Mortgage Servicing Fraud
occurs post loan origination when mortgage servicers use false statements and book-keeping entries, fabricated assignments, forged signatures and utter counterfeit intangible Notes to take a homeowner's property and equity.
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I will say that I don't know or understand fully about buying and selling MBS so if I use the wrong terminology please forgive me.

The investors who bought the crap MBS are saying they were lied to and now they want their money back because they are claiming fraud.  They are starting to sue.  OK, if the investors have a case for fraud what about the homeowner who got the loan that the investors bought?  If that pool had a bunch of bad mortgages in them and it was proven to be the case, couldn't the homeowner claim the same?  Seems like it would have to be fraud all the way around, not just for the investor. 
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William A. Roper, Jr.
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mkd said:
If that pool had a bunch of bad mortgages in them and it was proven to be the case, couldn't the homeowner claim the same?  Seems like it would have to be fraud all the way around, not just for the investor.


The arguments are NOT symmetric for several reasons.  If there was Lender fraud in the origination of the loan, this might present the borrower/defendant with some valid affirmative defenses to raise in a judicial foreclosure.  But there are often several problems for the borrower.

First, there is a PROOF PROBLEM.  Very often, the origination fraud is going to relate to various false oral representations made by the Lender, Lender's employees and/or mortgage broker.  But they will have papered the file with documents which will generally give the appearance that it was the BORROWER making the false representations.  Moreover, the promissory note, mortgage, deed of trust or other mortgage security instrument and other paperwork executed at closing will UNIFORMLY state that the ONLY representations made are those appearing within the closing paperwork and that the written documents supercede any prior oral representations.

Time also works in favor of the plaintiff, as memories tend to fade and witnesses, such as the persons participating in and orchestrating the fraud will be difficult to find.

Second, there is often a LIMITATIONS problem.  Many jurisdicitons have a statute of limitations relating to fraud and for loans made before the subprime crisis caused our financial collapse, the limitations period may have PASSED.  Notwithstanding, limitations sometimes TOLLS when a fraud is well concealed and the victim cannot have reasonably discovered it.  That is, limitations can, in some jurisdictions and circumstances, toll until the fraud is discovered or until the fraud SHOULD HAVE BEEN DISCOVERED.

Here, the perpetrators of the fraud will turn the tables on you and allege that the fraud was so blatant, obvious and brazen that the defendant OUGHT TO HAVE DISCOVERED IT or MUST HAVE DISCOVERED IT some time ago.  In short, they will assert that there fraud was so egregious that the discovery rule doesn't apply.

Third, the mortgage investor will interpose a holder in due course defense, asserting that it is merely a holder in due course and that any defenses relating to the origination need to be separately brought against the originating Lender, which is very often INSOLVENT and OUT OF BUSINESS.  Here, the mortgage servicers through their fraud and carelessness in foreclosure have left an interesting opening.  Very often the servicers are forging a mortgage assignment to use as evidence in support of the foreclosure.  This assignment purports to transfer the mortgage between the originating Lender and the mortgage investor which is the plaintiff in the case.

Generally, under the UCC, the holder in due course defense and immunity CANNOT BE ASSERTED when the the holder acquired the negotiable instrument AFTER DEFAULT.  So the assignment forgery can actually open the door to the assertion of the various fraud defenses against the mortgage investor!

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The discussion relating to investors suing to require repurchase by the originating Lender or the Servicer very often does NOT depend upon a showing of fraud.  The Lender typically makes certain representations and warranties to the purchasing mortgage investor, including the warranty that the loan is what it is represented to be.

Moreover, the pooling and servicing agreement includes express provisions relating to the delivery of the mortgage collateral.  If these provisions were NOT expressly followed and this resulted in losses, the mortgage investor may have a valid cause of action under the contract, even without a showing of fraud.

IF there was fraud in the origination and tbhis could be PROVEN, this would be yet another reason that the mortgage investor might be able to require repurchase by the originating Lender (if even still in business).  But with a lesser showing that the Lender failed to comply with the agreement of sale, the mortgage investor still might be able to put these mortgages back to the originator.     
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     The fraud against the investors was mainly caused by the fact that the
"mega bank" "ware house" lenders set up shill "correspondent lenders" to do
their dirty work for them and most of these correspondent lenders are out of
business.
      The "correspondent lenders" would use inflated appraisals to put subprime borrowers in an untenable position where default was assured.
Then they would sell the same Note, multiple times to different investors
in different "note pools". They did this by making "counterfeit color photo-
copies" and then destroying the "original" Note to hide the evidence of the
counterfeiting operation.
       Many investors are stuck with worthless Notes because they are counterfeits and will not pass muster as evidence in foreclosure court.
The homeowner needs to have a "forensic exam" done on the Note presented
to make sure it is real. My estimate based on about 80 cases I've worked
on is that about 50% of the time, the Note is a counterfeit so foreclosure is
not possible if the homeowner contests it. Unfortunately, many defendants
simply default by not contesting the suit.
       The servicers were in on the fraud because reserve accounts were set
up with some of the proceeds of the sale of the counterfeit Notes so that
monthly payments could be made to the "old" investors by funds paid into
the base of the Ponzi Pyramid by the "new" investors. The pyramid collapsed
in 2008 when many investors got wind of the fraud and stopped buying in.
Without the "new money" the "old investors" could not be paid when the
reserves ran out. This is where the government "bailout" came in, to prop
up the banking system temporarily. However, the crisis is still with us.
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connect the dots
mkd said:
If that pool had a bunch of bad mortgages in them and it was pr oven to be the case, couldn't the homeowner claim the same?  Seems like it would have to be fraud all the way around, not just for the investor.
The investors are relying on the representations and warranties laid out in the GSE Guidelines which are proffered to congress in exchange for the government guarantee of the MBSs.

Congress in their duty to protect their constituents (both borrowers and investors as well as the taxpayers) by insisting on this boilerplate language to protect the safety and soundness issues inherent in the mischievous conduct by the various players in the GSE Business Model.

Suggest that MKD write his congresspeople and remind them that what is good for the goose is good for the gander. This is not a free house, rather, a GSE Business Model contractor performing according to contract, the language of which and the protections therein was proffered to congress to protect non parties like taxpayers and borrowers, including MKD and others similarly situated.
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