Credit Bids and Claims for Overage or Wrongful Foreclosure by Borrowers

INTERESTING NUCLEAR OPTION: “A credit bid submitted by anyone, whether authorized or not, might well be an admission (or at least a question of fact allowing the homeowner to go forward in discovery) that the amount owed was far less than the amount demanded in the Notice of Default and demands for collection. The point is not just that the foreclosure could be overturned or that an overage was created for the benefit of the borrower (because the creditor is only entitled to the amount owed). This issue could lead to the holy grail of discovery requiring the forecloser and other players in the securitization chain to produce the transactions that paid off part or all of the amount due the investor and therefore part or all of the amount due from the borrower.” — Neil F Garfield,

Editor’s Note: This is a puzzle and I am wondering if it might have some significance. The legislature has clearly enunciated the premise that they do not want any creditor to get a windfall at the expense of the borrower. (see below). The case below is a commercial case in which the object for the Bank was to get a deficiency judgment — something that Arizonians and residents of most states don’t need to worry about. But the rest of the discussion is applicable to residential foreclosures and trustee sales.

The credit bid that is submitted is often under Fair  Market Value. I am wondering if that can be turned around to say that the higher amount of fair market value minus the credit bid might be an overpayment. The credit bid is supposed to be the amount that is owed.

“The primary purpose of the statute is to “prohibit a creditor from seeking a windfall by buying property at a trustee’s sale for less than fair market value.” First Interstate Bank of Ariz., N.A. v. Tatum & Bell Ctr. Assoc., 170 Ariz. 99, 103, 821 P.2d 1384, 1388 (App. 1991). Because of the nature of a trustee’s sale, the statute does not contemplate that the purchase price will necessarily reflect the fair market value of the property. Dewey v. Arnold, 159 Ariz. 65, 70, 764 P.2d 1124, 1129 (App. 1988). For this reason, the statute requires a determination by the court of the fair market value before a deficiency judgment may be awarded. A.R.S. § 33-814(A). The court is directed then to subtract from the amount owed the higher of the sales price or the fair market value. Section 33-814(A) defines fair market value as:

[T]he most probable price, as of the date of the execution sale . . . after deduction of prior liens and encumbrances with interest to the date of sale, for which the real property or interest therein would sell after reasonable exposure in the market under conditions requisite to fair sale, with the buyer and seller each acting prudently, knowledgeably and for self-interest, and assuming that neither is under duress.

There is no requirement of which I am aware that the creditor submit the bid at the amount owed, but there is a question of fact as to why they would bid anything else. Is the credit bid an admission that despite prior declarations of default and demands, the real amount owed was less than what had been used?

If that is the case, then is it possible that the issue of fact can be raised as to exactly what was really owed. If that opens the door to a full accounting it might be an admission that the “creditor” received mitigating payments from co-obligors like insurers and counterparties on credit default swaps.

That in turn would be the basis for an attack on the sale in that the Notice of Default and the redemption rights of the borrower were all affected by lies about the amount owed. If the amount owed was really as low as the bid, then did the forecloser get a windfall? Was the borrower prevented from submitting a meaningful proposal for modification since the “Creditor” withheld information about the real balance due.

Discovery might well lead to the conclusion that the figure used was, as Charles Koppa concluded, the amount reported to the investors after computations made by the Master Servicer. That can of worms would lead to the possibility that what they reported to investors was also a lie and that in fact they had been paid multiple times on behalf of the true “creditor.” Thus the action for overturning a foreclosure under a wrongful foreclosure pleading becomes enhanced. If the amounts received through insurance and other means exceed the debt, then the “creditor” was wrong in foreclosing because there was no balance due that was secured by the mortgage or deed of trust.,10&case=12267603999973988233&scilh=0

From Ken McLeod:

I missed this decision……bolds are mine.  I know it was a judicial sale but the Court did take notice of credit bids being lower that reasonable value of the property


Paragraph 4:  ¶ 4 After MidFirst filed its lawsuit, Palo Desert filed for bankruptcy protection. MidFirst obtained an order lifting the automatic stay in the bankruptcy, and a trustee’s sale was held in March 2010. MidFirst purchased the property at the trustee’s sale for a credit bid[3] of $486,000. MidFirst then moved for summary judgment against the Chases, seeking a deficiency judgment of $1,325,044.09. The Chases argued that there was no deficiency because the “value of the Property far exceeds anything that could be owed on the Loan.” The trial court granted MidFirst’s motion, finding that no genuine issue of material fact existed as to the fair market value of the property. The court stated that the Chases’ “contention that the property is worth more than the credit bid is purely speculative, has no foundation, and is based on a date far in the future, not as of the date of the trustee sale. No reasonable juror could find for [the Chases] on the issue of fair market value based upon the record presented herein.” The trial court also granted MidFirst’s request for attorneys’ fees of $80,550.91.

Paragraph 6:  ¶ 6 The Chases contend, inter alia, that the amount realized at a trustee’s sale does not fairly indicate the fair market value of the property conveyed, and that summary judgment granted to MidFirst solely on the basis of the credit bid was inappropriate.

Paragraph 9: Therefore, because the Chases were entitled to a determination of the fair market value of the property, we hold that the trial court erred in finding that MidFirst was entitled to judgment as a matter of law as to its entitlement to a deficiency judgment in the amount sought in its summary judgment motion. Section 33-814(A) requires that a deficiency judgment equal the amount owed minus either the fair market value of the property on the date of the sale or the sale price, whichever is higher. MidFirst only presented evidence of the credit bid, and no evidence as to the value of the property. On these facts, summary judgment was improper.


Eminent Domain is Still on the Table: Banks Outraged!

Editor’s Comment: The more people look at it, eminent domain looks like a good option that is fair and reasonable and smokes out the REAL creditor. Thus the Banks are up in arms about it and using every bit of lobbying and political muscle to stop it. But the practicalities of eminent domain might trump even the weight of the Banks. Curing the mortgage crisis will result in lifting the weight off of the budget of local government, limiting the burden on homeowners, and starting a robust, honest, transparent market in the secondary market where loans are traded and sold.

