate Wall St.) is pushing up against the 5 year statute of limitations in actions against investment banks and their employees for violations of the law relating to the 2008 mortgage meltdown and ensuing recession. They are rushing to file lawsuits at the last minute. Given that the actions of the large banks and Wall St went a long way to putting the US (and the world) in a terrible financial situation, to date, no investment bankers or executives at the “too big to fail” banks have been prosecuted or sent to jail. How could that be?

Also, last week, the news informed us that Barclay’s Bank was caught trying to manipulate the LIBOR by supplying false information as to interest rates. The LIBOR is used to to adjust interest rates involving adjustable rate mortgages. Articles have appeared which indicated that the Treasury Secretary had been aware of possible manipulations of the LIBOR but did nothing other than send a note to his British counterpart. Clearly, the government is protecting someone, but that someone is not you.

How could that happen? Why aren’t the staff at the SEC or the Federal Reserve doing more to protect the consumer? When I as intern at SEC enforcement years ago, my boss said when trying piece together a complex securities fraud, you had to follow the money. Well, many of the staff of these government agencies go to work for Wall St or the large when they leave government service. You draw your own conclusions.

If you are having problems with your lender, you would be naive to think that the government, whether federal or state, is going to step in to help you. You must help yourself. Make sure that you are protected (as best as you can be) by hiring competent legal counsel, experts, and the like. Your home may depend on it

Mitigation of Damages

Posted by kevin on January 19, 2012 under Foreclosure Blog | Comments are off for this article

This post is geared more for the lawyers; however, we invite all interested readers to follow.

From Contracts I, we learn that a wronged party to a contract is obligated to mitigate damages.  This is black letter law.  How can it apply to foreclosure defense?  Well, I have some ideas which, at least in New Jersey, are untested.  However, when the spigot opens and the lenders start their new wave of foreclosures, I will be testing the theory.

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Blame for All but the Borrower Pays

Posted by kevin on August 30, 2011 under Foreclosure Blog | Comments are off for this article

Lenders are licensed in New Jersey.  That means that doing business- mortgage business- is not a right but a privilege.  Yes, you can make money as a lender or mortgage broker.  But you have an obligation to the public, an obligation to the State.

People, even it appears sometimes judges, forget this simple fact when they are confronted with with continuing mortgage crisis.  They pay lip service to the idea that there is enough blame to go around; but when it is time to pony up, only the borrower is left to face the music.

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