Are You Queasy Yet?

Isn’t a beautiful irony that we are rewarding our favorite sub-prime lenders with bailout money? This list of bailouts was reported by the Center for Public Integrity on August 25, 2009. The full article can be accessed here.

Subprime Memory Lane
The list of the top 10 recipients is like a walk down subprime memory lane. Here are the leading HAMP participants, with the amount of taxpayer-funded incentives they are slated to receive:

1. Countrywide Home Loans Servicing LP, Simi Valley, California — $5.2 billion
No. 1 by a wide margin, Countrywide also led the Center’s list of the top 25 subprime lenders. Now known as BAC Home Loans Servicing, LP, Countrywide is now owned by Bank of America, which will receive any incentive payments due the company. Bank of America, thanks to its purchase of Merrill Lynch, also owns program participants Wilshire Credit Corp. and Home Loan Services Inc. Maximum funds for Bank of America total nearly $6.9 billion.
2. J.P. Morgan Chase Bank NA, Lewisville, Texas — $2.7 billion
JPMorgan Chase & Co. was No. 12 on the Center’s subprime lender list. It owns EMC Mortgage Corp., another program participant. EMC was a former subsidiary of Bear Stearns, the first major U.S. investment bank to falter last year. JPMorgan picked up EMC when it bought Bear Stearns (with government help) last year. Including the EMC total, JPMorgan could collect around $3.4 billion.

3. Wells Fargo Bank NA, Des Moines, Iowa — $2.4 billion
Wells Fargo & Co. is ranked No. 8 on the Center’s subprime list. Wells owns Wachovia Bank, which qualified for the program under two different names, and ranked No. 19 on the Center subprime list. Total funds potentially going to Wells are about $3.1 billion.

4. American Home Mortgage Servicing Inc., Coppell, Texas — $1.3 billion
American was formerly a unit of American Home Mortgage Investment Corp., No. 22 on the Center’s subprime list, before the company filed for bankruptcy. The loan servicing business was bought by billionaire Wilbur Ross Jr.
5. CitiMortgage Inc., O’Fallon, Missouri — $1.1 billion
CitiMortgage is part of Citigroup Inc. The banking giant, Citigroup, owes its survival to billions of dollars in cash infusions from the U.S. government. Citigroup ranked No. 15 on the Center subprime 25 list. It was also a major player in the mortgage-backed securities market.

6. GMAC Mortgage Inc., Ft. Washington, Pennsylvania — $1 billion
GMAC Mortgage Inc. is part of GMAC LLC, which received $5 billion in federal bailout money in late December 2008, and another $7.5 billion this past May. GMAC at one time was controlled by hedge fund Cerberus Capital Management, but Cerberus reduced its stake when the government made its huge investment in the lender. GMAC originated billions in subprime loans under several names, including Residential Funding Co. and Homecomings Financial. It ranked No. 20 on the Center subprime list.
7. Bank of America, NA, Charlotte, North Carolina — $804.4 million
Bank of America, another major bailout recipient, bought No. 1 subprime lender Countrywide in July 2008 for $4 billion after lending the mortgage company $11.5 billion the previous year. It also bought Merrill Lynch, and with it, two subprime servicing subsidiaries. Maximum funds going to the bank, lenders and borrowers total nearly $6.9 billion.
8. Litton Loan Servicing LP, Houston, Texas — $774.9 million
Litton was a major subprime loan servicer owned by a company known as C-BASS — Credit-Based Asset Servicing and Securitization LLC. C-BASS was a subprime mortgage investor that fell on hard financial times and sold its Litton subsidiary to Goldman Sachs & Co. in November 2007 for $1.34 billion.
9. EMC Mortgage Corp., Lewisville, Texas — $707.4 million
EMC was part of Bear Stearns, which J.P. Morgan bought with assistance from the Federal Reserve Bank of New York last year. Prior to the purchase in 2008, Bear Stearns agreed to pay $28 million to settle Federal Trade Commission charges of unlawful mortgage servicing and debt collection practices.
10. HomEq Servicing, North Highlands, California — $674 million
HomEq was created “by subprime lenders for subprime lenders,” according to the company’s Web site. The servicer was bought by British banking giant Barclays Bank PLC for a reported $469 million from Wachovia Corp. in 2006.
Seven other participants in the foreclosure relief program are also worth noting because of their associations with subprime mortgage servicing or lending:
Select Portfolio Servicing, Salt Lake City, Utah — $660.6 million
Select Portfolio was formerly known as Fairbanks Capital Inc. In November 2003, Fairbanks agreed to pay $40 million to the Department of Housing and Urban Development and the Federal Trade Commission for “unfair, deceptive, and illegal practices in the servicing of subprime mortgage loans.” The company was purchased by Credit Suisse First Boston in late 2005. Credit Suisse spokesman Duncan King told the Center the “entire management team” has been turned over since the settlement.
Saxon Mortgage Services Inc., Irving, Texas — $632 million
Saxon Mortgage Services Inc. is a subsidiary of Morgan Stanley that specializes in servicing subprime loans. Morgan announced in August 2006 – the tail end of the subprime boom – that it would buy Saxon for $706 million. Saxon at the time both serviced and originated subprime loans. Morgan was also a major underwriter of securities backed by subprime loans.
Ocwen Financial Corp. Inc., West Palm Beach, Florida — $553.4 million
In April 2004, Ocwen Federal Savings Bank’s chairman and CEO William C. Erbey signed a “supervisory agreement” with the federal Office of Thrift Supervision promising to improve the organization’s loan servicing practices, which had included “force placed” hazard insurance and objectionable fees. Barely a year later, Ocwen gave up its bank charter, thus terminating the agreement. Erbey earned $2.3 million in total compensation in 2008. Ocwen is also the subject of approximately 64 lawsuits accusing the servicer of abusive collection practices, according to the firm’s filings with the Securities and Exchange Commission. Ocwen Executive Vice President and General Counsel Paul Koches said the surrender of its bank charter had nothing to do with the supervisory agreement and the company has nevertheless continued to follow all of the servicing practices set forth in the agreement, and has improved on many of them.
Aurora Loan Services LLC, Littleton, Colorado — $459.6 million
Aurora was part of Lehman Brothers, the investment bank whose failure started the panic of 2008, and serviced the investment bank’s considerable subprime lending portfolio. Lehman and its subsidiaries rank No. 11 on the Center’s subprime list. The bank was also among the largest underwriters of subprime mortgage-backed securities on Wall Street. Aurora was not part of the bankruptcy.
Wilshire Credit Corp. Beaverton, Oregon — $453.1 million
Wilshire was bought by Merrill Lynch for $52 million in 2004. Merrill, another symbol of last year’s banking meltdown, was staggered by subprime lending losses and bought by Bank of America in a controversial transaction that resulted in congressional hearings. Another Merrill servicing subsidiary, Home Loan Services Inc., qualified for $447,300,000, ranking it 16th.
Carrington Mortgage Services LLC, Santa Ana, California — $131 million
When No. 3 subprime lender New Century Financial Corp. of Orange County, Calif., filed for bankruptcy protection in April 2007, the firm’s mortgage billing and collections unit was sold to Carrington for $188 million in August.
MorEquity Inc., Evansville, Indiana — $23.5 million
MorEquity is a subprime lending subsidiary of American International Group Inc., the top recipient of government bailout funds. AIG was best known for contributing to the crisis through the sale of “credit default swaps,” a form of unregulated insurance that investment banks purchased in the hope they would be protected from losses.

