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EDITOR’S ANALYSIS: MBIA insured mortgage-backed securities created by Countrywide. The insurance contract provides that MBIA waives any right of subrogation or claim to the loans that were supposedly in the pool of loans that were morphed into some sort of entity (people call it a trust) that issued mortgage bonds. MBIA paid when the securities were downgraded to junk, which is to say that someone received money from MBIA on behalf of the pool (REMIC, trust) to cover the losses that were stated by the Master Servicer, over which MBIA had no control. MBIA even waived the right to contest the downgrade.

All of that means that a payment was made on the obligation owed to investors that arose when they advanced money to fund residential mortgage loans. That payment is the subject of the lawsuit between MBIA and Bank of America, who now owns Countrywide. The allocation of that payment has been ignored by virtually everyone. It is a third party payment against the obligation owed to the creditor(s) who funded the mortgage loans.

It is important to note that the obligation to the creditor investors arose BEFORE the Borrower ever even applied for a loan, much less received it. Thus the obligation arose by definition from entities other than the Borrower. THEN the Borrower entered the picture to complete the circle of deception and THEN the borrower accepted the loan without knowing its true character, and THEN the Borrower executed the promissory note without realizing they were in reality only issuing a security, rather than commercial paper.

Hence the insurance payment (or any third party payment under like condition) reduces the amount owed to the creditor who either received the money directly or indirectly through a trustee or other agent — an agent that may or may not have properly accounted for it to the investors.

In some cases, the payment reduced the obligation to zero.In such cases, which were many, the assertion of a default by the Borrower was meaningless. How can the Borrower be in default of an obligation that does not exist or which has been largely prepaid?

The gaslight strategy of the intermediaries who are pretending to be lenders is to collect the insurance, collect all payments covering the investment by the creditor and still collect on the same obligation from the Borrowers. They elected to take the money from insurance and other sources. Why should they be allowed to double dip and take money from Borrowers too?

The accounting to the borrowers and the Courts in foreclosure litigation has been completely absent, despite numerous RESPA 6 and other inquiries. By ignoring those payments and the consequential reduction in the obligation, the Courts have allowed claims for 100 cents on the dollar when in fact much less than that was owed. This in turn created the conundrum that borrowers faced when they submitted modification offers that were later rejected. The borrowers were not allowed to know how much was actually still owed to the investors and therefore were required to guess at the amount or accept the amount demanded.

All of this turns on the issue of the single transaction doctrine. In simply language the loan was a transaction between investors and borrowers with many intermediaries between them. Since it is the intermediaries who are initiating the foreclosures rather than the investors, they are not creditors and the amount they are demanding is misleading and fraudulent if there was an insurance payment — or any third party payment that reduced the obligation owed to the investors. Instead they are asserting claims for the entire obligation of the borrower at the closing while the real creditor has been paid in whole or in part by these credit enhancement tools. The collateral source rule does not apply as it would enable a creditor to claim and receive more than the contract amount.

Countrywide misrepresented the securities to MBIA, AIG and everyone else. The misrepresentations are spelled out in the lawsuit now pending in New York state court. BOA attempted to dismiss the fraud charges on the basis that MBIA did not show a direct connection between the misrepresentations and the damages suffered by MBIA. MBIA responded that they didn’t have to show such a direct connection. It was sufficient, they said, that the misrepresentations occurred, and had they known about the misrepresentations there was no way on Earth that they would have accepted the premium or signed the insurance contract.

The Court agreed with MBIA, thus significantly lowering the burden of proof to succeed with their fraud action. Settlement sure to follow. The significance of this is that the same argument can be applied to a fraud action for damages against the securitization participants and the loan originator.

But for the misrepresentations of the loan originator who appears on the note (without ever having funded the loan), the borrower would most likely NOT have signed the loan papers — and instead either dropped the whole idea or shopped around for a loan where there were not so many intermediaries that were making so much money and where the truth of the loan terms and specifically the life of the loan would have been adequately disclosed. In most cases, the failure of the loan sometime in the near future was already known to everyone except the borrower. The appraisal fraud, the selling of teaser loan payments, and other tools used to set siege upon unsophisticated borrowers all add up to material misrepresentations (lies) that induced borrowers to enter into contracts that were easily identified as loss creators, including the loss of reputation and credit ratings.

It is a fair statement to say that the investors would not have invested, the borrowers would not have borrowed, and the insurers would not have insured these transactions if they had known the truth. But for the investment by the investors there would have been no loans. But for the borrowers’ signature on the documents, there would have been no loan and hence, no investments. The mortgage meltdown would have never happened. But for the lies told the insurers there would have been no insurance. Without insurance, most investors would not have invested and the investment grade ratings for the securities would not have been obtained. Hence again, no investment, no loans, and no meltdown.

