By William Hudson
Neil Garfield will return on Monday.
Many homeowners with loans held or guaranteed by a Government Sponsored Enterprise (GSE) like Fannie Mae or Freddie Mac find that they are dealing with a quasi-governmental agency that will play the role of corporate or government entity depending on which position better allows them to stonewall the homeowner. Unlike homeowners with private loans that can request the name of the trust from the servicer and then conduct their due diligence on their loan, homeowners with GSE loans are not permitted to know what trust their loan is allegedly held in (probably because it’s not). If the homeowner then attempts a Freedom-of-Information request for information about their loan due to the fact that both Fannie and Freddie are quasi-governmental agencies in receivership, the GSE’s will claim they don’t have to provide the requested information because they aren’t governmental institutions. Therefore, the homeowner’s access to their loan information is severely limited. There are ways you can fight back against these Quasi-motto governmental agencies (I know that was a bad joke) by using their own indenture agreement and servicing guides against them.
Real Estate 101
A mortgagee has two interests:
(1) the debt or obligation which is owned, and
(2) the security interest in real estate represented by the mortgage. Where the mortgagee (originator) has “transferred” only the mortgage, the transaction is a nullity and the “assignee,” having received no interest in the underlying debt or obligation, possesses a worthless piece of paper.
The promissory note represents a loan contract and are governed by the Uniform Commercial Code (UCC) Article 3- Negotiable Instruments. The UCC is a uniform law adopted in every state with small variations per state. The note is like a check that must be negotiated by being properly indorsed and transferred in order for another person to claim ownership of the note. If the note is not properly negotiated another party can’t claim ownership. A stranger who finds the check can try to indorse or cash the check but this is a criminal act.
The security on the debt refers to the mortgage or deed of trust, is a contractual interest in real estate. The home buyer is considered as the mortgagor and the lender/creditor as the mortgagee. Because a mortgage/DOT is an interest in real estate, the Statute of Frauds requires that all contracts be in writing and signed to be enforceable. Also, all assignment must be in writing and signed to be enforceable. Agreements that violate the Statute of Frauds are void and unenforceable contracts. Period.
Fannie and Freddie's Achilles Heel
The only exceptions to the Statute of Fraud’s written requirement is an admission in court under oath by the “party to be charged” and that there is a contract. Most mortgages are sold by the originator (that was not the lender and did not loan their own funds) to Fannie or Freddie. Freddie and Fannie do not own their own assets and are only guarantors for pools of loans. Fannie Mae’s information sheet called Basics of MBS states that, “the mortgages that back a Fannie Mae trust on behalf of Fannie Mae MBS investors are not Fannie Mae assets.” See below:
Fannie Mae MBS document is located here: 2012-02-06-fannie-mae-basics-of-mbs-2
Therefore loans guaranteed by Fannie Mae are not assets of Fannie Mae.
According to Freddie Mac’s website:
“Every day, Freddie Mac provides a continuous flow of funds to mortgage lenders. We do so not by making individual mortgage loans to consumers; instead, we support the U.S. home mortgage market by providing money directly to lenders, ensuring that the system is liquid, stable and affordable. To fulfill this vital mission, Freddie Mac buys residential mortgages and mortgage-related securities and guarantees mortgages made by lenders. We issue debt securities to the global capital markets to fund the purchase of mortgages and mortgage-related securities we hold as an investor. We also create and sell mortgage-related securities to the capital markets, providing a guarantee to investors on those securities.”
Therefore, Fannie and Freddie never own the assets, they simply act as a guarantor for the MBS investors. It is easy to see why Fannie and Freddie are in receivership- because most likely the government is guaranteeing trusts for pensions and investors that are basically worthless. When the truth is finally revealed there will be teachers, firemen, insurance companies and unions holding empty bags. If it can be established that Fannie or Freddie “owns” your mortgage- or should we say guarantees the pool your loan is placed in, they have legal title to the property and are the party with standing to foreclose or the “real party in interest”.
A brilliant Professor at Pepperdine University by the name of Dale Whitman wrote an article entitled, “How Negotiability Has Fouled Up the Secondary Mortgage Market, and What To Do About It,” 37 Pepp. L. Rev 738, 757-758 (2012) that explains the problem. Whitman states that, “While delivery of the note might seem a simple matter of compliance, experience during the past several years has shown that, probably in countless thousands of cases, promissory notes were never delivered to secondary market investors or securitizers, and, in many cases, cannot presently be located at all. The issue is extremely widespread, and, in many cases, appears to have been the result of a conscious policy on the part of mortgage sellers to retain, rather than transfer, the notes representing the loans they were selling.”
