Local Governments Weigh Eminent Domain to Stop Foreclosures

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Editor’s Comment:  

Picking up on a thought from Schiller, San Bernardino County is taking a long hard look at invoking the government’s power of eminent domain to seize mortgages, sell them to investors at market value and provide a basis for the homeowners to stay in the home based upon the reality of the marketplace without the corruption of data created by the Wall Street banks.

I did a little research on this idea and while it is a bit of a stretch it does not appear to be excluded from the power of eminent domain to claim the right to purchase the loans at fair market value and resell them to investors. Many properties have been seized by local government only to allow private developers to build highrise luxury towers on the same property.

All this does is force the issue of an open fair free market system and take away the power of the banks to manipulate the market for mortgages and housing. As it stands, these mortgages are blighting hundreds of neighborhoods in hundreds of cities. The basis of invoking the power is classic and permissible. Whether it can be or will be allowed by the courts is another matter.

One way of looking at it is to presume to know the defense: that eminent domain is not used for mortgages and then split hairs as to whether a mortgage is an interest in property that could be subject to eminent domain. That fails because nearly all properties taken by eminent domain have mortgages on them and the mortgages get paid in the same way — fair market value. What happens to the rest of the mortgage balance claimed by the lender? Well that remains to be seen.

If many local governments start invoking this power, it will gain momentum.

San Bernardino County Weighs Eminent Domain to Fight Foreclosures

The county, along with Ontario and Fontana, wants to use eminent domain to seize underwater mortgages from investors and restructure them to help borrowers keep the homes.

By Alejandro Lazo

A plan by San Bernardino County to seize mortgages and restructure them for underwater homeowners using eminent domain is perhaps the most aggressive example of how local governments are seeking new ways to combat foreclosure.

The cities of Ontario and Fontana are partnering with the county to create a Homeownership Protection Program that would use private funds to acquire underwater mortgages from investors. The county and the two cities have created a joint authority to explore and possibly enact the plan, and the first public meeting of that authority will be held next week.

David Wert, a spokesman for the county, said the program is worth exploring because it could offer a solution to one of the region’s most entrenched problems: the vast number of loans that are stuck underwater, with more money owed than the property is worth. If the program were to go countywide, it could benefit 20,000 to 30,000 homeowners, he said.

“The only thing we are doing at this point is conducting a conversation,” Wert said. “But the reason the county is interested in talking about this is because this is a proposal that could — if everything checks out — address the problem on a fairly large scale.”

Although still in its initial stages, the aggressive proposal has attracted controversy. A number of banking, financial and business groups oppose it, contending that seizing mortgages would raise constitutional issues and could increase lending costs in those cities.

The California Mortgage Bankers Assn., the American Bankers Assn. and the American Securitziation Forum, along with several other financial groups, sent a letter of opposition to the county and the two cities.

“We believe that the contemplated use of eminent domain raises very serious legal and constitutional issues,” the letter read. “It would also be immensely destructive to U.S. mortgage markets by undermining the sanctity of the contractual relationship between a borrower and creditor, and similarly undermining existing securitization transactions.”

Dustin Hobbs, a spokesman for the California Mortgage Bankers Assn., said the program also could hurt the local housing market.

“It could be devastating,” Hobbs said. “If investors are unsure as to the disposition of mortgages in San Bernardino County and in Fontana and Ontario, it could really curtail lending in the area, and if not curtail, certainly increase costs for new loans.”

San Bernardino County’s plan is the latest of several measures by local governments to fight foreclosures and the problems often associated with resulting neglect: crime and blight.

Chicago passed an ordinance last year that requires banks and other financial institutions to maintain vacant properties that have been foreclosed upon.

Oakland has instituted a blight program that would require banks to register, inspect and maintain homes that are in foreclosure. Cleveland has been using a land bank program to tear down foreclosed homes.

Legal experts said the San Bernardino County proposal was one of the first initiatives to try to strike at the problem before a home is in the foreclosure process.

At this point in the planning, only homeowners who are current on their mortgage payments would be allowed to participate in the program, which would target mortgages that have been securitized and sold to private investors. That would exclude loans owned or backed by mortgage titans Fannie Mae and Freddie Mac. The acquired loans would be restructured, lowering the amount owed, with the intent of helping the owner keep the home.

The plan was first proposed to the county by a San Francisco firm named Mortgage Resolution Partners. The firm has employed investment banks Evercore Partners and Westwood Capital to raise money for the initiative from private investors.

Kurt Eggert, a professor of law at Chapman University, said a sticking point could be whether the investors are able to make a profit on the transactions. He said he liked that the plan, unlike efforts elsewhere, was an attempt to get ahead of the problem.

“The alternatives too often are just cities cleaning up afterward, and getting stuck with the mess, and getting stuck with the foreclosures and the abandoned buildings,” he said. “It is good to see cities trying to do something proactive.”

Cornell Law Professor Robert C. Hockett advised Mortgage Resolution Partners on the design of the proposal. The initiative should pass muster in courts because they have had a long tradition of upholding cities’ eminent domain powers as long as the valuation methods used to acquire properties are sound, Hockett said.

It particularly makes sense to use eminent domain to seize underwater mortgages that have been securitized, he said, because often those mortgages can’t be sold at market value for legal reasons. Often, those loans must be sold at face value — a higher price — because of the contracts governing them, he said.

“The fact they can’t be marketed is the reason we are using eminent domain,” Hockett said. “This is actually a pro-market solution.”


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Wells Fargo to Pay up to $50,000 per person in bias case against blacks, Hispanics

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Editor’s Notes:  

The point here, besides the obvious bias, is that they were targeting people who were unsophisticated and if it all possible had language problems. Why would they go to so much trouble to find hapless people who are not going to be able to pay for the loans? ANSWER: Because every time a loan fails it gives them another opportunity to make even more money than they did before. Since they were playing with investor money, the risk of loss was not factored in making the loans.

Remember that in Florida alone it was discovered than more than 10,000 people were newly licensed mortgage brokers, each of whom was a convicted felon for economic crimes. They needed people who would say anything to close the deal, NOT people who were looking out for the bank or its depositors because there were no depositors in most cases and even when a depository institution initiated the loan origination, they were not using their own money or credit. Nobody after that EVER paid one cent for any of the transfers, assignments, indorsements, or allonges. All the transactions were fake descriptions of transactions that never occurred.

And they are STILL trading on the bad loans even if they were long ago “foreclosed” and even if there was an eviction. They are trading the synthetic derivatives that were based upon the derivatives whose value was derived from the mortgage bonds whose value was derived from the home. All the trades are bogus. While all Americans suffer, the banks continue to generate “profits” that don’t actually exist because they are more than offset by an unstated liability for selling “forward” an asset that they know they never had and which has been lost through the foreclosure.

Nobody in mainstream media has YET picked up on this because of its obvious complexity. But when they, do, all hell will break loose. It will be discovered that the original loan was paid in full at the moment of origination and that all trades after the fake transaction used as the basis of the contents of the “closing documents” were faked, which is why they couldn’t come up with real documents and were submitting fabricated, robo-signed, surrogate signed, forged documents and recording them.

And that is the tip of the iceberg on the degree of corruption of our title system. Because all those trades, foreclosures and evictions can and should be reversed. And the economic collapse should and would be restored to normal economic activity with the wealth back where it belongs — in the hands of people who were cheated, deceived and discriminated against by the banks.

Justice Dept: Wells Fargo to pay $175M to settle allegations of bias against blacks, Hispanics

WASHINGTON — Wells Fargo Bank will pay at least $175 million to settle accusations that it discriminated against African-American and Hispanic borrowers in violation of fair-lending laws, the Justice Department announced Thursday.

Wells Fargo, the nation’s largest residential home mortgage originator, allegedly engaged in a pattern or practice of discrimination against qualified African-American and Hispanic borrowers from 2004 through 2009.

At a news conference, Deputy Attorney General James Cole said the bank’s discriminatory lending practices resulted in more than 34,000 African-American and Hispanic borrowers in 36 states and the District of Columbia paying higher rates for loans solely because of the color of their skin.

Cole said that with the settlement, the second largest of its kind in history, the government will ensure that borrowers hit hard by the housing crisis will have an opportunity to access homeownership.

The bank will pay $125 million in compensation for borrowers who were steered into subprime mortgages or who paid higher fees and rates than white borrowers because of their race or national origin rather than because of differences in credit-worthiness.

Wells Fargo also will pay $50 million in direct down payment assistance to borrowers in areas of the country where the Justice Department identified large number of discrimination victims. Those areas are Washington, D.C., Chicago, Philadelphia, Oakland and San Francisco, New York City, Cleveland, Riverside, Calif., and Baltimore.

