New Republic contributor David Dayen’s book Chain of Title focuses on three individuals in South Florida—cancer nurse Lisa Epstein, car dealership worker Michael Redman, and Lynn Szymoniak, a lawyer specializing in insurance fraud—who stumbled upon the biggest consumer fraud in American history. They did so after they fell into foreclosure, and realized that all the documents they were sent by their mortgage companies—the evidence being used to kick them out of their homes—were fake. It turned out that the industry broke the chain of title—the chain of ownership, really—on millions of securitized mortgages, and were using false documents to cover it up.
As they researched this, they discovered that they were not alone. In fact, perhaps the first person to identify, fight, and broadcast his struggle against the mortgage industry and its various crimes was a guy named Nye Lavalle—nearly 20 years before the housing bubble and the financial crisis that resulted from its collapse. Lisa, Michael, and Lynn eventually sought out and worked with Lavalle as they tried to expose the epidemic they called foreclosure fraud. In 2010, Lavalle played a major role in getting JPMorgan Chase to admit that they were delivering documents with improper signatures into courtrooms across the country. But prior to any of that, Lavalle was just a guy who bought a house, and became conscripted into a fight he didn’t want over crimes he never knew possible.
Nye Lavalle’s story follows a trail that many other citizen activists walked after suffering the sting of foreclosure. The difference was that he had the perseverance to keep going—for more than a quarter-century. If people in power had listened to Lavalle, we could have had a different outcome from the crisis than millions of people losing their homes and no accountability for those who facilitated it. This excerpt tells how he uncovered the workings of the Great Foreclosure Machine—and tried to warn the world before the Great Recession hit.
It was 1989—before the housing bubble, even before the savings and loan industry blew up. Nye Lavalle was the great-grandson of an Argentinian president (Teatro Colon, one of the world’s finest opera houses, sits on a Buenos Aires square named Plaza Lavalle, after his ancestor) who successfully managed professional tennis players in the 1970s. Nye’s father, Ramon, was a diplomat, tight with the Kennedys and Ernest Hemingway. Ramon left Argentina to work in the Office of War Information during World War II, eventually becoming an executive vice president at the pharmaceutical firm Parke-Davis. Nye grew up in the tony suburb of Grosse Pointe, Michigan, and his dad liked to take him to inner-city slums in Detroit and New York City, telling him that people born into privilege had a duty to look out for those less fortunate.
In the 1980s Nye founded a consultancy and research firm called the Sports Marketing Group (SMG), which published groundbreaking studies into the popularity and viewing audiences of American sports. For many years he was a go-to analyst on sports trends and predictions, quoted in papers across the country. He called the rise of figure skating and NASCAR in the 1990s, and advertisers salivated over his detailed analysis. Nye’s business successes accompanied a flamboyant style. He dressed sharply, laughed big, and was never at a loss for dates, as he would tell you. One friend quipped that, with his monogrammed blazers, he looked like the captain of a ship, minus the hat.
At that point he would never have imagined that he would become a driving force in a grassroots movement to expose Wall Street malfeasance.
In 1989 Nye was building his business, running part of it out of a home in Dallas purchased for his parents, Anthony and Matilde Pew (his father, Ramon, died young, and his mother remarried). Savings of America (SOA), predecessor to the crisis-era lender Washington Mutual and the nation’s largest S&L, owned and serviced the loan. Though the Pews instructed SOA to send monthly statements to their primary home in Michigan, the company would either send them to Dallas or not at all. Nye paid the mortgage directly at an SOA branch. But SOA would mail the check to a servicing center, and by the time it got delivered to the proper division, the payment would be late. Nye protested that he held the check receipt, showing delivery well before the due date, but SOA would tack on a late fee anyway.
Nye started talking to banker clients—he represented Barclays and Visa in his consulting firm—about these nickel-and-dime schemes. Loan servicers were mostly automated, with software programs tracking payments and ringing up fees. They were paid through a small percentage of the principal balance on the loans they serviced; they also earned “float,” from investments made in the time between receiving monthly payments and sending them to investors. Most important, they kept all fees generated through servicing. Fees represented the only real variable, creating a big incentive to make customers delinquent. And the software could be dialed to increase fees and maximize profits.
