How “Standing” Is Causing the Longest Economic Recovery Since the Great Depression

THE PERFECT CRIME: THE VICTIMS DON’T KNOW ANYTHING

WHY INVESTORS AND BORROWERS SHOULD GET RID OF THE SERVICERS AND REPLACE THEM WITH SERVICING COMPANIES THEY CAN TRUST TO MITIGATE THE LOSSES CAUSED BY INVESTMENT BANKS

HOW? It is simple: since the perpetrators ignored the REMIC trust, didn’t fund them and never intended to actually have the REMIC trusts own the loans, the investors can go directly to homeowners or through their own servicers to settle and modify mortgages. This would leave the investors with claims against the investment banks for the balance of the losses, plus punitive damages, interest and court costs. It is the same logic as piercing the corporate veil — if you pay your grocery bills using the account of your limited liability corporation, the corporate entity is ignored.

Vasquez v Saxon (Arizona supreme Court) revisited

Assume the following facts for purposes of analogy and analysis:

  1. John Jones is a Scammer, previously found to have operated outside the law several times. He conceives of yet another PONZI scheme, but with the help of lawyers he has obscured the true nature of his next scheme. He creates a convoluted scheme that ultimately was never understood by regulators.
  2. The first part of his scheme is to offer shares in a company where the money will be held in trust. The money will be disbursed based upon standards that are promised to incoming investors.
  3. The new company will issue the shares based upon the receipt of money from investors who are buying those shares.
  4. Jones approaches Jason Smartguy, who manages a pension fund for 3,000 employees of ABC Company, a Fortune 500 company.
  5. Jason Smartguy manages the pension funds under strict restrictions. A pension fund is a “stable managed fund” whose investments must be at the lowest risk possible and whose purpose is capital preservation.
  6. John Jones promises Jason Smartguy that the new company will invest in assets that are valuable and stable, and that these investments will pay a return on investment higher than what Jason Smartguy is getting for the pension fund under his management. Jason likes the idea because it gives him employment security and probably bonuses for increasing the rate of return on the funds managed for the pension fund.
  7. The lawyers for John Jones have concealed the PONZI nature of the scheme (paying back investors with their own money and with money from new investors) by disclosing the existing of a reserve fund — consisting entirely of money from Jason Smartguy.
  8. Jason advances $100 Million to John Jones who says he is acting as a broker between the new Company (the one issuing the shares) and the Pension fund managed by Jason Smartguy.
  9. The new Company never receives the money. Instead the money is placed in accounts controlled by people who have no relationship with the new Company.
  10. The new Company never receives title or any documentation showing they own shares of the money pool now controlled by John Jones when it should be controlled by the new Company.
  11. John Jones uses the money to bet against the new Company, insurance on the value of the shares of the new Company, and the proceeds of other convoluted transactions — mostly based on the assumption that John Jones owns the money in the pool and based entirely on the assumption that any assets of the pool therefore belong to John Jones — not the new Company as promised.
  12. John Jones also uses the money to buy assets, so everything looks right as long as you don’t get too close.
  13. The assets Jones buys are designed to look good on paper but are pure trash — which is why John Jones bet against the pool and shares in the pool.
  14. Everyone is fooled. The investors get monthly statements from John Jones along with a check showing that the investment is working just as was planned. They don’t know that the money they are receiving comes entirely from the reserve pool and the meager actual returns from the assets. The insurance company believes that Jones is the owner of the money and the assets purchased with money from the pool created by Jason Smartguy’s advance from the pension fund.
  15. John Jones goes further. He pretends to own the shares of the new Company that actually belong to the pension fund managed by Jason Smartguy. He insures those shares naming himself as the insurance beneficiary and naming himself as the receiver of proceeds from his bets that the shares in the new Company would crash, just as he planned.
  16. While the assets are proving as worthless as John Jones had planned, Jason Smartguy receives payments to the pension fund exactly as outlined in the Prospectus and the Operating Agreement for the New Company. Unknown to Jason, the assets are increasingly proving worthless, as a whole and the income is declining. So Jason buys more shares in the new Company, thus providing Jason with a larger “reserve” fund and more “assets” to bet against and more “shares’ to bet against.
  17. John Jones sets out to “acquire” assets that will fail, so his bets will pay off. He buys assets whose value is low (and getting worse) and he creates fictitious transactions in which it appears as though the new Company has bought the assets at a much higher price than their value. The “sales” to the Company are a sham. The Company has no money because Jason Smartguy’s pension money never was made to the new Company in exchange for the new Company issuing shares of the company to Jason’s pension fund.
  18. The difference between the real value of the assets and the price “sold” to the pool is huge. In some cases it is 2-3 times the actual value of the asset. John Jones treats these sales as “proprietary trading profits” for John Jones,when in fact it is an immediate loss to Jason’s pension fund. The shares of the new Company are worthless because it never received any money nor title to any assets. John Jones as “broker” took all the money and assets.
  19. Meanwhile John Jones continues to pay Jason’s pension fund along with distribution reports showing the assets are in great shape and the income is just fine. In reality the assets are virtually worthless and the income is declining just as John Jones planned. John Jones is taking money hand over fist and calling it his own. His bets on the whole thing crashing are paying off handsomely and he is not reporting to Jason how much he is making by taking Jason’s managed money and calling part of it proprietary profits.
  20. The beauty of John Jones PONZI scheme is in the BIG LIE told not only to Jason Smartguy but also to Henry Homebody, who owns a home in Tucson Arizona. Henry is easier to sell on a stupid scheme than Jason Smartguy because Jason requires proof of independent appraisals (ratings), proof of insurance and various other aspects of the investment. Henry Homebody trusts the “lenders” and considers them to be banks, some with reputations and brands that go back 150 years.
  21. Henry Homebody’s house has been in the family for 6 generations and is fully paid off. He pays only insurance and taxes. Unknown to him, he is a special target for scammers like Merendon Mining, whose operators are now in jail. Merendon got homeowners with unencumbered houses to “invest” in a mirage (gold shares) thus putting the fantastic equity in their homes to work. Henry is flown to Canada, wined and dined, and has a very good time, just before he agrees to take out a loan using his family home as collateral, which will provide an income to him of $16,000 over month (which is about ten times his current income).
  22. Henry is approved for a loan equal to twice the value of the property and in which the mortgage broker (now on the run from the law) used projected income from the speculative investment in Merendon mining. This act by the mortgage broker was illegal but worth the risk because the broker was part of the Merendon Mining scam. (look up Merendon Mining and First Magnus Funding).
  23. Henry makes Payments on the mortgage principal, interest, taxes and insurance (all higher because of the false appraisal that was used for the property). He is able to do this because some of the money from the “loan” was given to him and he was able to make payments until the magnificent returns started to come in from his Merendon Mining shares. But those shares were worded in such a way that they were not exactly the ownership of gold that Henry thought he was getting. In fact, it was another pool with options on gold. And of course the money never materialized and neither did the gold. (Note 1996-2014: more than 50% of all loans were “refi’s” in which the home was fully paid or nearly so).
  24. Henry’s lender turned out to be a party pretending to lend him money, using MERS as a nominee for trading purposes, and naming the originator as lender when in fact they were also just a nominee.
  25. Henry’s mortgage and note recite terms that are impossible to meet unless Merendon Mining pays off.
  26. Henry believes at closing that First Magnus was the lender and that some entity called MERS is hanging in the background. Nobody explains anything to him about the lender or MERS. And of course he was told not to get an attorney because nothing can be changed anyway.
  27. Henry did not know that John Jones had spread out Jason’s money into several entities and then used Jason’s money to fund the origination of Henry’s loan.
  28. Jason does not know that the note and mortgage were never executed in the name of the pension fund or the new Company that was supposed to own the loan as an asset.
  29. Eventually the truth starts coming out, the market crashes and prices of homes return to actual value. Merendon Mining is of course a bankrupt entity as is First Magnus, whose operator appears to be on the run.
  30. Henry can’t make the payments after the extra money they gave him runs out. He has $2 million in loans and the “guaranteed” investment in Merendon Mining has left him penniless.
  31. John Jones fabricates and forges dozens of documents to piece together a narrative wherein an “independent” company would claim ownership of Henry’s loan despite the complete absence of any real transactions between any of the companies because the loan was fully funded using Jason Smartguy’s pension money.
  32. Henry knows nothing about the scam John Jones pulled on Jason Smartguy and certainly doesn’t know that the new Company was involved in his loan (because it wasn’t). Henry doesn’t understand that First Magnus and MERS never loaned him any money and that he never owed them money. And Henry knows nothing about John Jones, whose name appears on nothing.
  33. John Jones, the PONZI operator goes about the business of finishing the deal and making sure that the multiple people who bought into Henry’s loan (without knowing of the other sales and bets placed by John Jones) don’t start asking for refunds.
  34. John Jones MUST get a foreclosure or there will be auditing and reporting requirements that most everyone will overlook as long as this looks like just another loan gone bad. His PONZI scheme will be revealed if the true facts become known so he makes sure that nobody sees the actual money trail except him. He might go to jail if the truth is discovered.
  35. The lawyers for John Jones have told him that even fabricated, forged, non-authentic, falsely signed, and falsely notarized documents carry a presumption of validity. Thus the lawyers and Jones concocted a PONZI scheme that would most likely succeed because even the borrower, Henry, still thinks he owes money to First Magnus or its “successors”, whose identity he doesn’t really care about because he knows he took the loan. He doesn’t know that First Magnus and several other entities were involved in collecting fees and making profits the moment he signed the papers, and possibly before.
  36. Meanwhile Jason Smartguy, manager of the pension fund is starting to get disturbing reports about the assets that were purchased. Jason still doesn’t know that the money he gave John Jones never went into the New Company, that the Company never engaged in any transactions, and that John Jones was claiming “losses” that were really Jason’s losses (the pension fund).
  37. John Jones was collecting money from multiple sources without any of them knowing about each other and that he had no losses, he had only profits, and even got the government to lend him more money so he wouldn’t go out of business which might ruin the economy.
  38. Most of all John Jones never made a loan to Henry Homeowner; but that didn’t stop him from saying he did make the loan, and that the paperwork between John Jones and Jason Smartguy’s pension fund was irrelevant — the borrower got a loan and stopped paying. Thus judicial or non judicial process was available to sell the home that had been in Henry’s family for 6 generations.
  39. But the weakness in John Smith’s PONZI scheme is that his entire strategy is based upon presumptions of validity of his false documentation. If courts start applying normal rules and require Jones to disclose the money trail, he is cooked. There can be no foreclosure if a non-creditor initiates it by simply declaring that they are the creditor and that they have rights to enforce the debt — when the only proof of that is that Jason Smartguy, manager of the pension fund, has not yet put the pieces together and demanded ownership of the loan, settled the cases with modifications and went after John Jones for the balance of the money that was skimmed off the deal.
  40. And since Henry’s house is in Tucson, Az, he is subject to non-judicial foreclosure and he is in big trouble. He has no reason to believe the “servicer” is unauthorized, that the debt that is subject to correspondence and monthly statements does not exist, nor that the mortgage or deed of trust was void for lack of consideration — none of the “lenders” at closing ever loaned him a dime. The money came from Jason but Henry didn’t, and possibly still doesn’t know it.
  41. John Jones files a document called “Substitution of Trustee.” In this false document Jones declares that one of his many entities is the “new beneficiary” (mortgagee). Jones holds his breath. If Henry objects to the substitution of trustee he might have to reveal that the new trustee is not independent, it is a company controlled by John Jones.
  42. John Jones has made himself the new trustee. If the substitution of trustee is nullified in a court proceeding, NOTHING can be done by John Jones or his controlled companies.
  43. If the old trustee realizes that they have received no information on the validity of the claim and might still be the trustee, they might file an “interpleader” action in which they say they have received competing claims, demand attorney fees and costs along with their true statement that as the trustee named on the deed of trust, they have no stake in the outcome.
  44. If that happens Jones is cooked, broiled and boiled. He would be required to allege and prove that the “new beneficiary” is in fact the creditor in the transaction by succession, purchase or otherwise. he can’t because it was Jason who gave the money, it was Jason who was supposed to get evidence of ownership of the loan, and it is Jason who should be deciding between foreclosure (which John Jones MUST have to escape enormous civil and criminal liability).
  45. Jones doesn’t file documents for recording unless and until the case goes into foreclosure. That is because he continuing to trade and make claims of losses on “bad loans.”
  46. In fact, just to be on the safe side, he doesn’t file the fabricated, forged perjurious assignment of the loan at all if nobody makes him. He only files the assignment when he absolutely must do so, because he knows each filing is false and potentially proof of identity theft from the pension fund and from the homeowner.
  47. So it often happens that despite laws in each state requiring the filing of any transfer of an interest in real property for recording, Jones files the assignment when there is the least probability and least likelihood that the PONZI scheme will be revealed. Jones knows the mortgage is void and should never have been recorded, as a matter of law.
  48. Henry brings suit against Jones seeking justice and relief. But he really doesn’t know enough to get traction in court. Jones filed the assignment after the notice of default, after the notice of sale, and after the notice of substitution of trustee.
  49. The Judge who knows nothing about the presence of Jason, who still does not know this is going on, rules for Jones saying that it is irrelevant when the assignment was recorded because it is still a valid assignment between the parties to the assignment.
  50. Jason knows nothing about how the money from his pension fund was handled.
  51. Jason knows nothing about how each foreclosure seals the doom and affirms the illegal windfall to intermediaries who were always playing with OPM (other people’s money).
  52. The Court doesn’t know that that the assignment was just on paper, that there was no business reason for it to be executed, that there was no purchase of the loan from Jason’s pension fund, to whom the actual loan was payable. Thus the Judge sees this as much ado about nothing.
  53. Starting from the premise that Henry owed the money anyway, that there were no real defenses, and that since nobody else was making a claim it was obvious that Jones was the creditor, the Arizona Supreme Court says that anyone can can foreclose on an undated, backdated fabricated assignment forged and robo-signed with no real transaction; and they can execute a substitution of trustee even if they are complete strangers to the loan transaction and once they file that, they can foreclose on property that was never used as collateral for the real loan.

