Big Problem for Banks: Due Process

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EDITOR’S NOTE: Except for the assumption that the borrower’s bought homes they couldn’t afford (with which I disagree) and the assumption that the existence of a default is axiomatic if the borrower has missed a payment (with which I strongly disagree), this article pretty much hits the nail on the head for due process. Under the theory proposed by Wall Street, if the borrower missed a payment ANYONE can foreclose, without regard to whether they are owed any money. This turns American Jurisprudence on its head.

I do not agree that homeowners bought homes they could not afford. Many of the new mortgages were refinancing of homes that people had lived in for years, even generations. Even on the new home purchases, they could afford what the home was worth and if the loan product was priced appropriately to the home value, there would be few missed payments.

I do not agree that a default exists, ipso facto, when a borrower misses a payment. The question is not where the payment came from, it is whether a payment was made and received by an identified creditor. In nearly all cases, the creditors, if they can be identified, did receive payments even though their counterparts on Main Street were declaring a default. In nearly all cases, the end of month statements and the notices of default were based upon an amount stated as principal due that did not reflect loss mitigation payments received from third parties.

I do not agree with the premise that the obligations are secured by mortgages. If I lend money to you and my friend Joe puts his own name on the note and mortgage, the lender of record is in fact owed nothing. The mortgage, which secures the Note, not the obligation, is in favor of someone who is owed nothing. The mortgage therefore secures nothing. The note describes a non-existent obligation. And the real obligation is not described in writing nor is the real creditor disclosed. The absence of any actual transfers of paperwork corroborates the simple fact that they were not dividing up the mortgages, they were slicing up the money as it emerged from a pool collected by servicers. This is further corroborated by the continuing payment by servicers to the promised recipients of those receivables even after the loan, on Main Street, was declared in default.


  • The truth is, any rock you turn over in the Countrywide subprime portfolio, something slimy is going to emerge.
  • Banks took advantage of investors every bit as much as they took advantage of home buyers.
  • it simply does not follow that the bank therefore has an absolute right to take back the home. Under the law, it has to prove it has that right — by filing documents that show that the owner of the mortgage has conveyed that right to it. That’s why this affidavit scandal isn’t some legal nicety. It’s about the single most important value of American jurisprudence: due process.
October 22, 2010

Big Problem for Banks: Due Process


Earlier this week, Bank of America, the nation’s largest consumer bank, reported its third-quarter earnings. It was a very good quarter; putting aside an accounting charge — a very large, $10.4 billion accounting charge, admittedly — the bank reported $3.1 billion in profits. It was the third consecutive quarter that Bank of America had earned more than $3 billion.

During the ensuing conference call Tuesday morning, there was the requisite chest-thumping from Brian Moynihan, the chief executive, and Chuck Noski, the chief financial officer. But there was also something else: tough talk about two big legal problems the bank faces as a result of the subprime bubble. Not surprising, it was the latter that caught my attention.

Like everyone else, I’d been reading with amazement the stories about one of those legal problems: the robo-signing scandal that has ensnared all the banks with mortgage servicing subsidiaries, Bank of America included. That’s the scandal in which a tiny handful of employees had signed — or allowed others to forge their signatures — on thousands of affidavits confirming that the banks had the legal right to foreclose on properties they serviced. In truth, they had often never seen the documents proving the bank had that legal right. In some cases, the documents didn’t even exist. As a result of the mounting publicity, many big banks had halted all foreclosures while they reviewed the legality of their affidavits.

Mr. Moynihan said that, at Bank of America, at least, the foreclosure halt in 23 states that require judicial proceedings was over. It had reviewed some 102,000 affidavits and — guess what? — no big problem! “The teams reviewing data have not found information which was inaccurate” or that would change the plain facts of foreclosure — namely that the homeowners it wanted to foreclose on were in serious arrears.

Thus the bank’s central position is that, since it is so doggone obvious that the homeowners can’t pay their mortgages, the fact that the affidavits might not have complied with the law shouldn’t cause anyone to break into a sweat. At one point Mr. Noski actually said, “I think it’s a big issue because people are losing homes. It’s not a big issue” for the servicers. Glad he cleared that up.

