Beyond Robo-Signing: Mortgage Foreclosure Defense Basics
Wendy Alison Nora, U.W. 1975, owns Access Legal Services in Madison and Minneapolis. She has practiced foreclosure defense and financial reorganization since 1985. She is admitted to practice before the U.S. Supreme Court, the Seventh Circuit Court of Appeals, and the U.S. District Courts for the Eastern and Western Districts of Wisconsin and the District of Minnesota.
Recent revelations concerning unreliable mortgage-processing methods nationwide – such as the robot-like mass production of false and forged documents related to mortgage foreclosures – have cast a negative light on industry practices but also opened the door to new defenses for homeowners and their lawyers involved in foreclosure actions. Learn how to identify mortgage-document mistakes to help your clients keep their homes.
In September 2010, the ever-rising tide of mortgage foreclosures appeared to hit a wall when reports proliferated about “robo-signing” of foreclosure documents. But because there was far more to the issue than could easily be comprehended right away, and lawyers working to defend homeowners needed time to catch on to the implications of robo-signing, the issue did not develop in the media at large for what it really was: proof that some foreclosing entities did not have standing to foreclose and that fraud has been committed in and on the courts of this nation and homeowners in foreclosure proceedings. Shortly after the “problem” was defined by the press as robo-signing, the foreclosing entities declared that the robo-signing issue had been “fixed,” and the foreclosure business continued as usual.
A few skilled lawyers and countless pro se parties trying to keep their homes began to gain momentum from the robo-signing issue. These lawyers and pro se parties had long been fighting foreclosures by focusing on the fundamental legal issue that the foreclosing entities did not have standing to foreclose. The reports in the press concerning the discovery from the depositions exposing robo-signing that documents to support foreclosure were being created to make it appear that a party had standing to foreclose laid the groundwork to bring the courts’ attention to what the homeowners and their most skilled lawyers were declaring: the basic law of foreclosure has not been followed in thousands of cases. The foreclosing party must own both the promissory note and the mortgage to have a secured interest on which foreclosure proceedings can be maintained. (See Fundamentals and Terminology sidebar.)
Hundreds of thousands of homes have been foreclosed by parties who have not loaned a penny to any home-owners or borrowers. The foreclosing entities owned neither the promissory note nor the mortgage, which a foreclosing party must own at the same time. Furthermore, at the heart of the robo-signing issue is fraud: the robo-signers were creating documents to make it appear that the foreclosing entity owned the promissory note and mortgage, and such fraudulently created documents are the basis for many foreclosures throughout the nation. In many of these foreclosures, the foreclosing entity was Mortgage Electronic Registrations Systems Inc. (MERS), which is not a lender: rather, it is a computer system for electronically registering mortgages in a private database.
Think of it this way: a party to whom your clients owe no money and to whom your clients never granted a security interest in their home is seeking or has taken judgment of foreclosure against your client. How could we miss such a fraud? It is because we believe that the lawyers representing foreclosing entities are making honest representations to the courts that the foreclosing entity has standing to sue. In the beginning, most lawyers representing foreclosing entities believed this themselves.
Homeowners and their foreclosure defense counsel have usually tried to resolve the state court foreclosure issues with the foreclosing entity or its law firm by seeking loan modifications and trying to bring payments current. If these attempts are unsuccessful, homeowners might file a Chapter 13 bankruptcy. Homeowners’ defense counsel win a few settlements, lose most state court actions, and preserve some homes in Chapter 13 proceedings.
Homeowners’ defense counsel now risk committing malpractice if they continue to rely on the allegations on the face of the pleadings against their clients, fail to require strict proof of the standing of the foreclosing entity through verification of the ownership of the promissory note, and assume that assignments of mortgages are valid. Assignments from MERS to other entities outside the chain of title must be strictly scrutinized. Otherwise, homeowners’ lawyers fail to provide their clients with the complete defenses to which the homeowners are entitled under the law and facts of each case. To provide thorough, competent representation, homeowners’ lawyers must be fully informed on the basic legal issues in the residential foreclosure crisis.
