Foreclosure Defense & Attorney Hesitation

Why does defending mortgage foreclosure actions seem like a mystery to most attorneys?

One reason defending foreclosure actions has been an idea foreign to most attorneys is due, in part, to the many negative perceptions about such an undertaking. First, there is the mix of assumptions collectively held by nearly everyone looking at the homeowner’s situation.  The bank lent the money and the homeowner did not repay, therefore, the home will inevitably be lost.  The bank’s contract is valid, bullet-proof and there are no real defenses, therefore, the judge will likely grant judgment against the homeowner.  Sound familiar? Second, to defend mortgage foreclosures the advocate must navigate contract law, the Uniform Commercial Code, state and federal consumer protection statutes, banking and securities laws, among other bodies of law, legal doctrines and related rules.  The lending industry has made it even more complex with the bundling of mortgages and securitization. Third, until recently, representing a homeowner in mortgage foreclosure has been viewed by attorneys as not worth the risk.

Between the homeowner’s expectations and associated liability to the advocate, the amount of work required defending the action, the likelihood of getting paid fees and the low likelihood of success – it just has not been seen as a worthwhile pursuit. Before the current mortgage crisis, little was known about abuses in the lending process.  However, news coverage over the past two years has drawn attention to the dark side of the lending industry and revealed how lenders win big at the expense of unwitting borrowers in mortgage transactions that were once were relatively straight-up deals. Abuses by the mortgage lending industry and violations of numerous laws range from the first time a homeowner is offered a mortgage loan through servicing of that loan, collections activities and to the prosecution of the foreclosure action.  These abuses, when uncovered, translate into defenses that can be advance in representing homeowners in mortgage foreclosure by tapping into the arsenal of existing laws, regulations and procedural requirements that regulate enforcement of these loan agreements. CASECLARITY training arms advocates with knowledge and practice skills to advance the strongest arguments for homeowners facing the loss of their home.  What makes this training superior to anything else on the market is that beyond a comprehensive review of the law applicable to these cases, there is a strong emphasis on the workflow and business issues that makes taking on these cases both practical and profitable.

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Required Insight

What you don’t know can hurt your case.

Types of Foreclosure Plaintiffs. One size does not fit all – especially in defending foreclosure actions. For example, of the 12 different types of foreclosure plaintiffs discussed in our training two are at completely separate ends of a contractual relationship with the homeowner. The first is a non-bank entity having the right to foreclose a lien that has been voluntarily given in exchange for something of value, such as repair to the home. Defending a foreclosure action by this type of plaintiff is markedly different than if the action were brought by a bank lender. The second type of foreclosure plaintiff is an assignee of a promissory note and mortgage, not a holder in due course, who has purchased what the industry calls a “scratch-and-dent loan”. These two types of plaintiffs are not only far apart in terms of what potentially gave rise to their right of action, but they are treated differently in the defensive context as well. Although not all are named here, other types of foreclosure plaintiffs include property owners’ associations, bank lenders, non-bank/non-institutional lenders, trustees of mortgage-backed securities and others.

Stages of Foreclosure Distress. As a foundation to CASECLARITY foreclosure defense we help attorneys expand their view of the foreclosure fact-finding and representational opportunities spectrum. How? By showing that a homeowner’s distress relating to mortgage foreclosure begins with the first time that consumer was first offered a loan. This range continues through servicing the loan, foreclosure proceedings and ultimately to everything taking place after the foreclosure – including displacement of the consumer from the property. The stages are:

1. Loan
2. Default
3. Acceleration
4. Foreclosure
5. Disposition
6. Judgment
7. Appeal
8. Sale
9. Eviction
10. Post-Eviction

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Enemy One in Mortgage Foreclosure Actions. The enemy to slay in defending clients facing foreclosure is known as ASSUMPTIONS. No one can really argue that bias and prejudice does not exist when a homeowner is accused of not paying their mortgage. The collection of assumptions that tracks this allegation works such a prejudice against the homeowner that often, and before all the facts are in, everyone having any connection to the foreclosure will simply assume that the homeowner failed to pay; had no excuse for not paying; it is entirely the homeowner’s fault; the contract is air tight and not subject to attack; that the bank has not been paid and is innocent; that the homeowner has absolutely no defenses and will ultimately lose the home. Why would any attorney want to take on a case with such built-in negative bias and prejudice against their client? The truth is that attorneys who have looked past these assumptions have found serious overreaching by mortgage industry and others associated with the prosecution of foreclosures. The stories about abuses uncovered can fill several books. CASECLARITY teaches attorneys how to leverage new information about these abuses to attack the ASSUMPTIONS enemy and simultaneously advance both legal and equitable defenses in foreclosure actions.

