Colorado Fraud Case Sparks Debate on Mortgage Servicing Practices

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Innocent homeowners in Colorado have gotten foreclosure notices from banks they've never even heard of - because funds from the previous owner's mortgage payoff were siphoned off by a crooked servicer and never got to the bank that was owed the money.

A court is considering how title companies should handle the many transactions in which loans are managed by servicers. These notes are often owned by parties far removed from the bank the mortgagor thought he or she was dealing with - or in the case of fraud, somebody else entirely. It's hard for any homeowner to determine these days, just who the heck owns the mortgage note on their home -and whether or not their payments are landing in the hands of the rightful owner of that note, as intended!

This is fallout from a $3.4 million Ponzi scheme that got a crooked mortgage broker a 16-year prison sentence. This guy, John Reinholdt II, was borrowing money at 5-7 percent from wholesale lenders, making subprime loans at 11.5 percent and pocketing the difference. As often happens with Ponzi schemes, Reinholdt got behind and started paying old debts with new money.

In one of the cases now before the Colorado Appellate Court, Brenda Armijo bought a house in Thornton, Colo., from somebody whose mortgage was originated by one of Reinholdt's 19 companies, Jaguar Mortgage. The loan was sold to Citywide Bank and serviced by another one of Reinholdt's companies, Dakota Lending. At closing, Stewart Title disbursed the loan payoff to Dakota, the servicer, as is commonly done in Colorado. Trouble was, Reinholdt paid somebody else with the money that should have paid off Citywide. So the bank -surprise, surprise - wanted the house back. In fact, because of Reinholdt and his affiliates failure to forward money on to the proper lenders, innocent homeowners had their homes foreclosed on,

As Inside Real Estate's John Rebchook reports:

Armijo was current on all of her mortgage payments, but still was at risk of having Citywide foreclose on her home, because Citywide had not been paid. She could have lost her house even though she had never heard of Jaguar, Dakota, Reinholdt or any of his related companies.

Stewart Title argued that the servicer is the agent of the bank, so it did not err in paying Dakota. But Citywide argued that the Uniform Commercial Code makes it clear that the payment must be made to the note holder and not a servicer, and that title insurance is supposed to guard against this kind of error. Once again, it's the innocent borrower who gets caught up in a fiasco like this, through no fault of their own.

One suggested remedy would require the actual lender to be present at every closing. But with so many loans securitized, chopped up and resold to investors all over the world, title companies say the task of identifying the lender is difficult or impossible - let alone getting a representative to each of the half million closings that take place in Colorado each year.

The fact that it's near impossible for a homeowner to find the rightful lender and be assured their money is getting to the proper party, highlights the very real dangers of wrongful foreclosures and fraudulent mortgage servicing practices. In this Colorado case, Brenda Armijo still has her house as the case works its way through appeals. Other borrowers who dealt with John Reinholdt, have not been so lucky.. 

The thing is, this case is not an anomaly. In fact, it's strikingly similar to an early blog highlighting a tangled web of fraud that a Florida man found himself caught-up in when he learned his payoff funds never reached the rightful lender either. If we could only go back to the days of old when nightmares like this were the anomaly! 

For much more info on mortgage servicing practices, review a few earlier blogs.   

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Wow, I didn't know about this...

I feel sure that this is the reason I am in the shape that I'm in. The complaint that I received (from Wells Fargo?!?) stated that I have not made a mortgage payment since April of 2009, but I have receipts showing that I have been making payments through my servicer EMC Mortgage. I also have payment history statements showing that I made the payments. I get letters in the mail all the time saying that J.P. Morgan Chase is handling my loan so it's very confusing as to why I would receive a complaint from Wells Fargo? What a huge mess!!! I'll just continue sacking money into my savings account since EMC Mortgage will no longer take my payments. Not long before I feel I have gained back all of the equity they have stolen from me over the years. I plan to walk away from the house, but not until the eviction notice comes. Until then...happy savings to me!!!

I think it should be standard practices for banks to inform the borrower, either by phone or by mail, that they are now the owners of the loan and that the borrower should pay to them. It will only cost them several cents as opposed to the millions they will loose once the barrage of foreclosures and lawsuits hit them in the face.

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