Articles Posted in Mortgage Fraud

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These days, it is not uncommon for mortgages to be sold or transferred. Many mortgages start out with one company and are almost immediately transferred to a different bank or loan servicing agency. In fact, most homeowners who finance through a mortgage, are probably not paying the same company who originally provided the loan. You may be asking yourself, why does this happen, and how does it affect the average homeowner?

Anyone who has applied for a mortgage can attest to the fact there is no shortage of paperwork to fill out during the process. Very few people actually take the time to read the fine print. In fact, most simply verify the important terms then sign and initial as applicable. However, in most, if not all mortgage contracts, there is a clause stating whether or not their mortgage will be sold or transferred. This language is required by Title 12 Chapter 27 § 2605 of the U.S. Code.

Generally speaking, there are two parts of a mortgage that can be transferred or sold. The two components do not even have to be owned by the same company. However, to most homeowners the distinction is non-existent except in name. The first component is the actual mortgage, also called the note. The note is what sets forth the terms of loan, including the amount owed and when. The note is almost always secured by a deed of trust on the physical property. In Arizona, this is what allows banks to foreclose on homeowners who fail to pay their mortgages. This is what’s known as a non-judicial foreclosure.

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With the Arizona housing market making a recovery, potential home buyers need to be aware of pitfalls regarding mortgage fraud and real estate. Residential mortgage fraud is governed by Arizona Revised Statute § 13-2320. Although the purpose if this article is not to discuss criminal implications of mortgage fraud, a brief definition may be helpful. Generally, a person commits mortgage fraud if they make deliberate misstatements or material omissions during the mortgage lending process that is relied on by a mortgage lender, borrower or other party to the mortgage lending process. Again, this is only an overview and not intended to cover all aspects of what is or is not considered mortgage fraud.

In general, fraud must include at least one person committing an act and at least one other person relying on that act to complete the transaction. There could be more than two parties involved depending on the details. Fraud can either be prosecuted at the Federal level or State level depending on the circumstances of a case. Moreover, fraud can be perpetrated by different parties to a transaction including the buyer, seller or lender.

In addition to criminal penalties, there can also be civil liability for fraud. Arizona Revised Statute §33-420 allows a claim for damages for recording documents that are forged, groundless, contain a material misstatement or a false claim or are otherwise invalid. In addition to this statute there may also be liability for breach of contract, breach of fiduciary duties or breach of the implied duty of good faith and fair dealing among others. All of these claims provide for monetary relief to a victim of a fraudulent transaction. However, often times those perpetrating the fraud don’t have much to collect from, because of this it’s important to make sure the transaction is on the up and up before it’s completed. Taking steps ahead of time may be more costly and time consuming then skipping them, but it is very small relative to the time and expense it costs to fix them once the transaction is complete. This is especially true when dealing with larger transactions.

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A.R.S. § 33-420 permits a cause of action to quiet title to property and, among other things, also permits a claim for damages arising out of recording of documents that are forged, groundless, contains a material misstatement or false claim, or is otherwise invalid.

The Court of Appeals for the State of Arizona recently considered a case dealing with these issues as they arise within the context of multiple assignments of the lender’s interests in the home through MERS (Mortgage Electronic Registration System).

The case is Sitton v. Deutsche Bank National Trust Co. which was decided on September 5, 2013. In this case, the homeowner undeniably fell behind on her mortgage payments. During the time she owned the home, the mortgage loan was transferred to a variety of assignees. Crucial, however, was the fact that the original mortgage lender assigned its interest to MERS who then became the mortgage of record (and privately kept track of assignments from MERS to subsequent assignees even though MERS always remained the mortgage of record).

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In the recent Arizona Supreme Court case of Hogan v. Washington Mutual Bank, the Arizona Supreme Court ruled that Arizona’s non-judicial foreclosure statutes do not require the beneficiary to prove its authority or “show the note” before the trustee may commence a non-judicial foreclosure.

In Hogan, the borrower, John Hogan, borrowed money to purchase two properties. Each of the loans was secured by a deed of trust. Hogan defaulted on both loans, which triggered non-judicial foreclosure proceedings. After receiving a notice of trustee’s sale for each of the properties, Hogan sued to stop the trustee’s sales. Hogan asserted that the lenders could not proceed with the trustees sales until they “showed the promissory notes” signed by Hogan and the lender in connection with the underlying transaction.

