32: The Amateur Activists Who Took On The Foreclosure Machine

of the crisis to in today's edition. And it's a story that I think a lot of people know because they've read books like The Big Short or they've seen the movie, and so they know all of the troubles that happened on Wall Street and everything, all the money that was lost. But today we're gonna talk about the same story from literally, I would say, the exact opposite angle. The opposite angle. What do you mean. Well, so we know, of course what happened with all the major banks and

how much money they lost and everything. But what we don't have from many of these stories is the human angle on the own. So we know that housing crashed, and we know that all these people lost their homes and these foreclosures rippled through all these securities that Wall Street had made a fortune on, But we don't really know about these same securities from the perspective of the homeowner. Ah So this is like the epilogue to the housing crash, right,

this is what happened afterwards. Yeah, I think that's that's exactly right. And um, there's also, um, in addition to the fact that we're going to talk about the story from a totally different angle, Uh, there's also a really interesting tech angle to this story. Because as these foreclosures and the housing collapse rolled on, it was, you know, this was totally new territory for a lot of people. People didn't know how it was going to work, losing

their homes. And so the fact that this happened at a time of blogging in the Internet allowed people to learn about what was going on around them in a way that they probably could and have in any other era. So I remember actually writing a little bit about this in two thousand and ten. I think it was the idea that all these people who had their homes foreclosed on were sort of gathering together online to figure out how best to fight the banks or whoever they sort

of owed money too. It was a really big deal at the time. Absolutely. And so today we're joined by David Diane. He's the author of Chain of Title. It's a book all about how these amateurs who had no prior knowledge of the legal system, the housing law, foreclosure rules, housing finance, basically educated themselves and learned that all these foreclosures that were going on were essentially being done illegitimately with false paperwork or people who were foreclosing without proper

standing to foreclose. And it's about how they banded together and use the internet to find each other to teach themselves how this super complicated stuff were to fight against what they saw as these illegitimate foreclosures. And it's a fascinating book. I'm really excited for this one. Let's get started, all right, David, thank you very much for joining us here in studio. Thanks for having me. I think you summed it up. I think I'm at home, all right. Well,

thanks very all right. Well that was this week's edition of Online. You know, you tell her you could probably summarize it better than me. But what what is the essence of your book and why were you moved to write this book? Well, this is true. I did a story. I wanted to write this story from the perspective of those most powerfully affected by the financial crisis. There's been over four hundred books. There's actually a website out there that shows how many books there have been about the

financial crisis, and it's over four hundred. I think I would have been able to name about four or five. I didn't realize just quite definite. So I did want to attack it from a different angle. And and look at these people who, as you said, had no institutional knowledge resources. We're fighting their own foreclosures and suddenly stumbled upon this big secret and uh, and it was really

kind of a revolutionary act that they did. They read their own mortgage documents and they found these discrepancies in them, and then they instead of just using that to fight their own cases, they decided to look in the public records and become citizen journalists in a way. And uh, they found each other and then decided really to build a movement around this that to to to get this into the hands of people who could maybe do something

about it. David, can you give us a sort of quick description of the way mortgages are typically well, how they typically work and are assigned in the sort of mortgage framework in the US, because that's a big part of the story, right, absolutely, So during the how thing about what we saw is this tremendous amount of private label securitization. So a usually non bank issuer would issue

you a mortgage. That mortgage would immediately be sold to an investment bank, thrown through a few other intermediaries, and then put into a trust administered by a trustee UH. That trust, out of which the pass through certificates and mortgage backed securities would then be sold all over the world to UH you know, a Norwegian sovereign wealth funder in Indiana, public pension funder, whoever. UM. And there are very precise steps both in public law and in the

governing documents. The pooling and Servicing agreement is what it's known as UH. Behind how trusts are created and how you transfer property. It's very deliberate. It. The first property records law in the United States is predates the Constitution by a hundred and fifty years. UH. Sixteen thirties was

the first property recording office in the country. UH. And you're supposed to go be able to go to your county recording office and see the chain of title from the initial construction of the property all the way to the present day. And banks did not take those steps very intentionally, did not take those steps they they found

them either inconvenient or too costly or for whatever reason. Uh, these very precise steps of how to transfer a mortgage, and particularly how to transfer a mortgage into a trust which is tax advantaged, and you have to do it in a specific way to maintain and receive those tax advantages. Uh. That was what was not done, and that that causes a rupture in the chain of title. And in order to paper over that, uh, they literally papered over it with bad paper, with with bad false documents. Yeah, go

into that. So we had this, We had this massive economic downturn. We saw a unprecedented national downturn in home prices. Lots of people lost their jobs. Obviously a lot of people stopped paying their mortgage. But what did people discover when they started looking into these documents? What specifically did they discover that their view was being done wrong and made a lot of these foreclosures illegitimate. Right, Well, this

