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UPL and Mortgage Foreclosure Fraud

The Bank's Perspective

Virginia Townes, Esquire

Akerman, Senterfitt

Orlando, FL

virginia.townes@akerman.com

I. WHAT BANKS REALLY WANT

# 1-- Money, Money, Money: In general, any lender has one goal—to be repaid, in full,

on time, with interest. When foreclosure is necessary, or even when foreclosure is likely, the

lender is already at a disadvantage, because collateral—however desirable—is not cash. The

realization of collateral and turning that collateral into cash takes time, money, and involves risk.

If the collateral were worth more than the amount owed, the borrower would undertake the sale

and realize the profit. In the residential foreclosure arena, the lender is almost never made whole

by a foreclosure and resale.

# 2--A Happy Regulator: A financial institution's failure to achieve its primary goal has

regulatory consequences. Financial institutions are part of a highly regulated industry. Every

state or national bank undergoes strict scrutiny for safety and soundness, including examination

of its asset base.

Banks make loans, at least in part, with funds deposited by account holders.1 When those

funds—owed to depositors—are invested in, for example, a residential mortgage, the bank

obtains an asset to offset its liability to the depositor. If the loan generates more interest than the

bank pays on the deposit account, the bank earns a profit. If the loan is not repaid as and when

due, with all accrued interest, the bank stands to lose not only its stream of income, but to remain

liable to the account holder for both the money the account holder deposited (the source of the

loan) and the interest the bank promised the account holder to induce it to make the deposit.

Consequently, a significant measure of the safety and soundness of a financial institution is the

degree of risk associated with the loans it is making.

The Interagency2 Guidelines for Establishing Safety and Soundness list certain criteria as

required considerations in the regulator's determination of safety and soundness of a lender's

asset base.

1 Loans are a lender's assets; deposit accounts are a lender's liabilities.

2 National Banks are regulated by the Office of the Comptroller of the Currency; state-chartered banks are regulated

by the chartering state's administrative agency. The Federal Deposit Insurance Corporation ("FDIC") is a prudential

regulator for all FDIC insured banks. Similarly, federal credit unions are regulated by the National Credit Union

Association; state credit unions are regulated by the chartering states. Credit union deposits are insured by the

National Credit Union Share Insurance Fund (NCUSIF). For obvious reasons, the deposit insurers carefully monitor

the safety and soundness of the institutions whose deposits they insure.

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Operational and Managerial Standards.

. . .

F. Asset growth. An institution's asset growth should be prudent and consider:

1. The source, volatility and use of the funds that support asset growth;

2. Any increase in credit risk or interest rate risk as a result of growth; and

3. The effect of growth on the institution's capital.

G. Asset quality. An insured depository institution should establish and maintain a

system that is commensurate with the institution's size and the nature and scope of its

operations to identify problem assets and prevent deterioration in those assets. The

institution should:

1. Conduct periodic asset quality reviews to identify problem assets;

2. Estimate the inherent losses in those assets and establish reserves that are

sufficient to absorb estimated losses;

3. Compare problem asset totals to capital;

4. Take appropriate corrective action to resolve problem assets;

5. Consider the size and potential risks of material asset concentrations; and

6. Provide periodic asset reports with adequate information for management and the

board of directors to assess the level of asset risk.

InterAgency Guidelines for Establishing Safety and Soundness:

http://www.fdic.gov/regulations/laws/rules/2000-8630.html#fdic2000appendixatopart364

(emphasis added).

When a financial institution's asset base poses significant risk of loss, the institution must

reserve capital against the potential loss. The ratio of capital to risk-based assets was a

significant focus of the Dodd-Frank Act. The United States Treasury recently promulgated

proposed and interim rules requiring an additional 3% capital retention "buffer" for so called

"systemic" banks—what used to be known as "too big to fail," until they failed!

Here's a plan—Let's minimize risk! The rational business solution is to turn the risk-

based asset into a risk-free (or minimal risk) asset while realizing enough of the profit to offset

the interest being paid on deposit accounts and returning enough profit to the bank to make it

worth all the trouble. Banks and other lenders bundled the loans, including residential mortgage

loans, and sold an interest in the bundled loans as mortgage-backed securities ("MBS's") in the

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secondary market. Fannie Mae and Freddie Mac are the best know players in that market, but

not the only significant players. Most, but not all, of the securitized mortgages were sold with

recourse to the original lender. Thus, the risk-based asset was taken off the bank's books, but

there was a residual recourse risk.

