Interview with David Dayen, Author of Chain of Title

Slander of Title

The Massachusetts Foreclosure Law Blog is pleased to present an interview with David Dayen, author of Chain of Title, a new book about the foreclosure crisis.  Chain of Title is an account of how three ordinary Americans uncovered foreclosure fraud in the wake of the ongoing foreclosure crisis.  I started it during the Memorial Day weekend and recommend it as a great resource on foreclosure defense.  

Please tell us about your background and what inspired you to write Chain of Title.

I had a career in film and television production when I discovered political blogging back in 2004. I got more and more interested in it and then in 2009 started to work for a popular website of the time named Firedoglake writing political and news stories. The foreclosure crisis was this critical yet under-covered event in American life, affecting so much of our economy. I worked on stories about nightmares in the Home Affordable Modification Program (HAMP) and then heard about foreclosure fraud. Lisa, Michael and Lynn ran the most comprehensive websites about the scandal, and became sources of mine after I met them at a one-day conference about foreclosure fraud in late 2010. When I heard their stories about moving from foreclosure victims to activists, I knew it would be a great way to tell the story of the financial crisis at the ground level.

What is the most shocking thing you under covered while researching and writing Chain of Title?

Just the total lack of quality control on the part of the mortgage industry. You got the sense that they didn’t care what the piece of paper they put in front of judges or county officials said, as long as they could use it to dispossess someone of their home. There were mortgage assignments that were notarized but unsigned. There were entire filing cabinets of original notes that went missing. There were documents where the effective date was never filled in, leaving the date of execution of the mortgage assignment as 9/9/9999. Barack Obama’s own release of mortgage on his condo was signed by a robo-signer. The fraud was so systemic.

In Chain of Title, you discuss U.S Bank v. Ibanez, a landmark Massachusetts court decision that invalidated thousands of foreclosures across Massachusetts.  How do you feel other states and the federal government have responded to the foreclosure crisis? 

Every state is different because foreclosure law is generally adjudicated at the state level. Some states created verification standards where lawyers for the banks had to personally verify that the documents in their cases were legitimate. In other states, like those where you don’t need judicial sign-off for a foreclosure, the response was far more limited. I think Hawaii is a good example, they went from a non-judicial to a judicial foreclosure state. Lisa Epstein, one of my subjects, played a role in that, she testified via Skype to a legislative session in Honolulu to argue for the change.  I think the federal government took a walk on the rampant fraud that was evident in the foreclosure process, making no effort to criminally prosecute and wrapping up the whole thing into a large settlement designed to produce a penalty with a big headline dollar amount that didn’t correspond to reality. I believe it’s the greatest disappointment of the current Administration, and it fed a belief that there’s a two tiered system of justice in America. In many ways it fueled the anxiety and discontent we see in our politics.

While many Americans have struggled with the foreclosure crisis, others know little about the abuses of the lending industry.  What do you hope readers of Chain of Title learn from your work?

I do hope that the book sheds more light into just how many different types of abuses were heaped on homeowners and investors before, during, and after the crisis. More than that, I wanted to recognize these incredible people who did more investigation into this misconduct than the whole of state or federal government. And I wanted to let the public know that there was a real alternative here, that they could have gotten the accountability they so desperately sought. And we have to reckon with the consequences of how in America, who you are matters more than what you did.

Fannie Mae v. Rego: Supreme Judicial Court Permits a Chapter 93A Defense to Foreclosure

 

SJC

The Massachusetts Supreme Judicial Court issued Fannie Mae v. Rego today, an important foreclosure law decision that permits a Chapter 93A defense to foreclosure (full copy of the decision is below).  Chapter 93A, the common name for Massachusetts’s Consumer Protection Law, is a broad consumer statute that prohibits “unfair and deceptive practices” by businesses.  Chapter 93A claims are commonly used for monetary damages, and can provide an an award of treble damages against a party who violates this law (along with attorney fees).  The question for the Court was whether a Chapter 93A defense could be raised to void a foreclosure (as opposed to simply awarding a party money).

