Borrower Beware: Don’t Payoff Without Tender of REAL Original Note

The Perils of Payoff

On the road again: I met a fellow on the Red Coach from Tallahassee to Fort Lauderdale who is pursuing a case that proves the central point of this blog: Whether you are selling, refinancing, Short-Selling, or otherwise paying off your supposed loan balance, the institution that receives the payoff (a) has no right to the money and (b) has no authority to execute a satisfaction of the note and mortgage even upon receipt of the money. And the reason is that in most cases they don’t have the note, which means it is still in circulation somewhere supporting as much as 42 times the face value of the note in hedges and derivatives. When confronted with a payoff of the loan, the institution is more than happy to take your money but will lie and cheat to avoid providing you with a real non-photo-shopped original note.

Unfortunately, most people are still taking it on FAITH that the note is indeed satisfied and that the mortgage is released and satisfied at the time of the payoff but they are very wrong if they don’t get the original note at closing, since THAT is what is presumptively the cash equivalent instrument that is traded in the secondary market, and since the mortgage usually is presumed to follow the note, that gives the actual owner of the note the opportunity to make a claim — something that is already happening and will occur with increasing frequency.

So whether you are buying property, selling property or paying off the “old” mortgage for any reason you are not only creating a title mess, you have no proof that the original note has been canceled. Which led me to suggest in a few articles that for those able to do it, call the bluff of the pretender lender. And for those investors looking to make an infinite return on their money, they should be helping homeowners do this in or out of court: OFFER TO PAY THE BALANCE IN FULL AS DEMANDED BY THE PRETENDER LENDER ON THREE CONDITIONS: (A) PRODUCTION OF THE ORIGINAL NOTE AND THE RIGHT TO INSPECT IT FOR AUTHENTICITY (B) PRODUCTION OF PROOF OF PAYMENT AT ORIGINATION AND ALL TRANSFERS UPON WHICH THE PRETENDER LENDER RELIES FOR ITS AUTHORITY TO COLLECT THE MONEY AND (C) PROOF OF LOSS BY ACCESS TO THOSE PEOPLE WHO MIGHT HAVE RECEIVED AN ASSIGNMENT OF THE LOAN OR WHO HAVE A BACK-DOOR OWNERSHIP INTEREST IN THE LOAN THROUGH OWNERSHIP OF A DERIVATIVE OR CREDIT DEFAULT SWAP.

This is not for the feint of heart nor the people who don’t have access to actual funds that can be tendered in full payment. It is possible for the occasional real note to pop up and perhaps even sufficient proof that the Judge would rule it is sufficient to close the deal in which case you will have paid 100 cents on the dollars demanded in exchange for a loan valued at perhaps half that amount. But most of the time it will look like the following case described to me last night. I’ve changed facts (identities and figures) to protect the privacy of the individuals involved. But the foundation of the case is accurately described.

Owner Schwartenheimer has a mortgage claimed by Bank of America. It is for $3 million on a private residence in the State of Florida. He has a buyer at $2 million which leaves him $1 million short of the amount demanded by the “bank” claiming to own and service his mortgage. An estoppel letter is issued by BofA indicating the payoff amount and the dates that the estoppel letters is effective and may be relied upon.

The closing is in 5 weeks. And the Owner has elected to payoff the extra $1 million rather than attempt a short-sale. So the Bank is going to get full payment at closing — $2 million from the buyer and $1 million from the seller.

But the Owner’s daughter, an astute business woman who happens to be an avid reader of this blog intervenes with the demand that the original note be produced at closing. BofA assures her that the original note will be produced. At closing without the daughter in attendance, the father, as instructed by his daughter, demands to see a copy of the original note before he turns over the money to BofA. His buyer is there with the money and he has a bank check ready and payable to BofA for $1 million.

The curious answer from BofA is that they have the note but were unable to get it to the closing agent in time for the morning closing, but that it would be available for delivery at 4PM that afternoon. The proper thing would have been to wait until they produce the note. The Owner asks his lawyer, who is also a title agent, for advice on what to do. The lawyer thinks that the daughter is nuts and so is Neil Garfield with his livinglies conspiracy blog.

