The US BANK-BOA-LaSalle-CitiGroup Shell Game

What a shell game this is.. Many thanks to Neil for his undying efforts to save us.

The US BANK-BOA-LaSalle-CitiGroup Shell Game

by Neil Garfield

'The bottom line is that the notice of substitution of Plaintiff in judicial states, or notice of substitution of Trustee in non-judicial states should be the first line of battle. Neither one of them is valid and in both cases you have a stranger to the transaction being allowed to name itself as creditor, name its own controlled entity or subsidiary as trustee, and then ignore the realities of the money paid to the real creditor. They are claiming damages from the borrower --- all for a debt that in the ordinary course of things has already been paid several times over. But it is true that it wasn't paid to THEM because THEY were never and are not now the creditor fulfilling the definition of a creditor who could bid at the foreclosure auction. It is not that the borrower doesn't owe money when he borrows it, it is that he doesn't owe it to any of the people who are claiming it. And that is what gives rise to liability of law firms to borrowers." Neil F Garfield, http://www.livinglies.me

If our information can be corroborated through discovery with a corporate representative of US BANK or Chase Bank as the servicer, it is possible that a solid cause of action can be filed against the law firm that brought the action, particularly if the law firm took its instructions from the Desktop system of LPS.

In that system law firms are instructed to file foreclosures without contact with the actual client. We saw several cases where sanctions were levied against lawyers and their alleged clients, but none so stark as the one in Florida where the lawyer for US Bank as Trustee for XXX, when faced with questions he couldn't answer admitted that he had never spoken with anyone from U.S> Bank and didn't know who had retained his firm.

The law firm that brought the foreclosure action and especially the law firm that is demanding an assignment of rent to protect a creditor who has already been paid through non stop servicer advances was most likely not authorized to demand the assignment of rents which might be why there was no written demand as required by statute. I am considering the possibility of an actual lawsuit against one such law firm for interference with contract on both the foreclosure and the assignment of rents issue.

The Banks are being very cagey about this system --- one which they would never use for their own portfolio loans, which begs the question of why they would have two entirely different system of accounting and legal process. But the long and the short of it is that LPS in Jacksonville, Florida is used much the same way as MERS. It maintains a database service that requires a user name and password and that gives unlimited access to the client folders. Anyone can go in and authorize the foreclosure based upon a default that is invested by the person entering the data. They leave out any servicer advances or other third party payments and arrive at an amount to reinstate that is just plain wrong. So virtually all notices of default are wrong which means that the required notice is defective.

You should know that many judges appear unimpressed that there was no valid assignment of the mortgage. I think that it is clearly reversible error. The assignment frequently is clearly fabricated and back-dated because of references to events that happened a year after the assignment was executed. The assignment clearly did not exist at the time of the lawsuit and the standing issue is clear under Florida law although some courts are balking at the idea that standing cannot be cured after the lawsuit. The reasoning is quite simple --- if it were otherwise, you could file suit against a grocery store for a slip and fall, and the go over to the store to have your slip and fall.

In one of my cases involving multiple properties, they have an assignment that was prepared and executed by Shapiro and Fishman supposedly dated in 2007 ---- but it refers to Bank of America as successor by merger to LaSalle. it is backdated, fabricated and fictional, which is to say, fraudulent.

The assignment has two problems --- FACIALLY DEFECTIVE FABRICATION OF ASSIGNMENT:  the first problem is that the alleged BOA merger with LaSalle could not have happened before 2008 --- one year after the assignment was executed. So the 2007 assignment refers to a future event that was not reported by BOA until 2008, and was not approved by the Federal Reserve until 2008. On its face, then, based upon public record, the assignment is void as a total fabrication.

The second problem is that it is unclear as to how the merger could have occurred between BOA and La Salle, to wit:. you might need to read this a few times to understand the complexity of the issues involved --- issues that few judges or lawyers are interested enough to master.

LASALLE ABN AMRO ACQUISITION: Since neither entity vanished in the deal it is an acquisition and not a merger. LaSalle and ABN AMRO did a reverse merger in 2007.

That means that while LASalle was technically the acquirer, because it "bought" ABN AMRO, and ABN AMRO became a subsidiary --- the reality is that LaSalle issued so many shares for the acquisition of ABN AMRO that the ABN AMRO shareholders received the overwhelming majority of LaSalle Shares compared to the former owners of LaSalle shares.

Hence in substance LaSalle Bank was a subsidiary of ABN AMRO and the consolidated financial statements show it. But in form it appears as the parent.

So if someone, like BOA, was to say they merged with or acquired LaSalle, they would also be saying that included its subsidiary ABN AMRO --- and they would have to do the deal with the shareholders of ABN AMRO because those shareholders control LaSalle Bank, which brings us to CitiGroup ----

CITIGROUP MERGER WITH ABN AMRO: Also in 2007, CitiGroup announced and continues to file sworn statements with the SEC that it had merged with ABN AMRO, which means, if you followed the above, that CitiGroup actually owned LaSalle. It looks more like an acquisition than a merger to me but the wording makes it unclear. This would mean that LaSalle still technically exists as a subsidiary of  CitiGroup.

ALLEGED BOA MERGER WITH LASALLE: In 2008 the Federal Reserve issued an order approving the merger of BOA and LaSalle, in which case LaSalle vanishes --- but ABN AMRO is the one with all the assets. BUT LaSalle is named as Trustee of the asset pool. And the only other allowable trustee would be another bank that merged with LaSalle as a successor without the requirement of filing more papers to be a Trustee and BOA clearly qualifies on all counts for that. Section 8.09 of PSA.

But the Federal Reserve order states that the identities of ABN AMRO and LaSalle are the same and the acquisition of one is the acquisition of the other --- thus unintentionally ratifying CitiGroup's apparent position that it owns ABN AMRO and thus LaSalle.

Findings of fact by an administrative agency are presumptively true although subject to rebuttal.

Here is the kicker: there is no further mention in any SEC filings of a merger between BOA and LaSalle, unless I missed it. There is no reference to the fact that CitiGroup controlled LaSalle and ABN AMRO at the time of the Federal Reserve order approving the BOA merger with LaSalle Bank in 2008.

CitiGroup has not, to my knowledge ever reported the sale or loss or merger of LaSalle. Since Citi made the acquisition before BOA, and since BOA apparently did not buy LaSalle from Citi, how could BOA claim to be a successor by merger with LaSalle?

Hence there are questions of fact as to whether BOA ever consummated any transaction in which it acquired or Merged with LaSalle, which while technically possible, makes no business sense. UNLESS the OBJECTIVE was to transfer the interest of LaSalle as trustee to BOA, as a precursor to a much wider deal in which BOA then sold its position as Trustee to US Bank as a  commodity and then filed in the Kalam cases a notice of substitution of Plaintiff without amending the pleadings.

US BANK Notice of Substitution of Plaintiff without Any Motion to Amend Pleadings: The reason they filed it as a notice was that they obviously did not want to allege the purchase of "being a trustee", which would have been a contested issue in the pleadings. But the amendment is required in my opinion and there should be a motion to strike the notice of substitution of Plaintiff without amendment. The motion to strike should state that no objection to granting the order to amend, but that the circumstances should be pled and we should be able to respond with a denial and affirmative defenses if you choose.

Fannie and Freddie Demand $6 Billion for Sale of “Faulty Mortgage Bonds”

