Damned if you do, damned if you don’t. How the “failure” of rating agencies on Wall Street directly impacted homeowners.

I think the article presents some very valuable information, insight and analysis. But it fails to take into account the central weakness.


see Credit rating failure 47.full

The certificates that are referred to as “mortgage-backed securities” are neither mortgage-backed nor securities. There have been at least dozens of cases in which tax treatment or liability of the trustee for a REMIC trust has been decided and hundreds more where there were settlements without litigation. In every case, it was found that the owners of the certificates had a creditor-debtor relationship with the book runner investment bank that was unsecured. In every case, the court found or the case was settled on the premise that the owners of the certificates had no claim at all against the payments, obligations, notes, or mortgages issued by any homeowner.
The failure of the government to regulate the issuance of those certificates is traced back to the deregulation of those instruments as being “private contracts,” not to be regulated as securities.
So the whole notion that the rating agencies failed to properly assess the risk elements contained within the purchase of those certificates is correct but manifestly incomplete. Those certificates were promises to pay issued by Book runners doing business under the name of a nonexistent trust. The promise to pay, in most instances, contained no maturity date as to the principal. The promise to pay, in all instances, was subject to the sole discretion of the book runner.
The failure of the rating agencies can be traced to corruption. And the specific failure of the rating agencies was the failure to identify the immediate yield spread premium taken by the book runner together with its securitization partners. That premium had a range of 20 to 50% of the amount invested by purchasers of the certificate. A casual review of the “lending” transactions conducted with homeowners reveals that there was no possible way that certificate owners could’ve been paid as stated in the promotional materials and indenture. The payment was ultimately based upon the continued sale of certificates — with more yield spread premiums. So the “failure” of the rating agencies was the failure to call this scheme by its proper name: a PONZI scheme.
The intermediate securities brokerage houses were borrowing money from their securitization mega counterparts against the sale of the certificates. The certificates promised, on average, around 5% return to investors. The transactions that were actually funded had a stated average of 7 to 9% return (with very little likelihood that it would ever be paid). So the amount that was claimed as a loan was far less than what had been received from investors. Part of this money went into a reserve account from which the book runner, as master service sir, could make “servicer advances.” Do the math. In many cases, if you allocate the money to a specific “loan” transaction the amount of revenue generated was equal to or greater than the amount of “principal” on the “loan.” On average it was less than that — but far more than what was required to be disclosed to the consumer homeowner.
The only way that yield spread premium could exist is by charging a higher interest rate on the “loan.” The only way the higher interest rate could be charged was by structuring transactions with homeowners that had maximum risk instead of minimum risk. And the only way the book runner could keep paying the certificate holders was if more certificates were sold since actual payments from actual homeowners would never materialize in the amount needed to meet the whimsical promise made by the bookrunner. Knowing that, the bookrunner and securitization counterparts were able to create insurance contracts that insured them instead of investors but still promote the certificates as “insured.”
To get independent confirmation of what I am saying here, which is above most readers’ understanding, is by tracking the evolution of the definitions used in the TARP program. First, it was to offset losses suffered by the banks from homeowner defaults. Then it was discovered that the banks did not own any loans to homeowners and therefore could not suffer any loss and needed no bailout for such losses. But they were still left with the threat of financial Armageddon that was being pushed by the megabanks — bail us out or else we will freeze all credit markets.
So then TARP was changed to bail out the banks for losses on the RMBS certificates. That didn’t work either because the banks were selling those certificates, not buying them. SO there was no loss there either. But the threat remained that as Geithner said “The plane was burning, We had to land it.” The megabanks were insistent on the bailout even though none of them had experienced any losses.
The true nature of the bailout was revealed when the bailout of AIG occurred in the open. It turns out Goldman Sachs had been bailed out of losing a windfall profit it had “earned” by having insurance paid to itself instead of investors or homeowners. The taxpayers were coerced into funding profits. No losses were bailed out because no losses were incurred by the recipients of the bailout.
So that is why I say the “failure” of the rating agencies is a generous way of portraying what they did. This mess might never have occurred if they were not complicit in the scheme. And that is why I say that the legal doctrine of res ipsa loquitur applies —- in the absence of negligence or other tortious behavior, the thing would not have occurred.
It is peculiarly irksome for homeowners and their lawyers that there have been so many settlements predicated on the fact that the transactions with homeowners were never conducted, underwritten or executed properly. Those settlements have strictly been with the government or investors. What disturbs homeowners is that those defects are all violations of lending laws for which there are self-executing remedies including rescission. But while the banks are getting paid “bailout” money, the homeowners are being barred by the courts from remedies that were created in order to establish a self-regulation process rather than a gigantic new federal agency that would review, insure and approve all consumer lending transactions.
The second irksome issue for homeowners is that they know that the parties seeking enforcement against them are doing it for fun and profit — not to repay an existing loan account receivable. Any real analysis by the rating agencies would have revealed the fact that the enforcement of the homeowner’s scheduled payments was completely dependent upon the satisfaction of the condition precedent stated in Article 9 §203 of the UCC — payment for the underlying obligation. But what the Wall Street banks had created was an oxymoron. Anyone who had paid value did not own the obligation, and anyone who received “title” to the underlying obligation did not pay value. It was precisely this structure that enabled the virtual sale of the debt many times over rather than being limited to a single actual sale.
The problem then is that even if the certificates had been properly sold and properly managed, the homeowner transactions were mere points of reference rather than any enforceable contract that served as “mortgage backing” for the certificates. None of this could have occurred without the rating agencies and the homeowners who were unknowingly drafted into a securities scheme without receiving notice nor any incentive payment — despite statutory requirements to the contrary. Hence the sale of financial products to homeowners produced an inchoate liability for the Wall Street banks. This liability, based upon the stated position of owners of the certificates could vicariously be ascribed to the certificate owners who found themselves in the old position of “damned if you do, damned if you don’t.”