“The department’s action makes clear that we will hold financial institutions accountable, including some of the nation’s largest, for lending discrimination,” Cole said.

The settlement will bring “swift and meaningful relief” to African-American and Hispanic borrowers who received subprime loans when they should have received prime loans or who paid more for their loans, said Thomas Perez, assistant attorney general for the Justice Department’s civil rights division.

Perez said that because of the bank’s practices “an African-American wholesale customer in the Chicago area in 2007 seeking a $300,000 loan paid on average $2,937 more in fees than a similarly qualified white applicant. And these fees were not based on any objective factors relating to credit risk. These fees amounted to a racial surtax. A Latino borrower in the Miami area in 2007 seeking a $300,000 paid on average $2,538 more than a similarly qualified white applicant. The racial surtax for African Americans in Miami in 2007 was $3,657.”

Wells Fargo noted in a statement that it has denied the claims.

“Wells Fargo is settling this matter solely for the purpose of avoiding contested litigation with the DOJ,” it said, “and to instead devote its resources to continuing to provide fair credit services and choices to eligible customers and important and meaningful assistance to borrowers in distressed U.S. real estate markets.”

The part of the settlement for $125 million deals with mortgages that were priced and sold by independent mortgage brokers through Wells Fargo’s wholesale channel. The financial institution said that it is discontinuing financing mortgages that are originated, priced and sold by independent mortgage brokers through the mortgage wholesale channel.

“Through our separate decision to no longer fund mortgages through independent mortgage brokers, we can control how that commitment” to serving home ownership needs “is met on every mortgage that Wells Fargo makes,” said Mike Heid, president of Wells Fargo Home Mortgage.


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60 Minutes: Banks Walking Away From Homes They Foreclosed — Why Can’t You?

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CLEVELAND DEMOLISHES 1,000 FORECLOSED HOMES, 20,000 MORE SCHEDULED

Rokakis: “Very often a bank will take a property to the point of foreclosure, but won’t go to the sheriff’s sale, ’cause they don’t want that property. They don’t want the responsibility of the $8-$10,000 bill that comes with tearing this house down.”

Former County Treasurer Jim Rokakis says some banks have turned their backs on a blight they created.

Rokakis: “In a normal real estate market people are out looking for loans. In the perverse real estate market we created in this country, you know during the period 2000-2006 this wasn’t people looking for money, this was money looking for people. And that’s why so many of those loans were made without down payments and without verification of income. And I might also add, phony appraisals.”

WATCH THE SEGMENT ON CBS.COM

EDITOR’S COMMENT: Rokakis as County Treasurer was left to handle a problem that his city didn’t create, promote or want. The Banks were hell-bent to foreclose these homes and neighborhoods just like it across the country. NO, they couldn’t write down principal because that would create too big a loss. So they elected to take ZERO.

  • In many if not most cases the homeowners struggled to meet the payments even though those payments were based upon a principal balance that was too high to begin with — thanks to fraudulent appraisals, as Rokakis points out.
  • In many if not most cases, those same homeowners spent their last dollar of savings on a home that would ultimately be demolished because the Bank didn’t want it — the Bank just wanted to foreclose so that they could report a total loss to investors and thus avoid accounting for the money in the securitization scheme (see the movie, The Producers).
  • In many if not most cases, the homeowner was trapped by the “moral imperative” of maintaining payments on a home to a Bank that didn’t own the loan and a Bank that would itself fail to make payments, perform basic maintenance and security, and keep the utilities going. So it’s OK if the Bank walks away leaving entire neighborhoods destroyed but its “immoral” if a homeowner walks out of a bad deal that the Banks knew was a bad deal from the start and were counting on to fail. Too Anxious to Fail applies to these banks more than too big.
  • In many, if not most cases, the homeowner sought help and would have accepted a lower payment on a lower amount of principal to correct the distortion the Banks created when they gave the loans. Neighborhoods would have been saved, housing values would have leveled off, and investors would have mitigated their losses instead of having a complete loss — a loss the Banks created by false ratings and false appraisals.
  • In many if not most cases, the money from insurance, credit default swaps and other credit enhancements had already paid down or paid off the mortgage but that information was and remains withheld from the homeowner. 

So there you have it. Entire neighborhoods with tens of millions of dollars of home value reduced to rubble, with NO money going to investors, and in fact, with fees offsetting the money that was due them — fees that were generated by banks and servicers pursuing a  business model that was completely contrary to the interests of any of the real parties in interest. THE MIDDLEMEN HIJACKED THE FINANCIAL SYSTEM AND WE STILL HAVE NOT GRASPED THAT FACT.

If anything corroborates the widespread criticism that the Banks and servicers were acting against the interest of investors and homeowners, this is it. These are cold calculating decisions as to which homes would be kept and which ones abandoned. We already wrote here about the number of tax collectors that are now foreclosing tax liens on homes that were foreclosed by the banks and servicers.

Abandonment comes in many forms. Our politicians are abandoning us — those who are fighting it out day by day to stay alive and put food on the table — when they don’t step in and put an end to this madness. If the Banks choose to abandon the homes after they have reduced the value themselves, then they should be held accountable for each and every time they committed an illegal act in doing so. 

CLEVELAND TREASURER: THIS WAS A CASE OF “MONEY CHASING PEOPLE”

(CBS News)

Across America, recession-fueled foreclosures and plummeting home values have left countless properties abandoned and vulnerable to looting. As Scott Pelley reports, the problem has gotten so bad in Cleveland, Ohio, that county officials have demolished more than 1,000 homes this year – and plan to demolish 20,000 more – rather than let the blight spread and render nearby homes worthless.


The following is a partial script of “There Goes The Neighborhood” which aired on Dec. 18, 2011. Scott Pelley is the correspondent. Robert Anderson and Daniel Ruetenik, producers. See the full script or watch the segment by clicking the links above.

Chances are the home you’re in isn’t worth what it used to be. You may not have indulged in the real estate bubble with its liar’s loans and Wall Street greed, but you were stuck with the bill. Home values have dropped so far, so fast, that nearly 25 percent of mortgage holders today owe more than their house is worth.

And with unemployment so high, so long, many face foreclosure. If you thought your home value couldn’t drop any more, have a look up and down the block. You might say, “There goes the neighborhood.” The new threat from the great recession is the sudden surge in the number of abandoned houses. Vacant homes have become so ruinous to some neighborhoods that one city, Cleveland, decided it had to find a solution.

Perfectly good homes, worth 75, 100 thousand dollars or more a couple of years ago, are being ripped to splinters in Cleveland, Cuyahoga County, Ohio. Here, the great recession left one fifth of all houses vacant. The owners walked away because they couldn’t or wouldn’t keep paying on a mortgage debt that can be twice the value of the home. Cleveland waited four years for home values to recover and now they’ve decided to face facts and bury the dead.

Why destroy them? Jim Rokakis, a former county treasurer, showed us.

Jim Rokakis: We’re looking at a neighborhood that has almost as many vacant houses awaiting demolition as there are houses with people living in them. We have one here. One here. One here. One there.

Rokakis is leading the effort to tear down thousands of abandoned homes because they’re rotting their neighborhoods from the inside out. It often starts, he told us, when a vacant house becomes an open house to thieves.

Scott Pelley: It’s a nice house from the roof to about here. And then down here it’s been ripped to pieces. What’s goin’ on?

Rokakis: Well this is typical because this is as high as they could reach without using ladders. They ripped off the aluminum siding, which you’ll see on most of these houses. The aluminum and the vinyl siding comes off. It’s getting’ about a buck a pound.

Pelley: Essentially foreclosure scavengers have been through here?

Rokakis: The thieves have gone high tech. They know when evictions are occurring ’cause they’re posted online. And they will follow the sheriff. They’re usually there that afternoon or that evening.

Rokakis: So, in here, what you’re gonna see, well. I guess they took everything including the proverbial kitchen sink, right? The sink is gone. The plumbing is gone in this house. All the copper. Anything metal that had value is gone. The furnace is gone.

Pelley: The light fixture–

Rokakis: Light fixture came out–

Pelley: Is gone. How often is this happening in Cleveland?

Rokakis: This happens every day. And the foreclosure crisis creates this spiral, because as a result of this people are now more likely to leave neighborhoods like this. And as they leave, the scavengers come in and do the same thing to the house next door or across the street.

To make the house next door, worth more instead of less, vacant land created by demolition is often given to the neighbors, and sometimes turned into fields or gardens.