Posted on October 21, 2013 by Neil Garfield

You read the news on one settlement after another, it sounds like the pound of flesh is being exacted from the culprits again and again. This time the FHFA, as owner of Fannie and Freddie, is going for a settlement with Bank of America for sale of “faulty mortgage bonds.” And most people sit back and think that justice is being done. It isn’t. $6 Billion is window dressing on a liability that is at least 100 times that amount. And stock analysts take comfort that the legal problems for the banks has basically been discounted already. It hasn’t.
For practitioners who defend mortgage foreclosures, you must dig a little deeper. The term “faulty mortgage bonds” is a euphemism. Look at the complaints there filed. When they are filed by agencies it means that after investigation they have arrived at the conclusion that something was. very wrong with the sale of mortgage bonds. That is an administrative finding that concluded there was at least probable cause for finding that the mortgage bonds were defective and potentially were criminal.
So what does “defective” or “faulty” mean? Neither the media nor the press releases from the agencies or the banks tell us what was wrong with the bonds. But if you look at the complaints of the agencies, they tell you what they mean. If you look at the investor lawsuits you see that they are alleging that the notes and mortgages were “unenforceable.” Both the agencies and the investors filed complaints alleging that the mortgage bonds were a farce, sham or in other words, a PONZI Scheme.
Why is that important to foreclosure defense? Digging deeper you will find what I have been reporting on this blog. The investors money was not used to fund the REMIC trusts. The unfunded trusts never had the money to buy or fund the origination of bonds. The notes and mortgages were never sold to the Trusts even though “assignments” were executed and shown in court. The assignments themselves were either backdated or violated the 90 day cutoff that under applicable law (the laws of the State of New York) are VOID and not voidable.
What to do? File Freedom of Information Act requests for the findings, allegations and names of investigators for the agency that were involved in the agency action. Take their deposition. Get documents. Find put what mortgages were looked at and which bond series were involved. Get a list of the mortgages and the bonds that were examined. Get the findings on each mortgage and each mortgage bond. Use the the investor allegations as lender admissions admissions in court — that the notes and mortgages are unenforceable.
There is a disconnect between what is going on at the top of the sham securitization chain and what went on in sham mortgage originations and sham sales of loans. They never happened in the real world, no matter how much paper you throw at it.
And that just doesn’t apply to mortgages in default — it applies to all mortgages, which is why all the mortgages that currently exist, and most of the deeds that show ownership of the property have clouded and probably “defective” and “faulty” titles. It’s clear logic that the government and the banks are seeking to avoid, to wit: that if the way in which the money was raised to fund the loans or purchase the loans were defective, then it follows that there are defects in the chain of title and the money trail that were obviously not disclosed, as per the requirements of TILA and Reg Z.
And when you keep digging in discovery you will find out that your client has some clear remedies to collect the profits and compensation paid to undisclosed recipients arising out of the closing of the “loan.” These are offsets to the amount claimed as due. If the loan was not funded by the Trust, then the false paper trail used by the banks in foreclosure is subject to successful attack. If the loans were in fact funded directly by the trust complying with the REMIC provisions of the Internal Revenue Code, then the payee on the note and the mortgagee on the mortgage would be the trust — or if the loan was actually purchased, the Trust would have issued money to the seller (something that never happened).
And lastly, for now, let us look at the capital structure of these banks. A substantial portion of their capital derives from assets in the form of mortgage bonds. This is the most blatant lie of all of them. No underwriter buys the securities issued by the company seeking financing through an offering to investors. It is an oxymoron. The whole purpose of the underwriter was to create securities that would be appealing to investors. The securities are only issued when you have a buyer for them, and then the investor is the owner of the security — in this case mortgage bonds.
The bonds are not issued to the investment bank as an asset of the investment bank. But they ARE issued to the investment bank in “street name.” That is merely to facilitate trading and delivery of certificates which in most cases in the mortgage bond market don’t exist. The issuance in street name does not mean the banks own the mortgage bonds any more than when you a stock and the title is issued in street name mean that you have loaned or gifted the investment to the investment bank.
If you follow the logic of the investment bank then the deposits of money by depository customers could be claimed as assets — without the required entry in the liabilities section of the balance sheet because every dollar on deposit is a liability to pay those monies on demand, which is why checking accounts are referred to as demand deposits.
Hence the “asset” has been entered on the investment bank balance sheet without the corresponding liability on the other side of their balance sheet. And THAT remains that under cover of Federal Reserve purchase of these bonds from the banks, who don’t own the bonds, the value of the bonds is 100 cents on the dollar and the owner is the bank — a living lies fundamental. When the illusion collapses, the banks are coming down with it. You can only go so far lying to the public and the investment community. Eventually the reality is these banks are underfunded, under capitalized and still being propped up by quantitative easing disguised as the purchase of mortgage bonds at the rate of $85 Billion per month.
We need to be preparing for the collapse of the illusion and get the other financial institutions — 7,000 community and regional banks and credit unions — ready to take on the changes caused by the absence of the so-called major banks who are really fictitious entities without a foundation related to economic reality. The backbone is already available — electronic funds transfer is as available to the smallest bank as it is to the largest. It is an outright lie that we need the TBTF banks. They have failed and cannot recover because of the enormity of the lies they told the world. It’s over.

VICTORY for Homeowners: Received Title and 7 Figure Monetary Damages for Wrongful Foreclosure

Victory in California, as we have predicted for years. Maria L. Hutkin and Jude J Basile were the attorneys for the homeowners and obviously did a fine job of exposing the truth. Their tenacity and perseverance paid off big time for their clients and themselves. They showed it is not over until the truth comes out. So for all of you who are saying you can’t find a lawyer who “gets it” here are two lawyers that got it and won. And for all those who were screwed by the banks, it isn’t over. Now it is your turn to get the rights and damages you deserve.

Maria L. Hutkin and Jude J. Basile

Maria L. Hutkin and Jude J. Basile

The homeowners won flat out at a trial — something that should have happened in most of the 6.6 million Foreclosures conducted thus far. U.S. Bank showed its ugly head again as the alleged Trustee of a trust that was most probably nonexistent, unfunded and without any assets at all much less the homeowners alleged loan. Still the settlement shows how far Wall Street will go to pay damages rather than admit their liability to investors, insurers, counterparties in credit default swaps, and the Federal Reserve.
When you think of the hundreds of millions of wrongful foreclosures that were the subject of tens of billions of dollars in “settlements” that preserved homeowners rights to pursue further damages and do the math, it is obvious why even the total of all the “settlements” and fines were a tiny fraction of the total liability owed to pension funds and other investors, insurers, CDS parties, the Federal Government and of course the borrowers who never received a single loan from the banks in the first place. If 5 million foreclosures were wrongful, as is widely suspected at a minimum, using this case and some others I know about the damages could well exceed $5 Trillion. Simple math. Maybe that will wake up the good trial lawyers who think there is no case!

Maria L. Hutkin and Jude J. Basile

A fitting announcement on the 5th anniversary of the Lehman Brothers collapse. the economy is still struggling as more than 15 million American PEOPLE were displaced, lost equity and forced into bankruptcy by imperfect mortgages that were a sham, and thus imperfect foreclosures that were also a sham. Another 15 million PEOPLE will be displaced if these wrongful, illegal and morally corrupt sham foreclosures are allowed to continue.
This case, like the recent case won by Danielle Kelley (partner of GGKW) was based upon dual tracking. In Kelley’s case the homeowners had completed the process of getting an approved modification, which meant that underwriting, review, confirmation of data, and approval from the investor had been obtained. In Kelley’s case the homeowner had made the trial payments in full and paid the taxes, insurance, utilities and maintenance of the property.

The Bank argued they were under no obligation to fulfill the final step — permanent modification. Kelley argued that a new contract was formed — offer, acceptance and the consideration of payment that the Bank received, kept and credited to the homeowner’s account. But the bank as Servicer was still accruing the payments due on the unmodified mortgage, which is why I have been harping on the topic of discovery on the money trail at origination, processing, and third party payments. 

The accounting records of the subservicer and the Master Servicer should lead you to all actual transactions in which money exchanged hands, although getting to insurance payments and proceeds of credit default swaps might require discovery from the investment banker. So in Kelley’s case, the Judge essentially said that if an agreement was reached and the homeowner met the requirements of a trial period, the deal was done and entered a final order in favor of the homeowner eliminating the the foreclosure with prejudice.

In this One West case the court went a little further. The homeowners were lured into negotiations, expenses and augments under the promise of modification and then summarily without notice to the homeowner sold the property at a Trustee sale under the provisions of the deed of trust. The Judge agreed with counsel for the homeowners that this was dual tracking at its worst, and that the bank did not have the option of proceeding with the sale. 

The homeowners were forced to vacate the property and make other housing arrangements and these particular homeowners were enraged and had the resources to do what most homeowners are too fearful to do — go to the mat (go to trial.)

One West made several offers of settlement once the Judge made it clear that the homeowners had stated a cause of action for wrongful foreclosure. Bravely the attorneys and the homeowners rejected settlement and insisted on a complete airing of their grievances so that everyone would know what happened to them. After multiple offers, with trial drawing near, OneWest finally agreed to give clear title back to the homeowners and pay $1 million+ in damages on what was a six figure loan. 

We now have cases in both judicial and non-judicial jurisdictions in which the homeowner was awarded the house without encumbrance of a mortgage and even receiving monetary damages in which the attorneys achieved substantial rewards on 7 figure settlements  that probably would be much higher if they ever went to trial — particularly in front of a jury. This is only one of the paths to successful foreclosure defense. I hope attorneys and homeowners take note. Your anger can be channeled into a constructive path if the lawyers know how to understand these loans, and how to litigate them.

“There’s hope. I feel their pain.” — Danielle Kelley, Esq. , partner in Garfield, Gwaltney, Kelley and White.

http://calcoastnews.com/2013/09/onewest-bank-pays-7-figures-mortgage-fraud-case/

HAS FORECLOSURE DEFENSE BECOME A TERROR THREAT?

WHO IS TERRIFIED HERE?

This is a story about abuse of power or abuse of apparent power. The object is to cover-up crimes that remain largely undetected because the complex maze created by the "Thirteen Banks."The stakes could not be higher. Either the current major Banks will be sustained or they will come crashing down with a feeding frenzy on a carcass of a predator that stole tens of trillions of dollars from multiple countries, hundreds of millions of people, and millions of homes across the world that should, by all accounts under the Law, still belong to the owner who was displaced by foreclosure. The banks are willing to do anything and they are paying outsize fees and other legal expenses (topping $100 Billion now).

The agents involved --- Mike Lum from Homeland Security, Tim Hines, FBI Agent, and Sean Locksa, FBI agent --- were either moonlighting (the agents say they were acting in their official capacity) and using their badges in appropriately or they were sent to intimidate litigants with Bank of America represented by McCarthy Holthus and Levine. A few years back, I received reports that the law firm, and in particular attorney Levine, had sent letters to local prosecutors to request action against people who were defending their property from foreclosure. The agents admitted to Blomberg today that they received a "tip" and that "it" was "no longer" a criminal manner and that they had ended their investigation.