So how did that work out? So long as property values were rising and the real estate

market was hot, there was little real-world risk for the lenders. However, after September, 2007,

a new reality prevailed. Property values plummeted. Resales stopped dead. Lenders had

volumes of bad loans returned to them from investors that exceeded the "worst case" predictions

exponentially. In short, lenders had to buy back the worst of the assets they had previously sold

in the secondary market, without having new assets to sell into a rapidly retrenching and

diminishing secondary market.

In addition, regulators called for higher capital retention to off-set increased risk. That

further diminished liquidity and available loan funds to permit resales or refinancings (assuming

loan to value ratios would have allowed refinancing.)

Banks had to obtain new sources of capital to meet the increased regulatory demand for

retention and after the collapse of the securities market, in large part due to the complete

deflation of mortgage-backed securities, those remaining investors with available capital were

not excited about the investment potential for already troubled institutions.

Suffice it to say, a lack of money AND furious regulators was not the desired result.

Now banks were facing a tsunami of residential foreclosures for with they, the economy

and the courts were entirely unprepared.

II. COULD ANYTHING MAKE THIS WORSE?

Well, maybe not worse, but certainly not easier. In order to create an efficient market for

MBS's lenders securitizing mortgages and selling portfolios dealt in bulk, rather than negotiating

the transfer of individual loans and mortgages. The physical act of preparing, executing and

recording assignments of mortgages would, if required by the market, bring the secondary

market to a standstill.

A. Surrogates in the mortgagor/mortgagee relationship.

MERS : The development of the Mortgage Electronic Registration System "solved" that

problem of assignment after the loan closing and for subsequent transfers. At the time of the

closing of the mortgage loan, the original lender assigns the mortgage to MERS, as nominee.

The original mortgage document identifies the lender, the borrower, and names MERS as

mortgagee: "'MERS' is Mortgage Electronic Registrations Systems, Inc., MERS is a separate

corporation that is acting solely as a nominee for Lender and Lender's successors and assigns."

Thus, the mortgage itself can be sold or transferred multiple times without the need to reassign

the mortgage with each transfer. MERS keeps a running electronic record of both the investor—

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the entity that bought the note and mortgage—and the servicer for each loan so that the real party

in interest can be identified—if you know where to look..

Servicers: When loans are securitized, the investor typically does not manage receipt of

payments and escrows, amortization of loans, payments of taxes and insurance. This highly

lucrative function is contracted out to servicers. Many of the "too big to fail" banks have

extensive servicing departments; however, it is a common revenue source for smaller financial

institutions, as well. When a portfolio of loans (or of securities loans) is sold, the value of the

servicing rights is sold as a separate item of value and may be sold to a different purchaser.

B. What the mortgagor knows.

In recent times, most residential mortgagors have dealt only with the servicer after the

mortgage loan is closed. Because they receive account correspondence on Big Box Bank

Mortgage Company letterhead, and they send payments to Big Box Bank Mortgage Company,

most consumers are not aware that the bank is a different entity from its affiliated mortgage

company; they assume their mortgage is held by Big Box Bank. In fact, this is seldom the case,

and then only by coincidence.

When the economy tanked and mortgagors were desperately trying to negotiate

forbearance agreements, loan modifications, or short sales, they reached out to Big Box Bank.

Unfortunately, Big Box Bank did not have a relationship with them. Big Box Bank Mortgage

Company did not have the contractual authority under the servicing agreement to negotiate any

change in terms of the mortgage or underlying promissory note. Neither BBB nor BBBMC was

the owner and holder of the Note.

C. The open-door for UPL

If the consumer cannot understand the context of his or her legal situation, the typical

consumer seeks advice. The consumer, however, is already upside down on his home, facing a

layoff or a cut in hours, and seeing all his investments evaporate. Attorneys, by and large, cost a

LOT of money.

