Mortgage bond holders taking collective action


EDITOR’S NOTE: Another entry under the category of “I told you so.” Sooner or later the investors were going to figure out that they had real claims against the investment bankers and other intermediary entities in the illusion of the securitization chain, together with the servicers and other players at the loan closing. Not long ago investors would not talk with each other. Now they are banding together. Things change. This development will lead to further unraveling of the factual constipation that those players arrogantly thought they keep a lid on. The inevitable and only logical outcome here is the entry of real facts portraying the reality of these transactions.

The current reality is very simple: the investors were tricked, the borrowers were tricked, and the intermediaries took all the money. The ONLY way this can be fixed from a National perspective is to bring the borrowers and the investors together, realizing that they both have the same interests — recovery from their financial ruin. Investors need to bring certainty to what is left of their “investments.” They need to know the value of their investments and how best to recover that value. Without that they can’t bring a specific action for damages. Without that they can’t fire the intermediaries and get an honest deal launched with borrowers on property that just isn’t worth what was advertised.

There is no way to avoid principal reduction in some form because it is already there. The value is down to where it should have been at the beginning and it isn’t going up. Investors, sellers,, buyers and borrowers need to accept this fact and government, including the judiciary, need to realize that this wasn’t normal market movement, this was cornering the market and manipulating it. The investors will prove that in their own lawsuits.

A direct approach from investors to borrowers will eliminate the ridiculous fees being sucked out of what is left of these deals, and allow the investors to recoup far more than  what they are being offered. Most homeowners would be willing to accept a principal reduction that splits the loss fairly between the investors and borrowers if they were able to get fair terms.

The difference is night and day. What would have been zero recovery for the investor could be as much as $100,000 or more in a genuine modified or new mortgage. And with cooperation between borrower and investors the security interest, which is in my opinion completely invalid and unenforceable, could be perfected, title cleared and the marketplace renewed with confidence in contract , property laws and the rights of consumers and investors. Community banks could fund the new mortgages  giving the investors an immediate exist or the investors could hold the paper through REAL special purpose vehicles that were REALLY created and REALLY existing.

Mortgage bond holders get legal edge; buybacks seen

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Wed Jul 21, 2010 2:44pm EDT

By Al Yoon

NEW YORK July 21 (Reuters) – U.S. mortgage bond investors have quietly banded together to gain the long-sought power needed to challenge loan servicers over losses the investors claim resulted from violations in securities contracts.

A group holding a third of the $1.5 trillion mortgage bond market has topped the key 25 percent threshold for voting rights on 2,300 “private-label” mortgage bonds, said Talcott Franklin, a Dallas-based lawyer who is shepherding the effort.

Reaching that threshold gives holders the means to identify misrepresentations in loans, and possibly force repurchases by banks, Franklin said.

Banks are already grappling with repurchase demands from Fannie Mae and Freddie Mac, the U.S.-backed mortgage finance giants.

The investors, which include some of the largest in the nation, claim they have been unfairly taking losses as the housing market crumbled and defaulted loans hammered their bonds. Requests to servicers that collect and distribute payments — which include big banks — to investigate loans are often referred to clauses that prohibit action by individuals, investors have said.

Since loan servicers, lenders and loan sellers sometimes are affiliated, there are conflicts of interest when asking the companies to ferret out the loans that destined their private mortgage bonds for losses, Franklin said in a July 20 letter to trustees, who act on behalf of bondholders.

“There’s a lot of smoke out there about whether these loans were properly written, and about whether the servicing is appropriate and whether recoveries are maximized” for bondholders, Franklin said in an interview.

He wouldn’t disclose his clients, but said they represent more than $500 billion in securities managed for pension funds, 401(k) plans, endowments, and governments. The securities are private mortgage bonds issued by Wall Street firms that helped trigger the worst financial crisis since the 1930s.

Franklin’s effort, using a clearinghouse model to aggregate positions, is a milestone for investors who have been unable to organize. Some have wanted to fire servicers but couldn’t gather the necessary voting rights.

“Investors have finally reached a mechanism whereby they can act collectively to enforce their contractual rights,” said one portfolio manager involved in the effort, who declined to be named. “The trustees, the people that made representations and warranties to the trust, and the servicers have taken advantage of a very fractured asset management industry to perpetuate a circle of silence around these securities.”

