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In 2016 the California Supreme Court ruled in Yvanova v. New Century Mortgage Corporation (Case No. S218973, Cal. Sup. Ct. February 18, 2016) that homeowners have legal standing to challenge an assignment of the mortgage loan contract in an action for wrongful foreclosure on the grounds that the assignment(s) is/are void.
Obviously if the court had ruled differently, the banks would have had carte blanche to forge mortgage assignments with wild abandon. In fact, without a system of endorsements and assignments it would be impossible to determine who has a legitimate interest in the property!
Cases like the Glaski v. Bank of America and Jesinoski v. Countrywide Home Loans may have provided hope for homeowners who were victims of mortgage and foreclosure fraud. But they did not strike at the heart of the real problem behind the securitization of millions of mortgage loans.
The Glaski decision presents the idea that if some entity wants to collect a debt or foreclose on your property, they must first own the debt. Furthermore, if that entity is claiming ownership by way of an Assignment, it must prove that Assignment is valid.
The Jesinoski case addressed a borrower’s right to rescind (or cancel) their mortgage loan contract under the federal Truth in Lending Act by only providing written notice to the lender, without filing a suit. A loan is rescinded at the time the rescission letter is mailed. If the lender wants to challenge the rescission they must file an action to do so. They have limited time to do so. And they never do!
Like many other cases, current trial court decisions are getting reversed because the courts are waking up to the reality of the rule of law. What they have been following is an off the books rule of “anything but a free house.” However a recent Yale Law Review Article eviscerates the assumptions of a free house for the homeowners and destroys the myth that somehow that policy has saved the nation. You can read the Yale Law Review article “In Defense of “Free Houses” for more information on this tide change.
In THE PAPER CHASE: SECURITIZATION, FORECLOSURE, AND THE UNCERTAINTY OF MORTGAGE TITLE ADAM J. LEVITIN writes “the mortgage foreclosure crisis raises legal questions as important as its economic impact. Questions that were straightforward and uncontroversial a generation ago today threaten the stability of a $13 trillion mortgage market: Who has standing to foreclose? If a foreclosure was done improperly, what is the effect? And what is the proper legal method for transferring mortgages? These questions implicate the clarity of title for property nationwide and pose a too- big-to-fail problem for the courts.
The legal confusion stems from the existence of competing systems for establishing title to mortgages and transferring those rights. Historically, mortgage title was established and transferred through the “public demonstration” regimes of UCC Article 3 and land recordation systems. This arrangement worked satisfactorily when mortgages were rarely transferred. Mortgage finance, however, shifted to securitization, which involves repeated bulk transfers of mortgages.
To facilitate securitization, deal architects developed alternative “contracting” regimes for mortgage title: UCC Article 9 and MERS, a private mortgage registry. These new regimes reduced the cost of securitization by dispensing with demonstrative formalities, but at the expense of reduced clarity of title, which raised the costs of mortgage enforcement. This trade-off benefited the securitization industry at the expense of securitization investors because it became apparent only subsequently with the rise in mortgage foreclosures. The harm, however, has not been limited to securitization investors. Clouded mortgage title has significant negative externalities on the economy as a whole.
This Article proposes reconciling the competing title systems through an integrated system of note registration and mortgage recordation, with compliance as a prerequisite to foreclosure. Such a system would resolve questions about standing, remove the potential cloud to real-estate title, and facilitate mortgage financing by clarifying property rights.” You can read the entire paper here: Securitization.Foreclosure.and uncertainty of MTG title Professor Levitin
Securitization is the reason banks want homeowners to foreclose. When a bank assigns the risk of a loan to the investors (certificate holders) of a Real Estate Investment Conduit Trust (SPV), the “bank” is no longer a traditional bank that gets the benefit of mortgage payments.
Mortgage banks give as few modifications as possible and comply minimally with statutes put in place to protect borrowers, all while employing tricks to “cash in” on homeowners’ defaults, pushing them to foreclosure.
Banks benefit from foreclosures more than loan modifications because of something called “creaming the debt.” If the Banks modify the loan, their penalties and fees might not get paid to them. When they foreclose, they get their penalties first, before the investors– which is the “creaming.” The mortgage banks make more money from foreclosure than actually servicing the homeowner’s payment.
