Being a victim of consumer fraud when purchasing a mortgage doesn’t necessarily protect you when the bank that issued the loan forecloses on it.
That’s the lesson of Millard Leff, a widower and World War II veteran from Readington, whose home was recently ordered foreclosed — even after a federal court found the broker who sold Leff his mortgage guilty of fraud.
Leff won the notable legal victory seven years ago, three years after sales representatives of EquiHome Mortgage Corp. of Bernardsville convinced him to exchange his safe reverse-mortgage for a new 30-year “subprime” loan that he could not afford.
In the space of months, while he was in and out of the hospital, the deal sent Leff from financial security to the imminent threat of being out on the street.
At a June 2007 trial in Federal District Court in Trenton, Leff won the $220,000 value of the subprime mortgage from EquiHome, trebled to $660,000 because of the fraud. The case included an audiotaped admission by an EquiHome official that Leff had received “no benefit” from converting his reverse mortgage.
EquiHome promised to appeal but did not, an omission that spawned a continuing legal battle between the firm and its former attorneys. Instead, EquiHome as a corporation, and its principal officers as individuals, filed for bankruptcy in 2008. As a result, Leff collected only pennies on the dollar.
Following a brief hearing on Valentine’s Day in Somerville, Superior Court Judge Edward Coleman has ruled that the findings in the federal case do not bar Flagstar Bank, which issued the subprime mortgage, from seizing the home.
Leff died in 2011, but Coleman gave great weight to the fact that he was the first defendant listed, the “named” defendant, when Flagstar brought the new foreclosure action in May 2013.
Coleman also ruled that despite being heir to half the estate, his son Kenneth Leff has no legal standing to contest the foreclosure.
“Kenneth Leff did not execute the note or the mortgage,” the judge wrote.
“Kenneth Leff fails to suffer harm as a result of Plaintiff’s foreclosure and is not a real party in interest.”
“Flagstar brought suit against me, they named me in the foreclosure, then argued that I don’t have standing — and the judge agreed!” Kenneth Leff said.
Documents from that case can be viewed online.
Like many in his generation, Leff joined the armed forces during World War II. Afterward, the GI Bill helped him get an electrical engineering degree at the Newark College of Engineering, now part of the New Jersey Institute of Technology.
For 40 years, he owned and operated an electrical equipment firm, Kenbar Industries, in the Whitehouse Station section of Readington. For almost as long he had lived in a house nestled in a stand of trees on a 1.7-acre lot, sharing the bucolic property with his wife Barbara, who died in 1987, and their two children.
After paying off his original mortgage, Leff bought a reverse mortgage from a lending program geared to senior citizens. It ensured he would be able to remain in his house for the rest of his life, along with a renewable line of credit that held a balance of $76,123 in April 2004, when Leff was 79.
But at the end of that month, he received that fateful telemarketing call from Banctel, one he was ill-prepared to handle. For besides being ill and easily confused, Leff had made his previous mortgage decisions when banking was a sedate profession, known more for leisurely hours than for cut-throat sales practices.
By 2004, however, a mortgage loan was nothing more than a tidbit to be sliced, diced, and tossed with hundreds of others into mortgage-backed securities. It did not matter if the underlying loans were safe or risky — and ratings agencies almost invariably certified them as safe — just that they yielded more investment products.
According to Millard Leff’s subsequent suit, the Banctel telemarketer told him that he was “at risk” of being thrown out of his home because he had lived past the time calculated for his reverse mortgage. Not only would he lose the home, Leff’s “children would be liable” for his debts.
Not too long before that, someone with $940 in monthly income — Millard Leff’s Social Security check — would have had trouble qualifying for any sort of loan, much less a 30-year mortgage. But the mortgage application whipped up by Equihome put his annual income at $120,000.
“My Dad never made that much in his life, and it’s not what he reported,” Kenneth Leff said. “The only income he claimed was his Social Security.”
According to court records, Equihome never asked Millard Leff for his tax returns or other proofs of income. But in the high-flying mortgage market of the early ’oughts, such omissions had become commonplace.
Nevertheless, Leff agreed to a recommendation from Steve Nabors of Equihome to meet at a local law office on April 30, 2004. Leff signed the mortgage papers — though his suit claimed his signature was forged on one disclosure page — with the attorney representing both parties.
In exchange, Leff got a $52,000 cash payout. A neutral third party might have wondered, though, how long he would be able to meet his monthly mortgage payment, which had gone from zero to $1,319. But Equihome already had someone waiting to buy the note.