In one prior case I saw a letter and I believe I might have seen an affidavit signed by Levine. The result was a series of indictments against one individual that were later dismissed. I have no information on the other cases all dating back to around 2010. I know one of the people, the one who I know was indicted, spent the last bit of her money hiring a criminal attorney to defend her. The case was "settled with a dismissal." She subsequently lost two homes that were previously unencumbered in a foreclosure where different parties stepped in to foreclose than the ones who asked for lift stay in her bankruptcy. None of the parties were creditors or properly identified.

I now believe I have enough information to connect the dots, and raise the question as to whether members of local, federal and state law enforcement are colluding (or are being wrongfully used by the suggestion of false information) with Bank of America and at least one law firm --- McCarthy Holthus and Levine --- in which litigants and perhaps witnesses are intimidated into submission to wrongful foreclosures. The information contained in this article relates primarily to Arizona and to a lesser degree, California. I have no information on any other such activity in any other state of the union.

It also appears as though Bank of America and McCarthy Holthus and Levine were taking advantage of some sloppiness at the Post Office, for which the Postmaster in Simi Valley has apologized and sent a refund to the complainant, Darrell Blomberg whose story can be read below. The interesting thing here is that Blomberg reports that McCarthy Holthus and Levine directly received a letter that was addressed to Celia Mora, a suspected robo signor who apparently lives in Simi Valley, according to the post office, but whose mail bears a San Diego postmark.

The joint terrorism task force supposedly represented by the three men identified above, will not answer calls relating to this matter. Thus we only have Blomberg's report and my own information and analysis --- and of course public record. We do have a callback received today by Blomberg who reports that the agents answered a limited number of questions.

The information contained in this report is substantially corroborated by another source who, like Blomberg I consider to have the highest integrity and who was also visited this past week by the same agents who visited Blomberg. Since no specific act was alleged in the interviews except the perfectly legal request to the post office to confirm an address of a potential witness and test mailings to see who was receiving the mailings, it is hard to conclude anything other than that these agents were being used officially or unofficially to intimidate litigants who have been successful at defending their homes in foreclosure for years, and to intimidate them into ceasing their factual and investigative help to other homeowners who are also being wrongfully foreclosed.

If these interviews were sanctioned by the terrorism task force, the FBI or Homeland security it clearly represents the use of Federal law enforcement authority for the benefit of gaining a civil advantage --- a crime in most jurisdictions. How high the orders went in those organization I do not know. If there were no such orders and these agents were doing a "favor" then they are subject to discipline for misuse of their badge and deliberately misleading the persons interviewed into thinking that this was an official investigation. The agencies involved might be negligent in supervising the activity of these agents. Neither of the sources for this story have any mark on their record except the mark of distinction --- one having worked for decades in law enforcement in economic crimes.

Was Darrel Blomberg getting too close to the truth?

In litigation, one of the points raised by Blomberg was that Celia Mora --- allegedly signed an affidavit perhaps by herself and perhaps as a robo signor. The issue of forgery didn't come up. There was a San Diego post mark same day as the affidavit was allegedly signed 160 miles away. Blomberg's position was Mora had no actual authority no actual executive position or managerial position, and signed clerically under instruction without knowledge of the contents. That is it. The fact that McCarthy Holthus and Levine actually received the letter addressed to Mora through normal postal service leads one to believe that the affidavit may have been created at the law firm and perhaps even signed there in Arizona. Hence any criminal behavior suggested was not the work of Blomberg but could have been the work of the law firm or Bank of America. To my knowledge there is no investigation pending relating to the use of the mails, false documents, improper signatures, lack of authority or any of the issues presented by Blomberg.

From there it became a vague charge of harassment communicated by three Federal Agents. Harassment was the word used by the agents in the interview with Blomberg and the interview with my other source. But no specific act was stated even in passing as to what act would be investigated as harassment, no less a matter of national security. More telling, when the agents left both interviews, neither source was instructed or requested to stop any specific act. That leads to the question, if there was no conduct they sought to stop, why were they there at all?

Note that McCarthy Malthus and Levine has been replaced by the law firm of Bryan Cave since June, 2013 in Blomberg's case. Generally speaking Greg Iannelli, Esq. handles the more sensitive pieces of litigation that could blow the lid off of the fraudulent scheme of securitization.

Read Blomberg's account here ---> 2013-08-29, Unexpected Visit from the National Joint Terrorism Task Force

Background and analysis: Why do the banks continue to use low paid clerical workers to sign affidavits and other documents for which they obviously lack authority or knowledge? Why won't a true executive with true authority and actual personal knowledge based upon his or her own actual observation, investigation and analysis to make sure the foreclosure is proper as to the property, the persons, the balance due and the existence of a default --- especially with reference to the actual creditor's books of account?

Convenience doesn't cover it. With legal costs topping $100 Billion it would be impossible to pass the giggle test on any explanation of convenience when it comes to the paperwork. My conclusion is that it is worth getting embarrassed in court as long as the number of times is small enough that the overall scheme is not toppled. The use of clerical personnel to sign and approve documents relating to foreclosure is akin to allowing teller's decide whether you can have a loan on that new car or new house. It doesn't happen. If it doesn't happen when the "loan" goes out, then it is fair to assume that the same standards would apply when the loan turns bad and comes back in.

Think about it. The Banks are reporting record profits. U. S. Bank reported $42 Billion in just one quarter. They are attributing their profits to proprietary trading --- something I have attributed to laundering the illicit retention of funds that should have been used to pay investors the principal and accrued interest that was due on the promise of investment banks when they issued bogus mortgage bonds. That money was received by the Banks as agents for the investors and therefore, whether paid or not, is a credit against the account receivable owned by the investors.

The Glaski appellate attorneys gratuitously admitted that the true owner of the debts will never be known. Yet the true relationship between the homeowners and the lenders is regarded as known and enforceable. In short, the position of the Banks is that we don't know who this money belongs to but it must belong to someone so we are going to collect it and foreclose. We'll get back to you later on what we did with the money. The Banks are required to take that idiotic position because (a) it is still working in court and (b) they get to avoid liability to investors, guarantors, insurers, borrowers and government agencies that could exceed $10 trillion. So $100 Billion in legal expenses is only 1% of their exposure. It is easy to see how the Math works. If the legal expenses were a far more significant portion of the money the Banks were holding then they would find another way to deal with it. 

If the false trading and laundering of money was properly entered on the books as merely repatriating money that was hidden, the investors would be spared the losses that threaten our pensions and cities. It would also alleviate or eliminate the corresponding account payable due from homeowners, city budgets and other "borrowers" who were the unwitting pawns in a scheme to defraud investors. The collateral damage to all citizens, all taxpayers, all consumers, all workers and all homeowners has been obvious since 2007.

The extraordinary story is aggravated by the knowledge that the legal expenses of the Banks has now topped $100 Billion. Like I said, think about it. Nobody spends $100 Billion unless it is worth it. It is worth the price because of the amount of liability they are avoiding, and the amount of money they stole that went offshore. The amount of the theft can be estimated in a variety of ways, and the results are always the same. They siphoned trillions of dollars from many countries. In the U.S. alone it appears that the total was in excess of $17 Trillion, which is $3 Trillion MORE than the total amount of lending on residential "loans." Extrapolating the most recent profit report from U. S. Bank from a quarter (three months) to a year, that one Bank is reporting annual earnings from "proprietary" trading in excess of $160 Billion per year. That is one of 18 Banks that were involved in this crime against humanity. Do the math.

So the Banks retain money that they never legally earned at the expense of deceived investors, Cities and sovereign wealth funds AND at the expense of the "borrowers" in the "underlying" deals. And by not crediting the lenders, the corresponding reduction of the account payable from "Borrowers" is also absent. No consent for principal reduction is required because the balance has also been reduced or extinguished by payment. Follow the money trail and the results was astonish you. This is like organized crime with all the trimmings of governmental complicity.

Now I am reporting that based upon a pattern of conduct that appears particularly egregious in Arizona, this unholy alliance between the people who committed the wrongs and government is becoming apparent. Who would have imagined indictments and "investigations" of people litigating their cases against the Banks after the scale the crime became apparent in 2008-2009?

CAVEAT: The agents in the Blomberg interview insist they were acting in their official capacity and I take them at their word. My problem with that assumption is that it means the system is susceptible of manipulation by attorneys who have no problem playing dirty tricks to gain a civil advantage. Or, worse, it means that there are high level people in the system who are willing to look the other way when this behavior pops up.

By this point in the savings and loan scandal in the 1980's more than 800 bank presidents and loan officers, along with mortgage brokers and originators had been convicted by a jury and were serving their sentences. This time the tally is zero. But the reverse is not true. Mortgage brokers and originators and investors who played the system against itself have been investigated, prosecuted and sentenced to prison. And even homeowners have been accused of crimes that were identical to the crimes committed by Banks on a much larger scale. Steal a million, go to jail. Steal a Trillion and get immunity because the finance system might not survive removing the criminals from our society. No longer a nation of laws we have become a nation of men, corrupt men, who continue to accumulate wealth and power as they channel their illicit gains into reported Bank "profits" and control over world natural resources.