As time progressed, some lawyers representing foreclosing entities began to directly engage in the robo-signing “cover up” of the lack-of-standing problem and began to present falsely endorsed promissory notes and assignments of mortgages as the basis for the foreclosing entities’ allegation of standing to sue for the remedy of foreclosure in the courts. Worse, with all the issues of accounting errors, predatory lending practices, violations of the Truth in Lending Act (TILA), the Fair Debt Collection Practices Act (FDCPA), and the Real Estate Settlement Practices Act (RESPA), and fraud, the sham foreclosing entities have concealed the real party in interest liable for home-owners’ counterclaims. And worst of all, multiple concealed entities are acting in concert to pull off this assault on the judicial system’s rules of pleading and practice.
How can attorneys representing homeowners form a counterclaim in good faith without the basic information as to the identity of the real parties in interest and do it within the 20-day window for answering a foreclosure complaint? The only thing attorneys can do initially is to examine the standing issue and move to dismiss. This article is meant to assist in analyzing the initial motion to dismiss for the plaintiff’s lack of standing to bring the foreclosure action. It also is a basic guide to analyzing the merits of a motion to vacate the judgment or a new action for fraud on the court under Wis. Stat. section 806.07 after a client’s home has been unlawfully taken.
The Problem with Mortgages
Some lawyers and homeowners have taken new approaches to fighting foreclosures. Homeowners proceeding pro se (and a relatively small number of lawyers) who know or have researched and learned the law of mortgages and secured transactions have been identifying legal violations committed by foreclosing entities throughout the nation. Court decisions in favor of homeowners and against foreclosing entities have been proliferating rapidly.1 Effective homeowner defense relies on the long-established laws of secured transactions, mortgages, and jurisdiction (standing) and civil procedure. Class action lawsuits are being filed throughout the nation alleging violations of federal consumer-protection statutes such as RESPA, TILA, and the FDCPA as well as fraud and racketeering by foreclosing entities and, in some cases, by the foreclosing entities’ law firms.2 Following in the footsteps of these parties requires understanding the method by which many current mortgages have been processed, often in an invalid or fraudulent way.
MERS as “Nominee”
The “nomination” of MERS by the presumed holder of the promissory notes and mortgages was promoted as a new efficiency in the market, to cope with the expansion in mortgage lending and creation of investment trusts containing what were marketed as new financial instruments, the CDOs.
The MERS nomination was intended by the creators of this experiment to be the means of transferring assignment of mortgage and promissory note to an investment trust without the formality of actually endorsing the promissory notes and properly assigning the mortgages to the investment trusts. The original promissory notes usually were destroyed.
MERS can assign only the interest it had in the mortgage: its status as nominee. In Schuh Trading Co. v. Commissioner of Internal Revenue,3 the court defined a nominee as follows: “The word nominee ordinarily indicates designated to act for another as his representative in a rather limited sense. It is sometimes used to signify an agent or trustee. It has no connotation, however, other than that of acting for another, or as grantee of another….”
Black’s Law Dictionary defines a nominee as “[a] person designated to act in place of another, usually in a very limited way.” MERS’ status as nominee, without more, is not sufficient to vest MERS with the authority to effect a proper assignment of a note and mortgage.4
The reliance on MERS “as nominee” is a failing, and in some jurisdictions failed, attempt to allow foreclosures to take place without establishing the standing of any real party in interest as required by the law of secured transactions. With the MERS foreclosures under attack, parties desiring to foreclose needed to present plaintiffs whose standing was more secure.
The mortgage industry next attempted to create documents that would make it appear as if a real party in interest was seeking the equitable remedy of foreclosure. This involved a two-step process: 1) recreating the promissory note, and 2) creating assignment of the mortgages.
Recreating the promissory note. The courts have been flooded by foreclosure actions brought in the names of loan servicers. The plaintiffs in these actions attempt to use copies of destroyed promissory notes as originals, creating multiple endorsements without dates or warranties of authority or submitting “lost note affidavits” to the courts in lieu of the original promissory notes, which must be retired from commerce on payment or foreclosure.
