Three big banks were hit on Friday with yet another lawsuit related to wrongful foreclosures. Democratic New York Attorney General Eric Schneiderman filed suit against Bank of America, JP Morgan Chase and Wells Fargo for deceptive and fraudulent use of a private database used to register mortgages, according to a Friday press release from his office.

Schneiderman has been outspoken in urging the Obama administration to hold the nation’s largest financial institutions accountable for their role in the foreclosure crisis, notably hesitating to join a larger nationwide case against the country’s five largest banks for mortgage fraud. States now have until Monday, according to the Iowa attorney general’s office, to decide to join that deal.

The New York attorney general has yet to announce whether New York will participate in the deal because of concerns that joining the settlement would make it impossible for him to file his own, state-based lawsuits against the banks, said sources close to the negotiations who spoke on the condition of anonymity. The decision to bring this lawsuit on Friday indicates that the larger nationwide settlement is now more to Schneiderman’s pleasing, said a source familiar with the discussions.

“If the deal terms had been decided six months ago, a state couldn’t have pursued this kind of lawsuit,” said the source. “The fact that Schneiderman has filed this case suggests that the terms of the deal have changed since then.”

Last week Schneiderman was named one of five co-chairs of a new task force announced by President Barack Obama to investigate fraud related to bonds backed by mortgage loans.

The Friday suit positions Schneiderman to go after another piece of the mortgage securitization system that’s been blamed for foreclosure fraud: the system that banks use to facilitate the creation of mortgage backed securities. Banks use the Mortgage Electronic Registration Systems, or MERS, to register mortgage loan ownership. Before the creation of the system in 1995, registration took place at local courthouses, slowing down the process of bundling individual mortgages into securities. More than 70 million mortgages have been registered with MERS, according to a press release from Schneiderman’s office.

The Friday lawsuit claims that the system led to fraudulent foreclosures, undermined the state’s process for reviewing foreclosure cases and made it difficult for homeowners to access mortgage-related documents, said Schneiderman in the press statement.

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Gregory Korte and Fredreka Schouten, USA TODAY

A Detroit-area law firm that represents mortgage giants Fannie Mae andFreddie Mac in foreclosure and eviction cases contributed $200,000 to a super PAC supporting Republican Mitt Romney for president.

That super PAC, Restore Our Future, has run ads against rival Newt Gingrich attacking his ties to Freddie Mac and accusing him of “cashing in” on the foreclosure crisis.

The contribution, dated Dec. 27, was written from the corporate account of Trott & Trott PC. A 2010 Supreme Court decision allowed corporations and unions to spend unlimited amounts on independent campaigns to support or oppose federal candidates.

Managing partner David Trott is a member of Romney’s Michigan finance committee. He and his wife also contributed $7,500 personally to the Romney campaign, according to FEC reports, and Trott employees also contributed more than $11,000 to Romney.

Through a firm spokesman, Trott declined to comment.

Romney spokeswoman Andrea Saul explained it this way: “To the extent anyone is supporting Mitt Romney over President Obama it is because the state of the economy and the president’s failure to create jobs.” She referred further questions to Restore Our Future.

“We don’t comment on our donors beyond what is disclosed in our FEC report,” said Brittany Gross, a spokeswoman for the super PAC. By law, super PACs can’t coordinate with candidate campaign organizations.

In debates, ads and stump speeches, Romney has blasted Gingrich for his role as a consultant for Freddie Mac after he left Congress in 1999. “He made $1.6 million in his company, the very institution that helped stand behind the huge housing crisis here in Florida,” Romney said in Dunedin, Fla., this week.

With 96 attorneys, the Farmington Hills firm is one of two law firms in Michigan authorized by both Fannie Mae and Freddie Mac, the government-sponsored mortgage underwriters, to represent mortgage servicers foreclosing on government-backed mortgages.

“David Trott, either through Trott & Trott or individually, has a complete monopoly on everything that goes on post-foreclosure on someone’s home,” said Steve Dibert of MFI-Miami, who works as a mortgage investigator for homeowners in foreclosure.

