The CBS news show 60 Minutes produced a show on fraudulent mortgage documents. The show touches on a lot of the issues we have been discussing here on A Clean Slate.
Last fall, I had the honor and pleasure of being interviewed for an American Bankruptcy Institute podcast with Professor Laura Bartell about foreclosure fraud and the problems in mortgage documentation. The podcast came out just as the robosigning scandal was coming to light, but a lot of the discussion remains relevant.
The rock classic “American Pie” was inspired by the tragic death of three rock-n-roll greats, Buddy Holly, Ritchie Valens, and Big Bopper Richardson, in a plane crash on February 3, 1959. Don McLean famously coined the term “The Day the Music Died” to describe the event.
I was thinking about the phrase recently because there are dates and memories that get stuck in history. We remember where we were when heard that something happened. And to me a couple completely unrelated events are stuck together.
On September 17, 2010, I was not at Max Gardner’s Securitization and Servicing seminar at the Don Gibson Theater in Shelby, North Carolina. I would have liked to have been there, but various life things conspired to get in the way. Had I been there, I would have learned that day, rather than a few days later, about when stuff finally started hitting the fan for predatory mortgage servicing.
On September 17, 2010, an internal memo disclosed that GMAC had ceased foreclosure activity in twenty-three states. Those of us who have been monitoring various email listservs had been expecting this type of event for some time. Why? Because we had seen so many fraudulent documents and read too many depositions of the robo-signers. This type of thing had to happen eventually.
GMAC is part of a large family of financial institutions that includes various “servicers.” Servicers don’t actually own any mortgage notes but often act as if they do. Their main function is to collect payments from borrowers and enforce loan documents. Servicers try to be hyper-efficient in their approach to costs and one of their tricks is having people whose job it is to sign documents. Rather than hire higher-level, higher-paid loan officers to review and sign documents, the process is automated and a relatively small number of people get inflated titles just to sign documents. In my world, we call these folks “robo-signers.”
Unfortunately for the mortgage industry, one of GMAC’s robo-signers spoke the truth in a deposition. He admitted that he had signed tens of thousands of sworn affidavits under penalty of perjury without verifying the information. Want to read about it? Just Google “Jeffrey Stephan” and see what comes up. You might need a few hours.
Regular readers might remember the Alphabet Problem and the delicate comment that “banks have been known to create documents after the fact to give the impression that they documented the transaction properly.” I don’t want to say that every bank, servicer, creditor or other entity seeking to enforce loan documents has been creating false documents. But a lot of them have.
So on September 17, 2010, the world started getting clear and official word that what we had suspected was happening really was happening. This might have been the tipping point. No one can trust the documents that the mortgage industry supplies. Too many of them are incorrect — or worse — fake.
So why did I think about The Day the Music Died? Well, the first I started really learning about fraudulent documents was at Bankruptcy Boot Camp. Max Gardner has been championing this cause for a while. He believes that this GMAC stuff is just the tip of the iceberg and that issues in predatory mortgage servicing will become more apparent over the next several years. And I agree with him. I have seen too much sloppy documentation and too many bogus documents for this not to be a systemic problem. In fact, Chase soon followed GMAC and acknowledged that it had an affidavit problem as well.
But when I was at Boot Camp, we had one night “off base.” Max took us for pizza and a concert in…wait for it…the Don Gibson Theater in Shelby, North Carolina. The concert was Bobby Vee, whom people of a certain age might recall getting his start on the Day the Music Died by playing the concert in Moorhead, Minnesota in place of the headliners. Being of a different generation, I knew about the Day the Music Died from “American Pie,” but had never heard of Bobby Vee. Because the first I heard of Bobby Vee was the same weekend I started learning about fraudulent mortgage documents, in my head fraudulent mortgage documents and the Day the Music Died are connected. Very odd, but true.
Where will September 17, 2010 rank in dates that we will remember? I’m certainly not going to suggest that it will be like September 11, 2001 or November 22, 1963. But perhaps it will be like February 3, 1959. That was a day that was unremarkable but for a certain event occurring that ultimately affected a lot of people.
Because I am a nerdy restructuring and bankruptcy attorney, I am on a fair number of email listervs with colleagues. One recurring item in our discussions is what legendary bankruptcy attorney Max Gardner calls the “Alphabet Problem.” If you click on that link, you get a wonderful, in-depth explanation of the Alphabet Problem that Max wrote. If you are like me, though, and have a short attention span, you need a simpler explanation if you want to understand the Alphabet Problem.
Fortunately, I explain the Alphabet Problem to many of my bankruptcy clients because I want them to understand the approach that I will take to the real estate in their case. Although some of my clients are attorneys, most of them are not. So I try to put Max’s explanation into something that most folks can understand. As with any simplification, some of the nuance will be lost in the translation. But with luck you will understand the basics.
