Insurers Pay Pretender Lenders and Then Pursue Homeowner for the “Loss”

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see Insurers pay “losses” on mortgages and then pursue borrowers for recovery of payment

A big area of confusion in the foreclosure cases is the impact of insurance claims and payments with respect to insured mortgages and insured mortgage bonds. So let’s start with the fact that there are many types of insurance contracts that affect the balance to be proven in a foreclosure case. The simplest rule to follow which has been stated in a number of cases, is that if the party seeking foreclosure has already received payments ON THAT LOAN then the balance should be correspondingly reduced. But that reduction is between the pretender lender and the borrower. That doesn’t mean that whoever paid the money to the pretender lender can’t pursue the homeowner for the amount paid. But it does affect the foreclosure because the insurance or third party payment (FDIC loss sharing, for example or Fannie or Freddie buyout or guarantee) affects the claimed liability of the borrower.

If you ask the banks about these payments you get stonewalled. And depending upon the timing of the payment it might invalidate the claim of a default, a notice of default and notice of sale. It could also negate the right to foreclose — again depending upon the timing of the payment.

There have been only 2,000 cases in which the insurers have paid the pretender lender and then fled a lawsuit against the homeowner/borrower. They are claiming they paid for a loss incurred by the pretender lender and that the borrower was essentially unjustly enriched and also claiming subrogation (whatever rights the pretender lender had against the borrower goes to the party making the payment to the pretender lender). The problem here of course is that while only 2,000 cases have been field against borrowers by insurers, there are hundreds of thousands of payments received by the pretender lenders.

And the fact that the insurer paid does NOT mean (but will often be presumed anyway) that the loss was actually incurred by the pretender lender. It is one thing to mistakenly apply presumptions under the UCC in which the pretender lender gets to foreclose. It is quite another when the insurer is making a claim that it paid a loss on your mortgage. They must prove the loss. And that means they not only must prove that they paid the claim, but that the claim was real.

For that reason, I am suggesting to foreclosure defense lawyers that they include, in discovery, the insurers and other third parties who appear to have some connection to the subject loan. This might present an opportunity to determine whether any real loss was present and could open the door to argue the reality: that the foreclosing parties neither owned nor had any risk of loss on the subject loans and that they did not represent any owner or other party entitled to enforce.

The take away here is that in a huge number of cases there are or were third party payments that reduced the alleged loss of the creditor or alleged creditor AND depending upon when those payments were made if might have the effect of rendering a notice of default void or even a foreclosure judgment where the redemption rights of the homeowner were affected by an incorrect statement of the loss. In actions for deficiency, the insurers are essentially cherry picking cases in which they think the borrower can pay the alleged loss. It also might represent an overpayment. For example if the third party payment was on a GSE guaranteed loan, did the pretender lender submit claims for both the insurance payment AND the guarantee payment? Under the terms of the note, the borrower might well be entitled to disgorgement of the overpayment, especially if it totals more than the claimed balance due on the alleged loan.

Insurance on the mortgage bonds is the same but more complicated and harder to present in court. The mortgage bond derives its value from the loan. That is why it is called a derivative. In nearly all cases the payment received by the banks (supposedly on behalf of the investors) is received long before a default on any specific loans and there is NO SUBROGATION. The insurers cannot step into the shoes of the pretender lender under those contracts. The “loss” is a claimed reduction in value called a “credit event” that is declared by the Master Servicer in sole discretion. The payment might be all or less than all of the par value of the mortgage bond.

Whatever the amount, it reduces the alleged loss as between the homeowner and any party making a claim for foreclosure based upon an alleged loss incurred from their default. This is true because the balance due to the investors under the mortgage bond has been covered already by the “credit event” which includes many things other than default on any specific loans, so the payment might include a claimed loss from default on a specific group of loans and other factors. In any event, the investors’ books if they were available would show a lower balance due than what any servicer would show. And that would mean that the default notice might be incorrect especially in terms of the reinstatement amount in the paragraph 22 letter.