Creating the assignment from MERS to the loan servicer. Many original lenders are in bankruptcy and cannot assign any assets, or they have been sold to other entities. Therefore, it became necessary for loan servicers to attempt to establish a chain of title from MERS to the loan servicer or investment trust, by creating a mortgage assignment that appears to have come from MERS but in countless cases is actually an in-house, robo-signed assignment that only purports to be from MERS to the loan servicer.
Refusing Payments, Creating Defaults, and the Failure of HAMP
Loan servicers create and perpetuate defaults and fight against receiving payments before and during bankruptcy under Chapter 13 plans. Loan servicers charge the investment trusts more servicing fees for loans in default than they make in servicing. There is more profit to be made in taking back properties and reselling them than in reworking the mortgages. The Home Affordable Modification Program (HAMP) actually makes matters worse for homeowners who try to work with loan servicers. Of the 3 to 4 million homeowners who were to benefit from the program, only 579,659 permanent modifications were made. The U.S. Treasury originally set aside roughly $46 billion in Troubled Asset Relief Program (TARP) funds for HAMP, but, according to the Congressional Budget Office, it has spent only $12 billion in payouts to servicers and homeowners. 729,109 trial modifications were cancelled in November 2010 alone. Foreclosure processes continue as the efforts to obtain a temporary modification distract the homeowners from their real peril.
Such assignments are actually signed by loan servicer employees, who claim to have authority to sign for MERS and use titles such as vice president and assistant secretary although the loan servicers’ employees are not in any way associated with MERS. A now-famous example of loan servicers assigning mortgages in-house was described in the depositions of Jeffrey Stephan, an employee of loan servicer GMAC Mortgage.5
Stephan and his colleagues at GMAC were not what they represented themselves to be. They were not, as stated on the assignments, officers of MERS, the assignor. Instead, they were employees of the assignee. Additionally, an assignment cannot transfer a greater interest than that held by the assignor. Although there will be claims that MERS (a company with approximately 40 employees who handle data entry) authorized loan servicers to be MERS officers, any assignment purporting to be from MERS cannot be greater than that of MERS, a mere nominee.
As the process of packaging mortgages was changing, the typical means of obtaining a foreclosure judgment was not.
How Foreclosure Judgments Have Been Obtained in Wisconsin
In Wisconsin, the process for obtaining a foreclosure judgment tends to be the following:
1) A complaint is filed by a named plaintiff claiming the right to foreclose.
2) The plaintiff alleges default in payments by the borrower defendants.
3) The court grants judgment in favor of the plaintiff, by default judgment if the defendant homeowners fail to appear or upon a motion for summary judgment (which swiftly follows the homeowner’s answer) supported by an affidavit of an individual claiming to be the agent of the foreclosing entity swearing that the foreclosing entity is entitled to payments from the defendant borrowers and that there has been default in payments by the defendant(s).
After judgment, a sheriff’s sale is held. The foreclosing party plaintiff states the opening bid of the amount of judgment, which usually exceeds the current value of the home, after the accumulation of various charges including late fees, escrow costs (which are often duplicative and incorrect), the plaintiff’s attorney fees, and costs of the foreclosure proceedings. The foreclosing entity is not required to deposit funds at the sheriff’s sale. The original bid is based on a number provided to the circuit court in the judgment, which the attorneys for the foreclosing entities prepared.
A lawyer hoping to successfully represent a homeowner in a mortgage-foreclosure proceeding must be prepared to not only navigate this standard challenging course but also uncover and overcome the obstacles erected by the reliance on MERS.
Necessary Steps in Homeowner Defense
To properly analyze a mortgage-foreclosure case originating in the MERS scheme, lawyers must do the following:
1) Obtain the MERS registry mortgage identification number (MIN) data on the homeowner’s loan. The use of the MERS database is the essential indicator that the endorsements to promissory notes have been manufactured. “MERS as nominee” mortgages procured by original lenders will be in the MERS database, along with the MIN (assigned to all MERS-nominated mortgages) and the name of the investment trust that holds the unsecured interest in payments from the loan servicer. The registry can be searched by going to https://www.mers-servicerid.org/sis/.
