Chain of Title (8 page)

Instead of filing with county recording offices each time a mortgage transferred—and paying that fee—banks instead listed
MERS as the “mortgagee of record” in the initial mortgage assignment. Then, for subsequent transfers, the parties would go to the MERS database and list trades on an electronic spreadsheet. Banks could make unlimited transactions inside MERS; the county recorder only knew about the original assignment.

Though frequently listed as legal title holder on borrowers' deeds, and though named on the assignment in the public records, MERS has no financial interest in the mortgage, does not receive payments from any borrower, and does not receive proceeds from any foreclosure sale. They make their money on the front end from mortgage originators, who pay to use the MERS database. MERSCORP, the parent company, owned a headquarters in Reston, Virginia, and a data center in Texas. They employed around
sixty workers. MERS, Inc., the name on all the mortgage documents, was a shell company with no actual employees. Yet at the height of the housing bubble, most of the existing mortgages in the United States, more than sixty million, listed MERS Inc. as the “mortgagee of record.”

Law professors such as Christopher Peterson of the University of Utah identified a couple of major problems with MERS. First of all, it operated like a tax evasion scheme, depriving local governments of recording fees by transferring mortgages internally. The far bigger problem was that the MERS database served as the repository of all knowledge about the various transfers from originator to trustee. Thousands of people could access the MERS database, which proved far more susceptible to human error than the recording office. Banks failed to record transfers within MERS in a timely fashion, if at all. Nobody took responsibility for flushing out errors or double-checking transfers. With millions of loans, that project could hardly be managed by a large team of operatives, let alone the few employees at the MERS data center.
Law professor Alan White of Valparaiso University surveyed a sample of MERS loans and found that only 30 percent matched the ownership record in the public domain. MERS didn't so much track mortgage transfers as it
pretended
to track them.

If the borrower missed payments and the servicer decided to foreclose, MERS acted in one of two ways. In some cases they carried out the foreclosure process in their own name, as the mortgagee of record, despite the fact that they had no material interest in the loan itself. Alternatively, like in Lisa's case, they quickly made an after-the-fact assignment to the trustee, which under the pooling and servicing agreement is supposed to hold legal title on the loan. The difference depended on state laws surrounding foreclosures, whether the note was specifically endorsed to some other entity or not, and whether local courts had caught up to the fast-moving scheme.

Either way, MERS operated under questionable legal foundations. In depositions, MERS claimed to be merely acting as “nominee” for the lender while also claiming to hold legal title on the mortgage. They would argue their role as mortgage holder whenever possible but deny liability when pressed. In a March 2009 bankruptcy case in Nevada called
In re Hawkins
, MERS brought foreclosure action in its own name and as a nominee for others simultaneously. On page 9 of their brief in the Hawkins case, MERS asserted the “right to enforce the note as the note's holder”; on page 8 of the
same brief, they asserted “authority to
act for
the current beneficial owner of the loan or its servicer.” MERS didn't even seem to know what MERS did. (They lost that case, incidentally.) As Peterson wrote in a law review paper,
“To grant MERS standing based on legal title held by someone else is to treat the notion of legal title as some magical nonsense where ownership means nothing other than a willingness on the part of courts to let financiers seize homes in whatever manner is most convenient for them.”

In cases like Lisa's, where MERS assigned the loan to the trustee, the legal problems did not go away. First, the recorded assignments happened after the foreclosure commenced. Also, they were assigned after closure of the trust under the pooling and servicing agreement, after which time assets could not be conveyed. The PSA also barred trustees from putting delinquent or “nonperforming” loans into trusts, and by May 2009, the date on the assignment, Lisa's loan was delinquent.

MERS had, according to their corporate roster, just a handful of employees. How did Whitney Cook and Christina Trowbridge, named as MERS “corporate officers” on Lisa's mortgage assignment, work for them? MERS's corporate HQ was in Virginia and their data center was in Texas, and yet the mortgage assignment was signed and notarized in Ohio. Lisa did some more Facebook snooping and found a Whitney Cook, age twenty-three, living in Akron, Ohio, near the offices of Chase Home Finance. Furthermore, on the “Affidavit of Amounts Due and Owing” in the case, Cook's name appeared as a representative of Chase, not MERS.

Christopher Peterson, the Utah law professor, found that
MERS sold their corporate seal on their own website for $25. Thousands of low-level workers across the country who worked at mortgage servicers or their law firms became “vice presidents” and “assistant secretaries” of MERS, despite never working for or receiving pay from them, so they could sign documents purporting to assign mortgages. Under the membership agreement, MERS empowered these “corporate officers” to execute whatever documents were necessary for loans in the MERS system.