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Mortgage Electronic Registration Systems secured a legal victory this week when the Denver-based 10th Circuit Court of Appeals upheld three lower court opinions granting MERS the right to foreclose when the company is listed as nominee of the note.

The appellate case — Commonwealth Property Advocates v. MERS — dealt with three foreclosure cases on appeal. The homeowners argued the securitization structure prevents MERS from having a right to foreclose since investors with an ownership stake in loans held in trust never received a chance to approve the foreclosure action. Commonwealth Property Advocates became the plaintiff after the homeowners conveyed their properties to the entity.

The central issue debated on appeal was whether the “securitization of a note renders the holder of the underlying trust deed and its nominees unable to foreclose absent authorization by every investor holding an interest in the securitized note.”

The argument plays off the securitization process, which begins with an originator and a series of subsequent loan sales and assignments. Home loans that are securitized and sold to investors end up in a trust with investors generally retaining ownership in the form of their investments in the loan pool.

The plaintiffs further allege that Utah law prevents MERS from taking this type of action.

However, the 10th Circuit, which reviewed Utah appellate court decisions, upheld MERS ability to foreclose, saying the deed of trust specifically gave MERS the right “to foreclose on behalf of lender and lender’s successors and assigns.”

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For those of you that may have missed it, Eileen Foster, a former executive vice president in charge of fraud investigations at Countrywide Financial, told Steve Kroft from 60 Minutes that mortgage fraud was a common occurrence at Countrywide under the leadership of Angelo Mozilo.

GMAC Mortgage, the mortgage arm of Ally Financial Inc, said on Friday it will stop buying new mortgage loans in Massachusetts that were made by other correspondent lenders and wholesale brokers.

GMAC said it will honor all commitments made with such lenders as of Dec. 5, 2011, and will continue to service its existing customers and honor its contractual obligations as a servicer.

The move comes a day after the Massachusetts attorney general filed a lawsuit against five large U.S. banks — Bank of America Corp , JPMorgan Chase & Co , Citigroup , Wells Fargo & Co and GMAC — accusing them of deceptive foreclosure practices, such as using robo-signers and false documents.

“GMAC Mortgage has taken this action because recent developments have led mortgage lending in Massachusetts to no longer be viable,” the company said in a statement.

GMAC said it will continue to make loans to Massachusetts customers through its direct lending business.

A spokesperson for Ally Financial said in an e-mailed statement that “GMAC Mortgage is currently operating in full compliance with the law. Any suggestion related to past activity will be heard before the court, and we are confident in our ability to prevail.”

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Massachusetts Attorney General Martha Coakley is suing five of the nation’s biggest banks for deceptive foreclosure and mortgage modification practices, her office announced Thursday. Coakley’s suit signals her formal departure from ongoing settlement negotiations between those banks, the Obama administration and a coalition of other state AGs over faulty foreclosure procedures.

“The single most important thing we can do to return to a healthy economy is to address this foreclosure crisis,” Coakley said in a statement Thursday. “Our suit alleges that the banks have charted a destructive path by cutting corners and rushing to foreclose on homeowners without following the rule of law. Our action today seeks real accountability for the banks illegal behavior and real relief for homeowners.”

The lawsuit, filed against Bank of America, JPMorgan Chase, Wells Fargo, Citibank, Ally Financial and the Mortgage Electronic Registration System in Suffolk Superior Court, targets banks’ using fraudulent paperwork in the foreclosure process, foreclosing without actually holding the mortgage, corrupting the local land recording system and failing to uphold promises of loan modifications.

