January 2, 2018
2016 and 2017 were home building boom years. Well-known builders produced over 300,000 new homes, priced mostly from $250,000 to $600,000. Lennar Homes, the nation’s number one home builder, increased its closings from 30,455 in 2014 to 41,652 in 2016. Two publicly-owned builders, AV Homes and The New Home Company, doubled their yearly closings from 2014 to 2016. Even with all of this, the construction of new homes in the United States falls below historical averages. There was also a boom in sales of existing homes, with sales rising to an expected annual rate of 5.48 million units. While there have been several years of major growth for home builders and existing home sales, Wall Street has not managed to revive sales in its related product, residential mortgage back securitized trusts. Wall Street failed to produce trusts with significant improved protections for investors. As a result, investors remained reluctant to return to mortgage funding. Here are some of the improvements still on investors’ wish lists for 2018.
1. Trusts with a Narrow Range of Principal Balances
Almost every trust made from 2002 to 2007 had loans with a very wide range of principal balances, often ranging from $20,000 to over $3 million.[i] American Homes Mortgage Asset Trust 2006-6, for example, included a loan for $4.9 million. Improved trusts would have a much smaller range of principal values: $200,000 to $600,000. Most investors are not interested in the more unusual loans that are more likely to result in higher realized losses if the borrower defaults.[ii] Investors are also not interested in giving discretion to securities companies to include outlier loans.
2. No “Stated Income” or “No Documentation” Loans
Most of the trusts made from 2002 to 2007 were filled with poor documentation, often with less than 50% of the loans being full documentation and the remainder being stated income documentation or no documentation loans. Improved trusts would only include loans with full documentation. NINJA Loans – no income, no assets, no job, no problem – were almost always a red flag for mortgage fraud.
3. No Loans to Flippers, Landlords or Investors
Almost every trust made from 2002 to 2007 included loans made to borrowers who had purchased five or more properties in the previous two years. These borrowers most often bought the properties to flip or to rent and paid grossly inflated prices. Multiple purchases in a short time were often a sign of an over-extended buyer or a straw buyer.[iii] Many borrowers who ended up in foreclosure court defaulted on multiple mortgages. Gregory Claude Brown, a convicted South Florida mortgage fraud defendant who was eventually sentenced to 240 months in prison, bought eight properties in three years including townhomes for $530,000 and $520,000 that sold for $135,000 and $115,000 after foreclosure. Most of these loans had been sold to mortgage-backed trusts and defaulted within one year of closing. Improved trusts would only have loans made to borrowers who own no more than two residential properties at the time of the loan.
4. No “Teaser Rate” Loans
Teaser rates were used liberally from 2004 through 2007 to attract borrowers with adjustable rate loans that begin with a very low rate and then increase after a few years. Borrowers were often told that they would be able to refinance before the increases occurred. In 2005 and 2006, the initial rate was typically 7% to 8%, but would adjust to 14% to 15%.[iv] Teaser rates went as low as 1%. Improved trusts would only include loans with a very limited range of adjustments of 2% to 3%.
5. No “Piggyback” Loans
Borrowers in 2005, 2006 and early 2007 often found that they could borrow 100% of the purchase price of a new home. Lenders most often split the loans, lending 80% and 20% of the purchase price or 70% and 30%, etc. These split loans were often referred to as piggybacked loans. Over 70% of the loans made by HLB Mortgage in Palm Beach County from 2005-2007, for example, were piggybacked loans, often for combined amounts of over $1 million. 92% of these loans failed by 2010. Many resulted in judgments of over $1 million. Improved trusts would only include loans where borrowers put up at least 10% of the purchase price from their own non-borrowed funds.
6. No Over-Appraised Homes
Fraudulent appraisals played a key role in the mortgage fraud crisis that accompanied the financial crisis of 2008. When federal prosecutors brought cases involving multi-million dollar schemes, the list of defendants almost always included a real estate appraiser.[v] Many appraisers reported that they were faced with losing work in a failing economy or helping to defraud mortgage lenders by over-appraising properties. Some appraisers confessed to doubling the value of properties, at the request of agents, borrowers and even lenders, in order to stay employed. Appraisers certified that houses that had sold for $50,000 three years earlier were suddenly worth $250,000, even though there had been no improvements. Houses that were more than 60 years old, less than 1,000 square feet, and wood frame construction in poor condition were appraised for $250,000 or greater. After foreclosure, these same houses would sell for $20,000. Improved trusts would exclude any loan for a property that had a price increase of $200,000 or greater in the previous five years.