At some point a couple decades or so ago, banks started selling the right to receive the payment from your mortgage and turning that right to payment into mortgage-backed securities. Along the way, the banks established a basic protocol for these transactions. To make this easier to understand, Max gave each of the cast of characters a nickname consisting of a letter. So the originating bank, the one whose name you see on the loan documents, is called A. A sells the right to payment to an entity called the sponsor, whom we call B. B in turn transfers the right to an entity called the depositor, C. C then sells the right to a trust, D, who ultimately holds the right to payment on behalf of the holders of the security. In theory the trust, D, holds all of the loan documents related to your loan and the evidence of each true sale from A to B, B to C, and C to D.
Everyone understands that: A to B, B to C, C to D. Simple, right?
In the most straightforward bankruptcy case, D, the trust, ends up being the entity trying to enforce your mortgage. To do so lawfully, D needs to show an unbroken chain of true sales of original note from A to B, B to C, and C to D along with corresponding assignments of the mortgage, true sale agreements, transfer and delivery receipts, true sale opinions, etc.
In theory, this should not be hard. I remember as a law clerk at the bankruptcy court (this was maybe fifteen years ago) reviewing the documents that lenders provided. The documents contained endorsements of notes and recorded assignments from A to B, B to C, etc. But that was before the days of securitization.
These days, you almost never see a proof of claim that attaches all of the necessary documents. Why is that?
There are a couple of obvious reasons Either: (i) the documents don’t exist; or (ii) the attorneys for the creditor do not want to take the time to find out if the documents exist.
A typical Pooling and Servicing Agreement (aka the PSA), one of the main documents that controls the securitization of mortgages, does not require the parties (i.e., A, B, C, and D) to execute proper endorsement of the notes and recorded assignments of the mortgages. In fact, a typical PSA requires the parties to endorse the notes to no one; the endorsement should say “Pay to the order of _____, without recourse” and there will be no name in the blank. With no contractual requirement to document the transfers properly, and arguably a contractual requirement to do so improperly, the parties selling these rights had little incentive to execute proper endorsements and assignments.
So how does the typical D manage to enforce its rights in a bankruptcy case in light of the Alphabet Problem? There are at least two ways:
First, it happens often that no one challenges D’s loan documents. Bankruptcy lawyers and trustees vary in their approach to this issue. At one end of the spectrum are Boot Campers like me who tend to probe the bank’s documents at length. At the other end are people who barely look at the documents.
Second, and I want to say this as delicately as I can, banks have been known to create documents after the fact to give the impression that they documented the transaction properly. Again, this is the type of thing that Boot Campers have been working to expose.
As an easy example, one of the most typical versions of the fraudulent documents is an “A to D” transfer. When we see an A to D transfer, we know that it is bogus. For reasons that are beyond the scope of this post, the securitization process is designed to include at least two true sales. If we see an A to D transfer, we know that the lender by-passed the protocols imposed by the securitization process. We know that A didn’t sell to D, A sold to B. So when we see an endorsement from the originating bank to the trust, we know that document is a fake.
So why does this matter? There are a few points worth making here.
First, on a big-picture level, if you ever wonder why the mess that the banks created is so hard to fix, consider what I have discussed here. The securitization process made it difficult for the banks to enforce the mortgages they wrote. Rather than having a neighborhood bank holding your mortgage note in its records down the street, some securitization trust might hold the right to some payment from your mortgage while some other entity holds the right to foreclose on your home. It is not an easy task to match all those up to turn your mortgage into a useful asset for a bank.
Second, and by the same token, if you happen to be eligible for a home loan modification under a program like HAMP and cannot seem to get your mortgage lender to process the modification, you might consider the complexities described here. If one entity held both your note and mortgage, that entity could determine whether you are eligible for a modification and make the economic decision of whether to grant the modification. As it is, there are too many different parties with different incentives to want to manage your mortgage situation.
Third, there is a substantial tactical benefit in a bankruptcy case to finding the weakness in a secured creditor’s claim. No mortgage lender wants to be turned into an unsecured creditor. If there are defects in the mortgage lender’s documentation, and there almost always are, finding those weaknesses gives us leverage. Whether the ultimate goal for the client is a mortgage modification or otherwise, being able to put a bank on its back foot carries a substantial advantage. I use this both to get better results for my clients and also to take clients whom otherwise I would not be able to represent. Sadly, using this type of “leverage” is the best way to force a bank into sustainable mortgage modification.
Readers of A Clean Slate come from all walks of life, but a couple specific types might be particularly interested in the Alphabet Problem.