The prospect of a second legal assault is more recent. Shortly before the earnings call, Bank of America received a letter from a lawyer representing eight powerful institutional investors, including BlackRock, Pimco and — most amazing of all — the New York Federal Reserve. The letter was a not-so-veiled threat to sue the bank unless it agrees to buy back billions of dollars worth of loans that are in securitized mortgage bonds the investors own.

Mainly, they are saying that Bank of America was servicing loans in these bonds that the bank knew violated the underwriting standards that the investors had been led to believe the bank was conforming to. What’s more, they said, the bank had never come clean about all the bad loans, as it was required to do. Therefore, say the investors, the bank has a contractual obligation to buy back the bad loans.

During the conference call, Mr. Moynihan and Mr. Noski made it clear that Bank of America was going to use hand-to-hand combat to fight back these claims. “We’re protecting the shareholders’ money,” Mr. Moynihan said. Mr. Noski questioned whether the investors even had the right to bring the case. “We continue to review and assess the letter and have a number of questions about its content including whether these investors actually have standing to bring these claims,” he said.

So there you have it. Having convinced millions of Americans to buy homes they couldn’t afford, Bank of America is now revving up its foreclosure efforts on these same homeowners. At the same time, having sold tens of thousands of these same terrible loans to investors, it is going to spend tens of millions of dollars on lawyers to keep from having to buy back their junky loans.

Apparently, being the biggest bank in the country means never having to say you’re sorry.

In truth, it’s not really Bank of America itself that persuaded so many people to borrow beyond their means and then sold those terrible loans to investors. It was Countrywide, which Bank of America purchased in July 2008, by which time the company was on the verge of collapse because of all the corrosive subprime loans it had made.

Before the acquisition, Bank of America was already one of the biggest servicers of mortgages. After the acquisition, it was gargantuan. From a standing start in 1968, Countrywide had become — by far — the No. 1 mortgage originator in the country, and the No. 1 servicer as well.

But during the subprime bubble, it had debased itself to maintain that No. 1 position, becoming a hotbed of fraud and predatory lending. Take, for instance, the facts that have been revealed in a lawsuit filed against Countrywide by the Mortgage Guaranty Insurance Corporation, which insured many of Countrywide’s loans. Mortgage Guaranty investigators tracked down some of the people who had gotten subprime mortgages from Countrywide. What they discovered was startling.

A loan for $360,000 went to a Chicago woman who supposedly earned $6,833 a month at an auto body shop. In truth she was a part-time housekeeper who was posing as the buyer to help her sister. The Countrywide loan officer not only knew these facts, she came up with the idea of having the borrower pretend to work at the auto body shop.

The lawsuit uncovered a raft of similar examples — case after case where the loan officers not only knew that fraud was being committed, but were actively engaged in committing it. “By about 2006,” says the lawsuit, “Countrywide’s internal risk assessors knew that in a substantial number of its stated-income loans — fully a third — borrowers overstated income by more than 50 percent.” And that is just one small subset of what went on at Countrywide. The truth is, any rock you turn over in the Countrywide subprime portfolio, something slimy is going to emerge.

That’s why most people, myself included, have no sympathy for Bank of America’s legal predicament — and no patience for its “we’re not the bad guys here” arguments. It is absolutely true that the homeowners that Bank of America wants to foreclose on are in default on loans they should never have gotten in the first place. (Gee, whose fault was that?) But it simply does not follow that the bank therefore has an absolute right to take back the home. Under the law, it has to prove it has that right — by filing documents that show that the owner of the mortgage has conveyed that right to it. That’s why this affidavit scandal isn’t some legal nicety. It’s about the single most important value of American jurisprudence: due process.

“Just because the homeowner hasn’t paid his mortgage doesn’t mean anybody in the world can kick him out,” said Katherine Porter, a visiting law professor at Harvard. “The bank has to have the standing to do that.” She added that the bank’s argument was a little like saying that someone who committed a crime shouldn’t receive a trial because he’s so obviously guilty. America just isn’t supposed to work that way.

That’s also why the bank’s contention that the foreclosure scandal will soon be behind it is unlikely to hold true. Peter Ticktin, a Florida lawyer who represents some 3,000 homeowners, told me that he did not believe it was possible for Bank of America to have properly vetted those 102,000 affidavits in a matter of weeks.