The lawyer advises the client to proceed with the closing under the belief that BofA obviously MUST have the original note or else they would not have issued an estoppel letter and signed the papers to satisfy and discharge the mortgage in recordable form. Whether that advice will further be the subject of a malpractice case against the lawyer is another matter to consider at a later time. And the repercussions of that could extend to all sorts of situations where a “mortgage” and “note” are involved —even to the far reaches of family law.

As you have no doubt guessed, at 4pm the Owner and his daughter show up at 4pm to get the original note and of course it is not there, despite having been informed that it WAS there. The daughter although not a lawyer, is far from amused. She writes a bristling letter to BofA demanding that either they produce the original note or give the money back — and she demands not only the $3 million paid at “closing” but all the interest and principal paid before that for a total demand of $5 million.

BofA immediately responds with apologies and assures her and her father that the note will be provided.

[A word of context here: if BofA wanted to take the position that the note was lost or destroyed they could have filed an appropriate action to reconstitute the note and mortgage. But they didn’t do that, for good reason — the mortgage loan was supporting $60 million in credit derivatives, insurance and credit default swaps upon which BofA had already been paid. If they admit they don’t have the note and they can’t account for where it was last seen, and when it disappeared in the manner required to re-establish the note with assurance to the court that the real original won’t show up at a later time in the hands of a different claimant, in that event they might be subject to claims from insurance companies and counter-parties of credit default swaps for repayment of $60 million they paid and which was received by BofA. [considerable over-simplification is being used here, but the point remains true].

So BofA and the owner (with the new owner in the background wringing his hands over whether he really received clear title and whether his title policy excluded claims from securitization) go back and forth until BofA counsel informs the owner he doesn’t need the original note because BofA has already signed the satisfaction.

The owner and daughter, unsatisfied with that response (as well they should be) file a lawsuit against BofA for return of all money ever paid to them, plus statutory interest. BofA defends the action with various motions to dismiss and has now delayed discovery 5 times.

Suddenly the senior partner of the prestigious law firm representing BofA calls the daughter and asks what she wants. She replies that she wants her money back and he says “well, without saying we agree to your demand, for settlement purposes what would you take to satisfy your demand for your money back.” He understands that even if they pay the father $5 million or more, they are still saving the client (a) the $60 million payback to insurers who already paid and (b) the prospect of facing a lot more of these lawsuits from people who have the money and the right fact pattern to prosecute the case.

The daughter wants to dig in her heals knowing she has BofA over a barrel.

The lawyer who represented the owner at closing is still clueless and believes the action filed by the father and daughter is totally without merit. His advice, perhaps self-serving, is that they demand nothing.

The daughter wants it all — if BofA can’t produce any evidence that they ever bought the loan, that they ever knew or anyone ever knew where the note was, then she wants all the payments, monthly or otherwise were made to BofA without BofA having any right or authority or even excuse to collect the money.

The father as previous and perhaps still owner of the property would be satisfied with the money paid at closing to BofA — $3 million. BofA’s attorneys are now in process of suggesting a modification to the claim filed by the father in court upon which they will settle — and from the looks of it, the settlement will be for the full amount paid at closing. Thus if the note is still in circulation, the father will have received the full value of it from BofA who accepted it under false pretenses. The case is not settled yet, but is looming on the horizon.

The moral of the story is that this is all about money. And if you can find a way to come up with actual cash you can make the same offer as the owner did above — and in my opinion achieve the same results. And if people pool their money and make the offer to refinance the property at the full value of the demand made by the pretender lender — whether in foreclosure or not — a bona fide actual offer can be made and cannot be ignored by either the court or the pretender lender.

For those with entrepreneurial spirit  this is a business plan that I wish to raise money for. Write to if you are interested in combining resources with other investors to execute this business plan.

In Summary: The refinance package signed by the present owner provides that if the payment is required to be made, they now owe the money to the hedge fund or whatever entity put up the money and provides modification terms acceptable to the owner — which means a net loss to the investor. But, if the usual case prevails, and the pretender lender is forced to back off, a quiet title action, plus refinance of the property at 1/3 of the amount demanded by the pretender lender results in a windfall note and mortgage to the source of refinancing without ever having paid the “prior note”.

