Fla 2d DCA: HELOC Instrument Not Self-Authenticating Article 3 Note

Just because an instrument is not self-authenticating doesn’t mean it can’t be authenticated. Here the Plaintiff could not authenticate the note without the legal presumption of self-authentication and all the legal presumptions that follow.  And that is the point here. They came to court without evidence and in this case the court turned them away.

Florida courts, along with courts around the country, are gradually inching their way to the application of existing law, thus eroding the dominant premise that if the Plaintiff is a bank, they should win, regardless of law.


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see HELOC Not Negotiable Instrument and Therefore Not Self Authenticating

This decision is neither novel nor complicated. A note can be admitted into evidence as self-authenticating without extrinsic evidence (parol evidence) IF it is a negotiable instrument under the State adoption of the UCC as State Law.

The inquiry as to whether a promissory note is a negotiable instrument is simple:

  • Does the body of the note claim to memorialize an unconditional promise
  • to pay a fixed amount
  • (editor’s addition) to an identified Payee? [This part is assumed since the status of the “lender” depends upon how and why it came into possession of the note.]

A note memorializing a line of credit is. by definition, not a fixed amount. Case closed, the “lender” lost and it was affirmed in this decision. There was no other choice.

The only reason why this became an issue was because counsel for the homeowner timely raised a clearly worded objection to the note as not being a negotiable instrument and therefore not being self-authenticating. And without the note, the mortgage, which is not a negotiable instrument, is meaningless anyway.

This left the foreclosing party with the requirement that they prove their case with real evidence and not be allowed to avoid that burden of proof using legal presumptions arising from the facial validity of  a negotiable instrument.

The typical response from the foreclosing party essentially boils down to this: “Come on Judge we all know the note was signed, we all know the payments stopped, we all know that the loan is in default. Why should we clog up the court system using legal technicalities.”

What is important about this case is the court’s position on that “argument” (to ignore the law and just get on with it). “This distinction is not esoteric legalese. Florida law is clear that a “negotiable instrument” is “an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order.”§ 673.1041(1), Fla. Stat. (2012) (emphasis added).”

So THAT means that if the trial court is acting properly it will apply the laws of the state and THAT requires the court to rule based upon the UCC and cases involving
negotiable instruments.

But none of that invalidated the note or mortgage, nor should it. THAT is where it gets interesting. By denying the note as a self authenticating instrument the court was merely requiring the foreclosing party to proffer actual evidence regarding the terms of the note, including the manner in which it was acquired and how the foreclosing party is an injured party — a presumption that is no longer present when the note is denied admission into evidence as a self authenticating negotiable instrument.

The foreclosing party was unable to produce any testimony or exhibits demonstrating the prima facie case. Why? Because they are not and never were a creditor nor are they agent or representative of the actual party to whom the subject underlying DEBT was owed.


Florida law requires the authentication of a document prior to its admission into evidence. See § 90.901, Fla. Stat. (2012) (“Authentication or identification of evidence is required as a condition precedent to its admissibility.”); Mills v. Baker, 664 So. 2d 1054, 1057 (Fla. 2d DCA 1995); see, e.g., DiSalvo v. SunTrust Mortg., Inc., 115 So. 3d 438, 439-40 (Fla. 2d DCA 2013) (holding that unauthenticated default letters from lender could not be considered in mortgage foreclosure summary judgment). Proffered evidence is authenticated when its proponent introduces sufficient evidence “to support a finding that the matter in question is what its proponent claims.” § 90.901; Coday v. State, 946 So. 2d 988, 1000 (Fla. 2006) (“While section 90.901 requires the authentication or identification of a document prior to its admission into evidence, the requirements of this section are satisfied by evidence sufficient to support a finding that the document in question is what its proponent claims.”).

There are a number of recognized exceptions to the authentication requirement. One, as relevant here, relates to commercial paper under the Uniform Commercial Code, codified in chapters 678 to 680 of the Florida Statutes. “Commercial papers and signatures thereon and documents relating to them [are self-authenticating], to the extent provided in the Uniform Commercial Code.” § 90.902(8); see, e.g., U.S. Bank Nat’l Ass’n for BAFC 2007-4 v. Roseman, 214 So. 3d 728, 733 (Fla 4th DCA 2017) (reversing the trial court’s denial of the admission of the original note in part because the note was self-authenticating); Hidden Ridge Condo. Homeowners Ass’n v. Onewest Bank, N.A., 183 So. 3d 1266, 1269 n.3 (Fla. 5th DCA 2016) (stating that because the endorsed note was self-authenticating as a commercial paper, extrinsic evidence of authenticity was not required as a condition precedent…

We cannot bicker with the proposition that “for over a century . . . the Florida Supreme Court has held [promissory notes secured by a mortgage] are negotiable instruments. And every District Court of Appeal in Florida has affirmed this principle.” HSBC Bank USA, Nat’l Ass’n v. Buset, 43 Fla. L. Weekly D305, 306 (Fla. 3d DCA Feb. 7, 2018) (citation omitted). That is as far as we can travel with Third Federal.

The HELOC note is not a self-authenticating negotiable instrument. By its own terms, the note established a “credit limit” of up to $40,000 from which the Koulouvarises could “request an advance . . . at any time.” Further, the note provided that “[a]ll advances and other obligations . . . will reduce your available credit.” The HELOC note was not an unconditional promise to pay a fixed amount of money. Rather, it established “[t]he maximum amount of borrowing power extended to a borrower by a given lender, to be drawn upon by the borrower as needed.” See Line of Credit, Black’s Law Dictionary, 949 (8th ed. 1999).

This distinction is not esoteric legalese. Florida law is clear that a “negotiable instrument” is “an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order.”§ 673.1041(1), Fla. Stat. (2012) (emphasis added).

“Junior” lienholders Should File Wrongful Foreclosure Actions

As will be discussed in the workshops coming up in California (check the schedule), it isn’t just the homeowner who could be filing wrongful foreclosure actions for damages. Junior lienholders should be doing the same. They are the association that maintains the property or common elements, second mortgage holders, holders of HELOCS etc.

When THEY file, it will institution vs institution and the playing field will be more even. If the foreclosure was accomplished by a credit bid, and nearly all of them fall into that category, then all it takes is an allegation that the bidder was not the secured creditor and therefore the deed on foreclosure was invalid because it was wrong for the auctioneer to accept the credit bid.

Presto the first lien is gone and the the next “junior” lienholders move up in priority leaving the so-called first loan in the dust. That leaves the homeowner with a workable debt in which he can maintain the home, pay the junior lienholders, and tell the pretender lender to go pound salt.

