Internet Foreclosure “Myths”
Courtesy of Patrick Pulatie, originally published at The Implode-O-Meter Blog
Just over two and one half years ago, I began to work with homeowners facing foreclosure. At that time, there were two or three websites that had any information on foreclosure prevention and any viable defenses to foreclosure. Since that time, starting in late 2008, and throughout 2009, there has been an explosion of websites featuring foreclosure information. This has been both good and bad for the homeowner facing foreclosure; good because homeowners have been able to learn much about their situation, and know that they were not alone, but bad because there is much “inaccurate” information about foreclosure defenses being presented. This article is intended to help the homeowner sort the good and the bad.
I write this knowing that I am going to receive significant negative feedback from many different sources. Some will be disputing what I write because they have heard of people with positive results. Some will argue because for them, the distribution of such information is part of their business model and the more people who know that what they “preach” is not effective, the less they will make. Others will disagree because I am at direct odds with certain people that they follow, ones who have high visibility, but have not stepped into court rooms in years. More will even argue that I side with the lenders.
There is a particular motivation for writing this. I receive phone calls daily and weekly from homeowners who have read these from sites, and are thinking that if they just do one thing or another, their problems will “magically” disappear. Others are Pro Se litigants, doing their own lawsuits instead of hiring attorneys. They want me to review their filings, advise them where they are wrong, or do Predatory Lending Examinations. I refuse to do this because I will not work with a person who does not have an attorney, and I am not an attorney and cannot give legal advice. The sad part is that in their filings, I can immediately spot so many errors that it is obvious that they should just start packing to move.
The criteria for being considered a "myth" includes the probability of a desired outcome, and/or the factual basis of the representation. There will be people who claim to have had positive outcomes from using these strategies. I don’t deny that a few people succeed. But success must be measured in accordance with the following.
- Was the success the result of a Trial Court ruling after a trial? Or was it simply a denial of a Demurrer or Request for Dismissal of the allegations by a judge?
- Has the success held up at the Appellate Court level? Is it on appeal? Or has the lender completely given up?
- Is the success being duplicated on a regular and consistent basis? Or is the success “random”, coming from just one judge, in one court?
- Is the ruling appealable?
These are important considerations in whether the subject reaches myth status or not. As you read the myths, please read all that is written for each myth before jumping to conclusions. It is important that you understand the context that the myth is being propagated.
Myth #1: Rescission cancels the loan.
This myth is grounded in fact, but the facts have not been adequately disclosed. Many websites, especially “audit firms” will promote that certain violations will allow for rescission, which will “cancel” the loan. Then they state that you can get back the money you have paid. It sounds good in theory.
Rescission means “turning back the clock” so that all parties are returned to where they were before the loan. This means that to make an effective “rescission”, you must be able to return the money borrowed, minus what you have paid. Since the homeowner is in foreclosure, there is no ability to tender. Therefore, rescission will not cancel the loan
Myth #2: HAMP requires a loan modification to be done. [See also HAMP = Foreclosure]
Since the HAMP loan modification program was first announced just over a year ago, much has been written about it. Most of it has been to show that HAMP is not working, and loan modifications are not being done. As a result, there are now lawsuits being filed attacking the lack of loan modifications being done by HAMP lenders, the most recent of which is a filing against Bank of American in California and Washington.
The general thesis is that HAMP requires loan modifications be done. This is not true. The reality is that what is required to be done is a Net Present Value Test (NPVT), and if the loan passes the NPVT, then a modification should be offered. Herein lies where attorneys are missing the boat regarding Class Action suits against HAMP.
- HAMP is only for Fannie Mae and Freddie Mac. It does not apply to privately securitized loan. Yet many of the litigants will have the privately securitized loans and those do not qualify.
- HAMP requires a Net Present Value Test. If the person passes the test, then a modification is to be offered. The reality is that if one takes standard underwriting procedures into account, while disregarding credit scores ruined by the foreclosure, most homeowners will fail the NPVT anyway. So, any Class Action will have to account for that.
- The lawsuits are being filed as Third Party Beneficiaries. Nowhere does it appear that there is a Private Right to Action for a Third Party Beneficiary, and some courts in the US have already ruled such.