Appraisal fraud often involved new construction of luxury condominiums. A scheme involving Oak Island Condominium in North Carolina involved $4.5 million in loans and 20 properties. Eight defendants were eventually charged and sentenced including three real estate agents, a mortgage broker, two promoters and a bank employee. A scheme on the west coast of Florida involved two luxury condominium projects, Portofino at Largo and Bayshore Landing in Tampa, and seventeen defendants. A scheme involving Jade Residences in Miami resulted in 13 individuals being indicted. Jade Residences was a 48-floor condominium in downtown Miami with units that sold for over $3 million. The building featured ocean, city and skyline views, kitchens with wine coolers and cappuccino makers, a 24-hour concierge, “cutting-edge” security, a 32,000 square foot recreational deck, high-speed elevators, a waterfall and reflecting pool, an infinity edge lap pool and a European spa. In April, 2010, 13 individuals were indicted in connection with an elaborate $16.9 million mortgage fraud scheme at Jade Residences that caused $9.7 million in losses to Wells Fargo Bank. The lead defendant was sentenced to 72 months in prison. Other defendants included a Wells Fargo loan officer who was bribed to approve loan applications, a title agent, a closing agent, a recruiter of straw buyers, and several straw buyers who paid between $1.5 and $3 million for units that should have sold for half of the loan amounts. Improved trusts would limit the percentage of loans for newly constructed condominiums.
7. No Wide-Range of Interest Rates
Almost every trust made from 2002 to 2007 had a wide range of current mortgage rates, with rates often ranging over 10%. Rates typically ranged from 2% to 16%. The improved trusts would have a range of no more than 2%, with the current rates for each loan ranging from 2.5% to 4.5%.
8. No Loans Endorsed by Allonges
The notes in any trust need to be endorsed to the trust. The majority of foreclosure cases filed from 2007 to 2010 were filed with a Lost Note Count – an allegation that the original note had been lost, stolen or destroyed. Most often, abut a year after the cases were filed, the banks then claimed they had found the notes. The “found” notes that the banks produced were often lacking any endorsement or were endorsed by an allonge. In improved trusts, each note would be endorsed to the trust with an endorsement on the last page of the note, beneath the borrower’s signature. Each endorsement would be dated. If there’s no room on the last page for the endorsements, then that loan should be excluded from the trust. There should be no loans in the improved trusts where the endorsements were made by an allonge.
9. No Notes with Undated Endorsements
The actual promissory notes are the best evidence of the loans. The notes identify the borrower and the lender, the amount of the loan, the location of the property and the repayment terms. Although notes can be lost or destroyed, that should actually be a rarity.[vi] In improved trusts, the schedule of loans and a pdf. file with the endorsed notes should be filed with the Pooling and Servicing Agreement and readily available to investors.
10. No Loans Without Corresponding Filed Mortgage Assignments
The improved trusts would only include loans with at least two signed and filed mortgage assignments for each loan in the trust. The first assignment should be from the loan originator to the trust depositor. The second assignment should be from the trust depositor to the trust. If anyone other than the originators and the depositors owned the loan, there should be an assignment from that owner as well. The assignments from each owner would be signed, notarized and filed in the official county records where the properties are located no later than 90 days after the closing date of the trust. No exceptions would be made for MERS mortgages.
If they build it, investors will come.
