Think the Financial Crisis Is Over? Mortgage Servicers Still Abusing Borrowers For 10+ Years, Thanks to Lax Fannie/Freddie Oversight

Yves here. For the benefit of those of you who are relatively new to the site: in the wake of the financial crisis, many fought hard and sadly in the end with mixed success to combat predatory practices by mortgage services. Thomas Cox, a retired Maine attorney who represented struggling borrowers pro bono. The Portland Press Herald gave an overview of his work in 2012 after Cox won $100,000 from the Purpose Prize, which recognizes people over 60 who do public service:

Cox’s second career dates to the late 1990s, when the emotional toll of his work with banks [doing debt collection and foreclosures] led him to “major-league depression. …

After retirement and intense therapy, he started a second career as a carpenter. But he returned to law in April 2008, joining the Maine Attorneys Saving Homes project, started by Pine Tree Legal Assistance in conjunction with the Maine Volunteer Lawyers Project in Portland.

His expertise in foreclosures and his contacts in Maine’s legal community helped desperate Mainers find free lawyers.

In September 2009, Cox took up the case of Nicolle Bradbury, whose home was being foreclosed on by GMAC Mortgage, which was the nation’s fifth-largest mortgage servicer and is now facing Chapter 11 bankruptcy.

In a deposition, the company’s “limited signing officer” admitted to signing thousands of foreclosure affidavits in 23 states, including Bradbury’s, “without ever knowing if any of the information was true,” Cox said.

By exposing the practice, which soon became known as “robo-signing,” Cox “blew the lid off” systematic foreclosure fraud by some of the country’s biggest banks, wrote Encore.org, which distributes the Purpose Prize.

As a result of Cox’s work, GMAC suspended foreclosure activity nationwide on September 18, 2010. JP Morgan/Chase, Citibank and PNC Bank soon did the same, and tens of thousands of homes were saveed.

Some of the foreclosures were legitimate and proper procedure just wasn’t followed, Cox said.

But in the past four years, he’s uncovered scores of cases in which mortgage lenders wrongly kept customers delinquent and foreclosed on homes using improper accounting, illegal fees and an “egregiously inflated” forced-place insurance.

“Some of the practices that were being used were truly incredible,” he said.

Activists and foreclosure defense attorneys like Cox sought to stop foreclosures resulting from servicer misconduct, obtain mortgage modifications for borrowers who had adequate income, and help borrowers who could not save their homes minimize the damage. These abuses were the byproduct of a major change in mortgage lending, from having banks own the mortgages they originates, to selling them to securitization trusts. The cash flows from borrower mortgage payments were “structured.” Servicers did not own mortgage loans, but instead handles mortgage payment processing, and when applicable, delinquencies and foreclosures for these securitizations.

The financial crisis exposed the considerable shortcomings of this “innovation”. When banks owned mortgage loans and a borrower got behind in payments, the bank would modify the mortgage if the homeowner still had a viable level of income. By contrast, bank servicers were not paid to modify but they were paid to foreclose. And they set up high volume processes so they could foreclose as cheaply as possible, regularly cutting corners and even foreclosing when they’d misapplied borrower payments.

It’s bad enough that there ten million homeowners lost their homes to foreclosure between 2006 and 2016, out of roughly 55 million homes with mortgages. Even worse, as Cox illustrates below, there are still borrowers fighting to clear up foreclosures initiated over a decade ago. In case you think this is just an oddball example, Cox is about to send a second letter to the Inspector General for Federal Housing Finance Agency about a Maine borrower who defaulted in 2013. Only seven years after the default, and five years after her bankruptcy, in 2020, did Fannie Mae attempt to foreclose. The case was dismissed in 2021 over lack of Fannie Mae’s standing to foreclose. The servicer has left the borrower with a Sword of Damocles over her head and the community with an effectively abandoned property:

To this date, Fannie Mae’s servicers and lawyers have been unwilling to negotiate with the Borrower to induce her convey her remaining title in return for a cash payment. So, this house will just sit there, empty and deteriorating, while Fannie Mae continues to incur annual costs more than $6,000 for paying taxes and insurance and maintaining the property. Fannie Mae cannot sue the Borrower for money since she was discharged from personal liability for this debt in her 2015 bankruptcy, leaving Fannie Mae’ only recourse being against the mortgaged property.

Now to the main event.

