U.S. Criminal Probe: Bogus Foreclosure Docs

Below is a Must Read article in the Wall Street Journal today about an ongoing criminal probe of a Florida-based company that is being investigated for fabricating [bogus] documents for use in foreclosure actions.

Fabricating evidence to prop up foreclosures is finally now being investigated, criminally.  A mortgage company having nothing to hide, or to fabricate for that matter, should not have to engage in this kind of conduct.

This kind of fraud is what makes it difficult for everyone looking to get the foreclosure dispute resolved, including defense counsel, judges, mediators and the homeowner.  The mortgage and banking industry has shown over and over that it cannot be trusted.  Now the same people want to get Florida legislators to allow totally unsupervised non-judicial foreclosures in this state (pending House Bill 1523).

A memo with this article and related evidence attached should be filed with each challenge to bogus foreclosure actions.

By AMIR EFRATI and CARRICK MOLLENKAMP

A subsidiary of a company that is a top provider of the documentation used by banks in the foreclosure process is under investigation by federal prosecutors.

The prosecutors are “reviewing the business processes” of the subsidiary of Lender Processing Services Inc., based in Jacksonville, Fla., according to the company’s annual securities filing released in February. People familiar with the matter say the probe is criminal in nature.

Michelle Kersch, an LPS spokeswoman, said the subsidiary being investigated is Docx LLC. Docx processes and sometimes produces documents needed by banks to prove they own the mortgages. LPS’s annual report said that the processes under review have been “terminated,” and that the company has expressed its willingness to cooperate. Ms. Kersch declined to comment further on the probe.

A spokesman for the U.S. attorney’s office for the middle district of Florida, which the annual report says is handling the matter, declined to comment.

The case follows on the dismissal of numerous foreclosure cases in which judges across the U.S. have found that the materials banks had submitted to support their claims were wrong. Faulty bank paperwork has been an issue in foreclosure proceedings since the housing crisis took hold a few years ago. It is often difficult to pin down who the real owner of a mortgage is, thanks to the complexity of the mortgage market.

During the housing boom, mortgages were originated by lenders, quickly sold to Wall Street firms that bundled them into debt pools and then sold to investors as securities. The loans were supposed to change hands but the documents and contracts between borrowers and lenders often weren’t altered to show changes in ownership, judges have ruled.

That has made it hard for banks, which act on behalf of mortgage-securities investors in most foreclosure cases, to prove they own the loans in some instances.

LPS has said its software is used by banks to track the majority of U.S. residential mortgages from the time they are originated until the debt is satisfied or a borrower defaults. When a borrower defaults and a bank needs to foreclose, LPS helps process paperwork the bank uses in court.

LPS was recently referenced in a bankruptcy case involving Sylvia Nuer, a Bronx, N.Y., homeowner who had filed for protection from creditors in 2008.

Diana Adams, a U.S. government lawyer who monitors bankruptcy courts, argued in a brief filed earlier this year in the Nuer case that an LPS employee signed a document that wrongly said J.P. Morgan Chase & Co. had owned Ms. Nuer’s loan.

Documents related to the loan were “patently false or misleading,” according to Ms. Adams’s court papers. J.P. Morgan Chase, which has withdrawn its request to foreclose, declined to comment.

Linda Tirelli, a lawyer for Ms. Nuer, declined to comment directly on the case.

Ms. Kersch said LPS didn’t actually create the document and that the company’s “sole connection to this case is that our technology and services were utilized by J.P. Morgan Chase and its counsel.”

While the majority of foreclosures go unchallenged, some homeowners have won the right to keep their homes by proving the bank couldn’t show, on paper, that it owned the mortgage.

Some lawyers representing homeowners have claimed that banks routinely file erroneous paperwork showing they have a right to foreclose when they don’t.

Firms that process the paperwork are either “producing so many documents per day that nobody is reviewing anything, even to make sure they have the names right, or you’ve got some massive software problem,” said O. Max Gardner, a consumer-bankruptcy attorney in Shelby N.C., who has defended clients against foreclosure actions.

The wave of foreclosures and housing crisis appears to have helped LPS. According to the annual securities filing, foreclosure-related revenue was $1.1 billion last year compared with $473 million in 2007.

LPS has acknowledged problems in its paperwork. In its annual securities filing, in which it disclosed the federal probe, the company said it had found “an error” in how Docx handled notarization of some documents. Docx also has processed documents used in courts that incorrectly claimed an entity called “Bogus Assignee” was the owner of the loan, according to documents reviewed by The Wall Street Journal.

Ms. Kersch said the “bogus” phrase was used as a placeholder. “Unfortunately, on a few occasions, the document was inadvertently recorded before the field was updated,” she said.

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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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