These are just a few of the issues. But, it is not impossible to file Class Actions. It is just that the lawsuits must be filed with different tactics. I have been in discussions with law firms about just these different tactics, and they are being seriously considered right now.
Myth # 3: Prove the Note
I get more calls about this tactic than all others. The basic idea is for me to exam the Securitization of the loan so that they can show that the lender does not have the Note, or have the “Wet Signature” note, and therefore cannot foreclose for “lack of standing”.
This strategy first became prevalent in 2007 from a case in Ohio. Judge Boyko tossed a number of foreclosure cases due to lack of standing because the Note could not be found. Since then, it has been a common tactic to argue. Some courts in Judicial Foreclosure States have ruled the same in similar cases, but this is not the norm. Usually, it is only a certain type of judge doing so. Most judges do not except these arguments. (Some BK courts have been accepting these arguments as well, but only a few overall.) Furthermore, it’s my understanding that the Boyko Decision led to about 80% of the Notes being found, and the foreclosures completed. And with other cases across the country, lenders are usually appealing the cases, and it can be expected that many will be overturned.
If you are in a Non-Judicial Foreclosure State, like California, courts refuse to accept any consideration of the Prove the Note argument, though Judge Buford in the BK courts in Southern California does appear to entertain such arguments. I have not seen any Trial Courts accept the argument, but if there are such cases, please send them to me.
Non-Judicial States are not entertaining the argument because the Foreclosure Statutes for those states are considered “exhaustive”, and they control the entire foreclosure process. Hence such arguments go nowhere. (There are other specific lender arguments against Prove the Note, and specific tactics that they use, which I will not discuss at this time.)
Myth #4: The original lender was paid off, so the Note is void
This argument is based upon the fact that most Notes were sold. Once the Note was sold, the original lender was paid off, and therefore the debt is discharged. The theory is that whether “Aunt May” paid the Note off, or a “Wall Street Investor” bought the Note, it is all the same. The Note was paid, and the lender cannot foreclose.
The purveyors of such arguments are ignoring a central point. The Notes are negotiable instruments, and can be sold or traded. This is firmly rooted in Commercial Codes. The reality is that when “Aunt May” paid off your note, unless she transferred it to you, she is the “legal owner” and you owe her the debt. The same would go with the Trust who now holds the Note.
Myth #5: Securitization voids the Note
A variation of Myth 4, this strategy states that once a Note is securitized into a bond or certificate, it is no longer a foreclosable Note. Securitization has changed the “nature” of the instrument and voided any ability to foreclose. This argument is now being dismissed in many courts as soon as it is heard.
Myth #6: Credit Default Swap payments pays off the loan.
The “Aunt May” argument strikes again. In this case, when a Credit Default Swap related to a certain tranche was paid, the Note was paid off and there was no longer any liability. The people who argue this point have a poor and limited understanding of what a Credit Default Swap was, and who purchased them.
Credit Default Swaps and Credit Enhancements are separate contracts and agreements that are entered into between the Swap seller, and any person or entity who wants to buy such a contract. If the subject of the contract defaults, then the buyer receives a payout. The money does not go to pay off the loan, note or other security.
A simple explanation of this would be taking a trip to Vegas. You are watching a guy at the Craps table. He bets all on five. You bet for him to lose. He rolls a seven and loses. You get paid because he lost and you won, but he argues that he does not have to pay because you won. (Yes, very simplistic, but it gives people an idea of what swaps were about.)
Forez v. Goldman Sachs Mortgage, Lexis 35099 (E.D Va. 2010) “no provision in the U.S. or Virginia Codes supports [their] argument that credit enhancements or credit default swaps (“CDS”) are unlawful. No decision from any court in any jurisdiction supports such a claim.” “Plaintiffs’ double recovery theory ignores the fact that a CDS contract is a separate contract, distinct from Plaintiffs’ debt obligations under the reference credit (i.e. the Note). The CDS contract is a “bilateral financial contract” in which the protection buyer makes periodic payments to the protection seller. See Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co., 375 F.3d 168, 172 (2d Cir. 2004).”
This brings us to another myth.
