Legal Question in Real Estate Law in California

The bank is not responsible for damages for fraud, unless they actually acquired the other lender entirely and got the loan that way. Defenses to the original loan based on fraud and any ongoing illegality in the loan, however, generally survive the transfer to the new lender. In other words the bank isn't repsonsible for the past, but cannot continue a wrong, and cannot benefit from the wrongdoing if the original lender would have been prohibited from benefitting.

As for refusing to produce the original note, they probably never got it. That may provide a complete defense to the debt if they cannot at the very least provide a copy AND prove it is a true and correct copy (which without the testimony of the origial lender will be hard to do).

To start off, a "holder in due course" of your promissory note is entitled to enforce the terms of the note, and the security "follows the note," meaning that the new holder of the note can enforce it against the same collateral (the real property described in the deed of trust) that was security for the original lender.

Next, as you probably appreciate, the buyer/holder of a note is not required to modify. They'll do it when they think it's in their best interest.

Finally, it is a myth that a lender cannot foreclose without producing the original promissory note. I have researched this twice in the recent past, and it's covered by California statutes. While I can't cite chapter and verse right now, it involves either producing a true copy of the note, or alternatively a sworn affidavit of entitlement to collect, and a bond. There is plenty of evidence of what the borrower owes, including the original recorded deed of trust, the record of payments made before default, the statements mailed by the loan servicer (which would amount to an "account stated"), Also, in a judicial foreclosure or other court proceeding, the lender's attorney would put the borrower on the witness stand and ask the borrower a bunch of questions, under oath, about how much they borrowed and how much of that they repaid. Between the testimony under oath and the paper trail, the lender would prove its case.

As to whether the loans were originally fraudulent, it is certainly true that a fair percentage of loans made in the hysteria days of irresponsible borrowing and irresponsible lending a few years ago were poorly designed and failed to comply with various laws and lending standards such as truth-in-lending, RESPA, translation, and others. There are boutique law firms making a specialty of pursuing claims based on fraud by lenders and loan brokers. I have defended a couple such actions for loan brokers. Borrowers will win some such suits, but in many cases the lenders and loan brokers are out of business or otherwise judgment-proof (broke). The large financial institutions that have wound up owning the notes often have solid defenses, including the statutes of limitations.

Also please note that just because a transaction is unfavorable to a party, i.e., is "a pretty crappy loan," doesn't mean it is fraudulent. Further, I am doubtful that the fraud of the loan originator is a defense to the right of a holder in due course to collect on the note, although it may be in some situations.