Because there are hundreds of John Jones characters in this tragedy, the entire marketplace has been decimated. The middle class is permanently stalled because their only net worth has been stolen from them The borrowers would gladly execute a real mortgage for real value with real terms that make sense 95% of the time, but they need to do it with the owner of the debt — the pension fund. The pension fund the borrower need to be closely aligned on the premise that the loans can be modified for better terms that forced sales, the housing market could recover, and money would start flowing back to the middle class who drives 70% of our consumer based economy.

They are all wrong and are opening the door for more PONZI schemes and even better ways to steal money and get away with it. The Arizona Supreme Court in Vasquez as well as all other decisions from the trial bench, appellate courts, regulators and law enforcement are all wrong. The burden of proof in due process is on the party seeking affirmative relief. Anyone who wants the death penalty equivalent in civil litigation (forfeiture of homestead), should be required to prove beyond all reasonable doubt or by clear and convincing evidence that the mortgage was valid and should have been recorded.

If they didn’t make the loan they had no right to record the mortgage or do anything with the note or mortgage except give it back to the borrower for destruction. If they didn’t make disclosure of the real nature of the loan and all the profits that would arise from the borrower signing an application and the loan documents, those profits are due back to the borrower.

Each time the assumption is made that there are no valid defenses for the borrower, we are cheating investors and screwing the homeowners. And as for the windfall proposition we know who gets it — the John Jones PONZI operating banks that started all of this. Exactly how can this lead anyway other than a continued drag on our economy?

Vasquez v saxon Az S Ct CV110091CQ

For more information call 954-495-9867 or 520-405-1688

US Bank Gets Banged for Forcing Homeowner Into Foreclosure

Hat tip to Attorney Dan Hanacek in Northern California for spotting this.

Editor’s Note: U.S. Bank has been called everything from a slumlord in L.A. to a co-conspirator in the Merendon Mining Scandal a few years back. We have already seen them scam the system by foreclosing on property without relief from stay in BKR, and was a pioneer in the phrase “U.S. Bank as trustee relating to…” which of course means nothing other than that they have arrogated to themselves the role of trustee even though the securitization documents (that were ignored anyway) say otherwise.

While a lot of people have been complaining about “dual tracking” (luring homeowners into stopping payments while their modification proposal is “considered” and then foreclosing) this time it was a court ruling that nailed them.

“Applying basic contract and tort law, we reverse the judgment in favor of U.S. Bank on the causes of action for negligent misrepresentation, fraud, violation of section 2924g(d), and intentional infliction of emotional distress.” The use of emotional distress damages in both a boon to lawyers who take on clients after foreclosure is complete and a real threat to the millions of wrongful foreclosures that have been processed.

When lawyers ask me my opinion on advice to give a client who has been told to withhold payments on an otherwise current loan, my response is always the same. Don’t do anything that puts you into a worse position than you were in before you take any action. Now the delinquency appears real and the default becomes real and the homeowner looks like a deadbeat just like everyone else. In this case the Plaintiff was able to prove that the negligent representation had been made and that she had reasonably relied upon it with full intention of making the payments.

Obviously this was a case where the lawyer both wrote good pleadings, made a good record on appeal and wrote a good brief and argued it effectively. But there is an additional element creeping into these decisions. It is becoming less likely that Judges are ruling on a speculative presumption that the property would have ended up in foreclosure anyway. That presumption lies at the root of a lot of negative decisions where the argument by the homeowner was legally correct but denied and affirmed. The tide is changing.

The other interesting aspect is that this one invovled Downey Savings, about which that have been many complaints and maybe some regulator will take a closer look at them. But the point is that the misrepresentation by Downey was all the more believable because it was a bank that not mentioned prominently in the news as opposed to the banks and servicers who are well-known to have engaged in this behavior. So be careful with whom you speak, and be ready to record all conversations — especially if they tell you that the call may be recorded for quality control purposes — that I believe and so do other attorneys, is consent for the recording even in a state requiring two party consent.

D.J. cite:   2012 DJDAR 12769
California Courts of Appeal – 4th District
DAILY JOURNAL SUMMARY
In 2002, Pam Ragland refinanced her home mortgage through Downey Savings and Loan Association. In April 2008, she asked Downey Savings to modify her loan to decrease her monthly payments. While attempting to do so, a Downey Savings employee told her not to make her April payment. Although Ragland planned on making the payment, she cancelled it based on what the employee told her. Later that month, Downey Savings notified Ragland that her loan was delinquent. By June, Ragland received a letter informing her the Downey Saving was beginning foreclosure proceedings on her home. After she lost her home, she sued Downey Savings, alleging negligent misrepresentation, and other claims. She claimed that Downey Savings induced her to miss the April 2008 loan payment, which wrongfully put her loan in foreclosure. The trial court found in favor of Downey Savings. Reversed in part. To prove negligent misrepresentation, a plaintiff has to show that the defendant misrepresented a fact without having a reasonable ground to think it is true, and with the intent to make the plaintiff rely on the fact. Also, the plaintiff must prove that she justifiably relied on the defendant’s statements. Here, Ragland’s evidence showed that Downey Savings told her that her loan was not “behind,” and that she should not make the April 2008 payment. Further, she showed that she did not make that payment because she relied on Downey Savings’ statements not to do so. As a result, Ragland presented evidence that would allow her to prove negligent misrepresentation, and the trial court should not have found in favor of Downey Savings on the claim. Thus, this court reversed the case for further proceedings. Opinion by Justice Fybel. 
OPINION

PAM RAGLAND,

Plaintiff and Appellant,

v.

U.S. BANK NATIONAL

ASSOCIATION et al.,

Defendants and Respondents.

No. G045580

(Super. Ct. No. 30-2008-00114411)

California Courts of Appeal

Fourth Appellate District

Division Three

Filed September 11, 2012

Appeal from a judgment of the Superior Court of Orange County, Gregory H. Lewis, Judge.  Affirmed in part, reversed in part, and remanded.  Request for judicial notice.  Denied.  Motion to strike.  Granted in part and denied in part.

Travis R. Jack for Plaintiff and Appellant.

Sheppard, Mullin, Richter & Hampton, Karin Dougan Vogel, J. Barrett Marum and Mark G. Rackers for Defendants and Respondents.

