In the course of defending numerous foreclosure actions around the United States, we have come across some fairly horrendous fact patterns, but to date, that described here (a true story, by the way) is unprecedented.

The victim is a single young woman in Michigan who was looking to purchase a home. After viewing several properties, she decided on a particular home and initiated the loan application process to see if she qualified for the financing needed to purchase the property. Loan application documents naming several potential lenders, including Wells Fargo, were filled out through the mortgage broker. However, in the days that followed and within the legally prescribed period to decline the transaction, she decided for her own reasons not to pursue the purchase. She notified the broker and signed a Release of Purchase Agreement. These events occurred in late September, 2007.

Six months later on March 21, 2008, she received a call from a representative of Wells Fargo advising her that she was being placed in foreclosure, as Wells Fargo claimed that she was in default on a mortgage which Wells Fargo had placed in her name on the property which she had decided not to purchase in the fall of 2007. She advised Wells Fargo that she had properly declined to go through with the purchase and had signed a release of the purchase agreement. However, Wells Fargo stated that they were in possession of a mortgage in her name for the subject property, were proceeding with the foreclosure, and that Wells Fargo had placed the loan and foreclosure on her credit report.

Although she persisted in her attempts to rectify the matter informally, Wells Fargo did nothing but stall, make excuses, and do nothing. Wells Fargo first promised to rectify the matter “within 3-4 days”, then “within 6-8 weeks”, with eventually nothing being done at all other than Wells Fargo admitting to her that they had “no documents on this file”, but that Wells Fargo still would not remove the loan and the negative information on her credit report.

Notwithstanding that there was no valid purchase contract, no executed loan documents, and no closing, Wells Fargo created a fraudulent mortgage (which it may have sold to a third party given its recent admission discussed below); created a fraudulent foreclosure on property which the victim did not even own and which was not in her name; and created and published fraudulent negative information on the victim’s credit report. Until the victim hired an attorney, Wells Fargo insisted that the victim was in default on the (phantom) mortgage.

The victim’s attorney forwarded a formal demand and legal notice of the wrongful actions of Wells Fargo to the brokers and Wells Fargo. The brokers have confirmed that a closing did not take place, and that there were no loan closing documents executed in favor of Wells Fargo by the victim, and that the only documents referencing Wells Fargo signed by the victim were those in a standard-form loan application.

Today (July 25, 2008), Wells Fargo has advised that it has notified the credit reporting agencies that it has directed these agencies to remove any and all credit reporting made by Wells Fargo in connection with the mortgage loan, claiming that the entire incident was the result of a “processing oversight” and that the loan data was “inadvertently updated into our records for servicing of the loan”. How a financial megalith like Wells Fargo could claim that the creation of a nonexistent mortgage loan, the creation of false credit information, the creation of a fraudulent default on the nonexistent mortgage, and the creation of a wrongful threat of foreclosure on the nonexistent mortgage was nothing more than a “processing oversight” is beyond credulity. What may have occurred, given the widespread litigation involving Wells Fargo and its admission that it was going to “service” the loan, is that Wells Fargo presold this mortgage to an aggregator at or about the time of the loan application without any closing taking place and without any loan closing documents being signed by the victim.

This conclusion is bolstered by Wells Fargo’s actions in at least one other pending case in the Florida Keys where, in the first claim on the first page of its foreclosure lawsuit, Wells Fargo claims to “own and hold the note and mortgage”, yet on the second page of the same lawsuit admits that Wells Fargo does not own or hold the note or mortgage, do not know where these documents are, but will agree to indemnify and hold the borrower harmless, if the borrower agrees to a judgment of foreclosure, against anyone else who may come along claiming ownership of the note and mortgage.

Given that Wells Fargo is one of the largest financial institutions in the United States and given that Wells Fargo created a fraudulent mortgage obligation upon an innocent victim as part of what appears to be a national corporate policy of selling or assigning mortgages to third parties, it is more than likely that the victim here was not the only victim of this type of conduct on the part of Wells Fargo. The only question at this point is how widespread was this operation, and how many other victims of Wells Fargo are still out there not knowing what to do when Wells Fargo makes a fraudulent demand upon them.

