Proving Lender Negligence and Fraud Part 2: Follow the Money

Posted on February 8, 2013 by

In my last article, I explained that there are two approaches investors can take to determine whether or not a lender has been negligent or committed fraud. The first approach I described is to look through the paper trail to dig up issues. The second approach is to follow the money.

Not many people truly understand how the mortgage and finance industries work. It’s basically a shell game with them moving money around with little regard as to the laws and regulations that govern how banks are supposed to act.

They play this constant game all supposedly in the name of increasing the money supply. Attorney Neil Garfield describes the process as the bank starting out with $100 in the left pocket and taking $10 out to deposit in the right pocket, but still reporting to the SEC and investors that the full $100 is still in the left pocket. When the next $10 comes out, described as trading profits or a fee, the amount in the left pocket is still reported as $100 rather than the $80 that is actually there.

This is just an example of how the financial transactions that represent the mortgaging of a home rarely take place the way the homeowner, or the lender’s investors, think. To really know what is taking place investigators must follow the money, as well as the paper trail. The note, mortgage, HUD-1 and other documentation connected with any given loan most likely do not reflect what actually happened to the funds. As a result, some argue that these documents are null and void. The name of the real funder of the transaction rarely appears on these documents. The financial transaction occurred with different terms and with a different party than are included on the note and other closing documents. The instructions to the closing agent generally come from a stranger to the transaction, with instructions that any excess payment be refunded to that stranger.

If the loan originator were the real payee, then any wiring instructions should include terms such as “for the benefit of [the name of that payee]”. That rarely happens. The source of funds should also be included in the pooling and servicing agreement given to the investors of the mortgage-backed security pool. That never happens either. There is never any reference between the money chain that is represented by the wiring instructions and the documentation chain represented by the note, mortgage and HUD-1.

According to Garfield, “It was this split between the money trail and the document trail that enabled the banks to create a long term gap during which they could trade ‘ownership’ of the loan before making any attempt to deliver the loan to the investors who had advanced the funds.”

To make matters even more confused, the pretender lenders hedged insurance policies called credit default swaps against the potential loss of mortgage income due to default. What they failed to reveal to investors was that the investment banks themselves were the ones being protected, not the original investors who all had commingled funds in undifferentiated pools.

The mortgage losses on the books of the banks also caused these same banks to get huge federal bailouts even though they had already been paid off for their losses through credit default swaps.

By following the money investigators can spot one falsehood after another showing how the investment banks covered their assets while leaving distressed homeowners and the original investors to hang out to dry.

Combining the method of following the money with digging up the paper trail behind a mortgage, we now have a way to force the banks to negotiate on our terms. Not only are we able to use this information to help underwater homeowners get out from under their homes with no short sale, no deficiency, and no coming out of pocket, but we are able to pick up pretty houses at incredibly low prices.

For more information on how you can get involved in helping underwater homeowners while doing some awesome deals, give my office a call at 706-485-0162.

Bob MasseyBob Massey is a recovering corporate executive who is now living the dream running his own real successful estate investing business and teaching others how to do the same. In the process he has become the nation’s leading educator on the foreclosure investing process.

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