*                *                *

INTRODUCTION

After Pam Ragland lost her home through foreclosure, she sued defendants U.S. Bank National Association (U.S. Bank), the successor in interest to the Federal Deposit Insurance Corporation (FDIC) as the receiver for Downey Savings and Loan Association (Downey Savings); DSL Service Company (DSL), the trustee under the deed of trust; and DSL’s agent, FCI Lender Services, Inc. (FCI).  (We refer to U.S. Bank, DSL, and FCI collectively as Defendants.)  She asserted causes of action for negligent misrepresentation, fraud, breach of oral contract, violation of Civil Code section 2924g, subdivision (d) (section 2924g(d)), intentional and negligent infliction of emotional distress, and rescission of the foreclosure sale.  Ragland appeals from the judgment entered after the trial court granted Defendants’ motion for summary judgment and summary adjudication.

Applying basic contract and tort law, we reverse the judgment in favor of U.S. Bank on the causes of action for negligent misrepresentation, fraud, violation of section 2924g(d), and intentional infliction of emotional distress.  Ragland produced evidence creating triable issues of fact as to whether Downey Savings induced her to miss a loan payment, thereby wrongfully placing her loan in foreclosure, and whether she suffered damages as a result.  We affirm summary adjudication of the causes of action for breach of oral contract, negligent infliction of emotional distress, and rescission, and affirm the judgment in favor of DSL and FCI because Ragland is no longer pursuing claims against them.

The FDIC took control of Downey Savings in November 2008 and later assigned its assets, including Ragland’s loan, to U.S. Bank.  For the sake of clarity, we continue to use the name “Downey Savings” up through December 17, 2008, the date of the foreclosure sale.

FACTS

I.

Ragland Refinances Her Loan.  Her Signature Is Forged on Some Loan Documents.

In June 2002, Ragland refinanced her home mortgage through Downey Savings.  She obtained the refinance loan through a mortgage broker.  The loan was an adjustable rate mortgage with an initial yearly interest rate of 2.95 percent, and the initial monthly payment was $1,241.03.

Ragland thought that Downey Savings had offered her a fixed rate loan and claimed her mortgage broker forged her name on certain loan documents.  In July 2002, she sent a letter to the escrow company, asserting her signature had been forged on the buyer’s estimated closing statement and on the lender’s escrow instructions, and, in September 2002, she notified Downey Savings of the claimed forgery.  A handwriting expert opined that Ragland’s signature had been forged on those two documents, and on a statement of assets and liabilities, an addendum to the loan application, a provider of service schedule, and an itemization of charges.  By August 2002, Ragland had consulted two attorneys about the forged documents, one of whom wanted to file a class action lawsuit on her behalf, and the other of whom advised her of her right to rescind the loan. Ragland signed, and did not dispute signing, the adjustable rate mortgage note, the deed of trust, and riders to both instruments.

II.

Ragland Seeks a Loan Modification.  She Is Told to Miss a Loan Payment to Qualify.

By April 2008, the yearly interest rate on Ragland’s loan had increased to 7.022 percent and her monthly payment had increased to over $2,600.  On April 13, Ragland spoke with a Downey Savings representative named John about modifying her loan.  John told Ragland her loan was not “behind” but he would work with her to modify it.  He told Ragland not to make the April 2008 loan payment because “the worst thing that’s going to happen is you are going to have a late fee, we will get this done for you.”  When Ragland asked if there was a chance the loan modification would not “go through,” John replied, “usually not, you are pre‑qualified.”

John told Ragland a $1,000 fee would be charged to modify the loan, and Downey Savings would not waive that fee.  She replied that Downey Savings should waive the fee because her “loan was forged and nothing was done about it.”  John said he would check with his supervisor about waiving the fee.

John did not call back, and on April 16, 2008, the last day to make a timely loan payment for April, Ragland, who was nervous about a late payment, called him.  John told her nothing could be done about the loan, so she asked to speak to his supervisor. The supervisor told Ragland, “[i]f you have one document in your packet that’s forged, you may not be responsible for anything in your loan, at all, you may not have to even pay your loan.”  When Ragland said she had 13 to 15 forged documents, the supervisor checked her record and told her, “I can see that you reported . . . this to us.  We are going to have to put it in legal.”  The supervisor told Ragland that Downey Savings could not collect from her while its legal department investigated the forgery.   Ragland had planned to make her April 2008 loan payment but, based on what John and the supervisor told her, manually cancelled the automatic payment from her checking account.

In late April 2008, Downey Savings sent Ragland a notice that her loan payment was delinquent.  On April 29, 2008, Ragland spoke with Downey Savings representatives named Joseph and Claudia and made notes on the delinquency notice of her conversations with them.  Ragland noted that Claudia or Joseph told her:  “Can’t do modi[fication] while investigat[e] [¶] . . . Collection activity ‘frozen.’”  Claudia told Ragland that Downey Savings was initiating an investigation into her claim of forgery and could not accept further loan payments from her during the investigation.  Ragland noted that Joseph also told her, “collection activity frozen.”

No one from Downey Savings further discussed a loan modification with Ragland or requested financial information from her.  Ragland testified in her deposition, “once it went into legal, that was it.  It was like the legal black hole.”

In May 2008, a withdrawal was made from Ragland’s checking account and transmitted to Downey Savings as the May 2008 loan payment.  Downey Savings refused to accept the payment.

On May 5, 2008, Downey Savings sent Ragland a letter entitled “Notice of Intent to Foreclose” (some capitalization omitted).  According to the letter, the amount required to reinstate the loan was $5,487.80.  On May 9, Ragland called Downey Savings in response to this letter.  Her notes for this conversation indicate she spoke with “Reb,” who transferred her to “Jasmine,” who transferred her to “Lilia,” who said the loan was in Downey Savings’s legal department and “they[‘]ll C/B.”

III.

Downey Savings Institutes Foreclosure Proceedings; Ragland Gets the Runaround.

Nobody from Downey Savings called Ragland back.  In early July 2008, Ragland received a letter from Downey Savings’s collection department, informing her that foreclosure proceedings on her home had begun.  On July 15, Ragland had a telephone conversation with each of three Downey Savings representatives, identified in her notes of the conversations as Eric, Gail, and Leanna.  Ragland spoke first with Eric, who told her the account was in foreclosure and transferred her to the foreclosure department.  Ragland next spoke with Gail, who said she could not speak to her because the account was in foreclosure.  Gail transferred Ragland to Leanna.  Leanna told Ragland that the legal department failed to put a red flag in the computer to indicate the loan was being investigated and that the loan should never have been placed in foreclosure.  Leanna told Ragland that Downey Savings was “waiting for legal,” and Ragland’s attorney needed to “write the letter to legal and ask them . . . for a status update on the investigation, and that we had time, because it had just been referred in June and the sale wasn’t set for quite a while.”  Ragland’s notes from the conversation include, “[f]oreclosure on hold.”

IV.

Downey Savings Institutes Foreclosure Proceedings; Ragland Attempts to Make Loan Payments.

On July 18, 2008, Downey Savings instructed DSL, the trustee under the deed of trust, to initiate foreclosure proceedings on Ragland’s home.  DSL assigned its agent, FCI, to take the actions necessary to foreclose the deed of trust on Ragland’s home.

Ragland attempted to make payments on her loan in September, October, and November 2008 through transfers from her checking account.  Downey Savings rejected the payments.

On October 30, 2008, FCI recorded a notice of trustee’s sale, stating the foreclosure sale of Ragland’s home would be held on November 20.  Ragland filed this lawsuit against Downey Savings on November 7, 2008.  Several days later, Ragland’s attorney, Dean R. Kitano, spoke with general counsel for Downey Savings, Richard Swinney, about Ragland’s allegations of fraud and forgery in connection with the origination of her loan.  Swinney agreed to postpone the foreclosure sale until December 9, 2008.

By letter dated November 12, 2008, Swinney informed Kitano that until Downey Savings received certain documentation from Ragland, it would not consider modifying her loan.  The letter stated that any loan modification would require that she bring the loan current and described as “not credible” Ragland’s contention that a Downey Savings representative told her to skip a monthly payment.  The forgery issue, according to the letter, “has no impact on this loan” because Ragland did not claim her signatures on the disclosure statement, note, or deed of trust were forged.

Later in November 2008, the Office of Thrift Supervision closed Downey Savings, and the FDIC was appointed as its receiver.  U.S. Bank acquired the assets of Downey Savings from the FDIC.  Ragland’s loan was among those assets acquired by U.S. Bank.

V.

Ragland’s Home Is Sold at Foreclosure Sale on the Day After the Trial Court Denied Ragland’s Motion for
a Preliminary Injunction.

On November 12, 2008, Ragland filed an ex parte application for a temporary restraining order to enjoin the foreclosure sale scheduled for December 9.  The ex parte application was heard on November 26, on which date the trial court issued an order stating:  “Plaintiff shall be entitled to a temporary restraining order enjoining the foreclosure sale on December 9, 2008; upon bringing the loan current by Dec[ember] 16.  Current is as of Nov[ember] 26, 2008.”  A hearing on Ragland’s motion for a preliminary injunction was scheduled for December 16, 2008.

Following the ex parte hearing, Downey Savings provided Ragland a statement showing the amount necessary to reinstate her loan was $24,804.57, of which about $4,074 was for late charges, interest on arrears, property inspection and foreclosure costs.  Kitano sent Downey Savings a letter, dated December 2, 2008, stating that “[c]urrently, my client is unable to pay the arrearage to make the loan current” and proposing that (1) $12,000 of the reinstatement amount be “tacked onto the back end of the loan” and (2) Downey Savings forgive the remaining amount.

