After I discovered that Unnamed was not even requiring the bank to come to its own foreclosure sale, I went back and thought about old cases. Of course, foreclosure had become a hot topic over the last couple of years, and we had stopped several sales from happening. I thought of several files where I had run up against Unnamed, and then other foreclosure files where I had the same set of issues with other banks and trustees.
What did all of this mean? If the trustees consistently ran the foreclosure sales wrong, there was the potential that all of those sales could be invalid. Unnamed was one of the largest foreclosure mills in Missouri; if their foreclosures were all tossed, it would mean thousands of properties in limbo. But it also meant that thousands of families had been wrongly displaced, taken from their homes by people who had no legal right to do so.
I had my client bring in all of his paperwork and began sorting through it. The banks on most home loans had the borrowers sign hundreds of papers: Affidavits stating that John P. Doe was the same as J.P. Doe and John Phillip Doe. Stupid stuff. Legal stuff. Stuff that would make a one-armed paper pusher very tired.
But I noticed another major flaw:
All of these Harvard-educated lawyers and Stanford MBAs had forgotten simple legal steps to creating the Deed of Trust and Note. Imagine that: The two most important documents, and it almost seemed like they were afterthoughts.
For example: Most of the Deeds of Trust came up with all kinds of different definitions: Lender means this, Note Holder means that. Understandable. That's something almost any good contract does. But these Deeds of Trust almost forget to mention the Power of Sale.
The Power of Sale is different from the Power of Love. It has nothing to do with Huey Lewis. It is different from the Power of Greyskull, and bears no resemblance to Power Station, the mid-80s "super group" featuring various hair-sprayed members of Duran-Duran and such. Simply put, it is the clause that allows the bank and a trustee to sell your home without going to court.
Mortgage documents are just contracts. You can put in there what you want. If you agree to wear orange shoes and green pants in exchange for a lower rate, well, have at it. ( N.B.: Banks won't go for this. I already tried.) And if your contract includes a Power of Sale, well, then there's a Power of Sale.
But that's an IF. If a mortgage lender does a crappy job in writing a Power of Sale, that's their fault. In legalese, we say, "Contracts are construed against the drafter." That's a fancy (and more tactful) way of saying, "They wrote the damned thing. If they screwed it up, it's their fault."
And to my great surprise, what I kept running into was that the writers of the standard Deeds of Trust treated the Power of Sale like their crazy drunk uncle. They barely mentioned it. In the main deeds of trust used by most big banks (called RESPA documents), the Power of Sale is mentioned a grand total of:
-- wait for it --
One time.
What? The whole purpose of having a Deed of Trust in a non-foreclosure state is to have the Power of Sale. It's Rosebud. It's what Willis was talking about. You want to be able to foreclose without having to go to court. That's the whole point. And yet, in the most important of the 12, 453 documents you were required to sign in order to close on your house, the most important feature gets ONE MENTION!
And it gets better. It says, "If the Lender invokes the power of sale".
Huh? Are you kidding me? Think about this:
The Lender is whoever originates the mortgage. Most of the time with the big banks, they held onto the loan for the time it takes to open a jar of pickles. Then they dropped it like it was hot, collected a nice fee, and then walked the heck away.
Maybe this doesn't sound big to you. But they understand that future people are potentially going to hold the note who aren't the Lender. They call them the Note Holder (inventive, I know). They know someone else may bug you to get the payment. They're called the Loan Servicer. There's a little language in one place that MIGHT go in the favor of the banks on this, saying that the agreement "benefits" others who are assigned, but that's weak stuff.
To show you how easy it would have been to correct this problem, watch this:
THE WAY THAT IT IS: "If the Lender invokes the power of sale".
THEY WAY THAT IT EASILY COULD HAVE BEEN: "If the Lender, the Note Holder, the Loan Servicer, or any other holder in due course invokes the power of sale".
Was that hard? No. Would you have signed it to get your house. Ummm ... yes. You would have admitted to masterminding Jimmy Hoffa's disappearance to get that house. You would have signed.
I was now of the opinion that each mortgage now had major flaws. Foreclosures were likely called by the wrong people, and were perhaps devoid of the power of sale for anyone but the lender.
This was getting fun.
Monday, January 17, 2011
Sunday, January 16, 2011
TWO: Breaking the Chain
All right, let's make this simple.
Missouri is a non-judicial foreclosure state.
