Mortgage Lenders Network and Wells Fargo Battled over Servicer Advances

It is this undisclosed yield spread premium that produces the pool from which I believe the servicer advances are actually being paid. Intense investigation and discovery will probably reveal the actual agreements that show exactly that. In the meanwhile I encourage attorneys to look carefully at the issue of “servicer advances” as a means to defeat the foreclosure in its entirety.

As usual, the best decisions come from cases where the parties involved in “securitization” are fighting with each other. When a borrower brings up the same issues, the court is inclined to disregard the borrower’s defense as merely an attempt to get out of  a legitimate debt. In the Case of Mortgage Lenders  versus Wells Fargo (395 B.K. 871 (2008)), it is apparent that servicer advances are a central issue. For one thing, it demonstrates the incentive of servicers to foreclose even though the foreclosure will result in a greater loss to the investor then if a workout or modification had been used to save the loan.

See MLN V Wells Fargo

It also shows that the servicers were very much aware of the issue and therefore very much aware that between the borrower and the lender (investor or creditor) there was no default, and on a continuing basis any theoretical default was being cured on a monthly basis. And as usual, the parties and the court failed to grasp the real economics. Based on information that I have received from people were active in the bundling and sale of mortgage bonds and an analysis of the prospectus and pooling and servicing agreements, I think it is obvious that the actual money came from the broker dealer even though it is called a “servicer advance.” Assuming my analysis is correct, this would further complicate the legal issues surrounding servicer advances.

This case also demonstrates that it is in bankruptcy court that a judge is most likely to understand the real issues. State court judges generally do not possess the background, experience, training or time to grasp the incredible complexity created by Wall Street. In this case Wells Fargo moves for relief from the automatic stay (in a Chapter 11 bankruptcy petition filed by MLN) so that it could terminate the rights of MLN as a servicer, replacing MLN with Wells Fargo. The dispute arose over several issues, servicer advances being one of them. MLN filed suit against Wells Fargo alleging breach of contract and then sought to amend based on the doctrine of “unjust enrichment.” This was based upon the servicer advances allegedly paid by MLN that would be prospectively recovered by Wells Fargo.

The take away from this case is that there is no specific remedy for the servicer to recover advances made under the category of “servicer advances” but that one thing is clear —  the money paid to trust beneficiaries as “servicer advances” is not recoverable from the trust beneficiaries. The other thing that is obvious to Judge Walsh in his discussion of the facts is that it is in the servicing agreements between the parties that there may be a remedy to recover the advances; OR, if there is no contractual basis for recovering advances under the category of  “servicer advances” then there might be a basis to recover under the theory of unjust enrichment. As always, there is a complete absence in the documentation and in the discussion of this case as to the logistics of exactly how a servicer could recover those payments.

One thing that is perfectly clear however is that nobody seems to expect the trust beneficiaries to repay the money out of the funds that they had received. Hence the “servicer advance” is not a loan that needs to be repaid by the trust or trust beneficiaries. Logically it follows that if it is not a loan to the trust beneficiaries who received the payment, then it must be a payment that is due to the creditor; and if the creditor has received the payment and accepted it, the corresponding liability for the payment must be reduced.

Dan Edstrom, senior securitization analyst for the livinglies website, pointed this out years ago. Bill Paatalo, another forensic analyst of high repute, has been submitting the same reports showing the distribution reports indicating that the creditor is being paid on an ongoing basis. Both of them are asking the same question, to wit:  “if the creditor is being paid, where is the default?”

One attorney for US bank lamely argues that the trustee is entitled to both the servicer advances and turnover of rents if the property is an investment property. The argument is that there is no reason why the parties should not earn extra profit. That may be true and it may be possible. But what is impossible is that the creditor who receives a payment can nonetheless claim it as a payment still due and unpaid. If the servicer has some legal or equitable claim for recovery of the “servicer advances” then it can only be against the borrower, on whose behalf the payment was made. This means that a new transaction occurs each time such a payment is made to the trust beneficiaries. In that new transaction the servicer can claim “contribution” or “unjust enrichment” against the borrower. Theoretically that might bootstrap into a claim against the proceeds of the ultimate liquidation of the property, which appears to be the basis upon which the servicer “believes” that the money paid to the trust beneficiaries will be recoverable. Obviously the loose language in the pooling and servicing agreement about the servicer’s “belief” can lead to numerous interpretations.