Beware of Modification Scams: Harris Nails Another One Actions

Editor’s Comment: Don’t give anybody money unless you have checked them out. I’m not saying they must have a six year history in this like I do, but get some references and don’t part with your money until you understand exactly what they are planning to do and why it will or has a likelihood of working.

Modifications, for the most part, only work if the homeowner is agressive rather than timid and passive. By submitting a modification proposal along with an expert analysis and support for showing that the modification proposal is far more reasonable than the proceeds in foreclosure, homeowners can go to court and simply allege that the servicers/owners breached their statutory duty to “consider” modification proposals.

If you take one that they offer, then they are COUNTING ON THE FUTURE FORECLOSURE OF YOUR HOME. It’s what they need in order to prove to the investors who funded this mess that they lost money. Without the foreclosure, the investors are going to start getting increasingly involved and when they do (and I predict they will) they are going to hit the ceiling. When large institutional investors and pension funds start showing a patternof conduct violating the laws and rules of the “game” then maybe we will see the prosecutions that we saw in the savings and loan scandals.

Attorney General Kamala D. Harris Announces Judgment in National Multi-Million Dollar Mortgage Scam
LOS ANGELES — Attorney General Kamala D. Harris today announced defendants who ran a national loan modification scam were ordered to pay more than $4 million in penalties and restitution, including $2 million to consumers who were falsely promised modifications of their mortgage loans.
More than 1,000 customers paid more than $2 million for loan modification services to Statewide Financial Group, Inc., which did business as US Homeowners Assistance and Webeatallrates.com, and was based in Orange County. In July 2009, the Attorney General’s office shut down the business, which had been in operation since January 2008.
“These defendants took advantage of vulnerable people in extremely difficult circumstances, including many who faced imminent loss of their homes,” said Attorney General Harris. “The significant financial penalties imposed by the court let scammers know that severe consequences will flow to those who defraud California consumers.”
The Orange County Superior Court ordered that every US Homeowners Assistance loan modification customer should receive a full refund upon request. The defendants were also permanently enjoined from engaging in the conduct that led to the lawsuit and were ordered to pay $2 million in civil penalties. It is unclear, however, how much money will be recovered and available to pay refunds or penalties.
The prosecution of this action took nearly three years, culminating in a multi-week bench trial in March 2012. The business’ owners, Zulmai Nazarzai and Hakimullah Sarpas and Fasela Sheren (who went by the name Sharon Fasela), were all found liable for violating California’s Unfair Competition Law and False Advertising Law.
In a separate proceeding in late 2010, Attorney General Harris successfully prosecuted Nazarzai for contempt of court for his refusal to turn over $360,000 unlawfully taken by defendants as ordered by the court. He has been incarcerated in the Orange County jail since December 2010 because of his continued refusal to comply with the court’s order.
Attorney General Harris formed the Mortgage Fraud Strike Force in May 2011 to investigate and prosecute crimes and wrong-doing related to mortgages, foreclosures, and real estate. The prosecution of this action is part of Attorney General Harris’ ongoing efforts to protect homeowners, which also includes the national mortgage settlement and the California Homeowner Bill of Rights.
Copies of the court’s judgment and statement of decision are attached to the online version of this release at http://www.oag.ca.gov.

# # #

You may view the full account of this posting, including possible attachments, in the News & Alerts section of our website at: http://oag.ca.gov/news/press-releases/attorney-general-kamala-d-harris-announces-judgment-national-multi-million


COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary COMBO TITLE AND SECURITIZATION SEARCH, REPORT, ANALYSIS ON LUMINAQ

see 10-lies-we-live-by-and-should-stop-believing-if-we-want-this-to-stop


“ONE crucial reason the nation’s mortgage industry ran itself — and the entire nation — off the rails was its obsession with speed. Mortgages had to be approved chop-chop, loans pooled instantly. When it came to foreclosure, well, the quicker the better.”

“…no witnesses had been interviewed and that the coalition had sent out just one request for documents — and it has not yet been answered.”

“Treating holders of first and second liens alike is a boon to the banks, since so many second mortgages are owned by the nation’s largest institutions; many of the firsts are held by investors in mortgage-backed securities. The banks want the first mortgages to take the hit, leaving the seconds intact. Or at least for them both to share the pain equally.”

EDITOR’S COMMENT: Gretchen Morgenson has hit the nail on the head. Here we are AGAIN with SPEED being the driving force instead of asking and answering the appropriate questions. Why the rush? Probably because the more time that goes by, the more time there will be for some AG investigations to dig deeper and find out that the entire securitization scheme was a scam — an elaborate illusion that is causing our government, our economy and our relations with other nations to run on vapors.

The plain and obvious fact here is that the AG’s, as elected officials are more interested in pleasing their donors on Wall Street than the citizens they serve. With trillions of dollars in fake securitized loans, trillions of dollars in bailouts, trillions of dollars in unpaid taxes, fees, fines and probably $100 trillion in property or more subject to dubious title claims, the announcement of a $20 BILLION settlement is absurd. It is an unconditional surrender to Wall Street.

In the bizarre world we call American politics, the  victims — all the taxpayers, homeowners, and investors who were caught up in this PONZI scheme — are the ones paying the reparations. It’s all backwards. That’s like Jewish and other families whose property was seized and families  tortured and killed in World War II being required to pay Germany war reparations. Germany stepped up to its obligations not only because of unconditional surrender but because of a collective national guilt that they have been earning their way out of for over 60 years. What they did was bad and nobody in Germany would argue otherwise except a few extremist idiots.

But on Wall Street and the world media, there seems to be a gaslight approach to the worst financial fraud in history causing death, destruction and enslavement to generations of people all over the world. The job of an Attorney General is to enforce the law, not invent it and not to play politics on the basic rights of every citizen to be safe from predation and every taxpayer to be given the truth about the use of the their taxpayers and debts being created in the name of taxpayers who have not agreed to the deal. Nor should they.

Wall Street divided and created barriers between the real lenders (investors) and the real homeowners (also investors in securitization) and created the appearance of a deal that was good for Wall Street but that was neither good for nor acceptable to either the lenders or the homeowners. They did it by presenting different deals to each one without the other one knowing the disconnect between the deal they thought was on the table and the real deal with which Wall Street scammed the entire marketplace and world finance.

The proposed settlement, which is meant to to bar or persuade investors and homeowners to stop suing to recapture what was stolen from them, is an affront to the nation and the world. As Attorney Ashcroft said when the torturing was sanctioned by the Bush administration, “History will not treat us well for this.”