[i] Examples of trusts with a wide range of principal balances include:
American Home Mortgage Assets Trust 2005-1
Principal Balance Range: $40,000 to $3,500,000
American Home Mortgage Investment Trust 2005-1
Principal Balance Range: $30,000 to $4,241,196
Carrington Mortgage Loan Trust 2005-FRE1
Principal Balance Range: $6,665 to $1,000,000
Citigroup Mortgage Loan Trust 2006-4
Principal Balance Range: $22,563 to $959,621,000
First Franklin Mortgage Loan Trust 2005-FF4
Principal Balance Range: $22,950 to $1,000,000
Harborview Mortgage Loan Trust 2006-1
Principal Balance Range: $29,750 to $2,000,000
HSI Asset Securitization Corp. Trust 2006-NC1
Principal Balance Range: $54,900 to $1,000,000
Long Beach Mortgage Loan Trust 2006-1
Principal Balance Range: $20,000 to $720,000
Morgan Stanley ABS Capital 1, Inc. Trust 2005-WMC1
Principal Balance Range: $10,692 to $986,213
New Century Alternative Mortgage Loan Trust 2006-ALT1
Principal Balance Range: $27,000 to $1,491,215
Option One Mortgage Loan Trust 2006-1
Principal Balance Range: $17,700 to $1,690,000
Soundview Home Loan Trust 2005-OPT2
Principal Balance Range: $15,000 to $1,620,000
Wells Fargo Mortgage Backed Securities 2005-AR1 Trust
Principal Balance Range: $14,000 to $3,000,000
[ii] See, e.g., “How A Trust Lost Over $10 Million on Just One Loan,” Lynn Szymoniak, The Housing Justice Foundation, July 7, 2014.
[iii] See, e.g., the following cases involving convicted straw buyers:
USA v. Charles Zalcberg, 1:2011mj02813, Southern District of Florida
Zalcberg was identified as a straw buyer in a mortgage fraud scheme and convicted of attempt and conspiracy to commit mail fraud. Zalcberg bought six single family homes for $1,410,900 from February 2007 to July 2008. After foreclosures, the total resale price of all six homes was $133,600.
USA v. Anita Sharma, 2:2013cr00084, Eastern District of California
Sharma, a dental assistant at the time, was identified as a straw buyer in a mortgage fraud scheme in California. Sharma purchased five properties in San Jose, San Ramon, Elk Grove, Sacramento and Modesto. Sharma and her co-defendants were convicted by a federal court jury in November 2017 and are scheduled to be sentenced in January 2018. Sharma’s co-defendants were Surjit Singh and his son, Rajeshwar Singh. The scheme involved 14 properties.
USA v. Albert William Roberts, 4:12-cr-00160-BCW, Western District of Missouri
Roberts was convicted of four counts of wire fraud in 2016 and sentenced to four years in prison for a $3.7 million mortgage fraud scheme involving 12 mortgage loans.
USA v. Mary Ann Paschal, 2:13cr20565-BAF-RSW-1, Eastern District of Michigan
Paschal was convicted and sentenced to one year and one day in prison for her role as a straw buyer involving at least five properties. Paschal was also ordered to pay restitution of $523,750. Nine defendants were sentenced in the scheme that involved single-family homes in Detroit that were purchased for $5,000 to $40,000 each and res-sold to straw buyers.
USA v. Alex Blackmore, 1:2013cr00290, Northern District of Ohio
Blackmore was the straw buyer of three properties in Medina, Ohio in a $3.3 million scheme involving six properties. Blackmore was sentenced to one year and one day in prison. Thomas France, a co-defendant and real estate agent, was sentenced t ten years in prison.
USA v. Robert Rosenstein, 1:2010cr00498, Northern District of Ohio
Dr. Robert Rosenstein was convicted of being a straw buyer in a scheme involving two mortgage loans for $2.9 million to purchase properties in Panama City, Florida.
USA v. John Bingaman, 1:2013cr00598, District of New Jersey
Bingaman was convicted of being a straw buyer in a scheme involving three properties in Wildwood and Wildwood Crest, New Jersey. The scheme involved 12 co-defendants and $13 million in mortgage loans. Bingaman was sentenced to four months in prison and ordered to pay $61,388 in restitution.