What is not subject to interpretation is the language of the prospectus which clearly states that the investor who is purchasing one of these bogus mortgage bonds agrees that the money advanced for the purchase of the bond can be pooled by the broker-dealer; it is expressly stated that the investor can be paid out of this pool, which is to say that the investor can be paid with his own money for payments of interest and principal. This corroborates my many prior articles on the tier 2 yield spread premium. There is no discussion in the securitization documents as to what happens to that pool of money in the care custody and control of the broker-dealer (investment bank). And this corroborates my prior articles on the excess profits that have yet to be reported. And it explains why they are doing it again.

It doesn’t take a financial analyst to question why anyone would think it was a great business model to spend hundreds of millions of dollars advertising for loan customers where the return is less than 5%. The truth in lending act passed by the federal government requires the participants who were involved in the processing of the loan to be identified and to disclose their actual compensation arising from the origination of the loan — even if the compensation results from defrauding someone. Despite the fact that most loans were subject to claims of securitization from 2001 to the present, none of them appear to have such disclosure. That means that under Reg Z the loans are “predatory per se.”

To say that these were table funded loans is an understatement. What was really occurring was fraudulent underwriting of the mortgage bonds and fraudulent underwriting of the underlying loans. The higher the nominal interest rate on the loans (which means that the risk of default is correspondingly higher) the less the broker-dealer needed to advance for origination or acquisition of the loan; and this is because the investor was led to believe that the loans would be low risk and therefore lower interest rates. The difference between the interest payment due to the investor and the interest payment allegedly due from the borrower allowed the broker-dealers to advance much less money for the origination or acquisition of loans than the amount of money they had received from the investors. That is a yield spread premium which is not been reported and probably has not been taxed.

It is this undisclosed yield spread premium that produces the pool from which I believe the servicer advances are actually being paid. Intense investigation and discovery will probably reveal the actual agreements that show exactly that. In the meanwhile I encourage attorneys to look carefully at the issue of “servicer advances” as a means to defeat the foreclosure in its entirety.

I caution that when enough cases have been lost as a result of servicer advances, the opposition will probably change tactics. While you can win the foreclosure case, it is not clear what the consequences of that might be. If it results in a final judgment for the homeowner then it might be curtains for anyone to claim any amount of money from the loan. But that is by no means assured. If it results in a dismissal, even with prejudice, it might enable the servicer to stop making advances and then declare a default if the borrower fails to make payments after the servicer has stopped making the payments. Assuming that a notice of acceleration of the debt has been declared, the borrower can argue that the foreclosing party has elected its own defective remedy and should pay the price. If past experience is any indication of future rulings, it seems unlikely that the courts will be very friendly towards that last argument.

Attorneys who wish to consult with me on this issue can book 1 hour consults by calling 520-405-1688.

Federal Bankruptcy Judge Explains Wells Fargo Servicer Advances

In order to obtain forensic reports including servicer advances please go to http://www.livingliesstore.com or call 520-405-1688. for litigation support to attorneys call 850-765-1236.

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Mortgage Lenders Network v Wells Fargo, Chapter 11, Case 07-10146(PJW), Adv. Proc., Case 07-51683(PJW)

In an adversary proceeding in which evidence was presented, Judge Walsh dissected the confusing complex agreements involving the real set of co-obligors’ liability to the Creditor REMIC trust. Many thanks to our legal intern, Sara Mangan, currently a law student at FSU.

I had no idea the case existed. It apparently got buried because of all the ancillary issues presented. If you really want to understand the complexity of repayments to the creditor, this is one case that deserves your full attention.

As usual the best decisions are found when the adversaries are both institutions. We are looking for more such cases. This certainly applies to any Wells Fargo case and explains the nervousness of the witness during trial when I asked him about whether the records he brought were complete.