A Swift Deal May Not Be a Sound One


ONE crucial reason the nation’s mortgage industry ran itself — and the entire nation — off the rails was its obsession with speed. Mortgages had to be approved chop-chop, loans pooled instantly. When it came to foreclosure, well, the quicker the better.

So it is disturbing that the same need for speed is at work in the bank settlement being devised by state attorneys general relating to improper loan-servicing and foreclosure practices. When Tom Miller, the Iowa attorney general who leads the talks, announced initial terms of a deal on Monday, he said, “We’re going to move as fast as we can.”

While some might argue that a rapid approach will help borrowers, it is apt to benefit the banks far more. Hurrying to strike a deal means less time to devote to understanding how pernicious the foreclosure practices were at the nation’s largest institutions. How can you determine appropriate penalties for troubling practices when you haven’t conducted a full-fledged investigation?

Remember that the attorneys general who are participating in this settlement process have been a coalition only since October. Two people who have been briefed on the discussions, but who asked for anonymity because the deal was not final, told me last week that no witnesses had been interviewed and that the coalition had sent out just one request for documents — and it has not yet been answered.

And, yet, along comes a 27-page outline of remedies that the banks would have to abide by in their loan servicing and foreclosure businesses. Talk has also circulated that the banks would have to cough up $20 billion to close the deal, though there are no figures in the outline.

Mr. Miller declined to be interviewed about the proposal. But Geoff Greenwood, his spokesman, disputed the notion that the attorneys general have done no investigation. “We have dealt with this issue for some three and a half years on a day-to-day, front-line basis with consumers,” he said. “We know what the problems are, and we know what needs to change.”

Maybe so. But being able to produce reams of deposition testimony from bank employees and documents turned over under subpoena would give those negotiating for consumers and mortgage investors far more leverage than they’d have working with a series of talking points.

Recent lawsuits filed against Bank of America by Terry Goddard, then the Arizona attorney general, and Catherine Cortez Masto, Nevada’s attorney general, show the power that in-depth investigations provide. Both cases contend that the bank engaged in consumer fraud by failing to abide by loan modification provisions of a previous state settlement completed with Countrywide Financial in 2009. The bank has disputed the allegations, but the filings by these officials are chock-full of details gleaned from investigating more than 250 consumer complaints.

Mr. Miller’s list of remedies is helpful in showing just how dysfunctional and abusive the loan servicing business has become. Consider this proposed requirement: “Affidavits and sworn statements shall not contain information that is false or unsubstantiated.” And how’s this for revolutionary: “Loan servicers shall promptly accept and apply borrower payments.” (When they don’t, late fees magically appear.) And, get this: Loan servicers should also track the resolution of customer complaints.

You don’t say!

To be sure, there is substance to Mr. Miller’s proposal. A settlement would bar servicers from foreclosing on borrowers amid a loan modification, for example. And when a modification is denied, the servicer would have to explain why, and in detail.

But the terms severely disappoint in their treatment of second liens, a major sticking point in many loan modifications. The proposal would treat first and subsequent mortgages equally, turning upside down centuries-old law requiring creditors at the head of the line to be paid before i.o.u.’s signed later.

Treating holders of first and second liens alike is a boon to the banks, since so many second mortgages are owned by the nation’s largest institutions; many of the firsts are held by investors in mortgage-backed securities. The banks want the first mortgages to take the hit, leaving the seconds intact. Or at least for them both to share the pain equally.

To some degree, the document presented by Mr. Miller raises more questions than it answers. For example, what will state attorneys general have to give up regarding future lawsuits or enforcement actions against the banks if they sign on to the settlement? Typically, such deals contain releases barring participants from bringing new but related cases.

As they negotiate with Mr. Miller, you can bet the banks will push for aggressive releases. But because these institutions underwrote many toxic loans in the boom, barring attorneys general from bringing actions against them for lending improprieties is no way to hold dubious actors accountable.

One attorney general, Eric Schneiderman of New York, is concerned about such releases. According to a person briefed on the discussions, Mr. Schneiderman has told Mr. Miller that he will not participate in a deal that would preclude his office from pursuing claims against the banks relating to their mortgage origination, securitization and marketing practices. Mr. Schneiderman declined to comment.

IT is also unclear whether the settlement would prevent borrowers or investors from bringing their own lawsuits against loan servicers — a terrible result. And the list of terms has only the briefest mention of restitution for borrowers who have been hurt by questionable loan servicing.

These borrowers are legion. Reparations should not be limited only to those who were removed from homes improperly. Consider four who are suing the Money Store, a lender and loan servicer. Their two cases contend that the Money Store levied improper legal fees while borrowers were in foreclosure; one case has been dragging on for 10 years, the other for eight.

According to court filings, one couple paid $1,125 in legal fees and expenses associated with two bankruptcy motions that were never filed. They also paid $4,418 for legal work said to have been done by an outside firm (which lawyers for the Money Store have not proved it paid).

Another borrower paid $1,750 for legal fees that the Money Store could not show were paid to the firm that supposedly did the work. And yet another borrower paid $5,076 in fees and expenses that do not appear to have been submitted to the outside firm charged with the legal work, according to court filings.

“We picked four plaintiffs out of the hat here, and all four of them had situations where thousands of dollars in legal fees were passed on to them but where the evidence indicates the law firms were never paid,” said Paul Grobman, a New York lawyer for the borrowers. He wants to know if the servicer kept the fees.

The lead lawyer representing the Money Store declined to comment.

Shoddy loan servicing has clearly done significant damage to borrowers. If a state settlement morphs into yet another gift to the banks, let’s hope that at least some attorneys general will take a different path.





I would add that if you are the holder or the attorney for the holder of junior liens, you should pay careful attention, because it is possible if not likely that you will have an opportunity to improve the value of that lien and at the same time clear the title with the homeowner such that the predatory loan defenses and title defenses disappear forever.

While the judiciary has been slow to apply the normal requirements of law, procedure and prioritization of real estate interests, that has only been apparent where the homeowner is contesting a foreclosure and the presumption in the Judge’s mind is that you’re a deadbeat who is trying to use technical gimmicks to delay or get out of a jam. In several cases we have reported here the rules were easily applied when the party seeking relief was an institution seeking to perfect its lien and establish its priority in the chain of title.

