Bankruptcy Lawyers: it starts in the schedules — admission of secured debt is deadly

I was traveling and re listening to an older lecture given by 2 Bankruptcy judges generally held in high esteem. The largest point was that naming a party as the creditor and checking the right boxes showing they are secured basically ends the discussion on the motion to lift stay and restricts your options to either filing an adversary lawsuit attached to the administrative bankruptcy petition or filing an action in state court which is where you will be if you don’t follow this same simple direction. If you file schedules attached to your petition for bankruptcy relief, as you are required to do, these are basically the same as sworn affidavits. They will be used against you in any contested hearing.

So the judge lifts the stay and then often mistakenly enters additional language in the order ending the issue of whom is the real lender. After all, that is who you were making the payments to, right, so they must be a creditor. And this is all about a mortgage foreclosure so they must, in addition to being a creditor, they must be a secured creditor. And if the collateral is worth less than the claim, there is not much else to talk about it is simple to these Judges because nobody has shown them differently and one of the Judges is retired now. By definition when the Bankruptcy Judge says in the order who is the creditor, he or she has gone beyond their jurisdiction and due process because there was no evidentiary hearing.

This all results from a combination of technology (garbage in, garbage out), inexperience with securitized mortgages, laziness and failure to do the research to determine what is the truth and what is not. If you are a bankruptcy practitioner who uses one of the desktop bankruptcy programs, then the questions, boxes, and fill-ins are intuitively placed in the schedule that your client swears to. No problem unless the schedules are wrong. And they are wrong where the debt runs from the Petitioner to the REMIC trust beneficiaries and is unsecured by any mortgage that the homeowner borrower petitioner ever signed or meant to sign.

The first point is that the amount if the debt is unknown and we now this for a fact because there are multiple offsets for Third party payment (like Servicer advances) that must be examined one by one. It could be zero, it could be there is money due to the borrower, it could be more or less what is being demanded by the Servicer or trustee. Another thing we know is that neither the Servicer or trustee is likely to know the amount of their claim. So send out a QWR to all addresses for the Servicer and the REMIC trustee.

If you get several different payment histories it is a fair bet they came off of different records, different systems and require the records custodian to authenticate each Servicer’ rendition, of beginning balance, ending balance and every transaction in between. The creditor who filed a proof of claim has the burden of showing a color able right to enforce the mortgage. That can only come from the pooling and servicing agreement. The parties to the PSA are the REMIC Trust, the REMIC Trust beneficiaries and the broker dealer who sold the bonds issued by the REMIC trust.

But if there is no trust or the REMIC trust never actually acquired the subject loan, then the appointed Servicer in the PSA draws no power from a PSA for a nonexistent or empty trust (at least empty of the subject loan.) it is not the Servicer by right, it has become the Servicer by its intervention into the contractual right between the borrower homeowner and the lender (the REMIC trust beneficiaries). The “apparent authority” of the Servicer will only take it so far.

And every transactions means that as a Servicer they were paying or passing on the borrower’s payments . Where are those records — missing. Does the corporate representative know about those payments? Who was the creditor paid. When did the payments from Servicer start and when did they stop — or are they still on-going right up to and including trial, foreclosure sale auction and final disposition of proceeds from an REO sale.

So from the perspective of the Petitioner he might have made payments to an entity that claimed to be the Servicer and those payments are due back not the bankruptcy estate. OOPS but that is what happens when a company arrogated unto itself the powers of a Servicer for loans that are claimed to be in a trust — where the trust doesn’t own the loan, note or mortgage (deed of trust). Thus the Servicer would be owed zero but you would show them in the unsecured column, unliquidated and disputed. This could have a substantial income on the amount of the claim, whether part or all of it is secured.

But no matter, if you fail to take a history from the client, get the closing documents, title and securitization report together with loan level analysis, you are going to do a disservice to your client. We provide litigation support and analysis to give you the data to make an informed decision, fight the POC, MLS, turnover of rents, etc. Then you might avoid the dreaded call of calling your insurance carrier who will probably tell you neither paid for nor received a tail on your claims made policy.

LAWYERS: Go to and start journey toward the light.

Foreclosure Defense: AG’s Hit Countrywide

They don’t have it all, but reading the complaint and getting copies of discovery and motions will help anyone contesting the foreclosure and of course, going further to the main target: HAVING THE MORTGAGE ENCUMBRANCE REMOVED FROM THE PROPERTY AND ELIMINATING LIABILITY ON THE NOTE.



Countrywide’s Pressures Mount

Three States File
Legal Actions;
Holders Clear Sale
June 26, 2008; Page A3

The legal and financial pressures on Countrywide Financial Corp. mounted Wednesday as officials in three states filed separate legal actions against the mortgage lender.

The actions, by the attorneys general of California and Illinois, and the Washington State Department of Financial Institutions, came on the same day that Countrywide shareholders voted to approve the sale of the company to Bank of America Corp. The all-stock transaction was valued at $4 billion when Bank of America agreed to buy Countrywide in January. But Bank of America shares have since slipped, and the value has fallen to about $2.8 billion. The transaction is scheduled to close on July 1.

The California action, filed in state court by Attorney General Edmund G. Brown Jr., alleges that Countrywide used “misleading marketing practices” to steer home buyers into “risky and costly loans” without regard to borrowers’ ability to pay. Mr. Brown alleges that Countrywide, based in Calabasas, Calif., was driven by an effort to boost the company’s market share and fill demand from Wall Street for loans that could be packaged into securities. The 46-page complaint also names Countrywide Chairman Angelo Mozilo and the company’s president, David Sambol.


Separately, the Washington State Department of Financial Institutions filed an administrative action against Countrywide alleging that the company engaged in discriminatory lending practices. Meanwhile, Illinois Attorney General Lisa Madigan, as expected, filed a separate civil action in state court accusing Countrywide of “unfair and deceptive practices” in the sale of mortgage loans.

All states are seeking restitution for borrowers. If the states can persuade the courts to grant restitution, it “could be a staggering blow against Countrywide,” said Kurt Eggert, a law professor at the School of Law at Chapman University, in Orange, Calif. “Countrywide could be required to give back its profit on all those loans and conceivably give back houses on which it has foreclosed.”

A Countrywide spokesman didn’t respond to requests for comment. A Bank of America spokesman had no comment on the litigation Wednesday. But Bank of America Chairman and CEO Kenneth D. Lewis has said in the past that he believes the relatively low deal price gives plenty of cushion for potential damages, settlements and other litigation costs.

Litigation against Countrywide continues to pile up. In addition to the state cases, Countrywide and its top executives are under investigation by several federal agencies, including the Federal Bureau of Investigation and the Securities and Exchange Commission, and are the subject of numerous lawsuits from employees, shareholders and borrowers.

Analysts have estimated that Bank of America could face more than $9 billion in write-downs related to Countrywide.

The California suit is particularly notable because of the scale of Countrywide’s business in the state. California, the nation’s biggest housing market, accounts for a disproportionately large share of delinquent home loans and Countrywide was one of the largest mortgage lenders in the state. California attorney general Brown said in an interview that “Countrywide certainly contributed substantially to the overall problems” in the mortgage market. As custodians of the company, he added, Messrs. Mozilo and Sambol “have the legal and moral responsibility to protect their borrowers and they ultimately failed.”

While subprime loans — or loans to borrowers with poor credit — have captured most headlines in recent years, the attorneys general appear equally concerned about so-called option adjustable-rate mortgages, a type of loan taken out largely by prime borrowers. Payment-option ARMs, as they are often called, allow borrowers to make a minimum payment that may not even cover the interest due. Gross profit margin on these loans was roughly 4%, compared with 2% for loans guaranteed by the Federal Housing Administration, according to the California complaint.

In addition, the California lawsuit alleges that Countrywide loosened its underwriting standards and then often granted exceptions to those looser standards. The company’s Structured Loan Desk in Plano, Texas, was “specifically set up by Countrywide, at the direction” of Messrs. Mozilo and Sambol, to grant underwriting exceptions, the lawsuit says. In 2006, it processed 15,000 to 20,000 loans a month, the lawsuit says.

The California and Illinois actions “are both aggressive lawsuits” in that they “assert a responsibility on the part of the lender to offer appropriate products to the homeowner” in addition to making more traditional claims that lenders made deceptive statements to borrowers, said Prentiss Cox, an associate professor of law at the University of Minnesota.

These suits “have a much greater chance of succeeding now than they would have a few years ago because everyone will understand the consequences” of the practices alleged in the lawsuits, he said. “Before, there was a presumption that these are large financial companies and they surely know what they are doing. No one assumes that anymore.”

Connecticut Attorney General Richard Blumenthal said he is likely to file a lawsuit as part of a second wave of civil actions brought by states against Countrywide. Among the issues Connecticut would allege is “falsely promising refinancing opportunities and lying to consumers about possible risks,” said Mr. Blumenthal. Attorneys general in Florida and Iowa also say they are weighing their options.

–Amir Efrati and Valerie Bauerlein contributed to this article.

Write to Ruth Simon at ruth.simon@wsj.com5

Foreclosure Defense and Offense: Good News For Class Actions and Individual Actions

As with all cases cited here, you should get on line and capture the pleading documents and other pertinent motions, discovery etc. It would help us and thousands of others, if you would send what you find to


McKell v. Washington Mutual-Class Action Defense Cases: Defense Motion To
Dismiss Class Action Improperly Granted As To Breach of Contract And UCL
Claims Based On Federal RESPA Violations California Court Holds
California Court Holds as Matter of First Impression that RESPA Prohibits
Lender from Marking Up Costs of Another Provider's Services Without
Providing Additional Services of its Own 

Plaintiffs filed a putative class action lawsuit against Washington Mutual
Bank in California state court alleging inter alia violations of
California’s unfair competition laws (UCL), Consumers Legal Remedies Act
(CLRA), and breach of contract. “The basis of all causes of action was
defendants’ overcharging plaintiffs for underwriting, tax services, and wire
transfer fees in conjunction with home loans. Defendants charged plaintiffs
more for these services than defendants paid the service providers.” McKell
v. Washington Mutual Bank,___ Cal.App.4th___, 2006 WL 2664130 (Cal.App.
September 18, 2006) [Slip Opn., at 2]. Plaintiffs’ UCL claim was premised
upon alleged violations of the California Residential Mortgage Lending Act
(CRMLA) and the federal Real Estate Settlement Procedures Act (RESPA) and
Regulations X, among other state and federal laws. Slip Opn., at 5. The
trial court granted a defense motion to dismiss the class action complaint,
presumably on the ground that the claims “turn on the alleged existence of
an agreement requiring Washington Mutual to charge no more than pass-through
costs for underwriting, tax services, and wire transfers,” id., at 3, which
plaintiffs could not do. The California Court of Appeal affirmed in part and
reversed in part. We do not here discuss those aspects of the trial court’s
ruling that the divided appellate court opinion affirmed. Rather, we focus
on the Court of Appeal’s holdings that plaintiffs had adequately pleaded UCL
and breach of contract claims.

The appellate court first held that the trial court did not err “in
requiring plaintiffs to plead a factual basis for implying an agreement by
[the Bank] to charge only pass-though costs,” Slip Opn., at 8. But in
analyzing the UCL claims, the Court of Appeal explained at page 10,

A cause of action for unfair competition under the UCL may be established
“‘independent of any contractual relationship between the parties.’” . . .
Thus, the determination whether plaintiffs have stated a cause of action for
violation of the UCL is not dependent upon their ability to plead the
existence of an implied agreement to charge only pass-through costs for
underwriting, tax services and wire transfer services.” (Citations omitted.)
Plaintiffs’ fraudulent business practices claims survived demurrer because
“a reasonable consumer likely would believe that fees charged in connection
with a home mortgage loan bore some correlation to services rendered.” Slip
Opn., at 11. The Court rejected the Bank’s argument that Regulation X “only
requires that the HUD-1 statement itemize the charges imposed on the buyer
and seller” because listing the charge “does not preclude a finding [that]
it is deceptive.” Id. (citations omitted).