And because these insurance contracts provide for no subrogation (no claims can be brought by insurer against the homeowner) the reduction in the balance is a reduction of the balance due from the borrower; and THAT is because if the borrower paid the full amount due on the claims of the pretender lender there would be a windfall or “free ride” to the pretender lender (adding insult to injury).

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MIchigan Supreme CT: $3.75 Billion of Chase WAMU Mortgages Are Voidable


What’s the Next Step? Consult with Neil Garfield

For assistance with presenting a case for wrongful foreclosure, please call 520-405-1688, customer service, who will put you in touch with an attorney in the states of Florida, California, Ohio, and Nevada. (NOTE: Chapter 11 may be easier than you think).

MCL 600.3204(3) states:

“If the party foreclosing a mortgage by advertisement is not the original mortgagee, a record chain of title shall exist prior to the date of sale under section 3216 evidencing the assignment of the mortgage to the party foreclosing the mortgage.”

Editor’s Comment and Analysis: We are getting closer and closer as the Judges are seeing past the veil of fabricated paperwork and looking directly into the transactions checking whether there was offer, acceptance and consideration. All three are arguably not present in any of the so-called securitized mortgages because the offer made to the lender/investor is different from the offer made to the homeowner/borrower and the party seeking to assert ownership on the loan never funded the origination nor the purchase of the loan.

In this case the court in Michigan had a specific statute that merely states the obvious: if you are not the original mortgagee, you must prove up chain of title prior to the date of sale. In other words, without that, the “credit bid” is “voidable” which means that it is void if you challenge it. The court didn’t go all the way to saying the foreclosure sale was void, which I would have preferred.

I have personally spoken with the receiver for WAMU and I have read the Purchase and Assumption agreement between Chase, WAMU, the FDIC and the Trustee and noting could be clearer that their was no assignment of loans in that document. The receiver said he was mistaken when he signed the affidavit that Chase is using to say it acquired the WAMU loans “by operation of law.” Nothing could be further from the truth and the behavior of Chase, selecting loans to foreclose, shows that they themselves do not assert ownership over ALL the loans.

The receiver told me in no uncertain terms that if we were looking for an assignment of loans we would not find one because none exists either individually for each loan nor as a group. The purchase and assumption agreement together with other events (sharing in a tax refund) explains why the agreement says the consideration paid by Chase was zero. They “bid” $1.9 Billion but received more than that as their share of a tax refund due WAMU — a tax refund that had nothing to do with mortgages.

The story in the link below is the tip of the iceberg. The final ruling from the Michigan State Supreme Court rested on the specific statute quoted above. But that statute is inherently included in the recording requirement in all the states. Altogether the total of mortgages affected is, according tot he FDIC receiver is around $700 Billion.

While Chase can try to get or fabricate an assignment, the spotlight is on this transaction and it seems unlikely that anyone is going to sign anything from the U.S. Bankruptcy Court or the FDIC. Of course WAMU, now defunct, is unable to execute anything.

Analysis and Practice Tips: This case should definitely be used. But be careful. If it looks like you are knocking out Chase with no other creditor on the scene judges are going to act to prevent a windfall to homeowners. Somehow they will justify their decision unless, as the case progresses, you are able to show (through Deny and Discover) that the money for funding the purchase of $700 Billion in loans was never paid, which would technically mean that the estate of WAMU would need to be reopened to include the loans — which is impossible because of the claim of securitization in which WAMU reportedly sold all of those loans.

To whom and where were the loans sold and in what transaction? What was the consideration paid to WAMU. Answer: Nothing because they didn’t fund the origination of the loans to begin with. They had neither the capital nor available deposits with which they could make those loans.

So educating the Judge means leaving him/her with the notion that there IS a creditor that Chase tried to cheat — the lender/investors whose rights might be equitable or legal, possibly subject to a receiver being appointed and possibly subject to subrogation to prevent Chase from receiving windfall.