What I am suggesting here is that a deal between a junior lien holder with no equity covering their current position and the homeowner with an uphill fight on their hands could result in a favorable outcome for everyone except the first lien-holder. The following is a hypothetical scenario executing this strategy:

  • John Jones owns a house worth $75,000. The first mortgage is $200,000 and the second mortgage is $50,000. The original appraisal was $270,000. Jones also has a lien on his property for non payment of assessments to his condominium association. Each lien under law is subject to the procedure of foreclosure.
  • Scenario 1: The association sues to foreclose claiming the other lien holders have not perfected their liens and citing the deficiencies we all know from this blog. Homeowner settles or redeems property after Association has obtained a judgment placing it in first position. Homeowner is defendant is foreclosure of Association lien. If the Judgment states that the first lienholder failed to perfect their security interest, then the association has done your work for you.
  • Scenario 2: The holder of the second mortgage or HELOC which now views the loan as virtually worthless, or at least without any security covering the the loss, brings a quiet title action with you jointly establishing them is first position. In exchange for funding the litigation, the second place holder gets into first place, establishes that the first holder did not perfect their security interest and gets paid in full with or without a bonus.
  • Scenario 3: Homeowner is more creative and gets third party to purchase the holder of the junior lien and uses the same tactics as above. But without it appearing as bank vs. bank, the likelihood is that the court will see it as a homeowner maneuver and resort back to the wrongly conceived presumptions that makes all this necessary in the first place. A smart credit union or small community bank would do very well with this and could pilot it one house at a time.

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There is practically nobody left who doesn’t see that the “ownership” of the loan is a big red question mark. The question that is unresolved is whether that is relevant to questions of title and foreclosure sales. Here is the issue: In most cases the title record (the official title records books located in the property clerk’s office) show only one “party” to the note (a company identified as a lender) and one “party” to the security instrument — the mortgage or Deed of Trust — (a company identified as the mortgagee or beneficiary most frequently MERS or some other straw man or nominee).

So the first problem is that from the start, the ownership of the note and the ownership of the mortgage are split intentionally by the parties who engineered the “loan” closing. With the exception of a few states where the big banks lobbied for corrective legislation that probably is unenforceable or unconstitutional, it is not possible to enforce a mortgage that is not incident to a note. Each state has adopted the Uniform Commercial Code and its own property laws that make it impossible for one person to get the house and another to get a monetary judgment for the note —- both based upon the same obligation.

  • They must be the same person or there is no enforcement of the security instrument (i.e., no foreclosure). And in those states, the mortgage or deed of trust is not incident to the note unless they have a common “owner.” So even before we get to the issue of securitization of the receivable, we have a problem. There is basically no law that would allow foreclosure of a so-called mortgage or deed of trust in which the holder of the mortgage or deed of trust is different than the holder of the note.

Before we get to the securitization issue, there is one more factor that is covered by Reg Z and the Truth in Lending Act. It is whether the “loan” was table funded. A table funded loan is one in which the party identified as a lender was not the source of the money in the transaction. The prohibition and restriction against these transactions is meant to keep the consumer informed about the identity of the party with whom he/she is doing business and therefore able to decide whether in fact they want to do business with the party who is really funding the loan.

  • The title problem with a table-funded loan is obvious: the note is supposedly a description of the obligation that arises when the borrower accepts the benefits of the monetary advance from the source of funds. In a table funded loan, the note does NOT describe the real parties and therefore is not proper evidence of the obligation and thus cannot be used as a substitute for proof of the obligation.
  • Federal law and rules state that anyone who as a matter of practice is doing table-funded loans, is defined as a predatory lender.
  • This means that if someone wants to enforce the obligation, they must have more than the note to prove their case. This is precisely where the pretender lenders are finessing the courts — because before the antics of the last decade, there was no difference between the obligation and the note and everyone on both sides of even an adversary proceeding usually agreed that the original note was proper evidence of the obligation.
  • This also means that if someone wants to foreclose, they need something more than the note, because the note, as we have seen, is NOT the complete evidence of the obligation — there is another party involved who was undisclosed and who was the source of the funds. So the obligation was between the borrower and the source of the funds. But the borrower was not told or informed that the money being advanced was from another entity.
  • Ordinarily this would not present a major problem, but it still would require corrective action in order to clear title for  purposes of a satisfaction or release of the mortgage or deed of trust, refinance, sale, second mortgage, condominium association lien, homeowner association lien, HELOC, non-judicial sale or judicial sale. Without this corrective action ON RECORD at the county recorder’s office, the documents releasing or transferring title to the property would be fatally defective in that the real party who advanced the funds did not execute a release or satisfaction, leaving the borrower or the borrower’s successor with the exposure of yet another foreclosure or another claim on the original obligation. This defect is either suspect or apparent on its face when you see MERS involved or an “originating Lender” that is not a bank (and usually out of business now).

All of this mind-numbing analysis morphs from nitpicking to highly relevant when securitization enters the picture. Securitization as it was used in actual practice, i.e., real world reality, was simply a process by which the payments were split from the obligation, not the note and reframed as the basis for a third party obligation under the terms of a mortgage bond sold to third party investors. So the source of funding never receives the note or any of the borrower’s closing documents. He receives a mortgage bond in which there are multiple payors, obligors, and contingent liabilities only one of which is the borrower’s obligation to repay the obligation.

There are two primary defects in this process that are of high significance:

  1. In practice, the intermediaries used the documentation for securitization to multiply rather than split the obligation to pay amongst the various payors and co-obligors.
  • This means that for every dollar that was advanced for the benefit of the borrower, an obligation was ADDED to the receivable stream for each payor or co-obligor that was ADDED to the obligation to make payments under the mortgage bond. This is where the intermediaries began to make multiples of the money being funded rather than small basis points as was customary in the industry.
  • Through the use of highly sophisticated cloaked transactions, each dollar funded was multiplied as a nominal receivable which in turn was sold multiple times and insured multiple times in multiple ways.
  • Hence the the total evidence of the borrower’s obligation consists of the closing borrower documents PLUS the closing investor documents. The total accounting consists of the the servicing record of the borrower’s payments PLUS the distribution and tape record of reports and payments to the bond holders.
  • This totality of the evidence reveals that the borrower’s obligation resulted in multiple payments by multiple payors and co-obligors, some of whom made money participating in the sham scheme, and some of whom lost money in the scheme.
  • In most cases, one of the groups that lost money were the original investors who advanced money for their share of the flow of receivables described in the mortgage bond, which included, at all times, the receivables due from third party payors and co-obligors. Other losers were traders and institutions that were creating the appearance of an unregulated but phantom securities market in which profits and losses were apparently made on a daily basis, but which in fact were all accounting entries much like the Madoff scheme.
  • The current foreclosure scheme ignores these factors enabling intermediaries dubbed “pretender lenders” to profit from the confusion by pretending to be lenders when in fact they were never lenders of record and never lenders in the sense that they ever advanced any money. The intermediaries are filing false, fabricated and even forged or back-dated affidavits in the name of “Trustees” for trusts that do not exist or which have been dissolved or paid in whole or in part. The lender having been paid or settled as to the obligation under the mortgage bond thus releases any further claim. The intermediaries profit by pocketing the multiples of payments received, and the borrower suffers from the loss of a home or enforcement of a note that was never the evidence of the obligation.
  1. In practice, the actual source of funding — the party who advanced funds and who received a mortgage bond instead of the evidence of the borrower’s obligation —- NEVER held the note and was never intended to hold the note — and NEVER was the mortgagee or beneficiary and never was intended to be the mortgagee or beneficiary. Thus a declaratory action against the mortgagee or beneficiary of record should succeed in raising the priority of the interest of the plaintiff above that of the record holder of the security instrument, since the record holder has no obligation owed to it, and never was intended to be the recipient of funds nor to have the right or capacity to foreclose on the loan.