“KING” DEUTSCH CITED FOR DESTRUCTION OF CITIES

The article below was purloined from www.foreclosureblues.wordpress.com — the comments are mine. Neil Garfield

“According to the Federal Deposit Insurance Corporation (FDIC), Deutsche Bank now holds loans for American single-family and multi-family houses worth about $3.7 billion (€3.1 billion). The bank, however, claims that much of this debt consists of loans to wealthy private customers. (EDITOR’S NOTE: THUS ALL THE OTHER LOANS IT CLAIMS TO OWN, IT DOESN’T OWN)

The bank did not issue the mortgages for the many properties it now manages, and yet it accepted, on behalf of investors, the fiduciary function for its own and third-party CDOs. In past years, says mortgage expert Steve Dibert, real estate loans were “traded like football cards” in the United States. (Editor’s Note: This is why we say that the loan never makes it into the pool until litigation starts AND even if it was ever in the pool there is no guarantee it remained in the pool for more than a nanosecond). Sworn testimony from Deutsch employees corroborate that no assignments are done until “needed,” which means that in the mean time they are still legally owned by the loan originator. The loan originator therefore created an obligation that was satisfied simultaneously with the closing on the loan. The note is therefore evidence of an obligation that does not legally exist. Thus there are possible equitable theories under which investors could assert claims against the borrower, but the note and deed of trust or mortgage are only PART of the evidence and ONLY the investor has standing to bring that claim. Recent cases have rejected claims of “equitable transfer.”)

How many houses was he responsible for, Co was asked? “Two thousand,” he replied. But then he corrected himself, saying that 2,000 wasn’t the number of individual properties, but the number of securities packages being managed by Deutsche Bank. Each package contains hundreds of mortgages. So how many houses are there, all told, he was asked again? Co could only guess. “Millions,” he said.

The exotic financial vehicles are sometimes managed by an equally exotic firm: Deutsche Bank (Cayman) Limited, Boundary Hall, Cricket Square, Grand Cayman. In an e-mail dated Feb. 26, 2010, a Deutsche Bank employee from the Cayman Islands lists 84 CDOs and similar products, for which she identifies herself as the relevant contact person.

However, C-BASS didn’t just manage abstract securities. It also had a subsidiary to bring in all the loans that were subsequently securitized. By the end of 2005 the subsidiary, Litton Loan, had processed 313,938 loans, most of them low-value mortgages, for a total value of $43 billion.

EDITOR’S NOTE: Whether it is Milwaukee which is going the the way of Cleveland or thousands of other towns and cities, Deutsch Bank as a central player in more than 2,000 Special Purpose Vehicles, involving thousands more pools and sub-pools, is far and away the largest protagonist in the foreclosure crisis. This article, originally written in German, details just how deep they are into this mess, while at the same time disclaiming any part in it. It corroborates the article I wrote about the Deutsch Bank executive who said ON TAPE, which I have, that even though Deutsch is named as Trustee it knows nothing and does nothing.

SPIEGEL ONLINE
06/10/2010 07:42 AM
‘America’s Foreclosure King’
How the United States Became a PR Disaster for Deutsche Bank
By Christoph Pauly and Thomas Schulz

Deutsche Bank is deeply involved in the American real estate crisis. After initially profiting from subprime mortgages, it is now arranging to have many of these homes sold at foreclosure auctions. The damage to the bank’s image in the United States is growing.

The small city of New Haven, on the Atlantic coast and home to elite Yale University, is only two hours northeast of New York City. It is a particularly beautiful place in the fall, during the warm days of Indian summer.

But this idyllic image has turned cloudy of late, with a growing number of houses in New Haven looking like the one at 130 Peck Street: vacant for months, the doors nailed shut, the yard derelict and overgrown and the last residents ejected after having lost the house in a foreclosure auction. And like 130 Peck Street, many of these homes are owned by Germany’s Deutsche Bank.

“In the last few years, Deutsche Bank has been responsible for far and away the most foreclosures here,” says Eva Heintzelman. She is the director of the ROOF Project, which addresses the consequences of the foreclosure crisis in New Haven in collaboration with the city administration. According to Heintzelman, Frankfurt-based Deutsche Bank plays such a significant role in New Haven that the city’s mayor requested a meeting with bank officials last spring.

The bank complied with his request, to some degree, when, in April 2009, a Deutsche Bank executive flew to New Haven for a question-and-answer session with politicians and aid organizations. But the executive, David Co, came from California, not from Germany. Co manages the Frankfurt bank’s US real estate business at a relatively unknown branch of a relatively unknown subsidiary in Santa Ana.

How many houses was he responsible for, Co was asked? “Two thousand,” he replied. But then he corrected himself, saying that 2,000 wasn’t the number of individual properties, but the number of securities packages being managed by Deutsche Bank. Each package contains hundreds of mortgages. So how many houses are there, all told, he was asked again? Co could only guess. “Millions,” he said.

Deutsche Bank Is Considered ‘America’s Foreclosure King’

Deutsche Bank’s tracks lead through the entire American real estate market. In Chicago, the bank foreclosed upon close to 600 large apartment buildings in 2009, more than any other bank in the city. In Cleveland, almost 5,000 houses foreclosed upon by Deutsche Bank were reported to authorities between 2002 and 2006. In many US cities, the complaints are beginning to pile up from homeowners who lost their properties as a result of a foreclosure action filed by Deutsche Bank. The German bank is berated on the Internet as “America’s Foreclosure King.”

American homeowners are among the main casualties of the financial crisis that began with the collapse of the US real estate market. For years, banks issued mortgages to homebuyers without paying much attention to whether they could even afford the loans. Then they packaged the mortgage loans into complicated financial products, earning billions in the process — that is, until the bubble burst and the government had to bail out the banks.

Deutsche Bank has always acted as if it had had very little to do with the whole affair. It survived the crisis relatively unharmed and without government help. Its experts recognized early on that things could not continue as they had been going. This prompted the bank to get out of many deals in time, so that in the end it was not faced with nearly as much toxic debt as other lenders.

But it is now becoming clear just how deeply involved the institution is in the US real estate market and in the subprime mortgage business. It is quite possible that the bank will not suffer any significant financial losses, but the damage to its image is growing by the day.

‘Deutsche Bank Is Now in the Process of Destroying Milwaukee’

According to the Federal Deposit Insurance Corporation (FDIC), Deutsche Bank now holds loans for American single-family and multi-family houses worth about $3.7 billion (€3.1 billion). The bank, however, claims that much of this debt consists of loans to wealthy private customers.

More damaging to its image are the roughly 1 million US properties that the bank says it is managing as trustee. “Some 85 to 90 percent of all outstanding mortgages in the USA are ultimately controlled by four banks, either as trustees or owners of a trust company,” says real estate expert Steve Dibert, whose company conducts nationwide investigations into cases of mortgage fraud. “Deutsche Bank is one of the four.”

In addition, the bank put together more than 25 highly complex real estate securities deals, known as collateralized debt obligations, or CDOs, with a value of about $20 billion, most of which collapsed. These securities were partly responsible for triggering the crisis.

Last Thursday, Deutsche Bank CEO Josef Ackermann was publicly confronted with the turmoil in US cities. Speaking at the bank’s shareholders’ meeting, political science professor Susan Giaimo said that while Germans were mainly responsible for building the city of Milwaukee, Wisconsin, “Deutsche Bank is now in the process of destroying Milwaukee.”

As Soon as the Houses Are Vacant, They Quickly Become Derelict

Then Giaimo, a petite woman with dark curls who has German forefathers, got to the point. Not a single bank, she said, owns more real estate affected by foreclosure in Milwaukee, a city the size of Frankfurt. Many of the houses, she added, have been taken over by drug dealers, while others were burned down by arsonists after it became clear that no one was taking care of them.

Besides, said Giaimo, who represents the Common Ground action group, homeowners living in the neighborhoods of these properties are forced to accept substantial declines in the value of their property. “In addition, foreclosed houses are sold to speculators for substantially less than the market value of houses in the same neighborhood,” Giaimo said. The speculators, according to Giaimo, have no interest in the individual properties and are merely betting that prices will go up in the future.

Common Ground has posted photos of many foreclosed properties on the Internet, and some of the signs in front of these houses identify Deutsche Bank as the owner. As soon as the houses are vacant, they quickly become derelict.

A Victorian house on State Street, painted green with red trim, is now partially burned down. Because it can no longer be sold, Deutsche Bank has “donated” it to the City of Milwaukee, one of the Common Ground activists reports. As a result, the city incurs the costs of demolition, which amount to “at least $25,000.”

‘We Can’t Give Away Money that Isn’t Ours’

During a recent meeting with US Treasury Secretary Timothy Geithner, representatives of the City of Milwaukee complained about the problems that the more than 15,000 foreclosures have caused for the city since the crisis began. In a letter to the US Treasury Department, they wrote that Deutsche Bank is the only bank that has refused to meet with the city’s elected representatives.

