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Pushback on the San Francisco City Assessor-Recorder Foreclosure Audit

posted by Adam Levitin

Not surprisingly, there's been some attempts to downplay the significance of the SF City Assessor-Recorder foreclosure audit. The attacks have come in three flavors:  questions about the auditors' own background; questions about the accuracy of the report; and the "who cares, as these are just lousy deadbeats" argument. Even if we acknowledge that there is something to each of these attacks, they don't take away from the core finding of the report, which is that things are FUBAR in mortgage documentation, and that is going to inevitably result in some honest, but unfortunate homeowners being harmed.

The first attack is on the credentials and former activities of the auditors. Given the deeply compromised background of the OCC foreclosure review auditors, this is a chutzpadik attack. The sad truth is that there isn't a huge pool of people who can do this sort of audit. (Yes, takes it takes a thief and all that...) 

The second attack on the audit is to point out that it doesn't get everything right. I address specific criticisms below, but it's kind of irrelevant.  The issue isn't whether the audit gets things 100% correct.  Instead, it's a gestalt point, namely that things are FUBAR in mortgage documentation, both on the front end (securitization) and the back end (foreclosure).  Whatever quibbles one might have with the audit's methodology, it's pretty hard to deny that there aren't serious paper work problems.  

If you want a "neutral" audit of the paperwork screw ups, take a look at MBS trustee exceptions reports (you can get them from servicer bankruptcies, when the trustee files a proof of claim). For the ones I've looked at, the number of exceptions (meaning paperwork problems found by the trustee) outpace the number of loans.  This is on the front-end, before foreclosure, and while many of the problems are minor or don't implicate foreclosures, the trustees also weren't looking for a whole bunch of potential problems. (I would also not assume that most of the problems noted in exceptions reports were ever fixed--the expense would be prohibitive to the servicer. Query whether trustees then insisted on putbacks....)  

In terms of specific problems with the SF audit Housing Wire, Paul Jackson, who has been a steadfast denier of servicing and securitization problems, argues that the audit's legal analysis is flawed because it claims that CA law requires recordaction of assignments. That's only half right. The most recent CA case on the issue, Calvo v HSBC, says that CA requires records to of mortgage assignments, but not deed of trust assignments.

There are questions about whether the CA appellate court got this right, given that California law has long held that differences in form between a mortgage and deed of trust are irrelevant. Let's assume, arguendo, that Calvo got it right. If so, Jackson's criticism is still misplaced as there's a whole separate question about whether those assignments actually happened and can be proven.

Recording has an evidentiary function; lack of recording means that banks will ahve to prove chain of title the hard way. That runs right into the PSA problem and the documentation required by UCC Article 9 (or Article 3 if the note is negotiable)--application of UCC Article 9 doesn't mean "bank wins".  If anything, it just goes back to the question of whether an authenticated PSA can be produced that sufficiently identifies the loan in question. The banks couldn't do that for either loan in Ibanez. There's no reason to believe that was an exceptional case.(If it was, then why on earth the did the banks--or their lawyers--let it run up to the Massachusetts Supreme Judicial court?)  The SF City Assessor-Record audit didn't look into the UCC issue, but it did show that there were transfers that didn't match the PSAs, which means that they cannot happen, so the foreclosure is being brought for a party that is not the deed of trust beneficiary. That's a real problem that is far more serious than recordation of assignments.   

Jackson also criticizes the audit's findings about defects in the substitution of trustee process. He correctly points out that CA law treats a recorded substitution of trustee as conclusive evidence of the authority of the substitute trustee. I'm not sure that has any bearing when the recording was done by a party that lacked authority to do so, as the recording has to be done by the "beneficiaries under the trust deed, or their successors in interest".  If record myself as substitute of trustee for Jackson's mortgage, could that possibly be valid? It's hard to imagine so. 

So that brings us to attack number three--that this is just paperwork and the people who lost their homes were bums anyhow so who cares.  Are we still barking up this no harm, no foul tree?

Yes, this is just paperwork.  But so to is the mortgage loan itself.  If signatures don't matter, then what about the borrower's signature?  Finance is built on an edifice of paperwork.  That paperwork creates and delineates legal rights, which in turn affect the pricing of transactions, both in mortgage originations and in mortgage sales.  It amazes me that shallow statements like this still have currency:

Reckless lenders who sold loans to people who didn’t qualify for the terms are one reason that home values are back to where they were a decade ago. But reckless borrowers who took those loans, making a bad bet that home values would continue soaring, are certainly another.