“My hat is off to them for doing the impossible,” he said, his voice dripping with sarcasm. “They figured out how to take a massive amount of perjured affidavits and turn them into real ones without robo-signers.” Mr. Ticktin said he had every intention of continuing to challenge Bank of America foreclosures. Most other lawyers specializing in these cases plan to do likewise. The affidavit scandal isn’t over yet, no matter how much Mr. Moynihan might wish it to be so.

As for the potential lawsuit with BlackRock and the New York Fed, the week before the investors sent the letter to Bank of America, three Countrywide executives, including former C.E.O. Angelo Mozilo, settled charges brought by the S.E.C. that they had engaged in fraudulent conduct. Internal Countrywide e-mail clearly show that they knew how dangerous their lending had become. Once the loans were sold to Wall Street — which, I should note, aggressively pushed the subprime companies to lower their standards — they went through a due diligence process that investors never knew about. Banks took advantage of investors every bit as much as they took advantage of home buyers.

And it would be nice, if just once, they would admit it. Instead, we get Mr. Noski, the chief financial officer, promising that the bank will fight these cases to the death because they’re looking out for shareholders. It’s appalling, really.

I admit it: I want to see the banks feel some pain. Most people do, I think. Banks did terrible things during the subprime bubble, and they still haven’t paid any real price. I find myself rooting for judges to rule against banks in foreclosure cases. I would love to see these big investors put the serious hurt on Bank of America, which will encourage other investors to pile on. I know this colors my thinking. I can’t help it.

Yet I also know the flip side. If the foreclosure lawyers start winning a lot of cases, if judges halt foreclosures on a widespread basis, if investors start to extract billions upon billions of dollars from the banks — and if banks become seriously weakened as a result — we’ll be right back where we were two years ago. The banks will need to be saved for the good of the economy. The taxpayers will have to come to the rescue. That’s an appalling prospect too.

Banks: We can’t live with them, and we can’t live without them. It stinks, doesn’t it?

11 Responses

  1. Order the Orange Jump Suits

  2. HOWEVER MUCH I appreciate your blog, the fact that my comments remain unacknowledged must mean that you label me to be without substance or merit.

    Spoofs are okay I guess but my sincere and mindless thoughts are not.

    I do have an attitude and I know how to use it. I have been screwed over by not one but two great bastions of democracy within the space of a few months time.

    How lucky I am to be relegated to stuff and nonsense.

  3. “eight powerful institutional investors, including BlackRock, Pimco”
    notice how the others go unnamed, but if you look up those 2 they’re clearly pension investment firms (one of which BlackRock Abby I think it was already said she discovered it had judges in their pools), and the NY Fed has already admitted on record that it has a MASSIVE CONFLICT OF INTEREST.
    And I’m sure everyone how BofA has the guts to tell the Fed to stuff it, that’s because it knows that all the Public Employee Pension Funds won’t wanna file a court case for all to see and them to be exposed for their HUGE HEDGED CONFLICT in which our public servants who are supposed to be looking out for the People’s best interest are actually putting their interests before anyone else’s even at the cost of putting the People and their families out on the street. THIS IS NOTHING SHORT OF TREASON & BofA KNOWS THIS AND IF NEED BE THEY COULD PULL THAT CARD AND EVERYONE WOULD TURN ON THE GOVERNMENT BECAUSE THAT WAS THE INTENDED TRAP ALL ALONG.



    Call George E.Babcock Esquire at 401-274-1905 for
    Information on properties in RI & MA & CT.

  5. Had contract on house and some land, no big profit, moved into spec home that i was building as a rental. Sale is lost two days before closing becuase of economy crashed. Construction buss. is all but gone here now. Can’t continue paying though tried. BACA files for Country Wide at court house for forclosuer. They haven’t got the right legal discrition of property and in fact there wasn’t never a legal discription on the deed of trust. They had put their own wrong discription and refiled without even my initials on it. They change the locks and turn house over to real estate company as if they have forclosed to market, and then bagger me for difference in new market value and what I owe. They haven’t at this time or now forclosed yet. I help bail out Bof A and they use money to hire laywers to sue my self but can’t. House sits and sits. David —Colorado

  6. The real question is: if we have a lack of due process in this foreclosure/mortgage mess, do we have a crisis of lack of due process rotting the entire judicial system of the USA? If the banks prevail on all of this foreclosure/mortgage mess, who is going to trust a bank to give us a loan on anything? Major regulation needs to be added to the banking system. I still like the idea of nationalizing the big banks and MAKE them do what’s right.