Lisa couldn't believe it. Three centuries of American land title operations had been outsourced to a shell company created by big banks so they could save a buck—and they were using it to circumvent established procedures and kick people out of their homes. Every step of the process involved an alphabet soup of companies blithely ignoring the law to maximize
profits. Originators neglected underwriting standards and served up predatory loans to anyone with a pulse. In securitization, banks chopped up the loans in faulty ways that clouded chain of title, and apparently didn't convey the notes properly. The same banks took bad loans and knowingly passed them on to investors to increase their profit margin. When this all crashed, servicers, foreclosure mill law firms, and trustees continued to neglect legal standards, using document fabrication and shady third parties to rush foreclosures through the system. In fact, foreclosure fraud was necessary to stay one step ahead of the origination and securitization fraud.

Chain of title is a long-standing concept in contract law
based on the principle of privity, under which nobody can sue on a contract to which they are not a party. In any other legal context, from shoplifting to murder, breaking the chain of evidence would lead to a judge tossing the charges. If evidence in a judicial proceeding can be faked and nobody challenges the fakeries, the legitimacy of the system breaks down. Anyone can be swept up and condemned to eviction based on false documents or inaccurate testimony.

If actually reading your mortgage documents constituted a revolutionary act, then Lisa was among a handful of brave radicals, conscripted into a fight she never sought against the most powerful foe in America. But unknowingly, Lisa was actually building on twenty years of critical forensic work done mostly by one man, unsurprisingly based in Florida: a former sports agent named Nye Lavalle.

4

THE ORIGINATOR

It was 1989—before the housing bubble, before the widespread adoption of private-label securitization, even before the savings and loan industry blew up. Nye Lavalle was the great-grandson of an Argentinian president (Teatro Colon, one of the world's finest opera houses, sits on a Buenos Aires square named Plaza Lavalle, after his ancestor) who successfully managed professional tennis players in the 1970s. Nye's father, Ramon, was a diplomat, tight with the Kennedys and Ernest Hemingway. Ramon left Argentina to work in the Office of War Information during World War II, eventually becoming an executive vice president at the pharmaceutical firm Parke-Davis. Nye grew up in the tony suburb of Grosse Pointe, Michigan, and his dad liked to take him to inner-city slums in Detroit and New York City, telling him that people born into privilege had a duty to look out for those less fortunate.

In the 1980s Nye founded
a consultancy and research firm called the Sports Marketing Group (SMG), which published groundbreaking studies into the popularity and viewing audiences of American sports. For many years he was a go-to analyst on sports trends and predictions, quoted in papers across the country.
He called the rise of figure skating and NASCAR in the 1990s, and advertisers salivated over his detailed analysis. Nye's business successes accompanied a flamboyant style. He dressed sharply, laughed big, and was never at a loss for dates, as he would tell you. One friend quipped that, with his monogrammed blazers, he looked like the captain of a ship, minus the hat.

In 1989 Nye Lavalle was building his business, running part of it out of a home in Dallas purchased for his parents, Anthony and Matilde Pew (his
father, Ramon, died young, and his mother remarried). Savings of America (SOA), predecessor to the crisis-era lender Washington Mutual and the nation's largest S&L, owned and serviced the loan. Though the Pews instructed SOA to send monthly statements to their primary home in Michigan, the company would either send them to Dallas or not at all. Nye paid the mortgage directly at an SOA branch. But SOA would mail the check to a servicing center, and by the time it got delivered to the proper division, the payment would be late. Nye protested that he held the check receipt, showing delivery well before the due date, but
SOA would tack on a late fee anyway.

Nye started talking to banker clients—he represented Barclays and Visa in his consulting firm—about these nickel-and-dime schemes.
Loan servicers were mostly automated, with software programs tracking payments and ringing up fees. They were paid through a small percentage of the principal balance on the loans they serviced; they also earned “float,” from investments made in the time between receiving monthly payments and sending them to investors. Most important, they kept all fees generated through servicing. Fees represented the only real variable, creating a big incentive to make customers delinquent. And the software could be dialed to increase fees and maximize profits.

SOA's next attempted cash grab on the Pew home would become a commonplace scam in the bubble years, known as
force-placed insurance. Homeowners are required to hold property insurance, so whenever that lapsed, servicers automatically enrolled them in an overpriced replacement policy, taking a kickback from the insurer in exchange. Homeowners suddenly got a giant charge for junk insurance automatically deducted from their mortgage payment. Force-placed insurance served a dual function: it racked up profits for the insurer while making homeowners late on their full payment, leading to more fees. In this case, SOA's software program force-placed the Pew house into homeowner's insurance whenever the policy came
within
thirty days of expiration. This happened three times on the same loan, with SOA force-placing additional policies on top of the old ones, charging for each by deducting from the monthly payment. All the insurers who imposed new policies on the residence were actually owned by the same parent company as SOA.