By Thomas A. Cox, of Counsel to National Consumer Law Center since 2013 and a consultant to Maine’s Pine Tree Legal Assistance in managing the litigation strategies of its foreclosure prevention program. Tom also has significant experience training other attorneys in residential foreclosure defense and litigation practices, and has testified before the U.S. House Judiciary Committee

For the past 15 years I have devoted my legal work to representation of low-income Maine homeowners facing foreclosure by the national mortgage servicers. Before that, I devoted over 30 years of private practice work to representation of financial institutions including representation of the FDIC in numerous foreclosure cases curing the S&L Crisis of the late 1980s. I know this industry from inside out.

Fannie Mae and Freddie Mac do not service the huge numbers of loans they own–they must rely entirely upon the mortgage servicing industry for that work. As the following story illustrates, Fannie Mae does a terrible job of supervising the servicers of its loans and the mortgage servicers take advantage of that lax oversight. Fannie Mae and Freddie Mac have been under the conservatorship of the Federal Housing Finance Agency (FHFA) since the financial crisis of 2007. Almost all of the net profits of Fannie Mae and Freddie Mac are regularly paid into the United States Treasury. When they lose money on a loan they own, it is us as taxpayers that are the ultimate losers. The following story raises doubt about what FHFA is actual doing to “conserve” the assets of Fannie Mae and Freddie Mac.  This is the story of the mortgage of Mathew Raymond, who had to leave the State of Maine and his Sanford, Maine home in 2010 when he lost his job. After 12 years, his ordeal with Fannie Mae relating to its mortgage on Sandford property is ongoing.

I. The Mortgage Origination and Related Events

In 2005, Matthew Raymond obtained a mortgage from American Home Mortgage for $169,900 on his property in Sanford. Maine. The mortgage granted to Mortgage Electronic Registration Systems (“MERS”) a nominee interest in the mortgage only for the purpose of recording the mortgage, while the actual mortgagee interest was granted to American Home Mortgage.,  This loan was immediately sold to Fannie Mae, but under Fannie Mae’s servicing guide provisions and the financial industry’s scheme to hide true ownership of mortgage through the use of MERS, no mortgage assignment was granted directly to Fannie Mae. Later, a second mortgage for $22,000 was granted to GMAC Mortgage in 2007.

In 2010, Matthew Raymond lost his job and could no longer pay his mortgage. He contacted Fannie Mae’s servicer, Bank of America, and told its representative he could no longer pay and was moving out of the property and moving out of state to find other employment.

II. The Bankruptcy of American Home Mortgage Corp.

The originating lender, American Home Mortgage Corp., filed a liquidating Ch. 11 case in Delaware on August 7, 2007. On February 23, 2009, the Delaware Bankruptcy Court entered and order approving the Ch. 11 Plan and appointing Steven D. Sass as Liquidating Trustee. That Ch. 11 case remained open, and Sass remained as Liquidating Trustee through and after November 20, 2018, when the Delaware Bankruptcy Court enter a final order closing the case but authorizing Sass to continue his winding up work. The significance of these events will become apparent below.

III. Short Sale Attempt in 2011

Bank of America asked Raymond to arrange a short sale. He did so, obtaining in May of 2011 two purchase offers for $82,000 dated May 30, 2011,on a property on which Bank of America had received a Corelogic valuation of $81,000 dated February 23, 2011. Bank of America overreached and demanded that Raymond agree to sign a new note after the short-sale for $15,000, and GMAC on the second mortgage was demanding a $4,000 cash payment out of sale proceeds which Bank of America would not agree to. Mr. Raymond could not afford to sign a new note with Bank of America or pay any cash to GMAC because he had no income. Bank of America refused to back off its demands or to allow money to go from closing to satisfy the GMAC demand, so the short sale attempt fell through.

IV. The 2010 Foreclosure Case

BAC Home Loans Servicing, acting a servicer for Fannie Mae, commenced a foreclosure in July 2010 case in the Maine District Court. Raymond did not appear and did nothing to contest the action.  In December 2011 BAC moved to stay the case, stating to the court that it was attempting to settle, although there were no settlement efforts ongoing, and the short-sale efforts had fallen though months earlier. BAC then simply dismissed that case without prejudice on March 12, 2012.

