Chain of Title (15 page)

Lisa Epstein, Interested Person

Lisa added a “Suite 508” to her apartment address to make it look official. She mailed the notices and marked off sixty days on her calendar, waiting for a response.

After a classic Florida sunset, a nearly full moon shone over E. R. Bradley's on November 18, 2009. Lisa and Michael arrived first to set up and corral guests. And it went pretty well. The lawyers showed up because of the nurses, the nurses showed up because of the lawyers, and several foreclosure victims stopped by. These were people who knew one another only by aliases they used on the Internet. Intellectually, they knew others were out there, but meeting them in person confirmed they had allies in the fight.

James Elder called himself “Jazzy” on
Foreclosure Hamlet
; he met Lisa at the courthouse. His auto repair business was literally blown away by Hurricane Wilma in 2005, and his wife later fell ill, stressing the family finances. PNC Bank put James into foreclosure while negotiating a loan modification. Foreclosure mill law firm David J. Stern backdated the assignment of mortgage; it wasn't filed until 2009, but the date of assignment was listed as 2005, a bungling attempt to cover up the post-foreclosure production of the document. Grace Rucci's son got the same message from Chase Home Finance that Lisa did:
stop paying for three months and we'll give you a modification
. He did, and Chase put him into foreclosure. Grace, a home
health care worker, got activated by Lisa's website. Dave Lehoullier, Lisa's tech troubleshooter at
Foreclosure Hamlet
, came down, too. In all, about thirty people made it, which Lisa and Michael judged a success for a couple of weeks' notice and a whirlwind campaign of posting flyers on every utility pole and faxing every foreclosure defense and bankruptcy attorney in south Florida.

The big topic that week concerned the lending industry's comments to the Florida Supreme Court's task force on foreclosures. The Florida Bankers Association bluntly stated,
“Virtually all paper documents of the note and mortgage are converted to electronic files almost immediately after the loan is closed. . . . The reason ‘many firms file lost note counts as a standard alternative pleading in the complaint' is because the physical document was deliberately eliminated to avoid confusion immediately upon its conversion to an electronic file.”

This was an amazing admission. First, the pooling and servicing agreements for the securitization trusts explicitly stipulated that only notes and mortgages with “wet-ink signatures”—that is, original documents—would make a transaction valid. The Florida Bankers Association unwittingly admitted that, as a matter of course, these original documents were never delivered. Second, for months Lisa watched lost notes become miraculously found whenever plaintiffs were challenged to produce them. This happened in Lisa's own foreclosure case, with the “original note” conjured up months after the foreclosure action. How could they be found if they were destroyed? Either the Florida Bankers Association was lying or the notes were fraudulent.

Robert Bostrom, executive vice president at the mortgage giant Freddie Mac, made an even blunter statement in a comment that Michael found:
“Typically, the plaintiff in a foreclosure action does not own the underlying note or loan that is secured by the property subject to the foreclosure proceeding.” This is precisely what Michael had spent the better part of a year trying to prove! Information of this nature would acquit a shoplifter. If the chain of custody of evidence cannot be established and the prosecuting attorney cannot produce the stolen items, the case falls apart. And this was not a bottle of nail polish but someone's home, the store of most of their wealth.

Michael and Lisa encouraged defense attorneys to introduce these comments in their cases. And they wanted to prove that victory was possible against the banks, despite their power and prestige. So they ticked off a series of recent wins. Homeowner
Antonio Ibanez just reversed his foreclosure in Massachusetts, after U.S. Bank failed to execute the assignment of mortgage until after the foreclosure sale.
Federal bankruptcy judge Robert Drain canceled a $460,000 mortgage debt for a borrower in White Plains, New York, because PHH Mortgage couldn't prove their claim.
Even a bankruptcy judge in Idaho objected to an incomplete chain of title routed through MERS. Defense attorneys hadn't entered law school to facilitate the Great Foreclosure Machine, so they were eager to pick up new strategies to fight back.

People broke off into their own groups, but Lisa and Michael made sure to talk to everyone. The happy hour lasted all night. For a brief moment lawyers and homeowners were actually working together to solve the problem. Though Lisa and Michael planned to skip December because of the holidays, they hoped the happy hours would build momentum when they resumed in January.