Plaintiffs’ unfair business practices allegations also survived demurrer
because “the determination whether [a business practice] is unfair is one of
fact which requires a review of the evidence from both parties” and “thus
cannot usually be made on demurrer.” Id., at 12. The Court of Appeal
rejected the Bank’s judicial abstention argument because the Court was
“doing no more than enforcing already-established economic policies.” Id.,
at 13. The Court rejected also the Bank’s argument that the Court “should
not interfere” because “lending practices are strictly regulated” because
plaintiffs are not challenging the amount of the fees per se but rather the
business practice of “lead[ing] borrowers to believe it is charging them for
the cost of certain services it provides, when in reality it is charging
them substantially in excess of such costs.” Id., at 13-14.

Turning to the RESPA claim, the Court of Appeal quoted at length from Kruse
v. Wells Fargo Home Mortgage, Inc., 383 F.3d 49 (2d Cir. 2004), Slip Opn.,
at 16 et seq. Kruse analyzed HUD’s interpretation of section 8(b) and
concluded that it “prohibits a ‘“settlement service provider” from
“mark[ing]-up the cost of another provider’s services without providing
additional settlement services.”’” Id., at 19 (quoting Kruse, at 61-62). As
a matter of first impression, the California appellate court agreed with
Kruse and “adopt[ed] that court’s reasoning as our own.” Id. In accepting
HUD’s interpretation of section 8(b), the Court also noted that “its
interpretation of section 8(b) is consistent with Congress’s stated intent
to protect consumers from unnecessarily high settlement charges.” Id., at 20
(citation omitted).

The Court rejected defense arguments that RESPA and Regulation X expressly
preempt state law claims alleging violations of RESPA and Regulation X, Slip
Opn., at 21-24, and additionally rejected defense claims that plaintiffs’
claims were preempted by the federal Home Owners’ Loan Act (HOLA), 12 U.S.C.
§ 1461 et seq., id., at 24-31. With respect to the HOLA preemption claim,
the appellate court observed that “plaintiffs are not attempting to employ
the UCL to enforce a state law purporting to regulate the lending activities
of a federal savings association” but rather “to enforce federal law
governing the operation of federal savings associations.” Id., at 27. As the
Court explained at page 29,

Insofar as plaintiffs are using the UCL to enforce federal laws as set forth
in RESPA, they are not seeking to enforce “state laws affecting the
operations of federal savings associations.” (§ 560.2(a).) The UCL does not
“purport[] to regulate or otherwise affect [a savings’ association’s] credit
activities” (ibid.) but only provides a means of enforcing federal
requirements. It is thus the type of state law not preempted by federal law.
With respect to the breach of contract claim, the appellate court admitted
that “[p]laintiffs have still failed to identify the contract and
contractual provision under which [the Bank] required them to pay
underwriting and wire transfer costs” but that they identify the deed of
trust for the fee for tax services. Slip Opn., at 32. The Court agreed that
“[t]he deed of trust . . . required that any tax services fee [the Bank]
charged plaintiffs comported with RESPA,” id., at 33. Because plaintiffs
alleged the fee violated RESPA, they adequately pleaded a breach of contract
claim so as to survive demurrer. Id. 

NOTE: The Court of Appeal had no trouble in affirming the dismissal of the
CLRA claim: “Plaintiffs cite no authority or make no argument demonstrating
that Washington Mutual’s actions were undertaken ‘in a transaction intended
to result or which results in the sale or lease of goods or services.’ . . .
Rather, its actions were undertaken in transactions resulting in the sale of
real property. The CLRA thus is inapplicable . . . ” Slip Opn., at 31
(citation and footnote omitted). The Court also affirmed dismissal of the
common law claims for unjust enrichment, bailment, and conversion, id., at

One of the appellate court judges issued a concurring and dissenting opinion
in which he expressed the view that “this entire action is preempted by
federal law,” specifically, the Home Owners’ Loan Act (HOLA). Slip Opn.,
Vogel, J., concurring and dissenting, at 4


Foreclosure Offense and Defense for Borrower’s and Their Lawyers


Deed of Trust
An instrument signed by a borrower, lender and trustee that conveys the legal title to real property as security for the repayment of a loan. The written instrument in place of mortgage in some states.




In a conventional mortgage transaction, a mortgage is in default when any of its terms are breached. While there are cases where the default consists of compromising the security (e.g. failure to insure — favorite among predatory lenders who “force place” insurance at exorbitant rates without just cause), the most common default claimed is in the event that the borrower fails to make the payments as agreed to in the original promissory note.

In the Mortgage Meltdown context, the entire concept of default has been redefined by

(1) disengagement of the borrower’s obligations from the security instrument and note

(2) substitution (novation) of parties with respect to all or part of the risk of default

(3) substitution (novation) of parties with respect to the obligations and provisions of the security instrument (mortgage) and promise to pay (promissory note)

(4) merger of mortgage obligations with other borrowers

(5) addition of third parties responsibility to comply with mortgage terms, especially payment of revenue initiated in multiple mortgage notes and

(6) a convex interrelationship between

(a) the stated payee of the note who no longer has any interest in it

(b) the possessor of the note who is most frequently unknown and cannot be found and therefore poses a threat of double liability for the obligations under the note and

(c) cross guarantees and credit default swaps, synthetic collateralized asset obligations and other exotic equity and debt instruments, each of which promises the holder an incomplete interest in the original security instrument and the revenue flow starting with the alleged borrower and ending with various parties who receive said revenue, including but not limited to parties who are obligated to make payments for shortfalls of revenues.

It may fairly be argued that there is no claim for default without (1) ALL the real parties in interest being present to assert their claims, (2) a complete accounting for revenue flows related to a particular mortgage and note including payments from third parties, sinking funds, reserve funds from proceeds of sale of multiple ABS instruments referencing multiple portfolios of assets in which your particular mortgage and note may or may not be affiliated and (3) production of the ORIGINAL NOTE (probably intentionally destroyed because of markings on it or other tactical reasons or in the possession of an SIV in the Cayman Islands or other safe haven.

In ALL cases, including recent ones in Ohio, New York, Maryland and others, it is apparent that the “lender” is either not the lender or upon challenge, cannot prove it is or ever was the lender. Wells Fargo definitely engaged in the practice of pre-selling loans upon execution of loan applications rather than assignment AFTER a loan had actually been created. In nearly all cases the Trustee or MERS or mortgage service operation has no knowledge of where the original note is, has no interest in the note or mortgage, and has no knowledge of the identity, location or even a contact person who could provide information on the real parties in interest in a particular mortgage note.

The “clearing and settlement” of “sale” or “assignments’ of mortgages, notes, ABS instruments and collateral exotic derivatives whose value is derived from the original ABS of the SPV which received representations from an unidentified SIV (probably off-shore).

The abyss created in terms of identifying the actual owner of the mortgage and note was intentionally created to avoid liability for fraudulent representations on the sale of the derivative securities to investors. The borrower’s signature on an application or closing documents was part of the single transaction process of the sale of ABS unregulated security instruments to qualified investors based upon fraudulent appraisals of (1) the underlying real property, (2) the financial condition of the “borrower” and (3) the securities offered to investors.



Housing Bubble: How We All Got Screwed

  • And now, because nobody stepped in before the flood began, a new industry is born — bigger than personal injury lawsuits — it the flood of claims under TILA, RESPA, RICO, Securities laws, common law fraud and state and federal laws concerning false and deceptive business practices. People will be rescinding or simply voiding their mortgage transaction through rescission remedies provided under statutory law and common law. They will be seeking and getting damages, treble damages, exemplary damages, punitive damages. Lawyers will be happy. Anyone who says the worst is behind us is, to say the least, overly optimistic.

The bottom line is pressure, greed, arrogance, power, and recklessness. In the excellent article that follows, you can pick out the trail of fraud and deception, self-deception and how “everyone” was on board with the mortgage meltdown and how everyone knew it would bust.

By false and deceptive representations, by improper relationships with rating “agencies” (actually private companies out to make a buck just like everyone else in the process) and by creation of complex instruments wherein the buyer relied on the integrity of the firms involved in the issuance of derivative securities, demand for these high yielding “no-risk” AAA rated securities was insatiable. Wall Street was awash in money and put the screws on everyone down the line including the borrower who would buy real estate that was as falsely appraised in value as the security that provided the the money to fund the loan.

What started as an innovative way to increase liquidity and disperse risk ended up being institutionalized theft. As the success of derivative securities (measured by sales and demand from investors) rose, so did the pressure on lenders to increase their “output” of loans, no matter how ridiculous. In fact, the more ridiculous, the better — because the the lower the grade of the borrower, the higher the interest rate.

By parsing and packaging loans together, mortgage aggregators were able to report that a loan which started out at 1%, negative amortization, adjustable rate, with resets every 3 months, was actually a 12% loan or more. This allowed the CDO manager to “secure” the top tranche in an SPV with “income” left over for the lower the tranches. It all looked so good on paper.

The pressure was on — lenders threw out all their underwriting standards, while they and mortgage brokers, appraisers, and others conspired to simply get that signature on the loan documents, the devil be damned if he/she paid anything on the loan.  Get rid of the escrow for taxes and insurance and “qualify” the borrower based upon the very first teaser rate and PRESTO! a guy with an income of $30,000 can get a mortgage loan of $1 million, with negative amortization and adjustments to his payments. Using the same tactics as the time-share sales people of times past, they assure the borrower that his lack of understanding of how he could get a mortgage so big is understandable, but that the world of finance, rising home prices that will continue to rise, and the integrity of the lender, the mortgage broker, the appraiser and underwriting department is something he can rely on. 

The more they ran out of people to make loans to the lower the standards for lending. Nobody cared because they knew they were just middlemen taking their cut out of the pie created by the investment of some money manager in asset backed securities that were neither backed nor had assets.  The fall would be taken by the investors in CDOs issued by SPVs, and holders of credit default swaps and synthetic derivatives that were too complicated for anyone to understand without the assistance of a computer powerful enough to run our defense department. 

Then the developer’s ran out of product, as prices skyrocketed and people were lining “free money” loans. So the lender’s threw construction loan money at the developers — and sent THOSE loans upstream to be securitized. Developer’s filed for hundreds of thousands of permits, completing the picture of a market that was in a permanent spiral upward. The illusion that there was not enough housing drowned out the little voices of older, wiser people, who asked “where is all this demand coming from and why had we not noticed it before?”

Cities, counties, states all revised their budgets based upon increased revenues and increased demands on their infrastructure. Now they are committed to projects, some of them started, without any prospect of being able to fund their completion. Local governments are looking to the Federal government to make up the shortfall — for good reason.

Those in the Federal government who had anything to do with legislating or regulating lending and securitization were receiving “perks” which sometimes were as simple as getting a mortgage loan under market and sometimes involved much more than that. Congress made sure they played their part with REMIC legislation ostensibly to prevent double taxation of “revenue” that was in actuality mostly smoke and mirrors. But in so doing, Congress institutionalized the process of fraud, deception and crisis.

And of course there was the Federal Reserve, which had opened its loan window to investment bankers, accepting as collateral the face value of virtually worthless securities. The window is not open to ordinary people who got screwed, or their cities, counties and states. It is only open to the people who caused the mess to begin with.

The fact that the foreclosure “race” was on and could only end in disaster was of little concern to the Federal Reserve in accepting those securities at face value. Only two outcomes were possible — either the house would be acquired by the lender (95% of the cases) and then left to rot, be vandalized and robbed of everything of value right down to windows, doors, wiring and plumbing — or the “inventory” of homes would be shifted from seller’s to “lenders” — with big question on who the “lender” actually is anymore. It certainly is not anyone who was present at closing.

In many cases the houses are subject to the first scenario as there are organized crime groups making a business out of stripping unoccupied dwellings. The COST of either demolishing the house or renovating the house back to salable condition with warranties exceeds the “value” of the land and any existing structure on it. Thus the value of this investment is either already less than zero or headed there. Thus the value of the securities accepted by the Fed at their window is negative. The holders of those securities are upside down just like the borrowers but the investment bankers and banks have the Fed. Everyone else has nothing. 