In advance of the hearing on Ragland’s motion for a preliminary injunction, the trial court issued a tentative decision that stated, in part:  “The court’s order of November 26, 2008, conditions the TRO [(temporary restraining order)] on plaintiff’s bringing her payments current as of November 26, 20[08] by no later than December 16, 2008.  According to defendant, t[he] amount necessary to bring the loan current is $24,804.57.  Plaintiff does not dispute that she owes regular monthly mortgag[e] payments on the loan, and therefore whether or not she is likely to prevail on the merits is not at issue insofar as her responsibilit[ies] to bring the loan payments current [are] concerned.  If plaintiff fails to bring her payments current by the hearing date, there is no reason to issue a preliminary injunction, since the injunction would serve no purpose but to prolong the inevitable to no good purpose. . . .  [¶]  If plaintiff does bring her payments current by the hearing date, then there is no basis for a foreclosure sale because the arrears would have been cured.  Hence there would seem to be no need for the issuance of a preliminary injunction under such circumstances.”

Ragland did not pay the amount demanded by Downey Savings to reinstate the loan by December 16, 2008.  She had sufficient funds to make the back payments due under the note, but not to pay the additional fees.

On December 16, 2008, the trial court denied Ragland’s motion for a preliminary injunction, and the foreclosure sale was conducted the next day.  Ragland’s home was sold at the sale for $375,000.

MOTION FOR SUMMARY JUDGMENT

Ragland’s third amended complaint asserted causes of action against U.S. Bank for negligent misrepresentation, breach of oral contract, and fraud, and against Defendants for violations of section 2924g(d), intentional infliction of emotional distress, negligent infliction of emotional distress, and rescission of foreclosure sale.

In December 2010, Defendants moved for summary judgment and, in the alternative, for summary adjudication of each cause of action.  In May 2011, the trial court granted the motion for summary judgment on the ground Ragland could not pay the full amount demanded by Downey Savings to reinstate her loan.  The trial court ruled:  “A valid and viable tender of payment of the indebtedness owing is essential to an action to cancel a voidable sale under a deed of trust . . . .  [Citation.] [¶]  This rule . . . is based upon the equitable maxim that a court of equity will not order a useless act performed . . . if plaintiffs could not have redeemed the property had the sale procedures been proper, any irregularities in the sale did not result in damages to the plaintiffs.  [¶]  [Citation.]  [¶]  The defendants have shown that all of plaintiff’s damages under each cause of action were suffered as a result of the foreclosure sale of her property. . . . Plaintiff alleges that the foreclosure sale occurred six days too early in violation of Civil Code §2924g.  Even if this were true, plaintiff’s damages are not recoverable because plaintiff was incapable of reinstating her loan. . . . This was made clear by plaintiff’s counsel in his letter to Downey Savings’ counsel two weeks before the foreclosure sale (December 2, 2008).  Plaintiff’s counsel stated that ‘. . . my client is unable to pay the arrearage to make the loan current[.’] . . . Plaintiff’s failure to reinstate the loan by the December 16, 2008 preliminary injunction hearing confirmed as much, and plaintiff also admitted this in her deposition.”

As to the contention that Ragland could have made the past due loan payments but not the added fees, the trial court ruled:  “Plaintiff claims that she indicated in her deposition that she had the money to make up the back payments, but not enough money to also make up the fees.  Plaintiff’s Separate Statement, page 6, lines 16‑18.  The referenced deposition testimony amounts to a claim that plaintiff had only part of the money necessary to reinstate the loan.”  The court also rejected the contention that Ragland was prepared to file bankruptcy to delay the foreclosure sale, stating, “[t]his is a further admission that plaintiff was incapable of reinstating her loan even if the foreclosure sale had been delayed an additional six days.”

Ragland timely filed a notice of appeal from the judgment entered in Defendants’ favor.

REQUEST FOR JUDICIAL NOTICE AND MOTION TO STRIKE

I.

Ragland’s Request for Judicial Notice

Ragland requests that we take judicial notice of 18 discrete facts concerning the financial condition of Downey Savings from 2005 to the time of its acquisition by U.S. Bank, the nature of Downey Savings’s assets in that timeframe, the resale of Ragland’s home, and the condition of the Orange County housing market.  She argues those 18 facts are relevant to show “when Downey Savings’ disastrous financial condition beg[a]n showing in late 2007, and bec[ame] clear by April, 2008, Downey’s desperate need for cash explains its unusual behavior.”  She concedes, “[t]he matters concerning which judicial notice is requested were not presented to the trial court.”  We deny the request for judicial notice.

Ragland requests we take judicial notice pursuant to Evidence Code section 452, subdivision (h), which provides the court “may” take judicial notice of “[f]acts and propositions that are not reasonably subject to dispute and are capable of immediate and accurate determination by resort to sources of reasonably indisputable accuracy.”  The Court of Appeal has the same power as the trial court to take judicial notice of matters properly subject to judicial notice.  (Evid. Code, § 459.)  “‘Matters that cannot be brought before the appellate court through the record on appeal (initially or by augmentation) may still be considered on appeal by judicial notice.’”  (Fitz v. NCR Corp. (2004) 118 Cal.App.4th 702, 719, fn. 4.)

As evidentiary support for the request for judicial notice, Ragland offers 12 exhibits, consisting of an audit report of Downey Savings, prepared by the Office of the Inspector General of the United States Department of the Treasury (exhibit 1), printed pages from various Web sites and blogs (exhibits 2‑6 and 8‑12), and a recorded grant deed (exhibit 7). Ragland’s request for judicial notice requires us (with one exception) to take judicial notice of, and accept as true, the contents of those exhibits.  While we may take judicial notice of the existence of the audit report, Web sites, and blogs, we may not accept their contents as true.  (Unruh‑Haxton v. Regents of University of California (2008) 162 Cal.App.4th 343, 364.) “When judicial notice is taken of a document, however, the truthfulness and proper interpretation of the document are disputable.  [Citation.]”  (StorMedia Inc. v. Superior Court (1999) 20 Cal.4th 449, 457, fn. 9.)

Although the audit report is a government document, we may not judicially notice the truth of its contents.  In Mangini v. R. J. Reynolds Tobacco Co. (1994) 7 Cal.4th 1057, 1063, overruled on another ground in In re Tobacco Cases II (2007) 41 Cal.4th 1257, 1276, the plaintiff sought judicial notice of a report of the United States Surgeon General and a report to the California Department of Health Services.  The California Supreme Court denied the request:  “While courts may notice official acts and public records, ‘we do not take judicial notice of the truth of all matters stated therein.’  [Citations.]  ‘[T]he taking of judicial notice of the official acts of a governmental entity does not in and of itself require acceptance of the truth of factual matters which might be deduced therefrom, since in many instances what is being noticed, and thereby established, is no more than the existence of such acts and not, without supporting evidence, what might factually be associated with or flow therefrom.’”  (Mangini v. R. J. Reynolds Tobacco Co.supra, at pp. 1063‑1064.)

Nor may we take judicial notice of the truth of the contents of the Web sites and blogs, including those of the Los Angeles Times and Orange County Register.  (See Zelig v. County of Los Angeles (2002) 27 Cal.4th 1112, 1141, fn. 6 [“The truth of the content of the articles is not a proper matter for judicial notice”]; Unlimited Adjusting Group, Inc. v. Wells Fargo Bank, N.A. (2009) 174 Cal.App.4th 883, 888, fn. 4 [statements of facts contained in press release not subject to judicial notice].) The contents of the Web sites and blogs are “plainly subject to interpretation and for that reason not subject to judicial notice.”  (L.B. Research & Education Foundation v. UCLA Foundation (2005) 130 Cal.App.4th 171, 180, fn. 2.)

The exception is the grant deed.  A recorded deed is an official act of the executive branch, of which this court may take judicial notice.  (Evid. Code, §§ 452, subd. (c), 459, subd. (a); Evans v. California Trailer Court, Inc. (1994) 28 Cal.App.4th 540, 549; Cal‑American Income Property Fund II v. County of Los Angeles (1989) 208 Cal.App.3d 109, 112, fn. 2.)  The grant deed purports to show that Ragland’s home was conveyed by the purchaser at the foreclosure sale to another party. While we may take judicial notice of the grant deed, we decline to do so because we conclude it is not relevant to any issue raised on appeal.

In addition, Ragland has not shown exceptional circumstances justifying judicial notice of facts that were not part of the record when the judgment was entered.  (Vons Companies, Inc. v. Seabest Foods, Inc. (1996) 14 Cal.4th 434, 444, fn. 3;Duronslet v. Kamps (2012) 203 Cal.App.4th 717, 737.)

II.

Defendants’ Motion to Strike Portions of Ragland’s Opening Brief

Defendants move to strike (1) six passages from Ragland’s opening brief that are supported by citations to the exhibits attached to the request for judicial notice or by citations to Web sites outside the record on appeal, and (2) three passages accusing Downey Savings of trying to swindle Ragland to generate cash.

California Rules of Court, rule 8.204(a)(1)(C) states an appellate brief must “[s]upport any reference to a matter in the record by a citation to the volume and page number of the record where the matter appears.”  We may decline to consider passages of a brief that do not comply with this rule.  (Doppes v. Bentley Motors, Inc. (2009) 174 Cal.App.4th 967, 990.)  As a reviewing court, we usually consider only matters that were part of the record when the judgment was entered.  (Vons Companies, Inc. v. Seabest Foods, Inc.supra, 14 Cal.4th at p. 444, fn. 3.)

We have denied Ragland’s request for judicial notice; we therefore decline to consider those passages of the appellant’s opening brief, noted in the margin, which are supported solely by citations to exhibits attached to that request or to Web sites outside the appellate record.1  The three passages from the appellant’s opening brief accusing Downey Savings of trying to swindle Ragland also are not supported by record references,2 but we consider those three passages to be argument rather than factual assertions.

STANDARD OF REVIEW

“A trial court properly grants summary judgment where no triable issue of material fact exists and the moving party is entitled to judgment as a matter of law.  [Citation.]  We review the trial court’s decision de novo, considering all of the evidence the parties offered in connection with the motion (except that which the court properly excluded) and the uncontradicted inferences the evidence reasonably supports.  [Citation.]”  (Merrill v. Navegar, Inc. (2001) 26 Cal.4th 465, 476.)  We liberally construe the evidence in support of the party opposing summary judgment and resolve all doubts about the evidence in that party’s favor.  (Hughes v. Pair (2009) 46 Cal.4th 1035, 1039.)

DISCUSSION

I.

