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Attorneys Are Challenging Foreclosure Standing

West Palm Beach, FL-MFI-Miami, a mortgage fraud investigation and forensic auditing firm, said it is launching an investigation against several banks, including Deutsche Bank and LaSalle Bank, for what it alleges to be illegal foreclosures in six states.

Steve Dibert, chief executive officer, said the investigation will encompass homeowners in Florida, Maryland, Massachusetts, Michigan, New York, Virginia and will be covering foreclosure actions that were filed between 2005 and 2008.

"Every day I get calls from homeowners in foreclosure and in nearly 80% of the cases, the lender cannot prove they have the legal standing to execute the foreclosure. It boils down to simple Real Estate 101," Mr. Dibert told Mortgage Servicing News. "If you don't own the note, you can't sell it, modify it, enforce it or collect payments on it."

Most of the cases are exotic loans or subprime loans that have been transferred from servicer to servicer and from note holder to note holder.

Mr. Dibert said the problem was created by Wall Street firms who traded mortgage-backed securities with each other.

"They would package mortgages in pools and sell them, repackage them and sell them again and again. Through this maze of trades and counter trades, the mortgage and the note are moved upstream but in no case are all of the transfers of ownership recorded in the local property records," he said.

"Although a fund manager could offer a plethora of reasons as to why, the real reason is, fund managers wanted to save a few dollars by avoiding taxes and filing fees that would apply to each recording. Without recording these transfers in the public record, the right to enforce the mortgage and note is nullified because that recording is what proves ownership." According to Larry Platt, a partner with the Washington-based law firm of K&L Gates, the wave of investigations and cases claiming illegal foreclosures began last year based on a case in Ohio. In Cleveland, the ruling in Nov. 2007 by Judge Christopher Boyko related to 14 foreclosure cases brought by Deutsche Bank National Trust Company. The judge dismissed the cases brought on my mortgage investors, ruling they had failed to prove they owned the properties they were trying to seize.

"While the paperwork has not always followed sales of loans as quickly as possible, there is little doubt that that sales took place," said Mr. Platt. "The issue is not whether the foreclosing lender really owns the mortgage, but whether it has the paperwork to prove it. This is not about fraud, but about paper evidence."

In Florida, Mr. Dibert describes how chief justices have been inundated with cases questioning foreclosure. "They have said if you can't prove you that you are the legal holder of the note, as required under Florida law, I am dismissing it permanently. Attorneys are showing up for the lenders and for the investors totally unprepared. It's really prevalent in non-judicial foreclosure states like Michigan where the homeowner never goes in front of a judge. It's all done in a civil manner. The attorney handling the foreclosure for the lender does not go back and do all the research and trace the chain of ownership of the mortgage and the note."

He believes lenders are relying on MERS, but he said the Mortgage Electronic Registrations Systems is not doing what it is getting paid to do. MERS should properly track who the legal holder of the note is to record them with the county.

"The only true way to back up that the lender, the foreclosing party, is the legal holder of the note, without a doubt, is to record it to the county," said Mr. Dibert. "MERS and the investment firms and banks, they don't record them with the county because of the cost involved. In Florida for example, every time you do a refi you have to pay the mortgage tax. With everything that went on with the boom, they were trading these mortgage-backed securities like baseball cards. They sold them to another pool, bundled them up and sold them based on client income. All of these people kept getting shifted around and no one kept track of it. MERS was supposed to but now it's a double-edged sword. MERS comes along and says, 'We have the legal authority to foreclose.' Then you owe all these states and/or municipalities the unpaid filing fees for every time these mortgages switched hands."

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