The measure of the right to subrogation is whether the claiming party is asserting rights that diminish the value of other claimants. Chase, who received hundreds of billions from insurance and credit default swaps and trillions in Federal bailout programs has no loss on any loan receivable — which is why an accounting from the MASTER SERVICER, Trustee and the other active participants needs to be produced to follow the money trail from investors to all the different places it went, breaking every rule in the book, to the extreme detriment of investors, the financial system, homeowners, workers, and consumers.

Here the investors put up the money, Chase put up nothing, WAMU probably put up nothing, which means the investors are owed the principal due on the loans — if there is any balance due because of payment of insurance, credit default swaps and federal bailouts.

Since the money trail does not lead to the REMIC, there is a high probability of double taxation against the investors because their agents diverted the money and the documents from the investors and their “REMIC” and did the transaction “off record.” That leaves the investors with a claim but no security since the mortgage is not likely to be considered subject to subrogation in favor of the investors — although that is a possibility.

The main point of this and recent articles published in the latest Florida Bar Journal is that in considering subrogation or any other equitable remedy, the claimant must prove “clean hands,” which is going well nigh impossible for nearly all the claimants on these mortgages. The Court is looking for who is REALLY out of the money and who is really going to lose money and how much that loss is going to be because subrogation will not support enhancing the position of the alleged subrogatee.

AND THAT is why Deny and Discover is such a powerful weapon to use against the banks. By challenging the offer, acceptance and consideration starting with the origination and all the way through the assignments you can force them to either fess up to the fact that no money exchanged hands on ANY of their deals. As the proxy for the borrower the investment banks invited investors to advance the money but the offer to the investors was substantially different than the one offered to the prospective borrower. They then named the payee incorrectly which should have been the investors or the REMIC if the money had actually come from a REMIC trust account designating that particular REMIC as the owner of the bank account.

This was done intentionally, fraudulently and improperly for one simple reason. They were going to claim the obvious impending losses as their own, thus depriving the investor of the protection they were promised through insurance and credit default swaps, and enabling the investment bank to retain the difference as “trading profits.”

When all is said and done, Chase can’t prove up any actual loss on these loans because they don’t have any losses. The Michigan court saw the opportunity for moral hazard in Chase’s argument and rejected it. So should the courts in all 50 states.

It is these facts that make the impending “settlements” so insignificant and hopeless for the millions of people who have been foreclosed and evicted on loans whose balances were either non-existent or a small fraction of what was demanded.

Euihyung Kim v. JPMorgan Chase B[1] (1)



Sometimes it IS easier to prove a negative than a positive. Your opposition has far more facts than you do and in due process, should be required to prove them up into a prima facie case using real evidence from competent witnesses, with real documents that nobody played with before initiating foreclosure.

So let’s take a look at how all this WOULD HAVE BEEN DONE, because most judges, even today are seeing the transaction through this lens.

