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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Ginger
Neil posted a helpful list of legal commentary today, and this is part of it:

... Under the PSA the servicer is required to keep paying the creditor even if the borrower stops. There is no default. There is potentially a claim by the servicer against the homeowner for unjust enrichment but it certainly isn’t secured.

I sent a QWR to my servicer, which only produced a copy of the closing package and a loan application (showing rental income altered without authorization), and a history of payment activity. The pages were copies that showed fax information at the top edge. However, on the history of payments, I noticed a "lender adjustment." Do any of you know what that indicated?

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I must respectfully disagree with the theory that if the servicer pays the investor then the loan is not in default.  Not so.

If the borrower is in default, pursuant to the terms of the note, then the borrower is in default, period.  Technically the PSA requires that the servicer make advance payments to the investors.  In effect the servicer is advancing the borrowers missed payments to the investor.

Think of it this way - if the roof blew off the house and the homeowner borrowed money to replace the roof while waiting for the insurance company's check to arrive,  could the insurance company take the position that they do not owe the homeowner anything because the new roof is on and paid for?

 
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Brindy
Interesting thread.

One thing I have not been able to get my arms around is how long a servicer needs to make payments to the Investor upon default of the borrower.  Obviously there comes a point where the credit default swap is triggered but I can't connect the dots.

Anyone know?



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Ginger
Good food for thought, Way to Go.

I thought it was a helpful statement as it related to other comments Neil has published online. For instance, as I understood Neil to say in a YouTube video, the borrower executed the note with a party who wasn't the lender in fact. Rather, the originating lender was a mere "fee catcher" who passed the paperwork, or a copy of it, on to the MERS system with the note indorsed in blank. According to the video, the entity that was called the lender at closing had already executed an assumption agreement with the real lender for many loans it had yet to originate. If that is the case, then this happened before the borrower showed up to sign the note.

Maybe I misunderstood this.

Comments welcomed. I'm searching for facts, as I'm facing foreclosure soon. I'm hanging on by a thread now.

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William A. Roper, Jr.
Ginger:

Way To Go's analysis is correct.  The servicer's obligation to make the continuing payments to the mortgage trust under the PSA in no way relieves the borrower of its obligations under the note and mortgage, deed of trust or other security instrument.

The PSA is a separate instrument to which the borrower is not a party.

What the PSA essentially furnishes to the mortgage investor is a payment guaranty.

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Another way of thinking about the issue relates to the rights of the parties generally where another person has guaranteed an obligation as a guarantor generally.  And one should probably distinguish between the common implicit guaranty which arises when one obtains a co-maker of an obligation, because in that instance the co-maker is, in fact, a principal obligor, not truly a guarantor.

A guaranty can arise in several ways, traditionally, through indorsement of the instrument, or by a separate written instrument in which the guarantor undertakes to guaranty the obligation as additional inducement for the making of the loan.

What happens when the borrower defaults and the creditor looks to the guarantor for payment?

The payment by the guarantor does NOT usually discharge the obligation.  Rather, it vests in the guarantor the right to the debt through the concept of subrogation.  This concept is centuries old and perhaps millenia.

Here is how subrogation is described within Bouvier's Law Dictionary in 1854:
SUBROGATION, civil law, contracts. The act of putting by a transfer, a person in the place of another, or a thing in the place of another thing. It is the substitution (q. v.) of a new for an old creditor, and the succession to his rights, which is called subrogation; transfusio unius creditoris in alium. It is precisely the reverse of delegation. (q. v.)

2. There are three kinds of subrogation:  1. That made by the owner of a thing of his own free will; example, when be voluntarily assigns it.  2. That which arises in consequence of the law, even without the consent of the owner; example, when a man pays a debt which could not be properly called his own, but which nevertheless it was his interest to pay, or which he might have been compelled to pay for another, the law subrogates him to all the rights of the creditor. Vide 2 Binn. Rep. 382; White's L. C. in Eq.* 60-72.  3. That which arises by the act of law joined to the act of the debtor; as, when the debtor borrows money expressly to pay off his debt, and with the intention of substituting the lender in the place of the old creditor. 7 Toull. liv. 3, t. 3, c. 5, sect. 1, §2. Vide Civ. Code of Louisiana, art. 2155 to 2158; Merl. Repert. h. t.; Dig. lib. 20; Code, lib. 8, t. 18 et 19 9 Watts. R. 451; 6 Watts & Serg. 190; 2 Bouv. Inst. n. 1413.

http://www.constitution.org/bouv/bouvier_s.htm
This is a common sense and just result.  The guarantor rarely intends to make a gift of the principal amount or amount outstanding to the debtor fully discharging the debtor's obligation, though a guarantor is free to unilaterally do so if the guarantor chooses.