Minneapolis-based US Bank and San Francisco-based Wells Fargo apparently took the complaints more seriously and met with the people from Common Ground. The activists’ demands sound plausible enough. They want Deutsche Bank to at least tear down those houses that can no longer be repaired at a reasonable cost. Besides, Giaimo said at the shareholders’ meeting, Deutsche Bank should contribute a portion of US government subsidies to a renovation fund. According to Giaimo, the bank collected $6 billion from the US government when it used taxpayer money to bail out credit insurer AIG.

“It’s painful to look at these houses,” Ackermann told the professor. Nevertheless, the CEO refused to accept any responsibility. Deutsche Bank, he said, is “merely a sort of depository for the mortgage documents, and our options to help out are limited.” According to Ackermann, the bank, as a trustee for other investors, is not even the actual owner of the properties, and therefore can do nothing. Besides, Ackermann said, his bank didn’t promote mortgage loans with terms that have now made the payments unaffordable for many families.

The activists from Wisconsin did, however, manage to take home a small victory. Ackermann instructed members of his staff to meet with Common Ground. He apparently envisions a relatively informal and noncommittal meeting. “We can’t give away money that isn’t ours,” he added.

Deutsche Bank’s Role in the High-Risk Loans Boom

Apparently Ackermann also has no intention to part with even a small portion of the profits the bank earned in the real estate business. Deutsche Bank didn’t just act as a trustee that — coincidentally, it seems — manages countless pieces of real estate on behalf of other investors. In the wild years between 2005 and 2007, the bank also played a central role in the profitable boom in high-risk mortgages that were marketed to people in ways that were downright negligent.

Of course, its bankers didn’t get their hands dirty by going door-to-door to convince people to apply for mortgages they couldn’t afford. But they did provide the distribution organizations with the necessary capital.

The Countrywide Financial Corporation, which approved risky mortgages for $97.2 billion from 2005 to 2007, was the biggest provider of these mortgages in the United States. According to the study by the Center for Public Integrity, a nonprofit investigative journalism organization, Deutsche Bank was one of Countrywide’s biggest financiers.

Ameriquest — which, with $80.7 billion in high-risk loans on its books in the three boom years before the crash, was the second-largest subprime specialist — also had strong ties to Deutsche Bank. The investment bankers placed the mortgages on the international capital market by bundling and structuring them into securities. This enabled them to distribute the risks around the entire globe, some of which ended up with Germany’s state-owned banks.

‘Deutsche Bank Has a Real PR Problem Here’

After the crisis erupted, there were so many mortgages in default in 25 CDOs that most of the investors could no longer be serviced. Some CDOs went bankrupt right away, while others were gradually liquidated, either in full or in part. The securities that had been placed on the market were underwritten by loans worth $20 billion.

At the end of 2006, for example, Deutsche Bank constructed a particularly complex security known as a hybrid CDO. It was named Barramundi, after the Indo-Pacific hermaphrodite fish that lives in muddy water. And the composition of the deal, which was worth $800 million, was muddy indeed. Many securities that were already arcane enough, like credit default swaps (CDSs) and CDOs, were packaged into an even more complex entity in Barramundi.

Deutsche Bank’s partner for the Barramundi deal was the New York investment firm C-BASS, which referred to itself as “a leader in purchasing and servicing residential mortgage loans primarily in the Subprime and Alt-A categories.” In plain language, C-BASS specialized in drumming up and marketing subprime mortgages for complex financial vehicles.

However, C-BASS didn’t just manage abstract securities. It also had a subsidiary to bring in all the loans that were subsequently securitized. By the end of 2005 the subsidiary, Litton Loan, had processed 313,938 loans, most of them low-value mortgages, for a total value of $43 billion.

One of the First Victims of the Financial Crisis

Barramundi was already the 19th CDO C-BASS had issued. But the investment firm faltered only a few months after the deal with Deutsche Bank, in the summer of 2007. C-BASS was one of the first casualties of the financial crisis.

Deutsche Bank’s CDO, Barramundi, suffered a similar fate. Originally given the highest possible rating by the rating agencies, the financial vehicle stuffed with subprime mortgages quickly fell apart. In the spring of 2008, Barramundi was first downgraded to “highly risky” and then, in December, to junk status. Finally, in March 2009, Barramundi failed and had to be liquidated. (EDITOR’S NOTE: WHAT HAPPENED TO THE LOANS?)

While many investors lost their money and many Americans their houses, Deutsche Bank and Litton Loan remained largely unscathed. Apparently, the Frankfurt bank still has a healthy business relationship with the subprime mortgage manager, because Deutsche Bank does not play a direct role in any of the countless pieces of real estate it holds in trust. Other service providers, including Litton Loan, handle tasks like collecting mortgage payments and evicting delinquent borrowers.

The exotic financial vehicles are sometimes managed by an equally exotic firm: Deutsche Bank (Cayman) Limited, Boundary Hall, Cricket Square, Grand Cayman. In an e-mail dated Feb. 26, 2010, a Deutsche Bank employee from the Cayman Islands lists 84 CDOs and similar products, for which she identifies herself as the relevant contact person.

Trouble with US Regulatory Authorities and Many Property Owners

The US Securities and Exchange Commission (SEC) is now investigating Deutsche Bank and a few other investment banks that constructed similar CDOs. The financial regulator is looking into whether investors in these obscure products were deceived. The SEC has been particularly critical of US investment bank Goldman Sachs, which is apparently willing to pay a record fine of $1 billion to avoid criminal prosecution.

Deutsche Bank has also run into problems with the many property owners. The bank did not issue the mortgages for the many properties it now manages, and yet it accepted, on behalf of investors, the fiduciary function for its own and third-party CDOs. In past years, says mortgage expert Steve Dibert, real estate loans were “traded like football cards” in the United States.

Amid all the deal-making, the deeds for the actual properties were often lost. In Cleveland and New Jersey, for example, judges invalidated foreclosures ordered by Deutsche Bank, because the bank was unable to come up with the relevant deeds.

Nevertheless, Deutsche Bank’s service providers repeatedly try to have houses vacated, even when they are already occupied by new owners who are paying their mortgages. This practice has led to nationwide lawsuits against the Frankfurt-based bank. On the Internet, angry Americans fighting to keep their houses have taken to using foul language to berate the German bank.

“Deutsche Bank now has a real PR problem here in the United States,” says Dibert. “They want to bury their head in the sand, but this is something they are going to have to deal with.”

Translated from the German by Christopher Sultan

WHAT NOT TO DO IN PLEADING AND MOTION PRACTICE

REGISTER NOW FOR DISCOVERY AND MOTION PRACTICE WORKSHOP

(2006) Here is a case that should not have been filed (entire text of opinion below) and was argued improperly. The homeowners clearly lost because they put their eggs in the wrong basket. Nonetheless, the opinion is a pretty good compilation of the various statutes, rules and regulations affecting mortgages and their enforcement.

An interest quote used against the “homeowner” which itself was a trust, is that the word “interest” should be interpreted to mean “Ownership interest”. This is precisely the argument I advance regarding the holders of of certificates or even non-certificated mortgage-backed securities whose indenture is the prospectus. Those investors received at the very least a “beneficial” interest in the loans. Thus either the prospectus, the certificate or both are starting points, in addition to the note signed by the borrower, as evidence of the terms and status of the obligation.

CAROL R. ROSEN, Plaintiff,
v.
U.S. BANK NATIONAL ASSOCIATION as TRUSTEE, EQUIFIRST CORP., AMERICAN MORTGAGE SPECIALISTS, INC., and JOHN and JANE DOES 1-10, Defendants.

CIV-06-0427 JH/LAM.