The LPS Desktop system (formerly Fidelity) INCLUDES servicer advances and computations made based upon that. The unavoidable conclusion, drawn by this Judge, is that everything we have been saying about servicer advances is true. Everything in our forensic report is true as to all properties. The servicer makes those payments based upon a payment of enlarged fees for taking the risk on itself, according to the agreements. Whether there is an actual right to recover from anyone is actually not specifically stated except that the net proceeds of liquidation of REO properties after the auction are subject to servicer claims. This might include other insurance or guarantees.

There is no default experienced by the creditor. There is a new potential for a new party (not mentioned in note or mortgage) for recovery outside the terms of the note and mortgage. The expectation is that there will be a foreclosure and there will be a sale. If there is no foreclosure and there is no sale, then the amounts are not recoverable — unless the servicer too is insured. But all of those insurance contracts seem to have been purchased and procured by the broker-dealer (investment bank) that sold the bogus mortgage bonds. The conclusion to be drawn is that the default notice to the homeowner-borrower might be valid (probably not, because servicer advances have already begun) but it is cured immediately after it is sent by payments, often from the same party who sent the default notice.

Remember the language in US Bank and Chase et al. The servicer SHALL make the advances unless it believes the advances are not recoverable. If the servicer was merely making a loan to the trust beneficiaries there would be little doubt that the advances were recoverable. They can argue that the advances are recoverable in substance from the borrower, but that is only AFTER the foreclosure Judgement and AFTER the sale and AFTER the liquidation of the property after the auction sale.

In this case, the following issues are addressed:

1. Servicer advances — in 4 categories. Why they are advanced and when and how they might be recoverable — when the properties are liquidated. There is some confusing language in there about the trusts, so you need to read it carefully. But the main point is that this is a case of prior servicer and new servicer, both of whom take on the obligation of making servicer advances whether the borrower pays or not. If there is a short fall, the servicer pays — or an insurer. In reality, and not addressed by the Court is the fact that in all probability the actual money advanced by the servicer most likely comes from a slush fund created by language buried deep inside the Prospectus or Pooling and Servicing Agreement that allows the investment banker to pay the trust beneficiaries using their own money advanced by them when they became trust beneficiaries.
2. Recovery is clearly stated as whatever money is left after the REO property has been liquidated or from the borrower. [Note there is ONE reference by the Judge to recovering from the Trust but he doesn’t explain it nor does he cite to anything in the agreements]. Since this provision is not referenced in the mortgage, they cannot be traveling under the mortgage and there is no mention of the mortgage provisions in this decision. Since those proceeds frequently are far less than the amount advanced, there is ono direct right of action by the servicer against the borrower, although I postulate that they could potentially bring an unsecured claim for restitution or unjust enrichment.
3. In the end one previous servicer owes the other new servicer the advances, not the trust and not the borrower.
4. There is insurance that makes sure that if the servicer doesn’t make the payments, then the insurer will make-up the shortfall. The insurers do not appear to have any recourse against anyone.

5. There can be no doubt that there are two types of default — one where the borrower stops paying on a note and mortgage (assuming the note and mortgage are valid) and the other, where the REMIC trust beneficiaries fail to get the required distribution as set forth by the Prospectus and Pooling and Servicing Agreement.

6. The conclusion I draw is that the recovery of advances “by the servicer” takes place after the mortgage has been foreclosed, by which time the initial homeowner borrower is out of the picture. Hence, it seems that while there are “proceeds” that can be claimed by the servicer, it is under a separate transaction with the REMIC Trust and under a potential right to claim money from the borrower for contribution or unjust enrichment — with unjust enrichment being a center-point of this case.

This case also explains many other transactions that occur between the servicer and other entities. It isn’t the encyclopaedia of servicer advances, but it explains a lot of what I have been talking about. When the borrower stops making payments for any reason (and perhaps legal reasons for withholding payment, or being prevented from making payments by a servicer who proclaims the loan to be in default), the creditor keep getting paid. So even if the allegation is that the cessation of payments was a default under the note and mortgage, the fact remains that the creditor is not experiencing any default because payments are being made in full by various parties to the creditor. Hence, my question to corporate representatives, about whether they are showing the full record, and whether the books of the creditor show a default. They don’t, if servicer advances were made. I have personally seen a Wells Fargo witness get quite agitated as I approached this subject.