Rego  was an appeal of a post-foreclosure eviction (“summary process”) case, where the homeowner was defending against the eviction of his home on the grounds that the foreclosure was void.  The homeowner brought a counterclaim (a lawsuit brought in the same case against the original party who filed the suit) for violation of the Consumer Protection Law.  Here, the trial court dismissed this counterclaim, without offering a real reason for doing so.  The Supreme Judicial Court held in Rego that a homeowner is permitted to raise a Chapter 93A defense in a eviction foreclosure case that goes to the issue of possession of the property; in other words, whether the foreclosure was done correctly.  If this is the relief sought by a Chapter 93A claim, Rego suggests that it can be raised in a post-foreclosure eviction case.  If the Chapter 93A merely seeks monetary damages, such a claim is not allowed in one of these cases (and would have to brought separately).

Rego, in my interpretation, is an important decision because it clarifies that a Chapter 93A claim may be used to void a foreclosure sale.  Many lawyers (and some judges) are not aware that Chapter 93A provides a court with equitable relief.  Equitable relief  is a remedy that goes beyond money damages, and requires a party to act or refrain from performing a particular act.  This type of relief is especially important in foreclosure defense, where the homeowner isn’t looking for money as a defense to foreclosure; the homeowner instead wants the foreclosure reversed.  Rego, in my interpretation, holds that there is a Chapter 93A defense to foreclosure; something that was less clear before today’s decision, where some trial courts took the position that money was the only award from a foreclosure that violated Chapter 93A.

 Rego also decided another issue of foreclosure law: whether an attorney could perform a foreclosure on behalf of a mortgagee without written authorization.  The relevant foreclosure law, G.L. c. 244, Section 14, seemed to suggest that such a writing was required for attorneys who performed foreclosures.  The Supreme Judicial Court held that no such writing is required, and that legal counsel may perform the steps of the foreclosure process without written authorization.  Although the bulk of  Rego was spent on this narrow issue of law, the Court’s decision is unsurprising:  I am aware of only one trial court decision that came out in the homeowner’s favor on this argument (with the overwhelming majority following the reasoning of  Rego).

 Rego

What is a Loan Modification?

loan

I write often about loan modifications, but I’ve had many clients ask me what is a loan modification, and how does it compare to a loan refinance. It is an important topic, as loan modifications are essential for foreclosure defense. 

A loan modification is a restructuring of a mortgage loan.  The purpose is to make the monthly payments of the loan more affordable for the homeowners (the federal HAMP program aims to get the payment down to 31% of the homeowner’s monthly income).  Loan modifications attempt to do this through a variety of four different steps:

  1. Capitalization
  2. Interest Rate Reduction
  3. Term Extension
  4. Principle Forebearance
  5. Principle Reduction

Capitalization is where the lender adds the unpaid arrearage of the loan to the mortgage debt.   Through capitalization, the lender adds these unpaid expenses to the principle of the loan, which the borrower will repay as the part of the entire loan.

An interest rate reduction is where the lender decreases the loan’s interest rate, making the monthly loan payments more affordable.  HAMP permits a loan’s interest rate to be reduced to a minimum of 2%.  Non-HAMP loan modifications generally use the market interest rate (presently between 3% – 4%).

A term extension is an increase of the length of the loan.  HAMP permits loans to be extended up to forty years.  As the length of the loan increases, the monthly payments in turn decrease.

A principle forbearance is where a lender agrees to take a large chunk of a loan and put it at the end of the term.  A borrower is not required to pay interest on this amount of money, and it only becomes due once the loan term ends or the home is sold.  The purpose of a principle forebearance is to make the loan more affordable: while the borrower still owes this money, he or she will not pay interest on this portion of the loan.   However, this money ia still owed to a lender.  In contrast, under principle forgiveness, the  lender agrees to forgive a portion of the loan.  Understanding the difference between these two terms is critical in understanding what is a loan modification, as these two options come up often with modifications.  HAMP, for example, only allows for principle forbearances, without forgiving any portion of the loan.  Non-HAMP modifications, sometimes referred to as “in-house modifications” may be more open to debt forgiveness.