Yes, there were reckless borrowers, just as there were reckless lenders. But we can't possibly assume that everyone who has lost their home in foreclosure was a reckless borrower. Unemployment has no obvious connection to reckless borrowing and is a major cause of foreclosure.  And lots of people who didn't borrow recklessly (and those who didn't borrow at all) have seen their home prices drop. 

We might compare this to the way the debate on the death penalty has evolved. We're realizing that our criminal law system isn't perfect, and that we execute both guilty and not guilty (including innocent) people. Even if most are guilty, how much of an error rate are we willing to tolerate with the death penalty? Now losing a home isn't at all the same as losing one's life, but it is a pretty severe harm for a family.

In the end, then, the question is what sort of error rate are we willing to tolerate with foreclosures?Is it ok if 25% of foreclosures are improper? How about 10%?  5%?  1%?  That would still be 50,000 improper foreclosures since 2007! 

I would say that the optimal level of error is probably greater than zero, as the marginal cost of eliminating all errors is greater than the marginal harm prevented, but the contracts prof in me balks at this (and oh what a tension it has with the bankruptcy prof and claims estimation). The law has long treated the home as different, be it in property and contract (specific performance as a remedy) or in criminal law (right of defense). There is so much non-monetary value baked into the home that I'm not sure we can assume that the marginal cost of eliminating all errors will surpass the marginal harm.  Be this as it may, it strongly suggests to me that foreclosure needs to be a judicial process. 


Funny when a fire breathing dragon only puffs smoke.
Nice article Professor

thanks for this. it's daunting to hear the shallow reasoning you lament, everywhere, all around. I hear this familiar refrain over and over by the casual observer.

people must raise their awareness, and this may be the issue that defines the zeitgeist. things have changed in the world. there is no longer an ordering economy of optimal employment. without sound leadership our purpose wanders far from paths that might permit growth and dedication to something larger than an "i've got mine" mentality. in a very real sense, it's now or never. our common values will very soon be tested in a catharsis of new technology. it wouldn't hurt anything to define a common human purpose, before we enter that crucible.

dave dayen puts a perspective on the "its ok, they're all deadbeats" argument:

The idea that one rogue cop sitting at the police station was fabricating evidence was appalling. It is appalling, no question. But let us not forget that the vast, vast majority of criminal suspects are in fact legitimately guilty of some crime; it was the evidence gathering that was fraudulent. Cops didn’t pick up suspects for no reason, they picked them up because they did something wrong


Diana Olick is so far off base on everything, it's fair to characterize her as "not even wrong." You ask her whether the sun is out, and she responds, "Axehandle." Makes you wonder who's paying for her cornpone. And CNBC, with apparently no sense of irony, calls the show "Reality Check." With reporting like this as the US standard, it's no wonder people can't tell fact from fiction.

One problem in this whole mess is that many of the culpable parties fled the sinking ship long ago: originators, executives who allowed the sloppy securitization to persist, our government etc.

Remember that often the foreclosing entity is simply a trustee acting on behalf of investors (e.g. grandma and grandpa's pension fund. Unfortunately, invalidating mortgages for "process" based reasons punishes these folks more than the actors from the front end who have already booked their profits. How can we successfully bridge this gap in accountability?

Professor, there are no mortgages in CA. Only deeds of trust. Jackson is a lot more than "only half right" on that one. We'll have to see what happens in Calvo.

As one who has a company that has been involved in the foreclosure crisis in California since mid 2007, I must comment on the so called “audit” by Aequitas. The truth is that it was a pile of garbage, ignoring CA law. For example,

Assignment of Deeds of Trust – Under CA law, a mortgage must be “assigned and recorded” to the beneficiary, prior to foreclosure. This sounds like the assignment would be required, but under Cavalo v Countrywide, the Appellant Court “once again” as has been done regularly since the 1870′s, stated that a Deed of Trust and a Mortgage are two different entities entirely. The statute applies only to Mortgages, and not Deeds of Trust. Therefore, an Assignment of the Deed of Trust is not required. Aequinas conveniently ignores this fact.

MERS is another issue, along with the “robo-signing” issue. Cervantes v Countrywide established that using MERS to foreclose was lawful in California since MERS acts under an Agency or Power of Attorney relationship. The ruling was appealed to the CA Supreme Court and the US Supreme Court, and both refused to here the appeal, which further establishes the legitimacy of MERS. (BTW, each DOT in CA in which the borrower signs does give MERS the authority and right to foreclose.)

