Compliance and enforcement professionals will want to check out David Dayen’s new book, Chain of Title: How Three Ordinary Americans Uncovered Wall Street’s Great Foreclosure Fraud. The book is a gripping, perhaps film-worthy account of the proliferation of foreclosure fraud in the aftermath of the financial crisis. Although Dayen is highly critical of the behavior of various banks, his account contains important data and details for anyone who wants to understand the problems associated with foreclosures in the aftermath of the financial crisis – even if one does not share his political views. Chain of Title is the most complete account I have read of the various defenses that have arisen in foreclosures actions brought by banks that could not establish that they held the underlying mortgage loans.
The book is particularly relevant to both those working in compliance and to enforcement officials as a road map for what not to do. It provides fascinating insight into how deep the problems can run, and how open fraud becomes, particularly in a regime of weak regulatory oversight during a market bubble.
Dayen recites a parade of horribles that compliance officials apparently failed to catch or notice (or perhaps even were involved in). For example, apparently, drafters of many mortgage documents left a placeholder for “BOGUS ASSIGNEE,” but forgot to fill in the name, so that “BOGUS ASSIGNEE” showed up as the actual signee. That’s the kind of embarrassment one might imagine in fiction, but would hope a lawyer, or paralegal, would catch in fact. It reminded me of a story a friend told me about working on a CDO many years ago, and substituting his/her name for the trusts that were the ultimate recipient of all of the cash flows in the waterfall. Just before closing, this person told everyone about the prank, and then brought in documents that listed the correct recipients. Not very many people saw the humor value.
The book is focused on the efforts of three individuals who find discrepancies in their own mortgage documentation after a bank files a foreclosure action. The lead protagonist is Lisa Epstein, a cancer nurse who opens the story. Here is the actual, detailed daisy chain of the home loan that Epstein took on with her husband – this is the loan that got the whole investigation going by the “three ordinary Americans” who drive Dayen’s narrative. First, Lisa and her husband borrowed $313,000 from DHI Mortgage in 2007. The timing wasn’t great, obviously: the subprime-backed CDO market was evaporating, and bank credit default swap spreads were about to skyrocket, reflecting the perception that banks were much more likely to default on their own debts. The couple didn’t know their loan was immediately handed off, first to one bank, then another, and another. DHI told them to mail monthly payments to Chase Home Finance, a division of JPMorgan Chase. When the couple ran into financial trouble, they called Chase several times about renegotiating, but were told that “on loans like this we answer to Wells Fargo.” Apparently, someone advised the couple that they should miss a payment to get everyone’s attention and jump-start a renegotiation. That proved not to be such a good idea. In October 2008, right after Lehman’s collapse, when they actually did skip a payment and were sued, the plaintiff in the foreclosure action was not DHI or Chase or Wells Fargo. It was U.S. Bank. That was a surprise to everyone.
You’ll have to read the book to find out what was wrong from U.S. Bank’s perspective, though it isn’t exactly a spoiler alert to tell you that “Where Is the Note?” becomes a prominent catch phrase. Part of the reason the narrative works so well is that we get to watch close up as Epstein follows the foreclosure documents down a rabbit hole, where she learns that her loan, and millions of others, had been passed around like hot potatoes among originators, lenders, trustees, and so forth. In her case, and in numerous foreclosure cases, banks had no proof of ownership of the homes they seized. As we now know, the foreclosure fiasco was a major problem for the banks, which ultimately admitted to violations in a $25 billion settlement. As Dayen says about his own story: “It is unbelievable. That doesn’t make it untrue.”
Reading the Epstein’s story, I immediately thought of an op-ed I wrote in The New York Times on September 26, 2008, nine days after the Lehman Brothers bankruptcy, in which I proposed that the government should just “buy the loans.” It was an alternative to Treasury Secretary Henry Paulson’s complicated plan to bail out the banks and to support their underwater derivatives positions. In that piece I argued that if we ask “should the government buy the numerous derivatives that depend on the value of actual mortgage loans” or “should it just buy the loans,” the latter is more sensible. “It is hard to see the rationale for wagging the entire dog when wagging just the tail will do the same job. If the values of home mortgage loans increase, so will the prices of derivatives linked to those loans. This approach achieves the goal of the Treasury’s current proposal, but without favoring Wall Street over Main Street.”
Government officials considered, but rejected, my idea, for one simple, yet appalling reason: no one could figure out who legally held the loans. Advisers to the ongoing presidential campaigns considered the idea at the time (this was during the heat of McCain vs. Obama), as did some government officials who later told me the idea wouldn’t work. In retrospect, I suppose it might have been naïve to think the government could execute such a straightforward plan. They couldn’t buy the loans themselves: who would find them? Who could establish which entity legally held the loans? The banks, by cutting so many corners in the mortgage market, had ensured that such a plan would be impossible. That really is the overarching message I took away from Dayen’s book: financial innovation put a fundamental aspect of our economy at risk, and then made it impracticable to repair, by breaking the chain of title. (That’s an apt book title, by the way.)
Frank Partnoy is the George E. Barrett Professor of Law and Finance at the University of San Diego. He is author several books; the one most relevant to the compliance and enforcement professions is Infectious Greed: How Deceit and Risk Corrupted the Financial Markets. He recently published a full review of David Dayen, Chain of Title: How Three Ordinary Americans Uncovered Wall Street’s Great Foreclosure Fraud in The New York Times Book Review on May 15, 2016.
Disclaimer
The views, opinions and positions expressed within all posts are those of the author alone and do not represent those of the Program on Corporate Compliance and Enforcement or of New York University School of Law. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.