The Florida Foreclosure Fraud Weblog

Two major lenders, Chase and Wells Fargo, have angered federal judges sitting in two different cases: Chase, because of an apparent fraud on the court, and Wells Fargo, through incompetence and sloppy bookkeeping.

Chase lies to the court

My good friend Jay Fleischman describes the Chase case:

In the case of In re Pawson, Case No. 05-18439 (Bankr. S.D.N.Y.) Chase filed a motion for relief from stay although the debtor had substantial equity in a co-operative apartment valued at $1,000,000. Chase alleged that the debtor was two months in arrears in his mortgage payments, though the debtor showed that Chase had been rejecting the online payments he had made since filing his petition.

Because this is not the first time Chase has been caught with its hand in the cookie jar, it now has to agree to follow special procedural safeguards in that bankruptcy court designed to prevent future fraud, and, if I’m reading the story correctly, must pay to the debtor $50,000 in compensation.

Wells Fargo can’t keep track of its payments

The Wells Fargo case is simply one of extreme incompetence:

The Burriers denied that they had missed payments, but in April, to keep their home, they agreed to make double payments to cover the ones Wells Fargo claimed they had missed. If the borrowers could prove that the mortgage checks were submitted, Wells Fargo said, their account would be credited and they would no longer have to make up the payments. The proof required by Wells Fargo and approved by the court was “valid, accurate and true copies” of the front and back of the checks the borrowers sent in.

Only one problem: Wells Fargo had been recording the payments electronically, so that the borrowers never got any canceled checks, and Wells Fargo knew that.

“The payments have, evidently, been lost in a black hole of the creditor’s organization or through accounting mismanagement,” the judge wrote. “This is a major lender/mortgage loan servicer where the left hand does not know what the right hand is doing — the collection department does not know what the check processing and accounting departments are doing.”

Like Chase, Wells Fargo has been in hot water before with this same judge, and he’s considering whether their conduct in this case deserves some kind of punishment.

Watch CBS Videos Online

We’re “about halfway” through the bursting of the bubble.

Countrywide and Florida Attorney General Bill McCollum have reached a settlement of the wide-ranging fraud claims filed by the state earlier this year. The details remain to be worked out, but here are several key features to the settlement that could benefit more than 50,000 Florida homeowners with a Countrywide loan.

Cash payments

Floridians who have lost their homes due to some of Countrywide’s challenged practices may be eligible for cash payments in compensation. Up to $20 million may go to Florida’s former homeowners.

Late fee waivers

Countrywide borrowers who were assessed late fees due to improperly-written loans may be eligible for waivers of those fees. Up to $4 million has been set aside to benefit Florida homeowners with late-fee waivers.

Loan modification and foreclosure abatement

The most important feature of the settlement is the prospect of modifying the loans of qualified Countrywide borrowers, converting adjustable-rate loans into fixed-rate loans with more affordable interest rates, using HUD income-to-debt ratio guidelines. Countrywide has also agreed to hold off on filing or pursuing foreclosure against any borrowers who might qualify for relief.

Toll-free Countrywide hotline

Not all homeowners will qualify, so keep an eye out for more details as they develop. Countrywide has a toll free hotline for those who want more information: 1-800-669-6607.

If you want stricter laws protecting homewoners from predators looking to scam foreclosure victims, then Florida has some good news for you.

The state has enacted a new law, effective on October 1, 2008, aimed at equity-skimming and advance-fee fraud schemes designed to steal from Florida homeowners what little money or equity they may have left.

The law doesn’t apply to everyone - lawyers, for example, are already regulated by the Florida Bar and are exempt from the new law - but anyone who’s not exempt and offers services to foreclosure homeowners has to comply with strict new requirements, including written disclosure requirements, a cooling-off period, and a prohibition from taking fees before all services are complete. The law also makes it easier for homeowners to cancel any transaction where a foreclosure “consultant” tricks the homeowner into singing over a deed to their home.