  1. DON’T TRY OUT NEW THEORIES IN PLEADINGS THAT SOUND LIKE THE CONSPIRACY THEORIES OF CRAZY PEOPLE, EVEN IF YOU THINK YOU ARE RIGHT. IF YOU KNOW IN ADVANCE THAT THE THEORY IS OUT OF BOUNDS IN THE PERCEPTION OF MOST PEOPLE, USE SOMETHING ELSE — there are plenty of simpler basic principles of law that will enhance rather than reduce your credibility.
  2. Beware of companies that claim to have a magic bullet to end your mortgage problems. Securitization is complex, and you need to focus on breaking it down to its simplest elements.
  3. Don’t try to win your case on a knock-out punch in the first hearings. Plan your strategy around education of the judge as to what happened in YOUR loan, using published reports, expert declarations and forensic analysis as corroborative.
  4. Don’t even think the Judge will indict the entire financial industry for what happened in your case. This will diminish your credibility.
  5. Plead causes of action that are familiar to the Judge and make sure you know and plead all the elements of those causes of action.
  6. Focus in pleadings and hearings as much as possible on the premises with which nobody could disagree — like every case should be heard on the merits, that you have a right to the same presumptions as anyone else who is pleading a claim or defense, and that you need to conduct discovery because there are facts and documents known to the defendants for which it would be over-burdensome and hugely expensive for you to get any other way.
  7. Don’t expect the Judge to be sympathetic. In most cases Judges still look at securitized mortgages like any other mortgage. In most cases Judges see challanges to foreclosures as desperate attempts to stave of the inevitable. Lead and repeat your main message. Your main message is that it is indisputable that if the facts you are pleading are true, then you are entitled to the precise relief you have demanded. KEEP IT SIMPLE. Use each hearing to repeat the previous “lesson” and add new lessons for the Judge.
  8. Do not avoid arguments of opposing counsel. Challenge them in a direct manner showing the Judge that if the attorney was correct in what he is saying, then he would be right and his client would win (if that is the case) or showing that the if the attorney was correct he still would not win his case. THINK BEFORE YOU SPEAK. PLAN BEFORE YOU APPEAR.
  9. DO NOT FALL INTO THE TRAP OF ALLOWING OPPOSING COUNSEL TO PROFFER FACTS AS THOUGH THEY WERE TRUE. Challenge that tactic by admitting that counsel has a right to put on evidence in support of what he/she is arguing but that the hearing is not the trial and you have evidence too, and you’ll have more evidence if you are allowed to proceeds on the merits of your claim. By all means, once opposing counsel has “testified” include in your remarks prepared script as to YOUR facts and YOUR conclusions. END WITH THE INESCAPABLE CONCLUSION THAT THERE IS OBVIOUSLY AN ISSUE OF FACT AND WHETHER THE JUDGE THINKS YOU WILL WIN OR NOT IS IMMATERIAL. YOU HAVE A RIGHT TO BE HEARD ON THE MERITS AND A RIGHT TO CONDUCT DISCOVERY. If opposing counsel is so sure that what you are alleging is frivolous, then there are many remedies available including summary judgment. But it is not until the FACTS come out that any of those remedies arise.
  10. Do not characterize your opposition as part of an evil axis of power. They may well have contributed to the Judge’s campaign, or otherwise have indirect relationships that do not merit recusal. This is not about whether banks are evil, it is about why are all these entities necessary to simply foreclose on a mortgage? If it is as simple as THEY say, why don’t they have the paperwork to back it up?
  11. DO NOT SAY ANYTHING YOU CAN’T BACK UP. This does NOT mean you have all the proof you need to win your case when you file your first pleading. It means that you know that if you are allowed to proceed, and you actually get the disclosure and discovery of the true facts, you will win.

United States District Court, D. New Mexico.

November 8, 2006.

Carol Rosen, Albuquerque, NM, Attorney for Plaintiff.

Rhodes & Salmon, P.C., William C. Salmon, Albuquerque, NM, Attorney for Defendant U.S. Bank.

Karla Poe, Rodey, Dickason, Sloan, Akin & Robb, P.A., Albuquerque, NM, Kimberly Smith Rivera, McGlinchey Staford, PLLC, Cleveland, OH, Attorney for Defendant EquiFirst.

MEMORANDUM OPINION AND ORDER

JUDITH HERRERA, District Judge.

THIS MATTER is before the Court on Defendant U.S. Bank National Association’s (“U.S. Bank”) Motion to Dismiss or Stay [Doc. 23, filed Aug. 7, 2006], and Defendant EquiFirst Corporation, Inc.’s (“EquiFirst”) Motion for Judgment on the Pleadings [Doc. 28, filed Sept. 15, 2006]. The Court has reviewed the motions, the record in this case, and the relevant law, and concludes that the motions are well-taken and should be GRANTED.

I. FACTUAL AND PROCEDURAL BACKGROUND

Before turning to the facts presented in the pleadings in this case, the Court takes judicial notice of cases involving D. Scott Heineman and Kurt F. Johnson, who are the Trustees of the Rosen Family Trust, of which Plaintiff Carol R. Rosen is a beneficiary. See Doc. 17, Ex. B ¶ 4.A. Heineman and Johnson

were the proprietors of a business that claimed to help homeowners eliminate their mortgages. [Heineman and Johnson’s] business operated under the “vapor money” theory of lending, which holds that loans funded through wire transfers rather than through cash are unenforceable. [They] claimed that, through a complicated series of transactions, they could take advantage of this loophole and legally eliminate their clients’ mortgages.

In 2004, Johnson and Heineman filed a series of lawsuits against mortgage companies on behalf of their clients, seeking, among other things, a declaration that any mortgages on their clients’ properties were void. All fifteen cases were . . . found. . . to be “frivolous and . . . filed in bad faith.”

. . . .

On September 22, 2005, a federal grand jury indicted [Heineman and Johnson] on charges of mail fraud, wire fraud, and bank fraud.

United States v. Heineman, 2006 WL 2374580, *1 (N. D. Cal. Aug. 15, 2006). The step-by-step method Heineman and Johnson advertised over the internet and used to attempt to eliminate mortgages is as follows. They would have

the homeowner prepare and sign a promissory note as well as a loan agreement for the encumbered property. The homeowner then sends these documents to [Heineman and Johnson] with a cashier’s check “of $3,000 [to eliminate a] 1st mortgage, and $1,500 [to eliminate] a second mortgage or home equity line of credit.” Once this initial fee is received, Heineman and Johnson set up a Family Estate Amenable Complex trust in the homeowner’s name, i.e., the Frances Kenny Family Trust. Heineman and Johnson name themselves the trustees. Title to the homeowner’s property is transferred to the trust.

Now in charge as trustees, Heineman and Johnson approach the bank or lending institution that lent the homeowner the money to purchase the property. They make a “Presentment” to the bank in the form of “a cash-backed bond in double-amount of the promissory note.” The “bond” is allegedly “a valid, rated instrument backed by a $120 Million Letter of Credit against the Assets of an 85-year old, $800 Million Swiss Trust Company.” This is essentially an offer to the lender to satisfy the borrower’s indebtedness. The alleged “bond,” however, is a ploy.

. . . .

In addition to the “bond,” Heineman and Johnson hire “Trustee lawyers” to “begin the legal process by sending out a legal complaint in the form of a CPA Report that outlines 40 or more different federal laws that have been violated in the ‘lending process.'” The lending institution thereafter has a certain time frame within which to respond to the complaint. Purportedly, the homeowner will be notified by plaintiffs’ legal team when the loan is “satisfied.” The homeowner’s “lender may or may not let [you] know or acknowledge this.”

Once the loan is satisfied, “re-financing begins.” The homeowner is told to “refinance [his] property at the maximum loan to value ratio possible” with a new lender. The alleged “purpose of this new re-financing is for you, the client, to compensate the Provider and CCR.” Heineman and Johnson are the “Provider.” They run CCR. The proceeds from this new loan are disbursed as follows: “The Provider receives 50%. CCR receives 25%. You, the client, receives the other 25%.” This entire process takes “5-7 months in most cases.” And, “[t]he end result is that the [homeowner] gets free and clear title to the home and a good amount of cash in hand.”

[Heineman and Johnson], however, perpetrate a fraud to “satisfy” the original indebtedness. One of the documents Heineman and Johnson present to the bank or lending institution is entitled a “power of attorney.” This document demands that the lender sign and thereby acknowledge that it has given the homeowner “vapor money” in exchange for an interest (via a deed of trust) in the subject property at the time of financing. A provision of this “power of attorney” provides that the lender’s “silence is deemed consent.” When the lender fails to respond, [Heineman and Johnson] execute the power of attorney. They then sign a deed of reconveyance reconveying the lender’s security interest in the property to Heineman and Johnson. The forged power of attorney and the deed of reconveyance are duly recorded at the county recorder’s office. The county’s records thus show a power of attorney from the lender granting Heineman and Johnson the right to sign the deed of reconveyance and the reconveyance from the original lender. The title seems clear and unencumbered. The lender is unaware of the maneuver.

[Heineman and Johnson] then turn around and from an unsuspecting new lender seek a loan to refinance the property. When the new lender conducts a preliminary title search, it discovers the power of attorney and deed of reconveyance, both of which appear to have been validly executed. From the new lender’s point of view, the property appears to be unencumbered. And it is thus willing to refinance the property.

. . . .

At the conclusion of this process, the borrower is in even worse condition than when he or she first looked to [Heineman and Johnson] for debt relief. Two lenders believe that they have valid security interests in the subject property. When the homeowner defaults on both loans, both lenders commence foreclosure proceedings. In response, Heineman and Johnson, as trustees, file a bankruptcy petition on behalf of the borrower or file suit alleging that no enforceable debt accrued from either lender because the loans were funded through wire transfers rather than cash. Fifteen such lawsuits were filed in [the Northern District of California] on such a “vapor money” theory.

