Court Approves Massachusetts Settlement With Lenders In Bogus Foreclosure Rescue; Case Involved AG Claims Of Equitable Mortgage, Usury, Etc.

(originally posted 6-18-08; modified 6-19-08)
From the Office of the Massachusetts Attorney General:

• The U.S. Bankruptcy Court has approved a settlement between Attorney General Martha Coakley’s Office and 10 mortgage lenders and servicers that funded or serviced loans which facilitated fraudulent foreclosure rescue transactions by Brockton attorney Alec Sohmer. The Settlement Agreement with the lenders, entered last week by Judge Joan Feeney, was reached by the Attorney General’s Office and the Chapter 7 trustee in Sohmher’s bankruptcy case. The Settlement impacts 26 residential properties that are part of Sohmer’s bankruptcy case and is designed to return homeowners to their financial position before Sohmer arranged foreclosure rescue transactions that stripped their home equity and required payment of Sohmer’s fees and high settlement costs. The settlement will also provide an opportunity for Sohmer’s victims to reacquire the legal title to their homes.

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• Under the terms of the settlement, the lenders and servicers will provide restitution to the homeowners victimized by Sohmer’s fraudulent scheme by reducing the outstanding mortgage liens on the homeowner’s properties, and in many instances allowing the homeowners to apply to assume the loans. As a result of the foreclosure rescue scheme, 26 homeowners had transferred the titles of their homes to Sohmer. The original homeowners can now reclaim their property by paying a reduced mortgage obligation instead of the inflated mortgage loan arranged by Sohmer, and by refinancing the loans.

• The mortgage lien will be reduced to the lower of the actual amount paid for prior mortgage loans on the property, subtracting any beneficial payments to the homeowners; or 80% of the current value of the properties. In total, across 26 properties, the settlement will provide approximately $1.8 million in reduced mortgage obligations.

For more, see Massachusetts AG press release: Bankruptcy Court Approves Settlement Between Attorney General’s Office and Ten Mortgage Lenders and Servicers Involved in Foreclosure Rescue Transactions.

Go here to view the Proposed Amended Complaint filed by the Massachusetts AG's office, setting forth the allegations against the foreclosure rescue operators.

For earlier posts on this case, see:

• Foreclosure Rescue Sale Leaseback Deals Are Usurious Equitable Mortgages, Says Massachusetts AG's Civil Lawsuit, or
• Go here for all earlier posts.

Editorial Note:

As best as I can figure it, the $1.8 million hit that the lenders are taking represents the approximate home equity that the foreclosure rescue operator ripped off from the homeowners. Further, the settlement in this case appears to be a good illustration of how equity stripping, foreclosure rescue lawsuits in which a claim of equitable mortgage is made should be resolved when the financially strapped homeowners sign over the title to their homes but remain in possession thereof pursuant to some form of lease/buyback arrangement.

The homeowner's continued possession of the home after signing over the deed generally constitutes either actual or constructive notice to the foreclosure rescue operator's (or straw buyer's) mortgage lender of the homeowner's rights in the home under the equitable mortgage doctrine. This would be the case even if the mortgage lender had no actual knowledge of the arrangement between the foreclosure rescue operator and the homeowner (as any experienced real estate attorney will advise, one can be deemed to have "actual or constructive notice" of another's rights in real estate without actually having knowledge of the existence of those rights - see The Bona Fide Purchaser for Value of a Legal Estate Without Notice for a beginner's guide to actual and constructive notice, and the bona fide purchaser doctrine).

The effect, as illustrated in the Massachusetts AG's settlement, is that it is the equity stripper's lender, not the homeowner, that gets the screwing over in the deal. Of course, the lender will then have a cause of action for any damages it suffered against the foreclosure rescue operator, any straw buyer, possibly the title insurance underwriter who issued any title policy in the transaction, and anyone else who participated in the fraud.