What that means is that when you borrow money to buy property, you most likely sign papers that give the lender the chance to get the property back if you don't pay for it, or make it smell too much like cat pee so the neighbors rat on you, or whatever. You can breach the agreement in a number of ways. Not pay taxes, not keep insurance, or give your interest to someone else without okaying it with the lender first.
In a non-foreclosure state, when you sign your paperwork, you actually deed it to a trustee. Note in that word "trustee" the word "trust." That means in latin or something "dude or female dude you can trust." And the trustee holds it until you pay for the property, and then he or she deeds it back to you. If you don't pay for it, then you have already okayed the fact that the trustee can sell it without having to go to court, like would have to be done in a state where foreclosures (known as "judicial foreclosures") would have to be taken to court and run before a judge.
In many cases, this works great. Has for many years. It keeps cases out of court that don't need to be there. But something changed that made the system go haywire.
For most of recorded history, when someone borrows money on a house, here's what happened:
This is not sexy. It will never be the subject of a made-for-TV movie starring Valerie Bertinelli. But it WORKS. It STILL works. But as we moved into the past two decades, it wasn't enough.
For many years, not everyone could get a loan. The reason was sometimes their past credit, sometimes their work record, sometimes their income or assets, sometimes the value of the property they wanted to borrow against. This meant the banks could loan at lower rates, because they felt good they knew how often they were going to get burned.
But there were so many people that WANTED to own homes. And it seemed like such a waste for them not to have them. The lenders who tapped into this market in the 1990s spoke about it in very patriotic terms: They said were doing everyone a favor by lending money to people who really couldn't afford it. They talked a lot about the value of home ownership. People like Angelo Mozilo, who started the toxic waste dump of a company known as Countrywide, was just one of those people.
But they couldn't take these loans to regular banks. Those banks had their patterns of lending, and the people and the properties in question were clearly not in them. So they created an entirely new system, of "mortgage-backed securities."
Mortgage-backed securities was a process of taking a large number of loans and pooling them all together. The idea was that based on the background and credit history of those borrowing the money, you could divide the loans into different groups, and charge different rates for them.
If you were getting people like Jane Juicebox, with great credit scores and properties with great appraisals, you got paid a lower interest rate. If you took Freddie Forty-Ounce who just lost his job at the pawn shop, you got a lot higher interest rate, because you were taking a bigger risk.
Problem was, Freddie really couldn't afford that house and that rate. And to top it off, Freddie got sold the loan by an unscrupulous mortgage broker who:
So banks and school districts and pension plans bought tiny slivers of Freddie's loan. Freddie was out smoking a joint and hitting on teenagers again, and he forgot that he had a loan payment due. Freddie had some choice words for the debt collectors, and then when he saw that the interest rate -- and his payment! -- was going up, he said screw it, invited his friends over for a big party, painted a few pentangles on the wall, then threw deuces up on his way out the door.
And the investors, who had forgotten that the sweet return they were getting was due in large part to the fact that Freddie had never paid a loan in his life, were now screwed.
Problem was, the mortgage broker who sold Freddie the loan was gone. So was the lender that made the original deal. And the people who broke these mortgages into a million pieces were not really real estate people, and so they didn't know how to handle a mortgage.
It would have been easy for them to do. After Freddie signed his paperwork, the bank held the interest in his property. When the bank transferred that interest to one of the loan pools, they should have made a deed and recorded it at the courthouse, just like the first one was done, and told the world, "Hot Mess Loan Pool Number 69 now owns your loan. We're no longer involved." Then if Hot Mess sold it off, they would record a deed and say, "Suckers Unlimited now owns your loan, Freddie and anyone else who cares. Peace Out."
But they didn't do that. They just trusted that by saying that someone else "serviced" the loan (kinda sounds massage parlor, doesn't it?), that was all they needed to do. They took all of the loans, worth tens and hundreds of thousands of dollars, and did nothing to follow up on them.
But then all those loans went bad. Lindsey Lohan at Happy Hour bad. Freddie moved to East St. Louis and started work as a director at a strip club. And now someone had to try to foreclose on the house.
So they hired a "foreclosure mill," who did things similar to what Unnamed did in this case, and overlooked the fact that there was no paperwork and no authority for the "servicer" to call for a foreclosure. They went ahead and sold the house at the courthouse steps back to the bank, who could now put it back on its books as an "asset."
In this entry, I've obviously exaggerated Freddie to make a point about the way the loans were processed. But most of the loans were given to people who in good faith thought they could make this work. Then the interest rates went up, or somebody lost a job. And they found themselves in the position of being foreclosed on by a bank and a trustee who they naturally assumed were telling them the truth.