For about three years I have been investigating an unholy alliance between a law firm, McCarthy Holthus and Levine, Bank of America, U.S. Bank and law enforcement. It appears as though they have some special influence and that local, state and Federal law enforcement agents are acting as collectors and intimidators outside the boundaries of the law. Prosecutors have followed this line of attack against those pro se litigants who are getting close to the truth that the foreclosures --- all of them --- were bogus, if they were based upon mortgages and deeds of trust carrying claims of securitization, arising from Assignment and Assumption Agreements, Pooling and Servicing Agreements, and false prospectuses to investors.

The attached report from Darrel Blomberg, a person of unparalleled integrity, tells the story of agents from the FBI who (whether they realized it or not) are clearly acting at the behest and for the benefit of Bank of America, who was represented by McCarthy Holthus and Levine. In the past week, the agents have been visiting at least two people based upon a "harassment" allegation. The agents declared themselves to be part of a joint terrorism task force. The act of harassment was a request for confirmation of address and confirmation of address that ended up both in the offices of Bank of America and the office of McCarthy Holthus and Levine. It was addressed to the U.S. Postmaster who apologized for gaffes in processing the requests and even refunded money to Blomberg. No investigation has been threatened by the U.S. Postal inspector against either the Bank or the law firm. And none has been threatened against Blomberg.

Having a few pages of the attempt to get address of a robo signor whose signature appears to have been forged, these agents have interviewed two people in Arizona that have been known to provide factual assistance to other homeowners and whose own cases have been spread out over many years as the Bank continues to fail in its attempt to claim ownership or verify the balance of the debt. These agents identified themselves as having been dispatched from the FBI, Homeland security and the joint task force. Whether they were merely moonlighting or were in fact dispatched by their superiors, it is clear that no criminal matter was under investigation, and that their purpose was to intimidate two people who fortunately are not easily intimidated. Based upon my investigation it appears as though that law Firm, McCarthy, Holthus and Levine who is frequently replaced by Bryan Cave, has been doing dirty work for the banks through contacts in law enforcement.

It is happening and this should be stopped before it becomes a commonplace act throughout the country.

In the final analysis the issue of ownership of the loan is going to unravel this mess because it is only then that we can look at the books of account and see what money is owed on the original account receivable for the creditor/investor/REMIC.

The analysis of ownership does not merely look to the agreements the parties entered into because the label parties give to a transaction does not determine its character. See Helvering v. Lazarus & Co. 308 U.S. 252, 255 (1939). The analysis must examine the underlying economics and the attendant facts and circumstances to determine who owns the mortgage notes for tax purposes. See id. The court in In re Kemp documents in painful detail how Countrywide failed to transfer possession of a note to the pool backing a Mortgage Backed Security (MBS) so that Countrywide failed to comply with the requirements necessary for the mortgage to comply with the REMIC rules. See In re Kemp, 440 F.R. 624 (Bkrtcy D.N.J. 2010). Defendant in this case has done exactly what was adjudicated in Kemp, failure to sufficiently show a timely transfer that complied with the strict language of the trusts’ Agreements.

As the Kemp court notes, “[f]rom the maker's standpoint, it becomes essential to establish that the person who demands payment of a negotiable note, or to whom payment is made, is the duly qualified holder. Otherwise, the obligor is exposed to the risk of double payment, or at least to the expense of litigation incurred to prevent duplicative satisfaction of the instrument. These risks provide makers (Plaintiff in this case) with a recognizable interest in demanding proof of the chain of title” (specifically referring to the trust participants). 440 B.R. at 631 (quoting Adams v. Madison Realty & Dev., Inc., 853 F.2d 163, 168 (3d Cir. N.J. 1988). And because the originator did not comply with the legal niceties, the beneficial owner of the debt, the trustee, cannot file its proof of claim either.

Executive Accused of Mortgage-Securities Scheme – EVERYONE HAS BEEN PAID AT LEAST ONCE, 100 CENTS ON THE DOLLAR, PLUS FEES AND PROFITS. NOW THEY WANT YOUR HOUSE TOO. ARE YOU GOING TO LET THAT HAPPEN?

 

• The reasons why Wall Street was awash in money were (a) they were successfully selling unregulated securities under false pretenses and false ratings and (b) they pressured guys like Gordon to change the borrower information, who in turn pressured the mortgage brokers, all of whom pressured the “pretender lender” (the “bank” named as payee on the mortgage and as mortgagee or beneficiary under the mortgage or deed of trust respectively).
  
• Wall Street geniuses thought they keep “clean hands” by not doctoring the documents themselves.
  
• But the dictation of terms came from Wall Street and everything that Gordon and others did was at the behest of Wall Street.
  
• Thus the standard “market forces” were turned upside down, to wit: whereas once upon a time a mortgage broker or loan officer who turned in a lot of bad loans was out of a job, now he/she was out of a job if he/she didn’t fake loans, appraisals, mortgage terms, interest rates etc.
  
• The reason was, as usual, straight economics. If you can sell rotten apples for the same price as imported fresh apples you make a lot more money, because collecting up rotten apples is a lot cheaper than ordering good apples from a reliable vendor. You’re going great until someone sees or bites into the apple. So if someone says “let’s see the apples” you produce a certificate of freshness from a respected inspection service. But if they still insist on seeing the apples, what do you do? Why of course you get rid fo the apples by destroying or losing them.
• Hence 40% of the original notes were destroyed, another 40% were lost or doctored in some way, and the remaining notes, had conditions of insurance, overcollateralization, cross collateralization, reserves, insurance and Federal Bailouts.
• THIS IS WHY THE NOTE HAS BEEN PAID EVEN IF IT WASN’T PAID BY THE BORROWER. AND IT IS WHY THE FINANCIAL SERVICES INDUSTRY CANNOT COME TO COURT WITH A REAL HOLDER IN DUE COURSE. EVERYONE HAS BEEN PAID AT LEAST ONCE, 100 CENTS ON THE DOLLAR, PLUS FEES AND PROFITS. NOW THEY WANT YOUR HOUSE TOO. ARE YOU GOING TO LET THAT HAPPEN?
  

Executive Accused of Mortgage-Securities Scheme

By EVAN PEREZ

WASHINGTON — A financial executive used little more than a pen to alter credit scores and reclassify mobile homes as single-family houses, inflating the value of thousands of mortgages that were repackaged and sold to investors, prosecutors allege.
Federal prosecutors in Miami on Thursday charged Steven Gordon, 49 years old, a former partner at Bayview Financial LP, with one count of wire fraud, in one of the first cases highlighting investigators’ efforts to move beyond low-level mortgage schemes and delve into suspected fraud in the mortgage-securities business involving bigger financial firms.
Mr. Gordon, a former director of residential acquisitions at Bayview, made more than $2.8 million in additional commissions by altering the value of 2,800 loans from 2001 to 2006, according to documents filed by prosecutors in U.S. District Court in Miami.
Bayview said in a securities filing that after it discovered the fraud, it bought out or substituted potentially fraudulent loans valued at $66 million. It said there were no investor losses.
Mr. Gordon plans to plead guilty to the wire-fraud count, according to his lawyer. Prosecutors said Mr. Gordon is expected to turn himself in to federal authorities Monday. Mr. Gordon no longer works at Bayview, but his lawyer said he continues to work in the mortgage industry.
“I am appalled at how easy it was for him to do this,” U.S. Attorney R. Alexander Acosta said. “You would think there would be more due diligence.”
The case comes as Justice Department and Federal Bureau of Investigation officials push to determine the role fraud may have played in the inflation and subsequent collapse of sophisticated mortgage-backed securities, which have deepened the turmoil facing Wall Street firms.
The case against Mr. Gordon offers a snapshot of the ease with which some mortgage-backed securities became tainted.
Federal investigators say Mr. Gordon reviewed portfolios of Bayview loans and plucked out certain mortgages that he wanted to make more valuable before securitization. On some, he simply used a pen to increase the credit scores of borrowers, making the loans appear less risky and more valuable to investors, according to investigators. On others, he changed internal codes used to classify mobile homes or vacant land and reclassified them as single-family homes, investigators said.
Marty Steinberg, the lawyer for Mr. Gordon, said the conduct was “aberrant behavior” for his client. “When it occurred, Steve admitted he made a mistake in judgment. He has made full restitution,” Mr. Steinberg said.
Bayview, of Coral Gables, Fla., is one of thousands of players in the mortgage-securitization business, buying portfolios of loans from banks and pooling those mortgages into “special-purpose entities” that it uses to issue securities sold to institutional and other investors.
Bayview officials said in a conference call with investors in 2006 that it repurchased or substituted new loans to replace mortgages on which data had been altered. Out of a total of $3.3 billion in securitized residential mortgages outstanding at the time, the data alteration affected 2% of the loans, according to a transcript filed with securities regulators.
It isn’t known which financial firms bought the securities backed by the altered loans. Brian Bomstein, Bayview general counsel, said that “no investor suffered a loss” from Mr. Gordon’s alleged scheme.
Securities and Exchange Commission investigators conducted an informal inquiry into Mr. Gordon’s conduct in 2006 and concluded it without taking any enforcement action, the firm said in a securities filing.
Write to Evan Perez at evan.perez@wsj.com

 

Appraisal Fraud and Industry Standards

 

Red Flags

•

Critical loan processing activities, such as  verification of

income, employment, or deposit, is delegated to brokers.

