Proving Lender Negligence and Fraud Part 1: The Paper Trail

Posted on January 6, 2013 by

There are two approaches you can take to determine whether or not there has been negligence or fraud in the loan process. Both paths can be equally effective in uncovering lender misconduct and providing you with leverage for negotiations with the bank. One path follows the documentation from mortgage application through foreclosure documentation, and the other approach follows the money trail. This article will examine how the documentation can lead to a damaging case against a pretender lender. Our next article will cover the money trail method.

In order to prove that they have the right to foreclose on a property, it is becoming standard for lenders to be required to produce the original note on the property. The note is required before a court will allow a lender to sell a property. It must show that the lender is named with a recorded economic interest in the property. However, in many cases these original notes have been either lost in the securitization shuffle or purposefully destroyed as the note bounced around from entity to entity. The note could even have been Photoshopped or otherwise forged to make it appear that the entity trying to foreclose has the standing to do so. Fortunately, the lenders are being called on it by the courts.

Other documentation issues are found by examining the original mortgage application and what the homeowner was originally told or promised by the mortgage broker. If they were promised one kind of loan and received another, or they were sold a high risk mortgage on the basis of race, ethnicity or the neighborhood they were moving to rather than financial qualification, then there may be a case against the lender based on the Fair Housing Act or RESPA violations.

The note as submitted by the lender in a foreclosure hearing may clearly be fraudulent because it was notarized after the fact with a stamp that was not even valid at the time the mortgage was taken out. Many times the note was signed by a so-called Robo Signer (someone who could not swear in court that they had personal knowledge of the documents in the original mortgage package). Likewise, assignments and other affidavits presented after the initial mortgage was signed may have been to lenders who were in bankruptcy at the time the assignment was made, or companies already out of existence. The document trail is often just a sham constructed to give the impression of legitimacy for the court. With an experienced fraud investigator working on your side, you would be amazed how simple it can be to find clear cut examples of fraud.

We all know about the many fraudulent activities that surround foreclosure documentation. Often these records were signed by a fictitious bank officer who was robo-signing documents for several lenders at one time and signing thousands of documents each day, none of which were read or could be attested to in terms of accuracy of the facts by that fake officer.

For securitized loans the documentation trail is also usually a sham. Some examples are missing or incomplete records, not showing specific notes being placed into specific securitized trusts, or records may show that these notes arrived after the trust was closed out. The Pooling and Servicing Agreements that guide the performance and servicing for the trust may require a higher performance level than the notes included in the trust would warrant. The terms in the notes will almost certainly not match the terms that the investors in the trust agreed to.

One of the key forms of fraud in the lending process it that the name(s) of the true lender(s) will never appear on the note for a mortgage that was securitized. Therefore the buyer never had the opportunity to know who actually provided the funds for the loan.

A huge percentage of the loans written from the late 90s until about 2008 are full of these sorts of fraudulent activities. While it is extremely galling to see what the banks have been getting away with for so long, it also creates a huge opportunity for real estate investors. 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.

If you would like 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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