I hope this overview is helpful in understanding what is a loan modification.  If you find yourself having difficult obtaining a loan modification, contact me for a consultation.  As I always tell my clients, a lawyer is not a financial adviser.  Homeowners in need of loss mitigation assistance should always speak with a financial and tax adviser for advice on the advantages and consequences of accepting any sort of loan modification.

Overview of Robo-Signing as a Foreclosure Defense

Sign

The recent foreclosure crisis brought to light a term that is now synonymous with foreclosure defense: “robo-signing.”  A “robo-signor” is someone who signs documents on another’s behalf in massive quantities.  The charge of robo-signing came to light largely due to CBS’s 60 Minutes segment on “Linda Green”, a bank vice president whose signature was made by dozens of low level bank employees.  The segment offered conclusive evidence that thousands of land records across the country have forgeries.  Here in Massachusetts, the Southern Essex Registry of Deeds has taken an active role in fighting robo-signing, through a list of alleged culprits on its website.

Successful claims against robo-signors have mostly come from state and federal lawsuits against lenders, alleging that these practices are in violation of land recording laws and other consumer protection statutes.  Many of these lenders have settled these claims through huge cash settlements.

Can Massachusetts homeowners use robo-signing as a viable foreclosure defense?  The overwhelming response by courts is “no.”  Massachusetts law gives recorded land documents a large presumption of validity, making such challenges nearly impossible to succeed.  I, personally, am aware of no successful foreclosure defense case made upon such a claim.

Robo-signing is attractive to many foreclosure defense claimants because it comes across as a “sexy” issue, filled with claims of fraud and deceit.  The reality, though, is that it isn’t going to get very far as a foreclosure defense.  This is one reason, among many others, why struggling homeowners should speak with an experienced attorney on these matters.

Sherwin Law Firm To Argue Foreclosure Defense Appeal Before Supreme Judicial Court

SJC

The Supreme Judicial Court has granted direct appellate review for one of my upcoming foreclosure defense appeals.  Direct appellate review allows the Supreme Judicial Court (Massachusetts’s highest court) to hear an appeal pending before the Appeals Court (the appellate court that is responsible for initially hearing appeals).  Direct appellate review is often granted for pressing issues of law that the Supreme Judicial Court believes is necessary to resolve as soon as possible.

This appeal is whether a mortgagee’s failure to comply with G.L. c. 244, § 15A (which requires notices to be sent after the foreclosure sale) invalidates a foreclosure.  This law has been included as among the requirements for a Massachusetts foreclosure and trial courts are divided as to whether this is a valid foreclosure defense.  Stay tuned!

The Big Short – Origins of the Foreclosure Crisis

the-big-short-1

Last weekend, I went to see The Big Short, which portrays the origins of the foreclosure crisis.  As a foreclosure defense attorney, I was interested in seeing how the movie explained the events of the financial meltdown and its effect on residential foreclosures across the United States.  Notably, this is the second foreclosure defense movie that has come out in the past two years.  Who knew foreclosure defense could ever be so entertaining? 

The Big Short has an all star cast (Christian Bale gives a great performance) and a compelling story line.  Unfortunately, the movie is a bit long, even for someone highly interested in the origins of the foreclosure crisis.  The movie would have been much, much better if it was shorten and focused on fewer characters.   With all of the good movies out now, you are best waiting to see this one on video.

Nonetheless, if you are interested in the origins of the foreclosure crisis, The Big Short is worth watching.  The movie does a good job of explaining how the secondary mortgage market, securitization, and incompetent bankers lead to the mortgage meltdown.  The short answer to the origins of the foreclosure crisis is that bankers were given enormous incentive to give out mortgage loans, because these loans could be easily sold on the secondary market (allowing the loan originator to “wash their hands” clean of the original lending transaction).  Securitization, which I have written about before, played an important role as well: these complex financial transactions allowed investors to diversify risk, giving a great incentive for lenders to make toxic loans.  If you are interested in reading more about this, check out this op-ed from the New York Times, written by Michael J. Burry, one of the characters from The Big Short (played by Christian Bale).