Foreclosure Defense and Offense: ALL 2001-2008 WERE ASSIGNED AND SECURITIZED


In view of the fact that the bulk of mortgages, especially those created in connection with refinance and home equity lines which were initiated between 2002 and 2007, were only a small cog in a much larger machine, anyone even vaguely familiar with foreclosure litigation knows that the plaintiff in the foreclosure action is often styled as something along the lines of “So and so as Trustee for XYZ Asset-Backed Securities”. There is much more to this denomination than meets the eye, and whether or not such a plaintiff even has the right to institute a foreclosure case at all is a question which anyone defending such a foreclosure should be asking right up front.

There are numerous articles on this blog which explain the threshold concept of why the plaintiff in these types of cases winds up being a trustee for a group of otherwise unidentified holders of securities. The “Cliff Notes” version is presented here for the purpose of this article and to give the reader a place to begin their inquiry. However, it is strongly recommended that the reader delve into the wealth of information on the blog in order to have a more complete understanding of the entire transaction of which the mortgage was only literally “the pimple on the elephant” before taking the actual step of defending a foreclosure based on any of the matters herein.

In the case of the “asset-backed security” plaintiff, the sceanario went something like this:

(a) borrower seeks refi or HELOC (home equity line of credit) from mortgage broker, asking broker for best loan program available given borrower’s income, credit history, and ability to repay the loan;

(b) mortgage broker either initially tells borrower that they qualify for a fixed rate loan with an even payment throughout the loan and later changes this to “the only thing available to you is an adjustable rate loan”, or makes this representation at the outset if the borrower has sketchy credit, low income, etc.;

(c) mortgage broker presents borrower with loan application;

(d) loan is “approved” either on original appraisal or “revised” or “amended” appraisal if original was not sufficient to create the necessary loan-to-value to approve the loan;

(e) loan is also “approved” on basis of borrower’s qualifying for “teaser rate” only, not the adjustable rate later in the life of the loan which the originating lender knew the borrower could not qualify for, but did not care about as the loan was already either presold to aggregator or would be after closing;

(f) assignment of the mortgage to aggregator has either already been made at the time of the initial approval for the loan, at the time of the application, or is made shortly after closing;

(g) closing takes place. Original “lender” (which in certain cases was nothing more than a front for a securities brokerage) has already sold or assigned the mortgage or will do so shortly;

(h) mortgage is assigned to an aggregator, “bundler”, or other third-party for further resale;

(i) aggregator sells mortgage, with hundreds or thousands of others, in “bundles” to investment bankers;

(j) investment bankers create series of “mortgage-backed securities” to be sold to investors with false, unsupported, or outright fraudulent AAA ratings, as underlying stability of the borrowers (who oftentimes were not and could not have been approved for the life of the adjustable rate loan) is dubious at best, and probably nonexistent as borrowers did not qualify as having ability to repay loan after “teaser” rate expired and higher rate kicked in;

(k) borrowers default in droves, causing loss of value of security;

(l) trustee or other third party is appointed to represent the holders of the “mortgage-backed securities” to foreclose on the collateral (the property).

Thus, the name of the plaintiff in a foreclosure lawsuit can reveal a lot about where the underlying mortgage went and how it got there. With these types of actions, one knows, right away, that there had to have been multiple assignments of the mortgage from the time of initiation to the point where the mortgage became collateral for an “asset-backed security”. As such, the first series of questions to be asked are those surrounding the assignment process:

(a) for each assignment, was there a valid assignment given by one with full authority to transfer the interest in the mortgage?

(b) was the assignment recorded?

(c) was there any consideration for the assignment (e.g. were any monies paid to purchase the mortgage at a discount, thus creating a payment against the obligation on the mortgage note)?

The answers to these threshold questions will directly impact how the defense of the foreclosure will proceed. If all of the assignments in the chain were valid, then the ultimate assignee (here, the Trustee for the Certificate Holders of the Asset-Backed securities) took the mortgage subject to all defenses which the borrower could have raised against the originating “lender”. As such, on proof of a valid chain of assignments, defenses which the borrower may have had against the originating lender under the Federal TILA, HOEPA, and RESPA Statutes; state Consumer Protection statutes; and other laws (see blog glossaries for definitions of these terms) can be asserted against the “trustee” plaintiff. Obviously, if the assignments are nonexistent or problematic, the borrower can assert that the “trustee” plaintiff does not have the legal capacity to even institute the foreclosure action in the first instance (known as “lack of standing or capacity” in legal lingo).

The next level of inquiry in any multiple-assignment process involves a determination of whether any payments by any of the assignees to the assignor in connection with the assignment can be characterized as payments against the underlying obligation of the note to which the mortgage attaches. The originating “lender” is obviously not going to assign the mortgage to an aggregator for no money. As such, there is the possibility that the foreclosing plaintiff may have wrongfully claimed the borrower to be in default, which results not only in a fraud being perpetrated upon the borrower, but also on the court as well. Unrecorded or unapplied paydowns against the note result in the foreclosing plaintiff not only seeking monies which it is not owed, but also in effect causing the theft of property to which the plaintiff is not entitled.

These threshold issues should be addressed at the outset of any foreclosure proceeding where there is an “asset-backed security” plaintiff, as the results of the inquiry may open up numerous additional avenues of defense and potential affirmative claims as well. Obviously the more diligent one is with their inquiry, the better potential for an effective, multi-level defense against the foreclosure.