And now, because nobody stepped in before the flood began, a new industry is born — bigger than personal injury lawsuits — it the flood of claims under TILA, RESPA, RICO, Securities laws, common law fraud and state and federal laws concerning false and deceptive business practices. People will be rescinding or simply voiding their mortgage transaction through rescission remedies provided under statutory law and common law. They will be seeking and getting damages, treble damages, exemplary damages, punitive damages. Lawyers will be happy. Anyone who says the worst is behind us is, to say the least, overly optimistic.


MSN Tracking Image
The housing bubble, in four chapters
How homeowners, speculators and Wall Street rode a wave of easy money
By Alec Klein and Zachary A. Goldfarb
The Washington Post
updated 2:10 a.m. MT, Sun., June. 15, 2008

The black-tie party at Washington’s swank Mayflower Hotel seemed a fitting celebration of the biggest American housing boom since the 1950s: filet mignon and lobster, a champagne room and hundreds of mortgage brokers, real estate agents and their customers gyrating to a Latin band.

On that winter night in 2005, the company hosting the gala honored itself with an ice sculpture of its logo. Pinnacle Financial had grown from a single office to a national behemoth generating $6.5 billion in mortgages that year. The $100,000-plus party celebrated the booming division that made loans largely to Hispanic immigrants with little savings. The company even booked rooms for those who imbibed too much.

Kevin Connelly, a loan officer who attended the affair, now marvels at those gilded times. At his Pinnacle office in Virginia, colleagues were filling the parking lot with BMWs and at least one Lotus sports car. In its hiring frenzy, the mortgage company turned a busboy into a loan officer whose income zoomed to six figures in a matter of months.

“It was the peak. It was the embodiment of business success,” Connelly said. “We underestimated the bubble, even though deep down, we knew it couldn’t last forever.”

Indeed, Pinnacle’s party would soon end, along with the nation’s housing euphoria. The company has all but disappeared, along with dozens of other mortgage firms, tens of thousands of jobs on Wall Street and the dreams of about 1 million proud new homeowners who lost their houses.

The aftershocks of the housing market’s collapse still rumble through the economy, with unemployment rising, companies struggling to obtain financing and the stock market more than 10 percent below its peak last fall. The Federal Reserve has taken unprecedented action to stave off a recession, slashing interest rates and intervening to save a storied Wall Street investment bank. Congress and federal agencies have launched investigations into what happened: wrongdoing by mortgage brokers, lax lending standards by banks, failures by watchdogs.

Seen in the best possible light, the housing bubble that began inflating in the mid-1990s was “a great national experiment,” as one prominent economist put it — a way to harness the inventiveness of the capitalist system to give low-income families, minorities and immigrants a chance to own their homes. But it also is a classic story of boom, excess and bust, of homeowners, speculators and Wall Street dealmakers happy to ride the wave of easy money even though many knew a crash was inevitable.

Chapter I: ‘A lot of potential’
For David E. Zimmer, the story of the bubble began in 1986 in a high-rise office overlooking Lake Erie.

An aggressive, clean-cut 25-year-old, armed with an MBA from the University of Notre Dame, Zimmer spent his hours attached to a phone at his small desk, one of a handful of young salesmen in the Cleveland office of the First Boston investment bank.

No one took lunch — lunch was for the weak, and the weak didn’t survive. Zimmer gabbed all day with his clients, mostly mid-size banks in the Midwest, persuading them to buy a new kind of financial product. Every once in a while, he’d hop a small plane or drive his Oldsmobile Omega out for a visit, armed with charts and reports. The products, investments based on bundles of residential mortgages, were so new he had to explain them carefully to the bankers.

“There was a lot of education going on,” Zimmer said. “I realized, as a lot of people did, this was a brand new segment of the market that had a lot of potential, but I had no idea how big this would get.”

Zimmer joined the business as enormous changes were taking hold in the mortgage industry. Since World War II, community banks, also called thrifts or savings and loans, had profited by taking savings deposits, paying their customers interest and then lending the money at a slightly higher rate for 30 years to people who wanted to buy homes. The system had increased homeownership from less than 45 percent of all U.S. households in 1940 to nearly 65 percent by the mid-’60s, helped by government programs such as G.I. loans.

In 1970, when demand for mortgage money threatened to outstrip supply, the government hit on a new idea for getting more money to borrowers: Buy the 30-year, fixed-rate mortgages from the thrifts, guarantee them against defaults, and pool thousands of the mortgages to be sold as a bond to investors, who would get a stream of payments from the homeowners. In turn, the thrifts would get immediate cash to lend to more home buyers.

Wall Street, which would broker the deals and collect fees, saw the pools of mortgages as a new opportunity for profit. But the business did not get big until the 1980s. That was when the mortgage finance chief at the Salomon Brothers investment bank, Lewis Ranieri — a Brooklyn-born college dropout who started in the company’s mailroom — and his competitor, Laurence Fink of First Boston, came up with a new idea with a mouthful of a name: the collateralized mortgage obligation, or CMO. The CMO sliced a pool of mortgages into sections, called “tranches,” that would be sold separately to investors. Each tranche paid a different interest rate and had a different maturity date.


Investors flocked to the new, more flexible products. By the time Zimmer joined First Boston, $126 billion in CMOs and other mortgage-backed securities were being sold annually. “Growth is really poised to take off,” Zimmer thought.

After a few years at First Boston, Zimmer eventually ended up at Prudential Securities on the tip of Manhattan near the World Trade Center, selling increasingly exotic securities based not only on mortgages but also credit card payments and automobile loans.

As Wall Street’s securities grew more complex and lucrative, so did the mathematics behind them. Zimmer would walk over to Prudential’s huge “deal room.” The room was filled with quantitative researchers — “quants” — a motley crew of math wonks, computer scientists, PhDs and electrical engineers, many of them immigrants from China, Russia and India. The quants built new mathematical models to price the securities, determining, for example, what borrowers would do if interest rates moved a certain way.

The industry, which came to be known as structured finance, grew steadily. Zimmer grew with it. He got married, raised two kids and climbed to the level of senior vice president, a top salesman at Prudential.

Zimmer’s clients through the 1990s were mutual funds, pension funds and other big investors who dealt in big numbers: sometimes hundreds of millions of dollars. He’d get up at 4:30 a.m., be out of the house by 5, catch the 5:30 train from Princeton, N.J., be locked to his desk for 10 hours, devouring carbs — pizza, lasagna — and consumed by stress, but thinking nonetheless, “It was so much fun.”


Chapter II: ‘Extraordinary’ boom
April 14, 2000. A rough day on Wall Street. The technology-laden Nasdaq stock index, which had more than doubled from January 1999 to March 2000, falls 356 points. Within a few days, it will have dropped by a third.

Although the business of structured finance grew during the 1990s, Internet companies drew the sexiest action on the Street. When that bubble popped, average Americans who had invested in the high-flying stocks saw their savings evaporate. Consumer and business spending began to dry up.

Then came the 2001 terrorist attacks, which brought down the twin towers, shut down the stock market for four days and plunged the economy into recession.

The government’s efforts to counter the pain of that bust soon pumped air into the next bubble: housing. The Bush administration pushed two big tax cuts, and the Federal Reserve, led by Alan Greenspan, slashed interest rates to spur lending and spending.

Low rates kicked the housing market into high gear. Construction of new homes jumped 6 percent in 2002, and prices climbed. By that November, Greenspan noted the trend, telling a private meeting of Fed officials that “our extraordinary housing boom . . . financed by very large increases in mortgage debt, cannot continue indefinitely into the future,” according to a transcript.

The Fed nonetheless kept to its goal of encouraging lending and in June 2003 slashed its key rate to its lowest level ever — 1 percent — and let it sit there for a year. “Lower interest rates will stimulate demand for anything you want to borrow — housing included,” said Fed scholar John Taylor, an economics professor at Stanford University.

The average rate on a 30-year-fixed mortgage fell to 5.8 percent in 2003, the lowest since at least the 1960s. Greenspan boasted to Congress that “the Federal Reserve’s commitment to foster sustainable growth” was helping to fuel the economy, and he noted that homeownership was growing.

There was something very new about this particular housing boom. Much of it was driven by loans made to a new category of borrowers — those with little savings, modest income or checkered credit histories. Such people did not qualify for the best interest rates; the riskiest of these borrowers were known as “subprime.” With interest rates falling nationwide, most subprime loans gave borrowers a low “teaser” rate for the first two or three years, with the monthly payments ballooning after that.

Because subprime borrowers were assumed to be higher credit risks, lenders charged them higher interest rates. That meant that investors who bought securities based on pools of subprime mortgages would enjoy higher returns.


Credit-rating companies, which investors relied on to gauge the risk of default, gave many of the securities high grades. So Wall Street had no shortage of customers for subprime products, including pension funds and investors in places such as Asia and the Middle East, where wealth had blossomed over the past decade. Government-chartered mortgage companies Fannie Mae andFreddie Mac, encouraged by the Bush administration to expand homeownership, also bought more pools of subprime loans.

One member of the Fed watched the developments with increasing trepidation: Edward Gramlich, a former University of Michigan economist who had been nominated to the central bank by President Bill Clinton. Gramlich would later call subprime lending “a great national experiment” in expanding homeownership.

In 2003, Gramlich invited a Chicago housing advocate for a private lunch in his Washington office. Bruce Gottschall, a 30-year industry veteran, took the opportunity to pull out a map of Chicago, showing the Fed governor which communities had been exposed to large numbers of subprime loans. Homes were going into foreclosure. Gottschall said the Fed governor already “seemed to know some of the underlying problems.”


Chapter III: ‘Half-truths’ and lies
The young woman who walked into Pinnacle’s Vienna office in 2004 said her boyfriend wanted to buy a house near Annapolis. He hoped to get a special kind of loan for which he didn’t have to report his income, assets or employment. Mortgage broker Connelly handed the woman a pile of paperwork.

On the day of the settlement, she arrived alone. Her boyfriend was on a business trip, she said, but she had his power of attorney. Informed that for this kind of loan he would have to sign in person, she broke into tears: Her boyfriend actually had been serving a jail term.

Not a problem. Almost anyone could borrow hundreds of thousands of dollars for a house in those wild days. Connelly agreed to send the paperwork to the courthouse where the boyfriend had a hearing. As it happened, he was freed that day. Still, Connelly said, “that was one of mine that goes down in the annals of the strange.”

Strange was becoming increasingly common: loans that required no documentation of a borrower’s income. No proof of employment. No money down. “I was truly amazed that we were able to place these loans,” Connelly said.

It was a world removed from his start in the business, in 1979, when the University of Maryland graduate joined the Springfield office of a savings and loan. For most of his 25 years in the industry, home buyers provided reams of paperwork documenting their employment, savings and income. He’d fill out the forms and send away carbon copies for approval, which could take 60 days.

Connelly was now brokering loans for Orlando-based Pinnacle or for subprime specialists such as New Century Financial that went to borrowers with poor credit history or other financial limitations. Connelly said he secured many loans for restaurant workers, including one for $500,000 for a McDonald’s employee who earned about $35,000 a year.

Lenders saw subprime loans as a safe bet. Home prices were soaring. Borrowers didn’t have to worry about their payments ballooning — they could sell their homes at any time, often at a hefty profit. Jeffrey Vratanina, one of Pinnacle’s co-founders, said Wall Street wanted to buy more and more of the mortgages, regardless of their risk, to pool them and then sell them to investors. “Quite candidly, it all boils down to one word: greed,” he said.

In the Washington area, the housing boom coincided with a surge in the immigrant population, especially Latinos in places such as Prince William County. For many of them, subprime and other unconventional loans were the only way to attain the American dream of owning a home. Pinnacle’s customers included construction workers, house cleaners and World Bankemployees, who “saw an opportunity to get into a house without putting much money on the table — to save money to buy furniture to decorate the house,” said Mariano Claudio, who in his late 20s was helping run Pinnacle’s emerging-markets division, which was dedicated to immigrants.

Pinnacle ran ads on Spanish-language television and radio, set up booths at festivals and sponsored soccer matches at George Mason University. Brokers would hold raffles for gift cards or digital music players to collect names, addresses and phone numbers. It was “a great way to assemble a database of potential clients,” Connelly said.