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Neil F Garfield, MBA, JD, 74, is a Florida licensed trial and appellate attorney since 1977. He has received multiple academic and achievement awards in business, accounting and law. He is a former investment banker, securities broker, securities analyst, and financial analyst.

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15 Responses

  1. Also, Charles I don’t know when this 10Q info was published. But this is what WAMU did — So the certificate is claimed for you – or prior owner. Costs 50 dollars to the article. If I knew date can to look up, but will try. Note the “unusual swap” and Freddie — Article cuts off there.

    WaMu Becomes More Aggressive on GNMA Buyouts, Explains 3Q Rate Lock Problems
    Our Price: $50.00
    Washington Mutual has become more diligent in buying out certain defaulted FHA and VA loans from Ginnie Mae pools and has reaped the benefits, the company says in its most recent 10-Q filing with the Securities and Exchange Commission. The disclosure also provides more detail on the rate lock problems that forced WaMu to take a hefty loss on loan production activity, and reveals an unusual swap transaction designed to help Freddie Mac meet

  2. And, Charles which Ginnie REMIC Series do they claim went to? I don’t see WAMU for any – or Wells Fargo. Looking at security underwriters —

  3. Charles,

    Michael Drayne is a LIAR and a seasoned fraudster who must be in jail at least since 2007

    Drayne is a former CEO of Chevy Chase Bank who defrauded insurer Ambac from $5.2 Billion

    Of course the bank itself does not defraud insurance companies – its CEOs do, Drayne for example

    I asked Sen. Peters to contact HUD re owner f my alleged “loan” and it was responded by Drayne who lied in every sentence !

    If Drayne lied to the Senator, he lied to you as well!

  4. Charles — GSE REMICs pools are not regulated by SEC. I am not sure about Ginnie — will check out. They may be. Nevertheless – private trusts were implemented. And, Ginnie is not the same as it was pre-2000. Regulation AB for private label securitizations prohibited segregation of the “ultimate pool” into multiple REMICs. The “Pool” cannot be segregated into multiple pools and multiple REMIC trusts. Some of these “multiple” REMIC pool trusts are NOT offered for security sale, but rather sold out the back door to a third party. So – you need to know not only the “certificate” holders but also the specific REMIC, and the exact pool that claims to support that REMIC. I see Ginnie has multiple REMICs for one trust. Not feasible. In addition, loans are sold and liquidated from pools all the time. You need to know how the “loan” is reported as recorded. Zero value? Repurchase? Swap out? REMIC pool not sold to security underwriter for secondary market? This is complex. And, very unlikely you will get the answer without extensive discovery.

  5. Anon I also talked with Ginnie about my loan and received a letter from the Michael Dryane who was over pooling at that time and is now overseeing strategic planning Acting Executive VA at Ginnie about my loan.

  6. Enter your comment here…Anon I know it went to Ginnie as I received from the FOIA request to them the certificate and day it was underwritten and pooled. What I believe happen was at some point either before the bank was seized of after the information as to issuer was changed in the system. All you have to do is google WAMU selling servicing to Wells Fargo, and it tells you the $140 billion mostly Fed Gov portfolio was completed on Jul 31, 2006,

  7. Charles — I have just gone through multiple Ginnie REMIC pools from July to Sept 2003 — those all relate to July prospectus offerings. I see no REMIC trusts where WAMU was the 1) security underwriter 2) sponsor 3) trustee. What you see is the big banks – WAMU was not one of the banks originally involved with GSEs/Ginnie. I see – BofA, Citigroup, UBS, Credit Suisse, some Goldman, Bear Stearns and Lehman. Trustee varies – but I don’t see WAMU. Usually sponsor would remain the servicer. Also, WAMU would not place into “Their own Ginnie MBS” — all WAMU could do is invest in Ginnie Mae securities. WAMU would not be the one to sell to Ginnie — they would sell to one of the big guy (sponsors)., Thus, WAMU holding Ginnie MBS does NOT mean your loan went to Ginnie. You can search these REMICs online. What you look for is security underwriter (will be in bold) and sponsor, and trustee (I see notation for almost all that if there are any questions contact CHase as information agent — did not know that even exists).