Stay tuned. There is surely more to come.

Jeff Barnes, Esq.
[email protected]


This is a question that anyone who has a mortgage should be asking, notwithstanding what the “bank” or “loan servicing company” claims that you owe on your monthly statement or, if you are in foreclosure, what is being claimed as owed. The truth may surprise you.

A “mortgage loan” actually has two components: the Promissory Note (stating the amount borrowed and ultimately owed, with interest), and the Mortgage instrument which gives the lender” an interest in the property as security for repayment of the loan in the event that the borrower defaults. The Note itself is not the basis of any right to foreclose on the property. It is only a document evidencing a promise to pay. It is the mortgage document which gives rise to a fight to foreclose as this is the document which places the encumbrance on the property to secure repayment of the amount of money borrowed. Thus, the party seeking to foreclose must be in possession of both documents: the Promissory Note which is claimed to be in default, and the mortgage document which authorizes the remedy of foreclosure on the property. The presumption is that the party seeking to foreclose has a right to do so as (a) there is an amount owed which has not been paid; (b) the borrower is in default, and thus (c) foreclosure is an available remedy. Of course, this entire process presumes that the amount claimed to be owed on the Promissory Note is actually owed by the borrower.

In connection with the reselling, assignment, aggregation, and bundling of mortgage documents for purposes of creating CMOs (Collateralized Mortgage Obligations, a/k/a “mortgage-backed securities”) and the reselling and assignment of promissory notes to loan servicing companies, the two documents have, in many instances, become separated, with the mortgage winding up in a bundle with hundreds and perhaps thousands of other mortgages as part of the “backing” of a mortgage-backed security. The purchasers of such securities have become the true owners of the mortgages although, with the system that was used by the investment bankers, one investor could be a partial owner of literally thousands of mortgages without even knowing who the mortgagees are.

The Promissory Notes have likewise been assigned or sold off to other parties such as loan servicing companies or investors, sometimes with the investors permitting the original “lender” or the loan servicing company to retain the right to collect payments from the borrower.


A common thread which is emerging in foreclosure cases is the claim of the plaintiff (a/k/a the “foreclosing party”) that they have “lost the note and/or mortgage”. In such a case, the foreclosing party may file a Affidavit as to the lost note and mortgage in a purported attempt to cure the material defect of proof of ownership and production of the original note and mortgage. This position should be met with a vigorous challenge based on what is being discovered in case after case: that the “plaintiff” does not and never had the original note OR mortgage, which was probably sold or assigned more than once and may today be somewhere in the Cayman Islands as part of a specialized investment vehicle.

Thus, when a borrower or borrower’s attorney is met with such a position, several defenses should be considered. These “affirmative defenses” may take the form of or be asserted along the following lines, provided they are asserted in good faith:

1. Upon information and belief, the mortgage note has been paid in whole or in part by one or more undisclosed third party(ies) who, prior to or contemporaneously with the closing on the “loan”, paid the originating lender in exchange for certain unrecorded rights to the revenues arising out of the loan documents.

2. Upon information and belief and in connection with the matters the subject of paragraph “1” above, Plaintiff (foreclosing party) has no financial interest in the note or mortgage.

3. Upon information and belief, the original note was destroyed or was transferred to a structured investment vehicle which may be located offshore, which also has no interest in the note or mortgage or revenue thereunder.

4. Upon information and belief, the revenue stream deriving from the note and mortgage was eviscerated upon one or more assignments of the note and mortgage to third parties and parsing of obligations as part of the securitization process, some of whom were joined as co-obligors and co-obligees in connection with the closing.

5. To the extent that Plaintiff has been paid on the underlying obligation or has no legal interest therein or in the note or mortgage, or does not have lawful possession of the note or mortgage, Plaintiff’s allegations of possession and capacity to institute foreclosure constitute a fraud upon the court.

6. Based upon one or more of the affirmative defenses set forth above, Defendant (borrower’s name) is entitled to a release and satisfaction of the note and mortgage and dismissal of the foreclosure claim with prejudice.


