New post on Scanned Retina Resource
by arnierosner
Banks Exposed: Illegal Mortgage Fraud. Are your Documents fake?
Foreclosure Fraud Revealed: Your Mortgage Documents Are Fake!
This article originally appeared on Salon
If
you know about foreclosure fraud, the mass fabrication of mortgage
documents in state courts by banks attempting to foreclose on
homeowners, you may have one nagging question: Why did banks have to
resort to this illegal scheme? Was it just cheaper to mock up the
documents than to provide the real ones? Did banks figure they simply
had enough power over regulators, politicians and the courts to get away
with it? (They were probably right about that one.)
A
newly unsealed lawsuit, which banks settled in 2012 for $95 million,
actually offers a different reason, providing a key answer to one of the
persistent riddles of the financial crisis and its aftermath. The
lawsuit states that banks resorted to fake documents because they could
not legally establish true ownership of the loans when trying to
foreclose.
This
reality, which banks did not contest but instead settled out of court,
means that tens of millions of mortgages in America still lack a
legitimate chain of ownership, with implications far into the future.
And if Congress, supported by the Obama administration, goes back to the
same housing finance system, with the same corrupt private entities who
broke the nation’s private property system back in business packaging
mortgages, then shame on all of us.
The
2011 lawsuit was filed in U.S. District Court in both North and South
Carolina, by a white-collar fraud specialist named Lynn Szymoniak, on
behalf of the federal government, 17 states and three cities.
Twenty-eight banks, mortgage servicers and document processing companies
are named in the lawsuit, including mega-banks like JPMorgan Chase,
Wells Fargo, Citi and Bank of America.
Szymoniak,
who fell into foreclosure herself in 2009, researched her own mortgage
documents and found massive fraud (for example, one document claimed
that Deutsche Bank, listed as the owner of her mortgage, acquired
ownership in October 2008, four months after they first filed for
foreclosure). She eventually examined tens of thousands of documents,
enough to piece together the entire scheme.
A
mortgage has two parts: the promissory note (the IOU from the borrower
to the lender) and the mortgage, which creates the lien on the home in
case of default. During the housing bubble, banks bought loans from
originators, and then (in a process known as securitization) enacted a
series of transactions that would eventually pool thousands of mortgages
into bonds, sold all over the world to public pension funds, state and
municipal governments and other investors. A trustee would pool the
loans and sell the securities to investors, and the investors would get
an annual percentage yield on their money.
In
order for the securitization to work, banks purchasing the mortgages
had to physically convey the promissory note and the mortgage into the
trust. The note had to be endorsed (the way an individual would endorse a
check), and handed over to a document custodian for the trust, with a
“mortgage assignment” confirming the transfer of ownership. And this had
to be done before a 90-day cutoff date, with no grace period beyond
that.
Georgetown
Law professor Adam Levitin spelled this out in testimony before
Congress in 2010: “If mortgages were not properly transferred in the
securitization process, then mortgage-backed securities would in fact
not be backed by any mortgages whatsoever.”
The
lawsuit alleges that these notes, as well as the mortgage assignments,
were “never delivered to the mortgage-backed securities trusts,” and
that the trustees lied to the SEC and investors about this. As a result,
the trusts could not establish ownership of the loan when they went to
foreclose, forcing the production of a stream of false documents, signed
by “robo-signers,” employees using a bevy of corporate titles for
companies that never employed them, to sign documents about which they
had little or no knowledge.
Many
documents were forged (the suit provides evidence of the signature of
one robo-signer, Linda Green, written eight different ways), some were
signed by “officers” of companies that went bankrupt years earlier, and
dozens of assignments listed as the owner of the loan “Bogus Assignee
for Intervening Assignments,” clearly a template that was never changed.
One defendant in the case, Lender Processing Services, created masses
of false documents on behalf of the banks, often using fake corporate
officer titles and forged signatures. This was all done to establish
standing to foreclose in courts, which the banks otherwise could not.
Szymoniak
stated in her lawsuit that, “Defendants used fraudulent mortgage
assignments to conceal that over 1400 MBS trusts, each with mortgages
valued at over $1 billion, are missing critical documents,” meaning that
at least $1.4 trillion in mortgage-backed securities are, in fact,
non-mortgage-backed securities. Because of the strict laws governing of
these kinds of securitizations, there’s no way to make the assignments
after the fact. Activists have a name for this: “securitization FAIL.”