is all about standing in illegal context. So, uh, if I said that Joe, you you stole my car, I would have to come up with a piece of paper in a court in order to sue you that that says I owned the car. And this was the documentation that was really missing, uh, and that was confused, and so in order to rectify that, the industry UH basically

mocked up the documents after the fact. And so you know, for example, Lisa Epstein gets her mortgage assigns someone in your book, Lisa Epstein is a cancer nurse who was a foreclosure victim. Uh. She kind of kicks off the book and she gets this mortgage assignment and it's Uh, US Bank is the entity foreclosing on her. She didn't know who U S Bank was. She thought it was a fi fational name from a movie, because there's no US Bank in Florida. Uh, and they were the trustee

uh that that somehow got her mortgage through these this process. Uh. The assignment was made to US Bank and was dated as of May May two thousand nine. She was foreclosed on in February two thousand nine. So by the evidence that US Bank gave that they owned this loan, they didn't own it at the time that they foreclosed on her.

And that's just one example of many, not just in her case, but in millions of cases, UH, in in situations where because not everywhere in America do you actually need to go through a court to foreclose, but in Florida you did, and that's why the this was sort

of the epicenter. But I remember at the time there was a lot of talk about judicial versus non judicial core and so a lot of your book centers around what happened in Florida, which is a judicial state, which means that to do a foreclosure you actually have to go see aud right, you need judicial sign off. And in fact of one thing the industry did is try to make Florida a non judicial state. And uh my, my activists they went up to Tallahassee and through a

rally and did a lobby day. They haltered it for about three years, and uh even what ended up getting done was not completely you know, eliminating the judicial part of the system. So they were successful in that event. So how we're I mean, we are talking about very very technical mortgage law here, assigning notes what needs to be done, going down to the county courthouse. How did people actually figure out how to mount these sorts of

legal battles? They were really self taught. Uh, you know, foreclosure law wasn't a booming industry prior to two thousand seven, two thousand eight. Uh. There was not a lot of understanding, both from the perspective of homeowners defense attorneys who were mostly closing attorneys who then you know when now the bubbles going down, so let's get into foreclosure law uh uh and judges even uh. There just wasn't a lot

of understanding of it. And so what Lisa and Michael Redman who was a car salesman, and Lynn Simoniac who was a lawyer but mainly involved in in a different kind of white collar crime, insurance fraud. Mainly, what they did is they really self taught themselves. They they they went through pooling and servicing agreements, They went through the public records, looked at assignments, found all these patterns. Uh. Michael built a guide to look through the public records.

They got very popular online. People started looking through the public records with them, and it really was that era of the blog is sphere, where you could have this sort of networked community that could distribute information, collaborate on information, and amplify each other's work. And they would find things in the paperwork that were so stunning that when they brought it to legal professionals, the professionals first reaction was

we don't this cannot be right. They didn't believe what some examples, I mean, it just really blew people's mind when they were discovered. Well, these third party companies that were hired to mock up these documents, these were low margin businesses. They were not very sophisticated operations, and so they did all kinds of things wrong. One example that's great.

Lyn Simmoniac finds this document. It's a mortgage assignment and that's a transfer from one entity to the other, and it says on the mortgage document that they basically forgot to remove the placeholder for the mortgage was assigned to. And it literally said we grant and assigned this mortgage to bogus assigny. And this was a filing that was with the court in the court and used successfully to to foreclose on something. There was a summary judgment on that.

So I mean, in a sense, this mortgage was actually, you know, the foreclosure was granted to the bogus assigny. Uh. And they found it. Michael Lisa didn't believe this when they saw it, even and then they heard of another one. And Michael's watchword and this whole thing was if you can find too. There are thousands. And they did this thing called Project Bogus, where they spent the weekend looking through every state's public records looking for bogus documents, and

they found dozens of them. Uh and and I believe a spokesman for the company said, uh that was that was just a placeholder. That was a mistake. So what was the success rate on these sorts of legal challenges? Pretty low? You know. Um, there was definitely some ice to break through with judges and maybe even with the general public. The idea that this was a technicality, This was individuals trying to get a quote unquote free home, which is never really what Michael, Lisa and Lynn said

they wanted. They wanted an equitable solution. Uh And And this was a situation of false evidence. In any other legal context, whether the defendant is guilty or innocent, if you're using false evidence to convict that defendant, it gets thrown out immediately. It seems only in foreclosure law is this judgment made on the part of the judicial system that we can't give this guy a break, this defendant.

Let's talk about that a little further, because it does in reading your book, it does seem like that was a big hurdle for judges to get over because even if you could establish that the person bringing the foreclosure it didn't really have standing or the document or mocked mocked up. You still had situations where people weren't paying their mortgage, they lost their job or whatever it is.