  1. A homeowner or prospective homeowner would apply for refinancing or a purchase money first, second or Home Equity Line of Credit (HELOC).
  2. Loan Closing and Disclosures
  3. Details of the loan and loan closing, good faith estimate and closing statement are provided in some form to both the borrower and the investors who acknowledge receipt and acceptance in binding form. Presumably this would be done through the offices of the manager, agent or “Trustee” of the Special Purpose Vehicle, the name of which and contact information was disclosed to the borrower prior to closing and is confirmed at closing.
  4. Assignment of Loan into Pool, acknowledged by Borrower. Intermediaries and Investors disclosed to borrower/debtor. The lender is identified as the group of investors who have provided funding for the loan.
  5. Investors’ representative(s) identified and disclosed, with contact information.
  6. During the life of the loan, Borrower receives same statement as investor — receipts and disbursements allocable to the loan are allocated and applied to payments and loan balance. If third party payments are received for any reason by any of the intermediaries, who are all disclosed, the amount of the receipt and the method of allocation to the borrower’s loan is disclosed.
  7. If the Borrower falls delinquent, the Investors either decide as a group or through their representative, manager, agent or named Trustee whether to offer a workout or to foreclose. A modification or settlement would be negotiated with parties known to Borrower at closing or successors in interest which would have been disclosed immediately upon execution of closing documents between the investors, or part of them, and the successor(s).
  8. Any change in ownership of the loan would be a change in beneficiary and a change of Payee under the note, which would be the same party. Such change would be recorded in accordance with State Law. The change would not, under these circumstances leave the Borrower in doubt as to the amount of the obligation and whether the obligation was or should be affected by the third party transactions. If the third party transaction is intended contemporaneously with the closing with the Borrower, even if the third party is not identified, this fact would also be disclosed to the Borrower and the Investors.
  9. Insurance, credit default swaps, and other credit enhancements are identified and disclosed to the Borrower — pursuant to contractual provisions executed between the Investors as a Group or individually; provided however, the insurer or third party payor would have rights of subrogation in which upon payment under the referenced contract, they have acquired the interests of the insured parties, in order to mitigate their losses, a fact which was identified and disclosed to the borrower at the closing with the borrower.
  10. In this transparent series of transactions that are part and parcel of a single transaction consisting of many steps, the Borrower having accepted all the terms and conditions of the approval of the loan and the securitization of the loan, achieves no greater standing or defense in the event of default. The only exception would be malfeasance or misfeasance by the participants in the securitization chain wherein, disclosed or not, the loan, or part of it, was satisfied by direct or indirect payment to a representative with apparent authority over the loan and to act in the interests of the investor as an agent. If the loan was sold multiple times, neither the Borrowers liability nor the Initial investors’ asset would be effected. Any dispute would NOT include the Borrower whose obligation would be unaffected UNLESS the intermediaries receiving multiple payments for sale of the same loan or percentage interests in the same loan pool were allowed to retain the proceeds of said sale, inasmuch as this would mean that the liability of the borrower would either (a) be diminished by the excess payments or (b) spread out to investors that were not disclosed at the Borrower’s Loan Closing.
  11. In the event that the matter is referred to a foreclosure proceeding, the action (whether private non-judicial sale or public lawsuit in foreclosure) would be brought on behalf of the named investors, through their authorized representative, with a complete statement of accounting and exhibits showing the entire securitization structure and the balance due on the Borrower’s obligation, including any third party payments, whether those were allocated to payments, interest or principal, and what balance of the obligation exists. Also named as foreclosers would be those party who acceded to a subrogated interest in the Borrower’s loan in whole or in part.
  12. Since a judicial allocation would be required to determine the relative interests and priority of interests of the investors, successors and subrogated parties, it is probably not possible to initiate a non-judicial sale unless there existed an agreement between all of the parties as to those matters. Such an agreement would specifically describe the distribution of proceeds of sale, which party was entitled to enter a credit bid, and what would be done with the property if the bid resulted in a Trustee Certificate being issued giving title to the party that initiated the foreclosure.
  13. If the creditor parties were able to satisfy all the prerequisites of a non-judicial foreclosure sale and the sale took place under non-judicial circumstances, the Borrower would lose the right of redemption and the Creditor would lose the right to pursue any delinquency or deficiency resulting from the sale of the home.
  14. If the Borrower was the defendant or re-oriented as the defendant in a foreclosure lawsuit, then the borrower’s right to redemption would be retained, if State Law permits same, and the Creditor would, if State Law permits it, be allowed to pursue a deficiency judgment against the Borrower. The allegation for suing for damages to cover a deficiency would include the fact that the sale price was fair and reasonable under the circumstances. The prima facie case of the Plaintiff Creditor in those circumstances would require evidence from an appraiser or other credible resource that is admitted by the Court as competent testimony and evidence of the fair market value and the sales price. Submission of a written affidavit or document is sufficient to support the allegation, not insufficient to satisfy the requirements of establishment of a prima facie case. A competent witness with personal knowledge and recollection is required to establish the foundation of any document. Business records do not include records regularly prepared after the loan goes into default, if those records are offered to prove facts that relate to events prior to the default. SUCH RECORDS ARE ONLY ADMISSIBLE TO PROVE (WITH FOUNDATION FROM A COMPETENT WITNESS) FACTS, CIRCUMSTANCES OR EVENTS THAT OCCURRED AFTER DEFAULT.
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