Savings of America’s next attempted cash grab on the Pew home would become a commonplace scam in the bubble years, known as force-placed insurance. Homeowners are required to hold property insurance, so whenever that lapsed, servicers automatically enrolled them in an overpriced replacement policy, taking a kickback from the insurer in exchange. Homeowners suddenly got a giant charge for junk insurance automatically deducted from their mortgage payment. Force-placed insurance served a dual function: It racked up profits for the insurer while making homeowners late on their full payment, leading to more fees. In this case, SOA’s software program force-placed the Pew house into homeowner’s insurance whenever the policy came within 30 days of expiration. This happened three times on the same loan, with SOA force-placing additional policies on top of the old ones, charging for each by deducting from the monthly payment. All the insurers who imposed new policies on the residence were actually owned by the same parent company as SOA.
Nye and his family had enough. He told SOA he wanted out of the loan: Just give him the payoff amount and the loan histories, and he’d cut them a check. When Nye finally got the data, he found that SOA overcharged by close to $18,000. Plus they failed to supply the promissory note. Nye refused to pay the charge-off amount, believing it fraudulent. The ensuing battle took more than a decade and cost around $2.5 million in legal fees.
Throughout the dispute, Nye and his parents consistently made mortgage payments to stay current. But SOA kept demanding excess charges and court fees well above the loan balance, based on a delinquency they concocted. More frustratingly, Nye could never get a clear estimate of the amount owed. He received 20 different loan histories throughout the ordeal, none of which matched. Sometimes monthly payments were missing; other transactions were redacted or even manually whited out and typed over.
In 1991, SOA started charging the Pews monthly property-inspection fees without telling them, taking the money from the mortgage payments. This generated additional late fees because the payment would come up short, though the deductions were unknown to the Pews until after the fact, and even then concealed as “miscellaneous advances.” Nye’s banker friends called the deliberate strategy “fee pyramiding,” layering obscure overcharges to siphon as much extra cash as possible from every loan. Any attempts to fix these errors would only meet with stall tactics.
SOA probably didn’t think anyone would read the payoff statements; surely none of their homeowners would have the resources or the will to fight them over it. And mostly they were right. But Nye had a sense of principle, a buildup of personal wealth, and a temper. “You can fuck with me,” he told me later. “But fuck with my family, my friends, or my dog, and you have an enemy for life.”
In September 1993, Savings of America claimed to have sold the loan on Lavelle and his parents’ Dallas house to EMC, a subsidiary of the investment bank Bear Stearns. (Interestingly, all of these entities—SOA, their purchaser Washington Mutual, EMC, and Bear Stearns—would after the financial crisis fall into the hands of JPMorgan Chase.) EMC rapidly filed for foreclosure, demanding nearly $1 million in excess fees, court costs, and late payments. Nye and his parents, who never missed a mortgage payment, were on the brink of losing their home. They countersued in Dallas District Court to stop the foreclosure, which in Texas did not have to go through a judicial process.
It appeared that EMC operated as, to use Nye’s phrase, a “mortgage toxic waste dump,” taking over what the industry called “scratch-and-dent loans” in default and moving to foreclose, regardless of the homeowner’s ability to cure past-due amounts. Nye considered it a form of extortion. He demanded that EMC fix SOA’s repeated misapplications of payments, fee pyramiding, and other fraudulent behavior, but EMC representatives openly threatened to ruin Nye’s business credit and his family’s credit if they weren’t paid the full amount, arguing that they had no obligation to correct previous errors. EMC submitted loan histories to Dallas District Court that were pastiches of past SOA records, similarly flawed and incomplete, while swearing under penalty of perjury to their veracity.
And then there was the sale of the loan itself. EMC hyped the purchase from SOA, involving more than 8,000 loans with a total value of more than $2 billion, one of the largest loan purchases in history to that point. But when Nye pressed EMC to fix the pattern of fraudulent charges on his account, EMC asserted that the master transaction records were destroyed. Nye asked EMC for the promissory note and all the assignments and transfer documents on the loan, but EMC never provided them either, claiming several of them were also destroyed.