Negligent Misrepresentation Cause of Action

In the first cause of action, for negligent misrepresentation, Ragland alleged:  “On or about April 29, 2008, Downey [Savings] represented to Plaintiff that Downey [Savings] could modify Plaintiff’s current loan during the time that the legal department was investigating the fraud allegation on Plaintiff’s loan.  However, in order to do a modification of Plaintiff’s loan, Plaintiff would have to be in arrears on her current loan.  Downey[ Savings]’s representative then told Plaintiff not to pay April’s mortgage payment.  Upon . . . Downey[ Savings]’s representations Plaintiff did not pay April’s mortgage payment.  Thereafter, Downey [Savings] informed Plaintiff that Downey [Savings] could not accept any further mortgage payments from Plaintiff until the legal department investigated the alleged fraud on the initial mortgage.”

The elements of negligent misrepresentation are (1) a misrepresentation of a past or existing material fact, (2) made without reasonable ground for believing it to be true, (3) made with the intent to induce another’s reliance on the fact misrepresented, (4) justifiable reliance on the misrepresentation, and (5) resulting damage.  (Wells Fargo Bank, N.A. v. FSI, Financial Solutions, Inc. (2011) 196 Cal.App.4th 1559, 1573; National Union Fire Ins. Co. of Pittsburgh, PA v. Cambridge Integrated Services Group, Inc. (2009) 171 Cal.App.4th 35, 50.)

In opposition to Defendants’ motion for summary judgment, Ragland presented evidence that John or his supervisor represented (1) her loan was not “behind” but he would work with her to modify the loan; (2) she should not make the April 2008 loan payment because “the worst thing that’s going to happen is you are going to have a late fee, we will get this done for you”; and (3) her loan modification request likely would be approved because she was prequalified.  Ragland also presented evidence that several days later, on the last day for her to make a timely loan payment for April, John’s supervisor told her the loan would be turned over to the legal department because Ragland had reported some of the loan documents were forged. The supervisor told Ragland that Downey Savings would not attempt to collect from her until the matter had been investigated by the legal department.

Ragland presented evidence that in reliance on the representations made by John or his supervisor, she did not make her April 2008 loan payment.  Defendants assert Ragland was already in default when she first spoke with John on April 13, 2008, because she failed to make her payment due April 1, 2008.  The note stated Ragland’s monthly payment was due on the first day of each month, but that the monthly payment would be deemed timely if paid by the end of the 15th day after the due date.  In addition, Ragland presented evidence that John told her on April 13, 2008, she was not “behind” but he would work with her to modify the loan.  The payments made by Ragland for September and October 2008, which were rejected by Downey Savings, were dated the 16th of the month, and the rejected payment for November 2008 was dated the 14th.  At the very least, there is a triable issue of fact whether Ragland was in default when she spoke with John on April 13.

Defendants argue Ragland did not rely on the misrepresentations because she tried to make her loan payments in May, September, October, and November 2008.  Ragland made her loan payment by automatic transfer from her checking account. She manually prevented or undid the automatic payments for April, June, July, and August 2008.  As Ragland argues in her reply brief, an inference could be drawn that she inadvertently did not stop the May 2008 payment.  We draw all reasonable inference in favor of the party against whom the summary judgment motion was made.  (Crouse v. Brobeck, Phleger & Harrison (1998) 67 Cal.App.4th 1509, 1520.)

Defendants argue Ragland’s reliance was not justified because she was told her loan was in the foreclosure department and nobody at Downey Savings ever told her she could stop making loan payments.  The evidence presented by Ragland created a triable issue of fact whether her reliance was justified.  On April 29, 2008, Ragland spoke with Joseph and Claudia at Downey Savings, and they told her Downey Savings was initiating an investigation of her forgery claim; during the investigation, Downey Savings would not accept loan payments; and collection activity was frozen.  In May 2008, on receiving a letter stating her loan was in foreclosure, Ragland called Downey Savings.  Her call was transferred several times, until a person named Lilia told her the loan was in Downey Savings’s legal department, which would call her back.  Nobody from the legal department called Ragland back.  In July 2008, Ragland received a letter from Downey Savings, telling her foreclosure proceedings had begun.  After receiving the letter, she called Downey Savings and spoke with three different representatives. The third, Leanna, told Ragland the legal department had failed to place a red flag on the loan and it should never have been placed in foreclosure.  Ragland’s notes from the conversation include the statement, “[f]oreclosure on hold.”

The trial court granted summary judgment against Ragland on the ground she suffered no damages because, on the date of the foreclosure sale, she could not reinstate the loan by tendering $24,804.57—the amount Downey Savings claimed was due and owing.  The evidence created at the very least a triable issue of fact on damages.  Ragland testified in her deposition that as of the date of the foreclosure sale, “I could have covered the back payments but not the fees, not all the fees.”  Those fees were tacked on because Ragland’s failure to make the April 2008 loan payment placed the loan in foreclosure.  However, Ragland presented evidence that she did not make the April 2008 payment because she relied on misrepresentations made by Downey Savings.  In July 2008, Downey Savings told Ragland her loan should not have been placed in foreclosure and the foreclosure was “on hold.”  If Downey Savings wrongfully placed Ragland’s loan in foreclosure, as Ragland alleges, then it had no right to demand payment of additional fees and interest to reinstate the loan.  Downey Savings could not take advantage of its own wrong.  (Civ. Code, § 3517.)

Defendants point to the December 2, 2008 letter from Ragland’s attorney as undermining her claim she could make the past due monthly loan payments.  In that letter, the attorney stated that Ragland could not pay the full amount required to bring the loan current and proposed $12,000 of the reinstatement amount be “tacked onto the back end of the loan.” Defendants ask, if Ragland could have made all of the past due monthly loan payments, why did she not offer to pay them? The question is rhetorical:  If she had offered to pay the past due monthly loan payments, Downey Savings certainly would have rejected the offer, just as now Defendants vigorously argue a tender must be unconditional and offer payment of additional fees.

Defendants argue Ragland’s declaration is inconsistent with her deposition testimony because, in her deposition, Ragland could not identify precisely the people from whom she asked to borrow money to make the past due monthly loan payments. Her declaration is consistent with her deposition testimony.  Ragland testified, under oath, in her deposition that as of the date of the foreclosure sale, she “could have covered the back payments but not the fees.”  The evidence established she was not behind on her monthly payments when she spoke with John at Downey Savings on April 13, 2008, and Downey Savings rejected her payments for May, September, October, and November 2008.  A reasonable inference from this evidence, which we liberally construe in Ragland’s favor, is that Ragland would have been able to make the past due monthly payments by the time of the foreclosure sale.  (Miller v. Department of Corrections (2005) 36 Cal.4th 446, 470 [“We stress that, because this is an appeal from a grant of summary judgment in favor of defendants, a reviewing court must examine the evidence de novo and should draw reasonable inferences in favor of the nonmoving party”].)

II.

Breach of Oral Contract Cause of Action

In her second cause of action, for breach of oral contract, Ragland alleged Downey Savings breached its promise to investigate her allegations of forgery.  On appeal, she does not attempt to support a claim of breach of oral contract and argues instead, “[t]he second cause of action for breach of oral promise to investigate should have been labeled as a cause of action for promissory estoppel.”  While conceding the second cause of action does not include the required allegation of detrimental reliance (Kajima/Ray Wilson v. Los Angeles County Metropolitan Transportation Authority (2000) 23 Cal.4th 305, 310), she argues a detrimental reliance allegation may be extrapolated from the fraud cause of action.

The second cause of action did not incorporate by reference the allegations of the fraud cause of action.  Ragland argues we must ignore labels, but however labeled, the second cause of action does not allege promissory estoppel.  On remand, Ragland may seek leave to amend her complaint to allege a promissory estoppel cause of action.

III.

Fraud Cause of Action

In the third cause of action, for fraud, Ragland alleged Downey Savings “falsely and fraudulently” made the representations alleged in the negligent misrepresentation cause of action.

The elements of fraud are (1) the defendant made a false representation as to a past or existing material fact; (2) the defendant knew the representation was false at the time it was made; (3) in making the representation, the defendant intended to deceive the plaintiff; (4) the plaintiff justifiably and reasonably relied on the representation; and (5) the plaintiff suffered resulting damages.  (Lazar v. Superior Court (1996) 12 Cal.4th 631, 638.)

Defendants argue U.S. Bank was entitled to summary adjudication of the fraud cause of action because no evidence was presented of “a misrepresentation, reliance or damages.”  As explained in part I. of the Discussion on negligent misrepresentation, Ragland presented evidence in opposition to the motion for summary judgment that was sufficient to create triable issues as to misrepresentation, reliance, and damages.

Defendants do not argue lack of evidence of elements two (knowledge of falsity) and three (intent to deceive) and did not seek summary adjudication of the fraud cause of action on the ground of lack of evidence of either of those elements.3  Since Ragland submitted evidence creating triable issues of misrepresentation, reliance, and damages, summary adjudication of the fraud cause of action is reversed.

IV.

Violation of Section 2924g(d) Cause of Action

In the fourth cause of action, Ragland alleged Defendants violated section 2924g(d) by selling her home one day after the expiration of the temporary restraining order.

Section 2924g(d) reads, in relevant part:  “The notice of each postponement and the reason therefor shall be given by public declaration by the trustee at the time and place last appointed for sale.  A public declaration of postponement shall also set forth the new date, time, and place of sale and the place of sale shall be the same place as originally fixed by the trustee for the sale.  No other notice of postponement need be given.  However, the sale shall be conducted no sooner than on the seventh day after the earlier of (1) dismissal of the action or (2) expiration or termination of the injunction, restraining order, or stay that required postponement of the sale, whether by entry of an order by a court of competent jurisdiction, operation of law, or otherwise, unless the injunction, restraining order, or subsequent order expressly directs the conduct of the sale within that seven-day period.”  (Italics added.)

On November 26, 2008, the trial court issued an order stating:  “Plaintiff shall be entitled to a temporary restraining order enjoining the foreclosure sale on December 9, 2008; upon bringing the loan current by Dec[ember] 16.  Current is as of Nov[ember] 26, 2008.”  The foreclosure sale was conducted on December 17, 2008.

