Chain of Title (9 page)

When you combine the spoliation of the data with servicers driving borrowers into default, anyone with a loan, current or not, could find themselves wrongly evicted with false documents. But the Great Foreclosure Machine was sloppy; you could uncover its traces. And Nye wasn't just willing to look. He wanted to expose it to the world.

As someone frequently quoted in the press, Nye knew how to get media attention. He presented his findings under the names of Pew Mortgage Investigations and Americans Against Mortgage Abuse, two nonprofit organizations that consisted mainly of Nye Lavalle, in long reports with provocative titles.
“Predatory Grizzly ‘Bear' Attacks Innocent, Elderly, Poor, Minorities, Disabled and Disadvantaged!” excruciatingly detailed the schemes of Savings of America, EMC, and Bear Stearns that led to foreclosure on the family home in Dallas. The next report, “21st Century Loan Sharks,” took as its modest goal
“to defend and protect Americans and the American dream of homeownership from unlawful, fraudulent, criminal, unethical and illegal acts.” In that report, Nye described the modern financial industry as a white-collar mafia, using software and lawyers instead of guns and knives.
“Well-known banks and mortgage companies in Florida,” Nye wrote, “are providing perjured testimony, false affidavits and frivolous pleadings in cases involving mortgage foreclosure.” Nye described a litany
of false affidavits entered into courts by Florida foreclosure law firms, where they claimed control of documents the trusts never received, claimed ownership over notes when the entity merely serviced them, or claimed
“to support knowledge of facts not known by the affiant.”

This was a novel finding, that signatories on foreclosure documents had no understanding of the evidence they claimed to authenticate. Nye came to this realization while going through affidavits in the public records. The same names kept coming up over and over again, at a pace that suggested little or no examination of the loan files. Plus they signed multiple affidavits swearing to be vice presidents of different banks in different parts of the country. They were often the witness in one document and vice president in another. Finally, the signatures were inconsistent, with initials on one affidavit and full names on another. Signatures sometimes looked so different from one another, it seemed impossible for them to spring from the same hand.

Nye reckoned these were entry-level employees signing as bank officers—the lowest-paid vice presidents in history—with a corporate title rented by a foreclosure mill or document processor. He suspected that they lacked the personal knowledge of the facts of the case file, as required by law.
Nye later published an entire report in 2008 about one of these document executors, Scott Anderson, who worked for Ocwen, a specialized nonbank servicer that dealt with distressed loans. Nye demonstrated that Anderson adopted the position of vice president for dozens of different banks and lenders, signing with initials or “squiggle marks” that looked different across multiple documents, possibly signed by other employees on his behalf. While Nye was more exercised by double-pledging notes and concealing rip-offs inside servicer computing platforms, he included these dodgy signing practices in his reports as a way to reach nonexperts with something they could easily understand. High-priced attorneys can explain away complicated securities maneuvers, but what about the physical documents that govern real estate transactions?

Nye intended to get these reports in front of anyone who could stop the abuse, from homeowners who could challenge their foreclosures to the highest levels of government. The effects of institutionalized fraud, Nye warned, would lead to drastic devaluations of securities derived from mortgages, widespread failures of major banks and a mass sell-off in the stock market, not to mention millions of foreclosures, job losses, vacant homes,
and emotional distress.
He predicted the financial crisis and Great Recession eight years in advance.

For years Nye was under a gag order imposed by the judge in his foreclosure case. When it was lifted in 2000 he sent his reports to top executives at practically every major financial institution: Banc One, Countrywide, Merrill Lynch, Washington Mutual. Nye not only contacted Bear Stearns but created several websites with names like
EMCMortgageFrauds.com
,
BearStearnsCriminals.com
, and
BearStearnsShareholders.com
. On these sites he listed numerous criticisms against Bear Stearns and EMC. Bear Stearns sued to get the sites taken down because they created customer confusion.
A judge forced the closure of some, while allowing those whose addresses were “unmistakably critical” to remain up.