The way it works is simple. The local government seizes the mortgage, and pays the “owner” the fair  market value of the value of the mortgage. The amount is much higher than the amount they would receive in foreclosure so the banks would be stuck arguing for less money than they would ordinarily get. AND the actual party with a loan receivable would need to prove up the receivable, with all proper credits and debits — meaning that a final determination on the allocation of insurance, credit default swaps and Federal bailouts would need to be made.

This would expose the players in the securitization chain to civil and tax liability that they have not reported to the investors nor to the borrower. The actual amount left on the debt might lower than the fair market value of the property — but creditors are only allowed to get paid once for each debt, not multiple times the way they did in the securitization scam.

Each local economy would get a shot in the arm that would end or limit the fiscal and budgetary crisis, with homeowners given breathing room to develop equity and not feeling crushed under the weight of debt that can never be repaid anyway. This will increase spending, having an enormous effect on the local economy and a fairly substantial effect on GDP as the benefits trickle up to the top, where taxation of the players is already under scrutiny.

The problems for the banks is that they have two basic choices — give the money to the investors, making them whole or give back the money to the insurers, CDS counterparties and Federal agencies. They would have no claim on the seizure because by definition they are claiming that the REMIC pools own the debts.

This in turn will reveal the fact that the assets on the books of the balance sheets of the mega banks are largely fictitious and that huge liabilities have been left “off-balance sheet”. The insolvency of the megabanks would come front and center to the attention of everyone and then the Dodd-Frank bill and FDIC rules would work to “resolve” the insolvent banks by selling off pieces to those banks (out of more than 7,000 possibilities in this country alone) who are healthy and can absorb the pieces.

Whether it is eminent domain or anything else, this is the final result as I see it. We can only pretend so long before the sham economy becomes recognized and a real economy replaces the sham economy.

It simply is not possible for financial services to grow from 16% of GDP to 48% of GDP when the economy and every household was going further and further into debt. They were counting paper that was worthless in GDP when they should have been building things providing real services etc. The object became the illusion of making money rather than the reality of actually doing anything to earn it.

When financial services falls below 20% of GDP it will be at least one signal that our economy is back to basics. Eminent domain is one good way of forcing the issue. Everyone will be better for it and frankly the bankers who committed all these acts will be millionaires and billionaires regardless of what happens to their banks.

The Fight Over the Use of Eminent Domain to Seize Underwater Mortgages: Recent Updates

by Dechert LLP on 10/3/2012

The latest developments in the fight over the use of eminent domain to seize underwater mortgages in California and elsewhere have important implications for lenders nationwide.

The debate over the use of eminent domain for this purpose stems from plans raised by some municipalities to take title to underwater mortgages secured by real property within their jurisdictions and to pay the mortgage holders “fair market value” as the just compensation required by the Fifth Amendment of the U.S. Constitution. Municipalities and private investors would then issue new mortgages to the homeowners and write down the principal balance of their loan. This would serve the dual goals of allowing the homeowners to build equity and reduce their monthly payments, and hopefully restoring some vitality to the local housing market. The restructured mortgages would then be sold to third-party investors.

Unsurprisingly, the mortgage lender community has been outraged by these proposals, and numerous market participants and observers have called for restraint and thorough consideration of the likely consequences before any program is put in place. Recently, some new voices have joined the chorus on both sides of the proposals.

Please see full alert below for more information.


Five Bad Reasons to Avoid Principal Correction (Reduction)

5 years ago it was obvious to anyone with the facts that the entire system or mortgage origination and mortgage foreclosures had been turned on it’s head, starting with one huge lie: that the value of the property exceeded the amount of the loan. It was in 2005 when 8,000 appraisers warned congress that their industry had been poached by the banks — unless they came back with an “appraisal” that was $20,000 higher than the contract amount, they would never see another dime of business. This one fact was the keystone for the largest economic crime in human history.

The answer is obvious. If a borrower had bribed an appraiser to submit a fair Market value that they both knew could never be sustained — and the obvious purpose was to defraud a lending institution not underwriting a loan under the mistaken belief that the collateral was adequate to repay the loan, the borrower and the appraiser would be punished, disciplined and prosecuted and rightfully so. The outcome of such a case would have been that the perpetrators would lose any license they had for appraisals, that the property would be foreclosed, and that the perpetrators would be ordered to pay restitution for the loss incurred by the lending bank.

The law is pretty simple and there is no protection for anyone to lie for the purpose of defrauding another person. There are no federal or state exemptions, no complexities that make prosecution difficult, just plain facts in which the money of the lending bank was converted into the money of the borrower, the appraiser and maybe their co-conspirators — the mortgage broker, the real estate broker and others. Indeed a perusal of the newspapers across the countries reveals just such prosecutions against borrowers, mortgage brokers and others who conspired to defraud the system (albeit the actual victim being unknown but nonetheless named in each indictment or information prosecuting people “low on the food chain.”

The facts in the mortgage meltdown are equally simple and we call for the same remedies, prosecution, discipline and punishment of the perpetrators. But in this case the perpetrators are the banks. They needed to inflate the appraisals in order to accomplish their twin objectives — closing another loan and making certain that even the “good” loans would fail. Now they confused the issue of title to the property and loan ownership beyond recognition if you look at THEIR paperwork instead of the traditional way record title is kept as notice to the world — through public records title registries.

By blaming the homeowners for the mortgage mess and by sleight of hand tricks played with investors, the Banks managed to steal the homes, steal the money of the investors and steal the bailout. They now seek to steal the non-existent mortgage bonds to fill their balance sheets with non-existent assets. The simple remedies that apply against the. Borrower and the appraiser who lied about the property value are said to present system risks, thus making old fashioned restitution for fraud inapplicable.