  7. Funny, I think a lot of people who are not involved in this mess from the borrower side would think this is funny and that the bankers would be doing the world a favor by getting rid of us “deadbeats”.

  8. We do not need BOA, smaller banks can do the job better, take your money out and see them deflate. Don’t borrow from them either.

    I read that BOA is also buying tax leins and evicting the homeowners. What is it withis guys? They are bleeding America.

  9. I agree with your premises. It has been my experience that the people who are saying we bought more house than we could afford and now want someone us to pick up the tab, those people do not understand what is happening. They have the idea that debtors are being given principal reduction and that the taxpayers are on the hook for those reductions. I’ve not talked to one person who got a principal reduction.

    In my case, I have lived in my home for 17 years. I refinanced to pay off some credit card and medical costs and according to the housing market at the time I still had about $40,000 equity in the house and now I’d be doing good to walk away and be considered even.

    I got my refinance through Capital One and then it was transferred to Countrywide and is now with Bank of America. Whatever else is said about Countrywide, at least I was able to get on line and make my payment with no hassle. The very month it was taken over by BOA it became next to impossible to make a payment. Then finally they would agree to let you make it by phone FOR A FEE.

    I really feel sorry for my neighbors who bought their house when prices were at the highest. Now they want to sell it and if they do it will be at a loss.

    Thanks for the articles, always informative!



    It’s a SPOOF …… FALSE STORY ….. but then again even fiction
    has TRUTH buried some where.




    Dover, DE (BNSE): Justice Department investigators confirmed today they are considering possible fines and other penalties against several of the United States’ largest financial institutions for the murders of hundreds of homeowners delinquent in their mortgage payments.


    According to a Justice Department spokesman, “The Department is taking these accusations very seriously. While the laws regulating just how aggressive lending companies can act in their efforts to collect a dept are very broad, the actual legality of physically killing individuals behind on their payments is rather vague. Congress and the Courts have consistently ruled that large financial institutions can do whatever they want whenever they want, but, the authority to just kill people for very little reason is a power normally reserved to the federal government.”

    Officials for several of the largest banks were quick to defend the policy. “Banks have a right and obligation to protect their assets and manage them in a way to yield the highest profitability,” said one well known CEO. “The simple fact is there are some people out there who are not prepared for home ownership and its responsibilities. Some of these people were two, even three days late on their payments. What are we supposed to do? Wait around to Thursday, even Friday, so these deadbeats can meet their obligations?

    “Government regulation is making it nearly impossible for lending institutions to maximize their investments. It’s hard to believe, but in almost every state now, you actually have to prove that your bank owns the property your trying to repossess. Until recently that was an easy problem to fix, but thanks to the liberal media, Courts are actually requiring that any legal documents you produce must be real. This is insane! How are we supposed to make any money when we have to prove that it is actually owed to us? A simple foreclosure that used to take just a few days will now take months, even years to complete. When you look at the facts you can plainly see that the only legal solution available to us is to just hire some guys to go in and kill everyone who lives in a house. When the home owner is dead, the foreclosure process speeds up drastically which enables us to bring the returns our investors have come to expect.”

    A local branch manager for a large mortgage company also voiced support for the policy, “Everyone likes to make the people we kill out to be victims. Trust me, they’re not. Every time we break into a house late at night we offer to let the family live if they can give us the entire amount owed on their mortgage to us in cash. Hell, if they’d do that we’d probably let them off easy with a few rapes and castrations of all the males. But, no… There has not been a single family who has chosen to work with us. They’d rather die than pull two hundred G’s out from under the bed. That really shows you just how serious they are about paying their bills.”

    Congressional leaders expressed concern over the Justice investigation. “I’m not saying the banks don’t deserve a good slap on the wrists for this,” said a high ranking Republican. “But, we have to be cautious that we do not overreact to this situation and actually hurt the already fragile financial system. A reasonable fine, a few promises to reform their policies at an unidentified point in the future should be more than adequate in addressing this issue. Particularly when you consider how even handed the banks have been in the execution of this policy.

    Seriously, a few hundred people die every day in America choking on chicken bones. I don’t see anyone running around trying to sue chickens.”

  11. America has a history of lynching.

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