In 2000 Nye helped sponsor a conference of the National Consumer Law Center in Broomfield, Colorado. With his Italian suit standing out among the collared shirts and jeans of five hundred legal aid attorneys and housing counselors, Nye released his findings. “You're wrong if you call these errors,” he told the assembly. “This is intentional and premeditated. Servicers want their customers in default, it's designed to increase revenues.” Almost all of the lawyers thought he was nuts. Maybe they resented being lectured about their profession by a nonlawyer; maybe they just didn't like this guy with the fancy suit and brusque self-confidence. “Why is he wasting our time like this?” was the general reaction. “We're here to learn the law!”

The same year, Nye got to spend fifteen minutes with Arthur Levitt, chairman of the Securities and Exchange Commission at the end of the Clinton administration. He was in south Florida for a speech and Nye somehow secured a meeting. Levitt listened intently and agreed with Nye on virtually every point. But when Nye finished, Levitt leaned back and said, “I have as many lawyers at the entire SEC as one major law firm representing the banks.” Levitt described a ten-year lag between identifying a financial fraud scheme and its ultimate exposure to the nation. “It won't come out for ten years, and the banks know it. By then they're already on to the next scam,” Levitt sighed.

Undaunted and completely obsessed, Nye kept making his case. He published rants and critiques of the mortgage industry on
consumer websites like RipoffReport and on a primitive blog documenting these issues,
Mortgage Servicing Fraud
(
msfraud.org
), run by another foreclosure-victim-turned-evangelist named Jack Wright.
Nye infiltrated the corporate
message board for MERS, the private database for mortgage transfers, accusing them of fraudulent activity. (The company's CEO, R.K. Arnold, personally responded in the comments, writing, “There's nothing sinister about who we are and what we do.”)

But Nye's masterstroke was to purchase a piece of the companies he wanted to confront. He bought single shares of stock in several banks, mortgage servicing companies, and even the quasi-governmental entities Fannie Mae and Freddie Mac. Then he attended shareholder meetings and listed his grievances about pervasive mortgage misconduct and threats to the financial system. Nye studied every subsection of corporate shareholder rules, strategizing how to make himself heard.

In 2001 Nye and his parents flew to Seattle for Washington Mutual's annual meeting. Company bylaws stipulated that all shareholders had the right to inspect accounting books and shareholder lists fourteen days in advance. Washington Mutual didn't really make that information available. Nye found the woman who handled investor relations and asked to see the books. “I've been here sixteen years and nobody has ever made this request,” she said.

“Well, guess what—today's your lucky day,” Nye replied.

“But we just don't have this information!”

Nye smiled. “You'd better get it, because if not, that little party you're planning tomorrow won't go forward. I'll go to the Superior Court of King County and shut down your shareholder meeting!”

The woman turned white and left the room, returning a couple of hours later with William Lynch, Washington Mutual's corporate secretary, whom she pulled out of a board meeting. Nye handed Lynch one of his reports and reiterated his desire to see the shareholder lists and the books. Lynch pulled out his own file about the Pew family's long legal battle with Washington Mutual's predecessor, Savings of America. “You're just crying sour grapes because we foreclosed on you,” Lynch said, smirking.

The smugness set Nye off. “You can wipe that fucking grin off your face before I knock it off,” he said, banging the table in the conference room.

The startled head of investor relations rose. “How dare you speak to the corporate secretary that way! He took time out of his day to address your concerns!”

“The reason he's here,” Nye replied, shooting her a look, “is because he knows I can shut down your meeting in a second. So you're going to
listen to everything I have to say and take me seriously. This isn't a fucking joke.”

Nye's parents thought security would haul their son out of the room. But William Lynch stayed there until eight o'clock at night going over Nye's reports. And the next day Nye met for hours with the company's head of mortgage servicing while the annual meeting went forward across the street. But while Nye forced Washington Mutual to be respectful, nothing really changed.

