Monday, February 06, 2012

Blast from the past: Fannie was warned of foreclosure problems in 2006 internal report

Fannie Mae was warned in a 2006 internal report of abuses in the way lenders and their law firms handled foreclosures, long before regulators launched investigations into the mortgage industry's practices.

The report said foreclosure attorneys in Florida had "routinely made" false statements in court in an effort to more quickly process foreclosures and raised questions about whether some mortgage servicers or another entity had the legal standing to foreclose.

The report found no evidence that borrowers were improperly placed in foreclosure.

"Fannie Mae took the necessary steps to address the specific issues identified by the 2006 report and regularly evaluates and enhances oversight of its retained attorney network," said a Fannie Mae spokeswoman.

Read on.

And of course, as Florida lawyer Matt Weidner points out that Pinellas County judges predicted this fraud years ago:

I find it most interesting, but not at all surprising, that Pinellas County judges are featured prominently in this report. Think about it, there are untold tens of thousands of judges all across this country that have presided over millions of foreclosure cases, but a good judge long, long ago in Pinellas County first warned that all of this was going to come back to bite us all in the end. Some of the best foreclosure scholarship in the entire nation comes out of the thoughtful jurisprudence of Pinellas County. These judges are tough as nails, and even after all these years and all these motions years after years, they grab each file, and carefully examine each motion and each case, then rule as if each case was the most important one on their crammed docket.
Now, some keys from the report. Keep in mind here that this is just the tip of the iceberg. The thing that people won’t get is how those in power keep wanting to ignore all of this…to keep kicking the cow chip down the field. But sooner or later the cow chip breaks apart on your foot.
And now from the report:
Two Florida trial courts recently have criticized MERS for false pleadings in
foreclosure proceedings. Mr. Lavalle apparently approached judges in two Florida counties with
sufficient information to prompt the judges to call extraordinary hearings.
In MERS v. Cabrera, the judge started an extraordinary show cause hearing
regarding nine foreclosure cases by reading portions of inquiries from Mr. Lavalle and his
mother, Ms. Pew.47 MERS counsel was forced to concede that the complaints contained
inaccurate allegations regarding its interests in promissory notes.48 The complaints allege that
MERS is the “holder and owner” of promissory notes when neither is true. This allegation hides
the relationships of the parties who will benefit from the foreclosure and masks a serious legal
issue. The judge was troubled that MERS changed its stance after filing “thousands and
thousands of cases” stating that it owns the note.49
A second judge (who took the time to observe the hearing) criticized MERS for
routinely filing lost note affidavits and counts to reform the promissory notes. It appears the
notes are not lost but lawyers or servicers find it easier and quicker to claim the notes cannot be
found. The judge pointed out the inconsistency of the affidavit to the MERS complaint, asking:
Where is it at the time it is lost in all of these myriad hundreds of cases which alleged that it’s inour possession at the time it was
lost or destroyed?5o
The judge accused MERS of filing “false affidavits” and questioned whether foreclosures should
be allowed to go forward. 51 MERS’ attorney made the concession that “My understanding is lost
note affidavits and lost note counts are routinely filed by mortgagees and note holders … ,,52 He
acknowledged the practice should be “modified.,,53
In an order of dismissal dated September 28,2005, the court dismissed four
foreclosures as a “sham and/or frivolous pleading,” but dismissed them without prejudice so that
the true owners and holders of the notes could file their own foreclosure actions.54
The court also criticized MERS’ practice of certifying servicers’ employees as
certifying officers, saying: “[t]he use of designating employees of the servicer as officers of
MERS in order to circumvent the ‘technical’ requirement of law is transparent.,,55 He called the
practice a “charade.,,56
A judge in the Pinellas County, Florida, circuit court issued an order dismissing
20 MERS foreclosures for essentially the same reasons. Judge Logan noted the false allegations,
“The standard allegation in the Complaint alleged that … ‘Plaintiff
now owns and holds a mortgage note and mortgage … ‘ The Court
never found that allegation which is contained in all of the MERS
Complaints to be supported by a review of the documents within
the Court file. ,,57

Fannie Mae does not authorize attorneys to represent that MERS holds or owns promissory
notes. The Servicing Guide states “MERS will have no beneficial interest in the mortgage, even
if it is named as the nominee for the beneficiary in the security instrument. ,,58

We conclude that foreclosure attorneys in Florida are routinely filing false
pleadings and affidavits regarding the plaintiffs – MERS or servicers – interest in the
proceedings and regarding lost, missing or destroyed promissory notes. The practice could be
occurring elsewhere. It is axiomatic that the practice is improper and should be stopped. Fannie
Mae has not authorized this unlawful conduct. As a result of the MERS hearings in Florida,
Fannie Mae recognizes the issue and is taking action to correct it.

It is axiomatic that the practice of submitting false pleadings and affidavits is unlawful. With his complaint, Mr. Lavalle has identified an issue that Fannie Mae needs to address promptly. For some time, the Legal Department has been working on a proposal for a new computer system to communicate better with and control attorneys working on Fannie Mae litigated matters. As a result of the Florida cases, the Legal Department is formulating a more immediate solution for the issues raised in those cases, including a directive to attorneys and Servicers in Florida directing corrective action.

Mr. Lavalle’s claim that large numbers of foreclosures – tens of billions of dollars
worth – could be unwound as a result of this misconduct likely overstates the risk to Fannie Mae.
Courts are unlikely to unwind foreclosures unless borrowers can demonstrate that the foreclosure
would not have gone forward with the correct pleadings, which is a difficult burden for most
borrowers to meet. Even the Florida judges who were very angry about the false pleadings ordered that the foreclosures could go forward with correct pleadings and the proper plaintiff.

Civil lawsuits would have a similar burden; the plaintiffs would have to demonstrate damages
arising from the false statements. Mr. Lavalle has not presented evidence that the borrowers
were improperly placed in default. Nevertheless, the issues Mr. Lavalle raises should be
addressed promptly in order to mitigate the risk of exposure to lawsuits and some degree of

Prior to the creation of MERS, the borrower could look to the land records to
follow the chain of servicers. If a mortgage is registered with MERS, however, MERS is the
mortgagee of record. Fannie Mae does not require lenders to register mortgages they sell or
service for Fannie Mae with MERS.

Mr. Lavalle questions whether Fannie Mae has adequate procedures in place to keep track of 15 million promissory notes that it has in its possession or is held for its account. 155 Mr. Lavalle claims that the endorsement-in-blank policy leads to trillions of dollars of missing or lost negotiable paper. 156 Mr. Lavalle bases his claim that the problem is widespread by extrapolating from routine filing of lost note affidavits in Florida foreclosure proceedings. 157 He acknowledges that every entity operating in the secondary mortgage market has the same policy.158 According to his calculations, about $6 trillion worth of bearer paperexists due to this practice. 159 Since these notes are negotiable instruments, Mr. Lavalle contends borrowers face dire consequences from their mishandling. 160 A holder in due course, for instance, can recover even when the maker has defenses or has paid the note in full.

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