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Plaintiff Fails to Adequately Allege It’s Identity: Foreclosure Dismissed

In this mortgage foreclosure action by plaintiff Wachovia Mortgage, FSB F/K/A WORLD SAVINGS BANK the defendant argued that Wachovia had failed to adequately identify itself within the body of the complaint.  The circuit court agreed and dismissed the complaint granting the plaintiff 20 days to fix the problem.  Plaintiff’s counsel argued that 1) Wachovia was both a national  bank and also not required to register with the Secretary of State in order to establish its capacity to sue; 2) Wachovia was a foreign corporation and exempt from registration pursuant to Fla. Stat. § 607.1501.  The court did not buy that argument stating:  “The inconsistent allegations made in Plaintiff’s response are not facts that have been plead and such facts must be plead so that Defendant may respond to them through a responsive pleading”.

This defense argument is consistent with the 865 argument contained within motions to abate the action.  If you are not using these arguments to procedurally attack the foreclosure complaint you’re missing out.  Contact me if you’re unclear how to frame this in your motions.

Thank you Judge Rondolino for ruling properly in weighing this defense.  Congratulations to attorney Matthew Weidner for this result.  Thanks to attorney Brian Willis for shining a light on this case.

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Indymac/OneWest Article

Please take a moment to read a well presented analysis of one example of backroom deals that stand in the way of mortgage loan modifications.  This article was posted on iamfacingforeclosure.com blog.   For those working in the area of foreclosure defense this is an article worth reading.   A job well done by the author.

 

Anatomy of a Government-Abetted Fraud: Why Indymac/OneWest Always Forecloses

Several times per week, I get phone calls from attorneys. These calls all start out the same. “I am unable to get loan modifications done through a lender. What can I do?” The first question I ask is if the lender is Indymac/One West. Invariably, it is.I also field the same type of calls from homeowners and from loan modification companies. Everyone is having the problem of Indymac not cooperating with regard to doing loan modifications. Furthermore, if I google the issue or check out loan modification forums, the same is true on the internet.What is going on with Indymac/One West? Why aren’t they doing loan modifications? This article will try and bring together the known facts for a better understanding of the situation, and discuss what the Indymac situation means for foreclosures in general — and the government’s response to the crisis. First, to understand the situation today, one must have an understanding of the recent history of Indymac. 

History

Indymac was a national bank in the U.S. It was insured by the FDIC. On July 11, 2008, Indymac failed and was taken over by the FDIC.

Indymac offered mortgage loans to homeowners. A large number of these loans were Option ARM mortgages using stated income programs. The loans were offered by Indymac retail, and also through Mortgage Bankers would fund the loans and then Indymac would buy them and reimburse the Mortgage Banker. Mortgage Brokers were also invited to the party to sell these loans.

During the height of the Housing Boom, Indymac gave these loans out like a homeowner gives out candy at Halloween. The loans were sold to homeowners by brokers who desired the large rebates that Indymac offered for the loans. The rebates were usually about three points. What is not commonly known is that when the Option ARM was sold to Wall Street, the lender would realize from four to six points, and the three point rebate to the broker was paid from these proceeds. So the lender “pocketed” three points themselves for each loan.

When the loans were sold to Wall Street, they were securitized through a Pooling and Servicing Agreement. This Agreement covered what could happen with the loans, and detailed how all parts of the loan process occurred.

Even though Indymac sold off most loans, they still held a large number of Option ARMs and other loans in their portfolio. As the Housing Crisis developed and deepened, the number of these loans going into default or being foreclosed upon increased dramatically. This reduced cash and reserves available to Indymac for operations.

In July, 2008, the FDIC came in and took over Indymac. The FDIC looked for someone to buy Indymac and after negotiations, sold Indymac to One West Bank.

OneWest Bank and its Sweetheart Deal

OneWest Bank was created on Mar 19, 2009 from the assets of Indymac Bank. It was created solely for the purpose of absorbing Indymac Bank. The principle owners of OneWest Bank include Michael Dell and George Soros. (George was a major supporter of Barack Obama and is also notorious for knocking the UK out of the Euro Exchange Rate Mechanism in 1992 by shorting the Pound).

