As more and more reports of banks mishandling foreclosures sweep the nation, Colorado may prove to be the next horror story, judging by claims from a man in the tiny town of Crestone who has filed a federal lawsuit against the bank that handled the foreclosure of his home.
In a case that could be the tip of the iceberg when it comes to paperwork being massaged in Colorado foreclosure cases, Bruce McDonald alleges that OneWest Bank was not the holder of his mortgage when it foreclosed on his Crestone home earlier this year. He says banks are constantly transferring loans to other banks, and when it comes time to foreclose on a property, lax Colorado mortgage laws allow banks to conceal the fact that they don’t even own the loans they are foreclosing on.
“You have to prove you own the loan before you can foreclose,” McDonald told Boulder Weekly. “They’ve been doing this so long they think it’s OK and it’s legal.”
The allegations are expected to become part of the multi-state investigation that Colorado Attorney General John Suthers recently joined to examine claims that lenders and their agents are signing off on thousands of documents without verifying the accuracy of representations made in that paperwork.
Fraud and racketeering
In a complaint filed in U.S. District Court on July 22, McDonald accuses OneWest Bank of a host of possible violations of laws involving fraud, racketeering, money laundering, robbery and extortion. The case is being heard by none other than retired U.S. District Court Judge Richard Matsch, who presided over the Oklahoma City bombing trial.
In the lawsuit, McDonald produces evidence showing that his $198,000 loan, originally issued by IndyMac Bank in May 2003, was sold to Freddie Mac in September 2004. IndyMac folded in July 2008 and was later reopened as OneWest Bank, the bank that foreclosed on McDonald’s house.
OneWest asserts that it assumed all of the assets held by its predecessor, IndyMac. And according to the lawsuit, OneWest Bank assumed the servicing rights to the loan from IndyMac. But McDonald claims that since the loan had been sold to Freddie Mac years earlier, OneWest could not possibly be the legal holder of the promissory note or the deed of trust.
In its simplest terms, the argument is that if someone loans you money, under the law, another person shouldn’t be able to collect on that loan. In other words, the bank foreclosing on the loan should be the true aggrieved party, the entity that holds the note and is actually owed the money that is past due.
“If you are not a damaged party, you cannot waltz into court and say that you are,” McDonald told Boulder Weekly. “If you don’t own something, you can’t seize it. And [the banks] are saying, ‘Yes we can, because we got the laws rewritten to allow us to.’”
In his lawsuit, McDonald acknowledges that he stopped making his mortgage payments in April 2009 after being notified that the loan servicer had been changed to OneWest, and after OneWest failed to provide him with evidence that they now owned his note and deed of trust.
After he stopped making his payments, OneWest hired the Denver-based debt-collection law firm Aronowitz & Mecklenburg to pursue the matter, McDonald says. Under Colorado law, banks don’t have to produce the original note and deed to foreclose on a loan; they can produce copies of those documents accompanied by a “certification of qualified holder,” a document generated by firms like Aronowitz & Mecklenburg attesting that the bank has the right to foreclose on the loan. McDonald questions how much due diligence such firms do to verify which bank actually owns the loan.
Representatives of Aronowitz & Mecklenburg did not return calls by press time.
McDonald notes that other debt-collection law firms around the country have been accused of misdeeds, including the Law Offices of David Stern in Florida, where an office manager has testified to signing as many as 1,000 documents a day without reading them and without witnesses present, according to media reports.
“They’re
just nasty,” McDonald says of debt-collection firms that issue such
certifications without verifying the ownership of the loan. “Their modus
operandi is intimidation. They should be disbarred.”
Rule 120 hearing
McDonald’s
case went to what is known in Colorado as a Rule 120 hearing, an
administrative court proceeding in which a county judge determines
whether to authorize the foreclosure and sale of a property when
payments are past due. McDonald says that few Colorado homeowners are
aware of this hearing, which is their main opportunity to contest the
foreclosure. But the hearings are very limited in scope and usually only
deal with whether the borrower is delinquent on his or her payments,
not whether the bank has committed fraud or forged documents (see
related story in this issue).
