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.

Victory for Borrowers

Posted by kevin on January 28, 2015 under Foreclosure Blog | Comments are off for this article

I have had at least 100 clients or potential clients tell me that they have a great foreclosure defense because their mortgage servicer jerked them around unmercifully when they applied for a temporary modification, and refused to give them a permanent mod notwithstanding that they made three or more payments. Up to last week, the client or potential client in NJ was wrong.

Why? Because modifications are governed by the HAMP program (now MHA of which HAMP is one of the options). HAMP is based on a federal statute in which the federal government gives servicers money if they agree to modify mortgages generally in accord with the guidelines established under the statute. The parties to the agreement are the federal government and the sevicer. Even though borrowers are the reason for the statute and a beneficiary of the statute, they are not a party to the agreement. Federal courts held that borrowers cannot sue under HAMP or MHA (no private right of action).

In 2011 and 2012, certain federal courts got their “common sense” cap on, and concluded that notwithstanding that the borrower was not a party to the HAMP agreement, you cannot have servicers taking money with no intention of granting a permanent modification. One of those courts was the 7th Circuit Court of Appeals in the Wigod case.

Foreclosure defense attorneys in NJ have argued that Wigod is good law in NJ, and the failure to grant a permanent modification is tantamount to a violation of the Consumer Fraud Act or a breach of the implied covenant of fair dealing between parties.

Last week, in a published opinion, the Appellate Division in NJ adopted Wigod but limited the application. It held that if the servicer granted a temporary modification, and the borrower makes the required payments, turns over all required documentation, and his or her representations to the servicer are true and accurate, that borrower is entitled to a permanent modification. Failure to grant a permanent mod gives the borrower a cause of action.

Now, this ruling does not handle all cases involving a modification. If you apply for a mod, and send your documents in, but can never get someone on the phone, or your inquiries are pushed from one person to another none of which can make a decision, or your documents are lost three or four times, or the servicer claims that it never received your application notwithstanding that you have a Fed Ex proof of delivery, or you are asked for updated bank statement until or are pulling your hair out, then you get rejected- you are SOL. That stands for s&%! outta luck. Why, it is the temporary mod which establishes a contractual relationship between the borrower and the servicer which triggers Wigod.

The case in NJ is Arias v. Elite Mortgage Group. A victory in today’s foreclosure defense environment.

More BOA

Posted by kevin on December 10, 2013 under Foreclosure Blog | Comments are off for this article

Joseph Smith, the overseer of the $25 billion settlement, issued a recent report pointing out that Bank of America has violated the settlement because it failed to file accurate documents in bankruptcies. What that means is not clear. Did they add up a column of numbers incorrectly or did they submit robo-signed documents. Moreover, it is not clear that there was any real sanction for violations other than a promise to do better.

I have many problems with the $25 billion settlement. Among them is that the overseer seems to be a very qualified guy with a reputation for protecting consumers when he was the Commissioner of Banking in North Carolina. However, as overseer what we see are reports and sanctions that do not even amount to a slap on the wrist.

In the meanwhile, I really have not seen any real reduction in the antics that the lenders/ servicers are up to in foreclosure actions. In NJ, we see an upsurge in servicers stating that they are the lenders notwithstanding the there is ample proof that they are just the servicer. How do they do it? A combination of no meaningful discovery being allowed to borrowers and use of allonges which are endorsed in blank. The servicer puts in a certification that it came into possession of the note prior to the foreclosure filing. The problem is that the allonges, starting in about 2012, all started to look exactly alike as to form. The tranasction and the closing of loan date is on the top of the page followed by an endorsement in blank. Before 2012, I do not recall seeing this allonge form at all. Now, it is standard. So, it could be just a coincidence. Or it could be that the endorsements were all made after 2012 irrespective of when the note was signed by the borrower or sold. What do you think?

Many client and prospective clients tell me of the antics of servicers during the modification process. Being put on hold for long periods of time. Leaving messages and not getting call backs. Documents are lost time and again. Your “point of contact” person is never available. What can you do? Is it negligence on the part to the servicers or bad faith? Can you sue them? Is it a defense against the foreclosure?

The answer is that if you have not been offered a trial modification that you accepted, you are SOL against the servicer and lender. Why? You have no contractual right to a modification. Making Homes Affordable is a deal between the federal government and the banks. You are not the federal government. So, you have no standing to sue. The overseer has standing to do what is listed in the $25 billion settlement which includes wrist slapping. You can complain to people who will not listen whether that be the servicer, the lender, the consumer affairs department in NJ or the courts.

However, if you do get a trial modification and then get jerked around, you have standing and can sue the servicer and lender. In fact, in New Jersey, it may be a consumer fraud violation. In those limited cases, it may be worthwhile to pursue legal action.

Servicer games in modification process

Posted by kevin on September 15, 2011 under Foreclosure Blog | Comments are off for this article

Almost every client that I interview has a story about how he or she was jerked around unmercifully by a servicer.  Some servicers suggest that payments not be made so that the borrower can apply for a HAMP.  Others “lose” paperwork more than once.  Others take 7-8 payments instead of the required 3 and then deny a permanent modification.

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