So we now have the complaint in Massachusetts Attorney General Martha Coakley’s lawsuit against five big banks for foreclosure fraud, the first lawsuit to directly target banks for robo-signing (Catherine Cortez Masto in Nevada went after some low-level employees of document processing company LPS, but hasn’t worked her way up to the banks yet).
Simply put, Coakley seeks penalties for “unfair and deceptive practices” in violation of state consumer protection laws, in particular the Massachusetts Consumer Protection Act. The top list of complaints tells the story:
1. Engaging in unfair and deceptive foreclosure practices by conducting foreclosures when the defendants lacked the right to do so and misrepresenting to homeowners their roles as mortgagees or as the holders of the mortgages;
2. Engaging in false documentation practices to facilitate their foreclosure practices;
3. Deceiving homeowners in the course of servicing mortgage loans by misrepresenting to borrowers regarding its loan modification programs, acting deceptively in implementing loan modifications and deceiving borrowers regarding foreclosure proceedings; and
4. Failing to comply with Massachusetts’ registration statute.
That’s a pretty clear rendering of what went on. Notice that she tags robo-signing and document fraud (in #2) as a facilitator for the main crime, which is to foreclose on borrowers without the legal standing to do so. To prove this, Coakley cites the Ibanez decision, and the upholding of it recently in Belivacqua, which clearly states that, under Massachusetts law, “any effort to foreclose by a party lacking jurisdiction and authority to carry out a foreclosure under the relevant statutes is void.” The layman’s term for that is “stealing homes.” Coakley is accusing banks of stealing homes. They didn’t have the proper proof of ownership to take control of the homes in a foreclosure, and they did it anyway, by forging documents and committing fraud upon state courts.
Then there’s this ancillary point about mortgage servicing abuse, kind of a separate claim against the banks but one that fits well. Because the argument here is that the servicers have lied to borrowers about loan modification programs, deceptively strung them out and then engaged in foreclosures instead of granting the modifications. We know that servicers have a financial incentive to foreclose over modifying, regardless of the extreme disincentive from the standpoint of the general economy or the investors the servicers are supposed to work for. The one fly in the ointment here is that nobody can prove ownership of the underlying loan. But this ruins the servicer’s ingenious plan to force people into foreclosure rather than modifying their loans! So that’s where the document fraud comes in.
“Failing to comply with Massachusetts’ registration statute” refers to the MERS, and the (in Coakley’s eyes) unlawful system of private mortgage registration and transfer. The complaint mentions that MERS’ creation was a scheme to avoid county recording fees on mortgage transfers, and that “defendants ignored long-standing and well-established statutory requirements intended to protect property titles and their owners through the land title registration system. Their failure to follow these procedures solely to avoid paying registration fees — and without regard to the impact on the integrity of either the land title registration system or Massachusetts consumers — is unfair and deceptive.”
So this is a lawsuit against MERS as well as against the banks for foreclosure fraud. It includes elements of all the fraud and abuse we’ve seen from the industry throughout the past several years.
The lawsuit is very readable. It provides illustrative examples of homes illegally foreclosed on, of homeowners abused by the system. The claims for relief begin on page 54. Coakley asks for $5,000 per violation, and considering the breadth of the lawsuit, those violations could add up. Every illegal transfer under MERS, for example, is one violation. There are additional fees and claims of restitution sought, as well as this:
Requiring each of the Bank Defendants to take all actions necessary to cure defects in title resulting from its initiation of foreclosure proceedings on mortgages secured by land within the Commonwealth where (i) it was not the holder of such mortgages or (ii) it published notices that failed to accurately identify the present holder of the mortgage; and
Requiring the defendants to take all action necessary to cure defects in title resulting from their failure to register all assignments or transfers of beneficial interests in mortgages secured by registered land in the Commonwealth.
This is a big deal. In some cases there isn’t really a way to cure title: the true ownership of the property has become confused, or the statute of limitations on fixing the securitization has run out. The only way I can see where satisfaction could be reached is on a new mortgage, with the expectation of a mass principal write-down or some other accommodation, that cures title. In her press conference (which I wasn’t able to see), Coakley said that she was moving forward because the banks were proving unwilling to deliver any benefits to homeowners in the global settlement. They wanted too much liability release and wanted to deliver too little in return.
This is how you drive a bargain. If the other side refuses to go along with demands, you use the tools at your disposal. You do the investigation and you sue the pants of the offending party. You don’t go into an investigation by leaping right to the settlement. You carry out a credible threat. Maybe Coakley wasn’t a great Senate candidate. But she’s a damn sight better negotiator than anyone on the AG settlement. And that’s because she displays a responsibility to homeowners in her state and not bankers. The AG settlement is a sham, and if it wasn’t, every AG in the country would be doing this to secure the maximum benefit for homeowners as a result of their being abused in a criminal enterprise. This is a telling statement from a JP Morgan Chase spokesman:
“We are disappointed that Massachusetts would take this action now when negotiations are ongoing with the attorneys general and the federal government on a broader settlement that could bring immediate relief to Massachusetts borrowers rather than years of contested legal proceedings,” a spokesman from JP Morgan Chase tells CNBC.
Shorter version: “We really like how the AGs are trying to give us immunity. Coakley should try that.”