A.  Section 2924g(d) Creates a Private Right of Action and Is Not Preempted by Federal Law.

In their summary judgment motion, Defendants argued section 2924g(d) does not create a private right of action and is preempted by federal law.  Although Defendants do not make those arguments on appeal, we address, due to their significance, the issues whether section 2924g(d) creates a private right of action and whether it is preempted by federal law.  Following the reasoning of Mabry v. Superior Court (2010) 185 Cal.App.4th 208 (Mabry), we conclude section 2924g(d) creates a private right of action and is not preempted.

In Mabrysupra, 185 Cal.App.4th at page 214, our colleagues concluded Civil Code section 2923.5 may be enforced by private right of action.  Section 2923.5 requires a lender to contact the borrower in person or by telephone before a notice of default may be filed to “‘assess’” the borrower’s financial situation and “‘explore’” options to prevent foreclosure.  (Mabry,supra, at pp. 213‑214.)  Section 2923.5, though not expressly creating a private right of action, impliedly created one because there was no administrative mechanism to enforce the statute, a private remedy furthered the purpose of the statute and was necessary for it to be effective, and California courts do not favor constructions of statutes that render them advisory only.  (Mabrysupra, at p. 218.)

There is no administrative mechanism to enforce section 2924g(d), and a private remedy is necessary to make it effective.  While the Attorney General might be responsible for collective enforcement of section 2924g(d), “the Attorney General’s office can hardly be expected to take up the cause of every individual borrower whose diverse circumstances show noncompliance with section [2924g(d)].”  (Mabrysupra, 185 Cal.App.4th at p. 224.)

The Mabry court also concluded Civil Code section 2923.5 was not preempted by federal law because the statute was part of the foreclosure process, traditionally a matter of state law.  Regulations promulgated by the Office of Thrift Supervision pursuant to the Home Owners’ Loan Act of 1933 (12 U.S.C. § 1461 et seq.) preempted state law but dealt with loan servicing only.  (Mabrysupra, 185 Cal.App.4th at pp. 228‑231.)  “Given the traditional state control over mortgage foreclosure laws, it is logical to conclude that if the Office of Thrift Supervision wanted to include foreclosure as within the preempted category of loan servicing, it would have been explicit.”  (Id. at p. 231.)  Section 2924g(d), as section 2923.5, is part of the process of foreclosure and therefore is not subject to federal preemption.

B.  The Foreclosure Sale Violated Section 2924g(d).

Defendants argue the foreclosure sale did not violate section 2924g(d) on the ground the trial court’s November 26, 2008 order was not a temporary restraining order because it conditioned injunctive relief on Ragland bringing her loan current by December 16, 2008.  That condition was not met, and, therefore, Defendants argue, a temporary restraining order was never issued.

We disagree with Defendants’ interpretation of the November 26 order.  The foreclosure sale had been scheduled for December 9, 2008.  The November 26 order was for all intents and purposes a temporary restraining order subject to section 2924g(d) because the effect of that order was to require postponement of the sale at least to December 16, 2008.  The requirement that Ragland bring the loan current by that date was not a condition precedent to a temporary restraining order, which in effect had been issued, but a condition subsequent, the failure of which to satisfy would terminate injunctive relief.4

Defendants argue they were entitled nonetheless to summary adjudication of the fourth cause of action because Ragland could not have brought her loan current within seven days of December 16, 2008.  Although Ragland submitted evidence that she could pay back amounts due, she did not present evidence she could bring the loan current, including payment of additional fees, as required by the trial court’s November 26 order.

The purpose of the seven‑day waiting period under section 2924g(d) was not, however, to permit reinstatement of the loan, “but to ‘provide sufficient time for a trustor to find out when a foreclosure sale is going to occur following the expiration of a court order which required the sale’s postponement’ and ‘provide the trustor with the opportunity to attend the sale and to ensure that his or her interests are protected.’  [Citation].”  (Hicks v. E.T. Legg & Associates (2001) 89 Cal.App.4th 496, 505.)  “The bill [amending section 2924g(d) to add the waiting period] was sponsored by the Western Center on Law and Poverty in response to an incident in which a foreclosure sale was held one day after a TRO was dissolved. The property was sold substantially below fair market value.  The trustor, who had obtained a purchaser for the property, did not learn of the new sale date and was unable to protect his interests at the sale.”  (Ibid.)

Thus, in obtaining relief under section 2924g(d), the issue is not whether Ragland could have reinstated her loan within the seven‑day waiting period but whether the failure of Downey Savings to comply with the statute impaired her ability to protect her interests at a foreclosure sale.  Defendants did not raise that issue as ground for summary adjudication of the fourth cause of action.

V.

Intentional Infliction of Emotional Distress Cause of Action

In the fifth cause of action, Ragland alleged that in December 2008, Defendants intentionally caused her severe emotional distress by selling her home in a foreclosure sale.

Defendants argue Ragland cannot recover emotional distress damages—either intentionally or negligently inflicted—because she suffered property damage at most as result of their actions.  (See Erlich v. Menezes (1999) 21 Cal.4th 543, 554 [“‘No California case has allowed recovery for emotional distress arising solely out of property damage’”].)  Erlich v. Menezesand other cases disallowing emotional distress damages in cases of property damage involved negligent infliction of emotional distress.  (Ibid. [negligent construction of home does not support emotional distress damages]; Butler‑Rupp v. Lourdeaux(2005) 134 Cal.App.4th 1220, 1228‑1229 [negligent breach of lease of storage space]; Camenisch v. Superior Court (1996) 44 Cal.App.4th 1689, 1693 [negligent infliction of emotional distress based on legal malpractice]; Smith v. Superior Court(1992) 10 Cal.App.4th 1033, 1040 [“mere negligence will not support a recovery for mental suffering where the defendant’s tortious conduct has resulted in only economic injury to the plaintiff”].)  The rule does not apply to intentional infliction of emotional distress:  “[R]ecovery for emotional distress caused by injury to property is permitted only where there is a preexisting relationship between the parties or an intentional tort.”  (Lubner v. City of Los Angeles (1996) 45 Cal.App.4th 525, 532; see also Cooper v. Superior Court (1984) 153 Cal.App.3d 1008, 1012 [no recovery for emotional distress arising solely out of property damage “absent a threshold showing of some preexisting relationship or intentional tort”].)

The elements of a cause of action for intentional infliction of emotional distress are (1) the defendant engages in extreme and outrageous conduct with the intent to cause, or with reckless disregard for the probability of causing, emotional distress; (2) the plaintiff suffers extreme or severe emotional distress; and (3) the defendant’s extreme and outrageous conduct was the actual and proximate cause of the plaintiff’s extreme or severe emotional distress.  (Potter v. Firestone Tire & Rubber Co.(1993) 6 Cal.4th 965, 1001.)  “Outrageous conduct” is conduct that is intentional or reckless and so extreme as to exceed all bounds of decency in a civilized community.  (Ibid.)  The defendant’s conduct must be directed to the plaintiff, but malicious or evil purpose is not essential to liability.  (Ibid.)  Whether conduct is outrageous is usually a question of fact.  (Spinks v. Equity Residential Briarwood Apartments (2009) 171 Cal.App.4th 1004, 1045 (Spinks).)

Ragland argues Downey Savings engaged in outrageous conduct by inducing her to skip the April loan payment, refusing later to accept loan payments, and selling her home at foreclosure.  She likens this case to Spinkssupra, 171 Cal.App.4th 1004, in which the appellate court reversed summary adjudication in the defendants’ favor of a cause of action for intentional infliction of emotional distress.  The defendants in Spinks were landlords of an apartment complex in which the plaintiff resided under a lease entered into by her employer.  (Id. at p. 1015.)  When the plaintiff’s employment was terminated following an industrial injury, the defendants, at the employer’s direction, changed the locks on the plaintiff’s apartment, causing her to leave her residence.  (Ibid.)  The Court of Appeal rejected the contention the defendants’ conduct was not outrageous as a matter of law:  “First, as a general principle, changing the locks on someone’s dwelling without consent to force that person to leave is prohibited by statute.  [Citation.]  Though defendants’ agents were polite and sympathetic towards plaintiff, they nevertheless caused her to leave her home without benefit of judicial process. . . . ‘While in the present case no threats or abusive language were employed, and no violence existed, that is not essential to the cause of action.  An eviction may, nevertheless, be unlawful even though not accompanied with threats, violence or abusive language.  Here the eviction was deliberate and intentional.  The conduct of defendants was outrageous.’”  (Id. at pp. 1045‑1046.)  In addition, the defendants’ onsite property manager had expressed concern over the legality of changing the locks, and the plaintiff was particularly vulnerable at the time because she was recovering from surgery.  (Id. at p. 1046.)

Defendants argue Spinks is inapposite because changing locks on an apartment to force the tenant to leave is unlawful, while, in contrast, Downey Savings proceeded with a lawful foreclosure after Ragland defaulted and had a legal right to protect its economic interests.  (See Sierra‑Bay Fed. Land Bank Assn. v. Superior Court (1991) 227 Cal.App.3d 318, 334 [“It is simply not tortious for a commercial lender to lend money, take collateral, or to foreclose on collateral when a debt is not paid”]; Quinteros v. Aurora Loan Services (E.D.Cal. 2010) 740 F.Supp.2d 1163, 1172 [“The act of foreclosing on a home (absent other circumstances) is not the kind of extreme conduct that supports an intentional infliction of emotional distress claim”].)

This argument assumes Downey Savings had the right to foreclose, an issue at the heart of the case.  Ragland created triable issues of fact on her causes of action for negligent misrepresentation, fraud, and violation of section 2924g(d). Defendants do not argue Downey Savings would have had the right to foreclose if any of those causes of action were meritorious.  Ragland’s treatment by Downey Savings, if proven, was at least as bad as the conduct of the defendants in Spinksand was so extreme as to exceed all bounds of decency in our society.

VI.

Negligent Infliction of Emotional Distress Cause of Action

In the sixth cause of action, Ragland alleged that in December 2008, Defendants negligently caused her severe emotional distress by selling her home in a foreclosure sale.  As explained above, Ragland cannot recover under her cause of action for negligent infliction because Defendants’ conduct resulted only in injury to property.  In addition, she cannot recover for negligent infliction of emotional distress because she cannot prove a relationship giving rise to a duty of care.

