Commercial Property Securitized? Problems Look Like Same Games as Residential

In the last 3 months I have been assisting in the defense of some commercial property cases — strip malls, small hotels, warehouses, etc. And while the consensus has been that securitization of commercial mortgage backed securities has been relatively straightforward, it appears that at the very least there are exceptions to that rule and perhaps we are only seeing the tip of the iceberg.

The one thing that all the cases I have been working have in common is the presence of substantial equity in the property far above the principal balance claimed by the “lender” who, like the residential “lender” was not the lender at all. But the odd thing about these is that if you go to any lecture, book, or article on commercial foreclosures, the main thrust of the material is a workout presumably based on missed payments — even without the equity or any argument over whether payments were indeed missed.

But the cases coming to me have another thing in common — the unwillingness and runaround they get from the “lender” in working out the loan. This usually forces the case into Chapter 11 Bankruptcy and thereafter the “fun” starts — differing accounting reports, documents appearing out of nowhere, and in general the same false, tired arguments from opposing counsel as we have heard in the residential cases. The fact that there is substantial equity has caused some bankruptcy judges to question the absence of a workout and why the case had to be brought to bankruptcy court.

Doing our securitization and title research we find that the players are frequently Deutsch Bank, Goldman Sachs and Bear Stearns lurking somewhere in the background. And it doesn’t take long before the “lender” admits that the loan was funded by a securitization “trust.”

In one case that I might take, the “issue”is the payment of default interest when there does not appear to be any default even in conventional terms. So why would a lender, WANT a loan to be declared in default when there is plenty of equity, plenty of profit to pay the payments due and there is a long record of payments that were made on time?

In residential loans we know the reason is that the players in the securitization chain all claimed stakes in the loans and then traded the loans or bought insurance, credit default swaps or received federal bailouts because the loan was put in a pool where there genuine defaults in promised payments. They received a chunk of money from investors who thought they knew what they were buying, how the money would be used and that the loan would be subject to normal underwriting standards. None of that happened.

Instead, the players went “to the track” with the money placing bets on the loan pools and often collected multiples of principal that was in default, meaning that the “default” loans were completely paid off and that left money to cover loans that were not in default — at least not yet. By offering the investors one interest rate under terms of repayment that differed from the the terms agreed by the borrower and signed on the note, a yield spread premium was created. The higher the interest rate charged to the borrower compared with the interest rate promised to the investor, the less the players had to fund to complete the loan transaction.

So my suspicion, enhanced by the unwillingness of the players and their attorneys to provide real data on real money transactions involving the loan or the pool claiming ownership of the pool suggests to me that the loan was not assigned into the pool within the 90 day cutoff provided in the PSA, which is merely a recital of the rules under the REMIC statute in the Internal Revenue Code.

It also suggests to me that partially because there were loans like this in the pool, the declaration of a write-down of the pool, triggering payments of insurance and proceeds from credit default swaps was a false declaration. AND the money received from insurance and credit default swaps — all purchased with money originated from the investors, was neither credited against the balance due on the mortgage bond, nor to the borrower’s account, whose loan balance would be correspondingly reduced by a reduction in the account payable to the investor-lender.

So my suspicion is that the lawyers for these commercial properties are missing a possibility. The “lender” may need to kick the can down the road so that they can avoid being caught in the lie that the value of the loan pool was severely compromised, or worse, that they might owe the money back to the insurers and counterparties in the credit default swaps.

If that is correct then the REAL problem is not the missed payments that are alleged, or even the applicable default interest, but rather the money it will cost to give back to AIG, AMBAC, Deutsch etc. for receipt of funds that either were never deserved or are in any event owed back to those parties were duped into buying the loan pool multiple times under the guise of insurance contracts and credit default swaps.

The stonewalling of these players can only be attributed to some business (money) reason. And the only money reason I can think of is that they have received money for which they have not accounted on properties that were (a) not in default in any sense of the word and (b) fully collateralized by substantial equity.

If that is the case, it might be easier to get to the truth of the matter than in residential loan cases because commercial property owners tend to be able to pay for an adequate defense and they can’t be intimidated as easily as a homeowner. If I’m right, going after the money in discovery and showing the trail it followed and all the side deals that were made might be very productive in these commercial cases, and in fact, might lead to valuable information in residential loan “defaults.”