On the other hand, the internet has become the surrogate for professional-seeming,

rational-appearing, and ostensibly practical advice. Most consumers have access to the internet;

an amazing number of people seem to believe that if it's on the internet, it must be so!

III. FORECLOSURE—THE ULTIMATE LOSE/LOSE PROPOSITION

A. What Banks Really DON'T Want

1. Delay

2. Increased litigation (amount and cost)

3. REO—Real Estate Owned

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Obviously, the lender's goal is to maximize recovery and minimize cost and time-lapse. Stated

in regulatory terms—the sooner the troubled asset can be turned into a quantifiable and stable

asset, even if at a loss, the smaller the risk-based asset total, the less capital retention needed.

However, the cost of foreclosure further decreases the actual recovery, and the longer it

takes, the less the value of the recovered asset is worth. Finally, REO is a complete drain on the

lender's books. The property is not money. It can't be put out to earn revenues, like cash can.

Lenders are not allowed to engage in business with REO (e.g., rent foreclosed properties out

while trying to market them). Once title vests in the foreclosing bank, the bank becomes

responsible for taxes, maintenance, community association dues and assessments, and basically

everything that makes owning a home a constant drain. (That's why a short-sale or a loan mod

makes sense to a financial institution.)

B. UPL creates delay, litigation, loss

1. Lawyers abetting UPL

The biggest cause of delay in the mortgage foreclosure process, nationwide, was a form

of malpractice masking UPL. While the legal profession cannot condone or forgive the breach

of public trust committed by licensed attorneys, much of the blame for this delay must be placed

squarely at the feet of the lenders, investors and servicers.

Foreclosure mills have always existed. In normal times, with normal flat rates, most

were highly profitable, but largely ethically run, law firms. As the crisis developed, the number

of foreclosure actions to be filed outstripped available resources. At the same time, the costs of

foreclosure, including legal fees, ate into the profit margin of servicer contracts; investors were

not set up to absorb the additional losses; lenders facing an onslaught of recourse returns did not

have the internal budgets to meet the need. The fee-setting mantra, "volume discount," morphed

into "all-in flat rate." At the same time, the hiring market for lawyers was dwindling and even

the most elite firms faced significantly dwindling practices—and revenues. Thus, more lawyers

with less experience in this (or any other) field were willing to take on any work at any price and

hope for the best.

The foreclosure mill became a paralegal-intensive practice with a routinized method of

prosecuting foreclosures. Under the nominal supervision of a licensed attorney, all the legal

work on a file was done by an unlicensed staff member—sometimes a paralegal, sometimes a

secretary. 3

The result was headline news:

3 For a cautionary insight into the operation and downfall of one of the most notorious of these foreclosure mills, see

The Florida Bar v. Daniel L. Stern, Docket No. 13-643

http://www.floridasupremecourt.org/pub_info/summaries/briefs/13/13-643/index.html

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Robo-signing controversy could derail nation's entire foreclosure process

. . .

Lenders and their law firms have been under fire for months, accused not only of shoddy work but using "robo-signers" to either sign affidavits that haven't been researched or forge documents outright.

The affidavits are used to verify whether loan documents and other records are correct. Judges rely on them to make sure lenders are on firm ground in kicking someone out of their home

Jeff Harrington, Leonora La Peter Anton, TAMPA BAY TIMES, Oct. 8, 2010.4

The upshot of this revelation, and of the judicial backlash that resulted against such

shoddy legal practice, resulted in the major servicers declaring moratoria on foreclosures and

conducting a wholesale audit of the files of all loans currently being foreclosed or in imminent

danger of being foreclosed. Notably, it also triggered investigations by attorneys general of most

of the fifty states and costly (to the banks) and lucrative (to the states and, hopefully, ultimately

to the consumers) settlements.

The embarassingly common practice of lawyers filing legally fraudulent document in a

legal proceeding, simply save the client time and effort and to maximize their own profits not

only created significant and costly delay, it held both the financial services industry and our own

profession up for justified excoriation.

