The Foreclosure MESS: Why Bank of America, GMAC/Ally and others are

FREAKING OUT.

Presented by Chris McLaughlinAttorney at Law (FL)

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What We’re Going to Cover…• Overview of foreclosure MESS.

• Explanation of Mortgage securities and who the players are,

• Where the process breaks down and violates the PSA

• Explanation of assignments and “robo signing”

• What the heck is MERS?

• Chris’ Forecasts of What Will Happen

The Problem: 10 Trillion In Mortgages

•How much is this in seconds???–Million seconds is 11 ½ days–Billion is 33 years–Trillion is 3 millennia

The “Fourth Wave” Arrives

First Wave: Speculators give up

Second wave: Alt-A reset and interest

rates expire

Third wave: Growing

unemployment combined with declining real estate values; Mainstream

borrowers with conventional

mortgages begin to slide into default

Fourth wave: Strategic Default.

People make a business decision

to walk away.

Doesn’t Make Sense• Lenders say they want to help …

• From an economic point, it should make sense– Homeowner wants to keep house, can still make a payment.– Lender will lose far more than they would in a foreclosure

than they will from a loan mod.

• BUT as you will see … the problem is MUCH worse then most people think…

Failed Efforts• Hope NOW Program.

• Then FHA Secure.

• Then Hope for Homeowners.

• All required industry participation and didn’t work.

• More than ½ failed to reduce payments. And 1/3 actually increased payments. Office of Thrift Supervision.

• “Converting risky subprime loans into risky subprime loans.”

• NOW: The process BROKE DOWN at the beginning of the process because they gave risky loans Now it is BREAKING DOWN at the end of the process because of poor documentation and paperwork.

How Did We Get Here?The New Mortgage Cycle …

Banks took deposits

Mortgages began to be

commoditized

Pressure from Regional and

National Lenders

Standardized Underwriting

Process

Credit Scores, Loan Servicing

Companies

Sale of Mortgages in

Bundles

Mortgage Business came of

Age.

Hometown bank went away.

Payment Due, No Payment Made

Call from Lender

Late Charge Added

Lender calls and sends Letter

Default reported to Credit Bureaus & Lender sends 2nd Notice

Lender sends Letter with Payment Options

Lender sends Demand Letter

Lender sends file to its Attorney

Complaint Filed, Lis Pendens issued and Summons served

1 7-10 16 20-25 30 40 60 90 91-120

Day

Pre-Foreclosure Process Foreclosure Process

THE LENDER’S ACTIONS

The Lender’s Actions

91-120

Complaint Filed, Lis Pendens issued and Summons served

No Answer Filed, Court Schedules Hearing for Default Judgment

141

Court Orders Sale of Property

Notice of Sale Published

Sheriff’s Sale of Property

Clerk Issues Certificate of Sale

Sheriff issues Notice to vacate home

Home vacated

Right of Redemption to Property Ends

+25 to 75 Days +10 +1 to 14 +1 to 21

Mediation / QWR / Pre-Answer Motions Heard /

Answer Filed

140

Final Court issues Final Judgment

Win Action, Time or Both

Up to 4 months, or less

Fight or Don’t Fight

Discovery Interrogatories

Depositions

Pre-Trial Motions Trial Appeals

Up to 4 years, or more

Lender may begin Deficiency Action

Fight or Don’t Fight

Let’s See Why This Is A Mess…• Mortgages are underwritten with certain guidelines. • Go into a “pool” owned by Originator and then the

“Sponsor” and “Depositor.” • Credit enhancements also used in form of payment

guarantee. • Pool divided up into projected payment streams with

various yields and maturities. • Tranches then sold to investing public.• Proceeds of Tranches reimburse Depositor.• Then Servicer rights can be bought and sold so numerous

people become Master Servicer and Special Servicer.