•

Delegated underwriting allowed for correspondents that are new or

lack an established track record with the FI.

•

A growing number of loans is being repurchased due to

misrepresentations by the FI under purchase and sale agreements

with secondary market investors.  The originating FI may suffer

significant financial losses in the event of a large and

unforeseen fraud.

•

Third party mortgage loan fraud is not covered in standard

fidelity bond insurance.

•

Tax returns show RE taxes paid but no property is identified as

owned.

•

Alimony is paid but not disclosed.

•

Evidence of white out or other document alterations is observed.

•

Type or handwriting varies from other loan file documents or

handwriting is the same on documents that should have been

prepared by different people or entities.

Internal Controls/Best Practices
√
Review purchase and sales agreements with brokers, correspondents,
and secondary market investors to determine if general
representations and warranties contain appropriate fraud and
misrepresentation provisions.
√
Determine the FI’s responsibility for repurchasing and putting
back loans that were funded based on misrepresentations.
√
Check whether an endorsement or rider exists to the fidelity bond
that provides coverage of third party mortgage fraud.
√
Regularly document the FI’s review of insurance coverage.
√
Establish procedures to ensure the bonding company is notified of
a possible claim within the policy’s specified period.
√
Adopt detailed policies and procedures to ensure effective
controls are in place to set, validate, and clear conditions prior
to final approval processes.
√
Base underwriter compensation on loans reviewed and not loans
approved.
√
Establish effective pre-funding and post QC programs that include
sampling, portfolio analysis, appraisal, and income/down payment
verification practices.
√
As a part of the pre-funding QC process, use AVMs to corroborate
appraised values.
√
Employ internally developed or vendor-provided fraud detection
software.
√
Institute corporate wide fraud awareness training.
√
Perform due diligence of brokers and correspondents.  Understand
the risks in their policies, procedures, and practices before
transacting business.
√
Determine how and when the FI reserves for fraud and ensure
compliance with FAS 5.
√
Review the FI’s litigation roster for existing and potential class
actions, and threatened litigation that may highlight a problem
with a particular broker, correspondent, or internal practices.
√
Review whistleblower and hot line reports, which may indicate
fraudulent activities.

Mortgage Brokers

A mortgage broker is an individual who, for a fee, originates and

places loans with an FI or an investor but does not service the

loan.

o Review the broker’s financial information as stringently
as for other RE borrowers.
o Ensure the FI’s broker agreements require brokers to act
as the FI’s representative/agent.
o Independently verify the broker’s background information
by checking business history outside of given references.
o Obtain a new credit report for the broker and check for
recent debt at other FIs.
o Obtain resumes of principal officers, primary loan
processors, and key employees.
o Conduct state license verification.
o Conduct criminal background checks and adverse data base
searches, i.e., MARI (fraud repository).
√
Conduct an annual re-certification of brokers.
√
Conduct pre-funding reviews on all new production utilizing a pre-
funding checklist.
√
Conduct QC underwriting reviews.
√
Base broker compensation incentives on something other than loan
volume, i.e., credit quality, documentation completeness,
prepayments, fraud, and compliance.
√
Establish measurable criteria that trigger recourse to the broker,
such as misrepresentation, fraud, early payment defaults, failure
to promptly deliver documents, and prepayments (loan churning).
√
Hold brokers and third party contract underwriters responsible for
gross negligence, willful misconduct, and errors/omissions that
materially restrict salability or reduce loan value.
√
Establish a broker scorecard to monitor volume, prepayments,
credit quality, fallout, FICO scores, LTVs, DTIs, delinquencies,
early payment defaults, foreclosures, fraud, documentation
deficiencies, repurchases, uninsured government loans, timely loan
package delivery, concentrations, and QC findings.
√
Perform detailed vintage analysis, and track delinquencies and
prepayments by number and dollar volume.
√
Closely monitor the total number of loans and products from a
single broker.
√
Establish an employee training program that provides instruction
on understanding common mortgage fraud schemes and the roles of a
mortgage broker, as well as recognizing red flags.
√
Establish a periodic audit of the brokered mortgage loan
operations with specific focus on the approval process.
√
Perform social security number validation procedures to validate
borrower identity.

Red Flags

•

No attempt is made to determine the financial condition of the

broker or obtain references and background information.

•

A close relationship exists between the broker, appraiser, and

lender, raising independence questions.

•

The broker acts as an advocate for the borrower instead of serving

as the FI’s representative/agent.

•

High “yield spread premiums” are paid by the FI.

•

Original documents are not provided to the funding FI within a

reasonable time.

•

An unusually high volume of loans with maximum loan to value

limits have been originated by one broker.

•

An uncommonly large number of foreclosures, delinquencies, early

payment defaults, prepayments, missing documents, fraud, high-risk

characteristics, QC findings, or compliance problems exist on

loans purchased from any broker.

•

A large volume of loans from one broker arrives using the same

appraiser.

•

High repurchase volume exists for a specific broker.

•

Numerous applications from a particular broker are provided

possessing unique similarities.

•

A high volume of loans exist in the name of trustees, holding

companies, or offshore companies.

•

An unusually large increase is noted in overall volume of loans

during a short time period.

Internal Controls/Best Practices5

√

Conduct an initial acceptance review and obtain documentation to

support broker approval.  Examples of actions to be taken include:

Application

The mortgage application is the initial document completed by the
borrower that provides the FI with comprehensive information
concerning the borrower’s identity, financial position and
employment history.