So here are the five major reasons the media, the pundits, the government agencies and of course the all-powerful Banks say that the most obvious remedy doesn’t apply.

1. The Banks didn’t commit the crime. It was the originators, the borrowers, the mortgage brokers, the appraisers — anyone but them. Not true. In fact not even close to true. The Banks put the pressure on by setting quotas in dollar volume without regard to quality. There are only two ways of enlarging the dollar volume of loans funded — (1) increase the number of loans and (2) increase the dollar amount of the loans. Since we know that the number of loans was decreasing by 2004-5, the only option left was to artificially inflate the value of the collateral which would enable the originator to fund a larger loan.

2. It’s not fair to reduce principal. But of course it is fair that banks get paid 100 cents on the dollar based upon an initial value and loan they tricked the borrower into taking. And it is fair that the banks get paid by the investors, paid by the insurers and paid by taxpayers all for the same loans even if they were not in default. The debt has been paid in full several times over. Allowing correction to a value of the collateral and the principal on the loan where the banks or investors get paid all over again, but at a realistic level is better than what the banks deserve — I.e., nothing.

3. Reducing principal will cause secondary problems that will disrupt the markets. First this refers to something bad happening if HELOCs or other secondary financing get paid off or modified. It is at best a muddled argument that is both wrong and at variance with the main argument that the borrowers are dead beats that don’t want to pay anything to anyone.

4. Correcting principal will cause disruption of the credit markets. Right. So by this logic, the fruit of fraud should always be sustained and allowed to prosper no matter who gets hurt. This logic certainly undercuts the notion of creating confidence in the credit markets.

5. Correcting principal to the value that should have been used when the deal was made will encourage people in the future to take out loans they nave o intention of repaying. This theory is advanced over the proposition that if Banks get away with this chicanery they might do it again. Here the borrowers did nothing wrong except believe the value that was used in the appraisal. Itmis the banks with a history if wrongdoing, not the borrowers.


APPRAISAL FRAUD IS THE ACT OF GIVING A RATING OR VALUE TO A HOME THAT IS WRONG — AND THE APPRAISER KNOWS IT IS WRONG. This can’t be performed in a vacuum because there are so many players who are involved. They ALL must be complicit in the deceit leading to the homeowner signing on the the bottom line and advancing his home as collateral on a loan which at the very beginning is theft of most of the value of the home. It’s like those credit cards they send to people who are financially challenged. $300 credit, no questions asked. And then you get a bill for $297 including fees and insurance. So you end up not with a credit line of $300, but a liability of $300 just for signing your name. It’s a game to the “lenders” because they are not using their own money.

And remember, the legal responsibility for the appraisal is directly with the appraiser, the appraisal company (which usually has errors and omissions insurance) and the named lender in your closing documents. The named “lender” is, according to Federal Law, required to verify the value of the property.

How many of them , if they were using their own money, would blithely accept a $300,000 appraisal on a home that was worth $200,000 last month and will be worth $200,000 next month? You are entitled to rely on the appraisal and the “verification” by the “lender” (see Truth in Lending Act and Reg Z). The whole reason the law is structured that way is because THEY know and YOU don’t. THEY have access to the information and YOU don’t. This is a complex transaction that THEY understand and YOU don’t.

A false appraisal steals money from you because you rely on it to make the deal for refinancing or for the purchase. You think the home is worth $300,000 and so you agree to buy a loan product that puts you in debt for $290,000. But the house is worth $200,000. You just lost $90,000 plus closing costs and a variety of other expenses, especially if you are moving into anew home that requires all kinds of additions like window treatments etc. But the “lender” who is really just a front for the Wall Street and the investor pool that funded the loan, made out like bandits. Yield spread premiums, extra fees, profits, rebates, kickbacks to the developer, the appraiser, the mortgage broker, the title agency, the closing agent, the real estate broker, trustee(s) the investment banking entities that were used in the securitization of your loan, amount in some cases to MORE THAN YOUR LOAN. No wonder they are so anxious to get your signature.

“Comparable” means reference to time, nearby geography, and physical attributes of the home and lot. Here are SOME of the more obvious indicators of appraisal fraud:

  1. Your home is worth 40% of the appraisal amount.
  2. The appraisal used add-ons from the developer that were marked up for the home buyer but which nobody in the secondary market will pay. That kitchen you paid an extra $10,000 for “extras” is included in your appraisal but has no value to anyone else. That’s not an appraisal and it isn’t collateral or fair market value.
  3. The homes in the immediate vicinity of your home were selling for less than your home appraisal when they had the same attributes.
  4. The homes in the immediate vicinity of your home were selling for less than your home appraisal just a few weeks or months before.
  5. The value of your home was significantly less just a  few weeks or months after the closing.
  6. You are underwater: this means you owe more on your obligation than your house is worth. Current estimates are that it might take 20 years or more for home prices to reach the level of mortgages, and that is WITH inflation.
  7. Negative amortization loans usually allow the principal to rise even above the falsely inflated appraisal amount. If that happened, then they knew at the time of the loan that even if the appraisal was not inflated, it still would not be worth the amount of the principal due on the obligation. For example, if your loan is $290,000 and the interest is $25,000 per year, but you were only required to pay $1,000 per month for the first three years, then your Principal was going up by $13,000 per year compounded. So that $300,000 appraisal doesn’t cover the $39,000+ that would be added to your principal balance. The balance at the end of 3 years will be over $330,000 on property APPRAISED at $300,000. No honest appraiser, mortgage broker, or lender, would be complicit in such an arrangement unless they were paid handsomely to do it and they had no risk because they were not using their own money for the loan.

23%+ of Homes Underwater

Editors Note: If anything shows the extent of appraisal fraud, it is the sheer number of homes that are under water. These figures while high, report only a fraction of the actual number of homes because of the way they are computed. If you take the asking price, reduce it by at least 4% (which is the actual sales price), reduce that by 6% (the average real estate brokerage commission) and reduce that by other selling expenses, you’ll end up with a much higher figure.