Once
the Rule 120 hearing is done, it is nearly impossible to appeal the
decision, McDonald says, aside from filing a civil suit, like he did.
According
to McDonald’s lawsuit, OneWest used “alleged” copies of his deed and
trust, along with the “certification of qualified holder” from Aronowitz
& Mecklenburg, to convince a Saguache County District Court judge
to authorize the foreclosure and sale of McDonald’s property last
spring. McDonald claims the bank knew full well that the loan had been
sold to Freddie Mac years earlier, and misrepresented to the court that
it was the sole holder of the note and deed.
“If
you indicate to the court that you hold a note and you don’t, I just
don’t think that fits with our American jurisprudence,” says McDonald’s
attorney, Gary Fielder. “It’s just not right. … Someone ought not imply
they own the note in court when they do not.”
McDonald
produces several documents to back his claim, including a Feb. 26
letter from OneWest confirming that “the investor on your loan is
Federal Home Loan Mtg. Co. [Freddie Mac]” and that OneWest “is
responsible for the servicing of this loan.”
McDonald
also has a March 1 letter from the Federal Deposit Insurance
Corporation (FDIC) attesting that Freddie Mac purchased and owns the
deed of trust and that OneWest is only the servicing agent. The FDIC
also provided a screen shot from OneWest’s own records showing the
transfer of the loan to Freddie Mac in September 2004.
McDonald
even questions what Freddie Mac does with the loans it acquires. He
cites a letter dated Oct. 15, 2009, written by Freddie Mac official
Robert Bostrom, in response to a Florida Supreme Court ruling. (The
Florida Supreme Court issued a ruling establishing that a foreclosing
party must prove it owns the underlying loan before foreclosing on it,
McDonald says.)
Bostrom
writes in the letter, “We fulfill our mission by purchasing mortgages
in the secondary market and securitizing them into mortgage-related
securities that can be sold to investors.”
McDonald’s
question is, what happened to his loan after it was sold to Freddie
Mac? Was it securitized and sold to investors? If so, who is now the
proper owner?
“Freddie
Mac doesn’t want to sully their hands, because they don’t want people
to know what they’re doing with the note,” Fielder says. “Someone’s
pulling some strings on some really weird business.”
In
a curious twist, on March 25, after foreclosing on McDonald’s home,
OneWest turned around and sold its interest on the property to Freddie
Mac for $10.
Foreclosure = profit
McDonald told
Boulder Weekly that it is more profitable for banks to foreclose on
properties than it is to work out a payment arrangement with the
homeowner because they can claim a loss — based on the value of the
original loan, which was often artificially high due to the housing
bubble — and regain 80 percent of that loss from the FDIC. (See http://www.larryhotz.com/fdic-pays-bank-to-foreclose.)
In his lawsuit,
McDonald requests a jury trial and seeks economic damages for the loss
of his home, damages for pain and suffering, and attorney’s fees.
Fielder says the outcome of the case could have national ramifications.
“Whatever Judge Matsch says on the McDonald case is going to be big,” he says.
While
OneWest and its public relations firm, Sard Verbinnen & Co.,
declined to comment on the case when contacted by Boulder Weekly,
OneWest has filed a motion to dismiss McDonald’s suit, responding to
some of his claims.
In
that motion, OneWest attests that it followed Colorado laws in the
foreclosure process, since it was certified by its debt-collection law
firm as a “qualified holder” of the loan. The bank claims it produced
“the original note and deed of trust” for the Rule 120 hearing. OneWest
also points out that, under Colorado law, to foreclose on a property, a
lender needs only a copy of the note and a certification of qualified
holder.