He said his commission and fees depended on how much work he did on the loan, a common industry practice that often led to higher charges for subprime borrowers. Connelly said he carefully reviewed fees with his customers. “The way it’s justified morally and ethically is [that] the deal requires more work for a first-time home buyer or one with inferior financial history,” Connelly said. “It’s a balancing act of morals and ethics — and the need to make a living.”

Some brokers ignored the balance. Connelly began to hear about loan officers who charged low-income borrowers fees of as much as 5 percent of the loan or got a kickback by tacking extra percentage points to the interest rate on a mortgage. “Many borrowers are overwhelmed by the sheer volume of paperwork, disclosures, etc., and they’re just not equipped to fully understand,” he said. “There were half-truths and downright lies and severe omissions.”

A mortgage lender could hire practically anybody. “It’s not rocket science,” Connelly would tell new hires, such as the busboy who quickly traded in his Toyota Tercel (value: $1,000) for a Mazda Miata sports car (value: $25,000). Pinnacle was running out of office space, forcing some loan officers to work on window ledges or out of their cars.

Then came the party at the Mayflower at the end of 2005, a celebration hosted by the emerging-markets division. In June 2003, the division had originated $500,000 in loans. By the end of 2005, it was doing $500 million with hundreds of brokers across the country.

“It built to a head,” Connelly said of the times. “You could point to the Christmas party as the pinnacle.”

Chapter IV: Warning sign
Jan. 31, 2006. Greenspan, widely celebrated for steering the economy through multiple shocks for more than 18 years, steps down from his post as Fed chairman.

Greenspan puzzled over one piece of data a Fed employee showed him in his final weeks. A trade publication reported that subprime mortgages had ballooned to 20 percent of all loans, triple the level of a few years earlier.

“I looked at the numbers . . . and said, ‘Where did they get these numbers from?’ ” Greenspan recalled in a recent interview. He was skeptical that such loans had grown in a short period “to such gargantuan proportions.”


Greenspan said he did not recall whether he mentioned the dramatic growth in subprime loans to his successor, Ben S. Bernanke.

Bernanke, a reserved Princeton University economist unaccustomed to the national spotlight, came in to the job wanting to reduce the role of the Fed chairman as an outsized personality the way Greenspan had been. Two weeks into the job, Bernanke testified before Congress that it was a “positive” that the nation’s homeownership rate had reached nearly 70 percent, in part because of subprime loans.

“If the housing market does slow down,” Bernanke said, “we’ll want to see how strong the subprime mortgage market is and whether or not we’ll see any problems in that market.”

Staff writers David Cho and Neil Irwin and staff researchers Richard Drezen and Rena Kirsch contributed to this report.


Foreclosure Offense and Defense: DISCOVERY OF Insurance Policies and Applications Reveal ALL

The simple mortgage on a home had been broken into many pieces (tranches — See Special Purpose Vehicle (SPV)) each having characteristics of entities unto themselves. The term “borrower” was severed from the the obligation to pay. The term “lender” was severed from the risk of loss and the right to payment from the borrower. The term “investor” was severed from the actual ownership of any asset, except one deriving its value from conditions existing between a myriad of third parties, but which nonetheless carried with it a right to receive payments from many different entities and people, the “borrower” being just one of many.


In the Mortgage Meltdown context, the challenge is to prove the point that this was a fraudulent scheme, a Ponzi arrangement that was a financial pandemic. You get that information through discovery, but unless you know what you are looking for, you will merely come up with volumes of paper that do not, in and of themselves reveal all the points you need to make — but they WILL lead to the discovery of admissible evidence (the gold standard of what is permitted in discovery) if you understand the scheme.

The nucleus of the scheme is the virtually unregulated creation of the Special Purpose Vehicle (SPV), which is a corporation formed by the investment banker to “own” certain rights to the loans and mortgages and perhaps other assets that were packaged for insertion into the SPV. The SPV issues securities and those securities are sold to investors with fake ratings and “assurances” and insurance that is falsely procured, but where the insurers or assurers were under common law, state law and/or federal law, required to perform their own due diligence, which they did not (in the mortgage meltdown). The proceeds of the sale of ABSs (CDO/CMO) go into the SPV.

The directors and officers of the SPV entity order the disbursement of those proceeds. (see INSURANCE in GARFIELD’s GLOSSARY).

The recipients are a large undisclosed pack of feeding sharks all claiming plausible deniability as to inflated appraisals of the residential dwelling, the borrower’s ability and willingness to pay, the underwriting standards applied (suspended because the lender was selling the risk rather than assuming it), and the inflated appraisal of the ABS (CDO/CMO) for all the same reasons — direct financial incentives, coercion (give us the appraisal we want or we will never do business with you against and neither will anyone else) or even direct threats of challenges to professional licenses.

In order to get this information, you must find the name of the SPV, which is probably disclosed in filings with the SEC along with the auditor’s opinion letter (see INSURANCE in GARFIELD’s GLOSSARY). You might get lucky and find it just by asking. Then demand production of the articles of incorporation and the minutes, agreements, signed and correspondence between the SPV and third parties and between officers and directors of the SPV. The entire plan will be laid out for you as to that SPV and it might reveal, when you look at the actual insurance contracts, cross collateralization or guarantees between SPV’s. Those cross agreements could be as simple as direct guarantees but will more likely take the form of hedge products like credit default swaps (You by mine and I’ll by yours — by express agreement, tacit agreement or collusion). 

You will most likely find that once you perform a thorough analysis of the break-up (“Spreading”) of the risk of loss, the actual cash income stream, the ownership of the note, the ownership of the security instrument (mortgage) and the ownership and source of payment for insurance and other contracts, that all roads converge on a single premise: this was a deal between the borrowers (collectively as co-borrowers) and the investors (collectively as co-investors). Everyone else was a middle man pretending to be NOT part of the transaction while they were collecting most of the proceeds, leaving the investor and the borrower hanging.

And there is no better place to start than with the insurance underwriting process — getting copies of applications, investigations, analysis, correspondence etc. Combined with the filings with the SEC you are likely to find virtual admissions of the entire premise and theme of this entire blog. I WOULD APPRECIATE YOU SENDING ME THE RESULTS OF YOUR ENDEAVORS.


promise of compensation for specific potential future losses in exchange for a periodic payment. Insurance is designed to protect the financial well-being of an individual,company or other entity in the case of unexpected loss. Some forms of insurance are required by law, while others are optional. Agreeing to the terms of an insurance policycreates a contract between the insured and the insurer. In exchange for payments from the insured (called premiums), the insurer agrees to pay the policy holder a sum of money upon the occurrence of a specific event. In most cases, the policy holder pays part of the loss (called the deductible), and the insurer pays the rest. IN FORECLOSURE OFFENSE AND DEFENSE, YOU WILL FIND ERRORS AND OMISSIONS POLICIES COVERING THE OFFICERS AND DIRECTORS OF THE INVESTMENT BANKING FIRM, THE SPV THAT ISSUED THE ASBs, THE RATING AGENCY FOR THE ASB (CMO/CDO), THE LENDER, THE MORTGAGE BROKER, THE REAL ESTATE AGENT, ETC. YOU WILL FIND MALPRACTICE INSURANCE FOR THE AUDITORS OF THE SAME ENTITIES WHICH RESULTED IN FALSE REPRESENTATIONS CONCERNING THE FINANCIAL CONDITION OF THE ENTITY. YOU WILL FIND LOSS COVERAGE FOR DELINQUENCY, DEFAULT OR NON-PAYMENT THAT MAY INURE TO THE BENEFIT OF THE BORROWER. By joining the borrower and the investor as victims in the fraudulent Ponzi scheme creating money supply with smoke and mirrors, it may be argued that the insurance premiums were paid by and equitably owned by the borrower and/or the investor. 



The Mysteries of Libor

And Other Revelations…







More than most financial crises of the recent past, the 2007-2008 credit crunch has exposed plumbing behind the walls of global finance, and the result is a lot of re-examination.


Let’s start with Libor. The London interbank offered rate, a figure drawn from dollar-lending rates among the biggest global banks, is used to set interest rates for a broad spectrum of borrowers, and it has provoked concern beyond banking circles lately thanks to some erratic movements. The Wall Street Journal decided to compare the borrowing costs reported by the 16 banks on the Libor-setting panel with a separate market that tracks the risk of lending and borrowing by these banks — the market for credit-default swaps, a form of default insurance. What the paper found is that Citigroup, UBS, J.P. Morgan Chase and some other Libor-panel members have been reporting borrowing costs that are lower than what the credit-default numbers suggest they should be. That has led Libor “to act as if the banking system was doing better than it was at critical junctures in the financial crisis,” the Journal says, which could cast doubt on the reliability of a number used to calculate home mortgages, corporate loans and a host of other borrowing around the world.


Some bankers have grown suspicious that rivals were low-balling their borrowing costs so they wouldn’t look desperate, and Libor’s overseer, the British Bankers’ Association, is expected to report on possible adjustments to the system tomorrow. But people familiar with the group’s deliberations tell the Journal no major changes are expected. The Libor and credit-default swaps rates have been diverging since late January, when the credit crunch was worsening and central bankers at the Federal Reserve and elsewhere started pulling out all the stops to calm the tumult. The BBA says Libor is reliable and that many financial indicators have acted funny during the crisis, while the Journal cites a number of reasons offered by analysts to explain the risk-rate disparity it finds: Lending between banks came to a halt for months amid the uncertainty, which added some guesswork to the borrowing-cost estimates; or Citigroup and others’ ability to tap their customers’ cash deposits and extra funds from the Fed could have reduced their borrowing needs.


Still, the Journal says, five banks in particular had wider gaps than the 11 others: Citigroup, WestLB of Germany, HBOS of Britain, J.P. Morgan Chase and Swiss lending giant UBS. And “one possible explanation for the gap is that banks understated their borrowing rates,” the paper says. “If dollar Libor is understated as much as the Journal’s analysis suggests, it would represent a roughly $45 billion break on interest payments for homeowners, companies and investors over the first four months of this year. That’s good for them, but a loss for others in the market, such as mutual funds that invest in mortgages and certain hedge funds that use derivative contracts tied to Libor.”

Foreclosure Defense: Ankle Biting from Lenders to Investment Bankers Benefits Borrowers


It might not seem like you should care about the woes of investors who were defrauded in much the same way as borrowers. Think Again. Our team has been assiduously researching the resources for borrowers and their attorneys to use. This site, we hope and we are told, is very helpful to attorneys and borrowers alike and lately bank executives and investors have been visiting. But remember, whether you are a borrower or an investor, you need a professional audit (See TILA AUDIT and Mortgage Audit under Foreclosure Defense links on right side of this page) done so you are not shooting blanks when you write your first demand letter or file your lawsuit. 

I have been contacted by a number of “auditing” companies that wish for us to recommend them. I would be more than happy to recommend more than the two we have here. (see links on right side of the page). But a review of the work by everyone else reveals serious deficiencies in their work and in their objectives. We also find that the fees charged by most of these start-ups or loss mitigators are too high — i.e., they are disproportionate to the relief or remedy they might achieve. In most cases all they offer, like bankruptcy attorneys is a very temporary deferral of the inevitable.

The total audit, report and recoemmnedation should consist of advising you on TILA, RESPA, RICO and the “little FTC” acts of each state. You should be seeking not merely relief on monthly payments, but refunds, damages and attorney fees if an attorney is used. You should be seeking to stop foreclosure, sale or eviction because proceedings up to this point have been procured by fraud, with the trustee or the lender misrepresenting the real parties in interest. (In legal parlance failure to include necessary and indispensable parties and lack of standing).

In most cases, the real parties in interest are multiple owners of perhaps multiple securitized instruments backed by your mortgage. And in most cases the lenders have no way of tracing the actual owners of the mortgage and note to the specific property which is encumbered by your mortgage. It is a realistic goal, even if improbable, to seek removal of the mortgage lien, release from liability on the note and to walk away with the house free and clear. 

Read carefully. These are lawsuits from investors who, as part of the deal when they bought the CDO, CMO, CLO etc., were entitled to sell the security back at full price to the lender if there was fraud, misrepresentation etc. The fraud and misrepresentation they are alleging is basically the same as the fraud and misrepresentation you, the borrower, were subjected to. Deceit and cheating were the name fo the game. Even Moody’s announced in today’s Wall Street Journal that they are cleaning house where ratings were improperly stated through “neogitation” rather than analysis. This is good stuff and you ought to get to know about it.