Red Flags

•
The application is unsigned or undated.
•
Power of attorney is used.  Investigate why the borrower cannot
execute documents and if formal supporting documentation exists.
•
Signatures on credit documents are illegible and no supporting
identification exists.
•
Price and date of purchase is not indicated.
•
Borrower is selling his current residence, but does not provide
documents to support a sale.
•
Down payment is not in cash, i.e., source of deposit is a
promissory note or repayment of a personal loan.
•
Borrower has high income with little or no personal property.
•
Borrower’s age is not consistent with the number of years of
employment.
•
Borrower has an unreasonable accumulation of assets compared to
income or has a large amount of unsubstantiated assets.
•
Borrower claims to have no debt.
•
Borrower owns an excessive amount of RE.
•
New housing expense exceeds 150% of current housing expense.
•
A post office box is the only indicated address for the borrower’s
employer.
•
The same telephone number is used for the borrower’s home and
business.
•
Application date and verification form dates are not consistent.
•
Patterns or similarities are apparent from applications received
from a specific seller or broker.
•
Certain brokers are unusually active in a soft RE market.
•
Concentration of loans to individuals related to a specific
project is noted.
•
Borrower does not guarantee the loan or will not sign in an
individual capacity.
•
Borrower’s income is not consistent with job type.
•
Employer is an unrealistic commuting distance from property.
•
Years of education is not consistent with borrower’s profession.
•
Borrower is buying investment properties with no primary
residence.
•
Transaction resulted in a large cash-out refi as a percent of the
loan amount.
Internal Controls/Best Practices
√
Establish an employee training program that provides instruction
on understanding common mortgage fraud schemes and recognizing red
flags.
√
Conduct pre-funding reviews on new production.
√
Closely monitor new brokers, correspondents, and products.
Scorecard criteria can be used to track performance.  Typical
tracking data includes:  default rates, pre-purchase cycle times,
loan quality indicators such as underwriting exceptions, and key
data changes prior to approval.
√
Verify the source of down payment funds by directly contacting the
FI where funds are shown deposited.
√
Closely analyze the borrower’s financial information for unusual
items or trends.
√
Independently verify employment by researching the location and
phone number of the business.
√
Employ pre-funding and post-closing reviews to detect any
inconsistencies within the transaction.
√
Conduct risk based QC audits prior to funding.
√
Ensure that prior liens are immediately paid from new loan
proceeds.
√
Assess the volume of critical post-closing missing documents,
determine the potential for repurchase recourse, and evaluate
reserve adequacy.
√
Monitor RE markets from the locale in which the FI’s mortgage
loans originated.
√
Establish a periodic independent audit of mortgage loan
operations.
√
Provide fraud updates/alerts to employees.
√
Review patterns on declined loans, i.e., individual social
security number, appraiser, RE agent, loan officer, broker, etc.
√
Establish a fraud hotline for anonymous fraud tips.
√
Increase the use of original supporting documentation on third
party transactions, i.e., wholesale and correspondent
originations.
Appraisals
An appraisal is a written report, independently and impartially
prepared by a qualified individual, stating an opinion of market
value of a property as of a specific date.
Red Flags
•
The appraiser is a frequent or large volume borrower at the FI.
•
The appraiser owns property in the project being appraised.  This
is a violation of the appraisal regulation and raises concerns
about appraiser independence and bias.
•
The most recent assessed tax value does not correlate with the
appraisal’s market value.
•
An appraiser is used who is not on the institution’s designated
list of approved appraisers.
•
The appraiser is from outside the area and may not be familiar
with local property values.  Understanding of local market nuances
is critical to an accurate property valuation.
•
An appraisal is ordered by a party to the transaction other than
the FI, such as the buyer, seller, or broker.
•
An appraisal is ordered before the sales contract is written.
•
Certain information is left blank such as the borrower, client, or
occupant.
•
The appraised value is contingent upon curing some property
defects, i.e., drainage problems or a zoning change.
•
Comparables are not verified as recorded or are submitted by a
potentially biased party, such as the seller or broker.
•
Old comparables (9-12 months old) are used in a “hot” market.
•
Comparables are an excessive distance from the subject property or
are not in the subject property’s general area.
•
Comparables all contain similar value adjustments or are all
adjusted in the same direction.
•
All comparables are on properties appraised by the same appraiser.
•
Unusual or too few comparables are used.
•
Similar comparables are used across multiple transactions.
•
Comparables and valuations are stretched to attain desired loan-
to-value parameters.
•
Excessive adjustments are made in an urban or suburban area when
the marketing time is less than six months.
•
Appreciation is noted in a stable or declining areas.
•
Large unjustified valuation adjustments are shown.
•
The land constitutes a large percentage of the value.
•
The market approach greatly exceeds the replacement cost approach.
•
Overall adjustments are in excess of 25%.
•
Photos do not match the description of the property.
•
Photos of comparables look familiar.
•
Photos reveal items not disclosed in the appraisal, such as a
commercial property next door, railroad tracks, etc.
•
Items with the potential for negative valuation adjustments, i.e.,
power lines, railroad tracks, landfill, etc., are avoided in
appraisal photos.
•
Loan amounts are disclosed to the appraiser.
•
File documentation is inadequate to determine whether appraisals
were properly scrutinized or supported by additional appraisal
reviews.
•
The appraisal fee is based on a percentage of the appraised value.
•
Independent reviews of external fee appraisals are never
conducted.
•
One or more sales of the same property has occurred within a
specified period (6-12 months) and exceeds certain value increases
(10% or more value increase).
•
A fax of the appraisal is used in lieu of the original containing
signature and certification of appraiser.
Internal Controls/Best Practices
√
Establish an employee training program that provides a good
overview of common mortgage fraud schemes, the appraisal
regulation, the RE lending standards regulation, appraisal
techniques, and red flag recognition.
√
Implement a strong appraisal and evaluation compliance review
process that is incorporated into the pre-funding quality
assurance program.
√
Ensure reviewers identify violations of regulations and
noncompliance with RE lending standards and other interagency
guidance.
√
Establish an approved appraiser list for use by retail, broker,
and correspondent origination channels.  This list should be
generated and controlled by a unit independent of production.
√
Obtain a current copy of each appraiser’s license or certificate.
√
Implement “watch” list and monitoring systems for appraisers who
exhibit suspect practices, issues, and values.  Include a post-
closing review to detect any transaction inconsistencies.
√
Establish a “suspended” or “terminated” list of appraisers who
have provided unreliable valuations or improper practices.
√
Implement controls to ensure that “terminated” appraisers are
prohibited from engaging in future transactions with the FI, and
its brokers and correspondents.
√
Implement third party appraisal controls to ensure compliance with
regulatory guidance, specifically as it applies to appraisals and
evaluations ordered by loan brokers, correspondents, or other FIs.
√
Develop appraisal requirements based on transaction risks.
√
Statistically test the appropriateness of appraisals obtained by
brokers and correspondents by obtaining independent AVMs and
appraisals.
√
Establish an independent appraisal review/collateral valuation
unit to research valuation discrepancies and provide technical
oversight.
√
Review the appraisal’s three-year sales history to determine if
land flips are occurring.
√
Perform detailed research on each appraiser’s business history and
financial condition.
√
Physically verify the location and condition of selected subject
properties and comparables.
√
Monitor RE market values in areas that generate a high volume of
mortgage loans and where concentrations exist.
√
Employ pre- and post-closing QC reviews to detect inconsistencies
within the transaction and hold production units financially
accountable for proper documentation and quality.
√
Conduct periodic independent audits of mortgage loan operations.
Credit Report
A credit report is an evaluation of an individual’s debt repayment
history.
Red Flags
•
The absence of a credit history can indicate the use of an alias
and/or multiple social security numbers.
•
A borrower recently paying all accounts in full can indicate an
undisclosed consolidation loan.
•
Indebtedness disclosed on the application differs from the credit
report.
•
The length of time items are on file is inconsistent with the
buyer’s age.
•
The borrower claims substantial income but only has credit
experience with finance companies.
•
All trade lines were opened at the same time with no explanation.
•
A pattern of delinquencies exists that is inconsistent with the
letter of explanation.
•
Recent inquiries from other mortgage lenders are noted.
•
AKA (also known as) or DBA (doing business as) are indicated.
•
The borrower cannot be reached at his place of business.
•
FI cannot confirm the borrower’s employment.
•
DTI ratios are right at maximum approval limits.
•
Employment information/history on the loan application is not
consistent with the verification of employment form.
•
Credit Bureau alerts exist for Social Security number
discrepancies, address mismatches, or fraud victim alerts.
Internal Controls/Best Practices
√
Establish an employee training program that provides instruction
on understanding common mortgage fraud schemes, analyzing credit
reports, and recognizing red flags.
√
Include an analysis of the credit report in the pre-funding
quality assurance program.
√
Make direct inquiries to the borrower and creditors to get an
explanation of unusual or inconsistent information.
√
Obtain an updated credit report if the one received is older than
six months.
√
Independently verify employment by researching the location and
phone number of business.
√
Implement a post-closing review to detect any inconsistencies
within the transaction.
√
Establish a periodic independent audit of mortgage loan
operations.
√
Define DTI calculation criteria and conduct training to ensure
consistency and data integrity.
√
Clarify non-borrower spouse issues, such as community property
issues and the impact of bankruptcy and debts on the borrower’s
repayment capacity.
√
Ensure lease obligations are reflected in borrower debts and
repayment capacity.
√
Conduct re-verification of credit to ensure accuracy of
broker/correspondent provided credit reports.
√
Obtain more than one report from multiple repositories available
to corroborate the initial credit report if data appears
questionable.
Escrow/Closing
A closing or settlement is the act of transferring ownership of a
property from seller to buyer in accordance with the sales contract.
Escrow is an agreement between two or more parties that requires
certain instruments or property be placed with a third party for
safekeeping, pending the fulfillment or performance of a specific
act or condition.
Red Flags
•
Related parties are involved in the transaction.
•
The business entity acting as the seller may be controlled by or
is related to the borrower.
•
Right of assignment is included which may hide the borrower’s
actual identity.
•
Power of attorney is used and there is no documented explanation
about why the borrower cannot execute documents.
•
The buyer is required to use a specific broker or lender.
•
The sale is subject to the seller acquiring title.
•
The sales price is changed to “fit” the appraisal.
•
No amendments are made to escrow.
•
A house is purchased that is not subject to inspection.
•
Unusual amendments are made to the original transaction.
•
Cash is paid to the seller outside of an escrow arrangement.
•
Cash proceeds are paid to the borrower in a purchase transaction.
•
Zero funds are due from the buyer.
•
Funds are paid to undisclosed third parties indicating that there
may be potential obligations by these parties.
•
Odd amounts are paid as escrow deposits or down payment.
•
Multiple mortgages are paid off.
•
The terms of the closed mortgage differ from terms approved by the
underwriter.
•
Unusual credits or disbursements are shown on settlement
statements.
•
Discrepancies exist between the HUD-1 and escrow instructions.
•
A difference exists between sales price on the HUD-1 and sales
contract.
Internal Controls/Best Practices
√
Establish an employee training program that provides an
understanding of common mortgage fraud schemes, proper closing
procedures, and recognizing red flags.
√
Provide the closing agent with instructions specific to each
mortgage transaction.
√
Instruct the closing agent to accept certified funds only from the
FI that is the verified depository.
√
Require the closing agent to notify the FI if the agent has
knowledge of a previous, concurrent, or subsequent transaction
involving the borrower or the subject property.
√
Obtain a specific transaction closing protection letter from the
closing agent.
√
Implement controls to ensure loan proceeds fully discharge all
debts and prior liens as required.
√
Employ pre- and post-closing reviews to detect any inconsistencies
within the transaction.
√
Conduct periodic independent audits of mortgage loan operations.
√
Use IRS form 4506 on all loans to facilitate full investigation of
future fraud allegations.