Bankruptcy Judges Not Afraid of Difficult Task of Holding Servicers Accountable

Judge Shea-Stonum of the Bankruptcy Court for the Northern District of Ohio (Eastern Division) issued an interesting opinion chastising Countrywide for its systemic servicing shortcomings. Among other interesting tidbits, including requiring each servicer to attach a prescribed worksheet to a proof of claim, she notes that the servicers have absolutely zero incentive to serve the homeowner (

One problem with relying on the mortgage servicing industry to voluntarily improve its
practices is the industry’s incentive to increase costs. Its interests are not aligned with the borrower,
nor even in some circumstances with its investor.7
Mortgage servicers do not have a customer relationship with homeowners; they work
for the investors who own the mortgage-backed securities. Borrowers cannot shop
for a loan based on the quality of the servicing, and they have virtually no ability to
change servicers if they are dissatisfied with the servicers’ conduct. The only exit
strategy for a dissatisfied borrower is refinancing the mortgage, and even then, the
homeowner may find the new loan assigned to the prior servicer. Because their
customers are the trustees who hire them to collect on behalf of investors, servicers
have few reputational or financial constraints pushing them to work to satisfy
homeowners with their performance.
In fact, servicers have a financial incentive to impose additional fees on consumers.
Mortgage servicers earn revenue in three major ways. First, they receive a fixed fee
for each loan. Typical arrangements pay servicers between 0.25% and 0.50% of the
note principal for each loan. Second, servicers earn “float” income from interest
accrued between when consumers pay and when those funds are remitted to
investors. Third, servicers often are permitted to retain all, or part, of any default
fees, such as late charges, that consumers pay. In this way, a borrower’s default can
boost a servicer’s profits. A significant fraction of servicers’ total revenue comes
from retained-fee income. Because of this structure, servicers’ incentives upon
default may not align with investors’ incentives. Servicers have incentives to make
it difficult for consumers to cure defaults.
Porter, supra note 2, at 126-27.

7 Indeed, as noted in the prior Memorandum Opinion in this case, an apparent
driving force in Countrywide’s failure to document the satisfaction of Ms.
O’Neal’s note and to release the mortgage was Countrywide’s internal pursuit of
its own fees that amounted to 56 % of the short-sale proceeds.

It goes far beyond “show me the note”

It isn’t really just show me the note.  It’s show me the entitlement to enforce the note.  Show me the note was negotiated properly through all of these “true sales” envisioned in the PSAs, and other securitization contracts.  Nice try with forging the purported late assignment but that doesn’t cut it.    Was the note duly and timely transferred?  I’m thinking the answer is no.

The Credit Slips blog had a nice piece on this issue:

Show Me the Original Note and I Will Show You the Money

posted by O. Max Gardner III

As mortgage delinquencies rise each month, and as the number of foreclosures increase each quarter, the “new mantra” of many pro-se and represented consumers is to demand that the mortgage servicer “prove up the original note.” Is this just some new and creative gimmick that has been sold to the desperate homeowners and to a few lawyers who have attended “progressive” seminars or is there really something to it? I submit that there is really something to it.

In my last Credit Slips post, I wrote about what I call the “Alphabet Problem.” Succinctly stated, this problem arises out of the necessity for a true sale of the mortgage note and mortgage from the originator to the sponsor for the securitized trust; then from the sponsor to the depositor for the securitized trust; and finally from the depositor to the owner Trustee for the trust. These multiple “true sales” are necessary in order to make the original asset (the note and mortgage) bankruptcy-remote and FDIC-remote frin the originator in the event the originator files for bankruptcy or is taken over by the FDIC.