When OneWest took over Indymac, the FDIC and OneWest executed a “Shared-Loss Agreement” covering the sale. This Agreement covered the terms of what the FDIC would reimburse OneWest for any losses from foreclosure on a property. It is at this point that the details get very confusing, so I shall try to  simplify the terms. Some of the major details are:

• OneWest would purchase all first mortgages at 70% of the current balance
• OneWest would purchase Line of Equity Loans at 58% of the current balance.
• In the event of foreclosure, the FDIC would cover from 80%-95% of losses, using the original loan amount, and not the current balance.

How does this translate to the “Real World”? Let us take a hypothetical situation. A homeowner has just lost his home in default. OneWest sells the property. Here are the details of the transaction:

• The original loan amount was $500,000. Missed payments and other foreclosure costs bring the amount up to $550,000. At 70%, OneWest bought the loan for $385,000
• The home is located in Stockton, CA, so its current value is likely about $185,000 and OneWest sells the home for that amount. Total loss for OneWest is $200,000. But this is not how FDIC determines the loss.
• ‘FDIC takes the $500,000 and subtracts the $185,000 Purchase Price. Total loss according to the FDIC is $315,000. If the FDIC is covering “ONLY” 80% of the loss, then the FDIC would reimburse OneWest to the tune of $252,000.
• Add the $252,000 to the Purchase Price of $185,000, and you have One West recovering $437,000 for an “investment” of $385,000. Therefore, OneWest makes $52,000 in additional income above the actual Purchase Price loan amount after the FDIC reimbursement.

At this point, it becomes readily apparent why OneWest Bank has no intention of conducting loan modifications. Any modification means that OneWest would lose out on all this additional profit.

Note: It is not readily apparent as to whether this agreement applies to loans that IndyMac made and Securitized but still Services today. However, I believe that the Agreement does apply to Securitized loans. In that event, OneWest would make even more money through foreclosure because OneWest would keep the “excess” and not pay it to the investor!

Pooling And Servicing Agreement

When OneWest has been asked about why loan modifications are not being done, they are responding that their Pooling and Servicing Agreements do not allow for loan modifications. Sheila Bair, head of the FDIC has also stated the same. This sounds like a plausible explanation, since few people understand the Pooling and Servicing Agreement.  But…

Parties Involved

Here is the”dirty little secret” regarding Indymac and the Pooling and Servicing Agreement. The parties involved in the Agreement are:

• The Sponsor for the Trust was…………Indymac
• The Seller for the Trust was……………Indymac
• The Depositor for the Trust was………..you guessed it………….Indymac
• The Issuing Entity for the Trust was……………….(drumroll)……………….Indymac
• The Master Servicer for the Trust was……..once again………Indymac

In other words, Indymac was the only party involved in the Pooling and Servicing Agreement other than the Ratings Agency who rated these loans as `AAA’ products.

To make matters worse, Indymac wrote the Agreement in order to protect itself from liability for these garbage loans. By creating  separate Indymac Corporations — which the Depositor, Sponsor, and other entities were — Indymac created a bankruptcy-remote vehicle that could not come back to them in terms of liability. However, they did not count on certain MBS securities and portfolio loans coming back to bite them and force them under.

Now, the questions become:

• If Indymac was responsible for Securitization at every step in the Process, and was responsible for writing the Pooling and Servicing Agreement, can they be held accountable for the loans that they are foreclosing on?
• Since Indymac was the Issuing Entity, can they actually modify loans, but refuse to do so because they can make money for OneWest Bank by refusing to do so?
• Does Indymac have to “buy back” the loan from the Indymac Trust in order to do a loan modification?

These are questions that I have no answer for. All I know is that at every step of the way, Indymac was involved in the process, and have taken steps to protect themselves from liability for loans that should never have been made.

Loan Modifications

As referred to earlier, the Agreement covers all aspects of the Securitization Process. With respect to Loan Modifications, the Agreement for Indymac INDA Mortgage Loan Trust 2007 – AR5, states on Page S-67:

Certain Modifications and Refinancings

The Servicer may modify any Mortgage Loan at the request of the related mortgagor, provided that the Servicer purchases the Mortgage Loan from the issuing entity immediately preceding the modification.

Page S-12 states the same “policy”:

The servicer is permitted to modify any mortgage loan in lieu of refinancing at the request of the related mortgagor, provided that the servicer purchases the mortgage loan from the issuing entity immediately preceding the modification. In addition, under limited circumstances, the servicer will repurchase certain mortgage loans that experience an early payment default (default in the first three months following origination). See “Servicing of the Mortgage Loans—Certain Modifications and Refinancings” and “Risk Factors—Risks Related To Newly Originated Mortgage Loans and Servicer’s Repurchase Obligation Related to Early Payment Default” in this prospectus supplement.