Industry studies indicate that a significant portion of the loss
associated with residential RE loans can be attributed to fraud.
Industry experts estimate that up to 10% of all residential loan
applications, representing several hundred billion dollars of the
annual U.S. residential RE market, have some form of material
misrepresentation, both inadvertent and malicious.  An in-depth
review by The Prieston Group of Santa Rosa, California of early
payment defaults, an indicator of problem loans, revealed that 45-
50% of these loans have some form of misrepresentation.
Additionally, this study showed that approximately 25% of all
foreclosed loans have at least some element of misrepresentation,
and losses on floan balance.
The second motive, fraud for profit, is a major concern for the
mortgage lending industry.  It often results in larger losses per
transaction and usually involves multiple transactions.  The schemes
are frequently well planned and organized.  There may also be intent
to default on the loan when the profit from the scheme has been
realized.  Multiple loans and people may be involved and
participants, who are often paid for their involvement, do not
necessarily have knowledge of the whole scheme.
Fraud for profit can take many forms including, but not limited to:
•
Receipt of an undisclosed or unusually high commission or fee,
•
Representation of investment property as owner-occupied since
FIs usually offer more favorable terms on owner-occupied RE, •
Sale of an otherwise unsalable piece of property by concealing
undesirable traits, such as environmental contamination,
easements, building restrictions, etc.,
•
Attainment of a new loan to redeem a property from foreclosure
to relieve a burdensome debt,
•
Rapid buildup of a RE portfolio with an inflated value to
perpetrate a land flip scheme,
•
Mortgage of rental RE with the intention of collecting rents
and not making payments to the lender, retaining funds for
personal use,
•
The advance of loan approvals for customers to benefit from the
commission payments, and/or
•
Misrepresentation of personal identity, i.e., use of illegally
acquired social security numbers, to illegally obtain a loan,
or to sell/take cash out of equity on a property with no
intention of repaying the debt.
The third motive, which involves additional criminal purposes beyond
fraud, is becoming more of a concern for law enforcement and FIs.
This involves taking the profit motive one step further by applying
the illegally obtained funds or assets to other crimes, such as:
•
Money laundering through purchase of RE, most likely with cash,
at inflated prices,
•
Terrorist activities such as the purchase of terrorist safe
houses and,
•
Other illegal activities like prostitution, drug sales or use,
counterfeiting, smuggling, false document production and
resale, auto chop shops, etc.
PARTICIPANTS
It is important to be aware of the different participants and
transaction flows to understand the fraud schemes described in this
paper.  This section provides background information on various
participants and their roles in typical mortgage transactions.
Participants
Common participants in a mortgage transaction include, but are not
limited to:
•
Buyer – a person acquiring the property,
•
Seller – a person desiring to convert RE to cash or another
type of asset,
•
Real Estate Agent – an individual or firm that receives a
commission for representing the buyer or seller, •
Originator – a person or entity, such as a loan officer,
broker, or correspondent, who assists a borrower with the loan
application,
•
Processor – an individual who orders and/or prepares items
which will be included in the loan package,
•
Appraiser – a person who prepares a written valuation of the
property,
•
Underwriter – an individual who reviews the loan package and
makes the credit decision,
•
Warehouse Lender – a short term lender for mortgage bankers
that provides interim financing using the note as collateral
until the mortgage is sold to a permanent investor, and
•
Closing/Settlement Agent – a person who oversees the
consummation of a mortgage transaction at which the note and
other legal documents are signed and the loan proceeds are
disbursed.
Refer to Appendix A – Glossary for additional and expanded
definitions for participants and other terms used throughout this
paper.
Mortgage Loan Purchased from a Correspondent – In this transaction,
the borrower applies for and closes his loan with a correspondent of
the FI, which can be a mortgage company, small depository
institution, or finance company.  The correspondent closes the loan
with internally generated funds in its own name or with funds
borrowed from a warehouse lender.  Without the capacity or desire to
hold the loan in its own portfolio, the correspondent sells the loan
to an FI.  The purchasing FI is frequently not involved in the
origination aspects of the transaction, and relies on the
correspondent to perform these activities in compliance with the
FI’s approved underwriting, documentation, and loan delivery
standards.  The purchasing FI reviews the loan for quality prior to
purchase.  The purchasing FI must also review the appraisal or AVM
report and determine that it conforms to the appraisal regulation
and is otherwise acceptable.  The loan can be booked in the FI’s own
portfolio or sold.
In “delegated underwriting” relationships, the FI grants approval to
the correspondent to process, underwrite, and close loans according
to the FI’s processing and underwriting requirements.  The FI is
then committed to purchase those loans.  Obviously, proper due
diligence, controls, approvals, QC audits, and ongoing monitoring
are warranted for these higher risk relationships.
Financial institutions that generate mortgage loans through
correspondents should have adequate policies, procedures, and
controls to address:  initial approval and annual re-certification,
underwriting, pre-funding and QC reviews, repurchases, early
prepayments, appraisals, quality and documentation monitoring,
fraud, scorecards, timely delivery of loan packages, and utilization
of contract underwriters.  In addition, FIs should have contractual
agreements to demand and enforce repurchase proceedings and other
disciplinary actions with correspondents delivering loans outside of
product and other contractual agreements.
THIRD PARTY MORTGAGE FRAUD MECHANISMS
There are a variety of mechanisms by which third party mortgage loan
fraud can take place.  Various combinations of these mechanisms may be implemented in a single fraud.  Some of these mechanisms and
their uses are described in this section.
Collusion
Collusion involves two or more individuals working in unison to
implement a fraud.  Various third parties may conspire to perpetrate
a fraud against an FI with each generally contributing to the plan.
Each person performs his respective role and receives a portion of
the illicit proceeds.  Often, but not always, third parties recruit
or bribe FI employees to take part in the scheme.  The scheme may
also include additional parties not involved in the planning or
aware of all participants, but who are still part of the plan’s
execution.
Documentation Misrepresentation
Mortgage fraud is generally achieved using fictitious, forged, or
altered documents needed to complete a transaction.  Pertinent
information may also be omitted from documents.  The following
describes some key documents and ways they can be altered to
perpetrate fraud.
Loan Application – The application captures information needed
for an FI to make a credit decision based on the borrower’s
qualifications such as financial capacity.  It may include
false information regarding the identity of the buyer or
seller, income, employment history, debts, or current occupancy
of the property.  The information on the final application may
have been altered and be materially different than that
provided on the initial application.
Appraisal – An appraisal is a written statement that should be
independently and impartially prepared by a qualified
practitioner setting forth an opinion of the market value of a
specific property as of a certain date, supported by the
presentation and analysis of relevant market information.  It
is an integral component of the collateral evaluation portion
of the credit underwriting process.
An appraisal is fraudulent if the appraiser knowingly intends
to defraud the lender and/or profits from the deception by
receiving more than a normal appraisal fee.  This includes
accepting a fee contingent on a foregone conclusion of value,
or a guarantee for future business in response to the inflated
value.  The appraiser may inflate comparable values or falsify
the true condition of the property, which can allow the
defrauder to obtain a larger loan than the property legitimately supports.  An appraisal that does not include
negative factors affecting the property value can influence the
FI to enter into a transaction that it normally would not
approve.  The defrauder may use comparables that are outdated,
fictitious, an unreasonable distance from the subject property,
or materially different from the subject property.  Photos
represented to be of the subject property may be of another
property.  Inflated appraisal values create high loss potential
and contribute to an FI’s losses at the time of foreclosure or
sale.
Credit Report – This document contains an individual’s credit
history which is used to analyze an individual’s repayment
patterns and capacity.  Credit histories can be forged or
altered through various methods to repair bad credit or create
new credit histories.  Fraudsters can also use the credit
report of an unknowing individual who has a good credit record.
Perpetrators have been known to scan and alter illegally
obtained legitimate credit reports that are then printed and
used as originals.  Copiers can be similarly used to produce
fictitious or altered credit reports.  Fraudsters have used
computers to hack into credit bureau files and have purchased
credit bureau computer access codes from persons who work for
legitimate businesses.
Alternate credit reference letters are often used for
applicants with limited or no traditional credit history.  They
are usually in the form of a letter directly from a business
such as a utility, small appliance store, etc., to which the
applicant is making regular payments.  These letters can be
easily altered or completely fabricated using the business’s
letterhead.  As lenders expand to provide loans to more diverse
income levels, alternate credit references are becoming more
common.
Deed – A deed identifies the owner(s) of the property.  It can
be altered to disguise the true property owner or the
legitimate owner’s signature can be forged to execute a
mortgage transaction.  Alteration or forgery of this document
allows the fraudster to use a false identity to complete the
transaction.
Financial Information – This includes financial statements, tax
returns, FI statements, and income information provided during
the application process.  Any of this data can be falsified to
enable the applicant to qualify for a mortgage loan.
Inadequate income and employment verification procedures may
allow mortgage loan fraudsters to deceive the FI regarding this information.  Some perpetrators have been known to set up phone
banks to receive verification calls from FIs.
HUD-1 Settlement Statement – The HUD-1 accompanies all
residential RE transactions.  This is a statement of actual
charges, adjustments, and cash due to the various parties in
connection with the settlement.  Working alone or with
accomplices this document can be altered to defraud the parties
to the transaction.  Information on the original HUD-1 may show
entities or persons not noted as lien holders but who still
receive payoffs from seller’s funds.  These individuals may be
deleted from the final HUD-1 that is available for review prior
to loan closing.  This enables individuals involved in the
fraudulent scheme to receive funds from the loan disbursement
without the FI being aware of such payments.  The document may
