Your Mortgage Questions Answered: Consumer Lawyer Max Gardner

BY Paul Solman  October 27, 2010 at 1:10 PM EST

Editor’s Note: In Show Me the Mortgage, Paul Solman talked to “the dean of the bankruptcy bar,” North Carolina lawyer Max Gardner, about the possibly fraudulent paperwork banks are under investigation for using. Gardner answers viewer and reader mortgage questions.

Making Sense

Name: Jessica

Question: Please help us with some strategies. My house is in foreclosure and I am still living there, but I don’t know what to do. I met with a lawyer but he told me to wait because it’s too soon and they don’t yet know if Bank Of America can be sued.


Max Gardner: If the foreclosure involved the use of false, fraudulent or improper documents, such as affidavits of ownership or default, then under the laws of most states you can file a motion for relief from the judgment for a period of one year after the date of entry. Fraud, misrepresentation or misconduct provides grounds for such relief under the Rules of Civil Procedure.

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Name: Angel

Question: What recourse is available to those who have been foreclosed upon as a result of the court’s reliance on fabricated assignments and affidavits not discovered until after the foreclosure? We know to get an attorney, but mortgage-backed securities are relatively new to most attorneys. Can you offer up some possible claims or strategies?

Max Gardner: See my answer to Jessica, above. Under the laws of most states you can file a motion for relief from the judgment for a period of one year after the date of entry.
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Name: Domingo

Question: During the last few years, dirty business practices created a bad image of the mortgage industry. When will they recover the confidence of decent consumers?

Max Garner: I believe it will take massive reform on the Federal level, the enforcement of existing statutes, and new consumer protection regulations under the Dodd-Frank Act to restore consumer confidence in our financial system. In my view, this will take 20 to 30 years.

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Name: D McMahon

Question: How many foreclosures have there been since January 2007? How many voluntary modifications with reduced principal were there during this period? What is the actual government cost for all the mortgage modifications to date? How much has been allocated by the government to fund modifications? Does a bank make money in a foreclosure? Do they collect mortgage insurance to cover losses?

Max Gardner: The mortgage servicers certainly make more income on servicing mortgage loans that are in default than they do on performing loans. The standard servicing fee paid by a securitized mortgage trust for servicing a mortgage loan is 25 basis points based on the average outstanding principal balance. As a result, if the average balance on the loan was $200,000, then the servicer would receive $500 per year to service the loan (approximately $41.50 per month).

In most cases the late charge, which the servicer gets to retain, is actually more than the fixed monthly servicing fees. These fixed servicing fees have been in place for more than 25 years. The financial incentive to put a loan in default is pretty obvious. For a securitized loan, the investors who purchased the mortgage backed securities are the parties who take the loss when a loan is foreclosed. Many of these investors have insurance, such as credit default swaps, that will cover some (but not all) of the losses. And, for the lower-grade investors, the losses may result in a total loss of the initial investment.

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Name: Lrjohnston49

Question: If you have considerable equity in your home (over $500,000) and you owe $100,00 on your mortgage, can the equity in your home be applied to the unpaid balance on your delinquent loan, thus preventing foreclosure?

Max Gardner: This would be a great way to make it work, but the answer is no. And, I want to meet the homeowner who currently has this much equity in their home!

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Name: Ann

Question: Can the note recorded at the courthouse be out of date with no notification to the owner of the property? About a year ago when Washington Mutual mortgages became Chase mortgages, I phoned and asked who owns my mortgage. It was my understanding that it was a portfolio loan from Washington Mutual, and therefore assumed it was now a portfolio loan from Chase. My loan was, and is, current.

The representative said Bank of America now owned all of those mortgages. That was news to me, so I phoned again and another representative said that was wrong- Chase owned the loan. I asked if they owned and serviced the loan, and they said yes. I didn’t ask for the note, but they sent one anyway. It matches the one I have and the one recorded at the county. It still says Washington Mutual. What if the second representative was wrong too? Does Washington Mutual still own the mortgage, or does Chase? Or has it been sold to Bank of America? Or China? Or maybe Bank of America answers the phone for Chase. Could the first note recorded at the courthouse that says Washington Mutual now be outdated? Why don’t owners get copies of new notes automatically when their loans are sold?

Max Gardner: The mortgage or the deed of trust is the security instrument that is recorded with the local land registry. The note (promise to pay) is the instrument that is sold and securitized on the secondary mortgage market. The MERS system (whereby MERS is the nominee on the deed of trust or note for the originator and all successors and assigns) makes it impossible to check your local land records and determine who owns the note. And, finally, mortgage servicers collect payments; they do not own the notes.

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Name: Jessica

Question: What can we do if our home went into foreclosure during the time that we were working with the bank on a loan modification? We were told not to worry about it because the loan was in process. But after three days, we received a letter stating the house was sold.

Max Gardner: I would consider breach of contract, lack of good faith and fair dealing, unfair and deceptive trade practice, and other claims against such a servicer.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions _Follow Paul on Twitter._