Just Some of the Players• Borrower

• Originator

• Depositor

• Sponsor

• Issuer

• Underwriter

• Custodian

• Special Purpose Vehicle (Spv) ~ Remic

• Master Servicer

• Special Servicer

• Rating Agencies

• Insurer

This Is How Crazy It Gets…Loan Group I will consist of 9,701 first lien adjustable-rate mortgage loans secured by one- to four-family residences and individual condominium units, having an aggregate unpaid principal balance as of the Cut-off Date of approximately $2,642,014,591, after application of scheduled payments due on or before the Cut-off Date whether or not received. Sub-Loan Group I-1 will consist of 1,987 first lien adjustable-rate mortgage loans secured by one- to four-family residences and individual condominium units, having an aggregate unpaid principal balance as of the Cut-off Date of approximately $959,624,911, after application of scheduled payments due on or before the Cut-off Date whether or not received. Sub-Loan Group I-2 will consist of 5,172 first lien adjustable-rate mortgage loans secured by one- to four-family residences and individual condominium units, having an aggregate unpaid principal balance as of the Cut-off Date of approximately $1,000,382,723, after application of scheduled payments due on or before the Cut-off Date whether or not received. The principal balance of each mortgage loan in Sub-Loan Group I-2 will not exceed the limits established by Freddie Mac in connection with Freddie Mac's mortgage loan purchase program. Sub-Loan Group I-3 will consist of 2,542 first lien adjustable-rate mortgage loans secured by one- to four-family residences and individual condominium units, having an aggregate unpaid principal balance as of the Cut-off Date of approximately $682,006,957, after application of scheduled payments due on or before the Cut-off Date whether or not received. Loan Group II will consist of 4,926 first lien adjustable-rate mortgage loans secured by one- to four-family residences and individual condominium units, having an aggregate unpaid principal balance as of the Cut-off Date of approximately $1,387,540,063, after application of scheduled payments due on or before the Cut-off Date whether or not received. Sub-Loan Group II-1 will consist of 287 first lien adjustable-rate mortgage loans secured by one- to four-family residences and individual condominium units, having an aggregate unpaid principal balance as of the Cut-off Date of approximately $77,369,635, after application of scheduled payments due on or before the Cut-off Date whether or not received.

And Crazy … And Crazy…Sub-Loan Group II-2 will consist of 2,641 first lien adjustable-rate mortgage loans secured by one- to four-family residences and individual condominium units, having an aggregate unpaid principal balance as of the Cut-off Date of approximately $616,553,064, after application of scheduled payments due on or before the Cut-off Date whether or not received. The principal balance of each mortgage loan in Sub-Loan Group II-2 will not exceed the limits established by Freddie Mac in connection with Freddie Mac’s mortgage loan purchase program. Sub-Loan Group II-3 will consist of 1,998 first lien adjustable-rate mortgage loans secured by one- to four-family residences and individual condominium units, having an aggregate unpaid principal balance as of the Cut-off Date of approximately $693,617,364, after application of scheduled payments due on or before the Cut-off Date whether or not received. Loan Group III will consist of 3,352 first lien adjustable-rate mortgage loans secured by one- to four-family residences and individual condominium units, having an aggregate unpaid principal balance as of the Cut-off Date of approximately $1,157,489,713, after application of scheduled payments due on or before the Cut-off Date whether or not received. Sub-Loan Group III-1 will consist of 638 first lien adjustable-rate mortgage loans secured by one- to four-family residences and individual condominium units, having an aggregate unpaid principal balance as of the Cut-off Date of approximately $155,372,731, after application of scheduled payments due on or before the Cut-off Date whether or not received. The principal balance of each mortgage loan in Sub-Loan Group III-1 will not exceed the limits established by Freddie Mac in connection with Freddie Mac’s mortgage loan purchase program. Sub-Loan Group III-2 will consist of 1,782 first lien adjustable-rate mortgage loans secured by one- to four-family residences and individual condominium units, having an aggregate unpaid principal balance as of the Cut-off Date of approximately $413,494,551, after application of scheduled payments due on or before the Cut-off Date whether or not received. The principal balance of each mortgage loan in Sub-Loan Group III-2 will not exceed the limits established by Freddie Mac in connection with Freddie Mac’s mortgage loan purchase program.

Where the Process Breaks Down

Where’s The Note?

• 25%-50% of Original Notes no Longer Exist

• Plaintiff has to Produce Original Note

• Plaintiff has to Produce Title to Mortgage

• Failure to Produce can be Fatal to Plaintiff

• Raising Issue will Delay at Worst

How Much do I Owe?• Life of Loan History

• Principal, Interest, Loan Charges

• Frequent Churn of Loan Servicers

• This Information can be Difficult to Gather

• Not Fatal to Plaintiff but can Result in Substantial Delay

What Does the Pooling and Servicing Agreement Say?• Borrower Is 3rd Party Beneficiary.