During his investigation, Nye learned that Bear Stearns, parent company of EMC, was an investment adviser to SOA. EMC created a shell corporation called California Loan Partners as a pass-through. SOA sold the 8,000 loans to California Loan Partners, and on the same day, California Loan Partners sold them to EMC. By structuring the deal this way, SOA could hide losses in the shell corporation, so they wouldn’t have to take immediate write-downs. This would have led to technical insolvency and a takeover by the Resolution Trust Corporation, the entity President George H. W. Bush set up to unwind failing savings and loans. So the entire transaction was an elaborate game to get bad assets off SOA’s books and ward off a government takeover.
EMC concealed the notes and mortgages to keep the scheme hidden, but that left them lacking proof of standing to foreclose. In addition, once EMC got hold of the loans, they included them in mortgage-backed security sales to investors. None of those transfers was ever recorded at the Collin County, Texas, land records office. Nye wondered if EMC even had custody of the mortgages, or if they were assigned willy-nilly to different investor pools without a proper chain of title. Nye also believed EMC officials gave false testimony under oath, particularly in sworn affidavits attesting to the loan histories. In a court filing, Nye questioned whether EMC was “the actual owner of the note or mortgage upon which they attempt to foreclose in their own name, rather than the name of the trustee or investor in the note or mortgage.”
In the 1990s, the judicial system was not ready to hear about financial institutions creating false documents and lying to courts. After several years, the judge hearing the case unexpectedly recused himself, with a new judge brought in from retirement. The bank piled on frivolous challenges, even questioning Nye’s adoption by his stepfather at one point. The family’s own lawyers told them not to bother with the case, urging them to take an inadequate settlement; Nye suspected they were bought off. Ultimately the new judge ruled for EMC, and on January 4, 2000, they foreclosed on the Pew family property.
But the house in Dallas had ceased to be the point of the struggle.
Nye could tell he’d stumbled into something big; why else would a collection of financial institutions spend millions in legal fees to repossess a house worth, at best, $160,000? Only to conceal the fraud lurking underneath, and to inflict enough emotional and financial distress to get away with it. If what Nye saw in his case occurred across the U.S. housing market, it would be the greatest consumer fraud scandal in history, affecting people far more financially vulnerable than his family.
Nye used the extensive discovery period to acquire and analyze tax records, prospectuses, SEC filings, internal audits, insurance documents, and more. He flew around, at his own expense, to courthouses in Florida, Georgia, California, and Texas, reading foreclosure case files line by line, making notes and even scanning documents into an early version of a Mac laptop. He found other foreclosed homeowners with similar horror stories. He deposed employees of Bear Stearns, EMC, and SOA and interviewed dozens of other mortgage bankers, industry experts, forensic specialists, and even local, state, and federal banking regulators. And once people on the inside learned of his investigation, they anonymously fed him bits and pieces of information, too. Nye Lavalle was a full-time sports agent and consultant but a part-time mortgage sleuth.
One day in Florida Nye met a woman in a bar, a certified cash manager with Bank of America. She told him that the board of directors set a profit number for the bank, and employees had to hit the target in any way possible. With the rise of computerization, they could do that simply by moving numbers on a spreadsheet. If a bank robber steals a million dollars, they go to jail. But if banks steal that sum from their customers every day in five- and ten-dollar increments, auditors and regulators pay no attention.
Nye connected this to mortgage servicers’ financial incentives to drive borrowers into default and maximize fees. Servicers got paid first in a foreclosure sale, even before the owners of the loan. So there was no reason for them to help anyone in need or hire enough staff to handle requests for assistance. They devised ways to digitally extract profits through every stage of the mortgage process, from escrow accounts to homeowner’s insurance to applications of monthly payments. When mortgages transferred to new servicers, the computer systems wouldn’t reamortize the loan or reconcile the numbers, always benefiting the servicer over the borrower. At one point Nye counted 44 different schemes to ring up additional fees, even if borrowers paid on time. These weren’t back-office mistakes, but deliberate financial engineering. Nye found a policy manual from EMC Mortgage that referred to its customers as “smucks,” and if anything, that overstated the level of respect. Since smucks couldn’t choose their servicers, they had to live with the consequences.
