Chapter/ Trick # 3 – Bait and Switch

Bait and switch is when an individual or a corporation baits you with goods or services at a low price, but when it comes to delivering the goods or services, they will tell you that price is no longer available and switch to selling you something else. The bait will often include a picture of something or a written description of what is being offered – click here and follow the links until you get to the switch. This is a trick used by used car salesmen, hotels, people on dating sites, and mortgage lenders and servicers.

Bait and Switch # 1 – the Deed of Trust

The first big bait and switch for borrowers in California and other nonjudicial foreclosure states is getting handed a deed of trust instead of a mortgage. When people sign for a mortgage loan in California, they refer to it as "the loan" or "the mortgage" without understanding they are signing something completely different.[1] Deeds of Trust will be written in bold letters on the top of the document you sign, but nobody will explain to you how deeds of trust are different or the rights you give to a trustee.

Unlike a mortgage, which is a two-party instrument, a deed of trust is a three-party instrument that involves you (the trustor), the lender/ originator (later to become the beneficiary), and the trustee, the same pretend friend previously discussed, who will hold the title until you (the trustor) pay off the loan. This is a wholly different theory of mortgage lending than a regular mortgage – a form of lending based on something called title theory.

Because a deed of trust transfers title to the trustee (title theory), the trustee holds your title during the time you are in debt to the beneficiary. Once you finish paying off your debt, the trustee reconveys your title to you. Based on holding this title, along with the power of sale in the deed of trust, all the trustee needs to do to foreclose is to record a notice of default and a notice of trustee's sale with the county recorder (nonjudicial) and then sell your home at a foreclosure sale. This is the awesome power you give away when you sign a deed of trust, it’s the power of nonjudicial foreclosure.

A true mortgage, on the other hand, is a 2-party instrument with only a lender and a borrower. This is lien theory because the mortgage is treated as a lien only and not a transfer of title to the trustee, which will later allow them to record notices and foreclose on your home. In a judicial foreclosure state, to take your home by foreclosure, the lender, the lienholder, has to sue you in court, which doesn't happen in nonjudicial foreclosure states until you get sued for eviction. This is a much fairer process called judicial foreclosure.

Judicial v. nonjudicial foreclosure

In a judicial foreclosure/ mortgage/ lien theory state, the lender cannot foreclose on you without a lawsuit and due process, meaning they have to personally serve you with a summons and complaint, and you become a defendant in a court case. In a judicial foreclosure state, if you have evidence, say from your forensic loan audit, that the bank that is foreclosing on you doesn't have your promissory note and is not your actual beneficiary, you can challenge them based on lack of standing and get the case dismissed.[2] These are the states where you can challenge the lender's violations or their lack of a promissory note in court.

In a nonjudicial foreclosure/ deed of trust/ title theory state due process is replaced by notices of default and a notice of trustee’s sale recorded by the trustee with the County Recorder. In a nonjudicial foreclosure/ deed of trust/ title theory state you don't get due process until the new owner who purchased your home at foreclosure sale personally serves you with an unlawful detainer summons and complaint so as to take possession and evict you. Once that happens, you are in a summary proceeding in a different court where the judges will treat you like a deadbeat tenant. In a nonjudicial foreclosure/ deed of trust/ title theory state if you try to challenge the lender's standing to foreclose prior to them foreclosing, for instance based on them not having a promissory note, also known as the "show me the note" argument, it won’t work.

Bait and Switch #2 - Predatory Origination

In the run-up to the crash in 2008, there were many stories of borrowers who were told they were signing one thing only to find out years later that they had signed something different. An example of this is a loan broker telling you that you have a fixed interest rate of 5% for thirty years when what you really have is an introductory teaser rate for one year. It would be a year before you realized the trick, and by that time, the broker would be long gone, and it would be past the time to cancel or rescind the loan.[3]

The loans these predatory originators wrote were loans like the Wachovia pick-a-pay mortgage, which would have four payment options, the first one being called a minimum payment, which would be an attractive payment that the borrower could afford.[4] The other three payments would be an interest-only payment, which would never decrease the principal balance, a 30-year amortized payment, and a 15-year amortized payment. The unsuspecting borrower would make the affordable minimum payment, not realizing that it would cause the loan to self-amortize and the principal balance to balloon, which they would not realize until a year later when the loan balance re-amortized and increased by thousands, sometimes more than a hundred thousand dollars.