These situations typically come to light when a complaint is filed against the attorney

over whose name the actions are filed. See, e.g. In re Stephen Hrones, Formal Opinion 1995-11,

Committee on Professional and Judicial Ethics, The Association of the Bar of the City of New

York (July 6, 1995). http://www2nycbar.org/Publications/reports/show_html_new.php?rid+169;

In re Martin, 97 B.R. 1013 (Bkrtcy. N.D. Ga. 1989). There is no remedy for the borrower or for

the legal system, however.

Punishment should, rightly, fall upon the attorney. In addition, one court has noted that a

paralegal who knows or should know that she did not have any supervising attorney was engaged

in the practice of law. Tegman v. Accident & Medical Investigations, Inc., 107 Wash. App. 868,

30 P. 3d 8 (2001). While the court noted that mere evidence of infrequent contact with the

supervising attorney who is responsible for the case does not arise to the level of "knows or

should know," in some of the current mortgage mill situations, signatory "responsibility" for the

case may not extend to actual legal oversight of the case. In Florida, where all court filings are

electronic and e-signatures are typed in by assistants, there is nothing but the ethical commitment

of the licensed attorney to assure that the attorney has touched, much less reviewed, the

complaint and the supporting documents.

4http://www.tampabay.com/news/business/banking/robo-signing-controversy-could-derail-nations-entire-

foreclosure-process/1126987

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The failures of the legal profession to exercise legal oversight of staff (and to ensure that

our clients are themselves following the law) accounts for more delay and cost than any other

form of mortgage fraud, regardless of whether UPL was involved.

But UPL without the assistance of lawyers also contributes to delay and damaged in

creative and frustrating ways.

2. "Self" Help

a. The D-I-Y D-I-L

In Florida, as in most states with active community associations, the title holder is liable

for all association fees due, even those accrued prior to acquisition of title. There's a special

safe-harbor for lenders; upon receiving title through foreclosure or deed-in-lieu ("D-I-L") the

purchase money mortgage holder's liability is limited to one year of past-due assessments.

Problem: Condominium owner has mortgaged property to Lender. Owner has fallen

behind on assessments and dues, which results in a lien against the condominium property,

inferior to the lender's purchase money first mortgage.

Solution: Owner's neighbor (a non-lawyer5) prepares a quit-claim deed to the Lender and

records it in the public record, assuring owner that a) the bank can't foreclose because now it

already owns the condominium and b) the bank is now liable for all future dues and assessments,

including those that accrued up to one year before the date of the quit-claim deed.

The Bank discovered it "owned" the condominium when the condo association sought to

foreclose its lien for assessments. The bank commenced foreclosure, but mortgagor had died in

the meantime, leaving probate issues which are still being worked out.

Analysis and strategy: The bank was owed under $45,000. The condominium, at best

guess, was worth about $50,000, but accrued assessments were in the $5-6,000 range. No title

company would insure title as it stood on the public record.

The bank answered condo association's foreclosure action with declaratory judgment

action to void quitclaim deed. The case is still stalled and the bank's separate foreclosure is just

beginning to move again.

Upshot: The condominium is vacant, tied up in probate, with no resources to pay

assessments. The condo association has yet another non-productive unit not carrying any

portion of the common expenses. The bank has written off $45,000 on its books, but retains the

mortgage in case the probate ever gets sorted out and the quit-claim deed is voided.

5 The neighbor attempted to avoid the appearance of UPL by designating himself on the QCD as the owner's

"Attorney-in-Fact." No power of attorney appeared in the public records, but obviously, the neighbor had some

knowledge of law and restrictions on UPL.

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b. Strategic Default

Many print and web sources have circulated information and advice concerning strategic

default. Most urge the borrower who is upside down on his mortgage—to whatever degree--to

simply stop paying their mortgages and, when the bank starts foreclosure, simply surrender the

keys in a non-judicial foreclosure. The articles typically point out that money saved by not

making mortgage payments would fund a nice down payment on the next home, especially since

it would take the bank more than a year (at least in Florida and other judicial foreclosure states)

to get serious about the default. Moreover, if the owner doesn't want to pay property taxes, the

borrower is assured the "bank" will step up to cover taxes, too, to avoid a tax certificate sale.

