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

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