>This was inadvertantly posted a while back, when Dale Whitman, the author, sent it to me as a candidate for a DD. Not everyone could open that file, and in any event it’s a good DD subject, so here it is again. Thanks, Dale!!
>
>Daily Development
for Friday, August 8, 2008
>by: Patrick A.
Randolph, Jr.
>Elmer F. Pierson Professor of
Law
>UMKC School of Law
>Of Counsel: Husch Blackwell Sanders
>Kansas City, Missouri
>dirt@umkc.edu
>
>MORTGAGES; FORECLOSURE;“FORECLOSURE RESCUE” SCHEME: A
lender making a loan to a “foreclosure rescue” artist has a duty to investigate
the mortgagor’s financial status, and whether it is engaged in fraud against the
prior owner of the property.
>
>Mathurin v. Lost
& Found Recovery, LLC, 19 Misc.3d 756, 854 N.Y.S.2d 629
(N.Y.Sup.2008)
>
>This is a variation on the typical “absolute deed as mortgage” case.
Paulina Mathurin owned a house but was in default on her mortgage loan. She was
approached by Lost & Found Recovery, LLC (hereafter LFR), run by McDowall,
who promised her that he would provide refinancing of her mortgage on much more
favorable terms. She agreed, and attended a closing. However, in a classic
“bait-and-switch” routine, she was told at the closing that her credit was not
good enough to qualify her for the wonderful loan she had been promised.
Instead, she was persuaded at the closing to agree as follows: (1) she would
deed the property to Opuiyo (apparently a business associate of McDowall’s); (2)
Opuiyo would obtain a mortgage on the property, refinancing her existing loan,
and would make the payments on it for one year; (3) after one year the property
would be deeded back to her. She was “represented” at the closing by LFR’s
lawyer.
>
>She deeded the
property to Opuiyo, who gave a mortgage to Greenpoint for $562,000. The proceeds
of this loan were used to pay off her old mortgage, but the amount of the new
loan was in excess of the balance on the old loan by more than $133,000! The
excess money was retained by LFR for “services” and various miscellaneous (i.e.,
“junk”) fees. Opuiyo never made any payments at all on the new mortgage to
Greenpoint, so it immediately went into default.
>
>Mathurin brought
this action to have the court declare the note and the mortgage void and
unenforceable. Greenpoint and MERS (which was nominally the mortgagee) filed a
motion to dismiss. The court refused to grant the motion, concluding that
Mathurin had stated a cause of action based on “negligent underwriting.” Her
allegations were that Greenpoint had failed to make a reasonable investigation
of Opuiyo’s ability to make the payments on the loan, failed to discover that
Opuiyo was a “straw buyer” in numerous other transactions, and failed to prevent
Opuiyo and LFR from perpetrating a fraud on her.
>
>Perhaps most
arresting is the following statement in the court’s opinion: “Considering the
present difficulties faced in the subprime mortgage market, a lender
underwriting a mortgage has a duty to investigate and ascertain the economic
status of the purchaser/mortgagor and whether the purchaser/mortgagor may be
committing a fraud against the seller in the underlying
transaction.”
>
>Reporter’s Comment
1: This holding, if it gains a following, has the potential to become a powerful
defensive weapon in the hands of borrowers facing foreclosure on onerous
mortgage loans. In the present case, the nominal borrower was a “straw buyer”
who obviously never had the slightest intention of making payments on the loan.
But the reasoning seems to apply equally to situations in which the original
homeowner is granted a loan, but plainly has no capacity to make the payments –
either the initial payments, or the payments that will be due after the teaser
rate on the ARM expires and a fully-indexed rate applies.
>
>Reporter’s Comment
2. A number of “predatory lending” statutes around the country purport to impose
a duty on a lender of a subprime loan to make reasonable investigations to
ensure that the borrower has the financial capacity to make the loan payments.
But this is the first case, to my knowledge, in which a court has imposed such a
duty without reference to any statute at all.
>
>Reporter’s Comment
3. Of course, this case is only at the pleading stage, and we’re not sure
whether the homeowner’s proof will establish the facts alleged in the complaint.
But they are not very difficult to believe. The remedy sought is to make the
note and mortgage void. Is that too generous? Should the court, instead, hold
her liable on the basis of the balance and interest rate on the old loan
that was refinanced? (Of course, she was already in default on that one when
this scam was perpetrated, and very likely still doesn’t have the financial
capacity to keep it current.)
>
>Reporter’s Comment
4. An incidental fact: when Paulina Malthurin got to the closing, she was told
that she had to be “represented” by LFR’s lawyer. Why would any intelligent
lawyer allow himself or herself to be place in that position? Even if the scheme
isn’t fraudulent, it’s an egregious conflict of interest for the lawyer. If it
is fraudulent, the lawyer is likely to end up in even deeper trouble! For the
lawyer, it seems to be a case in which greed becomes plain old
stupidity.
>
>The Reporter for
this item was Dale Whitman of the Missouri, Columbia Law School, emeritus.
>
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