These sections would appear to suggest that the only way that OneWest could modify the loan would be as a result of buying the loan back from the Issuing Trust. However, there may be an out. Page S-12 also states:

Required Repurchases, Substitutions or Purchases of Mortgage Loans

The seller will make certain representations and warranties relating to the mortgage loans pursuant to the pooling and servicing agreement. If with respect to any mortgage loan any of the representations and warranties are breached in any material respect as of the date made, or an uncured material document defect exists, the seller will be obligated to repurchase or substitute for the mortgage loan as further described in this prospectus supplement under “Description of the Certificates—Representations and Warranties Relating to Mortgage Loans” and “—Delivery of Mortgage Loan Documents .”

The above section may be the key for litigating attorneys to fight Indymac. If fraud or other issues can be raised that will show a violation of the Representations and Warranties, then this could potentially force Indymac to modify the loan.

HAMP

At this point, it becomes important to note that Indymac/OneWest signed aboard with the HAMP program in August 2009. Even though they became a part of the program, they are still refusing to do most loan modifications. Instead, they persist in foreclosing on almost all properties. And even when they say that they are attempting to do loan modifications, they are fulfilling all necessary requirements so that they can foreclose the second that they “decide” the homeowner does not meet HAMP requirements, — which, since they can make more money by foreclosing on the property, meets the HAMP requirements for doing what is in the best interests of the “investor”.

Why did Indymac even sign up for HAMP, if they have no intention of executing loan modifications?  Clearly, just for appearances.

One Final Question

It now becomes incumbent upon me to ask one final question. The Shared-Loss Agreement states the following:

2.1 Shared-Loss Arrangement.

(a) Loss Mitigation and Consideration of Alternatives. For each Shared-Loss Loan in default or for which a default is reasonably foreseeable, the Purchaser shall undertake, or shall use reasonable best efforts to cause third-party servicers to undertake, reasonable and customary loss mitigation efforts in compliance with the Guidelines and Customary Servicing Procedures. The Purchaser shall document its consideration of foreclosure, loan restructuring (if available), charge-off and short-sale (if a short-sale is a viable option and is proposed to the Purchaser) alternatives and shall select the alternative that is reasonably estimated by the Purchaser to result in the least Loss. The Purchaser shall retain all analyses of the considered alternatives and servicing records and allow the Receiver to inspect them upon reasonable notice.

Such agreements are usually considered to be interpreted to the benefit of the homeowner, as with HAMP and other programs. In legalese, it is called “Intent”.

What was the “Intent” of the Shared-Loss Agreement? Was the intent to provide OneWest Bank solely with a profitable incentive to take over Indymac Bank? If so, then OneWest has been truly successful in every manner.

Or was the intent to offer to OneWest Bank a way to be compensated for losses for foreclosures, but with the primary goal to assist homeowners in trouble? If this was the intent, then OneWest has failed miserably in its actions. And if so, could OneWest be actionable by the Federal Government for fraud?

In fact the true “Intent” was to limit losses to the Treasury Department. Each and every loan modification done would save the Treasury, and the tax payer, from 80-95 cents on every dollar.

Since, technically, One West would get 5-20 cents of any savings, it should have been an incentive to use foreclosure alternatives. But the reality is  that the quick turnaround on foreclosure seems to give OneWest a better return. As a result, OneWest appears to simply ignore the intent and just foreclose (as far as I can tell).

So, OneWest’s failure to modify loans may actually amount to fraud on the Treasury and US taxpayers.

Conclusion

I have presented the story of Indymac/OneWest and what is happening today. But the story does not end with OneWest. There are over 50 different lenders and servicers who have Shared-Loss Agreements executed with the FDIC. Each Agreement offers essentially the same terms. Though other Lenders do not appear to be acting as flagrantly as OneWest, they are all still engaging in the same actions.

What is the solution for this problem?

• For homeowners individually, the most successes are being achieved by borrowers who are getting knowledgeable attorneys who will not just threaten litigation, but are also willing to act and file the necessary lawsuits. That tends to bring OneWest Bank to the table.
• For the country as a whole, and homeowners in mass, the problem must be brought to the attention of your local Congress Critters. You must hold their feet to the fire. They must know that if they do not respond to what OneWest and other lenders are doing, then they are subject to being voted out of their nice and cushy Congressional Offices.

Will this be easy? No way. After all, the lenders have the money and the ears of Congress. But if we do not draw the line here, then in 10-15 years, the Banks will devise another plan to “loot” the economy, as they do every 10-15 years.

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