“Lost notes” and the Sudden Appearance of “Original Notes.”

Think of it this way: If someone wrote you a check for $100, which would you do? (1) make a digital copy of the check and then shred it or (2) take it to the bank? Starting with the era in which banks made what is abundantly clear as false claims of securitization the banks all chose option #1. And they collected incredible sums of money far exceeding the Madoff scam or anything like it.

Back in 2008 Katie Porter was a law professor and is now a member of the US House of  Representatives. For those of who don’t know her, you should follow her, even on C-Span. She nails it every time. She knows and other congressmen and women are following her lead. Back in 2008 she uncovered the fact that in her study of 1700 filings in US Bankruptcy court, 41% were missing even a copy of the note, much less the original note.

Around the same time, the Florida Bankers Association, dominated by the mega banks and who absorbed the Florida Community Bank Association, told the Florida Supreme Court that, after the purported “loan closing,” digital copies of the notes were made — and then the original notes were destroyed. FBA said it was “industry practice.” It wasn’t and it still isn’t — at least not for actual creditors who loan money. Out in the state of Washington on appeal, lawyers for the claimant in foreclosure admitted they had no clue as to the identity of the creditor. The state banned MERS foreclosures, along with Maine.

That admission, with full consent of the mega banks, raised the stakes from 41% to around 95% — a figure later confirmed in Senate Hearings by Elizabeth Warren. The other 5% are loans that were truly traditional — funded by the “lender” (no pretender lender) and still owned by the lender who had the original documents in their vault.

The law didn’t change. In order to enforce a note you needed the original. And in order to plead you “lost” the note, you had to allege and prove very specific things starting with the fact that it was lost and not destroyed. Then of course you had to prove that the original was delivered to you, which nobody could because the original was destroyed immediately after closing and a fax copy was the only thing used after that.

Typically destruction of the note means that the debt is discharged or forgiven — something that is actually a natural outgrowth of the same debt being sold dozens of times in varying pieces under various contracts, none of which give the buyer any direct right, title or interest in the “underlying” debt, note or mortgage. In short, neither the debt nor the note exist in most cases shortly after the alleged loan closing.

The representatives of the mega banks who started the illusion of securitization of mortgage debts could neither produce the original note (because it was destroyed) nor tell a credible story to explain its absence. So they did the next best thing. They recreated the note to make it appear like an original using advanced technology that could even mimic the use of a pen to sign it.

Some of us saw this early on when they failed to account for the color of the ink that was used at closing. Those were among the first cases involving a complete satisfaction of the alleged encumbrance, plus payment of damages and attorney fees, all papered over by a settlement agreement that was under seal of confidentiality.

While obviously presenting moral hazard, the process of recreation could have been legal if they had simply followed the protocols of the UCC and state law to reestablish a lost note. But they didn’t. The reason they didn’t is that they still had to prove that the note was a legal representation of a debt owed by the borrower to a creditor that they had to identify. But they couldn’t do that.

If they identified the creditor(s) they would admitting that they had no claim because a person or entity possessing a right, title or interest in the debt did not include the named claimant in the foreclosure. Naming a claimant does not create a claim. A real claim must be owned by a real claimant. That is the very essence of legal standing.

If they had no claim they would be admitting that the securitization certificates, swaps and other contracts were all bogus. That would tank the $1 quadrillion shadow banking market. That is where we see the evidence that for every $1 loaned more than $20 in revenue was produced and never allocated to either the debt of the borrower or the investment of the investors. The banks took it all. $45 trillion in loans and refi’s turned into $1 quadrillion in “nominal” value. Nice work if you can get it.

So then they did the next next best best thing thing. They simply presented the recreation of the note as the actual original and hoped that they could push it through and that has worked in many, probably most cases.

It works because most borrowers and their lawyers fail to heed my advice: admit nothing — make them prove everything. By giving testimony regarding the “original” note the borrower provides the foundation and the rest of the foreclosure is preordained.

For some reason, lawyers who are usually suspicious, refuse to acknowledge the basic fact that the entire process is a lie designed to take property, sell it and apply or allocate the sale proceeds to anyone except the owner(s) of the debt. They hear “free house” and get scared they will look foolish.

A free house to those persistent and enduring souls who finance the great fight is a small price to pay for the mountains of windfall profit of the banks and related parties. As for the banks, adding the proceeds of a house that should never have been sold is adding insult to injury not only to the homeowner but to the entire society.

