Why the SEC Should Enforce Securities Laws and Regulations Against Wall Street Brokers Who Issued “certificates” Under False Pretenses

Investors who sued based upon “bad underwriting” have received settlements. Homeowners who sue based upon “bad underwriting” are given the boot. Either they are told they cannot sue proactively or they are defeated later because the trial judge thinks the homeowner is merely trying to improperly, immorally, and unethically get out of a perfectly valid debt by weaponizing legal technicalities — i.e. the exact opposite of the truth.

The dirty little secret about law enforcement agencies is that if you don’t do their work for them, they won’t prosecute anything except simple, easy to win cases.

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As far as the SEC is concerned I think we need to simplify the argument. The bottom line is that the “mortgage-backed” certificates, as issued in practice, are securities and should be regulated as such. The goal should be to create pressure on the SEC to take a closer look and see that they have been hoodwinked.

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The SEC has not enforced SEC regulations against the brokers who issued “certificates” because, it is said, that the “mortgage-backed securities” (“MBS”) certificates under the 1998-1999 legislation are private contracts and should not be treated as securities.
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The reason for that was that there was a public policy in place that made it a priority to make loan money more available to the average consumer and diversification of risk would provide a vehicle for accomplishing that objective. And that is the reason that Bush and Obama both were told that what Wall Street brokers had done was not illegal.

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However, the problem with that is that it was the legislation that was taken as an accurate description of what happened next. It wasn’t accurate and was never meant to describe future events.
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First, the certificates were not mortgage-backed and thus the public policy reason for the legislation was entirely defeated.
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Second, the vehicle did not diversify risk — it eliminated it — leaving “borrowers” twisting in the wind without a lender, loan account, or anyone with authority with whom they could communicate. Pretender lenders had only one incentive — get the homeowner to sign. These non-lender lenders were paid a fee regardless of scheduled payments being made or not. “Underwriters” similarly had only one incentive — get the homeowner to sign. That is what enabled them to sell layers upon layers of passive income securities on an almost infinite basis — without allowing the investors and the homeowners (the only two real parties in interest) — to participate in any way.
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They left homeowners accepting risks and losses that were deeply concealed for as long as 15 years. Investors who sued based upon “bad underwriting” have received settlements. Homeowners who sue based upon “bad underwriting” are being given the boot. Either they are told they cannot sue proactively or they are defeated later because the trial judge thinks the homeowner is merely trying to improperly, immorally, and unethically get out of a perfectly valid debt by weaponizing legal technicalities — i.e. the exact opposite of the truth. In short, thousands of course in millions of cases have reversed the facts because they erroneously believe they know “what is really going on.” This is exacerbated by the same belief of homeowners and their lawyers.
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Contrary to all Federal and state lending statutes, Wall Street brokers were incentivized to disregard the viability of the “loans” and instead create situations where the homeowner could be declared in default — even without a creditor, lender, successor lender, or anyone in authority to make that declaration. And homeowners, who had zero access to any information that would have or could have tipped them off to what was happening, failed in most cases to challenge the declaration of default or the seemingly innocuous correspondence and notices that preceded it.
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With the availability of bets, hedge contracts, and insurance the Wall Street brokers could fund these transactions hoping they would fail — the exact opposite of consumer lending statutes, rules, and regulations. Also, this was the exact opposite of normal expectations established by customs and practices in the business of “lending” over centuries if not millennia.

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So we know that investors and homeowners got screwed. We also know that so far that Wall Street brokers have escaped prosecution for what the rest of us know was an intentional consequence of illegal behavior. The trick is to find a way to force agencies to see it.  In the meantime, we must educate our judges one case at a time. That means educating ourselves. If we don’t know, we can’t teach.
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Neil F Garfield, MBA, JD, 73, is a Florida licensed trial and appellate attorney since 1977. He has received multiple academic and achievement awards in business and law. He is a former investment banker, securities broker, securities analyst, and financial analyst.
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2 Responses

  1. One huge thing is missing, Neil.

    “Borrowers” are not only twisting in the wind. They are fighting with fake “Servicers” who are instructed by Wall Street Brokers to STEAL homes from their unpaid contractors(aka “slaves”) by any possible means to initiate a new circle of securitization and cover for fatally defective Titles by blaming homeowners for artificially created “defaults” in accounts which do not exist.

  2. In the early 2000’s, in conjunction with the Community Reinvestment Act, a pilot program for private label RMBS was established. In 2005, the SEC came down with rules and regulations for this pilot program. One requirement was that the “ultimate pool” could not be segregated into separate pools. Not only were the private label (pilot) RMBS segregating the “ultimate pool,” they were creating separate REMICs from a title series name. This was all no-no. There could only be ONE REMIC. By 2006, the SEC started writing letters to the Depositors/Issuers, not the trustees, to answer questions about the set-up of the trusts. By these SEC letters it was clear that the private RMBS were not in compliance. By 2007, many depositors ceased any new “issues,” and those that continued changed from a REMIC to REIT organization. By 2008, we have the collapse. This was not an underwriting problem as related to the loans themselves, this was a security underwriting problem (issuer) problem as the “issues” did not meet compliance for the pilot program with oversight by the SEC. How courts continue to view the pilot RMBS program as valid, is beyond any of us to comprehend.

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