V. The 2013 Foreclosure Case

After doing nothing for over a year, on April 1, 2013, Bank of America started a second foreclosure case.Again, Raymond did not appear in that case and did nothing to oppose it. After multiple continuances sought by Fannie Mae’s then servicers, Bank of America and then Green Tree Servicing, Green Tree Moved to dismiss that case and it was dismissed without prejudice on August 8, 2015. Presumably, this motion to dismiss was due to the Maine Supreme Court decisions in Mortgage Electronic Registration Systems, Inc. V. Saunders, 2010 ME 79,2 A.3d 289, and again in Bank of America, N.A. v. Greenleaf, 2014 ME 89, 96 A.3d 700 which held, that Fannie Mae needed a mortgage assignment from American Home Mortgage to have standing to pursue a judicial foreclosure action.  At any time, Fannie Mae’s servicer could have gone to Steven Sass, the Liquidating Trustee for American Home Mortgage, to obtain the needed assignment, but no servicer or servicer employed attorney made that effort until 2018 (See Section VII. A. below).

VI. The 2016 Declaratory Judgment Case

Again, there were months of delay–nothing happened for over sixteen months after the dismissal of the 2013 foreclosure case, but on November 28, 2016, Fannie Mae commenced a declaratory judgment case, to try to overcome the problems presented by the Saunders and Greenleaf cases. This was a dumb, costly and time-wasting move.  The lawyers for Fannie Mae recognized that, due to the Saunders and Greenleaf decisions, Fannie Mae needed an assignment of the 2005 mortgage from American Home Mortgage, but they hoped to get some court declaratory judgment order that would be the equivalent of that. That was foolish because the ongoing Ch. 11 case of American Home Mortgage Corp. was still open, and all these lawyers had to do was to ask the Liquidating Trustee, Steven Sass, to give them an assignment of the mortgage on behalf of American Home Mortgage. Instead, these lawyers allowed that declaratory judgment case to linger for over three years until they finally moved to dismiss it without prejudice in December 2019.  As with the two previous foreclosure cases, Matthew Raymond did not appear in that case and did nothing to oppose it.

VII. The 2019 Foreclosure Case

In September 2019, while the 2016 declaratory judgment case was still pending, Fannie Mae’s lawyers commenced the third foreclosure case and fourth suit overall. Having apparently finally recognized the need for an assignment of the 2005 mortgage to American Home Mortgage, Fannie Mae’s attorneys drafted a mortgage assignment for execution by Steven D. Sass as Liquidating Trustee for American Home Mortgage.[1]  It was the right idea to finally obtain that assignment, but Fannie Mae’s lawyers botched the effort.

A. The First Botched Mortgage Assignment

The Bendett & McHugh lawyers, representing Fannie Mae and hired by its servicer, drafted the assignment, dated November 18, 2018, to run from American Home Mortgage Corp. to BAC Home Loans Servicing, LP. But BAC had had no legal existence for over seven years since it merged into Bank of America and out of existence on July 1, 2011. Texas law, where BAC was incorporated as a limited partnership, provides that “When a merger take effect…the separate exitance of each domestic entity that is party to the merger, other than the surviving …entity ceases.” Tex, Bus. Org Code Ann.§ 10-0008.  “A deed is, therefore, void if the grantee named is not a legal entity.” 2 Patton & Palmar on Land Titles § 339 (3^rded.).  The mortgage assignment of American Home Mortgage Corp. to BAC Home Loans dated November 18, 2018, was void because BAC had not been a legal entity for over seven years.

B. The Second Botched Assignment

This was not the end of the problems with the 2019 foreclosure. The void mortgage assignment from American Home Mortgage to BAC, was followed by another void assignment.[2] The lawyers for Fannie Mae then wrote an assignment from BAC to Fannie Mae dated April 5, 2019, which was signed, purportedly on behalf of the non-existent BAC Home Loans Servicing, by Ditech Financial, LLC, claiming to be attorney in fact for BAC. Since BAC had not existed since July 1, 2011, it could own nothing which it could convey in 2019. If Ditech ever had a power of attorney from BAC, any such power terminated on July 1, 2011, because of the termination of the existence of BAC by its 2011 merger. Hunt v. Rousmanier’s Adm’rs, 21 U.S. 174, 5 L.Ed. 589, 8 Wheat. 174 (1823, Marshall, C.J.) (“The general rule, therefore, is that a letter of attorney may, at any time be revoked by the party who makes it; and is revoked by his death.”); Restatement (Third) of Agency § 3.07 (2006) (“When a principal that is not an individual ceases to exist…the agent’s actual authority terminates…”)  So, the seven years gone BAC Home Loans Servicing had nothing to assign in 2019, it had no legal capacity to assign anything in 2019, and Ditech had no power of attorney in 2019 to assign anything on behalf of BAC.