Laurie Goodman, a senior managing director at Amherst Securities Group in New York, said at an industry conference last week, “Reps and warranties are not enforced.”

Increased pressure from bondholders comes as Fannie Mae and Freddie Mac have been collecting billions of dollars from lender repurchases of loans in government-backed securities. With Fannie and Freddie also big buyers of Wall Street mortgage bonds, their regulator this month used its subpoena power to seek documents and see if it could recoup losses for the two companies, which have received tens of billions in taxpayer-funded bailouts.

Some U.S. Federal Home Loan banks and at least one hedge fund are looking to force repurchases or collect for losses.

Investors are eager to scrutinize loans against reps and warranties in ways haven’t been able to before. Where 50 percent voting rights are required for an action, the investors in the clearinghouse have power in more than 900 deals.

Franklin said the investors are hoping for a cooperative effort with servicers and trustees. While he did not disclose recipients of the letter, some of the biggest trustees include Bank of New York, US Bank and Deutsche Bank.

A Bank of New York spokesman declined to say if the firm received the trustee letter. US Bancorp and Deutsche Bank spokesmen did not immediately return calls.

“You have a trustee surrounded by smoke, steadfastly claiming there is no fire, and what the letter gets to is there is fire,” the portfolio manager said. “And we are now directing you … to take these steps to put out the fire and to do so by investigating and putting loans back to the seller.”

Servicers are most likely to spot a breach of a bond’s warranty, Franklin said in the letter.

Violations could be substantial, he said. In an Ambac Assurance Corp review of 695 defaulted subprime loans sold to a mortgage trust by a servicer, nearly 80 percent broke one or more warranties, he said in the letter, citing an Ambac lawsuit against EMC Mortgage Corp.

The investors are also now empowered to scrutinize how servicers decide on either modifying a loan for a troubled borrower, or proceed with foreclosure, Franklin said. Improper foreclosures may be done to save costs of creating a loan modification, he asserted. (Editing by Leslie Adler)

13 Responses

    Posted on August 14, 2010 by Foreclosureblues
    Editor’s Note….I think the word “fraud” is mentioned a couple o’ times…….

    Don’t you hate it when the DOJ uses the words ‘reality’ and ‘fraud’ in the same sentence early and often.

    Man, this guy must really be talented like Einstein, hatching this plan and pulling off this heist all by himself. I guess no one else would have ever known, if they hadn’t gone busted. Bad luck they didn’t get their TARP money or everything would still Biz as Usual today….They could be making lots of money foreclosin and modifyin….movin money offshore….just like all his buddies are now……close, so close.

    Does he have to give back his bonus?

    LEE BENTLEY FARKAS, Defendant.

    CRIMINAL NO. 5:10-mj-1028-GRJ
    Magistrate Judge Gary R. Jones
    The Government’s Motion
    for Pre-Trial Detention

    ( – The United States of America, by and through its undersigned attorneys, moves this Court, pursuant to the Bail Reform Act, to detain Defendant Lee Bentley Farkas pending trial. The defendant orchestrated a seven-year, nearly $2 billion fraud scheme that contributed to the failure of Colonial Bank, one of the 50 largest banks in the United States, and Taylor, Bean & Whitaker Mortgage Corp. (“TBW”), one of the largest, privately held mortgage lending companies in the United States.
    The defendant and his co-conspirators disguised this massive and complex scheme in part by creating false documents and moving hundreds of millions of dollars between TBW, Colonial Bank and other entities. And after learning of the government’s investigation into TBW, the defendant instructed a co-conspirator to destroy evidence and sought to cover up the scheme. The defendant, if convicted, is likely facing a sentence that would result in him spending the rest of his life in prison, and he has amassed substantial wealth that would enable him to flee to avoid prosecution. He has both the motive and the means to flee, and no condition or combination of conditions will reasonably assure his appearance at future judicial proceedings in this case.