In another historic victory for borrower victims of predatory loan practices, the Court of Common Pleas of Mahoning County, Ohio has entered an Order today canceling a foreclosure sale set for June 24, 2008 and staying same pending the outcome of the borrower’s Federal lawsuit which has been filed against Bear Stearns Residential Mortgage Corporation, Encore Credit Corporation, Option One Mortgage Corporation, Motion Financial, and broker Ellyn Klein Grober (of Motion Financial) sounding in claims for violations of the Federal Home Ownership Equity Protection Act, the Federal Real Estate Settlement Procedures Act, the Federal Truth-In-Lending Act, the Federal Fair Credit Reporting Act, the Ohio Consumer Practices Act, and the Ohio Mortgage Broker’s Act; Fraudulent Misrepresentation; Breach of Fiduciary Duty; Unjust Enrichment; Civil Conspiracy to defraud; and Civil RICO. The case was filed in the United States District Court for the Northern District of Ohio, Eastern Division.

The ruling comes on the heels of the June 19, 2008 press release, from the Federal Bureau of Investigation’s National Press Office, as to the more than 400 Defendants charged for their roles in mortgage fraud schemes, including 60 arrests in 15 districts. Charges were brought in every region of the United States and in more than 50 judicial districts by U.S. Attorneys’ Offices. The indictments included two Senior Managers of Bear Stearns who were indicted in a mortgage-related securities fraud case.

The Ohio state court ruling paves the way for borrowers seeking relief from foreclosure by parties who have, in many instances, falsely represented to the Courts that they have the proper capacity to institute a foreclosure action when quite the opposite is true. Recent judicial decisions in California and other states have stated very clearly that the question of legal standing to institute a foreclosure is paramount, and absent satisfactory proof of this threshold element, foreclosure may not proceed. The Federal case filed in Ohio in connection with the ruling of the Judge in Mahoning County seeks various additional forms of relief, including money damages, refund of all monies paid by the borrower, rescission, punitive damages, costs, and attorneys’ fees against the Defendants Bear Stearns, Encore Credit, Option One, and Motion Financial.

“Failure to Add Indispensible” Parties: Why Not Raising This Defense in Your Client’s Mortgage Foreclosure Case May be a Ticket to a Legal Malpractice Claim

This article is intended for attorneys who choose to defend a mortgage foreclosure action. As has been repeatedly published in this blog, in the great majority of instances we have seen, the Plaintiff in the foreclosure action is something along the lines of “ABC Bank as Indenture Trustee for the Registered Holders of XYZ Asset-Backed Bonds Series 2005-V”, or something of that ilk. Per a previous article published on this blog by this author, when the name of the Plaintiff is something akin to this example, you need to dig, as that type of moniker tells you, right up front, that there were several assignments of the note and mortgage to various entities before these instruments wound up in some tranche in some special investment vehicle which may be in the Cayman Islands or with a batch of thousands of other notes and mortgages in some vault in Rekjavik, Iceland.

In other instances and in addition to the “red flag” name of the Plaintiff, we have seen  other cases where the Plaintiff admits that they do not own or hold the note or mortgage, do not know where they are, and in one case the Plaintiff actually put a settlement offer into the allegations of the Count for “Enforcement of Lost Documents” that the Plaintiff would “agree to a Final Judgment of Foreclosure which would require the Plaintiff to indemnify and hold [the named borrower Defendant] harmless” from someone who may come along later and claim ownership of the original note and mortgage. Talk about chutzpah!

Which begats the defense of failure to add indispensable parties. As soon as you see a case where the Plaintiff is some trustee or some assignee of some group of unnamed investors or holders of some series of mortgage-backed securities or bonds, etc., the Motion to Dismiss for Failure to Add Indispensible Parties should be filed forthwith. The allegation is that the Plaintiff knows or should know, by its very title, that the mortgage and note were assigned or sold or transferred at least one or more times between the time of loan origination and the time of the filing of the action, and that there are thus real parties in interest who may claim an interest in the note or mortgage who have not been named. Remember, the classic definition of an indispensable party is “one without whose joinder the complete rights and obligations of the parties cannot be determined”. The case cited above where the Plaintiff admitted that there may be some other party or parties out there who may, at some point, claim an interest in the note or mortgage is proof positive of the Plaintiff’s actual knowledge of this material issue.