Perhaps most important, for homeowners who have fallen victim to foreclosure predators, anyone who violates the new law may have to pay penalties of up to $15,000. Anyone who thinks they’ve been a victim of foreclosure rescue scams after October 1 should contact a lawyer to find out if they have any claims against a scammer.

MSNBC reports on just how bad the foreclosure fraud problem has become:

Rich Hagar is a former home appraiser based in Seattle who now runs seminars for law enforcement officials and real estate professionals on detecting fraud. He describes the mortgage fraud problem as “monstrous,” noting that bank “Suspicious Activity Reports” for mortgage fraud have jumped nearly 700 percent in the last five years, with 48,000 filed in the first nine months of this year alone. But Hagar said he believes those figures only represent 10 to 15 percent of the total fraud cases – suggesting nearly 1 million more fraudulent mortgages have been closed in the first nine months of this year.

The article also talks about the perils of fraud in short-sale transactions:

Fraudulent short-sale specialists often promise quick resolution for a fee. They can also hide the true value of the sale from parties involved and pocket the difference. For example, the con artist might persuade a buyer to pay $175,000 for a home with a mortgage of $200,000, then tell the bank the price was $150,000. The short-sale facilitator then pockets the $25,000 difference.

“There’s a lot of room for fraud in short sales,” said Wasylik, the Florida attorney.

Just one more reason to avoid fly-by-night foreclosure rescue operators and “short sale consultants.”

Attorney General Bill McCollum is at it again, targeting perpetrators of mortgage fraud. This time, McCollum has sued some twenty-five defendants who allegedly skimmed over $6 million out of approximately 60 home loan transactions. Here’s some of how they did it:

Starting in July 2005 and continuing through at least January 2007, three of the ring’s leaders allegedly defrauded lenders by recruiting “straw buyers” with good credit and using them to create false applications to buy homes throughout Central Florida.

The lawsuit, filed by the Attorney General’s Mortgage Fraud Task Force, claims the ring conspired with Realtors to artificially inflate purchase prices, thus enabling them to obtain larger mortgage loans.

One potential defendant was actually left out, because “real estate agents are exempted from the Deceptive and Unfair Trade Practices Act under which the others are being sued.” However, she and the others may be subject to criminal charges beyond the civil suit.

Of the 60 homes, about 50 are now in foreclosure.

Losing your home? Most homeowners facing a mortgage default have already come to grips with that consequence or at least they know it’s a very likely possibility. But may don’t realize that, long after losing their home, they might still end up paying against the debt for years, even decades.

The false promise of loss mitigation

When the mortgage lending industry hit the iceberg, all those brokers and real estate agents who had pocketed so much money during the boom suddenly found their empty pockets in need of refilling. Where’s the demand now? “Loss mitigation,” or helping homeowners find solutions for their home loan defaults. Unfortunately, real loss mitigation options are very limited: almost no one qualifies for a re-finance, and unless you choose to fight your foreclosure, almost every option involves losing the home.

Short sales: Not a silver bullet

One pitch that loss mitigation specialists have hit on is the “short sale.” There are two parts to the short sale: first, that it’s a sale of the home to some third party. Second, the sale price is less - often, much less - than the total loans on the property - that’s the “short” part. In order to make a short sale work, the lender or lenders have to sign off on the deal.

The main benefit to the lender on a short sale is that they get some cash, now, instead of the mere possibility that they might someday recover some amount of the loan. The main benefit to the borrower is that they achieve some finality - they get to settle their debt and end the worries that the bank will pursue them for years to pay on a loan for a home they no longer own. (This is a possibility in many foreclosures, in states like Florida that allow for “deficiency judgments” if the foreclosure sale doesn’t cover the amount of the debt.)

Lose the house, keep the pain

Now, the New York Times has reported, banks are calling a halt to the short-sale party.