At some point, usually prior to commencement of foreclosure, the mortgagor simply

abandons the property and moves elsewhere. This creates further delay, as the mortgagor has

now moved without providing a forwarding address. The lender must skip-trace the mortgagor;

if that is unsuccessful, the mortgagor is served by publication. In some jurisdictions, the court

appoints a guardian-ad-litem to protect the absent mortgagor's interests. In the meantime, the

property is vacant and unmaintained. Florida is a lien theory state; the mortgagee has no right to

enter into possession of the mortgaged property unless and until it is the successful purchaser at a

foreclosure sale. That process, augmented by service issues, may take as much as three years.

The collateral deteriorates, and so does the neighborhood and public safety.

The part of this problem created by UPL falls squarely on the defaulting borrower. Many

of the articles that appeared in Florida newspapers or periodicals, were wire copy, not written

specifically for the Florida market. Even when the article originated in Florida, the writer was

typically not sufficiently versed in Florida law to provide adequate information. For example,.

many states with non-judicial foreclosure condition the ability to proceed via NJF on waiver of

deficiency judgments. Thus, having passively surrendered the home, the borrower has no further

liability. Florida has NO non-judicial foreclosure and lenders almost never waive deficiencies; a

deficiency judgment will be entered against the borrower for the difference between the fair

market value of the property at the time of the foreclosure sale and the amount of the foreclosure

judgment. Few of these articles or posts discuss the effect of strategic default on credit scores

(other than the unhelpful suggestion that the person's credit is probably already ruined), the

defaulter's ability to qualify for another mortgage, and tax consequences.6

c. Google, Attorney at Law:

Many official and erudite sounding websites create a false sense of empowerment for

beleaguered homeowners which can, in the long run, create more problems than solutions. One

example—and not the most egregious—is Go Fight Foreclosure, http://gofightforeclosure.com.

The sponsor of this site sells a self-help manual, Go Fight Foreclosure System 2.0, for $297,

which compares favorably with the cost of any attorney. The manual is advertised as offering

"laser-guided accurate information SPECIFICALLY for home foreclosure prevention and how to

conduct proper research to identify flaws with your mortgage documents and use them to build a

6 A quick Google search for "Strategic Default" will reveal that many of the sites are attorney sponsored; many of

these sites are similarly defective, but they at least attempt to get the borrower into the office (brick-and-mortar or

virtual), so there is the potential that these issues get addressed before irrevocable harm occurs.

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rock solid foreclosure defense."7 If only it were that simple! Even assuming the manual

accurately identifies all legal flaws and that it can guide the consumer through the maze of issue-

spotting, it cannot prepare the self-represented consumer for the procedural intricacies of

litigation or the danger of losing rights and protections by inadequate pleading or presentatin.

A corollary problem is that the internet does not respect state lines or reflect state bar

memberships. A number of law firms advertise their ability to assist homeowners facing

foreclosure without geographic limitation. It is to be hoped that if the web-browsing consumer

actually contacts the site sponsor, such niceties are observed and explained. However, the

"come on" in most of the sites is a quick solution to a complex problem. If the reader thinks the

solution, on its face, can fix the reader's problem, he is not likely to undertake further inquiry.

The problem of extra-territorial practice is pretty much unchecked in the loan

modification process. It is fairly common for attorneys to engage in loan modification on behalf

of homeowners residing in states where the attorney is not licensed. Lenders/servicers are not

particularly sensitive to this problem, but the consumer who is injured by untimely or defective

representation is left without any remedy.

3. Why Lenders Like Lawyers:

Banks are not popular right now. They are not popular with media. They are not popular

with the public. They are not popular with legislative bodies. They are really not popular with

judges. See, e.g., J. Liebold, E. Babbitt, L. Huber, "Juror's Evaluations of Financial Industry

Defendants During a Recession," For the Defense, p. 18 (June, 2013).

Every time a negotiation goes badly, a mistake is made, or a consumer appears to have

been abused by the system, the fault is laid squarely at the feet of the lender. And it frequently

becomes a media hook to rehash every (admittedly) horrible event in a long parade of horribles.