As to robo-signing, again, most signings are done through Agency and Power of Attorney relationships. As long as you do not have the issue of forgery, it is generally a legitimate practice. (BTW, under CA law, the signing is an Acknowledgement. The person signing the document does not need to sign in the presence of the notary, but only needs to “testify” that it is their signature. Again, that comes from many different court rulings.)

Where the author describes contacting the borrower by mail or phone, he is referring to violations of 2923.5, the statute regarding contacting the borrower about options available, including loan modifications, instead of foreclosure.

I have reviewed the servicing practices of lenders regarding foreclosures, as well as the documents for homeowners. I have yet to see in the servicing history of any loan whereby the lender has not attempted to contact borrowers time and again. Servicing records clearly show the attempts.

Borrowers will claim that they were never contacted, and attorneys will bring up the argument of the borrower not being contacted because they do not see an Affidavit of Contact regarding the borrower in the borrower documents. But, they ignore the fact that most borrowers through away most communications.
(Yes, there have been a few violations of 2923.5 by not sending out the Certified Letter to the borrower at least 30 days before filing the NOD, but every time that I have seen this, I have seen the lender Communication logs that show all the attempted contacts. So, this is a bogus issue.

The simple fact is that most attorneys in CA, and so called audit firms, only look at homeowner “copy package” documents, which they review files, though the responsible ones do pull up Public Records as well. But homeowner documents do not reveal the full story, or even 1/4th of it, as I have found by examining documents by broker, lender and homeowner. Only by reviewing all three, can a true understanding of the events of the loan be determined.

I could go on and on about the foreclosure process, and how the flaws are generally being misrepresented, from the Default Notice to the Securitization process, but I haven’t the time or space. But I must address one final point…

I have yet to see a homeowner who was not in default receive a Default Notice. Yes, on occasion, there might be a flaw or flaws in the process, but in the court’s eye, how was the homeowner “harmed” or “prejudiced” by the flaw? A lender could easily correct the flaw and refile, but that would mean at least another 3-4 months of the borrower living in the home, and not making payments. Likely, it would be much longer because the homeowner would have legal representation from the first action, and would continue to fight the foreclosure. In the end, it is the lender or investor who would suffer the harm.

Shorter Pat Pulatie:
It's more important to crush the little guy, who's probably a lying bum anyway, than to inconvenience a lender or servicer who has a lot of money a guy with a loan research company could generate billables from.

No one is being harmed because they were just deadbeats anyway? Are you kidding me? The entire integrity of our system for establishing secure ownership interests in real property has been undermined.

I live in California and would like to buy a house at this time but certainly would not do so as a result of this forgery crime wave. I would have to be crazy to do so. Who knows what the "rules" are anymore, and who knows what they will be a few years from now.

It seems to me that the Obama administration's strategy is to ignore the forgeries and the gaps in the loan files and essentially proclaim that the banks are always right. Everyone with even an iota of sophistication knows that that is not sustainable because it is not based on the truth or the rule of law.

Mr. Pulatie, as a former conductor of "audits" on behalf of homeowners yourself, what made you hop the fence?

So California just doesn't care if the right party forecloses. That's really what Mr. Pulatie is saying. Note and security instrument can be severed at will, and there is no need to show a transfer chain for either, just go ahead and foreclose (As for MERS, the problem has never been that it's an agent. The problem is that it pretends to be a principal so long as convenient, then runs and hides behind its agency but won't or can't identify its principal.). I knew California was mismanaged, but I didn't know it just doesn't care who has legitimate interests in land.

The real problem here is contagion. The attitude has already spread to general collection cases. State courts routinely aren't bothering to make the collection agencies prove they have the right to enforce the debt at issue, they just log-roll it to judgment. It seems the bankruptcy courts are the only ones requiring creditors (but not trustees, unfortunately) to prove anything anymore.

@Knute - would love to see a case from CA where the wrong party foreclosed. I don't mean a case where the homeowner alleges the wrong party. Please produce a recent case involving a residential deed of trust where investor A goes after investor B for foreclosing on its interests improperly.

Something tells me you're going to have a hard time coming up with that example.

Most Peculiar, Momma -

The courts are ignoring the Legislature's concern over 'public interest' as the 3rd party to every deed of trust loan. The public interest has a right to be able to determine ownership of a property from public records. The public interest has a right to determine liens against properties in which it may have a legal or fiduciary interest. The borrower has a right to have a clean title history available for the public in order to receive the maximum bid in the case of foreclosure.

A ticking time bomb will be when a foreclosee realizes that 2932.5 mentions 'other encumbrancer', and as it does not apply to deed of trust loans, apparently they aren't encumbranced. If they aren't encumbranced, how can power of sale be invoked?

Strange days, indeed!

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