The divergence between the cost of renting a home and buying a home is a strong indicator of the real fair market value. When you add in the key component of housing values — median income — you can see that we are teetering on another downturn in home values. Those that are underwater are under “house arrest” being unable to sell their homes because they cannot afford to pay off the principal balance demanded from a servicer who has no idea of what is due on the principal because they are not allocating third party payments from credit enhancements and federal bailouts.

Short sales are hard to get although some people, like Edge Simonton in Houston are reporting better results lately. Strategic defaults are on the rise, thus increasing the number of homes that are in the pipeline for sale. The market already over-saturated with homes for sale has a hidden inventory of homes for sale that are not reported.


Mortgage Holders Owing More Than Homes Are Worth Rise to 23%

By Brian Louis

May 10 (Bloomberg) — More than a fifth of U.S. mortgage holders owed more than their homes were worth in the first quarter as repossessions climbed to a record, according to

Twenty-three percent of owners of mortgaged homes were underwater during the period, up from 21 percent in the previous three months, the Seattle-based property data provider said today in a report. More than one in 1,000 homes were repossessed by lenders in March, the highest rate in Zillow data dating back to 2000.

Underwater homes are more likely to be lost to foreclosure because their owners have a harder time refinancing or selling when they fall behind on loan payments. U.S. home values dropped 3.8 percent in the first quarter from a year earlier, the 13th straight period of year-over-year declines, Zillow said.

“Having a lot of underwater homeowners will add to the downward pressure on house prices,” said Celia Chen, senior director at Moody’s in West Chester, Pennsylvania. “We do expect that home prices will fall a bit more.”

Bank repossessions in the U.S. rose 35 percent in the first quarter from a year earlier to a record 257,944, according to RealtyTrac Inc., an Irvine, California-based company.

Sales of foreclosed properties by banks accounted for more than a fifth of all U.S. home sales in March, Zillow said. They made up 66 percent and 62 percent of transactions, respectively, in the metropolitan areas of Merced and Modesto in California.

About 32 percent of homes sold in the U.S. in March went for less than their sellers paid for them, Zillow said.

The closely held company uses data from public records going back to 1996. Its mortgage figures come from information filed with individual counties.

To contact the reporter on this story: Brian Louis in Chicago at

Last Updated: May 10, 2010 04:31 EDT

Magnetar Echoes Livinglies call for Alignment of Investors, Servicers and Borrowers

see Magnetar%20Mortage%20Recovery%20Backstop%20Whitepaper%20Jun09.pdf

Magnetar Mortage Recovery Backstop Whitepaper Jun09

Two things jump out at me with this paper from June, 2009.

First it is obvious that the “real money” investors are defined as those seeking low risk and willing to take lower yield. The fact that they are called “Real Money Investors” underscores my point about the identity of the creditor. Those “traditional” investors are no longer available to buy the mortgage backed securities or any other resecuritized derivative package based upon mortgage backed securities. Legal restrictions requiring the securities to be investment grade would prevent them from jumping back in even if they wanted to do so, which they obviously don’t.

Thus the inevitable conclusion drawn almost a year ago and borne out by history, is that the fair market value of the securities, trading as pennies on the dollar, is reflective of a lack of demand for mortgage backed securities no matter how high the yield (i.e., no matter how low the price).

Second there is a growing realization that the interests of the investor and the borrowers are actually aligned in many ways and that the solution to mortgage modification, principal reduction, and other aspects of the mortgage mess and the foreclosure crisis lies in recognizing certain realities and then dealing with them in an equitable manner. The properties were never worth the amount of the appraisal in most instances and now they are worth even less than they were when the loan deals were closed. The securities were also “appraised” far too high thus creating a giant yield spread premium for the investment bank-created seller of mortgage backed securities.

In my opinion, based upon a sampling of the data available, it is entirely possible that the “true” fair market value of those securities in the best of circumstances is probably less than 40% of the initial offering price. It is this well-hidden analysis that is not getting the attention of the Obama administration and which completely explains why servicers are obstructing modifications under instruction from investment banking intermediaries like the “Trustee”.

Leaving the servicers and other parties as the middlemen “in the middle” to sort this out is another license to steal creating another mark-up applied against both borrowers and investors as the “real money” parties. The status quo is what is causing the stagnation in lieu of recovery. Until everyone accepts basic notions of “real party in interest” and eliminates those who don’t fit that description, the moral hazards will remain and escalate.

As concluded in this paper, either judicial or executive intervention is required to kick the middlemen out of the way and let the light in. When investors and borrowers are able to compare notes and work with each other the figures for both will be enhanced, foreclosures will decline, losses will be taken, and yes it is highly probable that the number of investor lawsuits will proliferate against those who defrauded them.

The lender is identified as the investor in this paper (indirectly) and the party who defrauded them is not some greedy borrower with stars in his eyes, it was the usual suspect — a financial wizard making a sales pitch that was so complex, the buyer basically was forced to rely upon the integrity of the investment banking house for appropriate pricing. That is where the system fell apart. Moral hazard escalated to moral mess.

The Narrative Has Shifted: Take Advantage of it

Your allegations of intentional misdeeds, fabricated documents and forgeries have new life now that the SEC is hot on the trail of the wrongdoers in a very public way. As the news sinks in more and more Judges, lawyers and experts and forensic analysts will see their role more as a commitment to justice than just helping out a homeowner in distress.

It just didn’t make sense that anyone would loan money in a deal where they knew there would be no payback. My allegations rang hollow to many people, who felt that despite the many distractions and defects contained in the paperwork behind the foreclosure glut, it was the borrowers who made the financial crisis happen. Now we see more and more people taking another look.

For those of us who serve the judicial branch of government, it is no longer a dance to delay the inevitable. It is, as it has always been, a confrontation with giant corporations whose reach into the corridors of powers enabled them to suck the life out of an ailing economy.