Nye and his family had enough. He told SOA he wanted out of the loan: just give him the payoff amount and the loan histories, and he'd cut them a
check. When Nye finally got the data, he found that SOA overcharged by close to $18,000. Plus they failed to supply the promissory note. Nye refused to pay the charge-off amount, believing it fraudulent. The ensuing battle took over a decade and cost around $2.5 million in legal fees.

Throughout the dispute, Nye and his parents consistently made mortgage payments to stay current. But SOA kept demanding excess charges and court fees well above the loan balance, based on a delinquency they concocted. More frustratingly, Nye could never get a clear estimate of the amount owed. He received twenty different loan histories throughout the ordeal, none of which matched.
Sometimes monthly payments were missing; other transactions were redacted or even manually whited out and typed over.

In 1991 SOA started charging the Pews monthly property inspection fees without telling them, taking the money from the mortgage payments. This generated additional late fees because the payment would come up short, though the deductions were unknown to the Pews until after the fact, and even then concealed as
“miscellaneous advances.” Nye's banker friends called the deliberate strategy “fee pyramiding,” layering obscure overcharges to siphon as much extra cash as possible from every loan. Any attempts to fix these errors would only meet with stall tactics. SOA probably didn't think anyone read the payoff statements; surely none of their homeowners would have the resources or the will to fight them over it. And mostly they were right. But Nye had a sense of principle, a buildup of personal wealth, and a temper. “You can fuck with me,” he said later. “But fuck with my family, my friends, or my dog and you have an enemy for life.”

In September 1993 Savings of America claimed to have sold the Pew loan to EMC, a subsidiary of the investment bank Bear Stearns. (Interestingly, all of these entities—SOA, their purchaser Washington Mutual, EMC, and Bear Stearns—would after the financial crisis fall into the hands of JPMorgan Chase.) EMC rapidly filed for foreclosure, demanding nearly $1 million in excess fees, court costs, and late payments. Nye and his parents, who never missed a mortgage payment but were on the brink of losing their home, countersued in Dallas District Court to stop the foreclosure, which in Texas did not have to go through a judicial process.

It appeared that EMC operated as, to use Nye's phrase, a
“mortgage toxic waste dump,” taking over what the industry called “scratch-and-dent loans” in default and moving to foreclose, regardless of the homeowner's ability to
cure past due amounts. Nye considered it a form of extortion. He demanded that EMC fix SOA's repeated misapplications of payments, fee pyramiding, and other fraudulent behavior, but EMC representatives openly threatened to ruin Nye's business credit and his family's credit if they weren't paid the full amount, arguing that they had no obligation to correct previous errors. EMC submitted loan histories to Dallas District Court that were pastiches of past SOA records, similarly flawed and incomplete, while swearing under penalty of perjury to their veracity.

And then there was the sale of the loan itself. EMC hyped the purchase from SOA, involving more than eight thousand loans with a total value of over $2 billion, one of the largest loan purchases in history to that point. But when Nye pressed EMC to fix the pattern of fraudulent charges on his account, EMC asserted that the master transaction records were destroyed. Nye asked EMC for a chain of title, including the promissory note and all the assignments and transfer documents on the loan, but EMC never provided them either, claiming several of them were also destroyed.

During his investigation, Nye learned that Bear Stearns, parent company of EMC, was an investment adviser to SOA. EMC created a shell corporation called California Loan Partners as a pass-through. SOA sold the eight thousand loans to California Loan Partners, and on the same day, California Loan Partners sold them to EMC. By structuring the deal this way, SOA could hide losses in the shell corporation, so they wouldn't have to take immediate write-downs. This would have led to technical insolvency and a takeover by the Resolution Trust Corporation, the entity President George H. W. Bush set up to unwind failing savings and loans.
So the entire transaction was an elaborate game to get bad assets off SOA's books and ward off a government takeover.

EMC concealed the notes and mortgages to keep the scheme hidden, but that left them lacking proof of standing to foreclose. In addition, once EMC got hold of the loans, they included them in mortgage-backed security sales to investors. None of those transfers was ever recorded at the Collin County, Texas, land records office.
Nye wondered if EMC even had custody of the mortgages, or if they were assigned willy-nilly to different investor pools without a proper chain of title. Nye also believed EMC officials gave false testimony under oath, particularly in sworn affidavits attesting to the loan histories. In a court filing, Nye questioned whether EMC was
“the actual
owners of the note or mortgage upon which they attempt to foreclose in their own name, rather than the name of the trustee or investor in the note or mortgage.” This was the same complaint Lisa and her online friends would make years later.