When foreclosure becomes a possibility, like when a borrower misses a payment or asks for a modification, the banks seize the opportunity for increased profit by foreclosure. Foreclosure is clearly the fattest pot of gold possible and it’s for this reason foreclosure is the bank’s primary goal. The banks take the risk of litigation because few people sue, but getting legal information as soon as possible can make the difference between homeowners asserting their rights, or losing their homes while being bulldozed by the bank.
The bank refuses the check a homeowner sends in. The bank may offer a reason (for example, there’s a mistake on the account) or it might offer no explanation at all. The bank may even offer the homeowner a loan modification. The bank does this to delay the homeowner from immediately contacting an attorney to pursue a breach of contract claim.
Alternately, the bank may take trial payments in an effort to further delay the homeowner until the arrears (also known as the forbearance) becomes so great that the homeowner is ineligible for a loan modification or unable to repay the debt. Eventually, the servicer combines this trick with other tricks, such as changing servicers, to draw the homeowner further into default.
A homeowner gets a loan modification with one servicer and makes trial payments. The servicer advises the homeowner that it is switching servicing rights to another servicer.
The new servicer claims to know nothing about the modification and delays the homeowner for months waiting to get the relevant “paperwork.” No matter how many times the homeowner sends proof of the modification, the new servicer refuses to honor it. It is a violation of California law to not honor a modification from a prior servicer but servicers know that most people will not pursue litigation.
The homeowner gets a loan modification that includes a balloon payment of, for example, $50,000 after 20 years. After paying on this loan modification for a year and a half, the homeowner gets a new modification in the mail from the same servicer with a balloon payment of $150,000. No matter how many times the borrower calls the servicer, or tries to forward the existing modification, the agent will respond with a fixed script that does not acknowledge the prior modification but only talks about the new one. The confused borrower will feel like he or she is talking to a robot (on a recorded line, being monitored by a supervisor). Eventually, if the borrower does not sign and execute the new modification, the bank will begin to refuse their payments on the old modification.
The servicer will also create a paper trail that tells a different story than what is actually happening. If the bank is trying to stick a borrower with a new modification, the paper trail will show the borrower is refusing the modification and mention nothing about the old one. Eventually, the servicer will stop accepting payments unless the homeowner acquiesces to the new modification.
The homeowner receives a bill for extra fees out of nowhere so that the mortgage payment becomes something the homeowner suddenly can’t afford. The servicer refuses to accept any “partial payment.” After that, the bank continues adding on fees each month, increasing the amount the borrower has to pay to reinstate. They may offer the homeowner a loan modification as a distraction to trick the homeowner into a longer default. Because the borrower thinks they are getting a modification, they will spend the money they would have put towards their mortgage and be unprepared to pay their arrears if the modification falls through, as it most likely will. The servicer does all this while telling the borrower they are there to help.
The servicer may pay homeowner taxes early and then accuse the homeowner of not paying them. The servicer may point to a clause in the mortgage that says if the homeowner doesn’t pay the taxes, they can raise the interest rate. They may begin charging the homeowner for forced place insurance at a high rate even though the homeowner already has insurance. This is something the homeowner only finds out after-the-fact when trying to pay property taxes.
In a non-judicial foreclosure state, such as California, foreclosure is done by recorded notice. The Notice of Default states the amount of arrears that a homeowner must pay back to reinstate the loan.
Servicers uniformly overstate this amount by up to $20,000, which serves two purposes: (1) It scares borrowers with an inflated amount of arrears that they believe they can’t cure; and (2) It creates a paper trail for the bank so they can claim more money from investors.
The bank must respond to the loan modification application with a denial or approval within a definite period. A denial must be in writing and must inform the borrower of the right to appeal. The bank cannot “dual track” a borrower by posting Notices of Foreclosure and Trustee’s Sale while reviewing the borrower for a modification.
There are big penalties for “dual tracking” by the bank, but only if it is the borrower’s first time applying. This is why a servicer will often deny a modification over the phone or encourage a borrower to apply again. Once a borrower becomes a serial modifier, the bank can dual track the borrower all it wants without statutory penalties. And, they will!
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