Until now, Coakley had participated in settlement negotiations led by Iowa Attorney General Tom Miller and the Obama administration. The talks kicked off last fall when it came to light banks were using phony documents and forged signatures — a process dubbed “robo-signing” — to foreclose on thousands of borrowers.
New York Attorney General Eric Schneiderman and Delaware Attorney General Beau Biden became outspoken critics of the talks this summer, insisting Miller sought too narrow a settlement that would release the banks from liability for too much wrongdoing. Miller’s focus has been robo-signing and mistreatment of struggling homeowners seeking modifications, but not potential fraud in the way loans were given to borrowers or sold to investors, or in the way banks use MERS to shuffle mortgage documents. The settlement would not encompass the 50 percent of all home mortgages owned by government-backed mortgage giants Fannie Mae and Freddie Mac, according to sources close to the talks.

The deal sought by Miller would force the five banks to reform the way the service mortgages and to fork over $25 billion worth of help for homeowners, mostly in the form of principal reductions and modifications. Some who already lost their homes would be eligible for small restitution payments.

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ACT ONE – The shot across all bank bows

As the month of August came to a close, Nevada’s attorney general, Catherine Masto, filed her second amended complaint against Bank of America and friends.  Yves Smith provided the analysis in her post on Naked Capitalism,Nevada Lawsuit Shows Bank of America’s Criminal Incompetence, and all I can tell you is that it reads like a John Grisham or even a Robert Ludlum novel, I don’t know if it quite rises to the level of a John le Carre, but it’s a great read.  Oh, and spoiler alert… there’s going to be a sequel.

She says that the litigation by the attorney general is “significant not merely due to the damages and remedies sought, but because it paves the way for private lawsuits.”  So, that I like the sound of that… private lawsuits are good where Bank of America is concerned.  Here’s what she had to say about the complaint itself…

And make no mistake about it, this filing is a doozy. It shows the Federal/state attorney general mortgage settlement effort to be a complete travesty. The claim describes, in considerable detail, how various Bank of America units engaged in misconduct in virtually every aspect of its residential mortgage business.

The complaint describes abuses from the very outset of the securitization process: how borrowers were mis-sold mortgages (it describes how entire products were effectively predatory), how investors were misled as to their quality, how they were not conveyed properly to securitization trusts, how borrowers were subject to abusive servicing (as in charged improper and impermissible fees), how promises made under the old consent decree regarding mortgage modifications were violated (for instance, even though interest rate reductions were promised, instead modifications often resulted in HIGHER interest rates), and the filing of fraudulent paperwork to execute foreclosures.

Metaphorically, this complaint was a shot across all the bank bows.

ACT TWO – A robo-felony is born

Next, on November 7, 2011, the Wall Street Journal, in its article titled: Nevada Foreclosure Filings Dry Up After ‘Robo-Signing’ Law, described a new felony law that Nevada’s state Assembly passed and that took effect on October 1, 2011, that’s designed to crack down on “robo-signing.”  That’s what we call it when bank employees sign off hundreds of thousands of legal filings, lying about having personally reviewed each case.

The new law holds individuals criminally liable for such false representations and provides for civil penalties of $5,000 for each violation.

Early results say the law is working. In fact, during the first month after the law took effect, notices of default fell from 5,380 to just over 600, a drop of 88 percent, according to data tracked by ForeclosureRadar.com.

The new law also bans trustees from handling foreclosures if a subsidiary of the foreclosing bank, which means that Bank of America’s use of subsidiary, Recon Trust, in Nevada, is no longer allowed.  And ReconTrust didn’t file any NODs in October, about which a Bank of America spokesliar declined to comment.

Of course, the banking lobby is going with the SOP, claiming that the law is going to slow foreclosures, which we all know, hurts everyone.  And then I’m sure there was something about how there’s going to be no lending in Nevada in the future, and stuff like that.

Those behind the bill cleverly, if transparently, say that it’s not about stopping foreclosures, it about guarding against potential title defects that can lead judges to later invalidate foreclosures, as has happened in both Michigan and Massachusetts.  Tisha Black Chernine, a real-estate lawyer in Las Vegas who helped draft the bill, was quoted by the WSJ as having said the following when talking about healing the housing markets…

“This is not at all about preventing foreclosures. It is about helping end users.  We need to make sure foreclosures are done properly.  People taking title pursuant to a bad foreclosure run the risk of having no title at all.”