Servicers have kept this information away from borrowers and have withheld it from the courts when they do their accounting.  I would add that if the  argument from opposing counsel is that the servicer advances are secured by the mortgage because of language that includes the word “advances” then they are admitting at this point that the entire structure of the loan as presented to the homeowner borrower was a lie. Under the federal truth in lending act such disclosure was entirely necessary to complete the transaction.

It will also be inevitably argued that this gives the homeowner borrower a free ride. Of course we all know that there is no free ride in this. The homeowner has usually made a substantial down payment and has made monthly payments for years. The homeowner had spent a lot of money on furnishing and completing the house. There is no free ride. But the best argument against the “free ride” allegation is that this is asserted by the party with unclean hands (and often intentionally withheld information from the court or even committed perjury).

read all about it: case on servicer advances and unjust enrichment

HAPPY ENDINGS WITH PAIN AND LOSS

COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary

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Analyst Note: This transaction was probably really a securities transaction. The homeowner was converted from an owner in real property to an investor in a security that was issued, sold and documented illegally. The obligation was to pay for the security and not for a loan. It probably was unsecured. The mortgage of record probably was thus likely a wild deed — void when executed, void when recorded and probably conveys or grants no interest. Any assignment that occurred would have therefore conveyed no interest. The mortgagor named in the recorded documents never lent any money and was probably not even a conduit for the money that was used to fund the mortgage. Therefore the DOCUMENTS for the so-called mortgage loan are most likely fatally defective in failing to identify the correct parties, contrary to requirements of state and federal statutes. The promissory note is most likely fatally defective in that it relates to a transaction that never occurred between the payee and payor. The obligation, if it still exists, is undocumented, unsecured and subject to affirmative defenses, off-set, and counterclaims. It is probably subject to rescission under the same conditions. Check with a licensed attorney. There may be causes of action for quiet title, slander of title (money damages), fraud, rescission, violation of TILA, RESPA and other claims.

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What happened over the course of the next few years can only be described as Kafka-esque. Wilshire Credit asked her for a hardship letter; she sent one. Nothing happened. Three separate times, Wilshire set up short-term payment agreements — two of which included $7,000 upfront payments — claiming that it would make a decision on a long-term modification once the agreement expired. She paid every penny — to no avail.

“It’s offensive that BofA thinks a foreclosure action, an eviction notice of an elderly woman sitting in her house fearing that she will spend the remainder of her days in a shelter, is some sort of party invitation that can be ‘rescinded,’ ” she wrote in an e-mail. “Their disrespect for the law is appalling. But it is a pattern of behavior that led to this crisis and that is continuing to keep this country in this crisis.”

Let’s face it: Ms. Roberts got a break. Because she had a dogged lawyer, who had the wit to get a New York Times columnist interested in her case, a terrible mistake was uncovered. As a result, an unjustified foreclosure may well be reversed.

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EDITOR’S COMMENT AND NOTE: First, don’t pay those “upfront payments” to someone who is actually promising nothing. You’ll probably need that money when they throw you out anyway — unless of course you stand your ground and fight them. The woman in this story paid $30,000 without knowing if she was really saving her home and probably would have lost it but for the intervention described here.

Second, there is no question in my mind that NONE of the so-called servicers can or want to modify your mortgage. They want to stretch out the period that you are in “default” even though you don’t owe THEM a dime and the real creditor has also been paid off. Of course check with an attorney and if you can get press attention like this woman did, BofA or whoever the servicer is will step up and “prove” that we are all wrong and that modifications are going just fine.

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A Happy Ending to a Raw, but Common, Tale

By JOE NOCERA, NY TIMES

Lilla Roberts is a 73-year-old retired physical therapist, a pleasant, engaging woman who moved to this country from Jamaica 46 years ago. In 1988, she bought a small house in Jamaica, Queens, putting down $25,000, and taking out a mortgage for around $120,000. For many years, she religiously made her mortgage payments.