C. The 2019 Foreclosure Action is Doomed to Failure

Because the 2018 and 2019 mortgage assignments discussed above are void, Fannie Mae lacks the legal standing required by Maine law to complete the foreclosure action.  Raymond’s counsel will be moving to dismiss that action on standing grounds.

VIII. The Demolition of the Mortgaged Property by the City of Sanford, Maine

The mortgaged property had been vacant since 2010 and supposedly under the care of Fannie Mae’s servicers. Their care of the property has been so abysmal that in the summer of 2021, the City of Sanford voted to have the City declare the property to be a dangerous and unsafe building and secure the building and begin the process of demolishing it. Demolition was completed on May 22, 2022.

Is is unlikely that Fannie Mae ever received actual notice of the actions of the City of Sanford due to a third botched mortgage assignment by Fannie Mae’s servicers.  The City of Sanford notices regarding demolition all were sent to Ditech Financial Services, a former but now defunct mortgage servicer  because the records of the York County (Maine) Registry of Deeds show that, on December 9, 2020, Fannie Mae assigned its mortgage to Ditech.[3]  When the City of Sanford was trying to identify the owner of the mortgages on the property to send notices to, this assignment told them that Ditech, not Fannie Mae, was the owner.  That was not the case at all. The December 9, 2020, mortgage assignment is dumb, because almost two years earlier, on February 11, 2019, Ditech filed its second Ch. 11 case which was filed for the purposes of liquidation.  This December 9, 2020, mortgage assignment, states in the first line it is a “Corrective Gap Assignment.”  There is no such thing in Maine title law, and what this assignment actually did was to convey to Ditech whatever interest Fannie Mae may have had in this mortgage, although as shown in Section VII above, Fannie Mae did not own the mortgage at the time of the assignment to Ditech at the end of 2020 due to the defective BAC assignments. Due to this botched third assignment, neither Fannie Mae or its current servicer, NewRez, LLC d/b/a Shellpoint Mortgage Servicing received notice of the City of Sanford’s plans to demolish the property. This was a self-inflicted wound by Fannie Mae and its servicer.

IX. There is No Route to Recovery Left to Fannie Mae

Once the 2019 foreclosure action is dismissed, Fannie Mae will have no route to recovery left.  The Ch. 11 case of American Home Mortgage Corp. is finally closed, and Steven Sass is no longer a Liquidating Trustee with power to assign the Raymond mortgage.  Thus, there is no longer anyone who can assign the 2005 Raymond mortgage to Fannie Mae.

Even if there was some way for Fannie Mae to now obtain a mortgage assignment, the mortgaged property has become worthless for the reasons described in Section VIII above. Before demolition, the Town had been assessing the value of the building at $137,100 and the value of the land at $45,000. The building is now gone, and the Town is imposing a $19,300 tax lien against the property for the unpaid abatement and demolition costs. This now vacant lot sits on a dead-end street directly across the street from a noisy and dusty 20+ acre concrete products manufacturing site. It is unlikely that there is any value at all left for Fannie Mae on the mortgaged property.

If Fannie Mae sues Matthew Raymond for the mortgage debt, it will find that Matthew Raymond is a low-income wage earner who is judgement proof. He has no assets which are not exempt under bankruptcy law and if collection action is taken against him by Fannie Mae or the Town of Sanford, he will file for bankruptcy.  Raymond has the most compelling laches defense to any possible new foreclosure or collection action I have seen in my 50+ years of legal work. The Fannie Mae debt when the 2010 foreclosure action commenced was $173,854.73, but as of July 11, 2022, that debt amount had soared to $399,348.14. In that time the property has gone from a value of around $81,000 in 2010 to over $182,200 in more recent years and now to about zero.

“Laches is negligence or omission seasonably to assert a right. It exists when the omission to assert the right has continued for an unreasonable and unexplained lapse of time, and under circumstances where the delay has been prejudicial to an adverse party, and where it would be inequitable to enforce the right.” Brochu v. McLeod, 2016 ME 146, ¶ 13, 148 A.3d 1220.  The repeated and unreasonable failures of Fannie Mae and its servicers to complete a foreclosure for 12 years while the mortgage debt more than doubled has been prejudicial to Mr. Raymond and makes it inequitable for Fannie Mae to pursue any further recovery efforts. This is especially so when one recognizes that, back in 2010, Fannie Mae’s lawyers could have gone to Steven D. Sass, Liquidating Trustee of American Home Mortgage Corp., to obtain the mortgage assignment they needed to complete that 2010 foreclosure action within a year or two.