Frances Kenny Family Trust v. World Sav. Bank FSB, 2005 WL 106792 at *1-*3 (N. D. Cal., Jan. 19, 2005).

The following facts are taken from Rosen’s Amended Complaint and from the exhibits attached to her complaint and to U.S. Bank’s Answer. They demonstrate a pattern strikingly and disturbingly similar to the one described above. In December 2004, Rosen quitclaimed her property located on Wellesley Drive in Albuquerque, NM to Heineman and Johnson, as Trustees of the Rosen Family Trust. See Doc. 17, Ex. B ¶ 4.A. Colonial Savings held a mortgage secured by the Wellesley property. On March 3, 2005, Heineman, acting as “Attorney-in-Fact” for Colonial Savings, executed and recorded a notarized “Discharge of Mortgage” purporting to release Rosen from her mortgage of $86,250. Id. Ex. A. The Discharge stated that the mortgage had been “fully paid, satisfied, and discharged” and that Heineman’s power of attorney to act on behalf of Colonial Savings was granted “through the doctrine of agency by estoppel.” Id. The Vice President of Colonial Savings, however, recorded an “Affidavit of Fraudulent Recording of Discharge of Mortgage,” disputing that Heineman had any authority to act on Colonial’s behalf or discharge the mortgage and attesting that the note and mortgage had not been paid. Id.

On April 27, 2005, Rosen submitted a loan application to Defendant American Mortgage Specialists, Inc. (“American Mortgage”), a mortgage broker located in Arizona, for the purpose of refinancing the Wellesley property. See Am. Compl. at ¶¶ 8, 10-11 & Ex. A (Doc. 13). Rosen subsequently executed a note for $198,305 in favor of EquiFirst, secured by a Deed of Trust on the Wellesley property. See id. Ex. A, B. The mortgage provides that, if the note was sold or the Loan Servicer was changed, EquiFirst would give Rosen written notice, together with “any other information RESPA requires.” Id. Ex. B at 13.

Rosen signed the note and mortgage on May 17, 2005. See id. at 16. The loan was closed that same day, and proceeds were disbursed on May 23, 2005, including over $29,000 to third-party creditors. See Am. Compl. Ex. G. Colonial Savings is not included in the list of payoff recipients. See id.

Lines 801, 812, and 814 of the closing statement, under the heading “ITEMS PAYABLE IN CONNECTION WITH LOAN,” show that a 1% “loan origination fee” of $1983.05 as well as “OTHER BRK FEES” of $1762 were paid to American Mortgage from Rosen’s loan proceeds, and that a $940 “LENDER ORIGINATION” fee was paid to EquiFirst from Rosen’s loan proceeds. Id. at 2. In addition, line 813 of the closing statement states: “BROKER FEE PAID BY LENDER YSP $3,966.10 POC.[1]Id. This represented a yield spread premium that EquiFirst additionally paid to American Mortgage upon the loan closing.

On June 21, 2005, EquiFirst and Homecomings Financial notified Rosen that the servicing of her mortgage loan (i.e., the right to collect payment from her) had been transferred to Homecomings Financial and that the effective date of transfer would be June 29, 2005. See Am. Compl., Ex. C. The transfer of servicing did not affect the terms or conditions of the mortgage. See id. Further, during the 60 days following the effective date of transfer, timely loan payments made to EquiFirst could not be treated as late by Homecomings Financial. See id.

On July 11, 2005, Rosen executed a Grant Deed granting “to D. Scott Heineman and Kurt F. Johnson, Trustees of Rosen Family Trust, for a valuable consideration . . .” her Wellesley Drive property that secured her EquiFirst mortgage. Am. Compl. at ¶ 26, Ex. D. The complaint does not state whether Rosen gave Homecomings Financial or EquiFirst notice of her transfer of ownership of the property to the Trust. According to her “Affidavit of Sum Certain,” Rosen made only three mortgage payments between the time she closed the EquiFirst loan in May 2005 and August 7, 2006, when she filed the affidavit. See Doc. 22.

On January 23, 2006, EquiFirst granted, assigned, and transferred its beneficial interest in Rosen’s mortgage to Defendant U.S. Bank as Trustee. See Am. Compl., Ex. E. U.S. Bank initiated foreclosure proceedings on Rosen’s mortgage and the Wellesley Drive property on February 1, 2006, in state district court. See Am. Compl. ¶ 28. On May 11, 2006, Rosen mailed a “notice of rescission” to EquiFirst, U.S. Bank, and Homecomings Financial. See id. ¶ 42, Ex. I. She alleged a right to rescind her mortgage transaction based on her claim that, when she closed the loan in May 2005, “EquiFirst failed to meet the requirements to give me accurate material disclosures and the proper notice of the right to rescind.” Am. Compl., Ex. I ¶ 7. She also claimed that “[a] broker’s fee, in the form of a yield spread premium, was fraudulently assessed to the loan transaction, . . . [which] renders the HUD 1/Settlement Statement defective, inter alia, because it does not state to whom the fee was paid . . . [and because] the charge was encoded, to the extent that no consumer or most any other person could decipher [it] . . . .” Id. ¶ 10B. Rosen claimed that these failures extended her statutory right to rescind from the regular three-day period to a three-year period. See id. ¶ 10D. Homecomings Financial, through counsel, responded to Rosen’s May 11 letter on June 6, 2006. It sent Rosen a copy of the Notice of Right to Cancel she signed on May 17, 2005, in which she acknowledged receipt of two copies of the Notice. See Am. Compl., Ex. H. It asserted that the abbreviations of “YSP” and “POC” “are standard terms within the mortgage banking industry” and that, if she’d had any concerns about those terms, she should have addressed them at closing. Id. Finding no basis for rescission, it refused to rescind the loan transaction.

Rosen filed her initial complaint in federal court on May 19, 2006, seeking declaratory and injunctive relief and monetary damages. See Doc. 1. She filed an amended complaint on July 17, 2006, that contains six claims. Count One is for rescission under 15 U.S.C. § 1635 and § 226.23 of Regulation Z of the Truth in Lending Act (“TILA”). See Am. Compl. ¶¶ 33, 48. She claims that recission “extinguishes any liability Plaintiff may have had to Defendants for finance or other charges arising from the [loan] Transaction,” id. ¶ 49, and that “Defendants [sic] failure to take action to reflect the termination of the security interest in the property within twenty . . . days of [her] rescission. . . releases [her] from any liability whatsoever to Defendants.” Id. ¶ 50.

Count Two alleges damages under 15 U.S.C. § 1640 for Defendants’ failure to comply with § 1635 after Defendants received Rosen’s rescission letter. Id. ¶¶ 51-52. Count Three is for recoupment of a statutory penalty provided under § 1640. In support, Rosen lists twenty-eight alleged violations of various federal and state statutes and regulations. See id. ¶¶ 54(a)-(bb).

Count Four alleges violation of a right to Equal Credit Opportunity as described in 12 C.F.R. § 202.14. In support, Rosen alleges that the Defendants failed to make clear and conspicuous disclosures, and that various documents were confusing. See id. ¶ 55.

Count Five alleges violations of the Real Estate Settlement Procedures Act (“RESPA”), 12 U.S.C. §§ 2601-17. Rosen claims that Defendants failed to give her fifteen days notice before the loan servicing contract was assigned from EquiFirst to Homecomings Financials in violation of § 2605(b), see Am. Compl. ¶¶ 57-59, and that EquiFirst’s payment of the yield-spread premium to American Mortgage constituted an illegal fee or “kickback” violating 12 U.S.C. § 2607(a)[2], see id. ¶ 60. Additionally, she alleges that EquiFirst and American Mortgage engaged in “fee splitting” in violation of § 2607(d)[3]. Id. ¶ 61.

Court Six alleges violation of the New Mexico Unfair Practices Act, N.M.S.A. §§ 57-12-1 et seq., based on the same allegations that EquiFirst and American Mortgage engaged in illegal kickback and fee-splitting activities that caused her to pay a higher interest rate. See Am. Compl. ¶¶ 63-68, 76.

Rosen seeks: (i) a judicial declaration that she validly rescinded the loan and is not liable for any finance or other charges and has no liability whatsoever to Defendants; (ii) an order requiring Defendants to terminate their security interest in her home; (iii) an injunction enjoining Defendants from maintaining foreclosure proceedings or otherwise taking steps to deprive her of ownership of the property; (iv) an award of statutory damages and penalties; and (v) attorney fees. See id. at 26-27.