Which brings us to the final element that is oft discussed here. The execution of the promissory note was in fact the issuance of a security upon which other securities (mortgage bonds) were intended to derive their value. The abandonment of the claims and even the homes after foreclosure that are sitting vacant stand alone testifying to the fact that the mortgage loan designation was misleading in and of itself. This was a securities issuance scheme of which the apparent closing of a mortgage loan was a part.

But the “loan” and other documents were intentionally altered and neglected to allow time for the intermediaries to trade as though they were in fact the lenders when they most clearly were not. Had this fact been known by the borrowers or the investors, or the ratings companies, the mortgage bonds, the mortgages, the mortgage meltdown would have remained part of imagination rather than the basis of our terrible reality.

Like the insurance contracts all these loans were based upon fraudulent misrepresentations. The action for fraud is simple — damages, perhaps punitive or treble damages, attorneys fees and costs. With the profits in the trillions as earned by the intermediaries, it should be irresistible for enterprising lawyers to bring fraud claims on a continual basis piling up awards to their clients and huge amounts of attorney fees. Where are the attorneys?

Setback for Bank of America in a Lawsuit Filed by MBIA


A New York state judge on Tuesday made it easier for the bond insurer MBIA to pursue its $1.4 billion lawsuit accusing Countrywide Financial, a unit of Bank of America, of fraudulently inducing it to insure risky mortgage-backed securities.

Justice Eileen Bransten of the New York State Supreme Court ruled that to show fraud, MBIA need only show that Countrywide had misled it about the $20 billion of securities that it insured, not that the misrepresentations caused its losses.

MBIA accused Countrywide of misrepresenting the quality of underwriting for about 368,000 loans that backed 15 financings from 2005 to 2007, while the housing market was booming. It said it would not have insured the securities on the agreed-upon terms had it known how the loans were made.

“No basis in law exists to mandate that MBIA establish a direct causal link between the misrepresentations allegedly made by Countrywide and claims made under the policy,” Justice Bransten wrote, citing New York common law and insurance law.

While not ruling on the merits of the case, the judge lowered the burden of proof on MBIA to show Countrywide had committed fraud and breached the insurance contracts.

She also said MBIA could seek damages for its losses, rejecting Countrywide’s argument that the insurer’s only remedy was to void its insurance policies. MBIA had said that would be unfair to investors.

Manal Mehta, a partner at Branch Hill Capital, a hedge fund in San Francisco, said Bank of America had lost “one of its key defenses in the ongoing litigation over mortgage putbacks by the monoline insurers.”

Neither Bank of America nor MBIA officials were immediately available to comment.


16 Responses

  1. I experienced very similar circumstances. Builder has “special relationship” with local bank. Bulider promises to build a house for 350 on my fully improved lot—-gets shell only up–pushed percentage hard to get draws–then files bankruptcy. He overcharged by his admitted 50K my view 100K —–and house then went on to huge overruns because he had bid so low–and I was struggling to scrape up contractors to finish before bank did that to me—construction period loan for 18 mos—then what?

    At least they wont be trying to get your place back as hard—cant steal the $100,000 kitchen to resel for 2-4k in South America.
    Slightly used. The stuff is worth more if they can catch you with a lot of new fixtures in place that they can pull out and sell as out of box demos-

    They have your house plan, once they come in and photograph to calculate the strip out–in your case there must be some plumbing fixtures—prehung doors and windows do well in the secondary market. When they are done your home without stairs–i know that one too—stairbuilders are really last on job—so not scuffed. Those stairs come out nicely too. $15,000?cost you going in, $500 to preserver at used shop going out. And the local govt officials whine about falling revenue streams from property taxes while the do everything but load the trucks for the strippers–but they would protect them if some neighbor said “hey why are you ripping the guts out of the house next door to me–you are driving down values–and no owner in his right mind would allow or do that”

    WRONG—–they are presumed to have the right to do anything to destroy the tax base by decades of belief that “banks” are usually correct. Case in point–how many times does your super-aggravating checking acct reconciliation failure arise from their error?

    In my case, the contractor ranout on the duty to complete the house for expected FMV—bank somewhat involved–I shoudv kept it there–if they were foreclosing on me today I would counterclaim with predatory lending [probable], negligence in administering construction funds, the theft, attribute the theft to them as partners in the program and ask for punitive damages. Set off against the note balance rather than the separate problem after the front end bank has been refied out. I wish id done that–but every state and fact pattern different. Tough–10k id think to start—make affs and complaint—most attys dont like being against banks because they double as title guys—-maybe even in on the up front predatory loans–whered you close?