In fact, while major banks, accounting firms, and mortgage servicers accepted Nye's comments and vowed to address them, only one company, the mortgage giant Fannie Mae, took it a step further. Fannie did business with enough lenders, servicers, and law firms that changes to their practices would have ripple effects throughout the industry. Nye corresponded with several Fannie Mae executives, including CEO Franklin Raines. Eventually Fannie Mae hired an outside law firm, Baker Hostetler, to verify Nye's claims. Baker Hostetler conducted seventeen separate interviews with Nye over a six-month period. The deal for his participation was that Nye would get to review the final report and make comments, but when the time came, Baker Hostetler asserted attorney-client privilege and shielded it.
Nye was blocked from reading a study based on his own work.

Years later, the
New York Times
's Gretchen Morgenson published the 147-page report, which was authored in May 2006, at the housing bubble's peak.
With the saccharine title “Report to Fannie Mae Regarding Shareholder Complaints by Mr. Nye Lavalle,” Baker Hostetler corroborated most of Nye's allegations. The author, Mark Cymrot, distanced himself by noting,
“Mr. Lavalle is partial to extreme analogies that undermine his credibility.” But he agreed that Fannie Mae's foreclosure attorneys in Florida routinely filed “false statements” and affidavits, that MERS filed “sham pleadings” in cases across seven states, and that
“Lavalle has identified an issue that Fannie Mae needs to address promptly.”

But the report added one critical caveat.
“Mr. Lavalle's assertion that Fannie Mae faces tens of billions of dollars of unenforceable mortgages and damages from class action lawsuits is overstated in our view,” Cymrot explained, because borrowers were unlikely to robustly defend themselves from foreclosure. Most homeowners didn't have the resources. Plus Fannie Mae was insulated, one step removed from the attorneys who filed the false
documents. Reaching Fannie would require multiple lawsuits, and borrowers would simply run out of money.

There was an eerie parallel to the infamous
Ford Pinto memo. According to a 1977 exposé in
Mother Jones
magazine, Ford Motor Company discovered a design flaw in the fuel tank of its Pinto model that made it susceptible to explosion in a rear-end collision. But the company refused to fix it, because a cost-benefit analysis determined it would be cheaper to pay off individual lawsuits than to redesign assembly lines and repair the cars sold. They deliberately kept the public at risk rather than spend the money.

The Baker Hostetler report for Fannie Mae wasn't as explicit, but it made the same point: it would cost more to unwind the many problems with foreclosures than to keep everything in place and deal with borrower lawsuits on a case-by-case basis. As a result, Fannie Mae took no action on Nye Lavalle's claims. They certainly didn't make public the documented evidence of fraud.

Nye was hooked on exposing banking industry fraud, and years of setbacks wouldn't stop him. In his career, he always peered to the edge of the horizon and brought back the future. Now he saw tsunami waves on that other side, and he felt obligated to warn people. Nye started serving as a consultant and expert witness for some foreclosure defense lawyers who embraced his theories. Through those cases and additional reports, Nye believed, he could educate lawyers, judges, and the general public. It was hard to get people to listen; even Nye's friends would tease him, calling him Chicken Little, asking when the sky would fall. They stopped laughing when it did.

Nye left a trail a mile wide, so anyone could see what he called
“the fraud of our lifetime.” When the truth came out, as he knew it would, the corporate accountants, bank directors, judges, and federal regulators could not say they weren't informed. What would really bring down the whole charade, Nye thought, was the Internet. Without a way for people to talk to each other, banks could squash dissenters. But if victims could coordinate, and expose the fraud for themselves, everything would come crashing to the ground.

5

THE COMMUNITY

If Lisa Epstein was going to act as her own lawyer to fight her foreclosure, she figured she'd better observe the process. Once Jenna was well enough, Lisa returned to work, but shifted into a four-day-a-week schedule, reserving Fridays for the courthouse. On Craigslist Lisa found a babysitter named Mary Delaguila, who coincidentally lived on Gazetta Way, the same street as her foreclosed home. Every week she would pack a lunch, drop Jenna off with Mary, and drive to downtown West Palm Beach.