2) Demand production of the original promissory note. It is likely that copies will be produced that have been photo-shopped (usually badly) with multiple stamps from multiple entities, without warranties of corporate authority, powers of attorney, or dates. Compare the note, which might convey the false impression that multiple endorsements were made, to the actual MIN record. Most promissory notes were never endorsed and were simply transferred to an investment trust.
3) Watch out for allonges. An allonge is a separate document attached to a copy of a promissory note to make it look like the promissory note was actually endorsed by the original lender to the loan servicer. These also were robo-signed by the loan servicers in favor of themselves. They lack warranties of corporate authority, usually do not have a date, and are an attempt to make it appear that a long-destroyed promissory note was endorsed in favor of the loan servicer from a bankrupt, defunct, or otherwise bypassed endorsement from an original lender.
4) Examine the mortgage assignment. Assignments of mortgages for which MERS was the nominee often were executed in house by employees of the loan servicer. This self-assignment of the mortgage is an attempt to put a loan servicer into the chain of title. The loan servicer, without having the original promissory note and without having the assignment of mortgage from the original lender, is unsecured and has no standing to seek foreclosure. The best clue to this for a beginner is to check the notary public’s state of registration. MERS is located in Virginia. You will find many assignments executed by notaries in other states, establishing that the assignment was not executed by a MERS employee.
5) MERS is a nominee and can only assign the powers it was given as such. (See the discussion above about MERS as nominee.)
6) Demand the accounting of the payments and charges made. The accounting used by loan servicers is almost uniformly erroneous. Often there are improper charges for late fees, force-placed insurance, unnecessary and unauthorized property inspections, and the use of electronic-payment-processing services, along with failure to credit payments under trial loan modifications.
7) Determine the plaintiff’s standing in all mortgage-foreclosure cases.6
8) Review class actions brought against mortgage banks, servicers, MERS, MERSCORP, and law firms acting as their agents, using Google and PACER. You can locate class action lawsuits by following the instructions set forth at note 2.
A homeowner’s defense lawyer must require the foreclosing plaintiff to establish that it has standing to foreclose. The lawyer also must examine the documents with which the plaintiff attempts to establish standing, to make sure that the plaintiff is the real party in interest as the true holder of both a properly endorsed promissory note and a properly executed assignment of mortgage from the original lender. Finally, counsel must carefully review loan servicers’ financial documents and object to accounting errors in both state court and, if applicable, bankruptcy court (by making an objection to the claim). To do otherwise leaves the homeowners’ defense counsel as the easiest target for damages suffered by homeowners whose homes are taken by parties without the lawful right to foreclose on claimed secured debt.
5 The depositions, which were provided in the cases of Federal National Mortgage Ass’n v. Bradbury and GMAC Mortgage LLC v. Neu, are available at http://www.scribd.com/doc/33129394/2nd-Deposition-of-Jeffrey-Stephan-%E2%80%93-GMAC-s-Assignment-Affidavit-Slave and http://www.scribd.com/doc/28762965/Full-Deposition-of-Jeffrey-Stephan-GMAC-s-Assignment-Affidavit-Slave-10-000-Documents-a-Month.
6 Among the key cases concerning standing are the following: In re Foreclosure Cases, No. 1:07-cv-02282-CAB (N.D. Ohio Oct. 31, 2007); U.S. Bank Nat’l Ass’n v. Ibanez, No. SJC-10694 (Mass. Sup. Ct. Jan. 7, 2011); Wells Fargo Bank N.A. v. Ford, No. A-3627-06T1 (N.J. Super. Ct. Jan. 28, 2011); Pino v. New York Bank of Mellon, No. 4D10-378 (Fla. Ct. App. Feb. 2, 2011). See also PHH Mortgage Corp. v. Estate of Kolodziej, No. 2010AP60, 2011 WL 831175 (Wis. Ct. App. March 20, 2011). These cases can be found by doing a search on the Internet. A Google search will usually take you to scribd.com, from which you can download the complete opinions.
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