And so a lot of people and when at the time and probably even now looking back, they're like, well, yeah, maybe that wasn't done right, but doesn't mean the person should be able to stay in their homes because they're not paying for it. So how do you what is

the response to sort of philosophically that is right? One thing I would say is that you know, no homeowner asked for their documentation and to be lost and the standing to be to be confused on this in the chain of title to be broken, it's really not their responsibility. It's responsibility to the lender. And if we're talking about

personal responsibility, it works both ways. That's number one. Number two is this particular angle of of fraud is just sort of a layer from a whole mess of other fraud that went on in the housing market during this time, whether it was origination or loan modification fraud. With UH servicers pushing people into default or securitization. Obviously there's a lot of securities fraud that went on. UH. So this

was a moment of opportunity we had. This situation was six point two million people UH since September two thousand eight who lost their homes, and UH public policy and even even the interests of the investors in these loans dictate that you really didn't want that you wanted a better solution and and this was a moment of exposure where we could have got UH some sort of more equitable outcome so that the losses weren't allocated entirely on

the homeowner, which is what they were during the housing bubble. Yeah. One thing that early on your book, and this really struck me, is that one of the main characters, I think it was Lisa, she tried to renegotiate her mortgage long before she went into default. It's her closure, and it seems and ultimately she couldn't get the bank to even return her calls, and they hinted to her that if she stopped paying her bills that then she would

jump to the top of the queue. And so it seems as though perhaps that this incredibly complicated, disorganized web prevented an actual meaningful negotiation to keep people in their own There's no question. I mean mortgage servicing, which is this business that's basically who you pay your your mortgage to. It's it's the the person who services the loan on behalf of the investors. Uh. That business is first of

all rotten business. Um it's uh. They are all sort of financial incentives in mortgage servicing to default instead of to modify, uh, mostly around the compensation model. Uh. And so this was done routinely. What happened to Lisa ends up happening later in the book to an assistant Attorney

General of the state of Nevada. I mean this happened all the time, where they would imply, miss a few mortgage payments and then will help you, and then when you miss a few mortgage payments, they put you into foreclosure. And this idea of service or driven defaults was far more routine than people realize. So, you know, the moral argument of hey, they missed their mortgage payment, they got to pay the piper doesn't really account for the fact

that they were induced to miss their mortgage payment. But even if we saw a fairly low success rate when it came to individual legal challenges. There was a little bit of wider success in the sense that there was eventually a foreclosure settlement with some of the biggest services. Right did that help us all? Well? I I write

about that at length in the last third of the book. Um. You know, the settlement was really designed to you know, get people in front of a podium and creating a big headline number that they could talk about that we stuck it to the banks. The headline number was not

really as much as advertised. Sean Donovan, who was the head of the Housing and Urban Development Department at the time now he's at O m b UH, promised that there would be a million principal reductions, that we would cut principle in a million homes as a result of the biggest settlement, which was the National Mortgage Settlement. I went through the numbers and in the book I say that in the end, eighty three thousand people got a principle was over less than the initial advertising of how

good this would be. Um, and you know it's twofold. Number one. What was granted the homeowners at that time was far less than what was needed and far left than even what was promised. And number two, the idea behind a settlement is that the settlement, the activity you're settling stops And the fact is that every day in America continues to this day, somebody is thrown out of their homes based on a false document. Yeah, I just wanted to bring it forward to today. Has anything improved?

Not a whole lot. I mean, you know, the state and federal government has sort of walked off the field, and there are still active cases and they're just sort of fought out one by one by one. But this is something that obviously, uh, there aren't a lot of people out there who are in foreclosure with the kind of resources to really maintain those cases. There's some good rulings here and there, but this is something we're gonna be untangling for a long time. I wanna go back

big picture. I mean, you mentioned that the very first laws regarding property have been around since longer than the Constitution, and it's very specific how you have to you know, at every stage, there's all kinds of laws. In your mind, is there any doubt that if all these laws had been followed properly from the beginning, that we wouldn't have

had this huge bubble and crash and housing. I you think that that if the property records laws were adhered to, that you would have seen less uh securitized and subprime mortgages for a variety of reasons. Obviously, when they created property records laws, they didn't see over the horizon to a securitization machine. But it did, you know, not adhering to them certainly facilitated the financialization that we saw of this this very pen and ink market. Um it was,

it would have been a wet blanket. And and you know, the one thing just in particular, as an example, the REMIX tax laws. You know, these trusts were created as real estate mortgage investment conduits or remix and those are not supposed to take badly performing loans. You're you're not supposed to put in badly under written loans and quality

