By Michael Olenick, creator of FindtheFraud, a crowd sourced foreclosure document review system (still in alpha). You can follow him on Twitter at @michael_olenick or read his blog, Seeing Through Data
The focus of news stories on mortgage abuses often focus on the immediate victims, the borrowers, but that’s far from a complete tally of the losers. And they also typically fail to look hard enough at the winners and the way they are able, again and again, to burn everyone but themselves.
Our latest case study is a modest, non-descript one-story house in Seminole, Florida. Its owners, Suzanne and Luis Guerrero, did not set out to take a two-way trip through hell to win a free house as their prize for being tortured, but that is how their foreclosure case turned out. And as a result of bad conduct by local and the big ticket national law firm brought in to fight the Guerreros, the investors in Ace Securities Home Equity Loan Trust 2007-HE4 — even though they don’t know it, at least until now — get to pay the greatly magnified bill. Ocwen Loan Servicing, the most culpable party in this fiasco, also managed to emerge unscathed.
On Dec.7, 2006, at the height of the bubble, the Guerrero’s took out two loans for the same property, a first loan for $232,936 and a second loan for $58,234. Both loans were funded by Resmae Mortgage Corporation then later both the first and second lien were securitized into ACE 2007-HE4.
The Guerreros are anything but fast-and-loose condo flippers; they paid for two years before suffering an economic setback, making payments high enough to dent some principal. After defaulting they repeatedly engaged in good-faith negotiations with loan servicer Ocwen — offering to short-sell the house or modify the loan — and were repeatedly rebuffed despite that this would have lessened losses to investors. When the Guerreros were unable to negotiate a modification directly with their lender, they hired not one but two separate attorneys on two separate occasions. Only after the modification efforts failed did they hire a third lawyer to defend their case.
Elements of their case that should surprise have become the new normal. An assignment of their mortgage from Resmae to ACE 2007-HE4 was dated Feb. 27, 2007, notarized Jan. 9th, 2009, and recorded May 22, 2009, long after the 2007 cut-off date for conveying the note and with it, the mortgage (the lien) to the trust. This dubious assignment was “signed” by Ocwen employee Scott Anderson and notarized by Ocwen employee Leticia Arias.
The Guerrero’s new attorney, an experienced trial lawyer, quickly noticed that something was wrong with the documents. When pressed by the Guerrero’s attorneys, Anderson, testifying under oath, wasn’t sure whether a signature labeled “Scott Anderson” was his. Anderson explained he “delegated” signing authority to a “small group,” that could have been up to any of the 3,500 people working for him. When asked how many documents bear his signature he was “not sure” if it was more than seven, an odd statement since he is a prolific robosigner. Notary Leticia Arias had a better memory; she notarized more than a hundred documents and remembered it is Ocwen employee Naomi Morales who often signs for Anderson.
Ocwen’s lawyer, Eliot Pedrosa comes from the venerable Greenberg Traurig, a large law firm that advertises it has expertise in structured finance deals, including REMIC’s. Needless to say, one wonders why a big ticket national law firm has been hauled in on a mere small foreclosure, particularly when it is double teaming a local law firm. But since the costs are borne by investors, foreclosure lawyers are a free resource to servicers.
But all this costly lawyering only dug a very deep hole for the trust. An effort by Pedrosa to educate the judge about rules civil litigation justifying his demand for delay led the already-unhappy judge Williams to point out that a lot of what happened in foreclosure cases was well outside the rules of procedure and the Florida statutes. The judge’s conclusion: “Very unfortunate. Very unseemly. It sometimes makes me embarrassed to be a lawyer.”
In a follow-up hearing on Oct. 25th, another trust lawyer, Thomas Moon of the Van Ness Law Firm, explained to the judge they really had lost the original note when they swore so under oath. Later, Moon claims, they found it in the office of a prior lawyer. Further, Moon really did mean to file the note in court, as he told the Guerrero’s lawyers by handing them a signed pleading saying so, but claims he changed his mind minutes later because, he claims, a Greenberg Trauig lawyer told him notes disappear from the Clerk’s office. The judge recited the supposedly innocent mistakes, the filing of a false lost note affidavit which was signed by a party that the servicer couldn’t even identify, a servicer employee directing another staffer to forge his signature before a notary, and then the magical appearance of the note just when the lost note treatment was looking like it might not fly. Williams declared the entire case to be a fraud on the court and dismissed it with prejudice.
Ocwen would be undoubtedly prefer that this dismissal with prejudice should be a one off event, but a year old opinion from the Florida Bar suggests that the pattern of facts uncovered in this case should cause judicial review of untold thousands of cases that may be tainted with the same false and fraudulent documents that sent this judge over the edge.