    A. Indictment & Charges

    On June 15, 2010, a duly empanelled federal grand jury sitting in the Eastern District of Virginia returned a sixteen-count indictment charging the defendant with one count of conspiracy to commit bank fraud, wire fraud, and securities fraud, in violation of Title 18, United States Code, Section 1349; six counts of bank fraud, in violation of Title 18, United States Code, Sections 1344 and 2; six counts of wire fraud, in violation of Title 18, United States Code, Sections 1343 and 2; and three counts of securities fraud, in violation of Title 18, United States Code, Sections 1348 and 2. As a result of the indictment, the defendant faces a total statutory maximum sentence of 435 years, fines of at least $13.75 million and forfeiture of at least $22 million. More directly, a preliminary Sentencing Guidelines calculation results in a sentencing range of life in prison. As discussed in more detail below, for the defendant, who is in his late fifties, this factor alone creates a substantial risk of flight.

    Enjoy the rest here

  2. Abby and David,

    The answer is that we the people gave businesses the right to disseminate our personal information. We allowed Congress to pass the Fair Credit Reporting Act in 1970.

    I have been researching case law regarding the unconstitutionality and/or illegality of credit score system. So far, I have I have a Supreme Court case upholding the constitutionality of FCRA.

    It is true, as Abby stated, that when we sign loan documents, we also agree to have our personal information disseminated by the creditor. In retrospect, though, I wonder what would happen if we choose not to allow that. In other words, the next time you sing any loan documents, you cross out and/or do not sign the permission granting the creditor the right to share your info.

    However, we did not agree to have our personal information shared with possibly hundreds, if not thousands, of investors. Every time, the tranche that holds your loan is sold, your personal info is divulged to the potential purchasers. I do not think I signed anything givig that permission.

  3. I propose the Neil Garfield bottoms-up and top-down split mortgage options program.

    Each underwater home owner is given the right to fix a fair value on his home.

    The US Government will guarantee a mortgage on that homeowners own value with the full faith and credit of the US Government: I propose 5-year T-Bond rates for that underlying mortgage.

    And then the US Government will give a lesser guarantee on a 2nd mortgage to fill the difference.

    The rub: the US Government may condemn the property at will and on 60-days notice at the the price set by the homeowner. And third parties may force than condemnation procedure as well.

    And in that fashion – homeowners will be very honest about their homes value.

    Homeowners may adjust their value upwards if prices rise – as they will under this propgram.

  4. David
    I agree. The 3 agencies propagate incorrect data and it is a mighty struggle to get them to correct it.

    As far back as I can remember, I never told them they could have my personal data or sell it back to me.

    I did get them to put my statement in my credit reports that is similar to this”

    This loan (## with Bank so and so) is in dispute in a court of law for fraud, fraudulent transfer, TILA violations, Predatory Lending, civil Rico etc etc)

    So—anybody going to pull my sorry state credit report will at least see that

  5. Hi Abby,

    I was just thinking that these credit score companies hold personal information and I don’t remember ever giving them permission to get, keep it, or report it.

    My brain was thinking about Identity Theft. The only way these companies can report on a person’s credit – they must know a lot of personal stuff – SS# – addresses – account numbers etc. So, when they report that information to others – known & unknown – that equats Identity theft to some degree.

    Instead of charging us for the information, we SHOULD be charging them with a felony or PAY US for our information.

    I was checking around for car insurance prices and we recieved a letter stating there was a “discrepency” with the address I gave them from what was reported to them by TransUnion. I sent them a letter and I thought it was odd the other address was not included… That kind-a stuff gets under my skin… If TransUnion is reporting WRONG information about me, what else might they reporting…? Sounds like ID theft to me…

  6. Per the Editor’s Note…

    IMHO – The investors possibly hold the final links to connect the dots. However, those dots could be lethal for the investors because they will most-likely prove the loans were fraudulent. At the very least they will prove the instruments did NOT transfer properly therefore the carry no authority. The Transferor cannot Transfer what it never had. If the loan was properly recorded – it transfered zip therefore there is no holder…

    I might be wrong but it seems to me that the investors stand to LOSE a lot more but allow the borrowers to peak at their hand. If we see their cards – we’ll know they are bluffing – good for borrower – very bad for the investor.

    just my thoughts…

  7. David

    When you apply for a loan, that document, when you sign it, allows for the credit reporting agencies to report to the potential lender your data. Also, companies, such as PG&E, utiliites, other credit card marketers, can pull your credit report without you knowing about it.

    As to who gave authority to the 3 credit reporting agencies to collect & store & manage ‘your’ data – that is a good question.