Reluctantly, banks are agreeing to let some short sales go through. But instead of writing off the unpaid portion of the debt, they want homeowners to sign a note promising to pay some or all of the balance due.

As short sales become more popular, pitched by loss mitigation consultants looking to make a cut on the transaction, banks have become more sour on the idea. They are now demanding that homeowners carry substantial debt with them for as long as twenty years. One bank, slapping a last-minute condition on an already-approved short sale, told the homeowner, “When you are ready to participate in the loss, feel free to call me.” One lender actually demands that homeowners commit to repay the full debt, as far as thirty years into the future.

Credit scores: the hits keep on coming

One other potential benefit claimed by short-sale pushers is that a short sale is somehow less bad for your credit score. Unfortunately, this just isn’t true:

People in the industry say banks sometimes tell borrowers that their credit will take less of a hit if they agree to sign a promissory note than if they default. It is not true. In both cases, credit agencies consider the homeowner to have failed to live up to a solemn obligation.

Like any other credit obligation, it’s the timely payment that keeps your rating up. Missing a payment, even if you later make up every dime, is the damage to your credit report. A foreclosure filing, or even a pre-foreclosure default, are what affect your score, not your proficiency in negotiating a way out of the problem.

Short sales: not for everybody… in fact, darn near nobody.

If you’re a homeowner and behind on your mortgage, you’re going to start getting pitches from short-sale “specialists.” Unless you’re in a very unusual situation, you should probably tell them to take a long walk off a short pier.

Hat tip to Calculated Risk for the story.

Wondering why our banking system is on the verge of collapse? Baffled at just how a surge in mortgage defaults threatens to pancake our entire economy? Look no further than the power of cartoons:

Some genius, unknown to me, has created this slideshow, “The Subprime Primer,” and it tells you prety much all you need to know about how we got here. (Warning: there’s some salty language here. This is not a cartoon you’ll want to share with the kids.)

For a more serious treatment, check out “The Root Causes of the Financial Crisis,” by Francis Cianfrocca:

THIS IS WHY THE ECONOMY SLOWED DOWN, BEGINNING LATE IN 2007. And I’d been saying that in this space a whole quarter before it even happened. This is also why economic stimulus plans like the one we got this year from George Bush and will get from Obama if he’s elected President, only make the problem worse, not better. And it’s also why the economy can not recover until the bad paper all runs off.

Good, if scary, reading.

A new report claims that Florida leads the nation in mortgage fraud.

In fact, 24 percent of fraudulent loans reported to the [Mortgage Asset Research Institute] during the first quarter originated on properties in Florida.

The most common kind of fraud was application fraud, including misstating income and false identification. I wonder how many of those involved were brokers with criminal records?

Fighting on two fronts

Imagine getting called up for military duty, torn away from your family, your normal life, and your job. Imagine the stress of going off to war, and then imagine coming back having lost your home. I am amazed and saddened to learn that for too many of our soldiers, sailors, and airmen, this is not a drill - it’s their reality.

Foreclosures against deployed military violate federal law

NPR reports that many active-duty military are falling prey to banks hungry for foreclosures. Not only does this lender practice shock the conscience, it’s against the law. The Servicemembers Civil Relief Act, passed by Congress during World War II, is supposed to protect active-duty servicemembers from exactly this situation. If you’re on active duty - and that includes any time in basic training, as well as time actually spent overseas - the law provides important protections against foreclosures and other financial hardships that sometimes affect our men and women in uniform.

Relief from Foreclosure

The SCRA includes several provisions to provide active military with relief from foreclosure - before, during, and even after the foreclosure case. Some of those powers include preventing entry of default judgments, postponing court cases, and setting aside judgments that the court has already entered. Because these foreclosures violate federal law, victims might also find relief under other laws, such as those preventing unfair or deceptive debt collection practices. Members of the military, and their families, facing foreclosure while on active duty should consult with an attorney right away to plan for quick action to save their family home.