I liked The Big Short because it provides important ammunition in fighting big banks in foreclosure defense cases.  Bank like to blame everyone but themselves for the origins of the foreclosure crisis, but this movie shows where the real blame lies.  I’ve seen first hand the effects of these toxic loans from the early 2000s, with homeowners having been given loans and refinances despite no supporting income and documentation.  Many of these borrowers were “setup to fail” from the beginning.

An important word of caution about The Big Short.  I know some will see this movie and think that these origins of the foreclosure crisis alone are enough to beat foreclosure.  A few, unfortunately, may even believe that foreclosure defense can result in a free home.  Foreclosure defense is much, much more complex than that and struggling homeowners should consult an experience attorney in handling one of these cases.

Paragraph 22 of the Standard Mortgage

Mortgage

An important foreclosure defense is paragraph 22 of the standard mortgage.  The “standard mortgage” is the mortgage agreement used by Fannie Mae and Freddie Mac, two of the largest holders of residential mortgages in the United States, making it a widely used form for residential home transactions.  If you borrowed money for a residential home, chances are excellent that your lender used the standard mortgage.

Paragraph 22 of the standard mortgage requires the lender to provide the borrower a default notice prior to foreclosure.  This default notice provision, often found in paragraph 22 of the standard mortgage, requires the following for a non-judicial foreclosure state like Massachusetts (where the lender does not need to go to court to foreclose):

Acceleration; Remedies.   Lender shall give notice to Borrower prior to acceleration following Borrower’s breach of any covenant or agreement in this Security Instrument (but not prior to acceleration under Section 18 unless Applicable Law provides otherwise).  The notice shall specify:  (a) the default; (b) the action required to cure the default; (c) a date, not less than 30 days from the date the notice is given to Borrower, by which the default must be cured; and (d) that failure to cure the default on or before the date specified in the notice may result in acceleration of the sums secured by this Security Instrument and sale of the Property. The notice shall further inform Borrower of the right to reinstate after acceleration and the right to bring a court action to assert the non-existence of a default or any other defense of Borrower to acceleration and sale.  If the default is not cured on or before the date specified in the notice, Lender at its option may require immediate payment in full of all sums secured by this Security Instrument without further demand and those remedies permitted by Applicable Law may be invoked.  Lender shall be entitled to collect all expenses incurred in pursuing the remedies provided in this Section 22, including, but not limited to, reasonable attorneys’ fees and costs of title evidence.

NOTE:  I have included, as a PDF below, an excerpt from the standard mortgage with this provision, as it applies to a non-judicial foreclosure state.  Note that this default requirement is not always found in paragraph 22; I have seen some mortgages include it in other paragraphs of the mortgage.

Paragraph 22 requires lenders to provide borrowers with an opportunity to cure their mortgage loan default prior to foreclosure, and requires in this notice specific disclosures.  This paragraph is also referred to as the “right to cure” notice or the “default” notice.

Not surprisingly, lenders often mess up these simple notices.  Can a paragraph 22 defect be a valid foreclosure defense?  In Massachusetts, only a notice with a defect sent after July 17, 2015 will invalidate a foreclosure (per the Supreme Judicial Court’s Pinti v. Emigrant Mortgage decision).  Interestingly, other states interpret the paragraph 22 requirement differently; many Florida courts require “substantial compliance” for paragraph 22 of the standard mortgage, in which a minor defect will not void a foreclosure by itself.

While the Supreme Judicial Court in Massachusetts made the paragraph 22 defense only applicable to those notices sent after July 17, 2015, I think there is a good argument  to be made that this only applies to post-foreclosure cases, and not pre-foreclosure.  In other words, if a homeowner has received a deficient paragraph 22 notice and raises a challenge before foreclosure, there is a strong argument to be made on equitable grounds that the foreclosure should be stopped.

Facing a foreclosure?  Contact me to see if a paragraph 22 defense can be used to help you save your home.