Furthermore, as Nye would later tell The New York Times, “nothing— and I mean nothing—that a bank, lender, loan servicer or their lawyer says or puts on paper can be trusted and accepted as true.” No transfers of mortgages, which started to multiply with the rise of securitization in the late 1990s, were actually “true sales.” The notes and mortgages in securitizations never made it to the trusts, and mocked-up documents submitted to county recording offices, bankruptcy trustees, and courts in foreclosure cases constituted an elaborate game to conceal that fact.
Nye also identified how banks would offer for sale interests in mortgages that they did not own. Banks would “double-pledge” mortgages into a loan pool and also as collateral with the Federal Reserve to obtain additional borrowing. If the Fed ever called in the collateral, they would find that the bank who offered it to them already sold off the loan. It was as if a baker sold you a cupcake and then sold the same cupcake to the person in line behind you, letting you two fight it out over who gets to eat it.
Instead of documenting chain of title on each mortgage transfer and keeping assignments and notes in the individual loan file, investment banks made copies of the original documents, and when they needed to, they had foreclosure mills fill in the blanks with the necessary names and signatures. They couldn’t really do it any other way: If the rules of evidence for all other trials also held in foreclosure cases, the cost of litigation would be enormous. You would need original promissory notes and assignments from every link in the securitization chain, along with certified testimony from each document custodian. But nobody preserved the records. Nobody tracked or verified evidence. One industry hand told Nye it was like taking a criminal suspect’s lab specimen from the evidence room and letting someone else pee in the bottle. From a legal point of view, the chain of custody of hundreds of thousands if not millions of loans was fatally corrupted. And Nye’s family trust had numerous investments in mortgage-backed securities through mutual fund holdings. He was helping fund this mess.
When you combine the spoliation of the data with servicers driving borrowers into default, anyone with a loan, current or not, could find themselves wrongly evicted with false documents. But the Great Foreclosure Machine was sloppy; you could uncover its traces. And Nye wasn’t just willing to look. He wanted to expose it to the world.
As someone frequently quoted in the press, Nye knew how to get media attention. So in 2000-2001, he presented his findings under the names of Pew Mortgage Investigations and Americans Against Mortgage Abuse, two nonprofit organizations that consisted mainly of Nye Lavalle, in long reports with provocative titles. “Predatory Grizzly ‘Bear’ Attacks Innocent, Elderly, Poor, Minorities, Disabled and Disadvantaged!” excruciatingly detailed the schemes of Savings of America, EMC, and Bear Stearns that led to foreclosure on the family home in Dallas. The next report, “21st Century Loan Sharks,” took as its modest goal “to defend and protect Americans and the American dream of homeownership from unlawful, fraudulent, criminal, unethical and illegal acts.” In that report, Nye described the modern financial industry as a white-collar mafia, using software and lawyers instead of guns and knives. “Well-known banks and mortgage companies,” Nye wrote, “are providing perjured testimony, false affidavits and frivolous pleadings in cases involving mortgage foreclosure.” Nye described a litany of false affidavits entered into courts by Florida foreclosure law firms, where they claimed control of documents the trusts never received, claimed ownership over notes when the entity merely serviced them, or claimed “to support knowledge of facts not known by the affiant.”
This was a novel finding: The signatories on foreclosure documents had no understanding of the evidence they claimed to authenticate. Nye came to this realization while going through affidavits in the public records. The same names kept coming up over and over again, at a pace that suggested little or no examination of the loan files. Plus they signed multiple affidavits swearing to be vice presidents of different banks in different parts of the country. They were often the witness in one document and the vice president in another. Finally, the signatures were inconsistent, with initials on one affidavit and full names on another. Signatures sometimes looked so different from one another, it seemed impossible for them to spring from the same hand.
Nye reckoned these were entry-level employees signing as bank officers—the lowest-paid vice presidents in history—with a corporate title rented by a foreclosure mill or document processor. He suspected that they lacked the personal knowledge of the facts of the case file, as required by law. Nye later published an entire report in 2008 about one of these document executors, Scott Anderson, who worked for Ocwen, a specialized nonbank servicer that dealt with distressed loans. Nye demonstrated that Anderson adopted the position of vice president for dozens of different banks and lenders, signing with initials or “squiggle marks” that looked different across multiple documents, possibly signed by other employees on his behalf. While Nye was more exercised by double-pledging notes and concealing rip-offs inside servicer computing platforms, he included these dodgy signing practices in his reports as a way to reach nonexperts with something they could easily understand. High-priced attorneys can explain away complicated securities maneuvers, but what about the physical documents that govern real estate transactions?
