APPRAISAL FRAUD IN DETAIL

Posted on May 11, 2010 by Neil Garfield

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

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

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

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

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

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

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Yield Spread Premiums Revealed as Interest Rates Rise

Posted on April 12, 2010 by Neil Garfield
Editor’s Note: This article might help you understand the workings of a yield spread premium. For every 1% difference in interest rate the “cost” of the loan to you goes up 19%. Now if you look at it from the point of view of the “lender” that means the “value” goes up by 19%. That means, on a $100,000 loan an increase of $19,000.

So if you have a $100,000 loan and you qualified for a 5% loan, then a smooth-talking mortgage broker or mortgage originator might get you confused enough to get into a loan that looks better but ends being worse.

The result might be that you pay a 10% rate when the loan re-sets. This increases the “cost” of the loan (oversimplifying here for the purpose of education) to the borrower and the “value” of the loan to the “lender.” How much? 19% for every 1% increase, so in our example here, to keep it simple, the cost to you on a $100,000 loan is increased by 19%x5=95%. So you will pay $95,000 more for that increase. And the lender will get $95,000 more for their “investment.”

The mortgage broker gets a “share” of that increase as a reward for having talked you into a worse loan product even if it means that the viability of the loan (the likelihood that you will pay it off) has been diminished. This “share” is called a premium and it is caused by the spread between the original 5% that you could have had and the 10% loan they you bought. Hence yield spread premium, and I call that “tier 1.”

Tier 2 occurs because the source of funds is not the bank, it is an investor who is kept in the dark much as you are. They think they are getting 5% on a $200,000 loan. But what Wall Street did was they actually funded your $100,000 loan, valued it at 10%, and then kept the balance of the $200,000 investment for themselves. To the investor the numbers look the same — they expected 5% on their $200,000 purchase of mortgage backed securities which is $10,000 per year. Wall Street gave them what looked like an investment that yielded $10,000 per year simply by creating toxic loans and used it against the borrowers who would have otherwise paid on the loans because they could.

It is the same yield spread between 5% and 10%, but used in reverse against the investor.
In my opinion this gives rise to recovery of the undisclosed tier 2 yield spread premium payable to the borrower. It might also give rise to a cause of action for securities fraud that the investor could claim. At the moment, few people are pursuing this. Eventually as the mystery unravels, there will be competing claims for this money, and the first one to the finish line is probably going to be the winner.
April 10, 2010

Interest Rates Have Nowhere to Go but Up

By NELSON D. SCHWARTZ

Even as prospects for the American economy brighten, consumers are about to face a new financial burden: a sustained period of rising interest rates.

That, economists say, is the inevitable outcome of the nation’s ballooning debt and the renewed prospect of inflation as the economy recovers from the depths of the recent recession.

The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.

“Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. “It’s been a great thrill as rates descended, but now we face an extended climb.”

The impact of higher rates is likely to be felt first in the housing market, which has only recently begun to rebound from a deep slump. The rate for a 30-year fixed rate mortgage has risen half a point since December, hitting 5.31 last week, the highest level since last summer.

Along with the sell-off in bonds, the Federal Reserve has halted its emergency $1.25 trillion program to buy mortgage debt, placing even more upward pressure on rates.

“Mortgage rates are unlikely to go lower than they are now, and if they go higher, we’re likely to see a reversal of the gains in the housing market,” said Christopher J. Mayer, a professor of finance and economics at Columbia Business School. “It’s a really big risk.”

Each increase of 1 percentage point in rates adds as much as 19 percent to the total cost of a home, according to Mr. Mayer.

The Mortgage Bankers Association expects the rise to continue, with the 30-year mortgage rate going to 5.5 percent by late summer and as high as 6 percent by the end of the year.

Another area in which higher rates are likely to affect consumers is credit card use. And last week, the Federal Reserve reported that the average interest rate on credit cards reached 14.26 percent in February, the highest since 2001. That is up from 12.03 percent when rates bottomed in the fourth quarter of 2008 — a jump that amounts to about $200 a year in additional interest payments for the typical American household.

With losses from credit card defaults rising and with capital to back credit cards harder to come by, issuers are likely to increase rates to 16 or 17 percent by the fall, according to Dennis Moroney, a research director at the TowerGroup, a financial research company.

“The banks don’t have a lot of pricing options,” Mr. Moroney said. “They’re targeting people who carry a balance from month to month.”

Similarly, many car loans have already become significantly more expensive, with rates at auto finance companies rising to 4.72 percent in February from 3.26 percent in December, according to the Federal Reserve.