• Get Copy From Servicer or www.sec.gov

• SPV Can Only Do What Is Authorized…– Date Loan was Acquired– Specified Loan Charges– Specified Loan Services– Commencement of Foreclosure

Common Features of Trusts• All Securitized Trusts have a PSA

• All Require some form of A To B; B To C; and C To D

• All Trusts have Cutoff Dates for Transferring Notes and Mortgages to the Trust

Chain of Title• There has to be an Unbroken Chain of Title for the

Note

• This Chain of Title has to Match the Requirements of the PSA

• Just Because the Plaintiff appears to be the Original Lender on the Note

• Do Not Assume They Own The Note – e.g. Citi, Chase, Suntrust,– Wells Fargo, Bank Of America

Adhering to the PSA

• PSA requires Credit Counseling

• Provision of Services as a Condition Precedent to bringing Foreclosure

• Can also give rise to Breach of Contract

Problem Areas• May or May Not have a Secured Interest

• “Without Recourse”

• Dates on Endorsements, Allonges and Assignments are Critical; Check Notaries

• Does the Assignor Exist on this Date

• Locations where Documents are Executed;

• Your “Clearing Companies”

Who is the Plaintiff?IN THE CIRCUIT COURT OF THE 20TH JUDICIAL CIRCUITOF FLORIDA, IN AND FOR LEE COUNTY

CITIBANK, N.A., AS TRUSTEE FOR THE CERTIFICATEHOLDERS OF STRUCTURED ASSET MORTGAGE INVESTMENTS II, INC.,

BEAR STEARNS ALT-A TRUST, MORTGAGE

PASS THROUGH CERTIFICATES SERIES 2006-4

Plaintiff,

Click on “Search for Company Filings”

www.sec.gov

Click on “Company or Fund Name”

EDGAR

Enter the Name of the Trust

What is the Name of the Trust?

Company Search

Bear Stearns Alt-A Trust 2006-4Click the CIK Number

View Company Filings

Locate the Documents

Look for the 424B5 filing. This is the Prospectus. Click Documents to download the file.

There may be multiple 424B5 documents as supplements are registered. Look at the Acc-no: and select the highest value since it will be the most recent.

The Prospectus

Relevant InformationThe Table of Contents

Listing of all the relevant sections and reference to documents

The Issuing EntityBear Sterns ALT-A 2006-4

The DepositorStructured Asset Mortgage Investments II Inc.

The SponsorEMC Mortgage Corporation

The CustodianWells Fargo

The Trustee

Citibank N.A.

Loan ServicingCountrywide

Collection ProceduresServicer is bound by the terms

of the PSA

The Reserve FundThe servicer’s “slush” fund

Assignment of Mortgage LoansThe process of the loan and mortgage getting to

the trust

MERS: The Creation of the Confusion

• “The mortgage mess had to have a mechanism to cover its tracks. From all of the author’s research, the catalyst was the creation of MERSCORP, Inc. (incorporated in 1998) and its subsidiary Mortgage Electronic Registration Systems, Inc. (known hereinafter in this work as “MERS”). - Source: “Clouded Titles”, Dave Krieger

• “The bank argues that MERS’s status as a “nominee” for the lender and the “mortgagee of record” within the document qualifies it as a “mortgagee” within 14 M.R.S. §6321. We disagree.” MERS v. Saunders, Maine Supreme Judicial Court (2010)

Who Is The Plaintiff?

Assignment Of Mortgage• Greg Allen, Vice Pres.

• MERS

• Effective Date

• A-B; B-C; C-D

• Equitable Transfer

• Lots of BACK DATING!

Who Owns the Mortgage?• Unbroken Chain Of Title?

• Compliance With PSA?

• MERS?

• Vice President For A Day!

Who Holds the Mortgage?• Professor Adam Levitin, Georgetown University Law Center (via CNBC)

scary scenario (that only a law professor would enjoy!):

• “The mortgage is still owed, but there's going to be a problem figuring out who actually holds the mortgage, and they would be the ones bringing the foreclosure. You have a trust that has been getting payments from borrowers for years that it has no right to receive. So you might see borrowers suing the trusts saying give me my money back, you're stealing my money. You're going to then have trusts that don't have any assets that have been issuing securities that say they're backed by a whole bunch of assets, and you're going to have investors suing the trustees for failing to inspect the collateral files, which the trustees say they're going to do, and you're going to have trustees suing the securitization sponsors for violating their representations and warrantees about what they were transferring.”