A word of caution, however, which we have echoed in other blog articles: although these concepts may appear deceptively simple, asserting them properly in a foreclosure action as a defense, affirmatively in a separate legal action, or inside of a Federal bankruptcy proceeding is both a science and an art best left to attorneys who are versed in the technical terminology and the proper procedural rules in order to render these defenses effective. We thus repeat the recurring caveat to all non-lawyers reading these articles:


Jeff Barnes, Esq.

Foreclosure Defense: Fraudulent Appraisals, Teaser Rates, and Manufactured Defaults: Boons to Borrowers in Defending Foreclosure

Fraudulent Appraisals, Teaser Rates, and Manufactured Defaults: Boons to Borrowers in Defending Foreclosure
As more and more lender misconduct hits the Internet airwaves and more of us continue our investigation into and scrutiny of the practices of originating lenders and their downline successors, certain themes are developing which give rise to numerous defenses to mortgage foreclosure actions. Three such issues are discussed here which are not mutually exclusive; which are “inextricably intertwined”; and which, when properly presented, may force a foreclosing party to bring additional parties into a foreclosure action, each of which is not only a potential additional “settlement pot” for the borrower’s claims, but also, on playing the “blame game”, can provide the borrower with free information to bolster the borrower’s claim as well.
The first is the fraudulent appraisal, particularly in foreclosure actions involving equity lines of credit (also called home equity lines of credit or “HELOC”s) and refinance transactions where “cash out” is provided to the borrower. It goes without saying that a mortgage loan of any type depends in material part on the outcome of the appraisal of the property, which directly affects the loan-to-value (“LTV”) which percentage is used to calculate the maximum amount of money which can be disbursed as a “cash out” on a refinance, or amount of credit line which is extended on a HELOC. Given the literature concerning the tremendous pressure by the investment bankers to get mortgage loans signed up so that they could be sold to an aggregator and then bundled and used to “back” a “mortgage-backed” security, it was incumbent upon the appraiser to make sure that the appraised value of the property came in at the right number to close the loan, whether the appraisal was accurate or not. What is being learned is that a great many of these appraisals were inaccurate, misleading, or outright false and based not on true “comparable sales” as required for a proper appraisal.
The second is the so-called “teaser rate” in Adjustable Rate Mortgage (ARM) loans. Literally hundreds of thousands of these loans, made to borrowers with unproven, dubious, little, or no income, “teased” or lured the borrower in with a promise from the mortgage broker or “lender” that the interest rate on the loan would be small for the first couple of years before it would go up, but with the attitude that “Hey, don’t worry, your property keeps going up in value, so by the time the new rate kicks in, you will have more equity and you can just do another ARM for a low rate”. What the mortgage broker and lender knew, however (but which was not disclosed to the borrower) was that the loan was only qualified for the borrower, in view of the borrower’s unproven, dubious, little, or no income, on the “teaser” interest rate, with the “lender” knowing that the borrower, once the “new” rate kicked in, DID NOT AND COULD NOT qualify for the loan and would not be able to make the increased mortgage payment based on the borrower’s income. As such, a default was built into the loan from the outset. But hey, no matter, as the originating “lender” had no intention of keeping the loan anyway, that would be someone else’s problem later on and down the line.
Which brings us to the effects of the manufactured default. Teaser rate loans to borrowers with unproven, dubious, little, or no income were doomed from the start. The originating lender knew or had to know that a default upon instance of the new and higher interest rate on the loan was almost inevitable, but hey again (to my friend purchasing these loans), YOU CAN FORECLOSE ON THE PROPERTY, SO YOU ARE PROTECTED!  This line had to have been repeated down the line at least through the first few layers of resale of the loans before bundling and being used as alleged “backing” for a “mortgage backed security”, when it really didn’t matter anymore except to those who now seek to foreclose on something they may not really even legally own or have rights to, and is probably not worth what the lender said it was worth.
So now, as a hypothetical (based on existing facts from certain pending cases), mortgage broker sucks in low-income borrower to take a cash-out refi on his house on a 2-year ARM with a low initial interest rate. Mortgage broker convinces borrower that Bank A has the best deal for borrower and that loan WILL be approved shortly despite no proof of borrower’s income, or on whatever income figure borrower claims (also known in mortgage parlance as “stated” income). Mortgage broker and Bank A make sure that appraiser inputs the “right” value for property on the appraisal so that the proper LTV is met to make the loan work even if true comps are not available. Bank A makes loan and immediately sells off mortgage to aggregator who in turn sells it off to investment banker in bundles for mortgage-backed-securities purposes. Bank A sells off right to “service” the loan to Servicing Agent, which collects payments from borrower, who defaults when teaser rate expires. Although there are numerous legal issues in this process, the focus here is on the interplay of the effect of the fraudulent appraisal, teaser rate, and manufactured default as they relate to assisting the borrower defending a foreclosure.
Servicing Agent now sues borrower for foreclosure claiming default in payment. Borrower defends against the Servicing Agent (as the purported “lender”) and asserts claims against Servicing Agent for lender liability, violation of lending laws, and other remedies. Servicing Agent claims “not me”, then looks to see who it can blame for borrower’s claims, and is thus forced to bring in Bank A, appraiser, and mortgage broker, who are each going to cry “not me” as well and start pointing fingers. The beauty of this is that the Servicing Agent has now provided the borrower with several other parties to seek relief from and has also provided the claims to be asserted against these additional parties. Further, one or more of these new parties may agree to “cooperate” with the borrower by disclosing the truth in exchange for a quick settlement either directly or through their professional liability insurance carriers rather than risk the potential of an adverse Final Court Judgment being entered against them and/or a professional license suspension or revocation, or loss of professional liability insurance coverage.
Given the enormity of the resale/aggregation/bundling/securitizing of mortgage loans and the myriad legal issues involved in the broad scheme of these transactions, a borrower threatened with foreclosure should never be shy to seek an opinion as to their potential defenses from an attorney who has a working knowledge of the pertinent concepts and how they operate in synergy to the benefit of the borrower. The investment in obtaining such an opinion could literally save the roof over the head of you (the borrower) and your family.
Jeff Barnes, Esq.

Foreclosure Defense: Stated Income Loans, Income Overstated and TILA Rescission

Remember that rescission doesn’t mean you give back the house. It doesn’t even mean you have to give back the money to the lender against whom you are rescinding — THAT obligation commences AFTER the lender admits to the rescission or it is otherwise decreed and then it is reduced by the refunds of points, interest, closing costs you paid plus damages and attorney fees you suffered as a result of the issues raised in this post.