Bounded by the Intracoastal, downtown shimmered with fancy new buildings, as if a county commissioner happened upon a windfall of cash and decided its best use would be to make a giant movie backlot. The 1980s postmodernism of the eleven-story Palm Beach County Courthouse, all aqua and pink and granite and mirrored windows, fit the dominant aesthetic. The original courthouse, across the street on Dixie Highway, had traditional classical features; its replacement had the sobriety and seriousness of a shopping mall.

The last time Lisa stepped into the courthouse was to get her marriage license. Passing security, she reached the fourth floor, where one judge heard every foreclosure case in the county. A white folding table sat outside courtroom 4A, with well-dressed lawyers snaking down the hallway and back. Others loitered on their cell phones or hurried between floors. The bulletin board listing the day's cases in tiny type must have had a hundred docket actions scheduled. Lisa walked up to the entrance to courtroom 4A and put her hands on the door, whispering to herself, “Okay, God, let's see what we can do.”

The small, wood-paneled courtroom had just a few benches, packed with lawyers awaiting trials. Lisa could not find anywhere to sit, and struggled over to the back wall. Plaintiff and defense counsels each had a small table and a podium, with a staging area in the back, almost like an on-deck circle for future cases. The judge sat in front of the official seal of Florida, with her assistants and the bailiff off to the side. The place was so thick with murmuring that Lisa couldn't always make out if any business was taking place. What she did manage to hear, she didn't fully understand.

Nobody in attendance looked like a homeowner, nor did their needs seem addressed by the obscure maneuvers on display. In the morning, the judge made motions and set future schedules; she also affirmed plenty of summary judgments, ruling for the plaintiff without a trial, based on glancing at the motions and supporting evidence for a few seconds. Veteran defense lawyers later told Lisa they almost never saw a summary judgment in any other area of the law; the judge would usually figure there had to be a fact worth proving in the case file. But in the foreclosure division, summary judgments were almost the norm, with homeowners evicted with all the effort of buying a soda.

In the afternoon were the trials, which were seldom, because virtually no homeowner mounted a challenge. If foreclosure defense attorneys showed up, most had little trial experience and would jump at any deal they could get, no matter how piddling. A trial with counsel often did not last more than a few minutes; as long as the judge heard the magic sentence “Your honor, the defendant is in default on their mortgage,” material facts seemed not to matter.
Pro se
litigants put up more of a fight, but the judge appeared exhausted, if not outraged, by their mere presence. Even if the defendant managed to get the case withdrawn, the judge would almost never grant dismissal with prejudice, so plaintiffs could always refile. Servicers could try over and over again to foreclose, only needing approval once; homeowners lose any case and they lose their home. Some began to use a nickname to describe Florida foreclosure courts: the “rocket docket.”

Lisa took notes in a composition book, then made her way to the file room on the third floor. This long, narrow room had a desk separating visitors from the clerks, with paperwork-lined shelves behind them. By this time Lisa had several files to check, not just her own. A couple of her new online friends were local, with cases in the Palm Beach County system. Her
babysitter's in-laws had a problem with an underwater home. Even patients approached her for advice. Just by talking about foreclosures online or in public, Lisa became a valued source for desperate homeowners searching for information.

She had enough facility with her own documents to recognize what to look for in others. And many of the same discrepancies were evident: assignments dated after the foreclosure filing, the use of special document processing companies, the ubiquitous presence of MERS. She also pulled a couple of dockets she had just seen in the courtroom, tying together the motions and rulings. On many occasions the plaintiff's complaint purported to have the promissory note attached, but it was nowhere in the file.

Whitney Cook and Christina Trowbridge, the vice president and assistant secretary for MERS on her mortgage assignment, kept popping up on other homeowners' documents. Sometimes Cook and Trowbridge were representatives of MERS, sometimes JPMorgan Chase, sometimes Chase Bank, sometimes U.S. Bank, and sometimes Chase Home Finance.

