Foreclosures Defense Close-Up: Ponzi Nation or Musical Chairs?

Sharing my thoughts on Florida foreclosures yesterday with the NBC Nightly News team really brought back some past real estate scenarios.

Long before the Florida foreclosure meltdown and “double sold mortgage” became a widely used term, I represented a commercial pilot for a major airline who owned real estate in the Florida Keys. This client had a great house but wanted to live closer to mainland Florida so that he could be closer to work.

His decision? To sell his house. Nothing unusual… right?
Back then it took a few months to find a buyer, for the buyer to find a mortgage and then a few more weeks to close.

As the closing agent at Weston Title, my staff requested a pay-off letter from the lender and – to our utter surprise and the first time in my career – two banks lay claim to the loan. In other words the originating bank had sold the loan at least once, or twice, or maybe even more. Who really knows?

But as this client’s real estate defense counsel we could not figure out who owned the loan. Well… the real estate client lost the sale. We advised for him to rent out the property and place the monthly mortgage payments in escrow. He basically followed our advice, save the escrow.

Soon after, the banks started foreclosure. It became ugly and quite a mess. We counter-claimed and got real nasty. Even the judge and mediator could not believe the story. How could a well respected national bank have lost control of their real estate collateral and literally throw their good customer, a well respected professional, under the bus without any concern?

The banks ended up suing each other in federal court. It took years for the matter to resolve itself. In the interim, my client’s credit went down the tubes, his wife got terribly sick from the stress and little did I know it would take until now for me to start connecting the dots.

Yes we settled… my client was appropriately awarded damages, the house eventually sold, and I was paid well for my efforts too! This scenario should have been a one-time case in my career… an honest mistake by a large bank that mishandled the matter. Ok. That is how I viewed this case for ten years. Well I was wrong.

That was then…this is now.

What we had was the “tippy tip” of a massive iceberg completely submerged and covered by a real estate market that had run amuck due to unfettered greed, poor regulation, complacency, and out right corruption.

So you say what is he talking about? The story is slowly breaking… It started this past Sunday in Gretchen Morgenson’s column on the front page of the New York Times Business Section. She alleges that due to “sloppy bookkeeping” surprise, a few sub-prime mortgages, or for that matter, mortgages were maybe sold more than once into investment pools.

WHAT?? Just bad paperwork?? Fat chance!

According to the well-respected foreclosure defense attorney, April Charney, quoted in the Times piece, and with whom I spent eight hours with in a foreclosure crisis seminar yesterday, these loans were sold systematically and more than once into different investment pools.

It was simple. No one was checking… no one really cared. All incentives, all the way down the line, encouraged this trangressive behavior. Remember how Wall Street bonuses were always paid at year’s-end not after a loan was seasoned? Meaning after a borrower has paid on the loan for a year or two! In fact, on Wall Street, a loan was seasoned and bonuses paid all the way down the line after a borrower made even one payment!

Do I hear Madoff on steroids? Maybe? Maybe definitely! Maybe that is why Madoff is still at home and not in jail. What does he really know about a ponzi scheme that makes him look like yesterday’s news?

Bear Stearns in the fall of 2007 started seeing the writing on the walls. Internally warning of “double sold mortgages.” Well, I guess they rang the alarm a little too late.

In fact, Aunt Fanny and Uncle Freddy are refusing to buy back loans unless the lender can prove they, and only they, own the loan. That means the lender needs to produce the original note along with all the assignments appropriately endorsed. Shouldn’t be hard?

Why then, should the federal government all of a sudden be concerned if the lender has the note? Judges, until recently, didn’t seem to take notice, except for a few bankruptcy judges in California. The answer is simple. They are slowly catching on that the new money in the investment pools was simply being used to pay for loans that did not exist.

While the party music played and everyone kept on dancing… then all a sudden, the music stopped… oops not enough chairs for everyone.

NBC Nightly News new media journalist Mara Schiavocampo will be exploring these issues deeper this week. So, I guess you can say you heard it here first — from the trenches.