In the 1990s the judicial system was not ready to hear about financial institutions creating false documents and lying to courts. After several years, the judge hearing the case unexpectedly recused himself, with a new judge brought in from retirement. The bank piled on frivolous challenges, even questioning Nye's adoption by his stepfather at one point. The family's own lawyers told them not to bother with the case, urging them to take an inadequate settlement; Nye suspected they were bought off.
Ultimately the new judge ruled for EMC, and on January 4, 2000, they foreclosed on the Pew family property.

But the house in Dallas had ceased to be the point of the struggle.

Nye could tell he'd stumbled into something big; why else would a collection of financial institutions spend millions in legal fees to repossess a house worth, at best, $160,000? Only to conceal the fraud lurking underneath, inflicting enough emotional and financial distress to get away with it. If what Nye saw in his case occurred across the U.S. housing market, it would be the greatest consumer fraud scandal in history, affecting people far more financially vulnerable than his family.

Nye used the extensive discovery period to acquire and analyze tax records, prospectuses, SEC filings, internal audits, insurance documents, and more. He flew around, at his own expense, to courthouses in Florida, Georgia, California, and Texas, reading foreclosure case files line by line, making notes and even scanning documents into an early version of a Mac laptop. He found other foreclosed homeowners with similar horror stories. He deposed employees of Bear Stearns, EMC, and SOA and interviewed dozens of other mortgage bankers, industry experts, forensic specialists, and even local, state, and federal banking regulators. And once people on the inside learned of his investigation, they anonymously fed him bits and pieces of information, too. Nye Lavalle was a full-time sports agent and consultant but a part-time mortgage sleuth.

One day Nye met a woman in a bar, a certified cash manager with Bank of America. She told him that the board of directors set a profit number for
the bank, and employees had to hit the target in any way possible. With the rise of computerization, they could do that simply by moving numbers on a spreadsheet. If a bank robber steals a million dollars, they go to jail. But if banks steal that sum from their customers every day in five- and ten-dollar increments, auditors and regulators pay no attention.

Nye connected this to mortgage servicers' financial incentives to drive borrowers into default and maximize fees. Servicers got paid first in a foreclosure sale, even before the owners of the loan. So there was no reason for them to help anyone in need or hire enough staff to handle requests for assistance.
They devised ways to digitally extract profits through every stage of the mortgage process, from escrow accounts to homeowner's insurance to applications of monthly payments. When mortgages transferred to new servicers, the computer systems wouldn't reamortize the loan or reconcile the numbers, always benefiting the servicer over the borrower.
At one point Nye counted forty-four different schemes to ring up additional fees, even if borrowers paid on time. These weren't back-office mistakes but deliberate financial engineering. Nye found a policy manual from EMC Mortgage that
referred to its customers as “smucks,” and if anything, that overstated the level of respect. Since smucks couldn't choose their servicers, they had to live with the consequences.

Furthermore, as Nye would later tell the
New York Times
,
“nothing—and I mean nothing—that a bank, lender, loan servicer or their lawyer says or puts on paper can be trusted and accepted as true.” No transfers of mortgages, which started to multiply with the rise of securitization in the late 1990s, were actually “true sales,” as people like Lisa Epstein eventually figured out. The notes and mortgages in securitizations never made it to the trusts, and mocked-up documents submitted to county recording offices, bankruptcy trustees, and courts in foreclosure cases constituted an elaborate game to conceal that fact.

Nye also identified how banks would offer for sale interests in mortgages that they did not own.
Banks would “double-pledge” mortgages into a loan pool and also as collateral with the Federal Reserve to obtain additional borrowing. It was as if a baker sold you a cupcake and then sold the same cupcake to the person in line behind you, letting you two fight it out over who gets to eat it.

Instead of documenting chain of title on each mortgage transfer and keeping assignments and notes in the individual loan file, investment banks made copies of the original documents, and when they needed to, they had foreclosure mills fill in the blanks with the necessary names and signatures. They couldn't really do it any other way: if the rules of evidence for all other trials also held in foreclosure cases, the cost of litigation would be enormous. You would need original promissory notes and assignments from every link in the securitization chain, along with certified testimony from each document custodian. But nobody preserved the records. Nobody tracked or verified evidence. One industry hand told Nye it was like taking a criminal suspect's lab specimen from the evidence room and letting someone else pee in the bottle. From a legal point of view, the chain of custody of hundreds of thousands if not millions of loans was fatally corrupted. And Nye's family trust had numerous investments in mortgage-backed securities through mutual fund holdings. He was helping
fund
this mess.