• Source: http://www.cnbc.com/id/39634568

Scary Scenario, Part II:Josh Rosner, of Graham-Fisher, put the following out in a note today, claiming violations of pooling and servicing agreements on mortgages could dwarf the Lehman weekend:

Nearly all Pooling and Servicing Agreements require that “On the Closing Date, the Purchaser will assign to the Trustee pursuant to the Pooling and Servicing Agreement all of its right, title and interest in and to the Mortgage Loans and its rights under this Agreement (to the extent set forth in Section 15), and the Trustee shall succeed to such right, title and interest in and to the Mortgage Loans and the Purchaser's rights under this Agreement (to the extent set forth in Section 15)”. Also, an Assignment of Mortgage must accompany each note and this almost never happens.

We believe nearly every single loan transferred was transferred to the Trust in “blank” name. That is to say the actual loans were apparently not, as of either the cut-off or closing dates, assigned to the Trust as required by the PSA.

Rather than continue to fight for the “put-back” of individual loans the investors may be able to sue for and argue that the “true sale” was never achieved.

• Source: http://www.cnbc.com/id/39634568

Litany of Defenses• Statistically speaking, Foreclosures are seldom

contested by Homeowners

• Aggressive Defense can quickly cause Plaintiff to rethink plan of attack

• Opens up Additional Remedies – SHORT SALES!

• PSA States Loan Servicer’s Duties– Lender/Servicer Conduct can Constitute Estoppel or Waiver

Defenses• Fraud

• Duress

• Unconscionablity

• Predatory Lending

• Breach of Contract

The Answer• Deny or Admit every allegation

• Raise Affirmative Defenses

• Compulsory

• Offer and Compromise– Estoppel– Waiver– Payment

• Accord and Satisfaction– Compromise

• Satisfaction– Lack of Consideration

The Answer• Assert Counterclaims

• Predatory Lending

• PSA Violations

• Stated Loans and Broker Misconduct

• Negligent Lending

• Force Majeur

REQUEST A JURY TRIAL!!

Qualified Written Request• “QWR” Outlined in RESPA

• Should be made of the Servicer not the Lender• Must be sent to the address specified by the Lender

• Borrower and Attorney can each request • Consider doing both

• Must specify why you are asking ~ Misapplication of funds Violation of RESPA, FDCPA,TILA, HOEPA

• Servicer has 20/60 business days to respond

Title Insurance Implications…• Bank of America has already agreed to provide warranties to

Fidelity National Financial Inc. that cover the title insurer's costs if employees processing foreclosure documents for the bank make mistakes, Bloomberg News reports, and is in talks with other title insurers to do the same.

• In a weekly e-mail to members Monday, American Land Title Association CEO Kurt Pfotenhauer said the group has been working closely with officials at the Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac, lenders and other stakeholders to secure assurances that lenders have performed proper due diligence on their foreclosures. Pfotenhauer told Bloomberg that the talks include the issuance of warranties.

Chris McLaughlin’s Outlook …• Obama Admin. has made is CLEAR that they do NOT

want a foreclosure moratorium. Elizabeth Warren, Obama’s consumer protector, believes this is a STATE issue. A moratorium would made a very likely double dip in housing almost a certainty.

• Election posturing is BIG right now but after November 2nd this will subside. Less “beating up on banks” and more “let’s protect our financial institutions” after the election.

Chris McLaughlin’s Outlook• Short sales and modifications will become MORE important

to banks and their investors as it is politically acceptable.

• Investors have MUCH MORE LEVERAGE now with banks. “Ok, you’re going to close the file? Well I guess your investor won’t be happy this is sitting on the books for another 2 years then…”

• MERS will win in the end – because it HAS TO! The implications if MERS assignments are bogus frankly could be bigger than Lehman Brothers’ failing. Therefore state and federal legislation will likely take care of this issue.

Chris McLaughlin’s Outlook• The housing recovery will now be at least 1 year

longer. Prices will continue to decline as there is simply too much inventory out there.

• Remember that MAJOR servicers such as Wells Fargo are only doing a “review” and are STILL foreclosing. The other servicers don’t want to lose their investor clients so they likely will begin foreclosures sooner than the media thinks – because they have to.

Chris McLaughlin’s Outlook• The media hype is making some people think

borrowers can sue the servicers and get their home free and clear. That isn’t going to happen. The investors MAY sue the servicer, Trustee, or Custodian, but the borrower at the end of the day isn’t going to want to. Why? Because they would STILL owe SOME ENTITY for the loan!

• Because the AVERAGE investor is now scared, this could be the BEST TIME in your lifetime to buy REOs!

• More servicers WILL be doing MORE Short Sales!

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