Not filing this Motion can be a ticket to a claim for legal malpractice. Even if you prevail in defending the foreclosure on one or more of the substantive defenses, if you do not ascertain all other potentially interested parties in your intensive discovery, there is the distinct possibility that someone is going to come out of the woodwork down the road with the original note and mortgage and go “AHA, this property belongs to me!”, whereupon you, as the underlying foreclosure defense attorney, then get the letter from your client (or his malpractice attorney) requesting copies of your E&O or professional liability policy, dec sheet, etc.

Bottom line: file the Motion, do the discovery, and find out who all of the players were who may have an interest, and force the Plaintiff to add them as Defendants. In any settlement, make it an absolute “deal breaker” that the settling party sign an iron-clad  indemnification and hold harmless agreement, even if it means putting up a bond if the settling party’s future existence is dubious (a la Bear Stearns) or may be teetering on the verge of bankruptcy or closing its doors.

Stay tuned to this blog for examples of the type of discovery you will need to advance this most important issue in your client’s defense.

Preliminary Inquires Preceeding Foreclusure: A Small Investment in the Proper Letter May Open Many Doors and Avoid Nightmares Later

We have been receiving an increasing number of inquiries from foreclosure victims requesting our assistance in dealing with recalcitrant servicing companies who either ignore or send a “bluff response” to inquiry or demand letters sent by borrowers who are not attorneys. We have also received a literal deluge of telephone calls, e-mails, and faxes from borrowers who are attempting to advance defenses to foreclosure under Federal and state laws in court without the assistance of an attorney. In many of these instances, the borrower victims tell us, consistently, that when they try to make their arguments that the Judge “laughed at me”.

This harkens back to an article which I previously wrote for this blog advising on the dangers of going to court without an attorney, which is suggested reading. However, this article deals with the pre-foreclosure lawsuit process, where borrowers are being equally frustrated as well.

When a borrower sends a pre-foreclosure inquiry or demand letter to a “lender” or mortgage servicing company which touts citations to TILA violations, Federal law, and the like, the servicing company is going to do one of two things, either (a) realize that the borrower is probably “surfing the net” and trying to “play attorney”, knowing that a response of “there are no violations” is going to put the borrower on the defensive and confound them, or (b) send the letter to their attorney, who will likewise advise the borrower that they have no claim. In this instance, few if any borrowers know what to do next. An attorney versed in the concepts in this blog not only knows how to respond to this, but also undertakes efforts to avoid the type of “blow them off” response which is typically sent to a borrower. Recent responses from lenders and servicing companies to formal inquiry and demand letters crafted by attorneys associated with this blog show that when the letter is written by an attorney that the response is very different, and in certain instances which are becoming more frequent, the response is that the “lender” would like to engage in settlement discussions without going to court.

The entire tone for the negotiation and/or litigation process is often set by the initial inquiry or demand letter. A borrower who tries to do this on their own is invariably going to miss several, if not numerous, legal issues which, if properly presented by an attorney, should get the attention of the lender, servicing company, or their attorney(s), as it is this “first impression” which lasts. An attorney coming in after a borrower has muddied the waters is going to have more work ahead of him or her than an attorney who comes in at “ground zero”.

As such, the investment of a sum of money, at the initial stages of the process, with an attorney versed in foreclosure defense may be not only well worth it, but may ultimately save the borrower in the long run from having to hire an attorney to undo whatever damage the borrower did before hiring the attorney (sort of like an accountant trying to do a brake job on his own to save the cost of having a mechanic do it, only to have to pay the mechanic double when the brakes fail).

Those old adages like “a stitch in time saves nine”, and “penny wise and pound foolish” are pertinent here, as is the old commercial where the repairman says “well, you can pay me now or pay me later, but later is going to be a lot more”.

Once again, law is an extremely specialized field of endeavor which should not ever be “dabbled” in by non-lawyers. Doing so may not only result in you losing your home, but may also result in your having to pay the attorneys’ fees of the lawyer for the foreclosing party because the court or judge finds that what you attempted to argue was “frivolous”.