They were wrong to assume this.
Missouri is a non-judicial foreclosure state.
What that means is that when you borrow money to buy property, you most likely sign papers that give the lender the chance to get the property back if you don't pay for it, or make it smell too much like cat pee so the neighbors rat on you, or whatever. You can breach the agreement in a number of ways. Not pay taxes, not keep insurance, or give your interest to someone else without okaying it with the lender first.
In a non-foreclosure state, when you sign your paperwork, you actually deed it to a trustee. Note in that word "trustee" the word "trust." That means in latin or something "dude or female dude you can trust." And the trustee holds it until you pay for the property, and then he or she deeds it back to you. If you don't pay for it, then you have already okayed the fact that the trustee can sell it without having to go to court, like would have to be done in a state where foreclosures (known as "judicial foreclosures") would have to be taken to court and run before a judge.
In many cases, this works great. Has for many years. It keeps cases out of court that don't need to be there. But something changed that made the system go haywire.
For most of recorded history, when someone borrows money on a house, here's what happened:
- Person borrows money from Bank.
- Bank holds mortgage to Person's house.
- Bank records the deed, so the whole world (or at least anyone who cares) could go down to the courthouse and find out who owns it.
- Bank takes payments, makes the interest rate agreed upon.
This is not sexy. It will never be the subject of a made-for-TV movie starring Valerie Bertinelli. But it WORKS. It STILL works. But as we moved into the past two decades, it wasn't enough.
For many years, not everyone could get a loan. The reason was sometimes their past credit, sometimes their work record, sometimes their income or assets, sometimes the value of the property they wanted to borrow against. This meant the banks could loan at lower rates, because they felt good they knew how often they were going to get burned.
But there were so many people that WANTED to own homes. And it seemed like such a waste for them not to have them. The lenders who tapped into this market in the 1990s spoke about it in very patriotic terms: They said were doing everyone a favor by lending money to people who really couldn't afford it. They talked a lot about the value of home ownership. People like Angelo Mozilo, who started the toxic waste dump of a company known as Countrywide, was just one of those people.
But they couldn't take these loans to regular banks. Those banks had their patterns of lending, and the people and the properties in question were clearly not in them. So they created an entirely new system, of "mortgage-backed securities."
Mortgage-backed securities was a process of taking a large number of loans and pooling them all together. The idea was that based on the background and credit history of those borrowing the money, you could divide the loans into different groups, and charge different rates for them.
If you were getting people like Jane Juicebox, with great credit scores and properties with great appraisals, you got paid a lower interest rate. If you took Freddie Forty-Ounce who just lost his job at the pawn shop, you got a lot higher interest rate, because you were taking a bigger risk.
Problem was, Freddie really couldn't afford that house and that rate. And to top it off, Freddie got sold the loan by an unscrupulous mortgage broker who:
- Got a shady appraiser to inflate the value of the home;
- Lied about how much Freddie really made; and
- Didn't tell Freddie that his rate would start changing in six months, and would no longer be that low rate that he was initially promised.
So banks and school districts and pension plans bought tiny slivers of Freddie's loan. Freddie was out smoking a joint and hitting on teenagers again, and he forgot that he had a loan payment due. Freddie had some choice words for the debt collectors, and then when he saw that the interest rate -- and his payment! -- was going up, he said screw it, invited his friends over for a big party, painted a few pentangles on the wall, then threw deuces up on his way out the door.
And the investors, who had forgotten that the sweet return they were getting was due in large part to the fact that Freddie had never paid a loan in his life, were now screwed.
Problem was, the mortgage broker who sold Freddie the loan was gone. So was the lender that made the original deal. And the people who broke these mortgages into a million pieces were not really real estate people, and so they didn't know how to handle a mortgage.
It would have been easy for them to do. After Freddie signed his paperwork, the bank held the interest in his property. When the bank transferred that interest to one of the loan pools, they should have made a deed and recorded it at the courthouse, just like the first one was done, and told the world, "Hot Mess Loan Pool Number 69 now owns your loan. We're no longer involved." Then if Hot Mess sold it off, they would record a deed and say, "Suckers Unlimited now owns your loan, Freddie and anyone else who cares. Peace Out."
But they didn't do that. They just trusted that by saying that someone else "serviced" the loan (kinda sounds massage parlor, doesn't it?), that was all they needed to do. They took all of the loans, worth tens and hundreds of thousands of dollars, and did nothing to follow up on them.
