Securitization and TILA Audits: You Can’t Do One without the Other

Article below submitted From the desk of Brad Keiser:

Editor’s note: This is a perfect example of why ignoring the complexities of securitization leaves all the red meat on the table. The commingling of funds that is cited in the article below is exactly what I have I have been talking about , exactly why the pretender lenders balk at a full accounting, and exactly why a full forensic analysis (like the one Brad will be presenting later this  month) is essential if you are going to battle.

see: Brad Keiser\’s Forensic Analysis Workshop

It is not enough to know about securitization. You must understand what effect it had on the transaction. It sounds counter-intuitive to say that when you know the homeowner has not made a  payment, the obligation might still be considered performing and NOT in default because the payments were made to the creditor.

This does not automatically  mean that you get a free house. But it does mean that the real creditor who has advanced the money, the creditor that the debtor owes money to, is the real party in interest and they might no longer be secured depending upon the nature of the payment and the handling of the accounts — which is why I think that accountants would be ideal candidates for Brad’s workshop.

Securitized loans are not a separate animal from the discrepancies that are revealed in TILA audits. They impact the TILA audit in a way that dwarfs all other factors. Like the fact that the $5,000 yield spread premium paid to the mortgage broker is just a small fraction of the yield spread pocketed by the investment banking crowd behind the curtain.

And what about the very significant impact of those spreads and premiums combined with the impact of a reset on the life of the loan, and the false appraisal? The APR is misstated in virtually every securitized loan not by small amounts or fractions but by multiples of more than 100% of the loan principal in some cases.

Moody’s warns on GMAC mortgage bond servicing
Thu Mar 4, 2010 3:07pm EST
Related News

* Moody’s upgrades GMAC on US Tsy capital infusion
Fri, Feb 5 2010

NEW YORK, March 4 (Reuters) – Moody’s Investors Service on Thursday said it may downgrade portions of 125 residential mortgage bonds based on unusual “cash management arrangements” of GMAC Mortgage LLC, which services loans in the securities.

The rating company said GMAC commingled cash flows from multiple bonds in a single custodial account, Moody’s said in a statement. This allowed GMAC to use cash from loans in one bond for principal and interest payments on another, it said.

By allowing the commingling, it “increases the likelihood that some RMBS deals may not be able to recover the amounts ‘borrowed’ by the servicer to fund advances or another RMBS deal if a servicer bankruptcy were to occur,” Moody’s said.

This could give rise to competing claims in a bankruptcy proceeding, the rater said.

Downgrades based on mortgage servicing, rather than credit, may add to concerns of bond investors who have been long accustomed to harsh rating cuts as delinquencies and foreclosures increase losses.

GMAC Mortgage is a unit of Residential Capital LLC. Residential Capital is owned by GMAC Inc.

For some commentary see this link:

Brad Keiser


10 Responses

  1. Should a forensic audit be done on a mortgage over 3 years old. I have heard that due to statute of limitations being 3 years on TILA that it is a wast of money to do an audit.. what do you say?

  2. Does anyone know where I can get instructions on how to perform my own securitization audit?

  3. PJ

    Search “Board of Governors of the Federal Reserve System”.
    Type in “public comments” in the search box.

    Click on first entry for “Federal Reserve Board – Proposal for Comments”

    Scroll down to and click on : “Regulation Z – Truth in Lending R-1378”

    If you click on the title (Regulation Z – Truth in Lending R-1378) it will take you to either HTML or PDF opening of the Interim Opinion.

    You can also view “Comments” – which is under the title- some very interesting comments.

    Unfortunately, the new law does not appear to be retroactive to sale of loans before May 2009. However, there is one entry for public comments by the NCLC which requests that the law apply be retroactive (although they request 180 days to this). The FR has not yet issued a FINAL decision but public comments have been closed..

    Further, even in the law is not retroactive ( and some lawyers may dispute this), the Interim Opinion clearly outlines who is and who is not “covered” as the identifiable “creditor” under the act. You may want to start reading under Section IV – “Section by Section Analysis”.
    Clearly, investors in “pass-throughs” are not the “creditor” according to the the new “TILA” amendment. Balance sheet accounting is critical to determine identification of the actual creditor according to the FR Interim Opinion.

    The TILA Amendment was drafted by, I believe, Senator Boxer, and the purpose of the amendment was that borrowers could negotiate directly with the actual creditor once the creditor is disclosed by law.

    I believe that the TILA Amendment, along with changes to FASB 140 (Rules 166 and 167), which require that off-balance sheet conduits (REMICs/QSPE) be brought back onto lender’s balance sheet this year, are important in court proceedings to convince otherwise not knowledgeable judges that the Trustee (or servicer) for securitized trusts are not the current creditor.

    Finally, it is very important to ask about the LAST assignment. Judges just accept that assignments to trusts (however bogus they may be) are the LAST assignment – which is also not likely true. Again, the TILA Amendment was passed in order for borrowers to contact their CURRENT creditor – and that creditor to be identified, in order for the borrower to be able to directly negotiate with the actual current creditor. Courts, by accepting any willy-nilly assignments, are denying borrowers that right – the legal intent of the TILA Amendment.

    Disclaimer. I am not a lawyer, and this is for educational purposes only.

  4. 2 Anonymous

    “and the new TILA amendment defines and demands identification of the true creditor”

    Would you be kind enough to post that TILA amendment, or provide the link to it.