Flagstar Bank had a rapid rise. Established in 1987 in Troy, MI., and operating under the name Flagstar since 1994, as a new century dawned it had become the largest publicly traded savings bank based in the Midwest. Several factors contributed to its ascent, but one is germane to Millard Leff: even by the dismal standards of modern American banking, Flagstar wrote a lot of bad loans.
By 2009, Flagstar’s toxic mortgage business put it among banking’s walking dead. Bloomberg News named it among 150 “on the brink of no return.” To make that list, banks had nonperforming loans equal to at least 5 percent of their holdings. At Flagstar, the figure was 11.2 percent, the largest bank in double digits, according to Bloomberg.
But Flagstar survived, in part through a taxpayer bailout, $266 million from the Troubled Asset Relief Program. It also got a $250 million investment from a New York hedge fund, MatlinPatterson Global Advisers. A spinoff of Credit Suisse First Boston specializing in distressed businesses, MatlinPatterson steadily increased its stake. Since the end of 2010, it has been Flagstar’s majority owner.
Despite the bailout and the buy-in, Flagstar has not had smooth sailing. For a time in 2011 – 2012, its stock traded below the $1 per-share requirement to be listed on the New York Stock Exchange.
In December 2011, Flagstar sold its Georgia branches to PNC Bank, and its Indiana branches to First Financial Bank.
Flagstar has recently paid a number of settlements or court judgments for misrepresenting or mishandling mortgages and mortgage-backed securities:
Still, when it came to Equihome’s deal with Millard Leff, Flagstar seemed uniquely well positioned to evaluate the risk. Throughout its dealings with Millard Leff, Banctel’s president and CEO, Richard Litwin, also was a manager at Flagstar. In answering the suit, Banctel acknowledged it “share[s] common office location and equipment” with Flagstar.
Depositions would show that even before Leff closed, Flagstar already had two credit reports on him and had pre-underwritten the mortgage. Within 10 days, Equihome notified Leff that the mortgage had been assigned to Flagstar.
“Flagstar drove this process,” Kenneth Leff said. “They were the ultimate decision-maker.”
In an affidavit, Litwin denied any knowledge of or business dealings with Equihome. Instead, he explained, “Banctel.com had a contract with Flagstar Bank to solicit home equity lines of credit for its existing customers. Pursuant to this contract, Banctel.com contacted plaintiff, Millard Leff in June 2004.”
At that time, a Banctel saleswoman convinced Millard Leff that he needed a second mortgage to help pay his bills, primarily the first mortgage. But as it happened, when she came back to complete the arrangements, Kenneth Leff was up from Florida to look in on his father. He answered the phone.
“I said, `He doesn’t need a mortgage, he’s got a reverse,'” Ken Leff recalled. “And they said, `Oh, no he doesn’t.'”
Millard Leff made his mortgage payments until November, when he was hospitalized with a near-fatal bacterial infection that would keep him in and out of care facilities for most of the next five months. In January 2005, his daughter, Barbara Leff-Croop, contacted Flagstar to explain her father’s situation, but the bank was only interested in payment.
But Flagstar had a Plan B. On February 6, 2005, when Leff was still hospitalized, it sent him a notice that it had sold his mortgage to First Horizon Home Loan, a subsidiary of First Tennessee Bank National Association. On April 13, 2005, First Horizon filed for foreclosure.
The next day, the Leffs caught a break.
After months of trying to rescind the mortgage, and negotiate with anyone from Banctel, Equihome, Flagstar or First Horizon, Ken Leff heard from Jeffrey Bergida, then the general counsel for Equihome. And Bergida wanted to do the right thing.
“Look, if someone is in a reverse mortgage, they can’t be benefited by getting out of it, that’s it,” Bergida said. “There isn’t a tangible benefit, and certainly taking a senior citizen out of a reverse mortgage, you can’t do it and we won’t do it.”
Bergida explained that he wanted to restore Millard Leff’s previous situation. When they hung up, Ken Leff felt elated. As it turned out, though, that was the last he heard from Jeff Bergida, who would soon leave Equihome. Foreclosure papers were served at his father’s house two days later. But he had taped the conversation with Bergida.
In February, Millard Leff had signed over power of attorney to his son, witnessed by night staff at Hunterdon Medical Center. After assembling the paperwork, Ken Leff filed a lawsuit pro se on behalf of his father in Hunterdon County. The next month, he found an aggressive young lawyer, Paul Castronovo, then in his sixth year of practice, willing to take on the case.