Banks have difficulty negotiating with non-lawyer advocates because of the uncertainty

factor. Attorneys are regulated and subject to discipline. Thus, when an attorney makes a

statement in a negotiation, or a pleading, or even in a complaint, the desire to avoid sanctions and

to protect his or her right to practice law serves as at least a minimal restraint on abusive or

obfuscatory tactics. Even in a pro se situation, which is, of course, not UPL, the process is

hindered by both unequal bargaining power and by unequal understanding.8 While this is

painted in the media as an opportunity lenders embrace to take advantage of and to bully

unsophisticated consumers, banks cannot protect the consumer from their inability to navigate

complex legal and procedural matters. Not that a bank won't welcome a windfall, but banks

prefer to get it right the first time, and fast.

7 This same website also urges that homeowners facing foreclosure consult the UCC, "The most powerful property

asset protection for those in foreclosure!" 8 The problem can even be exacerbated when a borrower is ostensibly appearing pro se but is actually relying on the

advice of a behind-the-scenes advisor. Communication can turn into a game of telegraph, in which the bank's

message is related to the invisible advisor, inevitably losing something in the retelling. The resulting response is

relayed to the bank, again with minor or major misstatements. While bank and borrower may sincerely want to

work together to resolve the default, the not-quite-presence of an advisor who is not at the table makes that much

less likely to occur.

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Moreover, when a deal is reached, the ability to enter into an arm's length, fully

negotiated documentation of that deal is more difficult if the party is not represented by counsel.

When both the bank and the borrower are represented by counsel, there is an

acknowledged set of rules (both legal and procedural), a common vocabulary, and a more

informed view of viable options. This commonality permits a more efficient and a more fair

compromise where the parties' demands are mutually exclusive and, for both, probably

impossible of attainment.

4. The Bank Isn't the Big Loser—Ultimately, the Consumer Pays.

Anything that makes lending less attractive, or even secure, limits the credit available to

the consumers.

The tightening of the credit markets results from a complex interplay of economic and

regulatory factors, but it cannot be argued that the much lamented lack of ready lending is tied in

part to the problems lenders face in realizing collateral when loans fail.

In June of this year, after months of growth the stock market experienced a significant

retrenchment when Federal Reserve Chairman Ben Bernanke suggested that sometime, in a

foreseeable but not imminent future, the Fed was going to have to withdraw "Quantitative

Easing"—code for "subsidized lending." Interest rates are at an economically unsustainable low.

Consumer lending is not an attractive enterprise for most lenders. Of course, a retrenchment in

the stock market puts a damper on hiring, expansion and all the other activity required for

economic recovery.

In a move directly related to foreclosure delay, the Federal Housing Finance Agency (the

conservator for FNMA and FHLMC) announced that it will increase the guaranty fee on

mortgages held in 5 states--New York, New Jersey, Illinois, Connecticut, and Florida—by

between $3.50 and $7.00 per month. Federal Register Notice No. 2012-N-13, “State-Level

Guarantee Fee Pricing” These states, none of which has a non-judicial foreclosure process,

experience the longest foreclosure delay, In Florida, the average time between foreclosure filing

and foreclosure sale is 800 days—over two years.

Obviously, this cost is passed through to the consumer, increasing the cost of credit.

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IV. SO, HOW MUCH OF THIS CAN BANKS BLAME ON UPL?

Well, not a lot, and the banks come in for some of that criticism themselves. The

authorized practice of law hasn't always ameliorated the situation, either, as a subset of

attorneys has grown wealthy collecting a portion of the payment not being made on mortgages in

exchange for interposing every possible delay in the foreclosure process that will inevitably

succeed.

And, to be candid, banks will deal with anyone of any stripe who could make the

foreclosure or loan modification or short sale process work more efficiently.

In Florida, unlike many other states, a number of non-lawyer regulated professionals have

been legislatively authorized to manage some portion of the relationship between mortgagor and

mortgagee. While fervent lip service is paid to the non-lawyer professionals' scrupulous

adherence to a non-existent bright line between, say, real estate brokering or insuring title and

"practice of law," as lenders see it, any professional help and guidance is better than none.

The bottom line is that the system can't work without educated and committed

professional assistance for consumers who for whatever reason find themselves facing

foreclosure. The individual's understandable goal of postponing the inevitable in the long run

hurts all borrowers and all lenders and could, if unchecked, derail economic recovery,

particularly in real-estate based economies like Florida's.