Rescission might not even mean you owe any money at all to the lender. It could mean that the mortgage lien is extingunished and so is the note. And unless the party coming into court or the auction as a “representative” of the lender can prove that they have received their instructions and authorization from a party who is authorized to give those instructions, then they lack authorization, they lack legal standing and they are probably committing a fraud on you, the court and everyone else. 

Most lawyers have a knee jerk reaction in advising clients about challenging foreclosure when the stated income application contains mistatements or outright fraud. They tell their clients that they better not open this box because of all the criminal and civil liability issues that will arise from the deceptive information stating the income of the borrower. WRONG! Fear tactics and unimaginative and uninformed lawyers are allowing people to lose their homes when they should be keeping their homes and getting paid damages for what was done tot hem. This advice they are giving is in most cases completely incorrect.

The lender has an obligation to verify the income. As such, when it failed to verify the income it waived it’s right to complain that the income was wrong because the courts say that the lender did not reasonably rely on the stated income, as set forth in the mortgage application. And when they failed to verify the true value of the property, as they were supposed to do to protect your interest as their “client”, they knowingly assisted in defrauding you out of the benefit of the bargain you thought you were getting. In fact, you got a home worth less than the mortgage indebtedness you signed at closing and you didn’t know it because they didn’t want you to know it.

This might seem overly lenient or liberal” to some, but it isn’t. In all cases but a few, the application is filed out by someone other than borrower and the person filing out the application puts down the income necessary to justify the the amount of the loan sought without even asking what the real income is. If the subject comes up most borrowers tell the mortgage broker or representative that their income is not what is stated on the application, and they are told they must submit the application “as is” in order to get the loan.

The old “don’t worry, everybody is doing it” is true — that is exactly what was happening. And the responsibilities of the “lender” who was in actuality a mortgage broker which was not disclosed (as required by law) to the borrower is unchanged: they have a fiducuiary duty to the borrower to present the borrower with a loan program (with everybody’s role and compensation and risk fully disclosed) that will work given the economic, income and liability circumstances of the borrower. We have many stories where people were given mortgage loans in the millions based upon zero actual income or close to zero.

Investment speculation was promoted through encouragement of speculators to take ARM financing and then flip the homes in the ever growing housing market and explosion of housing prices. Advertising for refinancing, first home financing, HELOCs (which are now often dischargeable in bankruptcy and are fully within the right to rescind the transction stated in Truth in lending Act, encouraged every man, woman and child to become further and further in debt, diverting capital from the economy, the marketplace and main street to a select few on Wall Street, which is why some salaries now for the same job require greater qualifications at less pay than they were getting with fewer qualifications and far more pay 20-30 years ago.

See the following article from the Bakruptcy Law Network for more information. BLN is a very good source on a wide variety of issues but the old expression that “he works with a hammer tends to look at everything as a nail” comes to mind. Most people petitioning for bankruptcy are not protecting their interests in the best possible way, in my opinion, but of course your own attorney is supposed to know what is best.

First of all if you are going to file for bankruptcy, given the fact that the mortgage and note have been transferred many times more than once, there is a question about who the creditor is and WHETHER THE CREDITOR HAS BEEN PAID ALL OR PART OF THE “MISSING” PAYMENTS.

If some investor bought your loan and the investMent banking house paid some of the payments to the investor to whom was sold a CDO or CMO, then the loan servicing company that is posting notice of sale or suing you for foreclosure has no idea whether the payments have been made on YOUR note or not.


Thus the creditor you name IN A BANKRUPTCY PETITION OR LAWSUIT OR PETITION FOR EMERGENCY INJUNCTION TO STOP THE SALE OR EVICTION should be a contingent creditor, the amount due on the note should be a contingent liability, and the so-called security aspect is also contingent.

Remember that rescission doesn’t mean you give back the house. It doesn’t even mean you have togive back the money to the ldner aginst whom you are rescinding — THAT obllgation commences AFTER the lender admits tot he rescission or it is otherwise decreed and then it is reduced by the refunds of points, interest, closing costs you paid plus dmages you suffered as a result of the issues raised in this post.

Rescission might not even mean you owe any money at all to the lender. It could mean that the mortgage lien is extingunished and so is the note. And unless the party coming into court or the auction as a “representative” of the lender can prove that they have received their instructions and authorization from a party who is authorized to give those instructions, then they lack authorization, they lack legal standing and they are probably committing a fraud on you, the court and everyone else. 



“Liar Loans”—Who’s the Real Liar?

A recent article in The Wall Street Journal, Are Borrowers Free to Lie?, talks about a recent Bankruptcy Court decision in the Northern District of California.In re Hill dealt with an attempt by National City Bank to hold the Hills’ mortgage loan non-dischargeable, meaning that, despite the loss of their home due to foreclosure  and their subsequent bankruptcy, they would have to pay it back. How did the Hills get in this situation? They did what many borrowers were urged to do over the past several years: take out a “stated income” loan.

Stated Income loans, also called “liar loans” or NINJA (No Income, No Job, No Assets) loans, were mortgage loans in which no proof of income, employment or assets was required. Rather, the borrower simply “states” on the loan application what his or her income is, and the bank does no checking. No pay stubs, no tax returns, nothing. Ask for a mortgage, in virtually any amount, and get it without any investigation of ability to pay, examination, or common sense. Common sense would have disclosed that something was very wrong in the Hills’ case.

The Hills were 54 years old, and worked as delivery drivers and employee for an auto-parts distributor. They signed a loan application falsely stating they earned about a combined $191,000 a year. They claimed that their independent broker and the bank put the income figures into the applications without their knowledge and that they didn’t read them before signing.

Based on the obviously false figures in the application, following the foreclosure on their home and the Hills  filing for bankruptcy, National City Bank, the lender on the loan, asked the Bankruptcy Court to find that their debt to the bank should not be discharged because they lied on their mortgage application. While agreeing that the income statement was false, the Bankruptcy Court disagreed that the Hills should lose their discharge.

The Court stated:

While the Court finds and concludes that the debtors made a material false representation concerning their financial condition to the Bank in October 2006, with knowledge of its falsity and the intent to deceive the Bank, the Court finds and concludes that the Bank’s nondischargeability claim under § 523(a)(2)(B) must fail. The Bank failed to prove that it reasonably relied on the Debtors’ false representation concerning their income, as set forth in the October Loan Application. As a result, the Bank’s claim has been discharged.  Judgment will be ordered accordingly.

In other words, because National City knew or should have known that the Hills misrepresented their income and didn’t check it out, it didn’t meet one of the criteria for nondischargeability: it didn’t rely on the Hills’ false statements in making the loan. The Hills’ loan was found to be dischargeable.