From the Florida Bar’s Formal Ethics Opinion:
.. if an attorney knows that any material false representations have been made on the record by a client to any court or tribunal, then the attorney must follow the instructions in the Comment to Rule 4-3.3 and ask the client to correct these false statements on the record. In the pending cases, if the client will consent to the affidavits being replaced, then the attorney may do so. The disclosure needs to be made to the court that the affidavit was improperly verified and notarized.
It’s not just for cases with flawed or fraudulent affidavits and assignments, the Bar opinion makes it explicitly clear that even cases closed years ago must be reopened if false evidence was relied upon:
With regard to the cases that have already been closed and judgment has already been entered, the duties and obligations under Rule 4-3.3 continue beyond the conclusion of the proceeding…. Therefore, the fact that improperly verified and notarized affidavits have been filed with the court needs to be disclosed to the court in the closed cases as well as the pending ones.
Finally, the FL Bar – closing the barn door they left open by ignoring David J. Stern and his ilk – leaves no ambiguity:
…whether the case is currently pending or already closed, if the client refuses to give consent to the attorney to disclose, then the attorney must make these disclosures him/herself, preferably in an in camera proceeding if possible. (emphasis added)
It is clear that Ocwen’s problems extend far beyond this one single case.
In an earlier exchange during the Oct. 25th hearing Judge Williams and Greenberg-Trauig lawyer Donald Crawford touch upon a deeper problem:
Judge Williams: “… why do people need to fake assignments if you didn’t even need it (to foreclose)?”
Donald Crawford: “Your Honor, if I could answer that, I would be a much wealthier man than I am because I can’t get in the heads of the people that made those decisions.”
I’ll clarify the answer; because without the assignments conveying the notes into ACE 2007-HE4 the asset-backed securities were not legally backed by any assets. That is, without a valid assignment of this loan, and likely many others in the trust, the servicer would be stuck without the ability to enforce the loan and, consequently, didn’t have the collateral it claimed to have. If the investors in ACE 2007-HE4 knew the trust didn’t have the collateral it purported to have, they might want their money back. Since they’ve already lost $252.6 million, destroying the mezzanine-level tranches and distributing losses to the AAA-rated tranches – they might get as cranky as Judge Williams. Even if the money managers who invested are willing to “move on,” the pensioners and municipal governments who entrusted them with their money might not feel as generous.
This disregard for investors is on display to this day, with this loan. Despite that Judge Williams banged her gavel last October, effectively giving the home to the Guerreros and sticking the trust with a loss equal to the full amount of both loans, plus expenses, the latest investor reports show no loss to investors on the first lien. Codes are used to describe the status of loans and the Guerrero first-lien was changed to “No Action,” the same code used for loans that are current. There is no notation that investors get to swallow a total loss on the $232,936 first-lien, plus pay the Guerrero’s legal fees, plus the banks legal fees, plus the servicer advances, plus any other fees Ocwen may have larded-on during on during this tortured process. That second loan was written off in its entirety in the May, 2009 reporting cycle.
Since losses are allocated to tranches in the order that the trust records the loss, and these losses affect how investors are paid, it is imperative to record losses accurately. Further, swap agreements sometimes trigger based on losses, so misallocating losses can lead to serious consequences. That in fact happened to this trust, with this loan, with ramifications that we’ll examine more in-depth in the next piece in this series.
Investors should not be surprised since questionable disclosures involving this house, and this trust, date back to the prospectus. For example, the prospectus discloses that that 3.2% of the first group of mortgages and 8.03% of the second group were second liens, but they neglected to mention that both first and second liens from the same borrower, for the same property, could be in the deal. I suppose ACE could argue they never told investors the loans were not for the same property, though given this does nothing to mitigate credit risk that argument sounds disingenuous at best. ACE did disclose that it is common to write-off second liens in the event of default, which happened early in this case.
Perjury, forgery, blatantly ignoring rules requiring lawyers to report fraudulent documents to the court, refusing to mitigate a breach leading to much steeper damages, misleading investors in both initial filings and follow-up reporting, fraud on borrowers, fraud on investors, and fraud on the court system.
It appears this “unseemly” affair could not get worse, except that it does. Like many trusts ACE2007-HE4 is likely to take a catastrophic loss on its formerly AAA-rated tranches, including tranche A-2D, CUSIP 00442LAE9. Tranche A-2D is no ordinary sub-prime tranche because it is one of twenty in ABX.HE.AAA.07-2 index, one of the core sub-prime indexes. Part two of this “unfortunate” story will highlight other inexplicable patterns that should send shivers down the spine of investors, economists, and public policy makers.