you can't qualify for the tax benefits. And to do that, and one theory or postule is the reason they didn't write the paper is that it would have been obvious that it was bad they would have gotten a tax benefits. So you know, I mean, there are a variety of way days in which if there was actual adherence to this very deliberate system, I think you would have seen less of a crash. David, are there any efforts underway today to sort of modernize the way mortgage laws and

foreclosures are done? Because it does seem in a sense quite quaint, this idea that I have to go down to the courthouse and actually physically assign a mortgage note with you know, a pen and a piece of paper. It doesn't necessarily sit quite well with the current century, right right, I mean it is antiquated, and uh, you know, there there are steps around paperless mortgages, there are some steps around electronic notorizations, and we can have that argument

and legislated out. What we can't do is the industry just saying all right, we're not going to follow them anymore. That's that's gonna be the decision that we make. Uh that that that leads to bad public policy, and it certainly did in this case. Um So you know, I think that even the people profiled in this book would say, if you want to make an argument that we can do this in a more efficient fashion, then let's have

that argument. Let's legislate it out. But basically, uh. You know, the pro the public system of recording was privatized during this this uh this era, and it did not perform very well. One thing that you say in your book that really struck me is that this bird, this explosion that we had of securitization and the financialization of home ownership, in your view, didn't even do a very good job

of expanding the homeownership rate. And the fact that the traditional way that people always got loans from their local savings and loan did a perfectly good job expanding home ownership in America, and that all of this new speculative money didn't really have much even even before the crash,

which public benefit. When Fanny May was a public agency from the nineteen thirties to the nineteen sixties, homeownership rose twenty points uh and it went uh and and even in the this this bubble era, this era when when the mortgage market was kind of taken over by Wall Street or they at least pulled a lot of market share from the government sponsored entities, it only went up three or four points UM. And you know, it went up a decent clip during the bubble, but that was

an unsustainable uh scenario. Now we've seen it go back down to sort of the level it was really in the nineteen sixties. Uh, there was the biggest thing about the mortgage market as it was, is that everybody had a stake in everyone else's success. You know, Savings and loans got their deposits from people in the neighborhood who they gave loans to. And and that symbiosis meant that was if someone got into trouble, they would want to help them out, because you do better on a modification

and a foreclosure sale. Uh. When you sort of passed the risk around and it goes into somebody in Norway who has no connection, you know, to the trustee not really acting in their interests, and the service are not really acting in their interests, suddenly that everyone having a stake in one another is broken. And uh, that's something I think we need to get back to in some sense. And sometimes we almost are getting back to that because Fannie and Freddie are now de facto public agencies in

the conservatorship. And actually what we've seen is that loans are performing pretty darn well in the last three or four years. And now some say that's because the credit box is closed and not enough people are being able to get loans. But you know, as we move into what is housing finance reform look like, I think we can take some lessons from where it was in from the thirties of the sixties. All Right, David Diane, author of the new book Chain of title, highly recommended read,

thank you very much for joining us. All Right, thanks for having me off. I really enjoyed that conversation. That was sort of full of financial crisis nostalgia for me. That's probably a bad way to put it, because it also highlighted the very real suffering of a lot of people whose homes were put in foreclosure during that period

of time. Yeah, that's one of the reasons that I really enjoyed reading this because reading this book and talking to David, because so much of what we do and what we talk about, you know, we look at these indices and how they perform, or we look at these securities that collapse. But looking at it from this other perspective that there are real people on the other end and there is a massive human toll is really important.

And thinking about how how basically impossible it is to fight against a system that's so incredibly complicated and where the people on the other side are so well funded, and it's sort of reading the book made me very nostalgic for that era of the Internet when people were really using it to educate themselves and get access to all these documents, and how it really did enable them to, at least to some extent, fight back against this machine. So that's probably the one positive that came out of

the discussion. The most depressing thing in that, in my mind, was the idea that even though we built this huge private securitization machine on Wall Street, that we didn't actually see an increase in home ownership. And then we went through you know, we went through the housing crisis, we went through the foreclosure crisis, and we didn't really have

much to show for it. I agree it's depressing because you would think, well, we have this national goal to have more homeownership, so at least we got that out of it. But the fact that it didn't even do that good of a job, to me, was one of the more mind blowing things that I read in the book. And the other thing is, you know, we still have this debate going on about what exactly US housing finance should look like, and it seems like we have a lot of stuff to think about and we haven't even

really agreed on a path forward. So yeah, the fact that all this stuff is still happening, even if it's at low levels because theren't many there aren't as many foreclosures these days is um certainly seems ominous, and it makes you think that we've wasted a lot of time. Thank you for listening to this edition of The Odd Lots Podcast. I'm Joe Wisnthal. You can follow me on Twitter at the Stalwart, and I'm Tracy Alloway. I'm on Twitter at Tracy Alloway. Thanks for listening. Thank you,