February 5th, 2012
Econintersect: In 1988 Nye Lavalle (pictured), a successful sports management consultant, tried to pay off a $100,000 mortgage on his family’s Dallas home valued at about $175,000. All mortgage payments had been made on time and in full but the bank said that he owed far more than the $100,000 unpaid principal. The lender, Savings of America, had repeatedly applied late fees to the account when none were justified and had added unnecessary appraisals and charges for hazard insurance that had not authorized. The bank was unresponsive to appeals for resolution. Lavalle, with the financial support of his family, fought through the courts for a remedy to the situation. After seven years and a small fortune later the bank took the house.
The story is detailed in the New York Times in a February 4, 2012 article by Gretchen Morgenson. This article (link in Sources at end of this article) is a must read. Here are some of the facts that are woven into the story recounted by Morgenson:
- Lavalle launched a 20 year research effort to learn how the mortgage industry was run.
- By 1996 he had identified what appeared to be forged signatures on foreclosure documents.
- He took his findings to Banc One, Bear Stearns, Countrywide Financial, Freddie Mac, JPMorgan, Washington Mutual and others.
- Only a few responded. They later said his claims were not valid.
- In December, 2003 Lavalle presented a dossier of improprieties conducted by loan servicing companies that worked for Fannie Mae over to that firm.
- For the next two years He corresponded with Fannie Mae and their attorneys.
- In 2005 he informed Fannie Mae that some judges had ruled the Stern firm (a major foreclosure process law firm in Florida) was submitting “sham pleadings.”
- In 2006 a law firm retained by Fannie Mae used some of Lavalle’s research issued a 147-page report corroborating many of his findings.
- Lavalle found that Fannie Mae was not properly marking promissory notes “cancelled” when mortgages were paid. Instead they returned notes to lenders unmarked. This left open the possibility that the already paid notes could be presented for collection again or used as collateral.
The Morgenson article discusses some of the issues that have been discussed by others in articles posted a Global Economic Intersection. A partial list of references is given in Sources at the end of this article.
Following is an excerpt from the law firm report to Fannie Mae about Lavalle’s research and complaints. This report of 147 pages, known as OJC Case No. 5595 was completed by and presented by the law firm on May 19, 2006 . According to the Morgenson article no corrective action has been found to have resulted from the OJC Case No. 5595 report in spite of the fact that it confirms many of Lavalle’s specific allegations.
Here is an excerpt from OJC Case No. 5595 which indicates that the legal team was dismissive of the passion and frustration Lavalle expressed about more than 15 years of research into blatant fraud that was being ignored:
In spite of the report by the attorneys supporting some of Lavalle’s allegations they showed a complete lack of understanding of a significant aspect of the problem. The report says:
The problem was not with Fannie Mae’s books. The problem was that the promissory note connection with the mortgage was often severed by improper title transfers (actually forgone transfers) in local county records offices. Fannie Mae may have had the promissory notes properly recorded on the corporate books but the connection to the security had been broken in many cases through the machinations of the electronic records system MERS.
It appears that the attorneys who wrote this report did not understand the mortgage system operational details.
GEI guest author William K. Black has reported that there were many mortgage fraud reports referred to the Justice Department as early as 2004. The report by Fannie Mae’s attorneys was two years after that. Yves Smith has written a very clear detailed summary of the conveyance problem that was apparently not understood by the authors of OJC Case No. 5595.
Sources and References:
A Mortgage Tornado Warning, Unheeded (Gretchen Morgenson, The New York Times, February 4, 2012)
Report to Fannie Mae Regarding Shareholder Complaints be Mr. Nye Lavalle (Report OCJ Case No. 5595 by Mark A. Cymrot and Ambika Gibbs of Baker & Hostetler LLP, May 19, 2006)
The Virgin Crisis: Systematically Ignoring Fraud as a Systematic Risk (William K. Black, GEI Analysis, November 11, 2011)
The Mortgage Mess (Yves Smith, GEI Analysis, October 13, 2010)
Hat tip to Roger Erickson.