If you are an attorney and want to learn more about mortgage securitization works and the problems that it causes, you might want to get some training from Max Gardner. In addition to his regular Bankruptcy Boot Camps which I reviewed here, Max has a special weekend seminar in September on mortgage securitization and servicing.
If you are a consumer having difficulty with your mortgage lender and maybe facing foreclosure, you could do worse than finding an attorney who is versed in the Alphabet Problem. If you are in North Jersey, Central Jersey, or nearby parts of New York, feel free to contact me. Otherwise, the Bankruptcy Boot Camp alumni list would be a good place to start.
“Zombie Debt” is a term that people in my business use for debt that is not legally enforceable. The debt generally has been either paid, settled, or discharged in a bankruptcy.
So how does it happen?
There an industry of debt buyers who buy debt — both good and bad — and try to collect it. The debt buyers usually purchase the debt at a discount. Because the debt was purchased at a discount, the debt buyer does not need to collect on 100% of the debt to turn a profit. The debt buyers then use the usual ways to try to collect the debt. They report it to credit agencies, they bring lawsuits, they make telephone calls, etc. Often times, consumers will simply pay the debt or settle it rather than fight.
To be clear, trying to enforce zombie debt is illegal. In addition to the obvious violations of state law, attempts to collect debt that has been discharged in bankruptcy violate the discharge injunction in the U.S. Bankruptcy Code. Reporting zombie debt also often violates the Fair Credit Reporting Act.
How should you handle this? Find a lawyer who handles consumer law who can help.
When one of my clients receives a discharge in bankruptcy, we check the credit report shortly thereafter to make sure that all the debts are listed as discharged in bankruptcy. If any are not, we demand that the creditor make the correction. We check the credit report again, and when debt appears, we bring an action against the creditor for the discharge violation. I handle these matters on a contingency basis. We can use similar techniques against creditors trying to enforce debt that has been settled or paid.
If you think that you might be affected by zombie debt and live in North Jersey or Central Jersey, feel free to contact me even if I did not handle your bankruptcy or the initial settling of the debt. If you live in another area, you might want to start with the alumni list of Max Gardner’s Bankruptcy Boot Camp to find an attorney to represent you. And if you want to read more about zombie debt, there are more articles here, here, here and here.
A recent New York Times piece confirms a lot of what readers of A Clean Slate already know: A lot of debt settlement outfits are scams and don’t deliver anywhere close to what they advertise.
I have written about debt settlement here and here. These are some of the most visited posts on A Clean Slate. To summarize my views of debt settlement, it is a good idea for relatively few people and for the rest it’s a really poor approach. And if you are going to do debt settlement, use a local attorney rather than a debt settlement firm.
I happened to have had this discussion a few days ago with an unlikely source. I was riding with my son, who has just finished seventh grade, in the car listening to the radio. An advertisement came on for a debt settlement company. My son said to me, “It bothers me to hear these ads about debt settlement. They advertise getting rid of the debt but they charge a lot of fees. The people could just call you and you would get rid of their debt for a lot less money.”
Exactly. Debt settlement is generally a more expensive path to a less desirable result.
A chapter 7 bankruptcy might cost a couple thousand dollars in fees and a chapter 13 bankruptcy maybe twice that amount. How much debt will that get rid of? Probably all of it. And I usually can tell before we file which debts will be discharged and what the total cost will be.
You can’t say that about debt settlement. I know this because I represent clients in debt settlement under certain circumstances. Even in bankruptcy representations, I routinely field settlement offers from credit card companies and the settlement percentages are all over the map. It is a lot harder to predict what the results will be in a debt settlement situation. As noted by the FTC, the success rate for debt settlement companies that the FTC studied was less than ten percent. No one can predict with any degree of certainty what settlements can be achieved or on what terms.
Something to keep in mind if you are having financial difficulties.
The Automatic Stay.
It is one of the greatest and most powerful provisions of the Bankruptcy Code. If sections of the Bankruptcy Code were literary characters, the Automatic Stay would be a superhero.
The Automatic Stay comes from section 362 of the Bankruptcy Code. Section 362 provides that the commencement of a bankruptcy case stays pretty much any action that creditors can take against a debtor or the debtor’s property.
So, actions to collect a debt? Stopped.
Wage garnishments? Stopped.
Telephone calls to collect? Stopped.
And, importantly for the way that I practice, attempts to record or perfect a lien on property? Stopped.
When we file a bankruptcy petition, every creditor receives a notice that the case has been filed. And so all creditors become aware of the bankruptcy case and therefore should cease collection activity except through the bankruptcy court.
Do they? Usually. The vast majority of creditors try to obey the law.
But not all do.
When creditors don’t stop their collection efforts, if they continue to call or send letters, they are subject to sanctions. Section 362(k) of the Bankruptcy Code provides that an individual debtor may recover damages from a creditor who violates the stay. So when we see that a creditor has, for example, made telephone calls that violated the stay, we might bring an action for damages.