Myth #7: What happens in Florida is relevant in all States
Many websites, especially those in Florida, promote Florida rulings and lead to the impression that the case law is appropriate in all 50 states. This impression leads Pro Se litigants to file based upon that case law, and are then surprised when the charges are dismissed.
Foreclosure law is covered by the individual states. Each state has their own method or process for dealing with foreclosures.
When a lawsuit is filed, the first place that the Court will look for precedent is prevailing case law and state statutes and law within the jurisdiction. If none exists, then the court will often consider other jurisdictional matters, but the court will still rule on what is most appropriate in its jurisdiction.
Many “high profile” websites are promoting the Florida case law, and by doing so, they leave the reader with the impression that the same arguments will work in their state. None appear to reveal that this is only applicable to Florida. As a result, the Pro Se litigant uses such arguments, and in the end, he is looking for new housing.
Myth #8 The Second Yield Spread Premium
This argument is heavily promoted by one of the Florida websites. The argument is that there are two, and perhaps three Yield Spread Premiums on loans. These consist of:
- The first Yield Spread Premium is paid to the broker for putting the borrower into a loan that has a higher interest rate than what the borrower qualified for.
- There is arguably a second Yield Spread Premium, known as a “Service Release Premium”, which would be what the lender receives when they sell the loan to the warehouse lender or other entity, usually 2 to 4 points.
- The third Yield Spread Premium is what the lender receives when the interest rate adjusts.
Under TILA and RESPA, the first Yield Spread Premium payment to the broker is required to be disclosed, because this is a payment that is “guaranteed” to occur. It is readily calculated and entered into the Final Settlement Statement, and is usually readily identified.
The arguable second Yield Spread Premium, aka “Service Release Premium”, is paid to the lender when the loan is sold is not so easily quantifiable. It can take place within days, weeks, or months are the loan is closed. Amounts received are not readily apparent at closing. As a result, these payments are not required to be disclosed on the Settlement Statement.
The amount of SRP paid is based on the market value of the mortgage note, influenced by several key variables, such as interest rate, loan type, margin (for ARM loans), and the inclusion or exclusion of other items such as prepayment penalties. Also considered are the loan’s LTV (loan to value), the borrower’s credit score, the presence of Private Mortgage Insurance (PMI), pre-payment risk of the borrower and other factors. As a result, this could not be reasonably called a Yield Spread Premium, so the argument for it is certainly questionable.
The third Yield Spread Premium is a point of contention that I cannot accept. The arguments for being a Premium are simply absurd and show a lack of understanding of the Securitization Process, or of Risk Analysis, or of Adjustable Rate Mortgages.
The Adjustable Rate Mortgage was offered to borrowers as an alternative to a Fixed Rate mortgage. The benefit was a lower mortgage payment in the beginning of the loan, with a Risk of the payment increasing later, or the luck of the payment decreasing later. The risk was shared equally by both the lender and the borrower.
Those who promote these arguments claim that the increase in the Interest Rate and the resulting increase in payments should be considered a Yield Spread Premium, and in the opinion of the major promoter of this idea, to be recoverable to the borrower. So, any increase in the payments would be due back to the borrower.
If one follows this logic, then when the payment drops, the amount should be due the investor from the homeowner, but he conveniently ignores that fact. (When I have mentioned this on his website, people have complained that I don’t see the “big picture”.)
Furthermore, the arguments suggest that the lender reaps the profit, which is further from the truth. When the loan is securitized, there are Credit Enhancements and Over-Collateralization clauses. All excess payments, like increases in the interest rate and payment are used to Over-Collateralize the Tranche, so that losses are covered from the excess. It is not used as profit for the lenders. Hence, the “Yield Spread Premium” is a “bogus misrepresentation” that will only get thrown out in court.
Myth #9 Note and Deed are Separated
I place this in the Myth category because I honestly don’t know where this argument will end. I say this because in California, I have done examinations where the judge has accepted the arguments, and yet other judges have tossed the arguments. This is a highly complex argument which likely deserves an article written just covering it alone.
The basic idea is that when the Note is transferred to another party, usually through securitization, unless the Deed is assigned, then the Note and Deed are separated. Therefore, foreclosure cannot occur unless the two are reunited, since the Deed enforces the Note.