The Hill decision is an important one. It makes clear that banks cannot place sole responsibility for their poor lending practices and decisions on the shoulders of the borrowers. Mr. and Mrs. Hill aren’t without fault, but the fault was on both sides. The Hills lost their home of 20 years and had to file for bankruptcy. The bank lost its money.

Sounds to me as if the Court restored a bit of balance to the equation.


BK Judge Rules Stated Income HELOC Debt Dischargeable

by Tanta

This is a big deal, and will no doubt strike real fear in the hearts of stated-income lenders everywhere. Our own Uncle Festus sent me this decision, in which Judge Leslie Tchaikovsky ruled that a National City HELOC that had been “foreclosed out” would be discharged in the debtors’ Chapter 7 bankruptcy. Nat City had argued that the debt should be non-dischargeable because the debtors made material false representations (namely, lying about their income) on which Nat City relied when it made the loan. The court agreed that the debtors had in fact lied to the bank, but it held that the bank did not “reasonably rely” on the misrepresentations.

I argued some time ago that the whole point of stated income lending was to make the borrower the fall guy: the lender can make a dumb loan–knowing perfectly well that it is doing so–while shifting responsibility onto the borrower, who is the one “stating” the income and–in theory, at least–therefore liable for the misrepresentation. This is precisely where Judge Tchaikovsky has stepped in and said “no dice.” This is not one of those cases where the broker or lender seems to have done the lying without the borrower’s knowledge; these are not sympathetic victims of predatory lending. In fact, the very egregiousness of the borrowers’ misrepresentations and chronic debt-binging behavior is what seems to have sent the Judge over the edge here, leading her to ask the profoundly important question of how a bank like National City could have “reasonably relied” on these borrowers’ unverified statements of income to make this loan.

And as I argued the other day on the subject of due diligence, it isn’t so much that individual loans are fraudulent than that the published guidelines by which the loans were made and evaluated encouraged fraudulent behavior, or at least made it “fast and easy” for fraud to occur. Judge Tchaikovsky directly addresses the issue of the bank’s reliance on “guidelines” that should, in essence, never have been relied upon in the first place.


Here follow some lengthy quotes from the decision, which was docketed yesterday and is not, as far as I know, yet published. From In re Hill (City National Bank v. Hill), United States Bankruptcy Court, Northern District of California, Case No. A.P. 07-4106 (May 28, 2008):

This adversary proceeding is a poster child for some of the practices that have led to the current crisis in our housing market.

Indeed. The debtors, the Hills, bought their home in El Sobrante, California, twenty years ago for $220,000. After at least five refinances, their total debt on the home at the time they filed for Chapter 7 in April of 2007 was $683,000. Mr. Hill worked for an automobile parts wholesaler; Mrs. Hill had a business distributing free periodicals. According to the court, their combined annual income never exceeded $65,000.

In April 2006, the Hills refinanced their existing $100,000 second lien through a mortgage broker with National City. Their new loan was an equity line of $200,000; after paying off the old lien and other consumer debt, the Hills received $60,000 in cash. On this application the Hills stated their annual income as $145,716. The property appraised for $785,000.

By October 2006 the Hills were short of money again, and applied directly to National City to have their HELOC limit increased to $250,000 to obtain an additional $50,000 in cash. On this application, six months later, the Hills’ annual income was stated as $190,800, and the appraised value was $856,000.

At the foreclosure sale in April 2007, the first lien lender bought the house at auction for $450,000, apparently the amount of its first lien.

The Hills claimed that they did not misrepresent their income on the April loan, and that they had signed the application without reading it. The broker testified rather convincingly that the Hills had indeed read the documents before signing them–Mrs. Hill noticed an error on one document and initialed a correction to it. No doubt because the October loan, the request for increase of an existing HELOC, did not go through a broker, the Hills admitted to having misrepresented their income on that application. The Court found that:

Moreover, the Hills, while not highly educated, were not unsophisticated. They had obtained numerous home and car loans and were familiar with the loan application process. They knew they were responsible for supplying accurate information to a lender concerning their financial condition when obtaining a loan. Even if the Court were persuaded that they had signed and submitted the October Loan Application without verifying its accuracy, their reckless disregard would have been sufficient to satisfy the third and fourth elements of the Bank’s claim.

This is not an excessively soft-hearted judge who fell for some self-serving sob story from the debtors. “Reckless disregard” is rather strong language.

Unfortunately for National City, Her Honor was just as unsympathetic to its claims:

However, the Bank’s suit fails due to its failure to prove the sixth element of its claim: i.e., the reasonableness of its reliance.6 As stated above, the reasonableness of a creditor’s reliance is judged by an objective standard. In general, a lender’s reliance is reasonable if it followed its normal business practices. However, this may not be enough if those practices deviate from industry standards or if the creditor ignored a “red flag.” See Cohn, 54 F.3d at 1117. Here, it is highly questionable whether the industry standards–-as those standards are reflected by the Guidelines–-were objectively reasonable. However, even if they were, the Bank clearly deviated to some extent from those standards. In addition, the Bank ignored a “red flag” that should have called for more investigation concerning the accuracy of the income figures. . . .


Based on the foregoing, the Court concludes that either the Bank did not rely on the Debtors representations concerning their income or that its reliance was not reasonable based on an objective standard. In fact, the minimal verification required by an “income stated” loan, as established by the Guidelines, suggests that this type of loan is essentially an “asset based” loan. In other words, the Court surmises that the Bank made the loan principally in reliance on the value of the collateral: i.e., the House. If so, the Bank obtained the appraisal upon which it principally relied in making the loan. Subsequent events strongly suggest that the appraisal was inflated. However, under these circumstances, the Debtors cannot be blamed for the Bank’s loss, and the Bank’s claim should be discharged.

In short, while the Court found that the Hills knowingly made false representations to the lender, the lender’s claim that it “reasonably relied” on these representations doesn’t hold water, because “stated income guidelines” are not reasonable things to rely on. In essence, the Court found, such lending guidelines boil down to what the regulators call “collateral dependent” loans, where the lender is relying on nothing, at the end of the day, except the value of the collateral, not the borrower’s ability or willingness to repay. If you make a “liar loan,” the Judge is saying here, then you cannot claim you were harmed by relying on lies. And if you rely on an inflated appraisal, that’s your lookout, not the borrower’s.

This is going to give a lot of stated income lenders–and investors in “stated income” securities–a really bad rotten no good day. As it should. They have managed to give the rest of us a really bad rotten no good couple of years, with no end in sight.

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