How to steal a house: the pitch

This is the second part of my reflection on David Dayen's Chain of title. The first part is here.

In an earlier post I gave a condensed version of how mortgage securitization worked (or in most cases, didn't fully work), and how it led banks to a situation where they either needed to relinquish claims on millions of houses, or fabricate evidence to show ownership that they had previously neglected to properly document.

Guess which path they chose?

No, don't bother. This post is about the ways that banks fabricated the evidence they needed in order to foreclose on homes that they didn't properly have a right to. It's also about how they maneuvered borrowers into a place where the banks could make a case - sometimes blatantly unjustified - that the borrowers had been delinquent.

Near the beginning of the book, Dayen introduces Lisa Epstein, one of the three main people he profiles. Epstein was a nurse whose house was foreclosed on, but she fought back and ended up becoming a foreclosure activist.

When Epstein and her husband got into financial difficulties, she tried to be proactive. She calculated that they could afford to pay their mortgage for nine more months, so she didn't wait to run out of money. Instead, she called the mortgage company to see if they could make some arrangements.

The company kept asking for paperwork, which it kept losing. And Epstein kept being connected with different people, having to narrate the whole situation from the beginning each time.

The runaround used up Lisa's entire buffer of savings. Instead of being able to act prudently in January, she was now desperate in September, after wasting months calling, faxing, pleading, and begging. Finally someone at Chase offered advice. The bank had enough problems assisting borrowers who had already defaulted; it would never go out of its way for someone current on her loan. And while no agent ever said explicitly, You must skip a few payments to earn our attention, the implication was clear: Lisa should stop paying her mortgage for ninety days, trigger a formal default, and then call back. Only then would Chase offer help. (pp. 13-14)

So that's what she did. And then:

The ninety days were up, and Lisa called Chase again. "Okay, it's been three months," Lisa said. The rep said Chase would send something right out to her, just hang on, not to worry.

A couple weeks later, she got the knock at the door. And she just knew. (p. 14)

Chase served her with foreclosure papers.

Borrowers who paid on time would have their payments handled in ways that led to late fees:

Though the Pews instructed SOA to send monthly statements to their primary home in Michigan, the company would either send them to Dallas or not at all. Nye paid the mortgage directly at an SOA branch. But SOA would mail the check to a servicing center, and by the time it got delivered to the proper division, the payment would be late. Nye protested that he held the check receipts, showing delivery well before the due date, but SOA would tack on a late fee anyway. (p. 52)

There was an ingenious practice known as "force-placed insurance":

Homeowners are required to hold property insurance, so whenever that lapsed, servicers automatically enrolled them in an overpriced replacement policy, taking a kickback from the insurer in exchange. Homeowners suddenly got a giant charge for junk insurance automatically deducted from their mortgage payment. Force-placed insurance served a dual function: it racked up profits for the insurer while making homeowners late on their full payment, leading to more fees. In this case, SOA's software program force-placed the Pew house into homeowner's insurance whenever the policy came within thirty days of expiration. This happened three times on the same loan, with SOA force-placing additional policies on top of the old ones, charging for each by deducting from the monthly payment. All the insurers who imposed new policies on the residence were actually owned by the same parent company as SOA. (p. 52)

There were multiple versions of the same person's signature. The one that figures most prominently in the book is "Linda Green," widely used by DocX, a company that prepared "replacement" documents for banks that had never acquired the documents they needed in order to foreclose. Two investigators in the Florida Attorney General's office prepared a presentation that "identified fake signers, fake witnesses, and fake notaries. It included a dozen different Linda Green signatures and fourteen of her job titles." (p. 243)

60 Minutes eventually did a report on the story and tracked down the original Linda Green.

She allowed herself to appear on camera but would not be interviewed. [60 Minutes correspondent] Pelley explained in a voice-over that she was a shipping clerk for an auto parts facility before becoming the vice president of twenty different banks. DocX, "a sweatshop for forged mortgage documents," chose Green for the assignment because she had an easy-to-spell name. Chris Pendley, the whistleblower who had reached out to Lynn [Szymoniak], also appeared. "You're Linda Green?" Pelley asked Pendley.

"Yeah, can't you tell?" Pendley said he signed four thousand documents a day as Linda Green, alongside others spoofing their identity for $10 an hour.

"Not much for a guy who's vice president of five banks," Pelley said.