Like most homes in this part of Queens, this one is a little on the ramshackle side: a small, two-story home, part brick, part faded gray siding, with a red awning out front and a large backyard. But she raised her children and several of her grandchildren in this home. Her life’s memories are in this home. It means a lot to her.

“My whole life is here,” she said on Tuesday, when I visited her. “Every penny I ever had I put into this house.”

Ms. Roberts pointed down. “I finished the basement,” she said. She pointed up. “I had to put in new windows and repair all the rotting wood,” she said, referring to an upstairs apartment she rents out.

She pointed toward the back of the house, to the yard beyond her cramped kitchen and her two crowded bedrooms. “I love my garden,” she said. She paused, and then sighed. Between her pension, Social Security and rental income, she said, “I have enough income to pay my mortgage. I would love to enjoy the rest of my life here.”

Sitting across from Ms. Roberts was Elizabeth Lynch, a 30-something lawyer who works for MFY Legal Services. Ms. Lynch is a foreclosure specialist who has spent the last few months trying desperately to keep Ms. Roberts from losing her home. In 2007, a year after a refinancing, Ms. Roberts suffered a temporary setback that caused her to stop paying her mortgage for less than a year. Given her situation — steady income, a history of reliability — you would think that she would be a perfect candidate for a mortgage modification.

Instead, her servicer, Bank of America, foreclosed on the property in late August and handed it off to Fannie Mae, which owned the mortgage. Ms. Roberts first learned this when she saw Fannie Mae’s eviction notice taped to her front door.

As part of her effort to save Ms. Roberts’ house, Ms. Lynch filed a lawsuit to undo the foreclosure, on the grounds that fraud had been committed at various points along the way. Although such suits rarely succeed, a judge agreed to hear the case in early January.

Another part of her effort, though, was to try to create some media interest, which is how I got involved. “With all of the foreclosure cases I have seen,” Ms. Lynch wrote in an e-mail, “this is the one that gets at me the most.”

Truth to tell, Ms. Roberts’s story got to me too. Even putting aside the possibility of fraud, nobody should have to endure what she’s been through. Since March 2008 — that’s right, two and a half years — she has spent nearly $30,000 trying to hold onto her home. She has had to deal with a nasty foreclosure mill law firm, with servicing employees who gave her the runaround and with a foreclosure process that took place behind her back. And she has had to deal with the anxiety of not knowing whether she would be able to keep her home.

Yes, there are people who took out mortgages knowing they could never pay the money back. Ms. Roberts is not one of them. Rather, she is one of the many Americans, mostly poor and lower-middle class, who have been devastated by a system that is as rapacious, uncaring — and sloppy — in tossing people out of their homes as it once was in foisting predatory mortgages on them.

Two days after I spoke with Ms. Roberts, Bank of America and Fannie Mae acknowledged that foreclosing on her home had been a mistake, and they vowed to give her back the house. “We are going to work with her on a loan modification,” a Bank of America spokesman promised.

Yet, while Ms. Roberts’s story has a happy ending, it is hard to get too excited — not when so many others are in the same awful place, losing homes as much because of the system’s callousness as because of their own precarious finances.

Ms. Roberts’s troubles began with the rotting wood and upstairs windows. In 2006, her longtime tenant, who paid her $600 a month, moved out; she needed to fix the apartment before she could get a new tenant. The only way she could afford it was by refinancing her home.

The company that gave her the new mortgage was a now-bankrupt outfit, Mortgage Lenders Network, which a former employee described to me as “one of the bad actors” during the subprime bubble. It is hard to know now what kind of mortgage Ms. Roberts got; although it had a fixed interest rate below 6 percent, Ms. Roberts recalls having very little cash left over after the repairs were made — even though, at more than $300,000, the new mortgage was more than double the size of her original mortgage. Her new monthly payment was around $1,700 a month, a $500 increase. But with a new renter paying $900 a month, she felt it was well within her means.

Sometime in 2007, however, the tenant stopped paying his rent. Thanks to New York’s tough rental laws, she couldn’t easily evict him. Without that $900 a month, she couldn’t make ends meet and still pay her mortgage. Thus it was that in March 2008, she requested a mortgage modification from her servicer, the Wilshire Credit Corporation, a division of Merrill Lynch that specialized in delinquent mortgages.