show a down payment when none was made.  The document may also
include the borrower’s forged signature.
Mortgage – A mortgage is a legal agreement that uses real
property as collateral to secure payment of a debt.  In some
locales a deed of trust is used instead.  A mortgage can be
altered to disguise the true property owner, the legitimate
lien holder, and/or the amount of the mortgage.  Alteration or
forgery of this document allows the fraudster to obtain loan
proceeds meant for another party or in an amount that exceeds
the legitimate value of the property.
Quitclaim Deed – This is a document used to transfer the named
party’s interest in a property.  The transferring party does
not guarantee that he has an ownership interest, only that he
is conveying the interest to which he represents he is
entitled.  Fraud perpetrators may use this document to quickly
transfer property to straw or nominee borrowers without a
proper title search.  Straw borrowers are discussed on page 17
under Third Party Mortgage Fraud Schemes.  This technique can
disguise the true property owner and allow the mortgage
transaction to be completed quickly.
Title Insurance/Opinion – Either of these documents confirms
that the stated owner of the property has title to the property
and has the right to transfer ownership of that property.  They
identify gaps in the chain of title, liens, problems with the
legal description of the property, judgments against the owner,
etc.  Title insurance schedules or opinions can be altered to
change the insured FI or omit prior liens.  This can be part of
the falsification that occurs when a perpetrator attempts to
obtain multiple loans from different FIs for one mortgage transaction.  Alteration of title insurance or opinions occurs
in other fraud scenarios, as well.
Identity Theft
Identity theft means the theft of an individual’s personal
identification and credit information, which is used to gain access
to the victim’s credit facilities and FI accounts to take over the
victim’s credit identity.  Perpetrators may commit identity theft to
execute schemes using fake documents and false information to obtain
mortgage loans.  These individuals obtain someone’s legitimate
personal information through various means, i.e., obituaries, mail
theft, pretext calling, employment or credit applications, computer
hacking, and trash retrieval.  With this information, they are able
to impersonate homebuyers and sellers using actual, verifiable
identities that give the mortgage transactions the appearance of
legitimacy.
Mortgage Warehousing
Mortgage warehousing lines of credit are used to temporarily
“warehouse” individual mortgages until the mortgage banker, who may
be acting as a broker, can sell a group of them to an FI.  If a
dishonest mortgage banker has warehousing lines with two FIs, he can
attempt to warehouse the same mortgage loan on each line.  The
individual FIs may not be aware of the other’s line.  One FI may be
presented with the original documents, while the delivery of the
documents to the other FI is indefinitely delayed.  The second FI
may fund the line without the documents if previous dealings with
the mortgage banker have been satisfactory.  It is only after
transferring funds that the second lender realizes it has been
defrauded.  The Mortgage Electronic Registry System (MERS) can also
be used as a valuable control tool.
The mortgage warehouse lender often relies on the mortgage banker’s
internal loan data regarding FICO, loan-to-value (LTV), debt-to-
income (DTI), appraised value, credit grade and aging, making them
vulnerable to fraud if the provided data is not accurate.  The
mortgage warehouse lender should have proper procedures and controls
to provide ongoing monitoring, verification, and audits of the loans
under this line of credit.  It may also want to consider scorecards,
due diligence, and customer identification policies and procedures.
Negligence
Negligence occurs when people who handle mortgage transactions are
careless or inattentive to the accuracy and details of the documents
or disregard established processing procedures.  This often happens
when an FI is experiencing fast growth and uses temporary and part-time employees to process a large volume of mortgages without proper
controls or oversight.  Inattention to detail provides perpetrators
with the opportunity to submit documents containing fraudulent
information with the probability that the fraud will not be
detected.  Fraudsters may target FIs once they identify these
weaknesses.
THIRD PARTY MORTGAGE FRAUD SCHEMES
The purpose of this section is to describe some of the most
prevalent types of mortgage fraud that have resulted in significant
losses to FIs.  Fraud schemes using one or more of the mechanisms
described earlier are limited only by the imagination of the
individuals who initiate them.  The following scenarios are not
intended to be an all-inclusive list.  Specific examples for most of
these schemes are detailed in Appendix C.
Appraiser Fraud
A person falsely represents himself as a State-licensed or State-
certified appraiser.  Appraiser fraud also can occur when an
appraiser falsifies information on an appraisal or falsely provides
an inaccurate valuation on the appraisal with the intent to mislead
a third party or FI.  Appraiser fraud is often an integral part of
some fraud schemes.
Double Selling
Double selling is a scheme wherein a mortgage loan broker accepts a
legitimate application, obtains legitimate documents from a buyer,
and induces two FIs to each fully fund the loan.  In this scenario,
the originator leads each FI to believe that the broker internally
funded the loan for a short period.  Since there is only one set of
documents, one of the funding FIs is led to believe that the proper
documentation will arrive any day.  Double selling is self-
perpetuating because different loans must be substituted for the
ones on which documents cannot be provided to keep the scheme going.
Essentially, the broker uses a lapping scheme to avoid detection.
Another variation of double selling entails a mortgage loan broker
accepting a legitimate application and proper documentation, who
then copies the loan file, and presents both sets of documents to
two investors for funding.  Under this scheme, the broker has to
make payments to the investor who received the copied documents or
first payment default occurs.
False Down Payment
Another third party mortgage fraud involves false down payments.  In
this scenario, a borrower colludes with a third party, such as a
broker, closing agent, etc., to reflect an artificial down payment.
When this scheme is carried out with collusion by an appraiser, the
true loan-to-value greatly exceeds 100% and has the potential to
cause substantial loss to the FI.
Fictitious Mortgage Loan
A fictitious mortgage loan scheme is perpetrated primarily by
mortgage brokers, closing agents, and/or appraisers.  In one version
of this scheme, the identity of an unsuspecting person is assumed in order to acquire property from a legitimate seller.  The broker
persuades a friend or relative to allow the broker to use the
friend’s or relative’s personal credit information to obtain a loan.
The FI is left with a property on which it must foreclose and the
third parties pocket substantial fees from both the FI and buyer.
Straw Borrower
The straw borrower scheme involves the intentional disguising of the
true beneficiary of the loan proceeds.  The “straw”, sometimes known
as a nominee, may be used to:
•
conceal a questionable transaction,
•
replace a legitimate borrower who may not qualify for the
mortgage or intend to occupy the property, or
•
circumvent applicable lending limit regulations by applying for
and receiving credit on behalf of a third party who may not
qualify or want to be contractually obligated for the debt.
The straw borrower scheme is accomplished by enticing an individual,
sometimes a friend or relative, to apply for credit in his own name
and immediately remit the proceeds to the true beneficiary.  The
straw borrower may feel there is nothing wrong with this and fully
believes that he is helping the third party.  He expects the
recipient of the loan proceeds to make the loan payments, either
directly or indirectly.  The recipient may be unable to or may never
intend to make the payment.  Over time, default would occur with the
FI initiating foreclosure proceedings.  This scheme can involve FI
personnel, as well as other third party participants.  The straw
borrower may or may not be paid a fee for his involvement or know
the full extent of the scheme.
In summary, millions of dollars have been lost because of the
mortgage fraud schemes described above.  These schemes produce many
indicators that are apparent to an educated observer.  The next
section identifies these red flags and provides best practices that
FIs can use to mitigate risk of loss.
RED FLAGS, INTERNAL CONTROLS, and BEST PRACTICES
Prudent risk management practices for third-party originated loans
are critical.  Strong detective and preventive controls are an
integral part of a sound oversight framework, including adequate
knowledge of the FI’s customers.  Knowledgeable, trained employees,
coupled with disciplined underwriting and proactive prevention
controls, are an FI’s best deterrent to fraud.  Implementation of
strong controls does not prevent human errors or oversight failures,
but documentary evidence of QC measures taken by the FI can be a
useful defense against a repurchase request from an investor.
As a part of the exam process, examiners should assess actions taken
by the FI to document its controls over internal fraud, relative to
safe and sound FI practices and individual agency regulatory requirements.  Examiners should also include Patriot Act and SAR
requirements in their evaluations.
The following list of red flags3, which is not intended to be all-
inclusive, may be used to identify and deter misrepresentations or
fraud.  Other automated systems for fraud detection, if used in
conjunction with this list, are dependent on the quality of the
input and analysis of the output.  The presence of any of these red
flags DOES NOT necessarily indicate that a misrepresentation or
fraud has occurred, only that further research may be necessary.
APPRAISAL GUIDANCE
Congress enacted Title XI of the Financial Institutions, Reform,
Recovery and Enforcement Act of 1989 (FIRREA) requiring member
agencies of Federal Financial Institutions Examination Council
(FFIEC) to issue RE appraisal regulations to address problems
involving faulty and fraudulent appraisals.  One of the cornerstones
of the regulation was a requirement that a regulated financial
institution or its representative select, order, and engage
appraisers for federally related transactions to ensure
independence.  The agencies’ expectations on this subject are stated
in an interagency statement dated October 27, 2003 entitled
Interagency Appraisal and Evaluation Functions.  This statement
provides clarification of the various agencies’ appraisal and RE
lending regulations and should be reviewed in conjunction with them.
Specifically, the October 2003 statement primarily addresses the
need for appraiser independence.  A regulated institution is
expected to have board approved policies and procedures that provide
for an effective, independent RE appraisal and evaluation program.
Basic elements of independence are discussed such as separation of
the function from loan production and engagement of the appraiser by
the institution, not the borrower.  A written engagement letter is
encouraged.  An effective internal control structure is also
necessary to ensure compliance with the agencies’ regulations and
guidelines.  This includes a review process provided by qualified,
trained individuals not involved with loan production.  The depth of
review should be based on the size, complexity, and other risk
factors attributable to the transactions under review.  For the full
text of the October 27, 2003 statement please refer to Appendix G.