Under the securitization model, all of these “true sales” with supporting documentation must be confirmed and all of the documents must be held by the Master Document Custodian for the securitized trust. Finally, the ability of the rating agencies such as Fitch, S&P and Moody’s to rate the bonds to be issued by the underwriter for the trust is based in part on confirming that there are unbroken chains of transfers and assignments of all notes and mortgages from the originators all the way to the trust; that a “true sale” occurred at each stop along the way; and that the Master Document Custodian has all of the “original documents.”

The source of the “Show Me the Original Note” arguments arises out of bankruptcy and foreclosure cases where the mortgage servicer failed to attach a copy of the duly negotiated original note to the Proof of Claim, the Motion for Relief from Stay, or the foreclosure complaint. In a growing number of these cases, bankruptcy judges have characterized these practices as gross recklessness, extraordinary incompetence, systemic abuse, providing evidence of more concern about increasing the time line completion rates of the local law firms than about the accuracy of the documents and papers filed with the courts.

In the recent case of Niles and Angela Taylor, 2009 WL 1885888 (Bankr. E.D. Pa. 2009), Judge Diane Weiss Sigmund described in great detail how the default mortgage servicing and foreclosure systems really work. The servicer in Taylor was HSBC Mortgage Corp; the out-source provider was Lender Processing Services, Inc., f/ka/ Fidelity National Information Services, Inc.; the national law firm was Moss Codilis LLP; and the local law firm Udren Law Office. 

The system described by Judge Sigmund starts with LPS, the largest out-source provider in the United States for mortgage default services, with offices in Minneapolis and Jacksonville. LPS maintains a “network” of national and “local” law firms, all of who sign contracts with LPS. Under these “Network Attorney Agreements,” the national and local firms have no authority to communicate directly with the mortgage servicer about any issues that may arise in any given case. Likewise, the servicers must execute a 51-page Default Service Agreement with LPS that delegates to LPS all functions with respect to the default servicing work. LPS, in turn, then uses a software communication system called “NewTrak” to deliver instructions and documents to the LPS network attorneys and to deliver any information to the servicers. LPS also has access to the servicers data-base platforms so that LPS can review loan histories, enter payments, apply payments, enter charges and fees, reverse charges, place funds in suspense accounts, etc. The purpose for this business model is to “manage without human interaction” the relationship between the Servicers and the LPS network attorneys. See In re Taylor, supra, at 1885889 to 1885891.

The dysfunctional nature of this system and the lack of any real attorney supervision are demonstrated by the way the Moss Codilis law firm prepared the Proof of Claim form in Taylor. Moss Codilis apparently has a Proof of Claim document production team for each servicer. Each team consists of 10 people that “set-up” the form, 10 people who process the claims and 3 people who are allegedly quality control personnel. None of these team members are lawyers or even paralegals. A claims processor would retrieve the mortgage default data directly from the servicers accounting system (with 70% of the Servicers, this would be MSP, which is owned and supported by LPS) and complete the Proof of Claim form. The signature of the “Compliance Director” or “Team Leader” is then electronically affixed to each Proof of Claim and then it is e-filed using the Pacer system. In Taylor, the LPS “Team Leader” testified that the she randomly sampled about 10% of the claims filed and that even though she was employed by LPS she signed the claims as an officer of the servicer pursuant to a “signing authority.” The evidence in Taylor also established that the servicer, HSBC, did not “undertake to review the proof of claim either before it is filed by Moss or after although it could do so as the proof of claim is uploaded into the LPS NewTrak” communication system.

In Taylor, the amount of the alleged arrears and other payment data included in the Proof of Claim was simply not accurate.  Also, the “wrong note” was attached to the Proof of Claim. The Team Leader testified that one of the team processors should have “caught the payment error.” She then attributed the attachment of the wrong note to an e-filing error and explained that since no one reviewed the claims after they were e-filed there was no way this error could have been discovered (unless, of course, some one took the time to reviewed the filed claims).

The motion for relief from stay in Taylor was not filed by Moss Codilis but by the Udren Firm, which is noted as a local “Fidelity-LPS Network Firm.” According to the Network Agreement, the servicer is deemed to be the “mutual client” of both LPS and the local firm and LPS is designated as the agent for the servicer. Mr. Adrien, the senior partner of the local firm, testified that they delegated all of the LPS work to an administrative staff and that they relied solely on electronic data and had no paper files. The Udren firm employs 10 attorneys and 130 paralegals, processors and administrative personnel, including employees in the referral department that monitor NewTrak for LPS referrals.

The Taylor case confirmed that once a mortgage loan in bankruptcy becomes 60 days in default pursuant to the MSP system, a code is entered into MSP which automatically triggers a NewTrak communication to the designated local firm to file a Motion for Relief from the Automatic Stay. There is no human involvement in the designation or authorization of counsel for the task for which the referral is made nor is there any authority granted to counsel other than to perform the task for which the referral is made. The 60-day coding will also cause MSP to upload the mortgage payment data, including the note, mortgage and assignments (if any) and any other necessary documents for the filing, into NewTrak to be retrieved by local counsel.  NewTrak provides the local attorney with the precise information it is coded to produce to perform the given task. NewTrak also creates specific time lines for the performance of each task by local counsel, since such counsel is rated, paid and retained pursuant to their annual APR Ratings (Attorney Performance Ratings). The paralegal operation of the local firm will then prepare the motion and notice of hearing. The motion is they made available on the NewTrak screen for the designated bankruptcy attorney who then may or may not review the same. The electronic signature of the attorney is then affixed and the motion and notice are then filed ECF by the paralegal. None of these pleadings and exhibits are ever reviewed by any employee of the servicer before they are filed with the court. The Taylor court characterized these motions as “canned pleadings prepared by a paralegal from NewTrakl screens.”