    Also Is all of this something that is evolving in the homeowners defense, or has it been used in successful cases to date.If so a submitted motion using it would be helpful.

    Thanks for all the info and insight.

  5. Dave Kreiger

    Your reasoning, in my opinion, is excellent. What we have with derivative is “synthetic” securitization and the process you explain is right on target. Not only is the chain of assignment incomplete and therefore invalid from the onset, but also when original collateral ceases to be a current asset (receivable in accounting terms), the entire chain is broken. The original security (and the underlying receivable collateral) is extinguished with unidentified parties claiming rights to the “debt”. My point has always been that only current receivables are.securitized. Once the receivables are written off – no security (and it’s derivatives) exist. The security investors are returned their principal investment, via the swaps, and no longer have a claim to the underlying collateral (receivable) that once supported the security.

    Excellent post. The only problem is – how does one get this across to judges in courts of law? Judges like simplicity. Must find something to get judge’s attention. And, there is much to look at including, flaws in original assignments to trust (missing assignment to security underwriters), invalid Power of Attorney in subsequent assignments, assignments after the trust is closed, forgeries, inconsistencies, etc. etc. In addition, new FASB rules mean the off-balance sheet are coming back onto security underwriters balance sheet, and the new TILA amendment defines and demands identification of the true creditor. Also, as the swaps were executed on the original trust, the trust technically is dissolved. If we can demonstrate that these trusts are, in effect, dissolved and the securities have ceased trading, I believe that this would obviously, be very important in court.

  6. From the indications I have researched, the Uniform Commercial Code, which has been adopted into every states’ statutes, will come into play here … as a result of securitization, the direct effect it will have (because a derivative was created from all of the portfolios by Wall Street banking entities) meant the assignments that were created by the original lenders when they placed this into the secondary warehousing markets were “disconnected” when the derivative was created because … and I grimace here … isn’t it a felony to sell or use secured collateral to pledge as collateral on another debt? I believe even the UCC has restrictions about doing that (which the bankers obviously ignored when they used the portfolios to collateralize debt on top of debt and then bet against the performance of the security by buying credit default swaps.

    What ends up happening is the steps taken through procedures as described in the Uniform Commercial Code are undone when the derivative is created because that is accompanied by a CDO, which derives its operation in contract as a guarantee in of itself … and not the “Thing Itself”. Thus, any promissory note being re-sold and placed into any securitized portfolio is now unenforceable because the assignment of the debt disappeared with the derivative creation (re-created debt on top of debt with the assignments held within the debt BUT NOT WITHOUT THE DEBT) … in other words, the previous assignments contained which perfected the securities controlled on the local and state level disappeared when the security was created (whether proprietary or securitized through a brokerage) out of thin air.

    This is why you see unperfected security instruments filed at the state and local levels. They only represent the interest of the original lender and the subsequent assignments UP UNTIL THE DERIVATIVE WAS CREATED! After that, the whole chain of title disappears … and It RESTARTS itself, unperfected, OUTSIDE of the chain of title, at the point where the operation of the derivative begins.

    If you study the Uniform Commercial Code, you will realize that every “stem” or “citation” in the Code hits an ending point. The Code itself is finite under the operation of law (since these are incorporated by every state into statutory form). Every beginning point in the Code has an ending; the assignment stops when certain finite actions occur to cause it to stop. Each UCC Codified Form has a finite end and when the deriviate is created out of thin air; the only assignments still in place are the assignments that were originally created WITHIN the portfolio, not outside of it. The derivative causes a brand new chain of title to be created OUTSIDE of the assignments within the portfolio. Definitely unenforceable, because the assignments between the cumulative batch of notes in the portfolio were NOT tied to the OUTSIDE chain of title created when the derivative was formed.

    If that’s not it … please advise … because that’s how I’m seeing this mess after reading and re-reading the assignment portions of the UCC.

  7. Nye, unfortunately they are robbing Paul & Mary aka the average hard working American to pay Peter or whom ever, the Piped Piper call them what you will.

    The statement by that midget megalomaniac, at GS saying he/they are doing “God’s Work”, raises the question could he actually be Jihadist?

    In our country a strong Christian/Judo culture provides the vast majority of us with a strong moral compass and commitment to community and country. His statement should not be ignored and in fact the midget megalomanic should be held accountable and questioned on what he actually meant by that statement. What exactly is the Midget Megalomaniac’s definition of God’s Work undertaken by him and his employee’s at GS.

    Like the old saying goes, “God is in the details”. So let him provide us, we the people with the details of his inspiration, God’s work, that navigated GS to implode the US economy.

    A nation wide request for information / response campagain to GS, along with copies to all pertinent and regulating institutions requesting an explanation to his “statement” of God’s Work” will raise many pertinent issues at hand.

    If by our constitution we up hold and respect the distinct separation of “Church & State”, how can a backdoor bailout recipient, CS, via AIG claim that they are and have been doing “God’s Work”.

    Call me simple, but the qusetion requires an answere, which god, is GS doing the work for?

  8. so is the audit I had done by brad months ago obsolete?

  9. WOW .. so they could default any issue they wanted at any time (if they had insurance/cds’s) and they made it impossible to determine determine whose money went where … my note has specific language saying how the money must be distributed. Sounds like a suit with triple damages.

  10. We always said they were robbing Peter, to pay Paul and Mary!

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