    Did you clean off the liens he left? mine never paid for a thing–liens left hanging–that was fun.

    NOBODY BUILD A HOUSE WITHOUT A PERFORMANCE BOND–on one day you are secure downpayment saved and in place and loan set—contract–dirt flying —-your dream house under way after years of planning and anticipation—then in a 15 second phone call youv lost it all and are trying to determine if its chapter 7 or 11.

    Thats what you have coming at you–as soon as they can get you out.
    Who pays insurance and taxes? no insurance?
    I wish I were in your shoes, rather than mine.

  2. Hi DCB,

    Yes, the builder introduced us to “his” lender. From what I can figure now – it is obvious that the lender, builder, appraiser, and county code official, conspired together. The appraiser provided the bank with a Certificate of Completion which included a 100k kitchen when in fact, there were NO CABINETS, flooring, appliances, or even a legal stairway, in the house and I have pictures showing the condition of the house – PLUS – when I called to get the date for our final inspection they told me they have NEVER been to our house thus it was impossible for it to be completed and ready for a final inspection – the builder embezzled 100k from our account – when I tried to terminate the builder during construction “his lender” threatened to foreclose or as they put-it we must complete the house within the stated time and do-so with or without the 100k AND we must complete the house using one of THEIR PRE-APPROVED builders, yet they did NOT offer us a list of pre-approved builders.

    The lender was supposedly the “original lender” and NOT a broker. I specifically asked them about that because the house was in such bad-shape and behind schedule that I wanted to make sure it was THEIR-OWN money they were risking. I put it to them this way – would you pay for something so disgusting. I wanted to hold THEM accountable because I kept asking them – if we settle the construction loan, WHO is going to make the builder finish it? I obviously couldn’t because it was already 624-days behind schedule which cost us an additional 89k in interest payments during construction.

    The bank didn’t care because they already SOLD our loan and/or never used THEIR money to fund the loan in the first place. They simply figured once the loan was converted then Countrywide inherited the problem and would most likely foreclose on us before we could figure anything out. Once Countrywide was confronted with the illegalities involved they promised to rewrite our loan. However, they never sent new loan docs they tried to foreclose instead.

  3. so you are living in a house that is not complete–no permits–city could nail you? The contractor run with the last proceeds out ogf the loan and fraudulently assert completion?

    this is interesting–there is a similar pattern iv seen—–did your broker have a “relationship” with the builder???——perhaps thecontractor fraud is able to be imputed to the every other person that came near closing–title co? is the broker on an island on his yacht?

  4. what sort of entity would be maintaing insurance on promissory notes in a puprorted trust 7 years after the pool was closed [supposedly] –no loan list ever filed with SEC or sec state UCC on this one either–really slippery—any names–what agency cares?

  5. i agree with your sense of the acctg status—-p/l purchase cost on asset side–unrelated to principal of notes——-is it typical for a servicer that has purchased collection rights–and to have cds or other risk transfer at a loan level—–credit default insurance at loan level–in some way associated with servicer cash flows

    i understand they may want to have a pumped serviced balance for fees calculation—maybe also a per unit fee for liquidations that gets repeated? churning? without really churning? what agency would care?

  6. I have made this arguement to lawyers for our case multiple times, but they don’t get it. Our loan began as a construction loan which was to convert to a 30-yr perm “after” construction was completed. After months of needless delays (624-days) the construction lender settled & converted the construction loan to the 30-yr perm HOWEVER – they did-so even though our house was NOT completed. They sent their “appraiser” and obtained “Satisfaction of Completion Certificate” and we found out a 18-months later the lender obtained a fraudulent Use & Occupancy Permit at settlement.

    We received a letter that the originator (allegedly) sold the loan to Countrywide 2-wks after settlement. I would NOT have agreed to close our loan, if I knew they sold our loan because the house was NOT completed. In fact, the house has NEVER been completed and to this day still does NOT have a legal Use & Occupance Permit and we now know the house was NEVER legally inspected. All of which the original lender KNEW and we have PROOF – including a letter from the County Zoning Department stating that the BANK (lender) contacted THEM to obtain the Use & Occupancy Permit – even though the house was NOT finished.

    Consequently, we have a house that was never completed and does NOT meet state or county building codes. Thus we “literally” own a house that CANNOT be Completed – CANNOT be Repaired – and CANNOT BE SOLD because the original lender ILLEGALLY settled our LOAN using fraudulent documentation. Another builder cannot obtain the proper permits to repair or complete our house because it was NEVER inspected nor has a legal U&O Permit. The county code official providing the original lender with the fraudulent docs has been terminated by the county but we CANNOT find a reputable attorney to take our case without a very hefty retainer. We cannot sell the house because the liability falls on the owners UNLESS we are able to FIGHT the bank and PROVE they obtained the false documentation to close our loan. The last time I estimated the fines for the building code violations it was over 5-million dollars. Fines are assessed at 500-dollars PER DAY from the day of the violation. We closed our loan December 2006 and there are at least 8-12 known violations.

