Here, the second in a series of posts explaining the hows and whys of ForeclosureGate and the Florida Home Loan Fraud crisis:
Part 2. Things Get Lost: Lenders Lose Key Documents in Gleeful Days of Making More and More Money
Now that banks had discovered that they could not only make money on the interest paid from home loans, but also from selling RMBS trusts (Residential Mortgage-Backed Securities trusts) to investors, things got exciting. For the lenders, at least. Lots and lots and lots of mortgages were bundled and the RMBS market skyrocketed.
The lenders were enthusiastically bundling home mortgages into these trusts and then selling them as fast as deals could be made. Of course, all this was just paper: official documentation, but still paper. Bundling mortgages into trusts meant not only keeping track of notes and mortgages but also creating and keeping track of trust documentation as well.
The RMBS Trusts Needed Lots of Additional Legal Documentation: More and More Paper
Now, it wasn’t just a matter of the lender holding a mortgage and note in the bank vault. Now, there was RMBS Trust paperwork making its way, hand over hand, from the bank to the securities company to the trustee of the particular trust. This new money-making scheme meant there was a lot more paper involved: important paper involving not only the land documents, but contract documents and trust instruments. An amazing amount of paperwork would be created for each sale.
And, just as the old adage warns that too many cooks spoil the broth, bad things started to happen.
In hindsight, it is easy to see that all this important paperwork that tied the real estate to the promise to pay to the trust was not properly protected or respected. Stuff got misplaced. Things were lost.
Important documentation that had legal importance was disappearing: things that state and federal law have deemed of legal consequence.
Contracts, deeds, assignments, trust documentation: these documents in their original form with the parties’ signatures on them are recognized under state and federal law as being necessary to prove a claim or to establish title to land. These documents were the kind that ordinary people would safeguard in safety deposit boxes or fireproof safes. In all the flurry of activity involved in making money, no one was taking proper care of these legally-binding documents.
Of particular importance here: the documents that involved assignments of the home mortgages.
In order to accomplish bundling their mortgages for sale, the lenders had to transfer their ownership in each mortgage and note to the buyer of the bundle. For every home loan that Bank A entered into with a borrower, there had to be a formal document (the Assignment) signed by Bank A that transferred Bank A’s interest in the mortgage note to Bank B, the buyer.
The Assignment was the legal document that legally established Bank B stepping into the shoes of Bank A. This is a very important document under state and federal law. It replaces Bank B as the lender who gets the monthly payment on the mortgage note from the home owner, and it allows Bank B to sue to foreclose on the home if the borrower stops making payments.
Why? Bank B — because of the legally binding Assignment – now wears the hat of Owner of the Note and Mortgage. Bank A is out of the picture, having taken its money and run. Bank A, which made the deal with the home buyer (as discussed in part 1) after investigating the home buyer’s creditworthiness and making sure that the property had sufficient value as well as clear title, is no longer legally involved with its customer, the home buyer.
One of the problems that has created the national Foreclosure Fraud crisis is that important paperwork has been lost, and perhaps the most important document that has been mislaid in many instances is the Assignment.
When borrowers could not pay their home mortgage payments, Bank B was often in trouble. Bank B had to have a proper Assignment in order to institute a foreclosure action under state law in Florida and elsewhere, because state law mandates that only the Owner of the Note and Mortgage can sue to foreclose on the home owner.
So, lost paperwork created a huge, national crisis. Banks couldn’t gather together all the legal documentation they needed to properly foreclose under Florida law (as well as that of other states).
However, this wasn’t the worst of it. Losing things, even important things, is making a mistake. A big mistake, but not an intentional wrong. Problem is, the lenders didn’t stop there. Today, there is overwhelming evidence of intentional bad acts by some of the country’s most revered lenders.
In part 3: Fraud and Forgery – Enter The Robo-Signers.