A couple of days later, Michael got an unexpected call from Nye Lavalle. The same guy who blew Michael off several months before was now asking to collaborate. They met for drinks one night in Delray Beach and compared notes. Michael thanked him for leading the way, and Nye praised Michael's guide to looking up fraud. “We didn't have records online when I started out doing this,” Nye told him. “I had to go to the courthouses one by one.” Michael told him about the happy hours, and Nye said he would try to make them whenever he was in town. Michael drove back to Port St. Lucie that night thinking he had been let behind the velvet rope into an exclusive club.

Meanwhile, Dave Lehoullier, Lisa's tech guy at
Foreclosure Hamlet
, decided to throw a get-together for activists at his home, which he called “The Ranch.” Michael and Lisa attended, along with a few others. They talked a bit about foreclosures and documents, but more about themselves and what brought them to this point. “I don't know what I'm doing half the time,” Lisa confessed. But she was compelled forward, she said, by the same impulse that led her to become a nurse. Then she told a story that nobody,
not even Michael, knew. Lisa happened to be visiting New York City as a tourist on September 11, 2001. When news of the planes flying into the Twin Towers broke, she ran to help. Within a matter of hours, Lisa found herself in a triage center in lower Manhattan, tending to victims of the attacks for a couple of days. That's what she was doing now, she said—providing triage to those suffering from foreclosure.

Everyone left The Ranch that night a little closer to their compatriots. But they were wrong about one thing. They kept framing the goal as educating attorneys about the sorry state of the public records, as if no lawyer had it figured out. At some level they understood that was wrong; there wouldn't be any positive developments to tout if there weren't some attorneys out there trying cases. But Michael and Lisa didn't know about a robust coalition of lawyers—a giant virtual law firm—challenging lenders. Some had been doing it for decades. The activists, not the lawyers, needed to be educated.

9

THE NETWORK

April Charney did it first in 1992. A Miami native with long jet-black hair who shuttled between Florida and Arkansas in her legal career, she had just started working at the nonprofit Gulfcoast Legal Services in Sarasota. April's humility was evident in who she chose to defend. Back in Arkansas, clients would pay with money carried in their boots, which they withdrew from the “bank”—their backyards. In Sarasota, April represented many renters improperly evicted from apartments. But this was a home mortgage case.

All mortgages have language entitling homeowners to
special delinquent servicing prior to foreclosure. Once a borrower misses a payment, the loan servicer must contact them with a delinquency letter, advising the borrower of the amount due and how to cure the problem and bring the loan current. That letter must arrive within forty-five days of the missed payment. Servicers must take partial payments and cannot begin foreclosure until the window for the borrower to fix the default closes. Borrowers fund this servicing entitlement themselves through part of their mortgage payments. On Veterans Administration or Federal Housing Administration loans, special servicing directives are even more stringent.

April Charney started getting cases where none of these requirements had been satisfied. She tracked down the federal statute mandating the delinquency notice,
12 USC 1701x(c)(5). It was part of the National Housing Act of 1934. Early intervention made sense: if struggling borrowers got special assistance when they missed a payment, they might have a chance to
prevent foreclosure. Yet many servicers did not even seem to be aware of the obligation.

You could count on one finger how many lawyers realized this in 1992. Fortunately, the lawyer who figured it out was April Charney. She began to fight foreclosures on grounds of inadequate servicing, first on VA and FHA loans, where requirements were very rigid. Her main contention to the judges was that the consumer paid for this service and wasn't getting it, just like if you went to a repair shop and bought a spare tire and they forgot to bring it out to you.

April began to train lawyers on foreclosure defense for the Sarasota Bar Association, explaining how servicers routinely broke a fundamental consumer right. She had a knack for breaking down complex legal issues into accessible bits, like a high school math teacher. For years April and her colleagues fought bad servicing practices. Servicers ran a low-margin business, and they couldn't afford to follow federal law and hire enough staff to counsel delinquent borrowers. So they took their lumps from a handful of rabble-rousers in 0.005 percent of their cases, rather than change their practices.

The rise of securitization made improper delinquent servicing look quaint. In 2004, April moved to Jacksonville Area Legal Aid as a consumer attorney, and before long the foreclosure cases rushed in. Almost all the plaintiffs filed “lost note affidavits,” claiming that they owned the loan but just didn't hold the required paperwork. And the plaintiff was usually MERS, the electronic database that had no financial interest in loans but nevertheless claimed standing to foreclose. Nobody goes to law school to learn about foreclosures, April was fond of saying, and that was especially true in the securitization era. April taught herself about the various actors in the chain of ownership, spending nights reading intricate pooling and servicing agreements and obscure tax laws. The paperwork in her Jacksonville office piled up so high,
she had to meet clients in the lobby.