“Notably,
the qualified holder need not be in actual possession of the promissory
note to foreclose,” the motion says. “Contrary to McDonald’s
contentions, OneWest need not be a holder of the original evidence of
debt in order to foreclose.”
OneWest
also claims in its motion that in this case, a federal court does not
have jurisdiction over a matter that has already been decided by a state
court. The motion goes on to pick apart McDonald’s claims of fraud,
racketeering and other laws, but remains silent on the question of
whether his loan was sold to Freddie Mac in 2004.
McDonald, who has become a local expert on the foreclosure process (his website is www.kickthemallout.com), questions the whole system in which banks can obligate themselves for more than they actually hold.
“We
need to pull all of our money out of the big banks and use the local
banks and credit unions,” McDonald says. “That would stop this shit dead
in its tracks. We have no idea what they’ve done. They have created so
many ways to generate revenue off your loan. Most banks don’t have
anything invested in the properties they are foreclosing on.”
Nationally, several banks have suspended their foreclosure proceedings amidst claims of faulty documentation.
And,
according to media reports, it’s not the first time OneWest has been
accused of taking an illegal approach to foreclosing on properties it
inherited from IndyMac. According to Wikipedia, for instance, judges
have issued temporary restraining orders and preliminary injunctions
“preventing OneWest from foreclosing on properties where the borrower
claims OneWest failed to follow proper procedure in foreclosing on the
property or otherwise violated the borrower’s rights.”
In
early February, after a widely circulated Internet video characterized
the 2009 sale of IndyMac’s assets to the private investors behind
OneWest as a sweetheart deal, the FDIC issued a terse response. In that
Feb. 12 statement, the FDIC asserted that while there is an 80/20
loss-share agreement between OneWest and the FDIC, OneWest must shoulder
the first 20 percent of those mortgage losses, to the tune of $2.5
billion, before the FDIC will pay a dime, which at that time it hadn’t.
Carol
Snyder, public trustee of Adams County, says that under Colorado law,
even banks that are simply the servicing agent for a loan, as OneWest
claims to be in the McDonald case, have the authority to foreclose on
loans. But the bank must have been lawfully granted that servicing
authority, and it is the law firm issuing the “certification of
qualified holder” that must do its due diligence to verify that.
“The attorneys are putting their license on the line,” she told Boulder Weekly, explaining that the law firms are certifying
that the bank is either the holder of the loan or authorized to service
the debt. She quoted language from a “certification of qualified
holder” document in her office that seems to set the bar for exactly how
much due diligence a firm is required to do. It states in part that
“the following is true and correct to the best of our knowledge,
following reasonable inquiry.”
When
asked about the McDonald case, Snyder says the foreclosure probably
would not have gone forward if McDonald had simply continued making his
payments while challenging OneWest’s authority in court. If his lawsuit
then proved successful, she says, he could have been repaid.
“There
isn’t a free, make-no-payments law,” Snyder says. “You have to pay, or
something happens. You signed a promise to pay, and you don’t get out of
those payments just because you have questions about who to pay.”
Jan
Zavislan, Colorado deputy attorney general for consumer protection, is
involved in the multi-state investigation into foreclosure procedures.
When
asked whether McDonald’s questions will be part of the investigation,
he says, “There’s no part of the process we won’t eventually take a look
at.”
Zavislan says
he views the Colorado foreclosure law that allows for copies of the
deed/note, accompanied by the “certification of qualified holder,” as a
compromise struck by the Legislature that allows banks and other
servicers to get by without having the original documents — while also
protecting against having multiple entities attempting to collect on the
loan.
The
“qualified holder” document provides indemnification in case another
bank later lays claim to the promissory note, Zavislan explained.
But
he says the question of whether a bank or loan servicing agent must
actually own the loans it forecloses on is still somewhat of an open
question.
“It’s an
issue we’re still exploring,” he told Boulder Weekly. “It’s one of the
things we want to understand fully before we reach any conclusion.”
Respond: letters@boulderweekly.com