These are also the lawsuits of shareholders of lenders who allege that the lenders failed to disclose to the public and shareholders in particular what they were doing, what exposure they had to liabilities arising from almost certain buy-back of most of the loans they sold, many of which are averaging default rates of 30% or more.

This is all inside stuff that tells your story only from the point of view of the investor. By showing that the lenders were defrauding everyone up an down the line, you can demonstrate to a court that there was a pattern of corruption and fraud. The lenders know it and so do the investment bankers without whose help the scheme would not have worked. Settlements are the most likely way out for all concernerd. 

These lawsuits consist of allegations by INSIDERS who know the truth. The allegations verify what we have been saying in this blog for many months — that the scheme depended upon a consistent pattern of fraud, misrepresentation and plausible deniability from one end (the investor who provided the money under false pretenses, false ratings and false assurances of insurance) to the other end (the borrower who signed the mortgage documents under false pretenses, false appraisals, undisclosed lender practices, rebates to mortgage borkers, high fees — bribes — to appraisers, and title agents who turned ablind eye toward the obvious inequities of the closing).


Investors Press Lenders on Bad Loans

Buyers Seek to Force Repurchase by Banks; 
Potential Liability Could Reach Billions
May 28, 2008; Page C1

Already burned by bad mortgages on their books, lenders now are feeling rising heat from loans they sold to investors.

Unhappy buyers of subprime mortgages, home-equity loans and other real-estate loans are trying to force banks and mortgage companies to repurchase a growing pile of troubled loans. The pressure is the result of provisions in many loan sales that require lenders to take back loans that default unusually fast or contained mistakes or fraud.


The potential liability from the growing number of disputed loans could reach billions of dollars, says Paul J. Miller Jr., an analyst with Friedman, Billings, Ramsey & Co. Some major lenders are setting aside large reserves to cover potential repurchases.

Countrywide Financial Corp., the largest mortgage lender in the U.S., said in a securities filing this month that its estimated liability for such claims climbed to $935 million as of March 31 from $365 million a year earlier. Countrywide also took a first-quarter charge of $133 million for claims that already have been paid.

The fight over mortgages that lenders thought they had largely offloaded is another reminder of the deterioration of lending standards that helped contribute to the worst housing bust in decades.

Such disputes began to emerge publicly in 2006 as large numbers of subprime mortgages began going bad shortly after origination. In recent months, these skirmishes have expanded to include home-equity loans and mortgages made to borrowers with relatively good credit, as well as subprime loans that went bad after borrowers made several payments.

Many recent loan disputes involve allegations of bogus appraisals, inflated borrower incomes and other misrepresentations made at the time the loans were originated. Some of the disputes are spilling into the courtroom, and the potential liability is likely to hang over lenders for years.

Repurchase demands are coming from a wide variety of loan buyers. In a recent conference call with analysts, Fannie Mae said it is reviewing every loan that defaults — and seeking to force lenders to buy back loans that failed to meet promised quality standards. Freddie Mac also has seen an increase in such claims, a spokeswoman says, adding that most are resolved easily.

Many of the repurchase requests involve errors in judgment or underwriting rather than outright fraud, says Morgan Snyder, a consultant in Fairfax, Va., who works with lenders.

Additional pressure is coming from bond insurers such as Ambac Financial Group Inc. and MBIAInc., which guaranteed investment-grade securities backed by pools of home-equity loans and lines of credit. In January, Armonk, N.Y.-based MBIA began working with forensic experts to scrutinize pools it insured that contained home-equity loans and credit lines to borrowers with good credit. “There are a significant number of loans that should not have been in these pools to begin with,” says Mitch Sonkin, MBIA’s head of insured portfolio management.

Ambac is analyzing 17 home-equity-loan deals to see whether it has grounds to demand that banks repurchase loans in those pools, according to an Ambac spokeswoman.

Redwood Trust Inc., a mortgage real-estate investment trust in Mill Valley, Calif., said in a recent securities filing that it plans to pursue mortgage originators and others “to the extent it is appropriate to do so” in an effort to reduce credit losses.

Repurchase claims often are resolved by negotiation or through arbitration, but a growing number of disputes are ending up in court. Since the start of 2007, roughly 20 such lawsuits involving repurchase requests of $4 million or more have been filed in federal courts, according to Navigant Consulting, a management and litigation consulting firm. The figures don’t include claims filed in state courts and smaller disputes involving a single loan or a handful of mortgages.

In a lawsuit filed in December in Superior Court in Los Angeles, units of PMI Group Inc. alleged that WMC Mortgage Corp. breached the “representations and warranties” it made for a pool of subprime loans that were insured by PMI in 2007. Within eight months, the delinquency rate for the pool of loans had climbed to 30%, according to the suit. The suit also alleges that detailed scrutiny of 120 loans that PMI asked WMC to repurchase found evidence of “fraud, errors [and] misrepresentations.”

PMI wants WMC, which was General Electric Co.’s subprime-mortgage unit, to buy back the loans or pay damages. Both companies declined to comment on the pending suit.

Lenders may feel pressure to boost reserves for such claims because of the fear they could be sued for not properly accounting for potential repurchases, says Laurence Platt, an attorney in Washington. At least three lawsuits have been filed by investors who allege that New Century Financial Corp. and other mortgage lenders understated their repurchase reserves, according to Navigant.

–James R. Hagerty contributed to this article.

Write to Ruth Simon at

Mortgage Meltdown Recovery: Economics, Waste, Imbalance, and Unbalanced Economists

ECONOMICS: How Economists downplay substitution on the supply side, and discount American Innovation, American Ingenuity and American Temerity. Bad policy from flawed measurements. Flawed Measurements from biased, agenda-based ideology.

“The central problem confronting the new President is not the political issues of conflicting ideology nor the “choices” presented by well-intentioned economists; the real issue is leadership in seeing what economists call “waste” and imbalance” as opportunity.”

Empty steel and auto-making plants have an unequalled opportunity of leveraging an existing infrastructure to manufacture wind generators, new concept products and most importantly cars that are far ahead of the curve and exactly what consumers want.

Phoenix Motors Cars and other new entrants into the race for longer range high speed all-electric vehicles that can be recharged in minutes on the road, or with a few solar panels during the day at home have taken the ultimate risk and ultimate plunge and are doing very well in their development stage vehicles.

Too much wheat? Create incentives to find other uses. Of course we can help feed the world, but there are hundreds of other uses to produce energy, manufacture goods, create new products for building materials and dozens of possibilities that are probably lingering in the heads of some farmers right now. Those expensive subsidies could be turning a profit for government and farmers and provide an opportunity for small farmers to make money no matter how much surplus wheat is grown.

Subsidies: Whether it is for individuals going through rough times, businesses going through rough times, businesses being incentivized, there is an important element of risk that is being reduced for the recipients. This reduction of risk is worth a great deal of “value” to the recipients. What are they paying for it? If it is individual there are all kinds of community service that can be worked into almost anyone’s schedule. If it is a business, this value can be passed on to consumers in reduced prices or greater benefits. The point here is not to prescribe specific methods of payments but only to say that ANYONE who gets a benefit from the government should be paying for it through taxes, giving back to the community or providing financial or non-financial benefits to the marketplace and society. 

That corn is being diverted to production of ethanol is a political pandering of the worst sort. What politicians and economists have both missed completely is not just that there are much better energy efficient alternative products from which to refine ethanol (cane sugar, cellulose, wheat etc) but that since we are able to produce so much corn, we can lower its price, keep the farmers happy and substitute uses such that farmers are making a good rate of return on VOLUME.  This brings down food costs which increase the opportunities for consumers to pay their bills, save money and thus provide the capital that is currently being “borrowed” from other countries by issuance of increasingly worthless American paper, once called money.

Economists fail to recognize on the supply side that certain substitutions will routinely provide segments or tranches of demand for products wherein the exchange value might be low but the use value may be high. Taken collectively, this represents opportunity for even the smallest farmers and manufacturers.

Corn is a bastardized example of this process and a poor model, mostly because business schools, media and modern economists are not teaching substitution as a general application. They teach substitution only on the demand side where the inventiveness of the American consumer to adapt to changing quality and prices is assumed but the ingenuity and inventiveness of the American producer is dismissed.

Too much interest expense? This curse dating back to the early 1970’s has robbed the country and its citizens of much needed capital for savings, investment and consumption of goods and services that drive our economy. Government’s complicity in making legal (usurious rates and fees) what was always illegal and even criminal needs reversal.

Current plans to reduce mortgage payments and mortgage interest to the teaser rates that were forced down the throats of unsuspecting borrowers using the money from unsuspecting investors, reducing credit card interest and fees, banning payday loans that roll over into 450% loans etc.,. are all steps in the right direction of redirecting capital to where it needs to go without robbing the capitalists from receiving a fair return.

Reasonable minds may differ but they can come to agreement on a fair rate of return which maintains financial market liqudiidty without windfall profits to credit card issuers, payday lenders, oil companies, health-care, health insurance and drug companies.

These are the things that central bankers and investors around the world are watching and waiting for and it is only through aggressive innovation, which requires aggressive, innovative education techniques, that good old American ingenuity will once again save the day and the dollar.

Foreclosure Defense — Strategic Bankruptcy Options

Strategic Comment: There are two ways for you stop foreclosure, sale and eviction dead in its tracks. One is to file bankruptcy under Chapter 13 which is an opportunity for debtors to reorganize their payments to creditors.

  • An automatic stay goes into effect immediately upon filing with the Bankruptcy Court. Creditors who say or do anything in furtherance of collecting a debt are committing a federal crime from the moment it is filed, whether they know about it or not.
  • However, the payments include fees to the Court and Trustee which exceeds 10% of what you pay into the Court for the benefit of your creditors, so since you are strapped for cash it further impedes your ability to work out a realistic plan.
  • Also for secured debts like mortgages, the lender can come into Bankruptcy court and ask the court to lift the automatic stay which in the past has been routinely granted and for the most part still is, UNLESS YOU DO SOMETHING ELSE.
  • YOU SHOULD ALSO NAME, AS THE CREDITOR, THE ORIGINAL LENDER, and state the amount of the loan as a contingent liability to them. The fact is, in most cases, you have not been presented with proof of transfer of anything, nor seen any assignment, or what rights or obligations were picked up in transactions after your closing by third parties who own the servicing rights, or the mortgage or the note. The Trustee or other party coming into court or posting notices of sale on your property probably is getting his/her marching orders from someone who either doesn’t have or can’t prove they know the amounts you paid, to whom or what is currently due. PLACE THE BURDEN WHERE IT BELONGS — ON THEM.
  • Then you should state the present mortgage servicing entity to whom you are now sending your payments (this applies only where the loan has been sold which is true in 95% of the cases) as a contingent liability in an unknown or unliquidated amount.
  • Then you should add a creditor “John Doe” as also an unknown unliquidated debt as a party who might claim ownership of the implied or alleged unpiad loan account or the possible owner of a security under which he has ownership of the mortgage and note.
  • Then you should file an adversary proceeding or action under TILA, RESPA, fraud etc. making all appropriate claims for rescission, refund of interest, points, loss of value in the property etc.
If your case is handled in this way there is a higher probability that you will survive the motion for lifting of the stay as the movant will have to prove the chain of title and authority on the mortgage and note, thus giving rise the the issue of legal standing for them to standing in the courtroom at all.
The second option, if you are faced with foreclosure, sale or eviction is just file the TILA action in Federal court and then go the State Court and ask the State Court to issue a stay because there is pending litigation in Federal Court. Usually State Court judges are more than happy to get the matter off their desks and thus grant your motion for stay, but they might not be under no obligation to do so.
Remember that whether you go straight into Federal Civil Court or Federal bankruptcy Court, which is a different division, and you are NOT represented by counsel, the Judge must do the legal research to determine your claims’ merit.
If you are represented by counsel you need to make damn sure he knows what he is doing. Most bankruptcy lawyers don’t know an adversary proceeding or TILA action from egg on the wall. They have no experience with it. Very few lawyers or judges know this area since it only became important in the last couple of years.
Nobody paid me to write this. I am self-funded, supported only by donations. My mission is to stop foreclosures and other collection efforts against homeowners and consumers without proof of loss. If you want to support this effort please click on this link and donate as much as you feel you can afford.