"Yeah, I was very underpaid for my status," Pendley concurred. (p. 248)

Then there was the issue of getting things notarized. Say you're trying to foreclose in 2008, but you were supposed to have received a proper assignment back in 2003. You forge documents purporting to show a proper assignment at the proper time. Then you get a real notary to use her notary's stamp and indicate that she witnessed the signatures back in 2003. But the catch is that a notary's license is only valid for four years. So if the notary has dated her work "2003", but her stamp on the document expires in, say, 2009, then clearly she didn't do the actual notarizing in 2003. (See pp. 166-167)

At the core of the issue was the simple fabrication of documents.

An anonymous tipster passed Michael [Redman] a remarkable document. DocX printed a catalog for foreclosure mills and mortgage servicers, with an online order form called GetNet for missing documents. Curing a defective mortgage would cost you $12.95. Lost note affidavits and allonges were also $12.95. Creating a "missing intervening assignment?" $35.00. Re-creating "the entire collateral file" - that means the note, mortgage, securitization agreement, everything? It's yours for the low, low price of $95.00

So a company under state and federal investigation for fabricating documents had a document fabrication menu: choose one from column A and one from column B. As finance blogger Yves Smith of Naked Capitalism explained, this proved that trustees did not hold the evidence necessary to foreclose. Smith later relayed a heated conversation between a colleague and an anonymous subprime lender CEO, who acknowledged, "If you're right, we're fucked. We never transferred the paper. No one in the industry transferred the paper." (p. 218)

A revealing sub-species of forged documents had to do with an item known as an "allonge," a strip of paper for recording endorsements.

Allonges weren't supposed to be used unless room ran out on both sides of the original note, but they were commonplace during the crisis, as they were easier to fabricate. Allonges were also supposed to be permanently affixed to the note. (p. 139)

And yet:

Lisa [Epstein] found a flood of "replacement" mortgage assignments and affidavits being filed across Florida. Michael wondered how they managed to find people with deep personal knowledge of hundreds of thousands of foreclosure cases so quickly. Particularly amusing were the "found allonges," when the rules stated that allonges had to be attached to original notes and therefore couldn't simply be found. (p. 223)

Dayen recounts the discovery by one of his subjects of what he aptly terms "a remarkable mortgage assignment." It opened:

American Home Mortgage Acceptance, whose address is 538 Broadhollow Road, Melville, New York, does by these presents herby grant, bargain, assign, transfer, convey, set over and deliver unto BOGUS ASSIGNEE FOR INTERVENING AS[SIGN]M[EN]TS, whose address is XXXXXXXXXXXXX, the following described mortgage ... (p. 148)

And it's not as if this was merely a knowing nod to reality that was then cleverly covered up. The people manufacturing the fraudulent documents didn't always remember to replace "BOGUS ASSIGNEE" with some more anodyne made-up (or real) name:

Not only did DocX file the mortgage assignment to BOGUS ASSIGNEE, but the clerk of courts even entered the grantee as "BOGUS ASMTS." In other words, someone in the office read that document, saw it was made out to BOGUS ASSIGNEE, and, instead of raising questions, typed it into the system that way. Not only that, but the docket showed that Ann Patton, the homeowner, lost her home to repossession. Given Florida law, that meant there had to have been a trial, or at least a hearing, where a judge, sworn to uphold the law, issued a final judgment for foreclosure, even though the assignment dictated that the beneficiary of the home would be a company called BOGUS ASSIGNEE. (p. 150)

The "BOGUS ASSIGNEE" wasn't the only blatantly obvious piece of boilerplate to be found in foreclosure documentation:

A couple of them added a new wrinkle: the company doing the transferring was also absent, replaced on the template with A BAD BENE, short for "a bad beneficiary." The signers of the document were from the company transferring the mortgage (at least that was the theory), so right on the assignment, Korell Harp was listed as the vice president of A BAD BENE. The person who made the DocX templates had a wicked sense of humor. (p. 152)

This is a representative but not complete catalog of the fraudulent practices Dayen documents in the book. At the close of his preface, Dayen writes,

Michael Redman, one of these whistleblowers, sat next to me one night as he told me his story, and said over and over again, "I don't believe your book. I lived through it, and I don't believe it." I will forgive readers their skepticism, as even a protagonist in the tale shares it. It is unbelievable. That doesn't make it untrue. (p. ix)

I recommend you read the whole thing. Then you'll have a leg up next time you want to steal a house - assuming you're a bank.

The next installment: a way of thinking through the rights and wrongs of the situation.