These entrepreneurs, if I am right, will rarely have to pay an actual some of money to discharge the old note and mortgage while at the same time the owner gets the property free and clear except for a new mortgage to the investors for 1/3 of the original principal demanded plus a reasonable fixed interest rate with 40 year amortization, all of which can be sold into the secondary market. It is a virtually infinite return without putting very much money at risk and no risk of a total loss.

And for those without money — check the court file to see whether the original note has been tendered because most states, like Florida want the original note filed and out of circulation before they will allow a foreclosure sale even if it is determined that a foreclosure sale is proper in the circumstances. There is only one party that can submit a credit bid at auction — the party with the original note and proof of loss.


Shadow Foreclosures: Over 500,000 Az Homeowners Underwater

Yes, we can help at livinglies, but the numbers are so high that there is no way we have the resources to help everyone. Lawyers, accountants, analysts and others should be seeing this as a major opportunity to do well for themselves and for the owners of these homes by challenging the rights of the those collectors who are taking their money now, or demanding payment or threatening foreclosure. Arizona lawyers have been slow on the uptake here and in so doing are potentially setting themselves up for future malpractice claims for anyone, whether they aid or not, who received advice from the lawyer that was not based upon the realities of the securitization scam.

Call 520-405-1688, where you can get help in documenting the fraud, help in drafting the documents, and help in finding a lawyer. If you are a lawyer involved in foreclosure defense, bankruptcy or family law, you need to to start studying the real facts and the strategies that get traction in court.

We are planning a possible new Arizona seminar for lawyers, paralegals and sophisticated investors or homeowners. But we will only schedule it if we get enough calls to indicate that the workshop will at least pay for itself. It is a full day of information, strategy, role-playing and tactics to use in the court room.

Editor’s Analysis: Despite loosening standards for principal reductions and modifications, the foreclosure activity across the country is increasing or about to increase due to many factors.

The bizarre reason why the titans of Wall Street want these homes underwater combined with the miscalculation of the real number does not bode well for the housing market nor the economy. With median income now reported by the Wall Street Journal at 1995 levels, and the direct correlation between median income and housing prices you only need a good memory or a computer to see the level of housing prices in 1995 — which is currently where we are headed. As the situation gets worse, the foreclosure and housing problem will become a disaster beyond the proportions seen today.

Wall Street NEEDS foreclosures — not modifications, principal write-downs or settlements. The reason is simple. They have already received trillions in bailouts from the Federal Government. All of that was predicated upon the homes going into foreclosure. If the loans turn out to be capable of performing, many of those trillion of dollars ( generally reported at $17 trillion, which is more than the total principal loaned out to all borrowers during the meltdown period), the mega banks could be facing trillions of  dollars in liability as the demands are properly made for payback. The banks should not be allowed to collect the money and the houses too. Neither should they be allowed to collect the bailout money and keep the mortgages.

The “underwater” calculation is far off the mark. If selling expenses and discounts are taken into consideration, the value of homes used in that calculation is at least 10% less than what is used in the underwater calculation, which would increase the number of underwater homes by at least 15% bringing the Arizona total to nearly 600,000 people who know now that they will never see valuation even coming close to the amount owed. The prospect for strategic defaults in Arizona and elsewhere is staggering —- totaling more than 10 million homes  — or nearly twice the number of foreclosures already “completed”, albeit defectively.

As stated in the article below there is, as we have been saying for years, a huge difference between home prices and home values. Home prices can be pushed up or down based upon external factors In this case it was a flood of what looked like cheap money that is now apparent was neither cheap nor even money (because the named lender never made the loan). Home values and home prices should over the long run track each other given no manipulation of the marketplace which is exactly what Wall Street did. Home values, based upon the Case-Schiller index and thousands of other economists are based upon one simple variable — median income. Median income is now at the lowest point since 1995. That means home values are, after selling expenses and discounts, less than 90% of 1995 prices.

It is simply inevitable that people will take the hit on their credit and walk away from the homes rather than pay $200,000 for on-existent equity and that is exactly what Wall Street is counting on, forcing through its manipulation of government policy and spinning to the public media. If those homes do not go into foreclosure the mega banks’ scam will reveal itself, the assets on their balance sheet will vanish because they never existed anyway and the banks will fall. Whether they are too big to fail or not, they will fail — unless foreclosures spread out across the land.

by Kristena Hansen,

Roughly 40 percent of all mortgaged homes in Arizona were under water during the second quarter of 2012, the third-highest negative equity rate in the nation, according to a report released Wednesday by CoreLogic Inc.

