The curious case of the San Francisco foreclosure audit
I asked some questions about the firm that was retained to perform the the audit, Aequitas Compliance Solutions, and the principals whose names appear on it, primarily because much of what is actually contained in the report appears to ignore existing law within the state of California.
Our standard at HW is and always has been very clear: Do our best to get the story right. In the case of this audit, I felt that serious questions existed as to whether the findings were correct. So after HousingWire initially reported on the findings, I made the decision to pull our story covering the audit off the HW website in the interest of ensuring that our reporting wasn't echoing false information.
On Thursday, Forbes staff columnist Daniel Fisher penned a story asking many of the same questions I put forth on Wednesday via my tweets. I wanted to give just a hint of the factual problems that seem to plague this curious San Francisco audit, based on discussions I’ve had with licensed attorneys that practice real estate law in California.
For example, an entire section (5.1) of the audit is dedicated to discussing alleged defects in assignments. Which would potentially be a good discussion to have if the analysis were performed in, say, Massachusetts. In that state, assignments are required to foreclose and the assignments must comply with the same requirements as a deed transfer.
But it appears that no such requirement actually exists in the state of California. In fact, there is an appellate ruling in Calvo v HSBC Bank (2011) 199 CA4th 118, 130 CR3d 815, that held that assignments are not required to be recorded in California for a valid foreclosure.
So when the audit analysis spends pages claiming (without citing any legal authority) that the assignment chain is invalid — whatever that means — and then goes on to suggest that this somehow impacts the validity of a sale, it would appear to be simply and provably wrong. In fact, my guess is that the audit is very correct in asserting that the assignment chain is rarely recorded in sequence in California, but that’s exactly the point: It doesn’t matter, under California law.
Let’s look briefly at another audit section (5.3), which addresses alleged defects in substitution of trustee filings. The entire section appears to be based on faulty reasoning for at least four reasons I could gather from my conversations:
1. California law bars an attack on the foreclosure sale based on an attack on the signature on the SOT. There is even a statute on point here, Civil Code 2934a(d), which isn’t addressed in the audit.
2. In California, one need not have a recorded assignment to be a beneficiary. Thus, the fact that the assignment is recorded after the signing of the SOT is not proof that the SOT is invalidly signed, as the audit claims. This is a corollary from the holding in the Calvo appellate ruling I mentioned earlier.
3. Even if we grant that someone could attack the signature on the SOT, and even if we also grant that the recorded assignment is required to transfer the beneficial interest (when, as I also mentioned above, in California it’s not), the better view is that the SOT becomes effective on the recordation of the assignment. Thus, if the SOT is signed prior to the assignment, the SOT is not void; it simply becomes active upon the assignment being recorded.
4. It’s likely that the state's well-settled tender rule and prejudice rule also would apply to any attack on the SOT. While there is no case law on point here that was mentioned to me, it makes no sense that a direct attack on the deed is subject to these defenses while an indirect attack is not.
I’ll stop there because I’m not trying to write a legal treatise. I’m trying to make a point: This audit ignores a wide swath of existing California law, almost as if it doesn’t exist.
I’m not even arguing that I’m correct in the above interpretation of California real estate law. There is, in fact, plenty of discussion on the Calvo ruling in legal circles. Those opposing the appellate ruling are already hoping, as you might expect, that it will be overturned upon review by the state's Supreme Court. But even those that oppose it still grant that it directly affects foreclosures in California. So why did the San Francisco audit completely miss something as seemingly obvious as this?
What I’m arguing is that there is enough existing and ostensibly well-known California law missing here that should call into question the assertions being made by whomever actually performed the analysis in this audit.
So who wrote this audit, then? Good question. The best I can find is two principals at Aequitas that don’t appear to be practicing attorneys — or, in the case of one of the “auditors” who ostensibly leads the entire Aequitas "forensics” practice, may not even be a licensed attorney at all.
That's troubling enough. The even scarier truth is we probably don’t really know who actually penned the report, since the report doesn’t technically ascribe authorship to the two principals at Aequitas.
And any reasonable person should see that as a problem. How can this be construed an audit at all, then?