Whitman nails it- the notes were not delivered to the trusts in millions of mortgages. That would explain why the notes are created on-demand when a loan goes into default and must be recreated to provide the illusion that Fannie or Freddie has the note. They don’t.
The policy of Fannie and Freddie clouds the title and makes it nearly impossible to determine who has legal title to the property (mortgagee) and who “owns” the note. There are cases where homeowners have sued Fannie and Freddie and the Servicer, and when contacted, the GSE’s were unaware that the servicer was foreclosing.
Remember, a contract in real estate must be in writing to be enforceable under the Statute of Frauds. Any sale or assignment of the note to Fannie or Freddie must also be in writing to be compliant with the Statute of Frauds. Not all states required that assignments be recorded, but it would be helpful if they did. Therefore, if you are facing foreclosure the borrower (mortgagor) should determine if the loan originator assigned the note to Fannie or Freddie. This can be done at:
However, even if your property comes up as being owned by Fannie or Freddie- it may not be. Homeowners it litigation should do a targeted discovery request confirming that the servicer does not “own” the mortgage and demand records from Fannie and Freddie demonstrating they were assigned the note from the originator. Homeowners should then demand to see that Fannie or Freddie assigned your note back to the servicer. At a minimum your assignments should look like this in order for Fannie or Freddie to foreclose:
Originator--> Fannie or Freddie--> Servicer--> Fannie or Freddie
Servicers will state that Freddie or Fannie servicing guidelines require that the servicer should foreclose in its own name. Given the fact that a mortgage is an interest in real estate and must comply with the statute of frauds that requires that such contracts be in writing, the servicer’s standing to foreclose can be challenged absent proof that the mortgage was specifically assigned from Freddie or Fannie to the servicer. Freddie and Fannie must assign the note to the servicer to legally be in compliance to foreclose. In fact, Freddie has a specificForm 105 to do so.
Although Fannie and Freddie’s guidelines change over time as they become more sophisticated how to foreclose and evade the truth- the majority of notes I have reviewed that are owned by Fannie Mae to not assign the note to the servicer in order to foreclose! And they get away with this tactic because typically the homeowner’s attorney won’t force the issue. Unless there is a written assignment from the mortgage owner (Freddy or Fannie) to the servicer, the servicer cannot foreclose because they are not part of the mortgage contract and have not received an assignment legitimizing their right to foreclose.
The take-away fact is that ONLY the OWNER of the NOTE can FORECLOSE on a mortgage and note contract. Also, if the assignment of the mortgage is invalid or fraudulent by forgery, robosigning or a lack of transfer- there is then a “cloud on title” and the title and mortgage insurers for your home should be made aware of this cloud. The Judge is going to need to correct this issue- and this may allow the homeowner to litigate under the Statutes of Fraud and lack of standing defense.
Furthermore, there is also the issue that both the debt obligation and security interest are not transferred together. When the mortgagee transfers only the mortgage, the transaction is a nullity and the assignee never having received any interest in the underlying debt, has a worthless piece of paper. Professor Whitman believes that mortgage originators deliberately failed to transfer the notes representing the loans they were selling and that Fannie and Freddie knowingly went along with this plot. He states that,” it would appear that any alleged “sale” of the note or mortgage to Freddy and Fannie is a fraud. By analogy, you cannot cash a check that is not in your possession or that is not made payable to or endorsed to you. Not only is the sale of the note a sham where there is no delivery and/or endorsement of the underlying note to Freddie or Fannie, if their records (per the website) “show that Freddie Mac is the owner of your mortgage”, then the unity of interest (i.e. loan/note and mortgage/security must be transferred together) is destroyed leaving Freddie and Fannie with nothing.”
Why would Fannie and Freddie deliberately have a policy that is in direct conflict with state laws regarding mortgage contracts and promissory notes? Because Fannie and Freddie are GSE’s- a type of private corporation that is owned primarily by the major banks- could it be that Fannie and Freddie were DELIBERATELY created to purchase higher-risk mortgages primarily in lower to middle class neighborhoods? The banks could have engineered this feat by KNOWING in ADVANCE that based on the fact that the banks were deliberately giving away almost free money to anyone with a pulse (on homes whose price was artificially inflated)- that the loans would go BAD! These failing loans would then become the government’s problem through receivership, and the banks would get the bailouts?????? It is too diabolical to even consider that the banks would intentionally engineer the crash while concurrently profiting. But the evidence appears to support this hypothesis.
