Foreclosure In The Pandemic (Part I); Before the Moratorium
This is a two-part blog entry:
This two-part blog is for those of you that have stopped paying your mortgage during the pandemic and don’t know what to expect as the moratorium ends. Part I describes the general foreclosure business up to and including the moratorium and Part II predicts mortgage-servicer and trustee behavior and advises strategy for borrowers post-moratorium to avoid foreclosure.
Start by imagining you are a general fighting a war and your troops are hungry and tired. You ask the general from the opposing side, whose troops are well fed and rested, for a time out. “Please,” you say. “It’s not fair.” What do you imagine the answer might be?
This is no different than when you call your mortgage servicer and ask for help. The reason the war analogy is so apt is that you and your mortgage servicer want opposite things and you each want them badly. You want to save your home and the mortgage servicer wants money. Mortgage servicing is the business of foreclosure, and if you think of this as a war, it’s easier to understand the lies – the first rule of war being deception. And it’s also easier to understand corruption.
Over the last forty-plus years, an entire foreclosure economy has sprung up to profit from securitized subprime mortgage debt and most of it is corrupt. It was set in motion during the 1980s Reagan-era deregulation which dismantled mortgage lending protections and caused the Savings and Loan Crisis (1986-1995) and the first subprime bubble and collapse (1998-1999) and the bailouts that followed. Then there was the Clinton-era repeal of the Glass-Steagall Act (1999) which opened the door for Wall Street banks to merge their business with commercial banks which led to the subprime crisis (2008). Before this, mortgage lending had been conservative and stable going back to the New Deal (1933) and foreclosure was rare, but since then, taxpayers have paid the cost, not just for the bailouts and cleanups (the S& L bailout was $480B, the 2008 subprime bailout $700B) but in the loss of millions of homes to foreclosure. We hold onto the illusion of long gone government protection and ignore the current corrupt reality at our own peril.
A “loss mitigation” employee of Wells Fargo once admitted to me in court that he got bonuses when his cases went to foreclosure and nothing if he helped a borrower with a loan modification.1 Starting during the subprime crisis and continuing to today, corrupt mortgage brokers have been getting kickbacks for steering creditworthy borrowers into subprime or higher interest loans.2 Right around that same time, Wells Fargo was sending black agents to black churches to recruit subprime borrowers at church!3 This was all just good business.
Dual tracking is also good business; easier and cheaper to lie to a borrower that they are getting a modification so they miss their sale date than to help them get a modification. Better to make promises on the telephone and not by email or fax so there’s no paper trail for a borrower to use to sue in court. When you get a random letter from your servicer in the mail dated months before, they are back-dating evidence. When they make digital recordings of phone calls it’s to monitor rogue agents that might be trying to help you. In a trial where I represented clients against Wells Fargo, they edited out the part of the call that was favorable to my client before they burned the digital file to a CD for the court.4 Cheating is cheaper than losing and it makes good business sense too, especially if you know you won’t be caught or stopped.
The biggest scammers in this foreclosure economy are the big four mortgage servicers: Chase, Wells Fargo, Citi and Bank of America. Although we may still think of these big four as traditional mortgage lenders, during the late 1990s they each did a switcheroo from lending to servicing so they could benefit from this securitized subprime debt. In their new business model they originate loans with Wall Street money, pool and securitize those loans into mortgage-backed securities they control as trustees and retain the servicing rights so they can foreclose. As part of this scheme, they formed Mortgage Electronic Registration Systems Inc. (MERS) and created the MERS mortgage naming MERS as a fictional beneficiary.
The bankers did this to avoid the costs of the multiple recording assignments between actual beneficiaries that are required for securitization and also so that they could hide behind the fictional MERS beneficiary when they needed to foreclose. The gist of this entire scheme was to hide the fact that they were shifting their business so that they could keep the reward of foreclosure for themselves and put all of the risks of default onto the stock investors. The main deception was that they were keeping the most valuable right for themselves, that is the right to foreclose.
Besides the mortgage bankers, the foreclosure trustees are also corrupt. If you are lucky enough to live in a judicial foreclosure state like New York or Massachusetts you will have a mortgage which is a two-party instrument between lender and borrower and you’ll never have to meet a foreclosure trustee, but if you get into foreclosure in a non-judicial foreclosure state like California you will. In non-judicial states like California your type of mortgage is a deed of trust which has a lender, a trustor (borrower), and a trustee who takes legal ownership of the mortgage until it is paid off (or foreclosed on). In a non-judicial foreclosure, the first thing to appear in your county records will be a substitution from that innocuous trustee on your mortgage to a foreclosure trustee who, in theory, is still supposed to be impartial but who, in reality, is not.
Crafty California foreclosure trustees are protected by an archaic statutory scheme created before securitization when there were few foreclosures and it was reasonable to presume that a foreclosure sale would be fair. This law protects foreclosure trustees as impartial parties and allows them to postpone a sale multiple times without notice. (Cal. Civ. Code 2924g). But today, foreclosure trustee services are openly run as fronts for investor groups and they use this statutory protection to frustrate open bidding. Once they have postponed a sale multiple times, eliminating the other bidders, their select investor somehow attends the sale and pays as little as possible, usually only what the borrower owes. These days it’s the borrowers that need protection, to make sure they get a fair price for their house even if it is in foreclosure, but the law has not caught up.
The “sleepy seconds” problem facing borrowers today is also the result of an inside deal between servicers and investors that goes back to 2008 when home prices crashed. That was when borrowers sought to take advantage of government assistance to modify their first and second deeds of trust, the seconds those piggyback seconds and HELOCS that were now almost worthless paper. As borrowers were pleading with the servicers to also modify their seconds, or let them settle them, the mortgage servicers lied to them. They told these borrowers that these seconds had been “written off” or “charged off” and not to worry about them, leading the borrowers to believe they had been forgiven. Meanwhile, the servicers were selling these seconds to investors who would scoop them up and sit on them until the value in the property came back when they would be worth their full amount plus interest. Relying on the bank’s lies, these borrowers missed the opportunity to settle these debts for pennies on the dollar or lien strip them in a Chapter 13 bankruptcy.
Prior to and during the pandemic, these “sleepy seconds,” which were never even valuable enough to securitize, have been springing back to life to fuel the current wave of foreclosures and finally bring down those borrowers that survived the first. If it seems cruel that the bank would rather sell to investors than let you settle your debts, think of the two generals and remember the war is over money. Even during the pandemic, Bank of America, Chase, and Wells Fargo have been able to turn foreclosure losses into assets by releasing their loan loss reserves and claiming the loss on their books. This has led them to declare record profits in the First Quarter of 2021.
For those of you that have stopped paying your mortgages during the pandemic you will fall into two categories. The first have loans backed by HUD and the FHA, the USDA, the VA, Fannie Mae, or Freddie Mac and has managed to secure a written forbearance agreement from their mortgage servicers. The second group, regardless of beneficiary or type of loan, has not secured a written agreement from their mortgage servicer and is nevertheless missing payments. This second group will be most of you. Part II is for you.
Brown v. Wells Fargo, CV16-642-DMG (AGRx)
CFPB v. Castle & Cooke Mortgage LLC et al., 2:13CV684DAK (available online at: https://files.consumerfinance.gov/f/201307_cfpb_complaint_Castle-and-Cooke Complaint.pdf.
Bank Accused of Pushing Mortgage Deals on Blacks, by Michael Powell; New York Times, June 6, 2009.
Brown v. Wells Fargo.