In raw numbers, that translates to about 521,600 homeowners statewide being under water for the quarter out of roughly 1.31 million total mortgaged homes, the report said.

Arizona’s negative equity rate was much higher than the national average of 22.3 percent (10.8 million homes) of all mortgaged homes that were underwater during the same period. That nationwide figure was also a gradual improvement from the first quarter’s 23.7 percent negative equity (11.4 million homes).


Negative equity, or being under water, refers to homeowners who owe more on their mortgages than their home’s present estimated value. CoreLogic determines negative equity rates by the number of underwater homeowners versus all residential properties in a certain area with an outstanding mortgage.

CoreLogic experts say the improving negative equity landscape nationwide is largely due to the recent rebound in home prices, dwindling sales of lender-owned properties and low inventory of existing homes.

Home prices and home values, however, are distinctly different. Prices represent how much homes actually sell for, while home values are only an estimate and are therefore much harder to determine.

Michael Orr, a real estate expert at Arizona State University, said home value estimates will vary widely depending on who is making the assessment. That makes it tricky to hone in on best practices for calculating negative equity, he said.

Sam Khater, deputy chief economist for CoreLogic, explained how his firm makes its determinations.

The Games Are on At the Auction: Home Advantage?

Editor’s Note: While the banking industry have made it “illegal” for a homeowner to have a relative buy the home at foreclosure auction and then give it back to their son or daughter, there are many games at play in the auction. And don’t forget there are no auction police around. They have to figure it out in order to do something about it. And if your claim is fraud, which it probably ought to be, it becomes a he-said, she-said sort of thing that they don’t want to get into because that could mean you might have the right to legal discovery which would blow open the whole can of worms. It is obvious that the credit bid submitted to buy the property by the pretender lender is not a credit bid. A credit bid could only come from the creditor and the party submitting the “credit bid” is not the creditor.

So one thing emerging is that if you submit a bid  of SOME amount, even $100, and then invalidate the credit bid, you might end up with the house. Not so fast — it won’t be that easy most of the time but several reports received by this author indicate it has gone just that way. The higher the bid from you the more likely a court will confirm it, although there are some states that do not require confirmation of the bid, which is like non-judicial foreclosure in favor of the borrower. The key is to invalidate the credit bid. The next thing is to assert that your bid had to be accepted because it was the next highest bid and the only valid one. Obviously you need an attorney with guts and brains to do this.

Another interesting practice that has been in motion for for the past 2 years is peer-to-peer auction buying. The buyers know each other and have made a deal before the auctions on BOTH their homes. Each buys the home of the other. Usually they have the money to do it from relatives or some source. But the invalidation of the credit bid could be used in this scenario. After the auction is complete on both homes and the title is issued the two buyers either rent or swap titles. Now both are back in position where they can get a mortgage or loan from somebody that reflects the actual value of the home. In those states where the non-judicial sale or judicial sale prohibits the “lender” from pursuing a deficiency, the game is over. In other states I wouldn’t worry too much about it, because it is a regular law suit and they would have to prove how much they lost. If the pretender lender brings the suit, they didn’t have a dime in the deal and it is an admission that the credit bid was bogus. If anyone else files the suit they are alleging that the credit bid was submitted by someone other than the lender. Either way you win.

Then you have the games required to just do it using conventional means which are described in the article below.

The main point that I want to make here is that regardless which strategy you pick, including just walking away from the house, there is very good legal support for the proposition that a foreclosed house has neither been foreclosed nor sold and that the “former” homeowner is still in fact the legal owner of the house. This leads to all sorts of lawsuits and actions for damages. So whatever you do, you are probably missing an opportunity to get some money or the house back if you don’t file suit for quiet title and damages. Naturally this blog is no substitute for legal advice, so you should secure the advice and services of a licensed attorney before you make any decisions.

But here is a little word of caution to LAWYERS about MALPRACTICE. Don’t let your laziness or your failure to bring yourself up to speed on securitization get you into trouble with the bar or in a lawsuit later for attorney malpractice. And start re-tracing your steps for clients you have seen over the last 3 years.