It cost a dollar a page to photocopy files, and Lisa had no budget for this project. So she transcribed what she could and copied only what was absolutely necessary. The next week she brought in her Acer laptop and a portable scanner and started to scan the documents herself. The file clerk stopped her and said that was against court policy. “What is the policy?” Lisa asked. The clerk said she would discuss it with her supervisor, and Lisa heard nothing for months. All the while she scanned on the sly.

That summer of 2009, Lisa became a familiar presence at the courthouse. On Fridays she dressed professionally, always accessorized with a signature scarf. The rest of the week she would arrive in hospital scrubs. The cancer institute was a mile down Dixie Highway. Lisa estimated it took twelve minutes to walk from work to the courthouse, or seven minutes to run. Twelve minutes up and twelve minutes back gave her thirty-six minutes out of her lunch hour to scan files or observe hearings; if she ran, she'd get a bonus ten minutes. At first Lisa stopped by once a week; after a while she was there practically every lunch hour. There was always another theory to test, another case to watch, another file to check out. And she got really good at researching and identifying patterns of fraud.

Bailiffs started to recognize Lisa, along with attorneys from either side. She would meet homeowners in the hallways and tell them to observe court
proceedings, talk to other borrowers in trouble, work together to solve the crisis that had befallen their communities. The only way to fight back, Lisa believed, was by relying on each other.

Amid the suffering of the 1930s, communities banded together to fight foreclosures, particularly in rural areas. T.H. Watkins's chronicle
The Great Depression
explains how farmers would disrupt their neighbors' foreclosure auctions. They would bid low, no more than a few dollars. Anyone who attempted a more robust offer would feel the cold hand of the biggest farmer in the yard on his shoulder; that bid would be summarily withdrawn. The winning bidder would sell the farm back to the original owner for the pittance. As Watkins writes,
“So it was that in the fall of 1932, an $800 mortgage on Walter Crozier's farm outside Haskins, Iowa, was satisfied for $1.90, or that the horses, cows and chickens offered for sale at Theresa Von Baum's farm near Elgin, Nebraska, went back to her at a nickel apiece, for a total of $5.35.” Sustained action led to several foreclosure moratoria throughout the Midwest. Farmers simply would not allow their neighbors to get swallowed up by the side effects of rampant speculation and greed.

When it began in late 2006, the foreclosure crisis didn't find the same level of public solidarity and organized resistance. Decades of neglect of the civic square weakened traditional activism, and the relentless depiction of delinquent homeowners as irresponsible deadbeats kept many silent, turning their shame inward, asking what they did wrong to deserve foreclosure. That made it difficult to campaign for their rescue. And back in the 1930s the bank had a community face; now homeowners were not fighting the savings and loan in Bedford Falls but a thicket of servicers and depositors and trustees, all attached to impersonal yet powerful Wall Street conglomerates.

A few scattered groups did protest repossessions, including remnants of the Association of Community Organizations for Reform Now (ACORN), which set up a
Home Defenders campaign in early 2009, undertaking civil disobedience by standing in front of foreclosed properties and refusing to leave, while families barricaded themselves inside. They also mimicked Depression-era farmers by disrupting foreclosure auctions. In one case in Baltimore,
ACORN members reclaimed Donna Hanks's abandoned foreclosure by breaking in and replacing the locks.
Another group called the
Neighborhood Assistance Corporation of America (NACA) started demonstrating at the offices and even homes of top executives for major banks and lenders like Countrywide, demanding that they offer loan modifications. Encampments outside major cities, often referred to as
“Bushvilles” in an evocation of 1930s Hoovervilles, raised awareness of the crisis.