These days, this origination bait and switch mostly involves tricking you into a higher interest rate. It might be practiced by regular home mortgage lenders that will bait you with a lower interest rate and then delay you with a long waiting period, after which the rate will be higher. At that point, they'll tell you no longer qualify based on some internal review they never told you about.

The bait may be an advertisement for a low-downpayment loan that says no appraisal is required, for which they will collect a nonrefundable upfront commitment fee. Then, they'll force you to take out a different loan with a lower loan-to-value (L.T.V.) that requires you to put down more money. The lender may disclose an attractive interest rate while hiding other details in the promissory note, such as extension fees and prepayment penalties. This is especially likely to happen when interest rates are rising.

Bait and Switch # 3 –the MERS Mortgage[5]

Beginning in the 1990s, a fictional beneficiary began to appear on every mortgage or deed of trust where the money was provided by Wall Street and securitized into an RMBS. This beneficiary was called Mortgage Electronic Registration Systems Inc. (MERS). Similar to the fiction of a trustee holding your title is the fiction that the MERS beneficiary is a real beneficiary. However, this was a fiction created by the originators and the servicers so that they could avoid the costs associated with securitization.

People began receiving these MERS mortgages where the fictional MERS would show up on mortgages described as "the beneficiary under this Security Instrument" or a "nominee of the beneficiary." The fine print on these MERS mortgages would say that MERS is "a separate corporation" and that it was "acting solely as a nominee for Lender and Lender's successors and assigns…” The legal effect of this would be that the fictional MERS beneficiary/ nominee would now add another party to everybody's mortgage; for example, your deed of trust, which had been a three-party instrument, became a four-party instrument, and your mortgage, which had been a two-party instrument, now became a three-party instrument. There was no law passed to allow this fictional nominee, or to give it legal rights, the banks just did it.

Unwittingly, by signing this fictional MERS mortgage, you agreed to cloud your chain of title by allowing the servicer to disguise the identity of the actual beneficiary. You also unwittingly agreed to disrupt the grantor-grantee index of the county recorder system where deeds of trust and mortgages had consistently been recorded with the beneficiary's correct name since the 1600s and assignments between beneficiaries were also recorded. The mortgage servicer’s benefit by the fact that the MERS fiction simultaneously destroys your chain of title via the County Recording system and also allows them to act under the power of this "nominee-beneficiary" to conduct robo-signing, forgery, and other mortgage crimes with impunity.

Because these MERS mortgages disrupted chain of title by breaking up the grantor-grantee indexing system, the county recorders were the first to notice this fictional beneficiary and complain about it. New York State briefly fended off MERS when the New York Attorney General published an opinion stating that MERS did not comply with New York recording statutes and the Suffolk County recorder Ed Romaine began refusing to record them.[6] MERS appealed, and the appellate court compelled Romaine to record the MERS mortgages even if it did contain a fictional beneficiary, even acknowledging that it left the title clouded and unnegotiable.[7] The New York appellate court put their hands over their eyes and left the mess for others to clean up, which they put in legal terms as not looking "beyond the instrument."

Bait and Switch # 4 –Hard money Loan to Own

Bait and switch is also practiced with regularity by hard money lenders that have no ability or intention to offer a prime conforming loan but will lure you into thinking you are getting one by giving you an application for a prime conforming loan and letting you think they intend to offer it to you. These hard money lenders will then switch documents to describe your loan as a business purpose loan, usually a one- or two-year interest-only loan with a balloon payment that will be impossible for you to refinance. Hard money lenders do this because a business purpose loan deprives you of the protections that the federal government provides through the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA), which a homeowner is entitled to when they borrow against their primary residence. If you have more than one property, they will trick you into cross collateralizing a single promissory note against multiple properties, so you end up losing two properties instead of one. These hard money business purpose loans will also seek to avoid the usury laws by charging you interest far above 10%.

Hard money lenders, in general, loan to own, and they represent investors who depend on them to provide a 35% return on their money based on aggressively pursuing foreclosure on all the loans they make. Knowing you are strapped and need the full amount of the loan, they won't disburse the full amount, causing you to default on other commitments. You may have agreed to this because you feel desperate, but you will soon be shocked to learn that their fees will be up to 30% of the loan.