Washington, too, is expecting to have to pay more to borrow the money it needs for programs. The Office of Management and Budget expects the rate on the benchmark 10-year United States Treasury note to remain close to 3.9 percent for the rest of the year, but then rise to 4.5 percent in 2011 and 5 percent in 2012.

The run-up in rates is quickening as investors steer more of their money away from bonds and as Washington unplugs the economic life support programs that kept rates low through the financial crisis. Mortgage rates and car loans are linked to the yield on long-term bonds.

Besides the inflation fears set off by the strengthening economy, Mr. Gross said he was also wary of Treasury bonds because he feared the burgeoning supply of new debt issued to finance the government’s huge budget deficits would overwhelm demand, driving interest rates higher.

Nine months ago, United States government debt accounted for half of the assets in Mr. Gross’s flagship fund, Pimco Total Return. That has shrunk to 30 percent now — the lowest ever in the fund’s 23-year history — as Mr. Gross has sold American bonds in favor of debt from Europe, particularly Germany, as well as from developing countries like Brazil.

Last week, the yield on the benchmark 10-year Treasury note briefly crossed the psychologically important threshold of 4 percent, as the Treasury auctioned off $82 billion in new debt. That is nearly twice as much as the government paid in the fall of 2008, when investors sought out ultrasafe assets like Treasury securities after the collapse of Lehman Brothers and the beginning of the credit crisis.

Though still very low by historical standards, the rise of bond yields since then is reversing a decline that began in 1981, when 10-year note yields reached nearly 16 percent.

From that peak, steadily dropping interest rates have fed a three-decade lending boom, during which American consumers borrowed more and more but managed to hold down the portion of their income devoted to paying off loans.

Indeed, total household debt is now nine times what it was in 1981 — rising twice as fast as disposable income over the same period — yet the portion of disposable income that goes toward covering that debt has budged only slightly, increasing to 12.6 percent from 10.7 percent.

Household debt has been dropping for the last two years as recession-battered consumers cut back on borrowing, but at $13.5 trillion, it still exceeds disposable income by $2.5 trillion.

The long decline in rates also helped prop up the stock market; lower rates for investments like bonds make stocks more attractive.

That tailwind, which prevented even worse economic pain during the recession, has ceased, according to interviews with economists, analysts and money managers.

“We’ve had almost a 30-year rally,” said David Wyss, chief economist for Standard & Poor’s. “That’s come to an end.”

Just as significant as the bottom-line impact will be the psychological fallout from not being able to buy more while paying less — an unusual state of affairs that made consumer spending the most important measure of economic health.

“We’ve gotten spoiled by the idea that interest rates will stay in the low single-digits forever,” said Jim Caron, an interest rate strategist with Morgan Stanley. “We’ve also had a generation of consumers and investors get used to low rates.”

For young home buyers today considering 30-year mortgages with a rate of just over 5 percent, it might be hard to conceive of a time like October 1981, when mortgage rates peaked at 18.2 percent. That meant monthly payments of $1,523 then compared with $556 now for a $100,000 loan.

No one expects rates to return to anything resembling 1981 levels. Still, for much of Wall Street, the question is not whether rates will go up, but rather by how much.

Some firms, like Morgan Stanley, are predicting that rates could rise by a percentage point and a half by the end of the year. Others, like JPMorgan Chase are forecasting a more modest half-point jump.

But the consensus is clear, according to Terrence M. Belton, global head of fixed-income strategy for J. P. Morgan Securities. “Everyone knows that rates will eventually go higher,” he said.

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Wells Fargo, Option One, American Home Mortgage Relationship

Posted on March 30, 2010 by Neil Garfield

Wells Fargo Bank, N.A. appears in many ways including as servicer (America Servicing Company), Trustee (although it does not appear to be qualified as a “Trust Company”), as claimed beneficiary, as Payee on the note, as beneficiary under the title policy, as beneficiary under the property and liability insurance, and it may have in actuality acted as a mortgage broker without getting licensed as such.

In most securitized loan situations, Wells Fargo appears with the word “BANK” used, but it acted neither as a commercial nor investment bank in the deal. Sometimes it acted as a commercial bank meaning it processed a deposit and withdrawal, sometimes (rarely, perhaps 3-4% of the time) it did act as a lender, and sometimes it acted as a securities underwriter or co-underwriter of asset backed securities.

It might also be designated as “Depositor” which in most cases means that it performed no function, received no money, disbursed no money and neither received, stored, handled or transmitted any documentation despite third party documentation to the contrary.