[iv] Examples of initial rates and maximum adjusted rate include the following mortgages filed in Palm Beach County, FL on January 4, 2006:
File #20060005444: 8.7% to 15.7%, New Century MTG
File #20060006501: 6.95% to 13.95%, New Century MTG
File #20060003703: 7.475% to 14.475%, New Century MTG
File #20060006642: 9.95% to 16.95%, New Century MTG
File #20060005665: 8.8% to 15.8%, Novastar Mortgage
File #20060006540: 9.8% to 16.8%, Novastar Mortgage
File #20060004122: 6.875 to 13.875, Novastar Mortgage
File #20060005180: 8.15% to 15.15%, Ameriquest Mortgage
File #20060005211: 7.2% to 13.2%, Ameriquest Mortgage
File #20060006667: 7.375% to 13.375%, Indymac Bank
File #20060005455: 6.875% to 11.875%, Indymac Bank
File #20060006231: 6.25% to 11.25%, Indymac Bank
File #20060003560: 1% to 9.95%, Countrywide Bank
File #20060004890: 1% to 9.95%, Countrywide Bank
File #20060005210: 3% to 9.95%, Countrywide Bank
File #20060006040: 8.375% to 14.375%, First Franklin
File #20060006056: 9.9% to 15.9%, Option One Mortgage
File #20060004908: 9.7% to 15.7%, Option One Mortgage
File #20060003807: 8.94% to 14.94%, Option One Mortgage
File #20060004616: 5.375% to 10.375%, American Brokers Conduit
File #20060006294: 8.250 to 14.250, Tri Star Lending
File #20060003339: 7.9% to 14.9%, America’s Wholesale Lender
File #20060005958: 1.5% to 9.95%, America’s Wholesale Lender
File #20060006045: 2% to 9.95%, America’s Wholesale Lender
File #20060006138: 8.75% to 15.75%, America’s Wholesale Lender
File #20060003580: 2% to 9.95%, America’s Wholesale Lender
File #20060005307: 1.5% to 9.95%, America’s Wholesale Lender
[v] See, e.g. the following cases involving convicted real estate appraisers:
USA v. Lila Rizk, 2:2007cr00755, Central District of California
Rizk, a former state-licensed real estate appraiser, was convicted of conspiracy, bank fraud and loan fraud charges in a $46 million mortgage fraud scheme. She was sentenced to three years in prison. Rizk helped others in the scheme obtain inflated mortgages on homes in some of California’s most expensive neighborhoods including Beverly Hills, Bel Air, Pebble Beach, La Jolla and Malibu. According to prosecutors, Rizk’s appraisals typically valued homes at three times their true value.
USA v. Rejis Lamont Williams, 3:2008cr00153, Northern District of Texas
Williams and seven other defendants were convicted in a multimillion dollar mortgage fraud scheme that operated in the Dallas area. Williams, who did business as Executive Certified Appraisal, was sentenced to 46 months in prison. Williams, who did business as Executive Certified Appraisal, was convicted on one count of conspiracy to commit wire fraud, one count of bank fraud and aiding and abetting, nine counts of wire fraud and aiding and abetting, and five counts of engaging in a monetary transaction with criminally derived property and aiding and abetting. Eric Farrington, the lead defendant, was sentenced t eleven years in prison. Farrington was a motivational speaker and author wo ran infomercials on late night television on making money in real estate.
USA v. Julian Perez, 1:05cr00269-TWT-JFK, Northern District of Georgia
Perez, a certified appraiser, was involved in a mortgage fraud scheme in the Atlanta, Georgia area involving over 300 homes and condominiums and $41 million in losses. Perez was sentenced to 50 months in prison and ordered to pay $28,198,227 in restitution. Phillip Hill, the leader in the scheme, was sentenced to 28 years in prison and ordered to pay $41,764,244 in restitution. He was convicted on 166 felony counts after an eight-week trial.
USA v. James Lignelli, 2:2011cr02234, Western District of Pennsylvania
Lignelli was found guilty of bank fraud for his involvement in a mortgage fraud scheme in Pittsburgh. Prosecutors alleged that Lignelli produced inflated appraisals for multi-million dollar properties. Lignelli was sentenced to 42 months in prison.
[vi] Lost and destroyed notes were one of the single most significant problems with trusts made from 2004 to 2007.