II. LEGAL STANDARDS

U.S. Bank’s motion to dismiss is brought pursuant to Fed R. Civ. P. 12(b)(6). It asserts that Rosen has failed to state claims under particular statutes and that other claims are time-barred. It urges the Court to abstain from asserting jurisdiction over any remaining claims that should be resolved in the pending state foreclosure action. EquiFirst moves for dismissal under Fed. R. Civ. P. 12(c) (“Judgment on the Pleadings”), asserting that it is entitled to judgment as a matter of law on Counts One through Four and Count Six, and on part of Count Five of Rosen’s amended complaint. In resolving motions brought under either Rule 12(b)(6) or 12(c), the Court must

accept all facts pleaded by the non-moving party as true and grant all reasonable inferences from the pleadings in favor of the same. Judgment on the pleadings should not be granted “unless the moving party has clearly established that no material issue of fact remains to be resolved and the party is entitled to judgment as a matter of law.” United States v. Any & All Radio Station Transmission Equip., 207 F.3d 458, 462 (8th Cir. 2000). As with . . . motions to dismiss under Rule 12(b)(6), documents attached to the pleadings are exhibits and are to be considered in [reviewing] . . . [a] 12(c) motion. See Hall v. Bellmon, 935 F.2d 1106, 1112 (10th Cir. 1991); Fed. R. Civ. P. 10(c).

Park Univ. Enter., Inc. v. Am. Cas. Co. of Reading, PA, 442 F.3d 1239, 1244 (10th Cir. 2006).

It is true that dismissal under Rule 12(b)(6) is a harsh remedy which must be cautiously studied, not only to effectuate the spirit of the liberal rules of pleading but also to protect the interests of justice. It is also well established that dismissal of a complaint is proper only if it appears to a certainty that plaintiff is entitled to no relief under any state of facts which could be proved in support of the claim.

Moore v. Guthrie, 438 F.3d 1036, 1039 (10th Cir. 2006) (internal quotation marks and citations omitted). “The court’s function on a Rule 12(b)(6) motion is not to weigh potential evidence that the parties might present at trial, but to assess whether the plaintiff’s complaint alone is legally sufficient to state a claim for which relief may be granted.” Miller v. Glanz, 948 F.2d 1562, 1565 (10th Cir. 1991).

In reviewing a pro se complaint, a court applies the same legal standards applicable to pleadings counsel has drafted, but is mindful that the complaint must be liberally construed. See Hall v. Bellmon, 935 F.2d 1106, 1110 (10th Cir. 1991). But “[t]he broad reading of the plaintiff’s complaint does not relieve the plaintiff of alleging sufficient facts on which a recognized legal claim could be based.” Id.

[T]he [pro se] plaintiff whose factual allegations are close to stating a claim but are missing some important element that may not have occurred to him, should be allowed to amend his complaint. Nevertheless, conclusory allegations without supporting factual averments are insufficient to state a claim on which relief can be based. This is so because a pro se plaintiff requires no special legal training to recount the facts surrounding his alleged injury, and he must provide such facts if the court is to determine whether he makes out a claim on which relief can be granted. Moreover, in analyzing the sufficiency of the plaintiff’s complaint, the court need accept as true only the plaintiff’s well-pleaded factual contentions, not his conclusory allegations.

Id. (citations omitted). The legal sufficiency of a complaint is a question of law. See Moore, 438 F.3d at 1039.

III. ANALYSIS

A. ROSEN FAILS TO STATE A CLAIM FOR RESCISSION.

In transactions covered by the TILA, the borrower is entitled to rescind the transaction. See § 1635(a). The right to rescind lasts for three days, if the lender has given the borrower the disclosures required by the TILA and a notice of the right to rescind; the right lasts up to three years if the lender fails to give the requisite disclosures and notice, unless the borrower sells or transfers the property to someone else before the end of the three-year period[4]. See § 1635(f). EquiFirst asserts that Rosen’s right to rescind expired by operation of law upon her transfer of her ownership interest in the Wellesley Drive property to Heineman and Johnson as Trustees of the Rosen Family Trust. Rosen contends, however, that because she did not actually sell the Wellesley Drive property and maintains a beneficial interest in remaining in the house (apparently by the terms of the Trust, which is not part of the record), her right to rescind has not expired.

Congress gave the Board of Governors of the Federal Reserve System broad authority to promulgate extensive regulations implementing the TILA, see 15 U.S.C. § 1604(a), which it calls Regulation Z, see 12 C.F.R. § 226.1(a). In interpreting and implementing § 1635(f), Regulation Z specifically provides that the borrower’s right to rescind immediately expires not only “upon sale of the property,” but also “upon transfer of all of the [borrower’s] interest in the property.” 12 C.F.R. § 226.23(a)(3). The parties do not point to anything within the TILA, Regulation Z, or case law that further defines the extent of the borrower’s interest that must be transferred in order to trigger expiration of the right to rescind, and the Court has found none in its own research.

But the Court concludes that the words “all of the [borrower’s] interest” means all of the borrower’s ownership or title interest for several reasons. First, the Board clarified through § 226.23(a)(3) that something less than an outright sale of the property triggers expiration of the right to rescind. Second, because TILA provides for penalties when a lender fails to comply with rescission requirements and gives the lender only twenty days to return earnest money, down payments, and accrued interest and payments and to remove the security interest after receiving notice of the recission letter, see 15 U.S.C. § 1635(b), the lender must be able to quickly ascertain whether the borrower still legally owns the property securing the loan and has a statutory right to rescind. The only way to timely accomplish this goal is to examine the real property records in the county where the real property title is recorded. If, as here, those records demonstrate that the borrower has transferred her ownership and legal interests in the property, for valuable consideration, to another entity controlled by someone other than the borrower, the lender can reasonably contest the borrower’s right to rescission without fear of penalty. Trust documents that may contractually grant various types of beneficial interests after the sale or transfer of all of a borrower’s ownership interest in property are not generally filed in the public records, and a lender should not be required to assume that a beneficial interest of some sort may secretly exist that would hypothetically extend the borrower’s right to rescission. It is therefore consistent with the TILA’s goals to interpret “interest” as “ownership interest. See Williams v. Homestake Mortgage Co., 968 F.2d 1137, 1140 (11th Cir. 1992) (noting that “another goal of § 1635(b) [‘s recission requirement] is to return the parties most nearly to the position they held prior to entering the transaction”).

“Although the right to rescind is statutorily granted [in the TILA], it remains an equitable doctrine subject to equitable considerations.. . . Thus, district courts are to consider traditional equitable notions in applying [the TILA’s] statutory grant of rescission.” Brown v. Nat’l Permanent Fed. Sav. & Loan Ass’n , 683 F.2d 444, 447 (D.C. Cir. 1982); see In re Ramirez, 329 B.R. 727, 738 (D. Kan. 2005) (stating that, “[r]escission, whether statutory or common law, is an equitable remedy. Its relief, in design and effect, is to restore the parties to their pre-transaction positions. The TILA authorizes the courts to apply equitable principles to the rescission process. . . . [W]ithin the context of the TILA, rescission is a remedy that restores the status quo ante.”). Because Rosen has transferred her ownership of the property to a third party, the parties cannot be returned to their pre-transaction positions, which would unfairly prejudice EquiFirst if she maintained the right to recission. Cf., e.g., Powers v. Sims & Levin, 542 F.2d 1216, 1221-22 (4th Cir. 1976) (holding that a court could condition the borrowers’ continuing right of rescission upon tender to the lender of all of the funds spent by the lender in discharging the earlier indebtedness of the borrowers as well as the value of the home improvements). Without legal ownership of the Wellesley property to use as security for another mortgage, Rosen most likely could not return the $198,305 EquiFirst gave to her and her creditors. Equity therefore requires that the Court interpret § 226.23(a)(3) to provide for expiration of the right to rescission upon the transfer of a borrower’s ownership interest in the property securing a loan. See Beach v. Ocwen Fed. Bank, 523 U.S. 410, 411-12, 417-19 (1998) (noting that “a statutory right of rescission could cloud a bank’s title on foreclosure, [so] Congress may well have chosen to circumscribe that risk” by “governing the life” of the right to rescission with absolute expiration provisions under § 1635(f), “while permitting recoupment damages regardless of the date a collection action may be brought,” and holding that a borrower may not assert the right to rescind as an affirmative defense in a collection action after the right has expired by operation of law).

Finally, TILA is a strict liability statute. See Mars v. Spartanburg Chrysler Plymouth, Inc., 713 F.2d 65, 67 (4th Cir. 1983) (“To insure that the consumer is protected, as Congress envisioned, requires that the provisions of [the TILA and Regulation Z] be absolutely complied with and strictly enforced.”); Thomka v. A.Z. Chevrolet, Inc., 619 F.2d 246, 248 (3d Cir.1980) (noting that the TILA and its regulations mandate a standard of disclosure of certain information in financing agreements and enforce that mandate by “a system of strict liability in favor of consumers who have secured financing when this standard is not met”). There should, therefore, be a bright line delineating the borrower’s and lender’s rights and responsibilities. Interpreting § 226.23(a)(3) to mean that transfer of all of the borrower’s ownership interest in the property securing a loan triggers expiration of the right to rescission preserves an easily-ascertainable bright line.