There is no independent tort of negligent infliction of emotional distress; rather, “[t]he tort is negligence, a cause of action in which a duty to the plaintiff is an essential element.”  (Potter v. Firestone Tire & Rubber Co.supra, 6 Cal.4th at p. 984.)  “That duty may be imposed by law, be assumed by the defendant, or exist by virtue of a special relationship.”  (Id. at p. 985.)

Ragland asserted a “direct victim” claim for negligent infliction of emotional distress rather than a “bystander” claim. “‘Direct victim’ cases are cases in which the plaintiff’s claim of emotional distress is not based upon witnessing an injury to someone else, but rather is based upon the violation of a duty owed directly to the plaintiff.  ‘[T]he label “direct victim” arose to distinguish cases in which damages for serious emotional distress are sought as a result of a breach of duty owed the plaintiff that is “assumed by the defendant or imposed on the defendant as a matter of law, or that arises out of a relationship between the two.”  [Citation.]  In these cases, the limits [on bystander cases . . . ] have no direct application.  [Citations.]  Rather, well‑settled principles of negligence are invoked to determine whether all elements of a cause of action, including duty, are present in a given case.’”  (Wooden v. Raveling (1998) 61 Cal.App.4th 1035, 1038.)

Ragland argues a relationship between her and Defendants, sufficient to create a duty of care, arose by virtue of (1) the implied covenant of good faith and fair dealing in the loan documents and (2) financial advice rendered by John or Joseph during the telephone calls in April 2008.

The implied covenant of good faith and fair dealing is a contractual relationship and does not give rise to an independent duty of care.  Rather, “‘[t]he implied covenant of good faith and fair dealing is limited to assuring compliance with the express terms of the contract, and cannot be extended to create obligations not contemplated by the contract.’”  (Pasadena Live v. City of Pasadena (2004) 114 Cal.App.4th 1089, 1094.)  Outside of the insured‑insurer relationship and others with similar qualities, breach of the implied covenant of good faith and fair dealing does not give rise to tort damages.  (Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 692‑693; see also Cates Construction, Inc. v. Talbot Partners (1999) 21 Cal.4th 28, 61 [no tort recovery for breach of implied covenant arising out of performance bond]; Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 516 [“In the absence of an independent tort, punitive damages may not be awarded for breach of contract” even when the breach was willful, fraudulent, or malicious]; Mitsui Manufacturers Bank v. Superior Court(1989) 212 Cal.App.3d 726, 730‑732 [commercial borrower may not recover tort damages for lender’s breach of implied covenant in loan documents].)

No fiduciary duty exists between a borrower and lender in an arm’s length transaction.  (Oaks Management Corporation v. Superior Court (2006) 145 Cal.App.4th 453, 466; Union Bank v. Superior Court (1995) 31 Cal.App.4th 573, 579; Price v. Wells Fargo Bank (1989) 213 Cal.App.3d 465, 476.)  “[A]s a general rule, a financial institution owes no duty of care to a borrower when the institution’s involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money.”  (Nymark v. Heart Fed. Savings & Loan Assn. (1991) 231 Cal.App.3d 1089, 1096.)

Relying on Barrett v. Bank of America (1986) 183 Cal.App.3d 1362 (Barrett), Ragland argues Downey Savings exceeded the scope of its role as a lender of money because John and Joseph gave her what amounted to investment advice by telling her not to make her April 2008 loan payment.  In Barrett, the plaintiffs executed personal guarantees to the defendant bank of two loans made to a corporation of which the plaintiffs were the principal shareholders.  (Id. at p. 1365.)  Soon after the loans funded, the plaintiffs were informed the corporation was in technical default because the corporation’s liability to asset ratios no longer met the bank’s requirements.  (Ibid.)  The bank’s loan officer assigned to the matter suggested three different ways to improve the corporation’s financial situation.  As to the third suggestion, merger or acquisition, the loan officer told the plaintiffs a merging company would be responsible for the loans and the plaintiffs would be released from the guarantees. (Ibid.)

The plaintiffs followed the third suggestion, and their corporation merged with another one.  The merging corporation soon could not make the payments on the loans.  (Barrettsupra, 183 Cal.App.3d at pp. 1365‑1366.)  The assignee of the loans enforced them against the plaintiffs and instituted foreclosure proceedings against their home.  (Id. at p. 1366.)  The plaintiffs sued the bank for various causes of action, including constructive fraud and intentional infliction of emotional distress.  (Ibid.)  The jury returned a verdict in favor of the bank.  (Id. at pp. 1366‑1367.)

The issue on appeal was whether the trial court erred by refusing to instruct the jury on constructive fraud.  (Barrettsupra, 183 Cal.App.3d at p. 1368.)  The Court of Appeal, reversing, concluded substantial evidence supported a constructive fraud theory of recovery.  (Id. at p. 1369.)  Constructive fraud usually arises from a breach of duty in which a fiduciary relationship exists.  (Ibid.)  The court reasoned the bank acted as the plaintiffs’ fiduciary because one plaintiff perceived his relationship with the loan officer as “very close,” relied on the loan officer’s financial advice, shared confidential financial information with the loan officer, and relied on the loan officer’s advice about mergers.  (Ibid.)  In addition, a consultant for the merging corporation testified the loan officer assured him the plaintiffs would not be released from their guarantees.  (Ibid.)

The evidence presented in opposition to the motion for summary judgment did not create a triable issue of Ragland’s relationship with Downey Savings.  In contrast with the extensive financial and legal advice given by the loan officer inBarrett, John or his supervisor at Downey Savings told Ragland not to make her April 2008 loan payment in order to be considered for a loan modification.  This advice was directly related to the issue of loan modification and therefore fell within the scope of Downey Savings’s conventional role as a lender of money.

The undisputed facts established there was no relationship between Ragland and Downey Savings giving rise to a duty the breach of which would permit Ragland to recover emotional distress damages based on negligence.  The trial court did not err by granting summary adjudication of the cause of action for negligent infliction of emotional distress.

VII.

Rescission Cause of Action

Ragland concedes her seventh cause of action, for rescission, is no longer viable (“a dead letter”) because her home was resold after the foreclosure sale to a bona fide purchaser for value.  For that reason too, she states she is no longer asserting claims against DSL and FCI.

VIII.

Temporary Restraining Order

Ragland argues the trial court’s November 26, 2008 order violated her due process rights because it, in effect, required her to pay nearly $25,000 to bring her loan current or face foreclosure of her home.  There are two fundamental problems with Ragland’s challenge to the November 26 order.  First, an order granting or dissolving an injunction, or refusing to grant or dissolve an injunction, is directly appealable.  (Code Civ. Proc., § 904.1, subd. (a)(6).)  Ragland did not file a notice of appeal from the November 26 order or from the later order denying her motion for a preliminary injunction.  Second, even if Ragland properly had appealed, the sale of her home at foreclosure would have rendered the appeal moot.  An appeal from an order denying a temporary restraining order or preliminary injunction will not be entertained after the act sought to be enjoined has been performed.  (Finnie v. Town of Tiburon (1988) 199 Cal.App.3d 1, 10.)  “An appeal should be dismissed as moot when the occurrence of events renders it impossible for the appellate court to grant appellant any effective relief. [Citation.]”  (Cucamongans United for Reasonable Expansion v. City of Rancho Cucamonga (2000) 82 Cal.App.4th 473, 479.)

Ragland concedes her attempt to halt the foreclosure sale, like her rescission cause of action, is a “dead letter” and she is not seeking to set aside the November 26 order or the order denying a preliminary injunction.  She argues, “the denial of due process at the application for temporary restraining order was a substantial factor in [the] trial court’s decision to grant summary judgment in favor of U.S. Bank.”  We fail to see the connection.  In any event, we are reversing the judgment as to U.S. Bank, and affirming summary adjudication only of the causes of action for breach of oral contract, negligent infliction of emotional distress, and rescission.

DISPOSITION

The judgment in favor of DSL and FCI, and summary adjudication of the causes of action for breach of oral contract, negligent infliction of emotional distress, and rescission are affirmed.  Ragland may seek leave to amend in the trial court, as explained in this opinion.  In all other respects, the judgment is reversed and the matter remanded for further proceedings. Ragland shall recover costs incurred on appeal.

FYBEL, J.

WE CONCUR:

ARONSON, ACTING P. J.

IKOLA, J.

 1.  From page 4, the third full paragraph beginning “In October, 2007, Downeys’ publicly traded common stock,” through page 6, the citation following the first full paragraph and ending “http://www.ocregister.com/articles/bank-16076-fremont-fdic.html).

2  On page 7, footnote 3 that continues from page 6, the second sentence beginning “Between April 2008” and ending “[$543,000 + 14% = $619,020].”

3.  From page 7, in the third paragraph, the second sentence beginning “By that time, Downey’s” to page 8, the first line ending “(http:/www.bankaholic.com/ downey‑savings/).”

4.  On page 8, the second full paragraph beginning “In late July, 2008.”

5.  From page 9, the third full paragraph beginning “On November 21, 2008” through the first full paragraph on page 10.

6.  From page 31, the first full paragraph beginning “Going through a foreclosure can be so stressful” through page 32, the first full paragraph ending “(http://abcnews.go.com/Health/DepressionNews/story?id=5444573&page=1).

2  The three passages are:

1.  On page 16, the first full paragraph beginning “In the present case.”

2.  On page 16, footnote 4.

3.  On page 30, in the first full paragraph, the fourth sentence beginning “Downey Savings took Ms. Ragland’s home.”

3  In its notice of motion and separate statement of undisputed material facts, U.S. Bank moved for summary adjudication of two issues (issues 9 and 10) related to the fraud cause of action:  “9. U.S. Bank is entitled to summary adjudication against Plaintiff on the third cause of action for Fraud because U.S. Bank did not make an actionable misrepresentation.  [¶]  10. U.S. Bank is entitled to summary adjudication against Plaintiff on the third cause of action for Fraud because all of Plaintiff’s alleged damages arise from the foreclosure of her property and Plaintiff was incapable of reinstating the loan at the time of the foreclosure.”