What happened over the course of the next few years can only be described as Kafka-esque. Wilshire Credit asked her for a hardship letter; she sent one. Nothing happened. Three separate times, Wilshire set up short-term payment agreements — two of which included $7,000 upfront payments — claiming that it would make a decision on a long-term modification once the agreement expired. She paid every penny — to no avail.

Sometimes, when she was between short-term agreements, Wilshire would refuse to take her check. Sometimes, it cashed them. Sometimes she was told her request for a modification had been denied. Other times she was told it was being considered. At one point, the foreclosure mill law firm of Steven J. Baum, which represented Wilshire, tried to get her to waive her legal rights as part of the third short-term agreement. (The firm would not discuss the details of the case on the record.) All the while, behind Ms. Roberts’s back, Wilshire was inching toward foreclosure.

In March 2010, Bank of America, which got Wilshire when it bought Merrill Lynch in 2008, sold the servicing company to I.B.M. As part of the deal, though, it kept Wilshire’s servicing clients.

Was life any better with the mighty Bank of America now servicing her mortgage? Not a chance. Bank of America took her money in May and June. But in July and again in August, a bank employee told her not to send a payment because the bank was close to offering her a new repayment plan. Instead, in late August, the bank foreclosed and turned the property over to Fannie Mae.

After taking on Ms. Roberts’s case, Ms. Lynch uncovered the unseemly back story — a story that is playing out in poor neighborhoods all over the country. She found clear evidence of robosigning. She also discovered that the transfer of the mortgage from Mortgage Lenders Network to Wilshire appeared to have been backdated by two years — making it appear that it took place before M.L.N.’s bankruptcy. Assets cannot be sold by a bankrupt company without the assent of a trustee, thus suggesting that the transfer of Ms. Roberts’s mortgage might have been improper. And she found evidence that Ms. Roberts had never been served with the foreclosure papers — something Ms. Roberts swore to in an affidavit. These are the grounds for her lawsuit.

But as I discovered when I began asking around, the story is even worse than that. Why did Fannie Mae begin eviction proceedings? Because Bank of America claimed, wrongly, that Ms. Roberts was a deadbeat who hadn’t made a mortgage payment since March 2008. When Fannie Mae asked the bank to double-check, Bank of America simply repeated this false information. In other words, Ms. Roberts was being thrown out of her house because of Bank of America’s carelessness.

Stunned at what I was hearing, I sent James Mahoney, a bank spokesman, a copy of Ms. Roberts’s legal complaint, which documented all the payments she’d made over the year. Less than 24 hours later, he called to tell me that the bank had requested a “rescission” of the foreclosure sale to Fannie Mae — and that “this decision is receiving favorable consideration from Fannie.”

To Mr. Mahoney, this reversal showed that Bank of America was trying to do right by homeowners. “We have made 700,000 mortgage modifications this year,” he said. He described the bank’s willingness to give Ms. Roberts a loan modification as a “microcosm of Bank of America’s role” in the foreclosure crisis. I agree that it’s a microcosm, though not necessarily in the same way that Mr. Mahoney does.

To my surprise, when I called Ms. Lynch with the good news late Thursday, she did not jump for joy. Although she was pleased for her client, she was furious at what she saw as Bank of America’s presumption.

“It’s offensive that BofA thinks a foreclosure action, an eviction notice of an elderly woman sitting in her house fearing that she will spend the remainder of her days in a shelter, is some sort of party invitation that can be ‘rescinded,’ ” she wrote in an e-mail. “Their disrespect for the law is appalling. But it is a pattern of behavior that led to this crisis and that is continuing to keep this country in this crisis.”

Let’s face it: Ms. Roberts got a break. Because she had a dogged lawyer, who had the wit to get a New York Times columnist interested in her case, a terrible mistake was uncovered. As a result, an unjustified foreclosure may well be reversed.

But it has to make you wonder how many other people have lost their homes because of similar mistakes. I can’t bear to venture a guess. It’s too sickening to contemplate.

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