But while the topics were obscure and the cases complicated, at the heart of the matter were insights available to any novice law student. First of all, April reckoned, Americans simply didn't make enough money to keep up with the demand for mortgage bonds. As a result, underwriting guidelines had to be scrapped. But REMICs, the tax-exempt trusts set up for mortgage-backed securities, were supposed to invest only in safe assets, not subprime
loans. Wall Street banks that sold the securities didn't want the Internal Revenue Service to notice they were consistently violating the REMIC rules. So they purposely didn't create a paper trail, despite clear language requiring such documentation in the pooling and servicing agreements. April would explain it with one of her colloquialisms. It was like closing on your house and not signing the closing papers. Then ten years later you sign the papers and try to get everyone to believe that you owned that house the whole time.

Worse, there was no set schedule of mortgage loans pooled in a securitized trust, or if there was, the trustees were extremely loath to provide it. Sometimes the principal payments went to one trust and interest payments went to another. April saw cases with the same loan pledged into multiple trust pools, so when the loans went into default, different entities would try to foreclose on the same note. April called the mortgage-backed securities from the bubble years
“nothing-backed securities.”

April was preparing to put her arguments about securitization FAIL to the test in court when she attended a consumer attorneys' conference in Minneapolis and met the one person who independently came to similar conclusions about the mortgage industry and already won cases on these points. His name was O. Max Gardner III.

Max, whose grandfather was once governor of North Carolina, carried himself with the courtly mien of a political scion. One friend said that listening to Max was like listening to the prophet Elijah—if Elijah had a syrupy Carolina accent. After law school and clerking for the state supreme court, Max set up shop as a small-town lawyer in his southern Appalachian birthplace, Shelby, eventually specializing in consumer bankruptcy. Many of his clients struggled with mortgage payments, forcing him to deal with servicers. Starting in the mid-1980s, he began to see improper fees, misapplication of payments, and other unlawful activities. His
Chapter 13
bankruptcy clients would get charged for monthly property inspections that were never carried out. Servicers also ignored the bankruptcy stay, a designated stoppage of debt collection during the bankruptcy process. And they would try to recapture fees in asset sales. Max hooked up with a forensic accountant named Kevin Byers, who discovered that servicer software was actually programmed to violate the bankruptcy stay, so that servicers could
try to collect windfall revenue. Servicers could also change nonrecoverable fees to recoverable ones with a couple of keystrokes, and add them into payoff statements.

Unlike other bankruptcy attorneys, Max had trial experience, and he believed he could fight these improper charges in court. The bankruptcy judges were initially indignant. “Max, are you on a crusade against the banks?” they would ask. In his calm manner, Max explained that his client wasn't behind on the court-ordered payments; the servicers were just tacking on charges using their software codes. The presumptions of industry innocence lingered, but Max did start to have modest success, because the servicers would rather pay him off than correct their systems.

In 2000 Max attended the same National Consumer Law Center conference in Colorado where Nye Lavalle made his presentation. Max sized up Nye as the kind of guy who would play golf in a suit and tie. But unlike the rest of the room, Max didn't laugh at Nye's hyperbolic contentions, because he had seen hints of them in his cases: affidavits, assignments, and endorsements of questionable legality. No other lawyer had put it all together, but this civilian did. Max pulled Nye aside at the conference, and the two spent a few hours together in the hotel bar. They talked about the newfangled securitization model and how it was working on the ground. They bonded over being outcasts, lone voices in the wilderness.

Over the next several years Max came to discover the lost note affidavits, faulty mortgage assignments, missing transfers, and dubious signatures that infected courts nationwide. He theorized that passing authenticated, notarized documents along every link in the securitization chain and into the trusts was too costly for the fly-by-night originators that sold the loans, let alone everyone else involved. So they didn't do it.