The Motion for Relief from Stay filed in Taylor included numerous errors including misapplication of payments, charges that had not been approved by the Court, and funds held in suspense (money received by the servicer but not yet applied to any account associated with the loan). None of these facts were apparent from the Motion and no one with the local firm could explain any of these matters or how they might impact the right to relief from stay or the status of the debtors’ outstanding payment obligations.

It seems obvious that the LPS “Network System” is not organized to assure accuracy and accountability. A study performed in 2007 by Credit Slips own Professor Katie Porter and funded by the National Conference of Bankruptcy Judges found that in 70 percent of the cases studied mortgage servicers claimed homeowners owed an average of $6,309.00 more on their loans that the homeowners believed was owed.  Professor Porter also testified before the Congress earlier this year that servicers commonly foreclosure when they do not have the legal right to do so, impose unwarranted or illegal fees or charges to the loan, and miscalculate how much families owe. 

Judge Elizabeth Magner, in McCain v Ocwen, ______________, stated that the evidence adduced in multiple cases involving Ocwen showed that the servicer regularly acted in “bad faith” and engaged in a “systematic abuse” of the bankruptcy process by charging improper fee and attempting to collect bankruptcy-related fees without court approval and after many of the cases had been closed upon the debtor’s successful completion of their Chapter 13 plans.

We could go on and on with example after example of similar systematic abuses by almost every mortgage servicer but the extraordinary incompetence and recklessness of the mortgage servicers and their out-source providers speak for themselves. After reviewing Taylor, including all 62 of the detailed footnotes, there is nothing more one can say about the system other than the final comments by Judge Sigmund:

“When an attorney appears in a matter, it is assumed he or she brings not only substantive knowledge of the law but judgment. The competition for business cannot be an impediment to the use of these capabilities. The attorney, as opposed to the processor, knows when a contest does not fit the cookie cutter forms employed by the paralegals. At that juncture, the use of technology and automated queries must yield to hand-carried justice. The client must be advised, questioned and consulted. The thoughtless mechanical employment of computer-driven models and communications to inexpensively traverse the path to foreclosure offends the integrity of our American bankruptcy system. It is for those involved in the process to step back and assess how they can fulfill their professional obligations and responsibly reap the benefits of technology. Noting less should be tolerated.” 

And, this finally gets us back to the “Show Me the Original Note” argument. When you have a system that is devoid of any meaningful review by trained and competent lawyers; when you have a system where the documents are prepared by an automated software program with no review at all by a trained attorney or incredibly by the actual moving party; when you have teams of non-lawyers and non-paralegals preparing documents in a “production line operation” who are only graded on how many motions they “produce” per hour; when you have no one reviewing the attached mortgage note or mortgage or any assignments; well, when you have all this, then it is very easy to understand why so many motions for relief from stay and complaints in foreclosure are filed with a mortgage note that appears to have no legal or factual relation to the moving party and in some cases to the consumer debtors. Hence, the etiology of the “show me the original note” defense. The creditors own mass-production automated systems of “out of mind and out of sight” computer generated forms gave rise to this new defense.

However, the hodgepodge of motions for relief with improper notes cannot be blamed entirely on the need for speed and the use of automated document producing programs. In many cases, especially those where the mortgage was originated between 2005 and 2007, the originators were so busy that in lieu of transferring the notes and documents “up the line in an unbroken chain” they just keep the originals and transferred the “data” electronically. In short, there were no true sales and negotiations of the original notes and no true assignments of the mortgages and deeds of trust. As a result, when a court demands that the Trustee for a residential mortgage backed securitized trust produce the original note duly negotiated in an unbroken chain they simply cannot do it. They just do not have the hard copy documents.  All they have is data and information in a computer file.

This incompetence of the non-paralegals in the local law firms on the one hand and the desire of the mortgage originators to cut-corners and save paper on the other hand form the basis for what I call the “Alphabet Problem” that was the subject of an earlier Credit Slips post. Let me provide an example from a real SEC securitized trust filing. Between January 1 of 2006 and February 1 of 2006, Argent Mortgage Company LLC originated thousands of residential mortgage loans to be securitized. Exactly 7,767 of those mortgage notes were eventually securitized in a residential mortgage backed trust named “Argent Securities Inc., Asset-Backed Pass-Through Certificates, Series 2006-W2.”  The closing date for all of the notes and mortgages to be delivered to this Trust was February 27, 2006. According to the Prospectus Form 424B5 filed with the SEC, Argent Mortgage Company, LLC, sold the notes and assigned the mortgages to Ameriquest Mortgage Company as the Sponsor; Ameriquest then sold the notes and assigned the mortgages to Argent Securities, Inc, as the Depositor; and Argent Securities, Inc., them sold the notes and assigned the mortgages to Argent Securities Trust,  Asset-Backed Pass-Through Certificates, Series 2006-W2.

In this example, the A to B transfers were from Argent Mortgage to Ameriquest Mortgage Company; the B to C transfers were from Ameriquest to Argent Securities; and the C to D transfers were from Argent Securities to Argent Securities Trust, Asset-Backed Pass-Through Certificates, Secires 2006-W2. And, according to the Prospectus, ALL of these transfers were finalized before the closing date of February 27, 2006.