The Superior Court dismissed Hogan’s lawsuit and the Court of Appeals affirmed the trial court’s decision. The Arizona Supreme Court decided to hear the issue because it presented a recurring issue of first impression and statewide importance.

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When you have been fraudulently induced into signing a contract, you may be able entitled to have the contract rescinded. Rescission means that the contract is set aside or annulled, as if it had not existed. When a contract is rescinded, the agreement is extinguished, neither side has any more obligations under the contract and both sides are, as much as possible, restored to their condition prior to entering the contract. 

A contract can be rescinded if the contract was signed based on fraud. The plaintiff has the burden of proving the nine elements of common law fraud: 1) A representation; 2) its falsity; 3) its materiality; 4) the speaker’s knowledge of its falsity or ignorance of its truth; 5) his intent that it should be acted upon by the person and in the manner reasonably contemplated; 6) the hearer’s ignorance of its falsity; 7) his reliance on its truth; 8) his right to rely thereon; 9) his consequent and proximate injury. Hall v. Romero, 141 Ariz. 120, 124, 685 P.2d 757 (App. 1984).

If you prevail in your claim for rescission, you may recover monetary damages in the amount that you paid under the contract. In addition, you also may be entitled to consequential damages in an amount necessary to make you whole, i.e., to place you back in the economic position you had prior to the rescinded transaction.

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On February 9, 2012, the attorney generals from all 50 states entered into a settlement agreement with five of the largest mortgage lenders in the country. This settlement agreement was subsequently submitted to federal court, and was approved on April 4, 2012. The five mortgage lenders agreeing to the settlement were Bank of America, Chase, Citibank, GMAC/Ally, and Wells Fargo.

The settlement targeted changes in these lenders foreclosure practices which were done in contravention to state and federal law. Included among those practices were the now infamous “robo-signing” (in which mortgage lender’s employees signed foreclosure affidavits under oath without reviewing the accuracy of the sworn statements), and dual-tracking (the practice of offering loan modifications while simultaneously proceeding with foreclosure). These practices, and others identified in the settlement agreement, are believed to have led to many improper foreclosures and exacerbated the housing crisis.

The settlement also provides monetary relief aimed at redressing several different issues. First, the settlement provides $17 billion to assist borrowers to stay in their homes. No less than 60% of this amount will be utilized to reduce the principal balances on loans now in default or at risk of default. Second, $5.2 billion will be allocated to facilitate short sales, payment forbearance for those caught between jobs, relocation assistance, remediation for blight, and even waiving deficiency balances.

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1387291_decorative_house_in_sunlight.jpgBolstered by the recent verdict in United States v. Eitan Maximov in the United States District Court, District of Arizona, the FBI’s Arizona Mortgage Fraud Task Force continues to crackdown on perpetrators of mortgage fraud in the Phoenix area.

Eitan Maximov was sentenced to eight and half years in federal prison after a jury found him guilty of one count of wire fraud and one count of conspiracy to commit wire fraud. Maximov, with the help of several conspirators, had implemented a “cash back” mortgage scheme involving ten residential properties in the Scottsdale area. This type of fraud requires filing false documents with lenders in order to establish legitimacy and qualifications for otherwise unqualified “straw buyers”. Loans are secured in excess of the selling price of properties to be purchased by such “straw buyers” and the excess funds are taken by the conspirators through escrow. Additional monies are then extracted from the properties through the use of home equity lines of credit. The properties are subsequently allowed to fall into foreclosure.

In the Maximov case, most of the fraudulently obtained loans exceeded a million dollars and the Court determined that the conspiracy resulted in actual and intended losses to the lending institutions which approached $6.5 million. Maximov had no legitimate source of income and spent his ill-gotten gains on lavish luxury items.

When Maximov’s primary residence was allowed to fall into foreclosure, he stripped the property of all assets and attempted to repurchase it under an assumed name at a substantially reduced price. Failing to reacquire the property, Maximov settled for a lease to buy option on a luxury condominium at Esplanade Place. This condo carried a monthly rent of $5,000.00 and a purchase price of $1.4 million dollars.
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