But then all those loans went bad. Lindsey Lohan at Happy Hour bad. Freddie moved to East St. Louis and started work as a director at a strip club. And now someone had to try to foreclose on the house.
So they hired a "foreclosure mill," who did things similar to what Unnamed did in this case, and overlooked the fact that there was no paperwork and no authority for the "servicer" to call for a foreclosure. They went ahead and sold the house at the courthouse steps back to the bank, who could now put it back on its books as an "asset."
In this entry, I've obviously exaggerated Freddie to make a point about the way the loans were processed. But most of the loans were given to people who in good faith thought they could make this work. Then the interest rates went up, or somebody lost a job. And they found themselves in the position of being foreclosed on by a bank and a trustee who they naturally assumed were telling them the truth.
They were wrong to assume this.
ONE: Stumbled Upon ...
Sometimes, you're just in the right place at the right time.
I got a message from my secretary mid-morning on an early November day last year, 2010. I was heading to meet a client about a serious custody case, but I saw that an old client had called, so I called him on the way.
It was a beautiful, clear-skyed Friday. The leaves were turning, maybe a little later than they had when I was a kid, and I was driving the curvy roads down to southern Stone County, enjoying the drive and the late-fall colors that draped the hillsides.
After a couple of cell-phone missed connections, I got a hold of my guy. He told me that his dad's property, long the source of contention, was to be sold on the courthouse steps in about 45 minutes. Was there any way I could be there to help them buy a little time as they tried frantically to get the money together?
Normally, a lawyer can't do anything in 45 minutes except ask three questions or blow his nose. I have stopped foreclosures in the past in a very short time, but generally a very short time meant a couple of days, at the least. But I like to try to be creative, so I thought of what I could do.
I told him that I couldn't, that I was more than 45 minutes away. But I had an idea. I called my assistant Stevie, and asked him if he could make the ten-minute drive to the courthouse.
Stevie is a world-class guitar player and an ascerbic wit. If you gave him a birthday cake, he would still look like he was about to hit you. He conquered the guitar years ago, and now it speaks for him like his own language, one you've heard before. If there is a musical playground in heaven and I get to pick a band, my snobby musical self would pick Stevie as my guitar player over Richard Thompson or Tom Verlaine or Don Rich or Eddie Van Halen or Jeff Beck, guitarists whom I love dearly. He plays fast and smart and on the edge, and I'm pretty sure he could kick any of the other guitarists' asses as well. He's my Man Friday, and he's good at handling bad situations.
We probably generated ten phone calls between the three of us, and Stevie made it in time. When he got down there, just as I was to go into my meeting, he called me with a really strange piece of information.
"There's only one person here."
That one person was a representative for Unnamed (we'll get to that later), a big-city law firm who handle probably a quarter of the foreclosures in the state of Missouri. We had met before on a number of occasions, and I was neither a Facebook friend, nor on their Christmas card list. I believed, and still believe, that they have a huge conflict of interest in all of the cases they do, but I had never really seen it as any more than that.
Unnamed was the attorney for the banks, but would also have themselves appointed as the trustee in the foreclosure. Then, they would push to foreclose as quickly as possible. To me, this was a BIG problem, because the trustee, under tons of Missouri law, was supposed to have duties to both the borrower AND the lender. How can you do your duty to the borrower when you're acting like the US Army trying to hunt down Saddam Hussein?
We had told them this, over and over, starting way back in 2005. This is a conflict, dear boys. This is a conflict. Dude. Seriously. You've got a conflict.
We had told it to them in at least three prior cases. We had written it. We had said it to them in person. Sky writing. Smoke signals. Semaphore. But it was no use. They still called the banks "our client." No, hoss, you've got TWO clients here. Mine's just the one without the money and with the home that you're trying to steal.
Each time, we had been successful at stopping the foreclosure.
I talked to the woman. She was not a lawyer. She would wait ten minutes, maybe fifteen. That was all she could do. After that, she would have to call the sale. That was not unreasonable, I thought. She had other people's houses to take and miles to go before she slept.
Where was the representative for the bank, I asked.
I couldn't believe what I heard in response.
She was the representative for the bank. She would be bidding in the property.
WHAT? I nearly fell over.
I couldn't believe it. It might be one thing to refer to one party as your client and still do a good job at your job, but now I was hearing that they weren't even requiring the bank to be there at the sale! Did they have a range of authority? If someone else bid would they come back with another?