    There is an entirely different company, Fair Isaacs, which reports your FICO score.

    My FICO score is even published on the SEC website in the securities trust my mortgage loan is in.

    FICO score is a measure of credit risk and is reported at all 3 major credit reporting agencies.

    Fair Isaacs has developed very sophisticated analytics and predictive software to construct the FICO score and it is all based upon massive amounts of data from borrowers.

    The Fair Isaac people have unveiled a new official FICO score called FICO 08. This was supposed to become the industry about two years…. Some lenders may continue to use the traditional FICO score. But over time, FICO 08 will take precedence as the score of choice.

    So here’s what you need to know: FICO 08 still retains the 300-850 scoring range of the traditional FICO score. But there are some important new differences.

    Under the new FICO 08 score, a single late pay will have virtually zero impact on you. Under the old model, one late pay could have demolished your score. Another note of importance: The more of your available credit you use under the FICO 08 model, the worse your score will be.

    FICO scores have different names at each of the credit reporting agencies. All of these scores, however, are developed using the same methods by Fair Isaac, and have been rigorously tested to ensure they provide the most accurate picture of credit risk possible using credit report data.

    Credit Reporting Agency FICO Score
    Equifax BEACON® Score
    Experian Experian/Fair Isaac Risk Model
    TransUnion EMPIRICA®

    The FICO score is what gets you an interest rate. The lower the FICO score the higher interest you will pay on a loan.

    A new competitor to Fair Isaacs is: VantageScore

    VantageScore was developed by the 3 credit reporting agencies.

    Here is VantageScore’s ranges:
    901–990 = A

    801–900 = B

    701–800 = C

    601–700 = D

    501–600 = F

    again–an ‘A’ will get you very low interest rates
    while a ‘D’ will get you very high interest rates on your loan

  8. If Anybody in California needs the UD Bench Guide for Judges, please email me at

    UD = Unlawful Detainer (eviction).

    This judge’s guide has citations.

    Put this in the subject line: Request for UD Bench Guide

  9. That’s an interesting closing comment!

    “Franklin said. Improper foreclosures may be done to save costs of creating a loan modification, he asserted.”

  10. David,

    From Wiki:

    According to a Fitch study, the accuracy of FICO in predicting delinquency has reduced in recent years. In 2001 there was an average 31-point difference in the FICO score between borrowers who had defaulted and those who paid on time. By 2006 the difference was only 10 points. Meredith Whitney of CIBC World Markets has called the FICO score “virtually meaningless”. Some banks have reduced their reliance on FICO scoring. For example, Golden West Financial (which merged with Wachovia Bank in 2006) abandoned FICO scores for a more costly analysis of a potential borrower’s assets and employment before giving a loan. According to Richard Atkinson of Golden West, “some of our best borrowers had low FICO scores and our worst had FICO scores of 750.

    check out this link:

  11. An odd question

    How did credit reporting agencies obtain permission to REPORT on our credit. TransUnion Nation Disclosure Center and other such companies…

    Isn’t that ID Theft…? Who gave them authority to gather our personal information without our knowledge..?

    Just wondering…

  12. we need to be on the look out for these cases and their docket info. their pleadings will most likely paralel ours and both parties will most likely end up talking to each other.

  13. First paragraph here is great.

    Commercial mortgage market is supposedly working things out – how come this has not happened with residential mortgages?

    Have to be careful with the statement – “Most homeowners would be willing to accept a principal reduction that splits the loss fairly between the investors and borrowers if they were able to get fair terms. ” There are proposals going around which suggest some principal reduction, however, the investors would share in future home equity appreciation. This is no better for homeowners – if a homeowner is not entitled to full future appreciation (and market is likely to be soft for years to come)- they still will not want to – own the home!! There must first be a correction of principal to adjust for all the fraud – before other investors may step forward. Remember, these loans are being sold at steep discounts – with much profit being earned by new parties (hedge funds/distressed debt buyers). This is part of the reason why the first paragraph here is so true – the real party is still not surfacing.

    On higher value loans – such as commercial property and high residential property – banks have likely not sold the loan to a third party. If your loan was smaller – it is very likely your loan as been bundled with other smaller loans and sold – at a steep discount. Thus, plenty of room for principal reduction – without sharing equity with the new “investor/creditor.”.

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