In short, despite the sue of the word “BANK”, it was not acting as a bank in any sense of the word within the securitization chain. However, it is the use of the word “BANK” which connotes credibility to their role in the transaction despite the fact that they are not, and never were a creditor. The obligation arose when the funds were advanced for the benefit of the homeowner. But the pool from which those funds were advanced came from investors who purchased certificates of asset backed securities. Those investors are the creditors because they received a certificate containing three promises: (1) repayment of principal non-recourse based upon the payments by obligors under the terms of notes and mortgages in the pool (2) payment of interest under the same conditions and (3) the conveyance of a percentage ownership in the pool, which means that collectively 100% of the ivnestors own 100% of the the entire pool of loans. This means that the “Trust” does NOT own the pool nor the loans in the pool. It means that the “Trust” is merely an operating agreement through which the ivnestors may act collectively under certain conditions.  The evidence of the transaction is the note and the mortgage or deed of trust is incident to the transaction. But if you are following the money you look to the obligation. In most  transactions in which a residential loan was securitized, Wells Fargo did not work under the scope of its bank charter. However it goes to great lengths to pretend that it is acting under the scope of its bank charter when it pursues foreclosure.

Wells Fargo will often allege that it is the holder of the note. It frequently finesses the holder in due course confrontation by this allegation because of the presumption arising out of its allegation that it is the holder. In fact, the obligation of the homeowner is not ever due to Wells Fargo in a securitized residential note and mortgage or deed of trust. The allegation of “holder” is disingenuous at the least. Wells Fargo is not and never was the creditor although ti will claim, upon challenge, to be acting within the scope and course of its agency authority; however it will fight to the death to avoid producing the agency agreement by which it claims authority. remember to read the indenture or prospectus or pooling and service agreement all the way to the end because these documents are created to give an appearance of propriety but they do not actually support the authority claimed by Wells Fargo.

Wells Fargo often claims to be Trustee for Option One Mortgage Loan Trust 2007-6 Asset Backed Certificates, Series 2007-6, c/o American Home Mortgage, 4600 Regent Blvd., Suite 200, P.O. Box 631730, Irving, Texas 75063-1730. Both Option One and American Home Mortgage were usually fronts (sham) entities that were used to originate loans using predatory, fraudulent and otherwise illegal loan practices in violation of TILA, RICO and deceptive lending practices. ALL THREE ENTITIES — WELLS FARGO, OPTION ONE AND AMERICAN HOME MORTGAGE SHOULD BE CONSIDERED AS A SINGLE JOINT ENTERPRISE ABUSING THEIR BUSINESS LICENSES AND CHARTERS IN MOST CASES.

WELLS FARGO-OPTION ONE-AMERICAN HOME MORTGAGE IS OFTEN REPRESENTED BY LERNER, SAMPSON & ROTHFUSS, more specifically Susana E. Lykins. They list their address as P.O. Box 5480, Cincinnati, Oh 45201-5480, Telephone 513-241-3100, Fax 513-241-4094. Their actual street address is 120 East Fourth Street, Suite 800 Cincinnati, OH 45202. Documents purporting to be assignments within the securitization chain may in fact be executed by clerical staff or attorneys from that firm using that address. If you are curious, then pick out the name of the party who executed your suspicious document and ask to speak with them after you call the above number.

Ms. Lykins also shows possibly as attorney for JP Morgan Chase Bank, N.A. as well as Robert B. Blackwell, at 620-624 N. Main street, Lima, Ohio 45801, 419-228-2091, Fax 419-229-3786. He also claims an office at 2855 Elm Street, Lima, Ohio 45805

Kathy Smith swears she is “assistant secretary” for American Home Mortgage as servicing agent for Wells Fargo Bank. Yet Wells shows its own address as c/o American Home Mortgage. No regulatory filing for Wells Fargo acknowledges that address. Ms. Smith swears that Wells Fargo, Trustee is the holder of the note even though she professes not to work for them. Kathy Smith’s signature is notarized by Linda Bayless, Notary Public, State of Florida commission# DD615990, expiring November 19, 2010. This would indicate that despite the subject property being in Ohio, Kathy Smith, who presumably works in Texas, had her signature notarized in Florida or that the Florida Notary exceeded her license if she was in Texas or Ohio or wherever Kathy Smith was when she allegedly executed the instrument.

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

Posted on June 22, 2008 by Neil Garfield

WHAT’S IN A NAME: WHY THE WORDS “ASSET BACKED SECURITIES” IN THE PLAINTIFF’S NAME OF A FORECLOSURE CASE SHOULD MAKE YOU DIG

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

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

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

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

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

(c) mortgage broker presents borrower with loan application;

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

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

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

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

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

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

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

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

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

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

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

(b) was the assignment recorded?

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

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

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

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

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

DON’T TRY THIS AT HOME!

Jeff Barnes, Esq.

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