No society has ever persisted without a vibrant growing middle class. It will be a very long time before we succeed in reversing the damage wreaked by Goldman Sachs and other investment banking houses who acted without any sense of conscience, morality or even compliance with laws that society passed to enable their existence. But now, we have a chance. Let’s not waste this opportunity. Don’t let the pretender lenders get control of the narrative again.

The reality is that many, perhaps most loans were created according to specifications set by Wall Street, not by industry underwriting standards. The reality is that people were hired to lie and cheat and deceive homeowners into investing their homes into this salacious scheme. The reality is that the appraisals were false, and were given greater credibility by the reasonable borrower assumption that no lender would lend money on a bad deal where the property value was intentionally overstated, and that lenders would and did strive to comply with the requirements of the Truth in Lending Law, where the responsibility for appraisal verification, income verification, quality, viability, and affordability are BY LAW the responsibility of the Lender. Little did these hapless homeowners know, TILA was a joke to these players.

So now reality sets in. securities that were rated investment grade were junk and are worth far less than their sale price. Homes that were rated as high value were really still the same value as the market had shown before the flood of money and bird dogs looking for signatures on documents, even if the signatures were forged and even if the borrower was dead.

The finance system depends upon confidence. Confidence is based upon belief in the market values and practices in the marketplace. There is only one correction that is viable now. It is the simple recognition that neither the securities nor the properties they were based upon, had any new “value added.” It is the simple recognition that we had to accept when the NASDAQ that flew near 5,000 is really worth only 2,000, long after the boom and bust of that era. Any attempt to saddle the homeowners, the taxpayers or the investors with anything other than the reality of fair market value will undermine our financial system, and ultimately our future and the future of generations to come.


So in Chapter 11 for the big boys they address reality and treat the value of the property the way it is. But in individual little guy petitions for relief in bankruptcy court, they stick you with the entire amount of the Note even if the security is only worth 20% of the “principal.” And it’s not like the bank comes out any better. They still only get the value of the property. The ONLY thing accomplished by treating the property AS IF it were worth the amount of the principal due on the note is that the homeowner gets to be evicted.

Editor’s Comment: REALITY is not just a concept. Property values went artificially high and finally went into a correction period that is still not over. So the owners of the multibillion dollar residential Stuyvesant Town decided to drop off the keys and walk away. They bought the place for $5.4 billion, didn’t use their own money, and then decided that the place was only worth $2 billion now and would never recover because the price they paid was based upon artificially high appraisals. Sound familiar?
So the banks and investors (mostly the investors) take the hit for the loss and the intermediaries walk away with all the money they made while they owned the deal.
And while I am on the subject of double standards, the one in bankruptcy court is simply stunning. Any fool knows that if you lend someone $100 and you get a bicycle as security, then you have security up to the value of the bicycle. So if the bike is worth $50, you have $50 worth of security and the other $50 is obviously secured by nothing. Chapter 11 proceedings for the big boys recognize this when they do “lien stripping.”
If property is worth only $1 million and the mortgage note is for $5 million, the creditor’s claim is stripped into two parts — the secured part ($1 million) and the unsecured part ($4 million). The same holds true if you are a land speculator by profession and you have multiple houses. But if you are average Joe or Josephine you can’t strip the lien. Why? Because congress said so, that’s why.Speculators and big boys get the treats.
So in Chapter 11 for the big boys they address reality and treat the value of the property the way it is. But in individual little guy petitions for relief in bankruptcy court, they stick you with the entire amount of the Note even if the security is only worth 20% of the “principal.” And it’s not like the bank comes out any better. They still only get the value of the property. The ONLY thing accomplished by treating the property AS IF it were worth the amount of the principal due on the note is that the homeowner gets to be evicted.
Of course that IS the point. They want the homeowner out. They want the loan in default. Because the defaulted loan is worth far more in insurance dollars than it is in fair market value on sale. And the bonus is they get the house too even though they didn’t put up a nickle for the loan.
January 26, 2010

Wide Fallout in Failed Deal for Stuyvesant Town

In the beginning, investors and lenders could not get enough of the record-breaking $5.4 billion deal to buy the largest apartment complexes in Manhattan: Stuyvesant Town and Peter Cooper Village.

Now, three years later, they cannot get away from it fast enough.

The partnership that bought the 80-acre property on the East River announced on Monday that it was turning the keys over to its lenders after it defaulted on its loans and the value of the property fell below $2 billion.

Yet in walking away, the partners, Tishman Speyer Properties and BlackRock Realty, have left tenants in limbo and other investors with far bigger losses.

Many of the other companies, banks, countries and pension funds — including the government of Singapore, the Church of England, the Manhattan real estate concern SL Green, and Fortress Investment Groups — that invested billions of dollars in the 2006 deal stand to lose their entire stake.

“At the time, it looked like a sound investment,” said Clark McKinley, a spokesman for Calpers, the giant California public employees’ pension fund, which bought a $500 million stake in the property. “When the market tanked, we got caught.”

Calpers, he added, has written off its investment. So has Calsters, a California pension fund that invested $100 million, as has a Florida pension fund that put $250 million into the deal.

Even though nearly all of the attention and blame surrounding the default has been directed toward Tishman Speyer, it will lose only its original investment of $112 million. (BlackRock will also lose $112 million.)

Any collateral damage to Tishman Speyer, which manages a $33.5 billion portfolio of 72 million square feet of property in the United States, Europe, Asia and Latin America, was expected to be minimal; real estate experts said that Tishman’s reputation might suffer, but that the firm would still be able to put together deals and raise capital.

“This is a big black eye for them,” said John McIlwain, a senior fellow for housing at the Urban Land Institute. “But it’s not the end of Tishman. They own a lot of property. It’s a dent, but not the end.”

For decades, Stuyvesant Town and Peter Cooper Village were an oasis for middle-class New Yorkers; they were built in the 1940s by Metropolitan Life, which received tax breaks and other incentives in exchange for keeping rents low, initially for the World War II veterans who were the first tenants.