When the guarantor is called upon to honor the guaranty, the guarantor is therefore usually subrograted as to the rights of the creditor in the debt.

Where, as with the PSA, the guaranty is one of payment, with the advance of each defaulted payment to the mortgage investor, the servicer would usually be entitled to repayment of that amount from the proceeds of foreclosure (presuming that the mortgage investor validly owns the debt and is entitled to such foreclosure). 

Although the PSA does NOT usually require the servicer to pay the mortgage investor the outstanding balance in advance of the completion of the foreclosure transaction, in the limiting case, it is rather clear that through subrogation, if the servicer did so, it would usually be entitled to step into the mortgage investor's shoes and to enforce the obligation against a debtor.  So the effect of honoring the guaranty is not one of discharge of the obligation, but rather one of subrogation of the right to the debt.

It might be here noted that if the servicer had, in fact, advanced the funds in full to the mortgage investor, the mortgage investor would be made whole and the servicer would be fully subrogated as to the debt.  In such an instance, there could be a valid standing argument raised if the foreclosure suit was brought in the name of the mortgage investor rather than the servicer, because with payment in full the mortgage investor would cease to have an economic interest in the loan!  As a practical matter, this never happens, as such, though an originator can be required to repurchase a loan when the original representations and warranties made by the originator as seller are found to be false.

There are several other gurantees and backstops involved in the secondary mortgage market and the securitization of mortgage debt.  These include the guarantee of the mortgage debt by the GSEs (Fannie Mae and Freddie Mac), direct primary mortgage insurance by the FHA and primary mortgage insurers, and pool mortgage insurance by private mortgage insurers and financial guarantors.

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Brindy said:
One thing I have not been able to get my arms around is how long a servicer needs to make payments to the Investor upon default of the borrower.  Obviously there comes a point where the credit default swap is triggered but I can't connect the dots.


Credit default swaps were not typically used as a form of credit support for the default of individual mortgage loans.  Rather, these furnished a means of betting for or against the solvency of particular Residential Mortgage Backed Securities (RMBS) issues.  So there would almost never be a case where a borrower default of a particular mortgage triggered a payment through a credit default swap to make the servicer or mortgage investor whole.

It should also probably be mentioned that credit default swaps are essentially side bets rather than guarantees.  Imagine that you and a friend are watching a Texas Holdem Poker tournament live and you and your friend enter into a side bet as to the outcome of a particular hand or as to the disposition of particular contest players.  While the players are betting against one another and are faced with choices as to raising or folding, your side bets do not affect the rights or obligations of the contestants, the play of the tournament or the disposition of the tournament bets.

While it is true that a player could conceptually make a side wager with other non-players on the outcome of the hand or game, such a wager like that amongst spectators is exogenous to the game itself. 


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William A. Roper, Jr.
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Ginger said:
I thought it was a helpful statement as it related to other comments Neil has published online. For instance, as I understood Neil to say in a YouTube video, the borrower executed the note with a party who wasn't the lender in fact. Rather, the originating lender was a mere "fee catcher" who passed the paperwork, or a copy of it, on to the MERS system with the note indorsed in blank.


Although no doubt something has been lost or garbled in the retelling, Neil GARFIELD's understanding of commercial law and mortgage finance is rather wanting.  I wouldn't waste any time at his site.
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Sinking Ships
Brindy,

A piece of the puzzle that you may be looking for may be hiding here:

The Title I Program
p. 113
 
General. If so specified in the related prospectus supplement, all or a specified percentage of the loans contained in a trust fund may be loans insured under the Title I Program, which is formally known as the FHA Title I Credit Insurance Program created pursuant to Sections 1 and 2(a) of the National Housing Act of 1934. For any series of securities backed by loans that are insured under the Title I Program, the related trust fund will be assigned the benefits of the credit enhancement provided to the holders of the loans under the Title I Program. The following describes the material terms of the Title I Programs with respect to the benefits security holders will receive and the limitations to which they will be subject should the trust fund hold loans insured under the Title I Program. 
 