  • Whether you practice in property law, civil litigation or bankruptcy, if you don’t know the basics of securitization and if you don’t advise your client to get the information pertaining to their transaction and determine the identity of the creditor and the net amount of the obligation and whether there really is a default after loss mitigation payments, then you have failed to give advice to a client who needs it.

  • Later, just as the last few weeks have revealed, you may end up with egg on your face. I wouldn’t be too surprised to see some legal malpractice cases started by people who went to lawyers who didn’t notice that the notarization was invalid, that the document was fabricated and that the signatures were unauthorized and forged.

October 29, 2010

What It Takes to Buy a House in Foreclosure


ATLANTA — As in any economic downturn, the wave of home foreclosures has attracted voracious opportunists — investors among them who are buying, fixing and then renting the places out.

In their wake are aspiring owner-occupants. How hard could it be, they ask, to pick up one of these houses on the cheap and make it livable?

For an answer, consider Jennifer Kuzara, 32, a grants manager for a nonprofit organization here. From early 2009 to early this year, she spent about 1,000 hours on her foreclosure project. The gang of helpers she assembled included two real estate agents, a banker, an architect, a contractor and her parents.

To stand a chance of making the project work in the neighborhoods where she was willing to live, she needed $100,000 in cash. Ultimately, Ms. Kuzara and her parents were exposed to a fair bit of risk, all in the name of a bungalow in a middle-class neighborhood.

And while the specifics are particular to Ms. Kuzara, plenty of people in foreclosure-ridden markets in Florida, Arizona, Nevada and elsewhere are in for a house hunt that is going to look a lot like hers. The headlines may be raising all sorts of questions about whether the foreclosures were legitimate. But there will always be people who want to buy when things are really cheap and are willing to press ahead when the quest seems most challenging.

So this is the story of what it will take for their search to have a happy ending.

It began in 2006, when Ms. Kuzara had nearly six figures in student loan debt and the housing market was at its most heated. She was virtually certain that she would never be able to afford a home. “I remember thinking that it might have been the end of my American dream,” Ms. Kuzara said.

Two years later, after she had finished her Ph.D. course work in anthropology at Emory University, and begun full-time work in the nonprofit field, the housing market began to turn. Not long after, a friend was considering buying a foreclosed home as an investment property and encouraged Ms. Kuzara to look at the listings.

Through another friend, Ms. Kuzara found Lisa Iakovides and her business partner, Michael Redwine, real estate agents at a company called Atlanta Intown. They established some price parameters and some items that would be deal breakers, like mold and crooked rooflines.

Then they shopped for neighborhoods. One, East Atlanta, made the short list, even though Ms. Kuzara hit the floor of Mr. Redwine’s car one day when she heard gunshots on the way back from visiting a home there. She and Ms. Iakovides hadn’t even started up the walkway of a house in another neighborhood, Peoplestown, when a neighbor loudly made her feelings known about white people moving in.

Other homes told stories in subtler ways. “Squatters had taken them all over,” Ms. Kuzara said. “Some moved in furniture and their families. But there was one where I never would have known until I opened up a closet and saw a little stack of sleeping bags and blankets. And on the top ledge there was a knife, a fork and a spoon.”

Ms. Kuzara vowed to leave cookies and a nice note for whomever was living there if she bought that home, but she didn’t get it or many others. By the time she entered the fray, investors were already swarming. She bid on at least 10 homes over six months and lost them all.

The house she finally bought had been divided in half and turned into apartments, which might have been why she did not have to fight so hard for it.

The 1,100-square-foot bungalow sits high on a small piece of property in the Edgewood neighborhood. It is one of those places where you can walk a few blocks to the left and find two stores with a fine malt liquor selection, then stroll 10 minutes to the right to Bed Bath & Beyond for high thread-count sheets to sleep off the hangover. Ms. Kuzara’s block has a halfway house for former substance abusers next door and a beautifully renovated home across the street with an alarm service sign planted prominently out front.

Ms. Iakovides managed to get a preliminary $39,000 offer accepted by the bank on the home in early August 2009, and she began trying to set a closing date. Ms. Kuzara drove by the home each day, planning the renovation.

But one day she found the front door wide open and called her real estate agents in a panic, worried that vandals were casing the place or that squatters would take up residence. Without really asking the bank’s permission, the agents called a contractor to padlock the door. “Who would we have asked?” Mr. Redwine said, incredulously, as if the bank that still owned the house was actually going to return his calls.