With rents and condominium prices skyrocketing in 2006, MetLife put developments on the auction block. A partnership formed by Tishman Speyer and BlackRock paid $5.4 billion. The acquisition cost was actually $6.3 billion, because the partnership had to raise $900 million for reserve funds to cover interest payments, apartment renovations and capital improvements.

The rental income did not cover the monthly debt service. But the two partners were betting that they could turn a healthy profit over time as they replaced rent-regulated residents with tenants willing to pay higher market-rate rents. But their plan fell apart when they could not convert enough apartments to the higher rents as quickly as they had planned. And in the past two years, average rents in New York have fallen sharply, along with property values.

Last year, analysts predicted that Tishman Speyer and BlackRock would default. That prediction intensified when New York State’s highest court ruled in the fall that the partnership had improperly deregulated and raised the rents on 4,400 apartments. The partners were forced to roll back rents and they have been in negotiations on rebates owed to tenants. (The eventual owners, not Tishman Speyer and BlackRock, are expected to inherit liability for the $215 million in rent rebates.)

On Jan. 8, the owners defaulted on $4.4 billion in loans ($3 billion in senior mortgages and $1.4 billion in secondary loans). They had also raised $1.9 billion in equity. The problem was that the latest appraisal put the value of the complexes at about $1.9 billion.

“It’s the poster child for the entire housing bubble,” said Daniel Alpert, managing partner of Westwood Capital. “There’ll be some other spectacular blowups, but this will be at the top of the pecking order.”

Mr. McIlwain said it may take a decade or more for the prices to reach the levels they did in 2006.

“You’re talking about a prime deal at the top of the market when money was fast and free,” he said. “You’re not going to see money that is fast and free until bankers’ memories fade, which typically takes 10 years.”

In the meantime, real estate analysts said the collapse of the Stuyvesant Town deal would send ripples throughout the real estate investment community.

“The fact that they have given the keys back is going to have a chilling effect,” said Keven Lindemann, director of real estate for the research firm SNL Financial, which covers publicly traded real estate. “This was such an enormous transaction that it looks like most, if not all, of the equity is going to be wiped out.”

The Government of Singapore Investment Corporation, which made a $575 million secondary loan, and invested as much as $200 million in equity, stands to lose all of that.

CWCapital, the company that is negotiating with Tishman Speyer and BlackRock on behalf of the mortgage holders, declined to comment. With Tishman Speyer stepping down as manager of the 11,227 apartments, CWCapital has talked to both the LeFrak Organization, which owns and manages thousands of apartments in Queens and elsewhere, and Rose Associates, the Manhattan company that had managed the two complexes before Tishman Speyer took over.

This month, several of the secondary lenders sent letters to Tishman Speyer and BlackRock threatening foreclosure because of the default. The partners tried unsuccessfully to craft a new deal that would have involved them putting up “several hundred million dollars,” in return for restructuring the loans, according to one real estate executive briefed on the negotiations.

The secondary lenders, he said, had “overplayed their hand” in the hope that they would get back some of their investment. Instead of being forced into bankruptcy, Tishman Speyer and BlackRock will walk away sometime after a new manager is in place.

Fannie Mae and Freddie Mac may be in the best position of anyone involved in the deal’s financing. They acquired over $2 billion in securities backed, in part, by the $3 billion Stuyvesant Town mortgages. Fannie and Freddi Mac have to be paid before any other debtholders, but they are not parties to the negotiations over the property.

They may well become an integral part of the solution. In a report issued Monday, Deutsche Bank suggested that CWCapital’s most likely action will be to wipe out the existing mortgage and attempt to sell the complexes. “Given the size of the properties and an asking price likely to be well in excess of $1 billion, a sale may necessitate Fannie Mae and Freddie Mac providing financing to a potential buyer,” the report said.

Foreclosure Defense: Fed Bailout Discharges Mortgage Liability

They might have meant to do it and they might not have thought of it, but the effect of the funding created by The Federal Reserve that bailed out the investment banks so that the investment banks could bail out the investors in ABS certificates, is that the mortgages and notes are satisfied twice over and the borrowers have already paid through taxes and should not be made to pay twice by paying off a non-existent debt to a party that has been twice paid or more and has already signed off its rights to enforce the note or mortgage.

New Entry of Glossary

INVESTOR: SEE LENDER, REAL PARTY IN INTEREST, HOLDER IN DUE COURSE, SOURCE OF FUNDS see also cyruswellstexascase-excellent-verbiage-on-securitization-conspiracy-with-charts-and-causes-of-action

In the mortgage meltdown context the investor is the actual source of funding on all residential mortgages.  Investors include but are not limited to “qualified” investors possessing sufficient net worth under SEC rules, or the status of being a financial institution themselves, which includes pension funds, mutual funds, hedge funds, city operating funds, county operating funds, national operating funds from many countries, and corporate operating funds.

ABS certificates were sold as “cash equivalent” many of the investors being led to believe that they were weekly auction market interest rate securities that would not and could not vary in value — until one day in March, 2008, when Lehman Brothers sent out an innocuous memo to all investors in ABS certificates that the auction market had convened but that there were no buyers.Many thousands of “investors” most of whom representing tens of millions of individual people found out the certificates were essentially worthless. These worthless securities (having no value because of the reasons stated in this blog) are in the process of being publicly and privately re-purchased at face value, despite the fact that they have a negative fair market value. The purchasers are the investment banking firms that created and sold them in the first place. But the source of money is the Federal Reserve which in this “special circumstance” has opened its discount lending window to investment bank for the first time history. The FED is accepting the worthless ABS certificates or evidence of them at face nominal value and “lending” the investment bank the money using as collateral the worthless ABS certificates. Thus the FED, creates funds to soak up the losses across the board. The significance of all this is that the debt originated by the borrower has been paid multiple times and the right to foreclose the mortgage or enforce the note has been extinguished by alteration of terms and actual payment. In short, the Federal Reserve is becoming the real party in interest or the POSSIBLE real party in interest in virtually ALL loan transactions originated from 2001-2008, the holder in due course, and has no intention or desire to become involved in foreclosures. The parties who are “exercising their right” to enforce the note and mortgage do not have such a right because they are not who they say they are, because they have already been paid, and even the people who paid them have been paid. The terms of the secure transaction (mortgage) has been eviscerated and the note has been satisfied by the taxpayer bailout of the investment banking combines.