Under the Title I Program, the FHA is authorized and empowered to insure qualified lending institutions against losses on eligible loans. The Title I Program operates as a coinsurance program in which the FHA insures up to 90% of specified losses incurred on an individual insured loan, including the unpaid principal balance of the loan, but only to the extent of the insurance coverage available in the lender's FHA insurance coverage reserve account.
 
The owner of the loan bears the uninsured loss on each loan.
 
Claims Procedures Under Title I. 
p. 116
 
Under the Title I Program, the lender may accelerate an insured loan following a default on that loan only after the lender or its agent has contacted the borrower in a face-to-face meeting or by telephone to discuss the reasons for the default and to seek its cure. If the borrower does not cure the default or agree to a modification agreement or repayment plan, the lender will notify the borrower in writing that, unless within 30 days the default is cured or the borrower enters into a modification agreement or repayment plan, the loan will be accelerated and that, if the default persists, the lender will report the default to an appropriate credit agency. The lender may rescind the acceleration of maturity after full payment is due and reinstate the loan only if the borrower brings the loan current, executes a modification agreement or agrees to an acceptable repayment plan. 

Under the Title I Program the amount of an FHA insurance claim payment, when made, is equal to the claimable amount, up to the amount of insurance coverage in the lender's insurance coverage reserve account. The claimable amount is equal to 90% of the sum of: 

• the unpaid loan obligation, net unpaid principal and the uncollected interest earned to the date of default, with adjustments to the unpaid loan obligation if the lender has proceeded against property securing that loan; 
• the interest on the unpaid amount of the loan obligation from the date of default to the date of the claim's initial submission for payment plus 15 calendar days, but not to exceed 9 months from the date of default, calculated at the rate of 7% per annum;
• the uncollected court costs;
• the attorney's fees not to exceed $500; and
• the expenses for recording the assignment of the security to the United States.
 
 

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I think the argument about subrogration would be true in a normal situation of civil law, but the concept of securitization muddied the waters completely!  This isn't a normal time anymore, the playing field has changed somewhat.

The Plaintiff in most of these cases are the trusts, and their lawsuit is for equity relief for default from lack of payments.  So if those payments were indeed made to the trust, them their affidavit for amount owed is fabricated and fradulent.  If funds were fronted by the servicer, I dont feel they are going to be looked out as a guarantor but I would have to go back and re-read the PSA again.

I feel that the funds fronted by the servicer are owed by the borrower, but they are unsecured and will have procured by them.  But this is all my honest opinion.
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William A. Roper, Jr.
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Angelo said:
I think the argument about subrogration would be true in a normal situation of civil law, but the concept of securitization muddied the waters completely!  This isn't a normal time anymore, the playing field has changed somewhat.


As the Ibanez decision makes abundantly clear, securitization business practices DO NOT ALTER THE LAW.  Some of the MERS decisions also clarify this.  That is, the argument that "we do it this way therefore the law should recognize OUR WAY" is NOT the American Way.

While subrogation is more of a concept in respect of loans, it is interesting to note that a similar concept occurs routinely in the property and casualty insurance industry all the time.

In a typical auto insurance case, the insurer pays the insured's claim and then steps into the insured's shoes acquiring the insured rights and causes of action in respect of a particular accident.

Precisely how this works varies from place to place, particularly in respect of no fault laws.  In a classic case, if your vehicle is damaged and you are injured as a consequence of another person's tortious operation of the vehicle (the other person is at fault), then you might accept a settlement from YOUR insurer which will then have the right to proceed against the other driver's insurer.  Your acceptance of your insurer's settlement does NOT absolve the other party of its responsibility for the accident.

There are actually some interesting standing examples identified within the decisions cited by the Kentucky Court of Appeals in the Augenstein v. Deutsche Bank case.

The idea that a guarantor's or an insurer's payment might absolve someone of liability for their breach or default has no foundation whatsoever in the law.
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I have been researching this theory about the Servicer advancing these payments to the creditor. I can't find any case law on this. Can someone give me Neil's last name. Maybe I can read up on some of his information. This would be so helpful. Thank you!
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