Okay, so that her story and she’s sticking to it, I suppose.  And if people are buying that, and it’s working with the bank, then I’m in favor of saying it.  Heck, I’d tell BofA scary bedtime stories about all sorts of thing every night all year if I thought it would get them to do a Scrooge-like turnaround as far as the foreclosure crisis is concerned.

So, while Nevada’s NODs dropped by 88 percent, foreclosures picked in the other 49 states.  Looking at loans bundled and sold as mortgage-backed securities without any government guarantees, Fitch ratings attributed the spike in foreclosures to making up for time lost pretending to investigate robo-signing, which started during the fall of 2010, and caused intermittent delays for several months.

Read more here

Steve Dibert, MFI-Miami

The Michigan Supreme Court by a vote of 4-3 overturned a decision by the Michigan Court of Appeals in Residential Funding v. Saurman.  In April, the Court of Appeals ruled that MERS lacked the legal authority to foreclose on a home because the lacked any real ownership in the obligation:

Michigan Court of Appeals Rules Against MERS

The four Republican members of the Michigan Supreme Court decided to rule in favor of MERS stating that:

We clarify, however, that MERS’ status as an “owner of an interest in the indebtedness” does not equate to an ownership interest in the note. Rather, as record holder of the mortgage, MERS owned a security lien on the properties, the continued existence of which was contingent upon the satisfaction of the indebtedness. This interest in the indebtedness — i.e., the ownership of legal title to a security lien whose existence is wholly contingent on the satisfaction of the indebtedness — authorized MERS to foreclose by advertisement under MCL 600.3204(1)(d).

The Democratic Justices, Michael Cavanagh, Diane Hathaway and Marilyn Kelly wanted to keep the case alive in order to hear more arguments.

Read the ruling for yourself below:

MI Supreme Ruling -Residential Funding v Saurman

Contrary to what some people may initially think, this is not a devastating defeat for the homeowner.  This ruling actually makes MERS more vulnerable.   MERS’ power according to the Michigan Supreme Court is now limited to being nothing more than an agent for the lender.  This role is dictated in the Pooling and Servicing Agreement (PSA) that governs the Mortgage Backed Security.   In other words, it will force the foreclosure mills into arguments about securities law they do not understand and force them to admit things in court that will damage the credibility of their clients.

The Supreme Court’s ruling will now allow Michigan attorneys to argue New York Trust law in Michigan foreclosures case when the loan was pooled into a mortgage backed security on Wall Street.  This would essentially end a foreclosure mill’s ability argue Livonia Property Holdings, L.L.C., v. 12840-12976 Farmington Road Holdings, L.L.C. A ruling they like to invoke in order to convince a judge the homeowner lacks standing to question assignments.

The ruling also raises a very interesting question. If “pursuant to MCL 600.3204(1)(d), MERS is ‘the owner . . . of an interest in the indebtedness secured by the mortgage,’” then what becomes of MERS’ capacity and legal right to act as mortgagee (in its capacity as nominee for lender and lender’s successors and assigns) under this statute when the only power MERS really ever had per the “law or custom” limitations in the mortgage (with the “law” in play being the PSA), expires or is terminated stated in the PSA or a bankruptcy?

If I seem a bit overjoyed about this ruling, its because the Michigan Supreme Court just made things easier for the homeowner to drag out the foreclosure process and increased the chance of getting their notes dismissed.

Think about this, if “only the record holder of the mortgage has the power to foreclose” then a showing must be made by analyzing the mortgage documents and the PSA to show MERS is not the “undisputed record holder of a mortgage” at the time of the foreclosure and no longer possesses the statutory authority to foreclose.  Basically what the justices did was validate Hendricks v. USBank. 

Hendricks v. USBank

 The Supreme Court has also guaranteed me and my employees  job security over the next 3-5 years.

Apparently, whoever made the decision to appeal this to the Supreme Court didn’t think this through using MFI-Miami math of A+B+C+D+E=O.  Oh well, their stupidity is my clients’ gain.