Foreclosure Defense Strategies: Sale Pending


Here is a strategy for one person in California whose lenders are GMAC and Countrywide. He is about one week away from sale of his property. Feel free to use what suits you.

  • Keep in mind that the hyper-inflated values used by the appraiser, lender, underwriter, and mortgage broker constitute a violation, in my opinion, of the very abuse that TILA (Truth in Lending Act) was intended to stop: hiding the true cost of your loan. 
  • If your house is priced at $500,000 and you agree to pay 5% interest, you are agreeing to pay $25,000 in interest. 
  • But if the real fair market value was only $350,000 then the $25,000 you are paying in interest is actually 7.14% and that was NOT disclosed in TILA statement and neither was the possibility that the appraisal could be wrong.
  • This means that the interest, points, costs and fees were all misrepresented and you are entitled to a full refund, which in the case below could amount to over $100,000 from the lender.


OK, first the disclaimer, since I am a licensed attorney in Florida and the United States Courts and the U.S. Bankruptcy Court. I have not conducted an interview with you, offered you legal advice, nor suggested that you rely upon my advice or use my advice or any facts I share with you without consulting competent counsel in any state or Federal Court or in connection with any communication with your GMAC lender or Countrywide second mortgage. NEEDLESS TO SAY, WITH A SALE DATE LOOMING IN THE NEXT WEEK OR SO, YOU NEED TO MOVE VERY QUICKLY.


The following is an outline of information which you should read, re-read and study from 


Feel free to lift from this email or the blogsite any verbiage that is helpful to you in the pleadings you file in State and Federal Court (Bankruptcy Court). 


As I understand it, your intention is to first file a motion which I assume will look something like the following, and that you will be hand delivering the original to the Clerk of the Court, a copy to the Judge assigned to the case along with a request for an emergency hearing, and a copy to the attorney on the opposing side — and I assume that your local rules require your signature(s) on your Emergency Motion to be Notarized:


Comes now the defendants, xxxxxxxxxx and ___ xxxxxxx his wife, Defendants in the above-styled action and move this Court to vacate and set aside the Judgement entered on the __- day of ___, 2007/8, vacate and set aside the order dated __ day of ___, 2008 setting the sale date, and canceling the sale of the subject property and as grounds therefor says that the Plaintiff committed a fraud upon the Court in that the Plaintiff does not now and did not, at the time of the foreclosure, own the mortgage, the mortgage note, any security agreements, nor have the requisite power to represent the real party in interest, nor did the Plaintiff allege facts in support thereof. This Emergency motion is not filed for the purposes of delay. The true facts (and consequent fraud perpetrated upon this Court by Plaintiff) regarding the prior sale of the risk, servicing and ownership of the mortgage and note regarding the subject real property and alleged liability did not come to the attention of the undersigned defendants until the last 24 hours.

I HEREBY CERTIFY that a true and correct copy was sent by FAX to opposing counsel at the following number _____________________ and by U.S. Mail at the following address _________________________.




I further understand that you intend to file a Chapter 13 bankruptcy, await the motion for relief from stay for the foreclosure to proceed and that you intend to contest the motion for relief from stay by alleging the same thing as I have outlined in the State Court action and that in addition you will go to the Bankruptcy clerk’s office to file an adversary proceeding.


I assume you will put the “liability” in your bankruptcy proceeding as a contingent liability since it was procured by fraud along with a statement that the Creditor is not a creditor but claims to be one, and that the mortgage encumbrance is not a valid lien.


1. You have a house that was initially purchased in the year 2000 for $315,000.

2. You have done some refinancing during which your house was “appraised” at $750,000 around 3 1/2 years ago, which is about the middle of the period wherein a scheme had been hatched: money was made free by selling unratable securities to banks, governmental agencies, pensions, mutual funds and individual investors offering (a) a higher rate of return than they could otherwise get and (b) a higher rate of return than the underlying “investment” (mortgage) was paying. These were called collateralized debt obligations (CDOs) or collateralized mortgage obligations (CMOs) or other forms of “derivative securities, including but not limited to mortgage swap and other “hedge products, all of which were outside the regulatory scheme contemplated by the United States Federal Reserve and the various agencies controlling issuance and disclosure and sale or trading of such securities.

3. The seller’s of these securities obtained AAA ratings from Moody’s and S&P who were competing for market share of the ratings business and ended up literally going fishing with the people who were representatives of the securities that were being rated. Analysis was replaced by negotiation and thus AAA rated securities were sold when in fact they should have ben unrated.

4. The securities were sold to investors (including governments around the world, who now must write-off a portion of their “cash on hand” and cut back social services) with “disclosures” that the proceeds of sale would be used to pay the interest and repay the obligation, thus giving rise to an obvious Ponzi scheme, which was a violation of laws and rules under the Federal Securities and Exchange act of 1933, and the Securities and Exchange rules, and applicable and similar State laws and rules

5. The investment bankers and other intermediaries who were selling the securities were making a bundle of money through commissions, fees, and mark-ups from their own portfolio which they bought from mortgage aggregators.

6. The demand for these high rated “cash equivalent” securities sky-rocketed, causing the investment bankers and retail brokerages to step up pressure on mortgage aggregators to come up with more “product” to sell. This aggregation process is either done within the investment banking firm or by a third party who also gets a “mark-up”, rebate or kickback.