Given this complex and detailed securitization structure, what happens when LPS sends a NewTrak assignment to a local firm to file a motion for relief from stay for Argent Securities Trust Asset-Backed Pass-Through Certificates, Series 2006-W2, and the system attaches as an exhibit the original note and mortgage that names Argent Mortgage Company LLC as the beneficiary? If the court or the debtor raises an issue about “standing” or “failure to prosecute the motion in the name of the real party in interest,” what normally happens? First, remember that the local firm under the LPS Network Agreement cannot communicate with the servicer or trust, who is the movant in the case. The local firm can only send a NewTrak “issue” to LPS.  LPS has what it calls “document execution teams” for every LPS “Servicer Partner.” These teams do not include lawyers or trained paralegals but rather include individuals who have been trained to produce documents. So, what do they do to resolve the issue about the Argent Mortgage Company note and mortgage? Well, they will do the one thing that ensures maximum speed and efficiency and meets the attorney APR time lines. They prepare and sign as a Vice President of Argent an endorsement of the Argent Mortgage Note from Argent directly to Argent Securities Trust, Asset-Backed Pass-Through Certificates, Seris 2006-W2 and date it August 11, 2009. They prepare and sign as a Vice President of Argent an assignment of the mortgage from Argent Mortgage Company to the same Trust  and date it August 11, 2009, with an effective date of February 27, 2006.

What is wrong with these LPS created documents? First, they are what I call A to D transfers and assignments. Such transfers could not have occurred after the “closing date” for the named trust. Argent Mortgage Company had no note to transfer to the Trust in 2009, having sold the same back in February of 2006. Second, the A to D transfers ignore two of the most important entities in the securitization process—the Sponsor, Ameriquest Mortgage Company, and the Depositor, Argent Securities, Inc. Third, such transfers are totally inconsistent with the mandatory conveyancing Rules established by Section 2.01 of the Pooling and Servicing Agreement. Fourth, such transfers are totally inconsistent with the representations and warranties filed by the Master Document Custodian for the Trust with the SEC, the Owner Trustee, and the Rating Agencies. Fifth, such documents are inconsistent with the Real Estate Mortgage Investment Conduit Rules promulgated by the Internal Revenue Service for this type of trust. And, finally, from the point of view of the Chapter 13 debtor, these transfers and similar variations of the same raise serious issues about whether or not the Trust was really and truly a secured creditor on the petition date. If these A to D documents were filed in connection with a contested Motion for Relief from Stay, then one could infer that the Trust did not in fact hold and own the mortgage note on the petition date.

Another example of a similar but different problem occurs when you have an A to D transfer to try to prove up standing in a judicial foreclosure case and the debtor then files for Chapter 13 relief within 90 days of the date of the document. Under these facts, do we have an avoidable preference to the Trust under Section 547? Also, in the motion for relief from stay context does the A to D transfer post-petition expose the servicer, the trust and the originator to automatic stay liability under Sections 362(a)(4) and (a)(5)?  These Sections prohibit “any act to create, perfect or enforce any lien against property of the estate” and “any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secured a claim that arose before the commencement of the case.”  It would seem to be basic “Hornbook” law that the Trust would have to own and hold the note to “enforce” the mortgage.  As a result, if the Trust did not actually acquire the note until after the case was filed it would appear to be a clear violation of these sections.

In closing, I would not want the servicer to just “Show Me the Original Note.” I would want the servicer to show me that the original note had been duly and timely negotiated from A to B, B to C and C to D, with D being the securitized trust. I would want proof of an unbroken chain of such negotiations between all of parties. I would want to see the same timely assignments of the mortgage or the deed of trust. Consequently, the defense should not be limited to “Show Me the Original Note” but should be expanded to show me that the “Original Note” was duly transferred and negotiated between all of the parties involved in the deal and was in the possession of the Master Document Custodian for the Trust BEFORE the closing date for the due transfer and delivery of such documents. Thus, there is much more to this than a simple request to produce the Original Note. Given how hard it has been for servicer to comply with such a seemingly simple request, how they comply with this expanded version of the question will be a real test. Stay tuned.

August 17, 2009 at 6:20 AM in Bankruptcy Generally , Consumer Contracts , Financial Institutions , Mortgage Debt & Home Equity | Comments (13) | Permalink

Wells Fargo on the Hotseat

This should be fun. Bankruptcy Judge Haines has ordered a Wells Fargo VP to testify regarding their woeful loan modification record.

From the National Association of Forensic Mortgage Auditors, Inc. Blog:When it comes to obtaining a loan modification, Wells Fargo’s reputation is a long way from being stellar. In fact, they’re one of the worst, according to several attorneys who have had significant experience working with the bank on behalf of clients over the past six months. So, when I read this past week that a woman in Phoenix had filed a complaint claiming that Wells Fargo had ignored her request for a modification, it was hardly news to me.

According to a story from, Channel 5 in Phoenix, the woman’s name is Bobbi Giguere, and apparently she applied to Wells Fargo for a modification this past December after losing her job, and got nothing but lies, the run-a-round, and finally a foreclosure notice in return. The story quoted her as saying:

“I sent them everything they asked for, and then when I called to follow up they said, ‘What paperwork? What modification? We don’t know what you’re talking about,’” said Bobbi Giguere.

So, now a federal bankruptcy judge in Phoenix, Judge Randolph Haines, has ordered that a top Wells Fargo executive must come and testify about the bank’s loan modification policies.

Ms. Giguere’s bankruptcy attorney was also quoted in the story as saying that it’s “very unusual” for a judge to issue such an order. “The judge is trying to send a message to Wells Fargo and other banks that they need to pay better attention to customers who want to modify their home loans,” Nussbaum told Phoenix’s Channel 5.