How can you have duties to both sides, come to a sale, and then act at the bidder and the seller and leave the other party, literally, out in the cold?
I talked to Stevie again. GET THIS ON TAPE! Thank God for video-equipped cell phones. He taped the whole sale, which was like a scene out of Becket, with a woman essentially talking to herself, bidder and trustee and seller.
Now it all made sense. This wasn't an omission on Unnamed's part. This was proof that they not neutral, they were partisan.
Now I had something to work with.
I got a message from my secretary mid-morning on an early November day last year, 2010. I was heading to meet a client about a serious custody case, but I saw that an old client had called, so I called him on the way.
It was a beautiful, clear-skyed Friday. The leaves were turning, maybe a little later than they had when I was a kid, and I was driving the curvy roads down to southern Stone County, enjoying the drive and the late-fall colors that draped the hillsides.
After a couple of cell-phone missed connections, I got a hold of my guy. He told me that his dad's property, long the source of contention, was to be sold on the courthouse steps in about 45 minutes. Was there any way I could be there to help them buy a little time as they tried frantically to get the money together?
Normally, a lawyer can't do anything in 45 minutes except ask three questions or blow his nose. I have stopped foreclosures in the past in a very short time, but generally a very short time meant a couple of days, at the least. But I like to try to be creative, so I thought of what I could do.
I told him that I couldn't, that I was more than 45 minutes away. But I had an idea. I called my assistant Stevie, and asked him if he could make the ten-minute drive to the courthouse.
Stevie is a world-class guitar player and an ascerbic wit. If you gave him a birthday cake, he would still look like he was about to hit you. He conquered the guitar years ago, and now it speaks for him like his own language, one you've heard before. If there is a musical playground in heaven and I get to pick a band, my snobby musical self would pick Stevie as my guitar player over Richard Thompson or Tom Verlaine or Don Rich or Eddie Van Halen or Jeff Beck, guitarists whom I love dearly. He plays fast and smart and on the edge, and I'm pretty sure he could kick any of the other guitarists' asses as well. He's my Man Friday, and he's good at handling bad situations.
We probably generated ten phone calls between the three of us, and Stevie made it in time. When he got down there, just as I was to go into my meeting, he called me with a really strange piece of information.
"There's only one person here."
That one person was a representative for Unnamed (we'll get to that later), a big-city law firm who handle probably a quarter of the foreclosures in the state of Missouri. We had met before on a number of occasions, and I was neither a Facebook friend, nor on their Christmas card list. I believed, and still believe, that they have a huge conflict of interest in all of the cases they do, but I had never really seen it as any more than that.
Unnamed was the attorney for the banks, but would also have themselves appointed as the trustee in the foreclosure. Then, they would push to foreclose as quickly as possible. To me, this was a BIG problem, because the trustee, under tons of Missouri law, was supposed to have duties to both the borrower AND the lender. How can you do your duty to the borrower when you're acting like the US Army trying to hunt down Saddam Hussein?
We had told them this, over and over, starting way back in 2005. This is a conflict, dear boys. This is a conflict. Dude. Seriously. You've got a conflict.
We had told it to them in at least three prior cases. We had written it. We had said it to them in person. Sky writing. Smoke signals. Semaphore. But it was no use. They still called the banks "our client." No, hoss, you've got TWO clients here. Mine's just the one without the money and with the home that you're trying to steal.
Each time, we had been successful at stopping the foreclosure.
I talked to the woman. She was not a lawyer. She would wait ten minutes, maybe fifteen. That was all she could do. After that, she would have to call the sale. That was not unreasonable, I thought. She had other people's houses to take and miles to go before she slept.
Where was the representative for the bank, I asked.
I couldn't believe what I heard in response.
She was the representative for the bank. She would be bidding in the property.
WHAT? I nearly fell over.
I couldn't believe it. It might be one thing to refer to one party as your client and still do a good job at your job, but now I was hearing that they weren't even requiring the bank to be there at the sale! Did they have a range of authority? If someone else bid would they come back with another?
How can you have duties to both sides, come to a sale, and then act at the bidder and the seller and leave the other party, literally, out in the cold?
I talked to Stevie again. GET THIS ON TAPE! Thank God for video-equipped cell phones. He taped the whole sale, which was like a scene out of Becket, with a woman essentially talking to herself, bidder and trustee and seller.
Now it all made sense. This wasn't an omission on Unnamed's part. This was proof that they not neutral, they were partisan.
Now I had something to work with.
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