By that time, First Horizon had taken exception to the mortgage. Citing “contractural obligations,” it reassigned the note back to Flagstar, and the banks began their own legal skirmish. (They eventually settled, as did Flagstar and Equihome, but both deals are largely covered by confidentiality agreements.)
By taking advantage of relaxed federal foreclosure standards, the banks also had the Leff suit transferred to U.S. District Court in Trenton. That would turn out to be a mistake by the defense. But the plaintiffs then made their own crucial error.
As the case ground on in a welter of motions and cross-motions, claims and cross-claims, the array of wealthy defendants proved daunting. In May 2006, the Leffs agreed to concentrate on Equihome with Bergida’s taped statements. They dismissed their claims against the other players.
“Paul Castronovo and I went back and forth on it, but the bottom line was that Flagstar/First Horizon had tremendous monetary resources and I did not,” Kenneth Leff said. “Castronovo was overwhelmed financially with this case and all of the motions, sanctions, etc. and could not proceed without additional monies.”
Leff said he worried that Equihome might declare bankruptcy, but believed that the settlement with the other defendants meant that they were all dropping their claims. The streamlined case gain momentum. Where the defendants had tried to bring felony charges against Ken Leff for taping Bergida, U.S. District Judge Garrett E. Brown Jr. noted that in New Jersey it is legal even if only one party to the conversation is aware of being taped _ Equihome now acknowledged the recording’s authenticity.
The federal court was not as hospitable as the banks expected. Brown allowed jurors to consider the state’s consumer fraud statutes. But even the resulting verdict for Millard Leff was nowhere near the end of the case. For the next year, Equihome and its officers sought to shield their assets and appeal. The appeal was finally dismissed in March 2010 because Equihome failed to provide required bankruptcy status reports.
That outcome did provide some comfort to Millard Leff, although he had a hard time remembering it.
“I was my father’s principal caretaker during the last years of his life,” Ken Leff said. “He was suffering from dementia, but he did have lucid periods, and he always wanted to know whether he and his dog were going to be put out on the street.”
But because of the bankruptcy, Millard Leff did not see much of jury award. By the time he died, “he had gotten about $35,000, most of which went to the lawyers,” his son said. He recently received another $2,500.
Meanwhile, Ken Leff learned that Flagstar intended to revive the foreclosure, “I offered to put in some of my own money,” he said. “But they didn’t want to negotiate.”
And Leff, who often uses crutches because of the effects of an initially misdiagnosed Lyme disease, found himself back in court pro se. This time, Flagstar has kept the action in state court, where Coleman was impressed by the bank’s case.
While the Leffs attempted to rescind the mortgage in 2005, the judge noted, “a negotiation was attempted, but the parties never reached agreement.” He met Ken Leff’s suggestion that Flagstar was taking different positions than in the previous case with, “Isn’t that the whole point?”
Rather than dropping all claims under the previous settlement, Colman found that Flagstar only released personal claims against the Leffs, not property claims, and Ken Leff has no interest in the property.
Flagstar’s foreclosure complaint also named unidentified tenants, but Leff said, “The ‘tenants’ are me and my wife. Flagstar knows that because they served me at the house.”
When contacted, Flagstar spokeswoman Susan Cherry-Bergesen lent a sympathetic ear to the Leff saga, occasionally exclaiming, “Oh no!”
“It certainly is an interesting case,” she allowed, but seemed startled when asked why Flagstar has revived a foreclosure that began with mortgage fraud.
“That’s your question, why are we pursuing this case?” she said. ”I’m not, I just, no, no, I don’t think we’d have anything to say. It’s in litigation and we normally don’t comment on litigation.”
Leff said he will appeal, “but the odds are stacked against us,” particularly without an attorney. He contacted “more than 200 lawyers, but no one is interested,” he said. “There’s no money to recover; we’re only trying to save the house.”
That includes Castronovo, who since he met the Leffs has won legal accolades as well as $6 million in judgments. He is annually named to highly selective lists of “rising stars” for young lawyers, and then “super lawyers,” those in the top 5 percent of the profession.
“Paul Castronovo got to be a super lawyer on the back of this case, but now he won’t even respond to our emails or phone calls, even through his secretary,” Ken Leff said.
“I’m afraid I don’t have anything interesting to say,” Castronovo said. “I haven’t been a part of the case since 2008.”
But he did sound wistful about the downbeat outcome of what once seemed a remarkable success.
“It was a good victory, but when the loser files for bankruptcy, it can turn into a moral victory,” he said.