But politicians didn't heed these cries for help and easily knuckled under to the persuasions of the financial services industry. The White House's HAMP incentives for foreclosure mitigation were voluntary and did not force servicers to offer principal reductions, the most sustainable type of loan relief. Treasury Secretary Tim Geithner reportedly saw HAMP not as a relief vehicle but as
a way to “foam the runway” for the banks, allowing them to absorb inevitable foreclosures more slowly. The Obama economic team also resisted a policy called cramdown, which would have allowed bankruptcy judges to modify terms on primary residence mortgages, as they can other debt contracts. Liberal lawmakers believed this threat of bankruptcy modifications would give homeowners needed leverage to negotiate relief. But although then-Senator Obama endorsed cramdown on the 2008 campaign trail—banks even held meetings to prepare for its eventuality—
his administration pressured congressional leaders against including it in must-pass bills like the economic stimulus. When it came up as a standalone bill, a dozen Senate Democrats sided with the industry and against cramdown, and Senator Dick Durbin, the bill's sponsor, remarked about Congress that the banks
“frankly own the place.” But they appeared to own the White House too. Liberal lobby groups complained that they would meet with senators on cramdown, and then
Treasury Department bigwigs would come in afterward and lobby against it. Concern for fragile bank balance sheets outweighed concern for homeowners.

After losing the cramdown fight, housing activists focused primarily on the denial of modification requests. Mortgage servicers repeatedly lost paperwork, gave contradictory information, and showed little interest in granting mortgage relief.
The banks blamed homeowners for sending incomplete financial documents, but the breakdowns were deliberate.
Servicers turned HAMP into a predatory lending program, squeezing borrowers for every payment they could get and then foreclosing anyway. After keeping people in trial modifications for a year, servicers would suddenly reject permanent relief and demand the difference between the trial
and original payment, under threat of eviction.
Bank of America employees later testified they were given Target and Best Buy gift cards as bonuses for lying to homeowners, denying HAMP modifications, and pushing people into foreclosure.

While activists challenged the modification hustle, practically nobody went a level deeper to consider breakdowns in property transfers and mortgage documentation, or how lenders faked their way through foreclosures. It took victims connecting on the Internet, screaming about banks trying to seize their homes with trumped-up evidence, for foreclosure fraud to enter the conversation.

Writers for pre-crisis foreclosure fraud blogs typically had personal experience.
Robert “Jack” Wright of
msfraud.org
lost his $200,000 home without ever missing a payment. Craig Kinney started
FairbanksSucks.org
after a dispute with Fairbanks Capital over incompetent loan servicing;
Fairbanks would eventually settle with the Federal Trade Commission in 2003 for $40 million over unfair and deceptive servicing practices, changing its name to Select Portfolio Servicing in the aftermath.
Mike Dillon, a freelance stage technician in New Hampshire, spent nine years fighting Fairbanks in the courts; his site was
GetDShirtz.com
. The bubble's collapse, throwing millions of families into foreclosure, pushed awareness of fraud beyond these personal blogs and allowed formerly concealed patterns to float to the surface.

Few visitors to
Living Lies
, by 2009 one of the larger anti-foreclosure sites on the Web, even knew each other's names. But they managed to build a knowledgeable community out of what is normally a mélange of craziness and unrestrained anger. There was Deontos and SF_Dan and baffledinga and usedkarguy and maineloanmodifications. Lisa used her name, Lisa E, as her handle; every so often Nye Lavalle would post a comment. A lot of commenters were first-timers asking for help:
“My foreclosure was filed August 2008, never served. Should I file a motion to dismiss under the 120 day rule?”
“Can a foreclosure, in Florida, still take place where there was no assignment recorded but the original note?”

Neil Garfield jumped into comments periodically to answer questions. And the site offered resources—sample motions, definitions of legal terms, and examples where homeowners beat the banks. But perhaps the most powerful resource was the other commenters. They would reply to newbies
with information, suggest attorneys in different parts of the country, or detail what to look for in foreclosure documents. Most of all, they would fortify desperate homeowners who felt utterly alone in combating the most powerful institutions in America. The site became a salve to overcome that shame. This proved challenging, as foreclosure summoned up dark passions. One night an unidentified woman logged on and typed that she and her husband saw no other way out but a murder/suicide. Andrew “Ace” Delany replied, “It isn't your fault. I don't think it's my fault.” He tried to prove to the woman that her life had meaning and support. Nobody at
Living Lies
was a licensed therapist. Their only weapons against depression were honesty and the comfort of another voice to kill the loneliness.