Back in the day, law offices actually employed their own staff to do the office work in foreclosures. But in the past half decade, several high-volume foreclosure law firms (called by some "foreclosure mills") have taken a new tactic: spinning off their back-office work into a separate entity, selling the entity to a private equity firm for millions of dollars, and then leasing back these same employees to process their foreclosure paperwork.
As we all know, the mortgage funding world changed dramatically in the past few decades. Back in the 'day', the bank which provided the mortgage used its own funds to finance the mortgage, collected on it directly, and held the note as its own mortgage. Over time, mortgages were sold off after the bank originally issued them, so that banks, which paid depositors volatile short-term interest rates, were not stuck receiving fixed long-term interest on mortgages. Groups of mortgages were bundled together and sold as a package. More recently, these packages of mortgages were "securitized": sliced up and the right to receive the income from the slices in order of priority was sold to investors world wide.With the housing bubble collapse of the past few years, foreclosures zoomed, although not in western New York, where housing prices were stable. A legal issue in foreclosures is ownership of the mortgage. We see a similar issue in bankruptcy cases, where the purported mortgage owner files a claim for its mortgage. In Chapter 13 cases, if a debtor falls behind on post-petition mortgage payments, the mortgage owner will make a "lift stay" motion in bankruptcy court asking permission to start or resume a foreclosure.In all three of these legal situations - foreclosures, bankruptcy claims, and lift stay motions, the mortgage holder must prove it actually owns the mortgage. Foreclosure and bankruptcy law has not been updated in relation to the securitization of mortgages, and property owners have sometimes challenged ownership issues in bankruptcy and foreclosure courts. Recent newspaper articles have highlighted the paper-trail issues now facing foreclosure attorneys.I would like to highlight three blogs from "Credit Slips", a thoughtful blog on "credit, finance, and bankruptcy." These three blogs were written over a year ago (August 2009) by O. Max Gardner III, but there are a very thoughtful analysis of the evidentiary complications mortgage securitization presents to mortgage holders:The Alphabet Problem and the Pooling and Servicing Agreements (August 14, 2009)Show Me the Original Note and I Will Show You the Money (August 17, 2010)The Lack of Evidentiary Foundations Fosters Fraud (August 18, 2009)
The Amherst, NY law office of Steven J. Baum, the biggest foreclosure law firm in New York, has been getting some heat recently. I will be posting a separate blog about the complicated relationship between the Baum office and Pillar processing LLC. But independent of Pillar problems, Baum has been on the receiving end of some homeowner counter-suits in the New York City area.According to The Buffalo News (October 17, 2010 article by Jonathan P. Epstein), an attorney in New York City, representing two homeowners there, has sued Baum for "knowingly and fraudulently filing foreclosures, paperwork and false notarizations statewide on behalf of lenders that don't hold the actual mortgages, including HSBC Bank USA and its mortgage subsidiary." The Buffalo News reports that the Baum law firm was founded in 1972 by Marvin Baum. Steven Baum, his son, took over in 1999, after Marvin Baum's death. The New York Post reported on July 6 that Judge Arthur M. Schanck of Brooklyn dismissed a foreclosure there in part because of alleged conflict-of-interest by an attorney in the Baum office. According to The Post. "a Baum lawyer. . . signed papers claiming to be an executive of Mortgage Electronic Registration System, or MERS, which was given certain rights to the mortgages by the broker, Fremont Investment and Loan, while simultaneously representing Fremont and US Bank, which filed the foreclosure in July 2009. 'The Court is concerned that the concurrent representation by [the Baum firm] of both assignor MERS, as nominee for Fremont, and assignee plaintiff US Bank is a conflict of interest,' Schack wrote." The New York Times (Article October 3, 2010 by Gretchen Morgenson) reported that the United States Trustee in New York City supported the application of a Bronx bankruptcy debtor to sanction JP Morgan Chase for dubious foreclosure documentation in the Chapter 7 bankruptcy case of Sylvia Nuer (SDNY Bk 08-14106).