7. The aggregators went to mortgage brokers and lending institutions (financial and non-financial) offering financial incentives to the mortgage banks, non-financial lenders, and mortgage brokers to (a) steer customers (borrowers) into mortgage terms that were contrary to the interests of the borrower (b) contained terms that conformed to the needs of the investment bankers that were selling the bogus non-ratable securities and (c) adopting practices and tacit understandings to pressure or trick the borrower to sign the papers that would ultimately be aggregated into pools of the aforesaid bogus securities.

8. The “underwriting” lenders allowed practices of creating fictitious borrower income and assets, fictitious appraised values all driven up by the influx of “free money,” in which all parties to the transaction, except the borrower understood that there was no risk underwritten by the “lender” who was passing along the risk to the aggregator and eventually to the investor in the CDO or CMO.

9. Appraisers understood that they would never be hired again if they did not confirm the value of the property at a high enough level to close the financing deal and the sale of the home and were thus given improper financial incentives and coerced into providing fraudulent assessment of the value of surrounding property and the subject property itself.

10. Borrowers were thus lulled, pressured or tricked into believing that the fair market value was as stated in their closing documents, and that the lender, the underwriter and the insurers of title and property were all relying upon those representations concerning fair market value.

11. In fact, the reverse was true, all participants except the borrower understood full well that the fair market value was over-stated, that the risks were actually being undertaken by the borrower and the investor in the bogus securities and that all the parties in between were profiting from this Ponzi scheme.

12. As a result the borrowers were all overcharged for points, costs, fees, interest, in transactions that they never would have signed had full disclosure been made.

13. Under the above facts, the parties involved in the transaction, except the borrower, were engaged in a comprehensive nationwide scheme violating the provisions of the Truth in Lending Act, Securities Laws, RESPA and RICO and the comparable laws and rules of the applicable state agencies.

14. Multiple investigations of these actions are taking place under actions started by attorney generals of the United States and various state governments and at least one U.S.L Trustee in the Bankruptcy Court of Judge Raymond B Ray in the Southern District of Florida wherein the the trustee has been instructed to investigate the civil and criminal responsibilities of Countrywide Mortgage, the results of which will apply equally to thousands of other parties involved in this scheme which resulted in undermining the economy, money supply and wealth of the United States of America, other countries, and virtually all American citizens.

Mortgage Meltdown: Strategies for Defense and Settlement: Short Sales


Mortgage Meltdown: Strategies for Defense and Settlement: Short Sales


Borrowers, whether they are in foreclosure or not, are advised to write letters to their lenders claiming violations of law and their closing documents. The various causes of action and the advice to get an “audit” done of your loan have been detailed here for several months and are available by scrolling, search, or find commands. 


I would add to the list a demand and potentially an offer for pre-approval of a short-sale based again on the lender’s participation to defraud you by collaborating in a plan wherein it abrogated its fiduciary responsibilities to you, actually acted against your interests and in so doing mislead you into thinking that the Fair market value of your home, your financial condition, or both were sufficient to justify the loan and loan terms.

Keep in mind that short-sales are coming into increasing favor with regulators even while the lenders and investors in CMOs/CDOs are balking. The dam will break in your favor.

A short sale is simply a sale of property that would carry a price less than the amount owed on the property. It is used mostly in cases where there was little or no down-payment, or where negative amortization was employed that resulted in a higher mortgage balance than the borrower started with.

However it can be used in other setting as well. The problem has been that real estate brokers now won’t touch short sales and neither will most buyers because of the ornate and and frustrating “approval” process from the lender, who has its own problem: the lenders have in nearly all cases, sold off the obligation to investment banks or in turn re-marketed them to government purchasers, pension funds etc., under the guise of AAA ratings that were procured by forming personal relationships with the people working for rating agencies and by providing financial incentives to the rating agencies coupled with economic duress of losing a “client” if the rating agency did not bend.


Thus the lender is frequently without leverage to or even authority to offer approval or permission regardless of its own assessment, because the true owner of the obligation is either not returning calls or is actually unknown to the lender. It is the fact that the true owner is unknown that is enabling borrowers to (a) challenge standing in foreclosures thus dismissing the foreclosure or stopping the judicial sale of the property and (b) sometimes getting the house for nothing. 


It is suggested that you demand pre-approval for a short sale that amounts to the cumulative total of the following list — and keep in mind that by combining this with allegations of TILA violations and the other claims we have suggested on, you are threatening them with TOTAL loss of the loan and investment so you are more likely to get their attention:


  1. Your down payment
  2. Additional money you spent on the house as a result of taking ownership or re-financing
  3. Points paid on the loan
  4. All interest paid on the loan
  5. The loss in fair market value measured by the the appraised value at the top, minus the current value on sale, after a 6% real estate commission and various other seller expenses.


  • You bought a house for $630,000 and you made a down payment of $130,000. (Fill in your own figures to figure this out for yourself). 
  • The house was appraised at $650,000. 
  • You took a loan for $500,000, paying 
  • $15,000 in points and thus far you have paid 
  • $35,000 in interest. 
  • You also made improvements to the house that you can’t take with you of another $25,000. 
  • If you sell the house now you can’t get more than $480,000, which after commissions and other costs will net $450,000 (loss of $200,000 from “benefit of the bargain”). 
  • In your letter or pleading defending or foreclosure or challenging the lender without foreclosure pending, you will ask for pre-approval for a short sale discounting their loan to you to $95,000. 
  • This will enable you to sell the house for a net of $450,000 if you choose to, give the lender $95,000, who will give the investing pool the $95,000 less servicing fees with a “sorry Charlie” letter. 
  • You will net $355,000 on the deal, which pretty much makes you whole after the entire sorry affair.


The lender will do one of three things: They MUST answer you within 20 days under Truth in Lending laws. They will deny your request and offer you something else assuming you cite specific violations of the  truth in lending laws and make the allegations we have recommended here. They will agree to your proposal. Or they will negotiate with you. If they start negotiating, realize that you hit a nerve and you are sitting in the driver’s seat. You might be very pleasantly surprised by the outcome. 


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