There are several ways you can defend against default if your loan is owned by Fannie or Freddie. First, the GSEs require that the note is indorsed and the chain of title or assignments reflect each sale. Fannie Mae states that if there is any issue with these conditions the transfer is a fail and the servicer must correct it. Please refer to the Fannie Mae Custodian’s Job Aid to see how your loan failed the requirements of Fannie Mae. Freddie Mac's Custody Procedures guide is located here.
If you can locate the Servicer Guide between your initial loan originator and the GSE, the information is very specific as to the responsibilities of the servicer. The requirements for the servicer are strict in regards to the transfer and assignment of the note and mortgage, but in most cases there are gaping deficiencies between the GSE protocol and what procedure the servicer actually institutes prior to foreclosure. It is important to put on your investigator hat- because the more evidence you can locate that demonstrates that the servicer is in noncompliance with the GSE servicing regulations, the more explaining the servicer will need to do. If your note is a “fail” and is not in compliance with the GSE servicing standards then why did the GSE agree to accept your non-compliant loan? These are questions to ask in discovery.
Another way to demonstrate that your loan documents don’t comply with the GSE requirements is to research the Fannie Mae or Freddie Mac Indenture Agreement for Mortgage Backed Securities agreement. I have included the 2007 version that has for some reason disappeared off of Fannie Mae’s website. 2007 Fannie Mae Indenture Agreement
Again, most notes that I have reviewed do not comply with the Indenture Agreement for Fannie Mae. Why would Fannie Mae accept a note that violates of proper indorsement or assignment requirements? Apparently Fannie Mae and Freddie Mac didn’t bother to comply with their own rules and regulations and therefore the MBS pools they guarantee aren't worth a hill of beans.
The bigger story here, however, is that because the GSEs have failed to enforce their own rules of properly recording the mortgage instruments, the underlying collateral of the mortgage and promissory note are void and don’t require payments from the borrower. If the lender can’t prove the homeowner owes a debt the missing paperwork will ultimately create a Tsunami (****-storm is actually a better word) of defaults for every pension, mutual and trust fund that invested in this garbage.
Nye Lavelle is an expert in Fannie Mae and Freddie Mae and has researched these entities since 1993. In 2013 he wrote a white paper entitled, “Can’t Trust the Paper Trail.” Lavelle states that,”Robo-signing, false affidavits, lost notes, false pleadings, missing allonges, conflicting endorsements, missing endorsements, false assignments, and other wide-spread and socalled document deficiencies are not new, but tried and proven automated processes that have been employed since the early 90s.”
He has found the following issues with Fannie and Freddie documents:
a) double and multi-pledging of the same promissory note to different investors,
including Fannie Mae and Freddie Mac;
b) the destruction of evidence such as written assignments, allonges, and the
actual wet-ink promissory notes;
c) duel ownership evidenced by foreclosing parties’ own notes, assignments, and
d) creation of fabricated “ghost notes” or multiple notes never signed or executed
by the borrower; and
e) the creation of fraudulent lawsuit complaints, motions for summary judgment,
affidavits to support summary judgment, affidavits of indebtedness and lost
notes, and the creation of fraudulent assignments of notes and mortgages as
well as allonges to notes and endorsements upon note to fraudulently create
the “appearance” of legal standing or authority to foreclose.
Lavelle was confounded that Fannie and Freddie would go to such great lengths to conceal the name of the real identity of the actual creditor. He stated, “Who owns a borrower’s note and stands on the other side of the mortgage contract and its fine print is a fact that should be readily and easily
ascertainable and accessed without the need of judicial intervention.” Anyone who has sent their loan servicer a Qualified Written Request can understand the frustration of being stonewalled from receiving this information. Even people who sue their servicer for years in court may never be told who actually owns their loan.
It is time that Americans REFUSE to sign faulty loan documents. If you are considering purchasing a home DEMAND to know whose funds are being used by the originator to fund your loan. Ask the closer if the loan you are signing violates the provisions of Regulation Z in the Truth in Lending Act and have them sign an affidavit attesting that the loan is in compliance with TILA and RESPA. I guarantee your closing won’t occur. Better yet, find a lender that holds the paper or purchase a property from an individual who will hold the paper. It is time to refuse to participate in this fraudulent enterprise- if you look to a big bank lender you are contributing to the problem not the solution.