This includes a supposedly secured creditor that didn’t document its loan properly and tries to get the infirmities resolved post-petition. In these days of securitized mortgages, many banks in the mortgage industry discover after a bankruptcy petition has been filed that there are problems with the documentation of the mortgage. Those problems simply cannot be fixed after the bankruptcy case has been filed.
When a secured creditor tries to fix problems with the documentation, whether by transferring an interest, trying to record an assignment, or any other action that should have taken place long before, that creditor is subject to the same kind of suit for damages that the creditor who made an improper telephone call.
Which brings me back to the title of this post. I used to do a lot more work on the creditor side of cases. I understand the pressures that creditors’ lawyers face. No one wants to be the lawyer who made a goof and subjects his or her client to a stay violation. In fact, under some circumstances not only is the client liable, but the lawyer’s firm would be as well.
So I used to worry a lot about the implications of the Automatic Stay. Then I started representing debtors.
And now it doesn’t bother me at all.
New York Times columnist Ron Lieber writes about student loans and bankruptcy in his Your Money column this week. Ron spotted this post from A Clean Slate about how student loans are like a tattoo and called me to chat about it. Ron happens to know me from years ago so this was a good opportunity to catch up on things.
I don’t get too involved in the legislative battles over changes to the bankruptcy laws. Ever since the banking industry used its muscle to get Congress to pass the the disastrous and ill-conceived 2005 amendments to the Bankruptcy Code, I have had little faith in the legislative process when it comes to the bankruptcy laws. So I won’t be holding my breath whether Congress manages to overturn one of the many foolish provisions contained in the 2005 revisions.
Our conversation was much more involved than Ron could reflect in his column. Such is the nature of the media process, of course, where a sound bite or two ends up making the cut and much of what is discussed gets turned into background learning for the reporter. But I was pretty pleased with how the column came out.
Here is one point that Ron and I discussed that did not get as much attention in his column as I would have liked: Anyone who tactically chooses to incur dischargeable debt with the intention of discharging it in a bankruptcy case runs the risk of having such debt declared non-dischargeable. And any person in a bankruptcy case who turns down available government student loans to incur private student loan debt is providing the private student loan lender with a good circumstantial case to render such debt non-dischargeable anyway. So the argument that students might incur dischargeable debt with the intention of filing a bankruptcy case is probably a red herring.
Another point that Ron addressed tangentially is that the vast majority of my potential consumer clients are not the kind of people who would ever think about running up large amounts of dischargeable debt and filing a bankruptcy case. The very small percentage that I have seen who seemed to have taken such a tactical approach I simply decline to represent. As all of my consumer clients know, the first little speech I give every one of them before we ever enter into an attorney-client relationship is the need for candor. If I thought there were any chance that my client had incurred debt with the intent to discharge it, I would have a very serious talk with the client and possibly decline the representation. Just about every other bankruptcy lawyer I know would do the same.
But in any event it was a lot of fun to chat with Ron about this stuff. As I told him, I love what I do and very much enjoy talking about these kinds of things. So it was nice to have a small part in educating people in the broad scale that the New York Times can provide.
I wrote a short article on a very nerdy commercial bankruptcy litigation issue for the American Bankruptcy Institute. The article was published in the spring newsletter of the ABI’s Bankruptcy Litigation Committee. I have received good feedback on it so I thought it might be worth sharing a link here.
Regular readers of A Clean Slate might recall that I discussed Rule 2019 a little back in January. I had forgotten that I promised to follow up when I had more information. Better late than never I guess.
A couple times recently that people have asked me the same simple question and been surprised by the answer.
The question: “When should people call you?”
The answer: “When the first really bad thing happens.”
Let me give a little context. The first time I heard this question, it was from a consultant who was only vaguely familiar with a bankruptcy and restructuring practice. The second was from another attorney who has clients who might need my services. Both wanted to know at what point in someone’s life they should contact me. And both expected something to the effect of, “When debts are so bad that people are having trouble paying bills.”
You certainly can contact me then, but it would be better if you did it when you saw the first sign of financial trouble. That might be illness, job loss, hours being cut, divorce or anything else of the sort. You don’t have to wait for the train to hit you before you look for help. When you see the train coming and don’t know whether you might be able to get out of the way, that’s when you should call.
When I am involved early, we can look and see whether you might be able to avoid bankruptcy through some decisions. If bankruptcy is inevitable, we might have more flexibility about under what chapter to file, the timing of the filing, and some choices we can make. When I get involved as things are spiraling out of control, our options are often more limited. I personally don’t charge for initial consultations and often meet with people a couple times before they retain me.
So remember that you don’t have to wait for the train to hit you before you seek help.