Please Donate to Support Neil Garfield’s Efforts to Stop Foreclosure Fraud.

Neil F Garfield, MBA, JD, 75, is a Florida licensed trial and appellate attorney since 1977. He has received multiple academic and achievement awards in business, accounting and law. He is a former investment banker, securities broker, securities analyst, and financial analyst.
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But challenging the “servicers” and other claimants before they seek enforcement can delay action by them for as much as 14 years or more. In addition, although currently rare, it can also result in your homestead being free and clear of any mortgage lien that you contested. (No Guarantee).

Yes you DO need a lawyer.
If you wish to retain me as a legal consultant please write to me at

Please visit for more information.

Foreclosure Defense: Issues, Pleadings and Analysis

We are still in process of revising our manuscript for publication with all the forms we can think of. Here is a  summary of our findings thus far.

Generally we have two types of jurisdictions — the non-judicial sale jurisdictions and the mortgage foreclosure jurisdictions. California, Arizona and Nevada are non-judicial sale jurisdictions as are many others. Florida is a judicial sale (mortgage foreclosure jurisdiction) as are many others


We also have numerous possible stages at which a borrower can find him/herself

  1. Loan not in default but TILA claims can still be made. 
  2. Loan approaching default. 
  3. Loan in default 
  4. Foreclosure suit filed or sale date published 
  5. Judgment entered 
  6. Sale occurred to either third party or the lender. I have advised people to go to the sale and inform all potential bidders that the matter is in dispute which usually stops anyone from bidding. 
  7. Notice to Vacate -Forcible Detainer
  8. Eviction notice from Sheriff 
  9. Evicted — but TILA claims survive for (a) recovery of money and (b) possibly recovery of house from lender 

Origination of loan:

  1. REAL BANK THAT GIVES MORTGAGE AND HOLDS NOTE THEMSELVES. Direct relationship between the lender and borrower and it is not sold, migrated or otherwise transferred in any manner shape or form. Borrower gave honest information, tax returns etc. My guess is that the only claim here would be fraudulent appraisal but even that is weak because the bank is actually at risk. 
  2. Mortgage broker steering borrower to worst deal for highest fees. Inflated income and appraisals submitted. Lender is selling off or has entered agreements to provide “inventory” to mortgage aggregators who will sell the aggregated loan portfolio to investment bank who in turn will sell “derivative” securities (CMO – collateralized Mortgage Obligations or CDO — Collateralized Debt Obligations) to investors who are defrauded by representations from the lender, appraiser, mortgage aggregator, investment bank, and intermediate sellers of securities. Bank is NOT in any relationship with borrower but that is not disclosed. Bank has no risk or interest in whether borrower pays on loan or not. 
  3. MOST COMMON: A “bank” that is actually a front for one of the major players. In actuality the bank is a mortgage broker steering customers to worst loans for highest fees. 
  4. While the “lender” takes the position that they were defrauded by the borrower, the mortgage broker and the appraiser, the truth is that they intentionally defrauded themselves by setting up the structure and giving themselves the position of “plausible deniability.” Their intent was to create a plausible record for the mortgages and notes they were selling to mortgage aggregators and investment bankers. 

Types of Loans:

  1. Fixed rate 30 year mortgage fully amortized. 
  2. Fixed rate 30 year mortgage amortized but partially negative — i.e. the borrower is paying less than the full payment and the balance owed on the note is going up. Possible TILA violation. 
  3. Fixed rate mortgage interest only, negative amortization. Clear TILA violations in most cases. 
  4. Adjustable rate mortgage fully amortized. First adjustment after teaser rate in 1, 3, 6, 12 or more months. Borrower “qualifies” for mortgage because income figures support paying the teaser rate. At the first or second adjustment however, they no longer qualify and the lender knows it by definition. TILA violation, fraud, etc. 
  5. Adjustable rate interest only, negative amortization 6. Multiple mortgages and notes for multiple properties for speculators — usually involves falsifying information that buyer is going to use the house as primary residence, falsifying income and falsifying appraised values. TILA, fraud etc. 

Authority and ownership of loans — Legal Standing and Jurisdiction

  1. Originating lender still servicing the loan, holds note and mortgage. No assignment, sale or other fancy financial tricks. 
  2. Originating lender is actually mortgage broker, loan migrates to senior lending institution, to mortgage aggregator to investment banker to seller of securities to investor. 
  3. Trustee in non-judicial sale states posts notice of sale based upon information from a source that (a) does not service the loan and therefore does not know if the borrower is in default or not and/or (b) does not own the mortgage or cannot prove that it owns the mortgage and/or (c) does not own the note or cannot prove that it owns the note. In most cases an investor owns the mortgage and note and the people involved in the foreclosure don’t have a clue as to which bundle of mortgages went into which bundle of securities and how many investors bought into that bundle of securities, and there are no proper assignment documents that were designed much less signed in anticipation of being able to establish legal standing in sale, foreclosure or eviction. 
  4. Originating lender files foreclosure or posts notice of sale and does not have servicing rights, ownership of mortgage or ownership of note. 

Potential Pleadings:

  1. Federal Claim for TILA, respa, RICO, fraud etc. 
  2. Memorandum of Law in support of complaint. 
  3. State Court claim for Fraud 
  4. State court action for stay of sale, eviction etc. 
  5. Emergency Petition for temporary Injunctions- State and Federal Courts and memorandums in support thereof. 
  6. Motion to expedite discovery. 
  7. Interrogatories 
  8. Requests for admission 
  9. Request to Produce 
  10. Notice of deposition duces tecum 
  11. Adversary proceeding in Bankruptpcy Court 
  12. Memorandum and pleading in opposition to Motion for lifting stay 
  13.  Demand letter to Originating lender — for documents tracing where the mortgage went and for refunds and damages, enclosing TILA audit. 
  14. Rescission letter 
  15. Form retainer agreement for audit an checklist for retaining auditor 
  16. Form retainer agreement for attorney and checklist for retaining attorney 

Foreclosure Defense and Mortgage Meltdown: Worse than you think

Take a look at the article (link below) which highlights the essential issues. It’s a bit choppy in reading but it makes the points you should consider as you plan your strategy for dealing with life over the next 10 years.

Despite assurances from the administration and those on Wall Street who are trying to bolster confidence in U.S. financial markets, the trust level between bankers, the key indicator of our economic future, has never been lower. Even Libor which is the holy grail of indexes has been manipulated during the last 4 years. Moody’s admitted yesterday that a computer “mistake” caused it to miss the “downturn” in the value  and rating of certain securities — the very same ones they overrated in the first place because the analysts were literally given fishing trips and pressured from the top to keep the “client” through “negotiation” of the rating that Moody’s would apply. 

What you have is a picture of obfuscation.

Imagine on the right side,  an opaque cloud of misrepresentations, ratings and false insurance protection on a securities that are so complex the number of variables rose to as high as 125 and it took a modern computer an entire weekend to come up with a price that, like election results from an entirely electronic system, cannot be audited for integrity or credibility.

  • Imagine the AAA ratings that investors believed, because the rating agencies were reasonably trustworthy and accurate in the past. Imagine insurers putting their stamp of approval based upon negotiation and the false credit ratings. 
  • And know that the entire class of securities that are “asset-backed” consists of extremely high risk predatory lending practices including but not limited to originating loans to people with interest only negative amortization for sometimes over a million dollars where the borrower is out of work and disabled.
  • These are the “cash equivalent” securities that unsuspecting managers of pension funds, government funds, mutual funds, hedge funds and others were buying. 
  • Imagine them buying derivatives on derivatives thinking they were hedging their losses when in fact they were multiplying them.
  • And now imagine that investors bought $62 trillion dollars (yes that IS the figure — 4 times our GDP) of this garbage backed by unpayable mortgages, auto loans, credit cards, student loans, and other consumer and small business debt.

Now on the left side imagine the same kind of opaque cloud of misrepresentations, pressure tactics to close, and outright fraudulent misrepresentation of “appraised” value (just like the rating agencies on securities), only less regulated and more decentralized). A subsequent TILA audit reflects the following facts:

  • Imagine a person who speaks no English, or a person who is totally unsophisticated in finance.
  • A builder with a criminal record makes deals with people at the local fronts for bigger players like Countrywide, Barclays, Wells Fargo etc. The people at these front organizations are now in prison, fired or both — a very typical story.
  • The builder finds our unsuspecting buyer and tells them that for only $2,000 per month they can get a 5 acre piece of land and build a $400,000 house on it. 
  • He gets them to pony up all the money they have — $250,000.
  • They even pony up another $150,000 borrowed from the trust fund for their disabled child, injured in an accident. Nobody cares about the personal stories here because they were all out to make a buck.
  • When the prospective borrowers start asking questions about how this could possibly work they are told: “Look, it is true you are not making the whole payment. But the way things work, housing prices always go up and down the road you either refinance and get money out of the house or you can sell at a handsome profit. Housing prices have never been steadier, growth is enormous. The lender has approved this and you know it is their money they are risking and they know a lot more then either of us, so if they are willing to take the risk, why wouldn’t you?”
  • NOT DISCLOSED: (1) the lender had no stake in the outcome of the loan except to close it and collect pass through fees. (2) The mortgage and note and servicing rights were all transferred around to mortgage aggregators, and investment banks who in turn sold derivative securities based upon this garbage loan. (3) Thus the lender was not taking on a risk and neither was anyone who handled this hot potato until it landed in the hands of an unsuspecting investor. (4) And the appraiser, eager to do more appraisals and earn more fees is allowed to know the amount of the mortgage and the contract price and conveniently and always comes in with an appraisal a few percentage points higher than the contract, so it looks good to the borrowers, and even to auditors at least at the beginning of this wild free money lending cycle. Unknown tot he borrower the “bank” is actually an unscrupulous mortgage broker steering the borrower to the worst possible deal because it nets him the highest fees, and submitting falsified income information sometimes without even the knowledge of the borrower, and sometimes with a statement to the borrower (“don’t worry” this is a no-doc loan, nothing will be checked and you won’t get into trouble because everyone wants this loan to close. (the only true statement in the entire affair). 

NOW IMAGINE BETWEEN THE OPAQUE CLOUD ON THE LEFT (defrauding the borrower) AND THE OPAQUE CLOUD ON THE RIGHT (defrauding the investor) GOSSAMER THREADS REPRESENTING PLAUSIBLE DENIABILITY. All the people that were represented as principals and were in fact just sales people earning a commission on a sale. 

With nobody at risk but the least suspecting people who heard and read representations that were outright lies, misleading or only partial truths, lending standards when down the toilet. Nobody cared or had a stake in the outcome of the loan transaction except the borrower and the investor. The name of the game was “close as many loans as possible” because these investors are being offered just enough yield to be a little higher than other investments and were convinced by fraud that the perceived risk was much lower than the actual risk — after all Moody’s rated it AAA. 

The standard relationship between borrower and lender in which BOTH had  stake in a successful transaction was gone, but the borrower didn’t know it. How many people would have closed on their loans if they had known the truth? How many people would have bought these securities if they had known the truth. The answer is that the mortgage meltdown and general credit crisis would never have happened. Inflation would not be rising out of control.

Confidence in the the U.S. dollar and U.S. financial markets would not have sunk below zero. Borrowers and investors would still have their money and their lives and their credit ratings. Money managers would still have their jobs and the performance of the funds they managed would still be within acceptable bounds. And banks and investment banks would not be threatened with failure.

1,300,000 people would not be in foreclosure and 9 million people would not be “upside down” on the equity-loan ratio of their homes. 

Now  you can read the article I found on op-ed.


We have attempted to provide assistance here to attorneys and to people without attorneys. A good friend and colleague submitted the following piece which is well worth reading.