When the borrower defaulted and trustees needed standing to foreclose, they would call special fix-it companies. Max wrangled a copy of a quarterly newsletter put out by Fidelity National Title Group called
The Summit
. Fidelity actually created the main servicer software platform used to dial up profits. It had a subsidiary called Fidelity National Foreclosure Solutions. And
The Summit
described how the Document Execution team at Fidelity National Foreclosure Solutions generated whatever assignments or promissory notes were needed for its clients, after the fact. Team manager Dory Goebel explained how “FNFS has signing authority for a number of our
clients” and how plaintiff attorneys could simply request any mortgage document and receive it within twenty-four hours.
“The Document Execution team is set up like a production line,” Dory explained. “On average, the team will execute 1,000 documents per day.” There was even a flow chart showing the trail, from document request to fabrication to return to the foreclosure mill law firm. In 2008, Fidelity spun off its mortgage division into a public company called Lender Processing Services, or LPS. When foreclosures exploded, LPS controlled most of the market in servicer software and third-party document fabrication.

Max began to speak at national seminars about these issues. He also questioned whether the parties trying to claim payment from his bankruptcy clients actually established a proof of claim. He would use these challenges as legal leverage to secure better terms: reduced principal, forgiven past due balances, whatever. And he started to win. “Max has a better record than Roberto Duran, 103–0,” said one observer. Bankruptcy judges, who were accustomed to proofs of claim, began to understand Max's arguments. When the big cases started to move, bankruptcy judges were well ahead of state and federal courts.

In 2004, Max's wife, Victoria, who bred Cavalier King Charles spaniels, needed more land for a kennel. So the family packed up their menagerie (they have seven Great Pyrenees, along with three other dogs, two donkeys, and five horses) and moved into the mountains, to a remote log cabin and farm twenty-five miles northwest of Shelby, reachable only along a gravel road. Victoria made a suggestion: instead of flying around the country giving seminars on fighting improper mortgage claims, why not have people come to the farm? That was the beginning of
Max Gardner's bankruptcy boot camp, one of the more unusual legal training sessions in America. Lawyers paid $7,775 for the four-day retreat, room and board included; Victoria did all the cooking. Holed up in the woods, attendees had nowhere to go and could only focus on the good food, the homemade Carolina rye whiskey, and how to beat the banks in court. April Charney attended one of the initial events, on a scholarship.

In day-long strategy sessions Max counseled a cool, almost laconic strategy in the courtroom. Since the plaintiffs had nothing but false documents to use, he recommended having them present their evidence before jumping on it—letting them “dig their own grave,” in his words. An entire wall
of the classroom displayed settlement checks from Max's cases, a testament to his success. Eventually Max brought in expert guests, including Dick Shepherd, former general counsel of Saxon Mortgage; Margery Golant, a foreclosure defense attorney who previously worked at mortgage servicer Ocwen and two different title insurance companies; and Kevin Byers, his forensic accountant friend. With insight from those who spent their careers on the other side of the table, defense lawyers learned how to anticipate opposing counsel's arguments.

Max also handed out materials on a thumb drive for each attendee, including a file called “Max Gardner's Top Road Signs of Bogus Mortgage Documents.” By 2010 this would include sixty-six independent features of false documents, including a list of 295 names, a roster of fraudulent document signers from around the country. Once participants graduated from bankruptcy boot camp, they would get access to Max Gardner's private email listserv, which included case files from a growing number of lawsuits, all stored and indexed. Competing attorneys in the same field rarely collaborated like this, but boot camp graduates operated like a networked foreclosure defense practice, using the listserv for strategy and information sharing. Between 2005 and 2010, six hundred lawyers from forty-seven states attended boot camp and discovered this new support system. They all returned home ready to take on the mortgage industry. One of these lawyers was April Charney.

April set out to prevent every foreclosure in her case file, because the plaintiffs possessed no legitimate evidence that they owned the loan with a right to enforce it. In the bubble years, virtually every mortgage she saw was placed into a securitized trust or sold on the secondary market. If the originators tried to take over and claim the right to foreclose, they would be admitting that they never transferred the mortgages to the trusts—a major violation of securities law. So trustee plaintiffs were stuck asserting ownership without proof. April's pleadings got a reputation—they were known as
the “show me the note” defense.

Hanging over every case was this notion that judges might grant someone a “free house.” But April directly challenged that point. Societies constantly make legal rules that cannot be violated, even if they lead to a guilty person going free. Police cannot coerce a confession and have that be admissible in court. They cannot falsify evidence. Even failing to read criminal
suspects their rights should result in dismissal. Nevertheless, judges who would have no problem throwing out a criminal case if they found planted evidence wrestled with the moral and psychological implications of giving homeowners a windfall. Everyone had to follow the law, except for banks, which could wave a piece of paper and get a foreclosure affirmed. To April, stopping these foreclosures represented a critical step to preserving the whole concept of justice.