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.”