Having started you off in a hole by funding less than you thought you would get, the hard money lender will keep the pressure on in their loan-to-own scheme by recording a Notice of Default at the first possible moment, sometimes even before you are in default. They'll do this so they can ramp up the interest and fees while at the same time preventing you from going elsewhere for another loan to pay them off because they have destroyed your credit rating! Once that Notice of Default is recorded, they'll start charging you a default interest rate, making it even harder for you to borrow from someone else to pay them back. They will continue to squeeze you until they have foreclosed, and your equity is now being disbursed to their investors.

Bait and Switch # 5 – Forbearance without deferment

When the federal government first gave borrowers with federally backed mortgages the right to request a 180-day mortgage payment forbearance during the pandemic under the CARES Act, I was extremely skeptical. It felt like just one more program that put control in the hands of the services, with no enforcement to guarantee that they gave help to borrowers. It was also not a traditional forbearance where the mortgage payments were automatically deferred to the end of the mortgage; instead, it had vague language about "numerous options" that the servicer would later offer when the forbearance had ended.

Predictably the servicers were more than willing to allow borrowers to be in forbearance, especially in 2020 when housing prices were still rising, and equity was keeping pace with the borrowers' arrears. Servicers gave borrowers forbearance options that went on a year, and in some cases more than a year before they were asked to start paying again. Borrowers took this option without getting anything in writing, assuming that it would be a traditional forbearance where their payments would get deferred to the end of the loan. However, what happened was very different and far more onerous.

Once people got back around to paying, they were shocked to find out the servicer was now demanding the full arrears in a lump sum. Some were offered modifications that asked them to pay the arrears back in the form of increased mortgage payments over a short period, but these payments were a punishing amount they could not afford. Borrowers soon realized that those unsigned notices that the servicer had sent out, expressing sympathy for their financial distress during the pandemic, did not constitute a contract or a promise. When borrowers couldn't pay this lump sum or the punishing modification option, they would be shocked to receive a recorded a Notice of Default.

Many of the borrowers who are in foreclosure now are victims of this servicer scheme. Looking back, they realized too late that they shouldn't have leaned into the forbearance and shouldn't have trusted their mortgage servicer to help them recover once the pandemic was over and they were back on their feet. They realized too late that they should have worked harder to pay their mortgage to avoid bankruptcy or foreclosure. Many have had to sell their property in order to recover what is left of their equity.

Bait and Switch # 6 - oops, we made a mistake.

A modification is always given by the servicer only because it fits properly into their balance sheet. Meanwhile, they will sadistically encourage you to believe it has something to do with your hardship. Servicers tell you a loan modification is related to your hardship as a trick to lure you farther into default and gain access to your financial information. When they reverse a decision, it's because someone realized they overlooked something – for example, they were charging you less than they could get away with. They may suddenly realize they can make more money by foreclosure.

When a servicer refuses to honor your modification after it is signed, this is a breach of contract, but the servicer will come up with excuses why they don't have to perform. If it's a Veterans Administration loan, they'll blame it on the V.A. They'll say Fannie Mae didn't approve it or H.U.D. Treat these as lies. Someone just woke up and realized the servicer could do better.

[1] To make it even more confusing deeds of trusts and mortgages are also both known under the general umbrella of mortgages.

[2] This means they are not the party with the interest they are suing on.

[3] Right of Rescission is three days.

[4] Wachovia would be purchased by Wells Fargo in 2008.

[5] Mortgage Electronic Registration Systems Inc.

[6]The actual Plaintiff was MERS’ parent company MERSCORP Inc.; Link to NY state provisions. See In the Matter of Merscorp, inc., ET AL. v. Edward P. Romaine & C., ET AL.. Available at: (http://www.law.cornell.edu/nyctap/I06_0167.htm.); See also NY Informal Opinion; Link to case In Re Merscorp: Available at:(http://www.law.cornell.edu/nyctap/I06_0167.htm.).

[7] See In the Matter of Merscorp, inc., ET AL. v. Edward P. Romaine & C., ET AL.. Available at: (http://www.law.cornell.edu/nyctap/I06_0167.htm.); See also NY Informal Opinion.