Nye intended to get these reports in front of anyone who could stop the abuse, from homeowners who could challenge their foreclosures to the highest levels of government. The effects of institutionalized fraud, Nye warned, would lead to drastic devaluations of securities derived from mortgages, widespread failures of major banks and a mass sell-off in the stock market, not to mention millions of foreclosures, job losses, vacant homes, and emotional distress. He predicted the financial crisis and Great Recession eight years in advance.
For years, Nye was under a gag order imposed by the judge in his foreclosure case. When it was lifted in 2000, he sent his reports to top executives at practically every major financial institution: Banc One, Countrywide, Merrill Lynch, Washington Mutual. Nye not only contacted Bear Stearns but created several websites with names like EMCMortgageFrauds.com, BearStearnsCriminals.com, and BearStearnsShareholders.com. On these sites he listed numerous criticisms against Bear Stearns and EMC. Bear Stearns sued to get the sites taken down because they created customer confusion. A judge forced the closure of some, while allowing those whose addresses were “unmistakably critical” to remain up.
In 2000, Nye helped sponsor a conference of the National Consumer Law Center in Broomfield, Colorado. With his Italian suit standing out among the collared shirts and jeans of 500 legal aid attorneys and housing counselors, Nye released his findings. “You’re wrong if you call these errors,” he told the assembly. “This is intentional and premeditated. Servicers want their customers in default, it’s designed to increase revenues.” Almost all of the lawyers thought he was nuts. Maybe they resented being lectured about their profession by a non-lawyer; maybe they just didn’t like this guy with the fancy suit and brusque self-confidence. “Why is he wasting our time like this?” was the general reaction. “We’re here to learn the law!”
The same year, Nye got to spend 15 minutes with Arthur Levitt, chairman of the Securities and Exchange Commission at the end of the Clinton administration. He was in South Florida for a speech and Nye somehow secured a meeting. Levitt listened intently and agreed with Nye on virtually every point. But when Nye finished, Levitt leaned back and said, “I have as many lawyers at the entire SEC as one major law firm representing the banks.” Levitt described a ten-year lag between identifying a financial fraud scheme and its ultimate exposure to the nation. “It won’t come out for ten years, and the banks know it. By then they’re already on to the next scam,” Levitt sighed.
Undaunted and completely obsessed, Nye kept making his case. He published rants and critiques of the mortgage industry on consumer websites like Ripoff Report and on a primitive blog documenting these issues, Mortgage Servicing Fraud (msfraud.org), run by another foreclosure victim-turned-evangelist named Jack Wright. Nye infiltrated the corporate message board for MERS, the private database for mortgage transfers, accusing them of fraudulent activity. The company’s CEO, R.K. Arnold, personally responded in the comments, writing, “There’s nothing sinister about who we are and what we do.”
Nye’s masterstroke was to purchase a piece of the companies he wanted to confront. He bought single shares of stock in several banks, mortgage servicing companies, and even the quasi-governmental entities Fannie Mae and Freddie Mac. Then he attended shareholder meetings and listed his grievances about pervasive mortgage misconduct and threats to the financial system. Nye studied every subsection of corporate shareholder rules, strategizing how to make himself heard.
In 2001 Nye and his parents flew to Seattle for Washington Mutual’s annual meeting. Company bylaws stipulated that all shareholders had the right to inspect accounting books and shareholder lists 14 days in advance. Washington Mutual didn’t really make that information available. Nye found the woman who handled investor relations and asked to see the books. “I’ve been here 16 years and nobody has ever made this request,” she said.
“Well, guess what—today’s your lucky day,” Nye replied.
“But we just don’t have this information!”
Nye smiled. “You’d better get it, because if not, that little party you’re planning tomorrow won’t go forward. I’ll go to the Superior Court of King County and shut down your shareholder meeting!”
The woman turned white and left the room, returning a couple of hours later with William Lynch, Washington Mutual’s corporate secretary, whom she pulled out of a board meeting. Nye handed Lynch one of his reports and reiterated his desire to see the shareholder lists and the books. Lynch pulled out his own file about the Pew family’s long legal battle with Washington Mutual’s predecessor, Savings of America. “You’re just crying sour grapes because we foreclosed on you,” Lynch said, smirking.