If anyone wants to know why so many Americans are angry, look no further than the 40 million people were directly displaced by illegal foreclosure and the additional 70 million people who were affected by those dislocations. Voters know that if the many $trillions spent on bailouts had been used to level the playing field, 110 million Americans and millions more worldwide would have never faced the worst effects of the great recession.

And we will continue voting for disruptors until a level playing field re-emerges.

see Lost notes and Bad Servicing Practices and Incentives SSRN-id1027961

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Foreclosure Defense: Debtors Win Victories Against Mortgage Servicers



Debtors Win Victories Against Mortgage Servicers

posted by Katie Porter

In the last few weeks, several courts have issued opinions ruling that mortgage servicers’ actions have harmed consumers. Some of you follow this issue closely, but if you need an introduction, I’ve previously posted a bit on the basics of mortgage servicing and why it’s an important component of the foreclosure problem. After the jump, I summarize three recent and newsworthy decisions. Debtors won big in these cases, variously recovering sizeable damages, having the foreclosure action against their home dismissed, or getting a preliminary injunction issued against a servicer’s misconduct. Taken collectively, they all signal an increased willingness by courts at all levels (state, federal, bankruptcy) to take challenges to mortgage servicers’ actions seriously. While I’m convinced that legislation, regulatory enforcement, and different market incentives are necessary to stop the misbehavior of mortgage servicers, this trio of decisions shows how litigation can help real families and point the way for further policymaking.

The Jones v. Wells Fargo decision from the bankruptcy court in the Eastern District of Louisiana was a landmark opinion in describing the problems with Wells Fargo’s servicing of bankruptcy debtors’ mortgages. On July 1, 2008, the district court ruled on Wells Fargo’s voluminous appeal. The court affirmed the bankruptcy court’s factual findings and legal conclusions that actions like misapplying plan payments violates the Bankruptcy Code. The district court remanded to the bankruptcy court on the remedy, ruling that while the bankruptcy court had injunctive powers to order new accounting standards, the court should first make a finding that there was “no adequate legal remedy as an alternative to monetary punitive damages.” If I were Wells Fargo (and I’m grateful that I’m not), I’d be worried that the remand is an invitation to a large sanction. Wells’ decision to appeal the new accounting standards is itself noteworthy. Why not embrace correct accounting? Do servicers prefer to pay monetary damages on those rare (albeit increasingly frequent) occassions when they get caught and continue to overcharge debtors in all other instances? It appears the answer may be “yes.” I’ll post an update when the bankruptcy court rules on the remanded issue.

The bankruptcy court in the Eastern District of Arkansas granted a preliminary injunction against a mortgage servicer, ASC, to halt its “continuing its efforts to collect payments from [the debtors] that they did not owe.” While the matter will proceed to trial for final disposition, the opinion in support of the injunction finds that ASC misapplied 14 payments, sent the debtors “inaccurate, incomprehensible mortgage statements,” and refused to stop collecting. The court concluded that an injunction was required, in part, because the servicer had admitted that it “could not guarantee that it would not violate” an agreement to stop collecting, even though it had put a “stop call” on the account. This latter bit caused the judge to note that “[i]n other words, ASC’s counsel explained that ASC could not be responsible for its own actions.” The injunctive relief here is an important new remedy that we haven’t seen used frequently in the bankruptcy context.

On June 5, 2008, a New York state court dismissed with prejudice a foreclosure proceeding because Wells Fargo, and its servicing agent, Litton, could not prove that Wells Fargo owned the mortgage. The note had purportedly been assigned from Argent to Ameriquest to Wells Fargo but the court found the assignments defective. It also ruled that the servicing agreement between Wells Fargo and Litton was insufficient to give Litton authority to make the required “affidavit of facts” to support the foreclosure petition. While the original mortgage between the debtor and Argent seems to remain valid, the court ordered the other mortgages removed from the real property records. This “lack of standing” decision is very similar to the relief that two federal courts in Ohio granted to plaintiffs earlier this fall. While my research study found that 40% of bankruptcy claims were not accompanied by a note, these cases reveal the existence of an even bigger problem–the companies who are foreclosing may not have any legal right to do so. That is, it’s not just that some servicers are sloppy and don’t bother with the note, it’s that some do not have the authority to foreclose at all!

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