In reading through the many mortgage “horror stories” which I have seen both on your blog and elsewhere, it is understandable that homeowners who are being sued for foreclosure are frustrated with the system and that many have  decided, through their own reading and possibly because of financial issues, to defend their case themselves and proceed to court without an attorney. Doing so not may not only hamper a homeowner’s efforts to defend the foreclosure, but may make the matter worse and actually wind up accelerating the foreclosure process.
An increasing popular perception among homeowners who “surf the net” is that (a) I can look up defenses to the foreclosure on the web and learn them, and (b) I can do this myself without an attorney and do just as good a job as if I paid an attorney to defend me. Both assumptions are deplorably incorrect.
The area of law in mortgage foreclosure defense is evolving at a rapid and unprecedented rate. Never in the history of the United States have so many foreclosure cases been filed in such a short period of time. The Judges of the Courts, who are for the most part already overworked, now have caseloads which well exceed any capacity which anyone could have imagined and, as to foreclosure cases (which were historically disposed of on a 5-minute “motion” hearing with little or no opposition from the homeowner), each case now has the potential for going all the way to trial. Further, not every Judge is an expert in any one area of the law, and most do not have the additional time to learn or keep up with a rapidly evolving area of the law such as mortgage foreclosure defense. Most mortgage foreclosure cases are “blind assigned” by the Clerk of the Court, meaning that the homeowner’s case could be assigned to a Judge with little or no knowledge of current mortgage foreclosure defense law. Strike one.
Lawyers attend three years of intensive schooling just to learn “legalese” and prepare for the Bar Exam. Real “lawyering” comes years later after an attorney has practiced his or her craft for literally hundreds of thousands of hours. Litigation, which is that area of the law involving court battles, is a specialty in itself. Professional litigators have years of training and experience in not only learning the actual law itself, but applying it in the proper manner in court papers and argument through the proper procedure and properly before the Judge. As Judges recognize a litigator, the case can proceed much more smoothly and properly on the law (including the establishment of defenses) when a litigator is involved. Judges usually have little or no time or patience with non-lawyers who try to argue their own cases. Strike two.
  • As such, when a homeowner attempts to proceed in court without an attorney in defending a claim in a rapidly expanding area of the law, it is akin to going into battle against the Special Forces with a Boy Scout knife. The chances of a homeowner taking on the bank’s attorney and the Judge in their own backyard with no attorney can be likened to going into the Super Bowl with Donald Duck as the quarterback for your team. No insults are intended here as to homeowners; the homeowner just has to realize what is in store for them. The lender’s attorney is going to know that the homeowner does not know what is going on, so things may happen that probably would not happen if the homeowner had an attorney. Strike three, you’re out (of your house).
I would thus caution homeowners not to be “penny wise but pound foolish” when it comes to their foreclosure case. This is your home we are talking about here, and the defense of it is better left to the professionals. In sum, here is a piece of free legal advice to homeowners who want to defend their foreclosure case: “Don’t try this at home!”
Jeff Barnes, Esq.

Foreclosure Defense: Forcible Detainer and Eviction

We have received several urgent/emergency requests from people who are so far along in the process of this mortgage meltdown, that they feel hopeless and helpless. We can’t give you a magic bullet, but things are not quite as bad as they seem.

As for stopping the eviction —-

Yes, it is POSSIBLE: It depends upon whether you get a lawyer and it depends upon whether the lawyer knows how to throw some weight around at the courthouse. NOTE: You WILL STILL NEED A TILA AUDIT AFTERWARDS.

1. File petition for emergency temporary injunction alleging fraud: that the lender is not the owner of the mortgage and note, that the trustee is not properly authorized to post the sale notice and that they did so illegally and with intention to deceive the borrower and the Court, causing the Borrower and the Court to reasonably rely upon the statements of facts and procedures used by the Lender/Trustee is posting the notice of sale and going through with the sale. 

2. File complaint alleging the above fraud and denial of due process in that this non-judicial sale forces an unsophisticated borrower to get a lawyer and fight with the lender on sophisticated grounds of lack of standing, TILA violations, RESPA, RICO and other legal theories that a lay person would not be likely to know or know how to use even if they were aware of the theories. 

3. Rescind the transaction and file in the above complaint(s) that you have been denied your right to rescind which you hereby do so, and file lis pendens based upon the rescission. Arguably the lien form the mortgage and liability on the note will be extinguished, but you still need the TILA audit to back up your general allegations and you still need to follow TILA procedures. 

4. File complaint, along with the above for refunds of interest, points, closing costs, attorney fees, court costs etc.

5. Contest the eviction as void or voidable because the correct procedures were not followed or were fraudulently presented such that the court system and infrastructure supporting the non-judicial sale were applied improperly. This is called alternative pleading.

6. If the due process argument is turned down then the Court can still strike down the sale because the lender was not the real party in interest and therefore the Trustee was proceeding based upon “authority” from someone who had neither any interest nor even any information on the payments.

7. NOTE: In most cases the servicing rights to the loan have also been sold to yet another party which means that only they know what the real payment history has been. But if the documents don’t show clear authroity of the new servicing agreement (frequently Countrywide) to receive payments and accountability therefor, the argument can be made that the servicer can only account for the payments they received but can’t guarantee to the Court that the servicer knows if those payments were the only payments made.

8. The borrower could take the position that ALL interested parties — the original lender and the servicing agency and the CDO investor, who is the real party in interest on the mortgage and note, would be required to show documentation of assignment, authorization etc. In most cases this documentation either does not exist, cannot be found or is too vague for them to use. There have already been instances where the result was that the borrower ended up with clear title to the house and no mortgage or note to pay.

9. File Quiet Title action as alternative pleading so that lender, investor and trustee are forever blocked from asserting claims.

10. Consider Bankruptcy — Chapter 13, with an adversary proceeding alleging all of the above.

Foreclosure Defense: Contingency Fees

most vendors are looking for money up front that will make them rich while you go down the tubes

More and more “professionals” are coming out of the woodwork to “help” with your mortgage. Whether you are in default, foreclosure, in the midst of sale or eviction, or just sitting with a mortgage where the note is worth more than the house, there are plenty of remedies available for you to pursue and plenty of defenses to stop the foreclosures dead in their tracks. There are even methods by which you can modify your note downward, even without the congressional bill currently wandering through the halls of capital hill. 

The fact is that had you known your “lender” was just some middleman who didn’t care whether you could afford the mortgage or not, had you known that within 3-12 months your payments would be too high for you to qualify for the mortgage they were granting you at closing, had you known that the appraised value of your house and all the houses in your new neighborhood were artificially inflated (i.e. false and deceptive), well then you probably would have figured out this wasn’t such a good deal and that you could be in for a lot of heartbreak not too far down the road. 

All the people at closing — from the title agent through the lender — were only there for one purpose: to get your signature on those documents so the mortgage, the note and the servicing rights could be used to satisfy the commitments made on securities already sold in anticipation of your signature and the signature of millions of other people just like you. 


Very few lawyers really know anything about TILA from the consumer prospective. Some lawyers who have represented landers and others involved in the lending process, have familiarity with the procedures in TILA disclosures and statements but have a virtually no knowledge of the remedies for consumers and borrowers or how to pursue them. Yet lawyers are allowed to take your case even though they have no idea where to start. Accountants can do audits of your closing even they have no idea where to start.

And most vendors are looking for money up front that will make them rich while you go down the tubes. But it is actually fairly easy to tell who knows and who doesn’t. Ask them how many refund cases they have handled and ask them for personal and professional references and MAKE THE CALLS. 

The best source for a TILA audit is from people who are former auditors who worked for bank regulation agencies. I found one operation and I am starting to work closely with them. In fact, to be honest, I stopped looking for others after I got to know these people and I completed the due diligence. That is why I have a link for you to go to at If I run across others I will publish those too. If you know of others that fit the requirements, let me know and I will publish it here.

Some up-front money is all right if it is stated in hundreds rather than thousands. There are costs in performing the audit, getting the right documents from the lender and from you. Don’t forget, with all the sales of mortgages, notes and servicing rights, demands for the documents showing who is the real party in interest in your particular mortgage and note takes time and money. The lenders will almost always be reluctant to disclose that information but eventually they give in. 

If you deal with an organization that is (a) already registered as a collection agency (to collect on your behalf from the banks!) and (b) has a working alliance with lawyers who can put local boots on the ground in any state of the union, you are more likely to be in the hands of a true professional rather than a hit and run artist. 

The typical acceptable lawyer’s contingency fee is 33 1/3% if the matter stays out of litigation, 40% if the mater goes into litigation (including administrative proceedings) and 45% if the matter goes to appeal. The question of course is percentage of what? It is the value of the recovery you actually receive, whether it is an actual cash refund, payment of damages, reduction in your amount owed on your mortgage, etc. recovery of fees from the lender varies from zero to 100%. Usually the recovery of fees is applied first to a bonus for the collection agency and attorney and then the rest goes back to you. An even (50-50) distribution of the recovery of fees and costs is common although some are offering clients all of it, or 2/3 of it. 

Mortgage Meltdown: Nightmare on Main Street

From a reader:

I was running errands with my Mother the other day when she told me the amount My Father and her paid for their first house, in Seattle, the year I was born-1976. It was $15,000. I waned to throw up. I know inflation happens and I don’t expect things to remain at the lows they were back in “the day”, but when I hear something like that, I can’t help but think about the tiny 2bdrm house in Central Everett, that was built in 1950- purchased almost 3 years ago @ $210k -and that was a good price? Don’t get me wrong, it is a very cute property with tons of potential. But unfortunately, it’s all being taken away like it’s no big deal. $$$-Money, money, money-and greed. We, my Boyfriend and I moved in with stable jobs and income. Though the Mortgage seemed a bit high to me at $1600 per month, My boyfriend assured me it would be fine I was just used to my low rental payment of $475 (w/ roommate). Regardless, things were good for the first year or so. He remodeled the detached, 2 car garage, completely. It was practially ready to fall down and he put around $20K into refurbishing and turning it into a work shop/paint shop so he could supplement his income by doing side work because things were pretty tight in the financial dpartment and his current job as the Head Custom Painter for a busy Motorcycle Repair Facility, just wasn’t enough anymore. Funny how that works, inflation in everthing is justified for what ever reasons, and when you are approved for a loan. a payment amount is set based on your loan type (which is based on your debt/income ratio), so depending on how much you are already in debt for and what you bring in supposidly determines what and if you’ll be able to pay. And since my boyfriend had 1 or 2 credit blemishes due to an X Girlfriend that used his visa # to buy some items on line without his knowledge or consent and didn’t find out until it was too late and his perfect credit was not so. Making his loan rate ridiculous. needless to say, things went down hill in the financial department trying to keep up with two more debts+plus pay his two existng cards, both w/ insane interest rates, and everything else, that eventually he slowly started falling behind until payments started being later and missed. Now the part that seems F’d up is when he kept in touch, and tried to work things out wih his situation and the soulotion was charging him to keep his house out of foreclosure- an amount due right away- and then jacking his mortgage up setting him back further than before and utimately setting things up to fail. Raising rates and tacking on fee after fee isn’t helping matters, it’s simply causing more issues for the struggling dweller. Wouldn’t it be more humane to lower a person’s Mortgage payment when trouble rises? Or when prices go up on everything like gas, food, etc… I think living costs and such monthy bills should. go down. Now that things are so bad they’re only headed down the road of getting worse.

The mortgage had reached about $2800 per month basically forcing my Boyfriend into depression and pretty much lost his drive to try since he was killing himself to keep up, but still falling further and further behind. We received notice of foreclosure for the 3rd or 4th time and decided he wasn’t going to pay the amount to keep out and instead file bankruptcy with hopes to get things back on track and keep his house- At the last minute he was unable to qualify though. So with very little time left before the Auction of his house on April 11 2008, he scrambled to find a buyer to attend the auction with hopes to purchase and then lease to him with buy back options after he was able to regain his stability. We found a friend of the family that was willing to write a check for the amount, and having attended plenty of auctions knowing the typical proceedures he attended with a blank check since the starting bid info was not availible before hand. When trying to register to bid he was turned away because he did not have a cashiers check for the strating bid or higher- so he asked what the amount was so he could run to the bank and obtain one. The man just said that wasn’t his problem and would not tell him. So he guessed, and had a Cashier’s Check isssued in the amount of $150K. When he presented the check to the bidding host, he was told it was’nt enough therefore he was inelegible to bid.

