The nation has been shocked to learn that efforts to combat mortgage fraud have been overstated. A U.S. Department of Justice’s Office of the Inspector General report found that despite public statements that combating mortgage fraud was a high priority, the Justice Department failed to uniformly prioritize criminal and civil investigations into mortgage lending malpractice.
The report found that for many FBI offices, mortgage fraud is either not a priority or the lowest-ranking investigation priority. In addition, according to the assistant U.S. attorneys interviewed by the inspector general, the mortgage cases that are investigated are underreported and misclassified, preventing the Justice Department from evaluating its own performance in apprehending high-profile offenders.
This level of misreporting was best seen in October 2012, when U.S. Attorney General Eric Holder announced that through the Distressed Homeowner Initiative, the DOJ charged 530 criminal defendants with indictments, with 172 being executives. Holder also announced the filing of 110 civil cases involving more than 15,000 victims and total losses in excess of $1 billion. By August 2013, however, the FBI conceded that the Distressed Homeowner Initiative announcement was overstated: the actual number of criminal defendants was 107. The total loss of the cases involved was $95 million.
The DOJ cited the incorrect figures for 10 months following the 2012 announcement, despite knowing of flaws in the statistics since November 2012.
As the nation attempts to move past the Great Recession, the elements of what created the banking crisis that kicked off the recession — predatory lending and vast episodes of mortgage fraud, including “robosigning,” or the automatic approval and signing of borrowing documents — continue to re-emerge without clear indication that the federal government is working to address them.
“Endorsement in blank”
In 2010, Cynthia Carssow Franklin filed for bankruptcy protection to prevent Wells Fargo from foreclosing on her home. In July of that year, Wells Fargo filed a proof of claim on Carssow Franklin’s house, via the now-defunct law firm of Steven J. Baum. The proof included an assignment of mortgage which listed Mortgage Electronic Registration Systems as a nominee for Washington Mutual Bank. John Kennerty, as assistant secretary of Mortgage Electronic Registration Systems, signed the assignment.
The problem arises when one considers how Washington Mutual, a bank that failed in 2008, was able to authorize a nominee in 2010. Wells Fargo later amended the proof of claim with a second endorsement in blank — an endorsement consisting only of a signature that allows the instrument to be payable not to a specific person or organization, but to whomever bears the document.
While this satisfied the situation legally for the moment, the situation was enough of a reason to ask deeper questions. Earlier this month, Carssow Franklin’s attorney, Linda Tirelli, requested an emergency re-opening of the bankruptcy trial’s discovery phase when she came across two key documents: a Wells Fargo Foreclosure Attorney Procedures Manual and an order form for foreclosure paperwork on Wells Fargo letterhead.
The manual went into elaborate detail on how to handle foreclosure cases involving missing documents, including steps on how to procure replacements. The documents the manual details in replacing include endorsements, which indicate that a lender owns the mortgage for a property, and affidavits indicating the history of the loan.
While Wells Fargo insists that this is perfectly legal, the presence of such a manual has reignited claims that Wells Fargo and other lenders used forged and poor-quality paperwork to quickly foreclose on struggling homeowners. This action resulted in a $25 billion national settlement by Wells Fargo.
This also resulted in a situation in which entire neighborhoods were destroyed by predatory lending.According to USA Today, 25 cities throughout the United States went from being majority homeowners in 2000 to majority renters in 2010. Irvine, Calif., for example, went from 40 percent home rental in 2000 to 49.8 percent in 2010, while Philadelphia increased from 40.7 percent to 45.9 percent.
Typically, a large number of foreclosures in a community drives down the land value in an area, forcing the remaining residents to leave, selling their homes at a discount. This clears large tracts for development at pennies on the dollar. As minorities and those thought unable to pay were typically targeted for subprime loans, this effectively destroyed many of the nation’s historically black and Latino communities.
The manual represents a fundamental violation of the 2012 multi-state settlement that Wells Fargo agreed to, in which the bank agreed to notify lenders of missing documents in their mortgage packages. In May 2013, New York State Attorney General Eric Schneiderman announced that New York State would be suing Wells Fargo and Bank of America for non-compliance with the servicing standards of the settlement — specifically, for allegedly delaying loan modification request processing. This action is based on 339 individual complaints by New Yorkers against the banks in just the six months prior to Schneiderman’s announcement.
“This is a blueprint for fraud,” said Tirelli, who attached the manual as evidence in the lawsuit filed in U.S. District Court in White Plains, N.Y. “The idea that this bank is instructing people how to produce these documents is appalling.”
Tirelli has long suspected Wells Fargo of forging documents. In several past cases, she presented unendorsed mortgage notes to Wells Fargo, only for the bank to “magically” summon the endorsed documentation. The phenomenon is so common that consumer lawyers call such paperwork “ta-da” documents.
As this trend has not been formally investigated, it is unknown how widespread this allegedly forged document situation is and if it spreads to other banks. In technical terms, such actions are not illegal: banks regularly sell mortgages to each other in bundled securities. As the loan originator may not be the bank that ultimately services the mortgage, mortgages are sometimes endorsed in blank, in which no company or person explicitly signs the document, but the document is still enforceable “What’s so unfortunate here is the exaggeration on behalf of litigation,” said Wells Fargo spokeswoman Vickie Adams. “There are a number of procedures in place and triple checking before a foreclosure is brought. This is a misrepresentation of facts.”
[I feel bad for spokeswoman Vickie Adams here. What has she got to work with to make Wells Fargo look better? Not much. First of all, mortgages signed in blank are questionable in some states. Second, because according to the U.C.C. - Uniform Commercial Code - which most states have adopted.
Definition of 'Uniform Commercial Code'
A standard set of business laws that regulate financial contracts. The Uniform Commercial Code has been adopted by most states in the U.S. The code itself has nine separate articles. Each article deals with separate aspects of banking and loans. The UCC better enabled lenders to loan money secured by the borrower's personal property.
The New York State Attorney General’s Office, the New York State Department of Financial Services and the Consumer Financial Protection Bureau are all currently reviewing the manual.