Courts in Florida have been in both camps on this subject. Some judges accept it as valid and other judges in Florida ignore it. In California, the judges most ignore the arguments.
What must be remembered is that many different courts across the US have ruled that the Deed is incidental to the Debt. The Deed has no assignable quality outside of the Debt. Assign the Deed, but the Debt does not follow.
However, when the Note is transferred, then according to the same rulings, the Deed automatically follows the Debt. If this argument is used, then the Deed and Note cannot become separated.
The same Virginia Court, as referenced above, addressed this issue. “The court further noted “federal law explicitly allows for the creation of mortgage-related securities, such as the Securities Act of 1933 and the Secondary Mortgage Market Enhancement Act of 1984. Indeed, pursuant to 15 U.S.C. § 77r-1, “[a]ny person, trust, corporation, partnership, association, business trust, or business entity . . . shall be authorized to purchase, hold, and invest in securities that are . . . mortgage related securities.” Id. § 77r-1(a)(1)(B). Foreclosures are routinely and justifiably conducted by trustees of securitized mortgages. Therefore, the court held “Plaintiffs arguments for declaratory judgment and quiet title based on the so-called “splitting” theory fail as a matter of law.”
I expect this to become more common for rulings in the future.
Myth #10 Banks have a Fiduciary Duty to a borrower
Any person or attorney who makes this allegation in a complaint should be tarred and feathered and then run out of town. For years, courts have consistently ruled that lenders have NO fiduciary duty to a borrower.
Myth# 11 An audit is the answer to all your problems
Large numbers of people call up, thinking that an audit is going to make the lender “roll over” and give them what they want. This cannot be farther from the truth. An audit is only as good as the attorney using it. It is a “roadmap” for litigation, pointing out various issues with the loan, the origination of the loan, State and Federal Statutes, and other potential issues. The attorney must be able to take the audit and then determine the proper strategy to achieve the desired results.
One must also consider the type of audit being done. A low level audit, one that uses just TILA and RESPA violations, which is 90% of those done, will achieve worse results than a Predatory Lending Exam, which few people know how to do.
Myth #12 Qualified Written Request
Most websites will mention the requirement for a Qualified Written Request to be demanded by the borrower. The QWR is a RESPA requirement that mandates the Servicer provide you the Servicing History of the loan.
I will often receive QWR requests that run to 20 or 30 pages. These requests call for every type of document conceivable. Not only the Servicing History, but also any BPO’s, Title issues, Securitization issues, insurance and almost anything else. The general response from lenders, if they do reply, is to offer the Servicing History, Note, Deed of Trust and Settlement Statement. Any other documents will be denied delivery because it is “not mandated” under RESPA.
The truth is that only the Servicing History is required disclosure. Other documents are not required. The reason that such QWR requests developed is that in California in 2008, a cottage industry of “foreclosure consultants” emerged in which the QWR’s were sold to borrowers for $3,500 per request.
So, if you send out a QWR requesting more than the Servicing History, expect to be declined.
Myth # 13 You can get your home for free or a principal reduction to fair market value
It seems that everyone I speak with is looking for a principal reduction to fair market value or getting a home for free. This is so common, it gets boring. People, get over it. This does not happen, except in very rare situations. I have heard of only a few principle reductions, and getting homes for free seldom exist, except what you hear about in Florida and New York, and those are exceedingly rare circumstances.
At this point, it is probably advisable to wrap this up and plan on doing a “Part 2” in the near future. There are many more “Myths”, but hopefully, the ones presented above will serve to alert the reader to be cautious of what is presented. If it sounds too good to be true, it probably is.
I do expect that what I write will be met with derision and controversy, as I mentioned. But I welcome such controversy because these issues must be aired for better understanding of what is to be expected when you are fighting foreclosure. What you should not expect to happen is most important of all.
(Patrick Pulatie is the CEO of Loan Fraud Investigations. He can be reached at patrick-at-loanfraudinvestigations(dot)com. His website is www.loanfraudinvestigations.com. Articles written by him can be viewed on www.iamfacingforeclosure.com and http://blog.ml-implode.com/ . Patrick is not an attorney and does not give legal advice.)