Although nobody bid on it, the house was still returned to the lending bank or beneficiary which nobody had or would release any info regarding who theat was. After trying to contact someone to find out what he could do to get the house back with know results, a notice to vacate was issued by a Real Estate Company that had been hired to Manage the property. When he responded as the noticed requested, he played phone tag with the guy for weeks until he just showed up offering cash for keys and a wanting a date of vacate. When we explained our intentions and the need to know who to talk to about working out some kind of deal to either buy back, lease, anything, the guy claimed to know nothing and was simply there to offer the keys for cash and tell him the alternative. He agreed to contact us in a week to allow him see what he could come up with. We still were were unable to get any info from anyone about who we needed to talk to and never received a contact like promised. Decided to call to make sure exactly what the process was at this point. As soon as my boyfriend said who was calling- The real estate guy chuckled and said he would have to call him back. Two hours later we were served with an eviction notice. Says we have until the 5th to respond in writing or vacate. I want to respond , but I don’t know if it will do any good other than extend our living situation a little bit.

It’s very nerveracking to feel so helpless in a situation that involves the roof over your head that you’ve worked so hard for, is being taken away because your hardest just wasn’t hard enough.

Don’t know if you’d consider this a nightmare, but I sure do. (


Foreclosure defense and offense: Filing an answer to a complaint

For general instructions on filing an answer, see this link. Remember that an answer is not the same as an affirmative defense and an affirmative defense is not the same as a counterclaim. In most cases for foreclosure and even bankruptcy you should be prepared to file an answer, affirmative defenses, and counterclaim, in state court proceedings, and an adversary proceeding in bankruptcy proceedings.


Mortgage Meltdown and foreclosure defense disinformation

“If you don’t read the newspaper you are uninformed, if you do read the newspaper you are misinformed.”
Mark Twain

Pitfalls and advice for consumers and homeowners:

  • Don’t believe what you read in the newspapers or hear on TV. Reporters are just as lazy as lawyers and everyone else. They don’t know much about economics, they know less about foreclosure and even less about the whole mortgage meltdown process. Even the so-called “economists” that write columns are largely misinformed. 
  • The situation is much worse than is being reported. Housing prices will continue to decline. The dollar will continue its downward spiral and oil will continue to climb upward regardless of supply and demand — because the oil companies are bound and determined to get the price of a barrel of oil over $200 before the the next president takes office. The media is spitting out what they are told in the hope of avoiding a panic. The best we can hope for is that the crash will be elongated in time so we can adjust to it. 
  • Don’t believe the government is going to help you in time for it to mean anything. If you want to keep your house, preserve your credit, and go after the lenders and their pals that screwed up the credit markets all over the world then get to work on it yourself. Get the TILA AUDit. Rescind the transaction where appropriate. Recover all closing costs and interest paid since the closing. Negotiate to lower the principal on your mortgage because the lender was part of the “team” that fooled you any everyone else about fair market values.
  • Don’t use credit consolidators, debt re-relief and or tax relief organizations. They are selling ice in the winter. It costs money and they rarely do anything productive. 
  • Don’t believe lawyers who tell you how limited your options are in defending the foreclosure. Nobody taught them Truth in Lending, Respa or RICO standards in law school and few of them have ever run across it. They are wrong — the odds are stacked in your favor not the lenders. But you must use the remedies available to make that work for you.
  • Don’t believe anyone that tells you they know how to do TILA audits or how to negotiate with lenders over TILA claims. Most of them are full of crap. Make them prove it and ask for references and then check around on the internet for more references.
  • Don’t believe that someone has authority to speak for the lender just because they say so. Demand proof of authorization by getting a letter from some lender or owner of a mortgage backed security that represents that they are in fact the owner of the mortgage and note, and that you may speak with their representative (by name, address and contact information and signed by authorized person). You should demand to see copies of assignments, sales or encumbrances  and indentures based upon your mortgage and note. 
  • Giving notice of rescission removes the mortgage and removes the liability on the note. There is nothing to foreclose because the lender has no lien and has no note.
  • Don’t rely upon the automatic stay in bankruptcy unless you are prepared to do battle, challenging the authority of the entity seeking to lift the automatic stay. It is highly likely they don’t have the authority and they don’t have the documents to back them up. 
  • Don’t allow the mortgage lender or trustee to be named as creditors of a liquidated claim. You want to state it as an unliquidated claim, contingent upon the adversary proceeding, and contingent upon the real party in interest (owner of the mortgage and note) showing up. If you file your initial petition correctly, you will name the original lender and trustee as nominal creditors with an asterisk and note stating that upon information and belief this lender and this trustee no longer own or have authority to speak for the the true owner of the note and mortgage by virtue of an assignment that took place soon after closing of both the servicing rights and then substantive rights under the mortgage security agreement and the indentures of the note. 
  • Don’t rely on just any bankruptcy lawyer. Most lawyers are deficient in litigation skills and intimidated by the process — especially in Federal Court and even more so in Bankruptcy Court. If you have a foreclosure or loan issue, you want to convert the mortgage and note to a contingency that must be proven by the lender in an adversary proceeding. Get references from the lawyer that shows experience in adversary proceedings and a working knowledge of TILA, RESPA etc. 
  • Don’t rely upon the advice that it is all over when the “lender” takes title in a non-judicial or even judicial sale. First, you still have all your rights against the lender for refunds and damages. Second, you can file a quiet title action or motion to set aside order of sale or foreclosure on the basis of fraud — the fraud being that the Plaintiff/Petitioner lacked ownership of the mortgage and note, therefore lacked standing, and had no legal authority in writing to go forward with the sale and foreclosure and that that in any event, the amount demanded was wrong because of refunds due to you through violations discovered in your TILA audit. 

Mortgage Meltdown: EMS Solution — Follow-Up to Wells Fargo Lawsuit

Program Approach to the Way Out: Send this to everyone you know

Baltimore suing Wells Fargo is a wonderful first step in setting the stage for softening the landing on the mortgage meltdown. They are completely correct, and the research behind the standing of governmental entities and agencies to sue the lenders is impeccable. This will turn into the same type of litigation as the tobacco litigation. The only difference is that we don’t really need an “insider” who will give us the straight scoop. It’s obvious. But we have been in touch with insiders who could confirm the intent and knowledge on the part of the lenders in the entire scheme, the plausible deniability strategy, and the complete understanding on the part of the lenders, the investment bankers and the institutional and retail sellers of derivative securities that this would have massive impact if successful. The only thing the perpetrators didn’t realize is that their perception of “massive impact” was a tiny fraction of what actually happened.

The next step is to set up a procedure to stop the foreclosures and force the lenders into an admixture of settlements that does not attempt to discriminate between borrowers. Attempting to find borrowers who knew that the price was inflated, or who should have known the payments would go up out of reach, etc., misses the point completely. It doesn’t matter even if the borrowers were co-conspirators (which they weren’t). What matters is that the foreclosures, sales, evictions and lowering of home prices all over the world will have a devastating impact that must be stopped. 

Any attempt to provide equitable relief based upon knowledge or other factors should be AFTER the settlement is put in place and that should be done by the appropriate legislative body. This plan can be done without legislation. In short, KEEP IT SIMPLE.

GTC | Honors is setting up procedures in Arizona, Nevada and Florida, thus far to provide a procedure for immediate relief to the court system and the various victims of this massive economic fraud. 

We are publishing the plan in the hope that others will emulate it and even compete with us. The idea here is to grease the skids of settlement, provide an incentive for lawyers and government to get involved, and to bring the foreclosure nightmare to a grinding halt. In our opinion this plan ought to apply not only to homes in which owners are in distress, but also to homes that have been foreclosed, and even where the the residents have been evicted (as long as the the place has not already been resold).

Here is the EMS Plan: 

Emergency Procedures are put into place within the office of the clerk of the court and the administrative judge to halt (Stay) all foreclosures and assign them to a special master who will mediate a settlement. Older cases that have already gone to judgment, sale or eviction would require a separate filing but would subject to to the same ESM procedures. 

The local government only needs to provide offices and communication and a watchdog person to observe, but not meddle, in the procedures set up by the Emergency Mediation System (EMS). Press access would be allowed provided privacy and the procedures are not impeded.

Easy filing forms are made available at the office of the clerk of the court having jurisdiction over foreclosures. Those forms are prepared by the sponsor of the Emergency Mediation System, in our case, GTC | Honors. (this is not rocket science. For those enterprising lawyers and business people who want to steal this idea and use it, expand it, alter it or amend it, we give full permission). 

EMS also provides the Special Masters, who must be approved by the Administrative Judge of the Court system having jurisdiction based upon criteria agreed between the sponsor (GTC | Honors) and the local court system (the administrative Judge). Out of state attorneys are allowed to participate if they meet the criteria, but the sponsor must agree to train local lawyers in EMS procedures so that they can become Special Masters.

EMS will also provide at its own expense an economist who will make independent recommendations on the suggested settlement. These recommendations will be regarded as a finding of probable cause that an illegal act has been committed, but that the parties are settling their differences. 

EMS provides settlement forms that are similar in style to local mediation rules. 

The execution of a settlement will not bar criminal investigation by the State but will constitute an opt-out of any class action lawsuit brought on behalf of borrowers. It will also constitute a covenant not to sue the lender, the appraiser, the title agent, the mortgage broker, or any other third party involved in the pricing, sale, valuing, or sale of the home, derivative securities backed by the lien on the home etc. As such it would constitute an opt-out or reduction of any governmental civil lawsuit against participating lender to the extent settled by each settlement agreement executed.

The settlement will result in  maintaining  or returning the owner/borrower to the home provided, at a minimum, that the borrower can and does pay all utilities, insurance and maintenance on the property, and that the borrower pays a monthly amount to be determined by the independent economist and the agreement of the parties. 

The settlement may result in the reduction of the value of the home at the time of purchase, in which case the right of the lender to pursue recompense from the seller would not be impaired.

The settlement will generally be for a term of ten (10) years and result in a reduction of payments from the amount set forth in the original mortgage and note, but will NOT contain any negative amortization features directly or indirectly, unless the residence is sold or refinanced at the option of the borrower/owner for an amount in excess of the original purchase price of the home, in which case the participation of the lender in the subsequent equity of the home shall be suggested by the independent economist and by agreement of the parties.

No settlement under these procedures shall be construed to alter, amend or otherwise change the required lending practices, securities sale practices or other disclosures or liabilities of any parties in any new purchase transactions that occurred after January 1, 2007.  

No settlement will be final until an order is entered by a Judge of competent jurisdiction. No such order will be entered unless it comes through the EMS system.

The lender shall pay a an initial fee to EMS of $5,000 payable in five semi-annual installments commencing with the day agreement is reached. The lender shall also pay a maintenance fee of $1,000 in annual installments commencing six months after the semi-annual installments are completed and continuing until the settlement is complete or the house is sold. The first installment of $1,000 shall be payable, regardless of whether settlement is reached on the day of mediation, which shall not proceed without such payment. Payment shall be made to the Clerk of the Court. In the event payment is not honored or cleared, the lender shall be subject to further prosecution and all waivers of prosecution of civil or criminal claims shall be automatically terminated. The settlement however shall remain completely enforceable and in full force and effect other than the exceptions stated in this paragraph. 

The clerk shall pay the divide the payments of $1,000 as follows: $75 to the Clerk’s Office as a special filing fee, $50 to the State General fund in which the property is located, $100 to the County in which the property is located, $75 to the Town or City in which the property is located, $75 to any local agency or entity that provides free legal services for those in need, and $625 to the EMS sponsor (GTC | Honors) generally to be divided as $325 to the Special Master, and $200 to the Independent economist and $100 for administrative overhead and profit, if any.

One-half of the fees paid by lender shall be added to the principle balance of the loan due and the value of the home when purchased for purposes of computations as set forth above. The lender shall pay for any recording fees required under the settlement agreement but shall not be required to pay documentary or value stamps or taxes as with a new loan.

This plan works! Try it.

Neil F. Garfield, Esq.

General Transfer Corporation

GTC | Honors

Customer Service 954-494-6000


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