The smugness set Nye off. “You can wipe that fucking grin off your face before I knock it off,” he said, banging the table in the conference room.
The startled head of investor relations rose. “How dare you speak to the corporate secretary that way! He took time out of his day to address your concerns!”
“The reason he’s here,” Nye replied, shooting her a look, “is because he knows I can shut down your meeting in a second. So you’re going to listen to everything I have to say and take me seriously. This isn’t a fucking joke.”
Nye’s parents thought security would haul their son out of the room. But William Lynch stayed there until 8 p.m. going over Nye’s reports. And the next day Nye met for hours with the company’s head of mortgage servicing while the annual meeting went forward across the street. But while Nye forced Washington Mutual to be respectful, nothing really changed.
In fact, while major banks, accounting firms, and mortgage servicers accepted Nye’s comments and vowed to address them, only one company, the mortgage giant Fannie Mae, took it a step further. Fannie did business with enough lenders, servicers, and law firms that changes to their practices would have ripple effects throughout the industry. Nye corresponded with several Fannie Mae executives, including CEO Franklin Raines. Eventually Fannie Mae hired an outside law firm, Baker Hostetler, to verify Nye’s claims. Baker Hostetler conducted 17 separate interviews with Nye over a six-month period. The deal for his participation was that Nye would get to review the final report and make comments, but when the time came, Baker Hostetler asserted attorney-client privilege and shielded it. Nye was blocked from reading a study based on his own work.
Years later, in 2012, The New York Times’s Gretchen Morgenson published the 147-page report, which was authored in May 2006, at the housing bubble’s peak. With the saccharine title “Report to Fannie Mae Regarding Shareholder Complaints by Mr. Nye Lavalle,” Baker Hostetler corroborated most of Nye’s allegations. The author, Mark Cymrot, distanced himself by noting, “Mr. Lavalle is partial to extreme analogies that undermine his credibility.” But he agreed that Fannie Mae’s foreclosure attorneys in Florida routinely filed “false statements” and affidavits, that MERS filed “sham pleadings” in cases across seven states, and that “Lavalle has identified an issue that Fannie Mae needs to address promptly.”
But the report added one critical caveat. “Mr. Lavalle’s assertion that Fannie Mae faces tens of billions of dollars of unenforceable mortgages and damages from class action lawsuits is overstated in our view,” Cymrot explained, because borrowers were unlikely to robustly defend themselves from foreclosure. Most homeowners didn’t have the resources. Plus Fannie Mae was insulated, one step removed from the attorneys who filed the false documents. Reaching Fannie would require multiple lawsuits, and borrowers would simply run out of money.
There was an eerie parallel to the infamous Ford Pinto memo. According to a 1977 exposé in Mother Jones magazine, Ford Motor Company discovered a design flaw in the fuel tank of its Pinto model that made it susceptible to explosion in a rear-end collision. But the company refused to fix it, because a cost-benefit analysis determined it would be cheaper to pay off individual lawsuits than to redesign assembly lines and repair the cars sold. They deliberately kept the public at risk rather than spend the money.
The Baker Hostetler report for Fannie Mae wasn’t as explicit, but it made the same point: It would cost more to unwind the many problems with foreclosures than to keep everything in place and deal with borrower lawsuits on a case-by-case basis. As a result, Fannie Mae took no action on Nye Lavalle’s claims. They certainly didn’t make public the documented evidence of fraud.
But Nye was hooked on exposing banking industry fraud, and years of setbacks wouldn’t stop him. In his career, he had always peered to the edge of the horizon and brought back the future. Now he saw tsunami waves on that other side, and he felt obligated to warn people. Nye started serving as a consultant and expert witness for some foreclosure defense lawyers who embraced his theories. Through those cases and additional reports, Nye believed, he could educate lawyers, judges, and the general public. He left a trail a mile wide, so that anyone could see what he called “the fraud of our lifetime.” But it was hard to get people to listen; even Nye’s friends would tease him, calling him Chicken Little, asking when the sky would fall. They stopped laughing when it did.