Paragraph-22

Recommended Resource: Understanding the Secondary Mortgage Market

download

As I have written before, many homeowners are surprised to learn that the local bank they borrowed money from to buy their home often no longer owns their loan.  The reason for this is the secondary loan market: lenders routinely sell mortgage loans not long after the promissory note is executed.  The reason for this is that the lender gets a better return on their investment by selling the loan early, which provides them with more money to lend for new mortgage loans.

I recently came across a blog post from Freddie Mac’s website explaining the secondary mortgage market.  The blog post is obviously pro-Freddie Mac, but does provide a good overview of this process.  I recommend it for anyone interested in learning more about mortgage lending.

Massachusetts Appeals Court Issues Decision on “Hold the Note” Requirement for Foreclosure

 

SJC

The Massachusetts Appeals Court issued an important appellate decision this week on the “hold the note” requirement for Massachusetts foreclosures.

First, a brief background.  A promissory note is a written contract to pay a certain sum of money at a specific point in time.  When a homeowner purchases a property, they sign a promissory note with the lender, promising to repay the borrowed money (and with it, grant the lender a mortgage to the property; a security agreement allowing the  lender to foreclose if the money isn’t repaid).  A promissory note is a legal agreement that can be sold to another entity (known in law as a negotiable instrument).

“Negotiability” is the essence of promissory notes for residential home buying: the original lender of the home rarely holds the note for the duration of the loan, and generally sells it on the secondary market (with Fannie Mae, Freddie Mac, and securitized trusts being the common buyers of these loans).  Many homeowners are shocked to realize that the entity they borrowed money from is often out of the picture not long after the home is purchased.

These transfers of promissory notes became a real problem for banks and lenders during the foreclosure crisis.  With so many foreclosures happening at once, banks had difficulty getting their paperwork in order, with some foreclosing entities performing foreclosures without actually owning the underlining loan.  In Eaton v. Federal National Mortgage Association, the Supreme Judicial Court held that a foreclosing entity needs to hold the promissory note, or act on behalf of the noteholder, to do a valid foreclosure (this requirement applies only to foreclosures occurring after the date of the Eaton decision: June 22, 2012.).

In this recent Appeals Court decision, Khalsa v. Sovereign Bank, N.A., the Appeals Court considered what a foreclosing entity needed to show that it was “holding the note” or acting on behalf of the owner of the loan.  In Khalsa, the owner of the loan was Freddie Mac (a government corporation who buys loans from lenders).  The loan servicer (who collects the loan payments on behalf of the owner of the loan) was Sovereign Bank, which was the entity who performed the foreclosure.  Under Eaton, Sovereign Bank could foreclose only if it had authority to act on behalf of Freddie Mac.

Easy enough to prove?  Not quite, said the Appeals Court.  The Court ruled that the question of whether Sovereign Bank had acted on behalf of Freddie Mac was a question of fact: a matter that needed to be decided at trial.  The Appeals Court considered the thousands of pages of documents and amply determined that a trial was needed to resolve this issue.  Simply put, Sovereign Bank wasn’t able to show that, undeniably, such a relationship existed.  The homeowner, in turn, also wasn’t able to prove the opposite: that Sovereign Bank had no authority to do the foreclosure.  As such, the matter needed a trial to be resolved.

I read two important “take home” lessons from Khalsa v. Sovereign Bankas it relates to foreclosure defense:

  1. Proving that a foreclosing entity “holds the note” at the time of foreclosure can be an arduous task.  Khalsa shows that these questions often need to be resolved at trial, which can make for an effective foreclosure defense.
  2. In a footnote at the end of the decision, the Appeals Court appears to reject the argument that simply recording an affidavit in the land records is proof, in and of itself, that a foreclosing entity “holds the note”  (an argument that lenders often raise against this foreclosure defense argument).  Khalsa suggests that while such an affidavit may be considered as proof for this purpose, this document does not by itself resolve these matters (especially in the face of conflicting and missing documents).

A copy of  Khalsa v. Sovereign Bank is below.

14p1898