    To date – we cannot find an attorney to take up our fight because they all believe the banks will drive up legal fees upwards 150-200 thousand dollars. We have complete documentation PROVING our case, including the loan docs where the originator claimed we earned 300k per yr and other illegalities, including TWO different copies of our NOTE (with & without signatures).

    I was contacted by MBIA last year regarding their allegations of Countrywide creating fraudulent loans. I ever heard back.

    Our loan never met the criteria within the PSA and we have not made a payment since July 2008. We are still in the house and its as though they are ignoring our situation. They attempted to foreclose but their foreclosure mill used FORGED signatures on the foreclosure docs they submitted thus the case was dismissed WITHOUT prejudice.

    Who would have ever thought this type of gross arrogance would be happening in our country? These major banks should be destroyed and legislation should be forced upon ALL LENDERS – if they create the loan – THEY OWN IT UNTIL IT IS PAID IN FULL. ALL DEBT should be illegal to sell.

    just some thoughts


    I would like to email you some information and get your thoughts.

  8. DCB

    Servicers can report whatever they want — fiction included. Lots of insurance pay-outs.

  9. iwantmynpv,

    Interesting. Only problem is that we are dealing with collection rights. Collections rights do not need to be funded. – they are transferred by assignment only. They are not balance sheet assets. Collection rights profit reported by Income Statements. Name of the game for subprime refinances. Name of the game for debt buyers — banks included.

    But, insurance paid –over and over — for false assets. These guys are finally waking up??

  10. Im looking at servicer and trust records over time–two sets–one is dispositions by month –other listed loans performing in trust with notes –like “some risk potential”————–except the loans were reported as liquidated in prior months—losses quantified—sometimes same loan several times liquidated–several losses recorded same loan—–but still on the end of month’s statements on second recrd set as performing?????

    conjecture or see similar anybody—these lists go from 2004-2011 eoy ————with these double countings? why? its not about what they did/did not do up front its what they are doing now

  11. DCB,

    Loan Schedule reported by servicers. Can add to — and delete from — whenever they choose. And, that is whether valid or not. Mortgage Schedule must be accompanied by a valid Mortgage Loan Purchase Agreement, which cannot be an “intent” to sell, but, rather an actual sale validly executed. Have never seen one.

  12. Can you theorize as to why a servicer/trustee pool would maintain previously liquidated [ex REOd and sold] loans, as shown by ct filings and other records—- as performing in the loan schedule?

  13. Neil, the Lawyers are taking on other cases were the folks have the money to pay the retainer. I have started something in NY called “Impact Teams”. One quick Note:

    Leverage, or capacity to create debt does not originate at the warehouse level. When a subsidiary / affiliate company inside of the structure has fictional money to loan. They cannot feed it down the chain to fetch bank / originating bank (Distributor) based on nothing. The money needs to be created out of the leverage. To do this, the Originating bank can draw on the line of fictional currency only when it can be secured to something other than the Originating Bank name, or they become a party to the transaction and borrowed monies to fund. The money would have to have been created in the originating banks name and nobody wants that because than their are profits, taxes, interest, and real money must be transferred to the originator, versus a balance sheet deposit from the “Seller Bank” affiliate or parent company. The money is only created into existence by the debt / Note. Since all money is created through debt, an innocent third party / mortgagor in this case signs the money into existence.

    Although, I always wanted to reincarnated as a bank when I come back, I have since decided I would like to be a toll booth.

  14. As the owner should I agree…they have gone through so much already that their loss is priceless…and no amoutn of money will heal them so the least anyone can do is to reinstate the homeowners in their homes and leave those in that are still under the ax of pending foreclosure and lets move on to other ways to solve this problem…your thoughts…the bootm line is this, if homeonwers cannot be in their homes they cannot focus and be creative as everyone is to create new jo opportunities for themselves and for others…

  15. question–the mbia pmts were triggered by fall in value of mbs. pmts to investors correct?

    now we know that the mbs fell because the underlying homeowner promissory notes were found to be predatory etc—but it was indirect

    my question is whether the servicer or trust can insure or default swap on the actual underlying homeowner promissory notes themselves—say as by presenting a list of liquidations monthly that show losses on liquidation of the loan and home?

  16. Great news Niel: Now if we can just get the judges to hear for the homeowner the banksters can fight over who will pay and the homeowner gets clear title and an unsecured obligation.

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