4  The requirement that Ragland bring her loan current might also be viewed as a condition precedent to a preliminary injunction.  But, as the trial court noted: “If plaintiff does bring her payments current by the hearing date, then there is no basis for a foreclosure sale because the arrears would have been cured.  Hence there would seem to be no need for the issuance of a preliminary injunction under such circumstances.”

How Wall Street Perverted the 4 Cs of Mortgage Underwriting

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Editor’s Comment: 

For thousands of years since the dawn of money credit has been an integral part of the equation.  Anytime a person, company or institution takes your money or valuables in exchange for a promise that it will return your money or property or pay it to someone else (like in a check) credit is involved.  Most bank customers do not realize that they are creditors of the bank in which they deposit their money.  But all of them recognize that on some level they need to know or believe that the bank will be able to make good on its promise to honor the check or pay the money as instructed. 

Most people who use banks to hold their money do so in the belief that the bank has a history of being financially stable and always honoring withdrawals.  Some depositors may look a little further to see what the balance sheet of the bank looks like.   Of course the first thing they look at is the amount of cash shown on the balance sheet so that a perspective depositor can make an intelligent decision about the liquidity or availability of the funds they deposit. 

So the depositor is in essence lending money to the bank upon the assumption of repayment based upon the operating history of the bank, the cash in the bank and any other collateral (like FDIC guarantees).

As it turns out these are the 4 Cs of loan underwriting which has been followed since the first person was given money to hold and issued a paper certificate in exchange. The paper certificate was intended to be used as either a negotiable instrument for payment in a far away land or for withdrawal when directly presented to the person who took the money and issued the promise on paper to return it.

Eventually some people developed good reputations for safe keeping the money.  Those that developed good reputations were allowed by the depositors to keep the money for longer and longer periods.  After a while, the persons holding the money (now called banks) realized that in addition to charging a fee to the depositor they could use the depositor’s money to lend out to other people.  The good banks correctly calculated the probable amount of time for the original depositor to ask for his money back and adjusted loan terms to third parties that would be due before the depositor demanded his money.

The banks adopted the exact same strategy as the depositors.  The 4 Cs of underwriting a loan—Capacity, Credit, Cash and Collateral—are the keystones of conventional loan underwriting. 

The capacity of a borrower is determined by their ability to repay the debt without reference to any other source or collateral.  For the most part, banks successfully followed this model until the late 1990s when they discovered that losing money could be more profitable than making money.  In order to lose money they obviously had to invert the ratios they used to determine the capacity of the borrower to repay the money.  To accomplish this, they needed to trick or deceive the borrower into believing that he was getting a loan that he could repay, when in fact the bank knew that he could not repay it.  To create maximum confusion for borrowers the number of home loan products grew from a total of 5 different types of loans in 1974 to a total of 456 types of loans in 2006.  Thus the bank was assured that a loss could be claimed on the loan and that the borrower would be too confused to understand how the loss had occurred.  As it turned out the regulators had the same problem as the borrowers and completely missed the obscure way in which the banks sought to declare losses on residential loans.

Like the depositor who is trusting the bank based upon its operating history, the bank normally places its trust in the borrower to repay the loan based upon the borrowers operating history which is commonly referred to as their credit worthiness, credit score or credit history.  Like the capacity of the borrower this model was used effectively until the late 1990s when it too was inverted.  The banks discovered that a higher risk of non-payment was directly related to the “reasonableness” of charging a much higher interest rate than prevailing rates.  This created profits, fees and premiums of previously unimaginable proportions.  The bank’s depositors were expecting a very low rate of interest in exchange for what appeared as a very low risk of nonpayment from the bank.  By lending the depositor’s money to high risk borrowers whose interest rate was often expressed in multiples of the rate paid to depositors, the banks realized they could loan much less in principal than the amount given to them by the depositor leaving an enormous profit for the bank.  The only way the bank could lose money under this scenario would be if the loan was actually repaid.  Since some loans would be repaid, the banks instituted a power in the master servicer to declare a pool of loans to be in default even if many of the individual loans were not in default.  This declaration of default was passed along to investors (depositors) and borrowers alike where eventually both would in many, if not most cases, perceive the investment as a total loss without any knowledge that the banks had succeeded in grabbing “profits” that were illegal and improper regardless if one referred to common law or statutory law.

Capacity and credit are usually intertwined with the actual or stated income of the borrower.  Most borrowers and unfortunately most attorneys are under the mistaken belief that an inflated income shown on the application for the loan, subjects the borrower to potential liability for fraud.  In fact, the reverse is true.  Because of the complexity of real estate transactions, a history of common law dating back hundreds of years together with modern statutory law, requires the lender to perform due diligence in verifying the ability of the borrower to repay the loan and in assessing the viability of the loan.  Some loans had a teaser rate of a few hundred dollars per month.  The bank had full knowledge that the amount of the monthly payment would change to an amount exceeding the gross income of the borrower.   In actuality the loan had a lifespan that could only be computed by reference to the date of closing and the date that payments reset.  The illusion of a 30-year loan along with empty promises of refinancing in a market that would always increase in value, led borrowers to accept prices that were at times a multiple of the value of the property or the value of the loan.  Banks have at their fingertips numerous websites in which they can confirm the likelihood of a perspective borrower to repay the loan simply by knowing the borrower’s occupation and geographical location.  Instead, they allowed mortgage brokers to insert absurd income amounts in occupations which never generate those levels of income.  In fact, we have seen acceptance and funding of loans based upon projected income from investments that had not yet occurred where the perspective investment was part of a scam in which the mortgage broker was intimately involved.  See Merendon Mining scandal.

The Cash component of the 4 Cs.  Either you have cash or you don’t have cash.  If you don’t have cash, it’s highly unlikely that anyone would consider a substantial loan much less a deposit into a bank that was obviously about to go out of business.   This rule again was followed for centuries until the 1990s when the banks replaced the requirement of cash from the borrower with a second loan or even a third loan in order to “seal the deal”.  In short, the cash requirement was similarily inverted from past practices.  The parties involved at the closing table were all strawmen performing fees for service.  The borrower believed that a loan underwriting was taking place wherein a party was named on the note as the lender and also named in the security instrument as the secured party. The borrower believed that the closing could never have occurred but for the finding by the “underwriting lender” that the loan was proper and viable.  The people at the closing table other than the borrower, all knew that the loan was neither proper nor viable.  In many cases the borrower had just enough cash to move into a new house and perhaps purchase some window treatments.  Since the same credit game was being played at furniture stores and on credit cards, more money was given to the borrower to create fictitious transactions in which furniture, appliances, and home improvements were made at the encouragement of retailers and loan brokers.  Hence the cash requirement was also inverted from a positive to a negative with full knowledge by the alleged bank who didn’t bother to pass this knowledge on to its “depositors” (actually, investors in bogus mortgage bonds). 

Collateral is the last of the 4 Cs in conventional loan underwriting.  Collateral is used in the event that the party responsible for repayment fails to make the repayment and is unable to cure it or work out the difference with the bank.  In the case of depositors, the collateral is often viewed as the full faith and credit of the United States government as expressed by the bank’s membership in the Federal Deposit Insurance Corporation (FDIC).  For borrowers collateral refers to property which they pledge can be used or sold to satisfy obligation to repay the loan.  Normally banks send one or even two or three appraisers to visit real estate which is intended to be used as collateral.  The standard practice lenders used was to apply the lower appraisals as the basis for the maximum amount that they would lend.  The banks understood that the higher appraisals represented a higher risk that they would lose money in the event that the borrower failed to repay the loan and property values declined.  This principal was also used for hundreds of years until the 1990s when the banks, operating under the new business model described above, started to run out of people who could serve as borrowers.  Since the deposits (purchases of mortgage bonds) were pouring in, the banks either had to return the deposits or use a portion of the deposits to fund mortgages regardless of the quality of the mortgage, the cash, the collateral, the capacity or any other indicator that a normal reasonable business person would use.  The solution was to inflate the appraisals of the real estate by presenting appraisers with “an offer they couldn’t refuse”.  Either the appraiser came in with an appraisal of the real property at least $20,000 above the price being used in the contract or the appraiser would never work again.  By inflating the appraisals the banks were able to move more money and of course “earn” more fees and profits. 

The appraisals were the weakest link in the false scheme of securitization launched by the banks and still barely understood by regulators.  As the number of potential borrowers dwindled and even with the help of developers raising their prices by as much as 20% per month the appearance of a rising market collapsed in the absence of any more buyers.

Since all the banks involved were holding an Ace High Straight Flush, they were able to place bets using insurance, credit default swaps and other credit enhancements wherein a movement of as little as 8% in the value of a pool would result in the collapse of the entire pool.  This created the appearance of losses to the banks which they falsely presented to the U.S. government as a threat to the financial system and the financial security of the United States.  Having succeeded in terrorizing the executive and legislative branches and the Federal Reserve system, the banks realized that they still had a new revenue generator.  By manufacturing additional losses the government or the Federal Reserve would fund those losses under the mistaken belief that the losses were real and that the country’s future was at stake.  In fact, the country’s future is now at stake because of the perversion of the basic rules of commerce and lending stated above.  The assumption that the economy or the housing market can recover without undoing the fraud perpetrated by the banks is dangerous and false.  It is dangerous because more than 17 trillion dollars in “relief” to the banks has been provided to cover mortgage defaults which are at most estimated at 2.6 trillion.  The advantage given to the megabanks who accepted this surplus “aid” has made it difficult for community banks and credit unions to operate or compete.   The assumption is false because there is literally not enough money in the world to accomplish the dual objectives of allowing the banks to keep their ill gotten gains and providing the necessary stimulus and rebuilding of our physical and educational infrastructure.  

The simple solution that is growing more and more complex is the only way that the U.S. can recover.  With the same effort that it took in 1941 to convert an isolationist largely unarmed United States to the most formidable military power on the planet, the banks who perpetrated this fraud should be treated as terrorists with nothing less than unconditional surrender as the outcome.  The remaining 7,000 community banks and credit unions together with the existing infrastructure for electronic funds transfer will easily allow the rest of the banking community to resume normal activity and provide the capital needed for a starving economy. 

See article:  www.kcmblog.com/2012/04/05/the-4-cs-of-mortgage-underwriting-2

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