Ms. Kuzara’s next step was to get together the money to pay for the place and the $60,000 or so in repair work. After trying early on in her hunt to cobble together various combinations of tax credits, down payment assistance programs and government loans, it became clear that most banks preferred all-cash offers for their foreclosed homes.

But Ms. Kuzara had no cash. Her parents, Mark and Jennie, had some savings but not nearly enough. So her parents borrowed $25,000 at about 8 percent interest against a life insurance policy and $50,000 more at a lower rate from his 401(k) and bought the $39,000 home themselves. They used the remaining money for the renovation, planning all along to sell it to Ms. Kuzara as soon as the repairs were done.

For that to work, however, Ms. Kuzara would need to qualify for a mortgage to buy it from her parents. She had no money for a down payment, though. To qualify for the Federal Housing Administration loan that she needed, the home, postrenovation, would have to be appraised at a high enough amount that her parents could give her some of the newly created equity for a down payment while still getting all their money back.

And therein lay the risk. Because Ms. Kuzara bought one of the worst homes on a nice block, her agents were convinced that the renovation could yield an appraisal at the value that the bank required.

It helped that they had ushered in a contractor they had worked with before, whom they could count on to stay within the strict budget. Under his supervision, the renovations were finished in less than two months.

Then came the deciding moment: the appraisals. One came in at $130,000, while the other was for $145,000. As a result, the bank allowed Ms. Kuzara to borrow $100,000 to buy the home from her parents and thus make them whole. Then she used some of the remaining, newly created equity for the required down payment.

Ms. Kuzara moved in a year ago this weekend, and today the cozy house has three bedrooms, two baths, a front porch for dinner parties and a backyard for her two dogs. She’s furnished the place with chairs from consignment stores and thrift shops and has assembled a nice collection of vintage cookware and dishes.

She pays $828 a month on her 30-year fixed-rate mortgage, including taxes and insurance, and she has a roommate who chips in $500 month.

Including the weeks when she painted every inch of the interior, Ms. Kuzara spent about 1,000 hours on her foreclosure project — poring over listings, researching every last one in county databases, visiting houses and making her eventual home habitable.

So anyone who wants to do what she did needs to be ready to put in that much time. You may need a source of funds or willing co-conspirators like Ms. Kuzara’s parents. And you will need a team of people who know the rules of the foreclosure game cold.

The odds of success are certainly long. But for those with the patience to pull it off, it sure seems a whole lot of fun to play this game and win.

“It turned out to be a sweet little house,” said Mark Kuzara, Jennifer’s father. “And I think somewhere down the road, she’ll sell that house and come out pretty nicely on it.”

Foreclosure Defense, Predatory Lending and Attorney Malpractice: Language Issues

New comment on your post #168 “Foreclosure Defense: Cash for Keys Offer and TILA Defenses”


Can a mortgage be voided or canceled if the contracts, promissory note, deed of trust, TILA and RESPA disclosures and remedies were not produced in the native language of the purchaser or owner, e.g. Spanish?


Part of the pernicious scheme hatched on Wall Street was to target people who were least likely to understand what was going on, least likely to ask questions about the sagacity of the loan program they were being sold and least likely to have the resources to do anything about it. 

It is probably true that nearly every lawyer in the nation is committing malpractice by not recognizing TILA, RESPA, RICO and other non-disclosure, fraud and misleading practices by lenders and all the participants who were “feeding” on the closing.

Whether interviewing or representing a client on the lender or investor side, or the borrower side, or even someone on an unrelated matter who mentions a mortgage that was given or signed during the 2001-2007 period, there is good chance that something was mentioned that the lawyer didn’t pick up on when he heard about it. 

The absence of a certified language interpreter and extra efforts to make certain that the borrower understood the dynamics of the loan documents, the appraisal of the property and the way the payments would work in the future, is probably good grounds for asserting a complete violation of TILA disclosure — especially if you can honestly make the allegation that the borrower spoke little or no English.

Thus part of the TILA audit normally would include the fact that disclosure was absent because no effort was made to assure that the borrower understood the loan and the lender, by and through its affiliates, agents, servants or employees knew that the borrower didn’t understand the transaction.

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