Then there is the intimidation factor which is the standard play in residential foreclosures. In the case of commercial properties there is frequently a personal guarantee which is separate and apart from the default of the business operated on the commercial property. But this might just backfire on the “lender” because just as they are bringing in co-obligors into the picture, the door is then opened for inquiry into other mitigating payments from insurance and CDS co-obligors.

Pure logic tells me that something is wrong here, since I have been on both side of commercial property foreclosures — representing the bank and representing the owner. Something has changed here from just a few years ago when none of these cases would ever have seen a courtroom nor would it have been in the minds of either the owner or the lender. In short, I smell a rat.

12 Responses

  1. EULE…why would you want a new commitment to an insolvent debt…? These mortgages failed for a reason….they are insolvent. We were set up to fail. I was told a long time ago by a trustworthy attorney…don’t sign or agree to anything re this debt. It is unsustainable and can never be repaid. These mortgages were set up to fail and when they do, you will lose your property in 3 months because you signed a new contract….Beware the ties that bind….!

  2. EULE…I was told something early on by a close friend who used to be an FBI agent….Don’t wait for the Government to “fix” it. That was one of the best tips I ever received…

  3. Ivent , here is a commercial tip .I filed a complain with the new CFPB , the OCC forwarded it . I still wait for the result , but it looks like it will work .You may also file a refinancing with your Bank online for hardship ,the lower my Interest from 9 % to 5 % that tells you already
    what kind of paperwork I have.

  4. What we really need to watch out for are the fraudulent fixes for their fraud. Their evil end game plan that they intend to enslave humanity with….Reject any and all fixes for their fraud….like OBAMACARE…loan mods, refis, a gold backed dollar, a World Tax, a Carbon Tax. They have stolen too they want to own us. We need to stick to the restoration of the U.S. CONSTITUTION and The Bill of Rights and rally around it……That is the only thing that separates humanity from the beast….

  5. I am fighting two fraudclosures pro se… home & my commercial property which was our small business. The criminality in the commercial mortgage is even worse than in the home mortgage. When you get to the crux of this crime you will find the set up to fail. For me, it was in the commercial mortgage. People actually have more protections from the State acting as tyrants in a commercial mortgage because the UCC governs commercial mortgages.

  6. @elexquisitor …. Yes we Are! Its Always better to be in the Drivers Seat! Put the Petal to the Metal and Let the Good Times Roll! tehehehe …. giggles and grins.

  7. Oddly enough my residential property case is similar – equity is 5 times the remaining principal (alleged). Besides that, I have them causing me to stop making payments and then filing a NOD.

    My loan showed a ‘transfer’ to a GSE 2 years after the closing date of the PSA, and state law indicates effective date of transfer is when it is filed, not when it is ‘signed’. I passed this info to mediator for upcoming session. Then I listed my damages to include the ‘finders fee’ for reporting to the IRS a REMIC that violated the terms of the trust and the 10% reward for the taxes that could be collected as a result.

    Are we having fun now?

  8. From the article: And it doesn’t take long before the “lender” admits that the loan was funded by a securitization “trust.”

    More like – it doesn’t take long before the lender admits that it already realized the value of the note when it financed the anticipated loan receivables.

    Securitization is an elaborate receivables financing scheme.

    monthly payments don’t get applied to discharge the note because its value has already been realized.

    payments disappear in the shadow banking conduit which was the biggest growth industry in the US until it wasn’t.

    When everybody realized the collateral was sh*t, the music stopped.

  9. Who know the answer ? Can the Bank foreclosure on a commercial
    property , if you did not paid the Insurance and tax escrow ??
    I am talking about escrow , regular tax and Insurance is paid in the
    monthly payment , but additional $ 800 a month Escrow is required and of course w/o any interest.

  10. @Javagold..YEP! CH13 aka mini CH 11. I wonder if Ivent has figured out who is poking her with a pitchfork and who is fanning the flames yet? Is the pitchfork really a pitchfork or is it a Lifeline?

  11. oh boy ivent is going to have a field day with this post !

  12. Of course they are only seeing the Tip of the Iceburg. The did it to Commercial properties, Cars, Trucks, Credit Cards, Student Loans .. you name it and you will find a claim of securitization or a Curtain called secuitazation with nothing behind it …. Wall Street Stole It All from Main Street and Gambled with It. Set the Rules to Fail … Harvest the Rewards of swaps (peek at Romneys tax returns … what side of those swaps he was on? How did he make his money?… I’d make sure the FCs went thru To! …. if they dont, he wont be able to afford a pair off shoes.) Just Jabbering …….

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