Okay, so what? Big deal, right? Yet another story about a bank or servicer not doing what they’re supposed to do under the president’s Making Home Affordable program. Well, here’s the rub…

Again, according to the story, Wells Fargo responded by issuing the following statement from Mary Coffin, the bank’s head of home mortgage servicing. It said:

“We appreciate the court giving us the opportunity to share our servicing practices, which include working with all customers facing hardships — even if they declare bankruptcy — until every reasonable option to prevent foreclosure has been exhausted.”

The bank “appreciates” the court providing the opportunity to “share” servicing practices? Does anyone not see just how far from contrition we are here. We, and by “we” I mean anyone involved in obtaining loan modifications from servicers, all know what’s going on here… Wells Fargo is full of you know what.

They routinely deny having received paperwork, routinely refuse to comply with the rules of the president’s program, and obviously aren’t the slightest bit concerned that they be called to task for their widely known shortcomings that are putting people out of their homes and onto the street. Their practices are costing our president a great deal of credibility, and preventing our economy from even coming close to starting on a path to recovery.

CBS 5 News also reported that after running the story, many other homeowners contacted the station, “sharing remarkably similar frustrations”.

According to the station:

“Getting the runaround about lost paperwork was amongst the most common complaint. The complaints came from customers using a variety of loan providers, including but not limited to Wells Fargo and Bank of America.”

Channel 5 also quoted Arizona Attorney General Terry Goddard as giving banks and servicers “a D minus” when he was asked to grade them as related to helping homeowners obtain loan modifications. He went on to refer to the servicers’ response to the president’s program as “pathetic”.

Apparently, Channel 5 called Wells Fargo for a comment on the case and Ms. Coffin replied that the bank “could have offered better customer service and definitely could have communicated better.” Well, gee golly whiz… could they now? Is that all they could have done?

Listen, I’ve had enough with the sugarcoating that surrounds this issue. What the bank/servicer could have done is live up to its agreement to participate in the Making Home Affordable program. Wells Fargo took billions of dollars from taxpayers and they agreed to the terms of the president’s program. They need to live up to that agreement and they’re not… not even close. What was the percentage of Wells Fargo loans modified under the program that was reported last week in the administration’s “report card”?

Oh yeah… 6%. And in response, Wells Fargo’s Mike Heid, co-president of Wells Fargo’s mortgage unit issued the following statement:

“We know we’ve fallen short of our customer service goals in some cases.”

They’ve got to be kidding.

According to Phoenix’s Channel 5, “a Wells Fargo executive is scheduled to testify in federal court on September 3rd. The hearing was originally scheduled for this week, but the judge granted Wells Fargo an additional two weeks to research internal records and prepare their case.”

Wells Fargo needed a little extra time? In my view, they should have been given the same amount of extra time they’ve too often given homeowners before they’ve foreclosed on their homes… none.

Video available on NAFMA, Inc. blog:

A Dubious Achievement

This is not going to shock anybody but July foreclosure rates were up, according to Reuters article:

U.S. home foreclosures set another record in July

Thu Aug 13, 2009 12:11am EDT

By Lynn Adler

NEW YORK (Reuters) – U.S. home loans failed at a record pace in July despite ongoing federal and state programs to avoid foreclosures, which have severely strained housing and the economy.

Foreclosure activity jumped 7 percent in July from June and 32 percent from a year earlier as one in every 355 households with a loan got a foreclosure filing, RealtyTrac said on Thursday.

Filings — including notices of default, auction and bank repossession — have escalated with unemployment.

“July marks the third time in the last five months where we’ve seen a new record set for foreclosure activity,” James J. Saccacio, RealtyTrac’s chief executive, said in a statement.

“Despite continued efforts by the federal government and state governments to patch together a safety net for distressed homeowners, we’re seeing significant growth in both the initial notices of default and in the bank repossessions.”

More than 360,000 households with loans drew a foreclosure filing in July, a record dating back to January 2005, when RealtyTrac started tracking monthly activity.

Notices of default, auction or repossession have reached nearly 2.3 million in the first seven months of the year — with more than half a million bank repossessions, the Irvine, California-based company said.

Making timely payments keeps getting more harder for borrowers who have lost their jobs or seen their wages cut.

The unemployment rate is 9.4 percent and President Barack Obama has said he expects it will hit 10 percent.

Obama’s housing rescue is gaining traction in altering terms of loans for struggling borrowers, but slowly.

Earlier this month the U.S. Treasury Department detailed the progress of the top servicers in modifying loans and prodded them to step up efforts to stem foreclosures.


States where sales and prices surged most in the five-year housing boom early this decade remain hardest hit.

California, Florida, Arizona, Nevada accounted for almost 57 percent of total U.S. foreclosure activity in July.

Illinois had the fifth-highest total filings, spiking nearly 35 percent from June, in an example of how moratoriums often delay rather than cure an inevitable loan failure.

Default notices spiked by 86 percent in July, from artificially low levels the prior two months. A state law enacted on April 5 gave delinquent borrowers up to 90 extra days before foreclosure started, RealtyTrac said.

Michigan’s foreclosure activity fell 39 percent in July from June, mostly due to a 66 percent drop in scheduled auctions. A state law that took effect July 6 freezes foreclosure proceedings an extra 90 days for homeowners who commit to work on a loan modification plan.

Other states with the highest foreclosure filing totals last month included Texas, Georgia, Ohio and New Jersey.

Nevada had the highest state foreclosure rate for the 31st straight month, with one in every 56 properties getting a filing, or more than six times the national average.