The Court concludes that, when Rosen transferred her ownership interest in the Wellesley Drive property to a Trust with Trustees other than herself on July 11, 2005, her right to rescission expired that same date by operation of law. Her May 11, 2006, recission letter was untimely and ineffective. She therefore cannot state a cause of action for rescission, and Count One must be dismissed. Accordingly, her claims stated in Count Two for monetary damages and penalties arising from Defendants’ refusal to rescind the refinancing contract must also be dismissed.

B. CLAIMS FOR DAMAGES UNDER TILA ARE TIME BARRED.

“Section 1640 is a general ‘civil liability’ section in the TILA. In subsection (a) it provides for either actual and/or statutory damages for various TILA violations” set forth in parts B, D, and E of the subchapter. Baker v. Sunny Chevrolet, Inc., 349 F.3d 862, 870 (6th Cir. 2003); § 1640(a) (providing liability for creditors who fail to comply with “any requirements imposed under this part, including any requirement under section 1635 of this title, or part D or E of this subchapter”). Count Three, for recoupment of a statutory penalty provided under § 1640 alleges violations of not only TILA, but also of various other non-TILA regulations and the New Mexico UCC. Insofar as Rosen attempts to recover damages for violation of statutes not listed in § 1640(a), she has failed to state a claim.

Further, her claims for failing to disclose information or otherwise violating subchapter B at the time of closing must be dismissed as time barred. As both U.S. Bank and EquiFirst point out, claims for damages under § 1640 of TILA have a one-year limitations period. See § 1640(e) (“Any action under this section may be brought in any United States district court, or in any other court of competent jurisdiction, within one year from the date of the occurrence of the violation . . . .”). A review of Rosen’s complaint reveals that all alleged violations of subchapter B occurred at or before closing on May 17, 2005, but she did not file her complaint until more than one year later. Count Three must be dismissed.

D. ROSEN FAILS TO STATE A CLAIM FOR VIOLATION OF THE EQUAL CREDIT OPPORTUNITY ACT.

The Equal Credit Opportunity Act, codified at 15 U.S.C. § 1691-1691(f), makes it unlawful for a creditor to discriminate “on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract); [] because all or part of the applicant’s income derives from any public assistance program; or [] because the applicant has in good faith exercised any right under [TILA].” § 1691(a). Rosen’s amended complaint alleges no facts to support a claim for violation of the Act, and she made no argument in her response brief to support amendment. Count Four must be dismissed.

E. RESPA CLAIMS MUST BE DISMISSED.

Rosen attempts to assert two types of claims under RESPA in Count Five of the Amended Complaint. The first is for violation, on June 21, 2005, of a provision that requires creditors to give a borrower fifteen days notice before transferring an account to a different loan servicer. See § 2605(b)(2)(A) (“Except as provided under subparagraphs (B) and (C), the notice required under paragraph (1) shall be made to the borrower not less than 15 days before the effective date of transfer of the servicing of the mortgage loan.”). To recover under § 2605, the borrower must allege and show actual damages suffered “as a result of the failure.” § 2605(f)(1)(A). If the borrower also alleges and establishes that the violation is a “pattern or practice of noncompliance,” a court may additionally award statutory damages “not to exceed $1000.” § 2605(f)(1)(B). Although the Amended Complaint neither alleges that Rosen suffered any actual damages as a result of EquiFirst’s failure to give her a full 15-days notice of the change of loan servicer, nor alleges that EquiFirst engaged in a pattern or practice of not complying with the 15-day notice requirement, Rosen requests that the Court “reduce the amount owed by Plaintiff by the amount of statutory and actual damages available under RESPA.” Am. Compl. at 22.

Because she has not alleged she suffered actual damages, the Court concludes that Rosen has failed to state a claim for damages under § 2605 and that she should not be given an opportunity to amend her complaint because none of the Defendants have attempted, in this federal suit, to bring any claims for money Rosen owes them. Any claims for recoupment that Rosen may be able to bring are relevant to the state foreclosure action and should be litigated there. Cf. Demmler v. Bank One NA, 2006 WL 640499, *5 (S.D. Ohio, Mar. 9, 2006) (alternatively holding that the plaintiff’s claims brought pursuant to TILA and other federal statutes against lending bank and challenging validity of loan were barred because they were compulsory counterclaims that should have been raised in the foreclosure action in state court).

Rosen alleges that Defendants violated § 2607 by giving “kickbacks” or engaging in “fee-splitting” on May 17, 2005, when EquiFirst paid a broker’s fee to American Mortgage as a yield-spread premium. The statute of limitations for violations of § 2607 is one year from the date the violation is alleged to have occurred. See 12 U.S.C. § 2614. The Court concludes that Rosen’s claims for violation of § 2607 are barred by the one-year statute of limitations. See Snow v. First Am. Title Ins. Co., 332 F.3d 356, 359-60 (5th Cir. 2003) (“The primary ill that § 2607 is designed to remedy is the potential for ‘unnecessarily high settlement charges,’ § 2601(a), caused by kickbacks, fee-splitting, and other practices that suppress price competition for settlement services. This ill occurs, if at all, when the plaintiff pays for the service, typically at the closing. Plaintiffs therefore could have sued at that moment, and the standard rule is that the limitations period commences when the plaintiff has a complete and present cause of action.”) (internal quotation marks and bracket omitted). Rosen’s argument that her claim survives the one-year statute of limitations because it is one for recoupment is unavailing because Defendants have not sued her by way of counter-claim in this federal suit. Again, any claims for recoupment should have been brought as a defense in the state foreclosure action. See 15 U.S.C. § 1640(e); Beach, 523 U.S. at 417-19.

F. THE COURT WILL NOT TAKE SUPPLEMENTAL JURISDICTION OVER POTENTIAL STATE-LAW CLAIMS.

The Tenth Circuit has instructed district courts that, when federal jurisdiction is based solely upon a federal question, absent a showing that “the parties have already expended a great deal of time and energy on the state law claims, . . . a district court should normally dismiss supplemental state law claims after all federal claims have been dismissed, particularly when the federal claims are dismissed before trial.” United States v. Botefuhr, 309 F.3d 1263, 1273 (10th Cir. 2002); see Sawyer v. County of Creek, 908 F.2d 663, 668 (10th Cir. 1990) (“Because we dismiss the federal causes of action prior to trial, we hold that the state claims should be dismissed for lack of pendent jurisdiction.”). None of the factors identified in Thatcher Enterprises v. Cache County Corp., 902 F.2d 1472, 1478 (10th Cir. 1990) — “the nature and extent of pretrial proceedings, judicial economy, convenience, or fairness” — would be served by retaining jurisdiction over any potential state-law claim in this case. No discovery has been conducted in this case, and no energy has been expended on the potential state-law claims. The Court will dismiss Rosen’s state-law claims for violation of the New Mexico Unfair Practices Act contained in Count Six of her amended complaint.

NOW, THEREFORE, IT IS ORDERED that all Counts of Rosen’s federal complaint are DISMISSED.

[1] “YSP” is an abbreviation for “yield spread premium” and “POC” is an abbreviation for “paid outside closing.” Am. Compl., Ex. H

[2] Although Rosen cites 12 U.S.C. § 1207(a) as the statute violated, there is no such statute and her citation to 24 C.F.R. § 3500.14 refers to violations of § 2607. The Court therefore construes her complaint to allege violations of § 2607.

[3] See footnote 2.

[4] Section 1635 provides, in relevant part:

(a) Disclosure of obligor’s right to rescind

Except as otherwise provided in this section, in the case of any consumer credit transaction . . . in which a security interest . . . is or will be retained or acquired in any property which is used as the principal dwelling of the person to whom credit is extended, the obligor shall have the right to rescind the transaction until midnight of the third business day following the consummation of the transaction or the delivery of the information and rescission forms required under this section together with a statement containing the material disclosures required under this subchapter, whichever is later, by notifying the creditor, in accordance with regulations of the Board, of his intention to do so. The creditor shall clearly and conspicuously disclose, in accordance with regulations of the Board, to any obligor in a transaction subject to this section the rights of the obligor under this section. The creditor shall also provide, in accordance with regulations of the Board, appropriate forms for the obligor to exercise his right to rescind any transaction subject to this section.

. . . .

(f) Time limit for exercise of right

An obligor’s right of rescission shall expire three years after the date of consummation of the transaction or upon the sale of the property, whichever occurs first, notwithstanding the fact that the information and forms required under this section or any other disclosures required under this part have not been delivered to the obligor . . . .

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