One
smoking gun piece of evidence in the lawsuit concerns a mortgage
assignment dated Feb. 9, 2009, after the foreclosure of the mortgage in
question was completed. According to the suit, “A typewritten note on
the right hand side of the document states: ‘This Assignment of Mortgage
was inadvertently not recorded prior to the Final Judgment of
Foreclosure… but is now being recorded to clear title.’”
This
admission confirms that the mortgage assignment was not made before the
closing date of the trust, invalidating ownership. The suit further
argued that “the act of fabricating the assignments is evidence that the
MBS Trust did not own the notes and/or the mortgage liens for some
assets claimed to be in the pool.”
The
federal government, states and cities joined the lawsuit under 25
counts of the federal False Claims Act and state-based versions of the
law. All of them bought mortgage-backed securities from banks that never
conveyed the mortgages or notes to the trusts. The plaintiffs argued
that, considering that trustees and servicers had to spend lots of money
forging and fabricating documents to establish ownership, they were
materially harmed by the subsequent impaired value of the securities.
Also, these investors (which includes the Treasury Department and the
Federal Reserve) paid for the transfer of mortgages to the trusts, yet
they were never actually transferred.
Finally,
the lawsuit argues that the federal government was harmed by “payments
made on mortgage guarantees to Defendants lacking valid notes and
assignments of mortgages who were not entitled to demand or receive said
payments.”
Despite
Szymoniak seeking a trial by jury, the government intervened in the
case, and settled part of it at the beginning of 2012, extracting $95
million from the five biggest banks in the suit (Wells Fargo, Bank of
America, JPMorgan Chase, Citi and GMAC/Ally Bank). Szymoniak herself was
awarded $18 million. But the underlying evidence was never revealed
until the case was unsealed last Thursday.
Now
that it’s unsealed, Szymoniak, as the named plaintiff, can go forward
and prove the case. Along with her legal team (which includes the law
firm of Grant & Eisenhoffer, which has recovered more money under
the False Claims Act than any firm in the country), Szymoniak can pursue
discovery and go to trial against the rest of the named defendants,
including HSBC, the Bank of New York Mellon, Deutsche Bank and US Bank.
The
expenses of the case, previously borne by the government, now are borne
by Szymoniak and her team, but the percentages of recovery funds are
also higher. “I’m really glad I was part of collecting this money for
the government, and I’m looking forward to going through discovery and
collecting the rest of it,” Szymoniak told Salon.
It’s
good that the case remains active, because the $95 million settlement
was a pittance compared to the enormity of the crime. By the end of
2009, private mortgage-backed securities trusts held one-third of all
residential mortgages in the U.S. That means that tens of millions of
home mortgages worth trillions of dollars have no legitimate underlying
owner that can establish the right to foreclose. This hasn’t stopped
banks from foreclosing anyway with false documents, and they are often
successful, a testament to the breakdown of law in the judicial system.
But to this day, the resulting chaos in disentangling ownership harms
homeowners trying to sell these properties, as well as those trying to
purchase them. And it renders some properties impossible to sell.
To
this day, banks foreclose on borrowers using fraudulent mortgage
assignments, a legacy of failing to prosecute this conduct and instead
letting banks pay a fine to settle it. This disappoints Szymoniak, who
told Salon the owner of these loans is now essentially “whoever lies the
most convincingly and whoever gets the benefit of doubt from the
judge.” Szymoniak used her share of the settlement to start the Housing
Justice Foundation, a non-profit that attempts to raise awareness of the
continuing corruption of the nation’s courts and land title system.
Most
of official Washington, including President Obama, wants to wind down
mortgage giants Fannie Mae and Freddie Mac, and return to a system where
private lenders create securitization trusts, packaging pools of loans
and selling them to investors. Government would provide a limited
guarantee to investors against catastrophic losses, but the private
banks would make the securities, to generate more capital for home loans
and expand homeownership.
That’s
despite the evidence we now have that, the last time banks tried this,
they ignored the law, failed to convey the mortgages and notes to the
trusts, and ripped off investors trying to cover their tracks, to say
nothing of how they violated the due process rights of homeowners and
stole their homes with fake documents.
The
very same banks that created this criminal enterprise and legal
quagmire would be in control again. Why should we view this in any way
as a sound public policy, instead of a ticking time bomb that could once
again throw the private property system, a bulwark of capitalism and
indeed civilization itself, into utter disarray? As Lynn Szymoniak puts
it, “The President’s calling for private equity to return. Why would we
return to this?”
Update:
This story previously suggested that banks settled this lawsuit with
the federal government for $1 billion. That number is actually the total
for a number of whistle-blower lawsuits that were folded into a larger
National Mortgage Settlement. This specific lawsuit settled for $95
million. The post above has been changed to reflect this fact.
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