X.The Blatant Abuses of the Mortgage Servicers

If the foregoing litany of servicer misconduct is not enough, consider the following additional servicer abuses:

The Fannie Mae servicers took possession and control of the mortgaged property in 2010. It was winterized. A January 4, 2018, inspection report shows that the property was winterized by the time of that inspection. Yet, on Shellpoint mortgage statements dated February 16, 2021, February 16, 2022, Shellpoint added charges to the Raymond loan account for “winterization.”  After 10+ years of being in control of this property, there was absolutely no winterization work left to be done on it.

There are outrageous and bogus charges to the Raymond loan account for “Lawn Maintenance Disbursement” –two charges of $250 on the November 17, 2021, mortgage statement, two charges of $75 on the February 16, 2022, mortgage statement, two charges of $75 on the March 18, 2022, mortgage statement. The grass in Maine does not grow during the months of October through mid-April!  These charges cannot be legitimate. Even though, after demolition of the house on May 23, 2022, the house lot is little more than a gravel patch surrounded by field, still, on the July 18, 2022, mortgage statement, , Shellpoint charged Fannie Mae for July mowing expenses of $160.  The July 14, 2022, photo shows no sign of lawn mowing and no reason for there to be any lawn mowing.

Even though the house on the mortgaged property was demolished on May 23, 2022, and even though Fannie Mae’s current servicer, Shellpoint, is charging monthly inspection fees and therefore must know that the building was demolished in May, Shellpoint has continued through the June and July 2022 mortgage statements to charge for “Lender Placed Hazard Disbursement” on the mortgage statements–charges for insurance on a building that has not existed since May 23, 2022!

Even though the three court actions filed before the 2018 pending foreclosure action accomplished nothing and were dismissed by the lawyers hired by Fannie Mae’s servicers, the servicers have charged the loan account and charged Fannie Mae for over $10,000 of litigation fees and costs.

XI. Summary

If Fannie Mae’s servicers in 2011, Bank of America and its subsidiary BAC Home Loans, had properly handled this loan, one of two things would have happened, either of which would have finally resolved the foreclosure. Either one of the May 30, 2011, short-sale offers would have been accepted, or, failing that, the lawyers hired by Bank of America to represent Fannie Mae would have gotten the needed mortgage assignment from the liquidating trustee for American Home Mortgage and would have completed the foreclosure case with no opposition from Raymond by the end of 2011 or early 2012.  Instead, the servicers have delayed for over 12 years, and have charged the Raymond loan account and charged (and been paid by) Fannie Mae for over $41,000 of fees for “managing” the property and conducting four flawed lawsuits. And after all of that, the building on the mortgaged property has been demolished, and the City of Sanford is about to impose a $19,300 tax charge on the remaining land for the demolition costs.

The servicers and lawyers for Fannie Mae have inflicted 12 years of unending litigation upon Mr. Raymond and  forced him to put his entire financial life on hold, they left the Town of Sanford with a decaying and unsafe property and $19,000 of demolition costs, they have charged and been paid by Fannie Mae for all the expenses costs and fees associated with their misconduct, they have now left Fannie Mae with an essentially worthless piece of property, and they have left Mr. Raymond with a mortgage debt which has more than doubled and which he cannot pay and which is loaded with wrongful charges arising out of the misconduct of the servicers and their lawyers.

In my 15 years of specialization in representation of Maine homeowners facing foreclosure, I have repeatedly seen other instances of the kinds of misconduct described above by the servicers and lawyers hired by the Fannie Mae and Freddie Mac, though seldom all in the same case as here.  Either the GSEs are failing to adequately monitor and hold their servicers accountable, or the servicers are lying to the GSEs about their actual misconduct and are concealing it, and if so the GSEs need to figure out a way to stop such deception.  The servicers for Fannie Mae and their lawyers hired by them should be held accountable for the misconduct described above.

_________

[1] In response to requests for admissions in the pending foreclosure case, Bendett & McHugh has admitted that it prepared this assignment. The Bendett & McHugh firm is based in Connecticut but has a large law office in Portland, Maine

[2]This second assignment is also unmistakably one prepared by the Bendett & McHugh foreclosure firm.

[3]This assignment of mortgage shows at the bottom that it was prepared by National Title Clearing at the direction of Fannie Mae’s mortgage servicer, NewRez, LLC d/b/a Shellpoint Mortgage Servicing.