Initial notices of default fell 18 percent in the month, with a new Nevada law taking effect on July 1 requiring lenders to offer mediation to homeowners facing foreclosure. Scheduled auctions and bank repossessions each jumped more than 20 percent, however, boosting overall foreclosure activity in the state by 4 percent from June.

California, Arizona, Florida, Utah, Idaho, Georgia, Illinois, Colorado and Oregon were the other states with the highest foreclosure rates.

(Editing by Kenneth Barry)

Iqbal Trend Kills Notice Pleading. RIP FRCP 8.

Defense counsel are salivating to cite Supreme Court 5-4 case Iqbal v. Ashcroft to flesh out their motions to dismiss requiring impossible pleading standards. Iqbal is the new Twombly and it’s already getting old. What was wrong with good ol’ FRCP 8?
Maybe Specter can get the Congress to agree with Justice Ginsberg:

Specter Proposes Return to Prior Pleading Standard
David Ingram

Congress is preparing to wade into the growing debate over the pleading standard for civil lawsuits, after two recent Supreme Court decisions effectively upended long-standing precedent.

Sen. Arlen Specter, D-Pa., filed legislation Wednesday designed to return the standard to what it was prior to 2007, when the Court handed down its ruling in Bell Atlantic Corp. v. Twombly (pdf). That case and another — Ashcroft v. Iqbal (pdf) from the most recent term — have raised the standard that pleaders must meet to avoid having their cases quickly tossed.

Specter, in remarks prepared for the Senate floor, accused the Court’s majorities of making an end run around precedent with the two recent cases.

“The effect of the Court’s actions will no doubt be to deny many plaintiffs with meritorious claims access to the federal courts and, with it, any legal redress for their injuries,” Specter said. “I think that is an especially unwelcome development at a time when, with the litigating resources of our executive-branch and administrative agencies stretched thin, the enforcement of federal antitrust, consumer protection, civil rights and other laws that benefit the public will fall increasingly to private litigants.”

At issue is how specific a pleading must be under the Federal Rules of Civil Procedure. Rule 8 requires that a complaint include “a short and plain statement of the claim showing that the pleader is entitled to relief,” while Rule 12 allows for the dismissal of complaints that are vague or that fail to state a claim. Under Iqbal, a 5-4 decision written by Justice Anthony Kennedy, many courts are now requiring more specific facts that, plaintiffs lawyers say, aren’t often available until discovery.

Specter’s bill (pdf) directs federal courts to interpret the rules as the Supreme Court did in a much earlier decision, Conley v. Gibson (1957). The bill falls within the jurisdiction of the Senate Judiciary Committee and, if considered, would likely be a lightning rod for debate among plaintiffs lawyers, consumer groups and businesses.

This article first appeared on The BLT: The Blog of Legal Times.

also from

Monday, May 18, 2009

Iqbal and the death of notice pleading: Part II

Continuing on my discussion of the death of notice pleading in Ashcroft v. Iqbal:

The Court makes the distinction between conclusory and non-conclusory facts central to pleading analysis, with the former not “counting” in evaluating the sufficiency of the complaint. As Scott Dodson argues here, it is problematic that the Court has reintroduced two tiers of facts (conclusory v. non-conclusory), a remnant of fact pleading (which distinguished between evidentiary and ultimate facts).

But a bigger problem is how anyone can plead defendant’s state of mind anymore without avoiding such conclusory facts. This will be an issue in this case and beyond. In this case, the Supreme Court remanded to the Second Circuit to consider whether to remand to the district court to give the plaintiff a chance to replead. But what more could he say?

The majority rejected as conclusory, bare allegations that are not entitled to be taken as true for purposes of the 12(b)(6) the following allegations: 1) that Ashcroft and Mueller “‘knew of, condoned, and willfully and maliciously agreed to subject [him]’ to harsh conditions of confinement ‘as a matter of policy, solely on account of [his] religion, race, and/or national origin and for no legitimate penological interest.’”; 2) that Ashcroft was the “principal architect” of the discriminatory detention policy; and 3) that Mueller was “instrumental” in adopting and executing that policy.

As Justice Souter argued, it is not clear why these are conclusory or bare allegations (at least considered in light of the other allegations in the complaint). Nor is it clear why these were mere conclusions to be ignored while the following paragraphs were sufficient: 1) “‘the [FBI], under the direction of Defendant MUELLER, arrested and detained thousands of Arab Muslim men . . . as part of its investigation of the events of September 11.’”; and 2) “‘[t]he policy of holding post-September-11th detainees in highly restrictive conditions of confinement until they were ‘cleared’ by the FBI was approved by Defendants ASHCROFT and MUELLER after September 11, 2001.’” Can anyone find a principled way to determine why these are any less bare than the three paragraphs quoted above?

More problematically, even accepting the majority’s determination that the allegations are indeed bare and conclusory, what else could the plaintiff say at the complaint stage? How else could a plaintiff allege that two government officials had implemented and carried out a policy with impermissible discriminatory intent? Absent some discovery and the chance to inquire into the defendants’ thinking when acting (here, in establishing the policies at issue), what words can a plaintiff possibly use to describe that the defendant enacted or approved or acquiesced in a policy knowing (or intending) it to be discriminatory?

This seems to leave plaintiffs in an impossible position.

Posted by Howard Wasserman on May 18, 2009 at 06:12 PM in Civil Procedure, Howard Wasserman | Permalink

Double Dipping

Q&A: Roy Oppenheim

Weston attorney says banks are double-dipping at homeowners’ expense Amid continuing scrutiny of American International Group and how the failed insurance giant has used federal rescue funds, which have grown to $182.5 billion since September, Weston real estate attorney Roy Oppenheim is raising other concerns. Oppenheim of Oppenheim Pilelsky has contacted the office of New York Attorney General Andrew Cuomo about what he and his colleagues describe as “double-dipping” by banks seeking to foreclose mortgages. Some banks have already received money from AIG and the Troubled Asset Relief Program to cover losses on bad mortgages. By then taking back a house in a foreclosure and re-selling it, banks are being “unjustly enriched,” Oppenheim said “The banks should not be permitted under any circumstances to get paid twice,” Oppenheim told Cuomo’s staff in an e-mail. Oppenheim spoke earlier this week about the issue. The interview has been edited for length and clarity. What prompted you to contact Cuomo’s office? A lot of press accounts about AIG and TARP, and their own internal notices about their investigations of AIG. But they haven’t addressed that particular issue. So I’m trying to push them along a little. What companies or agencies insure the lenders or banks? It’s AIG and a few other insurance companies that decided to issue insurance policies without providing sufficient collateral behind the policy. So if risk arose, they couldn’t pay and they knew they were creating a scenario that is a domino effect and the government would have to bail them out. They didn’t expect that risk would come to fruition. And that risk was a certain amount of defaults that would occur — default swaps or mortgage default swaps. They are insuring entire portfolios of mortgages if a certain percentage fail. They were insuring against failure. Yes. Lloyd’s of London has people who pledge their individual net worth and when Lloyd’s issues policies, they are backed by individual net worth. Collectively, the individual net worths generally will meet the obligations of the syndicate. AIG was just a bold, bold gamble. But they didn’t insure with assets. They only insured that they’d have to make payment. So who did they have to pay? One hundred sixty billion to every major bank, including Goldman Sachs, who were the counterparties. And those counterparties all received funds from AIG under these contracts. All that money came from TARP, the U.S. taxpayer. Money flowed from the taxpayer to the U.S. government to AIG to these banks. And the banks used the money to prop up their positions and financial capability so they can remain a bank because a number were losing capital they needed. So the banks have been paid for these mortgage failures but they proceeded to bring foreclosure action and try to collect again from the home owner. They’ve already collected TARP money through AIG as counterparties. And a lot of us are saying, “Why didn’t the government force AIG to go into bankruptcy?” They could have done it in an organized way, provided debtor-in-possession financing, and paid 50 cents or 60 cents or 80 cents on these contracts. But nope, they paid 100 percent. And that’s why you’re saying the bank may not be able to go after the owners in a foreclosure? And possibly later for a deficiency. For example: You have a fender-bender, and you’re paid by your insurance company because someone hits you in back. You had a $2,000 repair. Your insurance company pays you the $2,000 and then has the right to sue the other insurance company and the other person. But you don’t have that right. You’ve already been paid your $2,000. If you collect another $2,000, you’ve been unjustly enriched. Under the law of insurance, you aren’t allowed to collect twice. There are fancy legal terms for that. One is collateral source rules — you have to disclose you have already been paid from another source when you are suing someone. No. 2, you have subrogation rights — where an insurance company has laid out money for a claim and become the equitable owner of that claim. So, in this case, AIG and the U.S. government should get some of this foreclosure money back. How do you prove they aren’t? From what we’ve seen so far — and only discovery in the foreclosure process will ever provide us with this true information, which we are pursuing — will we ever be able to fully understand when a bank forecloses and gets back money and if in fact they pursue a deficiency, does that money go back to the insurance company and back to the U.S. government. That’s where the attorney general’s office of New York comes in. We have inquired if that is a scenario and if the banks are pocketing this money and being unjustly enriched. What would be the proper process? If they were collecting this money on behalf of AIG and AIG has to turn it over to the Treasury, while it’s awkward, that’s probably the proper process. The taxpayer would be reimbursed. In my heart of hearts, I don’t believe that’s happening. I believe the banks are pocketing the money. I have no evidence of it. But I have no evidence that AIG is pursuing getting money back from the banks and that the government is putting any pressure on AIG to get the money back. It just seems horrific to me that the U.S. taxpayer, who paid AIG the money to pay the banks, is going to pay a second time [for the] one in 10 families who are being foreclosed. And if, in fact, the banks have been paid twice, they ought to give a credit to the homeowner for that money and adjust the mortgage to the market value and not get paid twice. Why has no one flagged that yet? I believe there is a group of us doing foreclosure defense and looking at TARP and the internal documents the banks used to create these collateralized debt obligations, and we’re seriously starting to question this entire juggernaut. What we’re suggesting here is almost revolutionary. It’s like what Shay’s Rebellion was about. [The 1700s rebellion led by Daniel Shay over Europeans’ demand for war investment repayments prompted wealthy businessmen to confiscate the property of poor New England farmers.] This is rebellious stuff. And people will rebel. ____________________________ Attorney Roy Oppenheim says banks holding distressed mortgages that have benefited from the government bailout are wrong to also foreclose on homes: – Double dipping: “Banks have been paid for these mortgage failures, but they proceeded to bring foreclosure actions and try to collect again from the home owner.” – The borrowers: “If, in fact, the banks have been paid twice, they ought to give a credit to the homeowner for that money and adjust the mortgage to the market value and not get paid twice. – Political impact: “What we’re suggesting here is almost revolutionary. … This is rebellious stuff. And people will rebel.” Terry Sheridan can be reached at (954) 468-2614. Roy Oppenheim photo by Melanie Bell