  8. Anon it was new construction that I locked in for 60 day lock, and the originator was Great Western Bank in NE (not associated with the CA bank) and that loan closed on Jul 3, 2003. There are no VA loan subprime product and all these loans are process exactly the same and must meet the requirements of the Dept of VA or the loan does not qualify for the insurance in the VA Guaranty that act like PMI.

    FHA loan as with VA loans that WAMU originated or purchase must go through an review approval with Ginnie Mae in order to be placed into the bank” Ginnie Mae MBS. Just as banks were found to have provided false documents to get FHA insured (MIP) and had to settle with the Fed Gov for the fraud.

    The Fed Gov product is not a subprime product but one that regulated as with prime loans. This loan are to be secure when entering into the Ginnie pools and that means a lien has been attached to the home in every single case!

  9. Charles — where was the loan before your origination? Or was house newly constructed? I understand WAMU did direct claimed “lending” — but where was it before July 9, 2003? Agree – many of these loans were NOT classified as subprime at the time. And, they were not classified as predatory. Later, all were lumped together No one cared.

  10. John there are many victims of what the FDIC did not do when it provide the cover for itself as it did not have enough insurance to cover the loses caused by the WAMU collapse and it made it look as if Chase purchase $140 billion in Fed Gov Backed loan for $1.9 billion when this is impossible as Ginnie Mea was owner of the 1.3 million FHA & VA loans involved in the pooling! These were not subprime loans as some are lumping into the situation as if WAMU was running some other type of pooling. All of these loan must go through the exact process to be insured for Ginnie participation.

  11. Anon WAMU was a huge lender and had a correspondent unit it that Wells Fargo Bank entered into a servicing deal for the 1.3 million Fed Gov Backed loan on Jul 31, 2006.

    I know for a fact we at my bank originated my loan on Jul 9, 2003 and sold it to WAMU on Jul 21, Jul 2003. We funded the loan and sign the Note over to WAMU who on Aug 6, 2003 placed the loan into their Ginnie Mae MBS! I personally lock the loan and we committed to sell the loan some 60 days out from closing! I was a mortgage loan officer for my bank.

  12. Excellent analysis by Neil. John and Charles — the error here is — it was sold to WAMU before your origination!!!!!!! Now, everyone knows when you are refinancing, or purchasing – everyone in the industry. WAMU was very naughty. WAMU as “master servicer” to many GSE/Ginnie trusts, would report – oh — delinquency – maybe a couple months, maybe some fees – and never notify the homeowner (all invalid). Then WAMU would use trust insurance proceeds to purchase collection rights from the GSEs/Ginnie – just prior to your origination. But they would time the “paid out” to the date of your origination. So all appears to match. So no one knew. Thus, loan is reported liquidated to prior trust –reported as not collectible. And, voila!!! WAMU has just done a reinstatement into a new private label trust (WAMU Securities was big) – or their own coffer. They were not the only ones. But they were VERY aggressive. Goal was to get control out of the GSEs. NO funding necessary – just reinstatement.
    And, as to Neil RMBS. Pilot program was implemented in early 2000’s for private label RMBS – which we never had before. Previous “Trusts” were guaranteed – one way or another by GSEs/Ginnie. By 2006 – they knew this pilot program was not in compliance and not working. It took a year to shut it down. And, how did they save face? They blamed the homeowners — “you bought too much house. you used house like an ATM.” And, the media bought it. This is NOT what happened. The Private RMBS was NOT compliant. And, that is why the ratings agencies are also – GUILTY.

  13. Mr. Reed – In reading your response, I found it to be eerily similar to our
    own situation. WF in 2011 used a false assignment to self assign the mortgage, not the note directly from our long dead originator, completely bypassing the fact that WAMU was clearly the second owner at least of servicer rights. No one has been able to explain how WF got our stuff to begin with. I can only surmise some kind of electronic shenanigans between WAMU , CHASE, and WF in the dead of night.

  14. Then they sue each other for billions, acknowledge servicing “problems”, and the agencies again give triple A ratings on same toxic loans and repurchases!


  15. As I said from the beginning that Ginnie Mae pooled loans required UCC3 procedure which separated the debt from the Note by making Ginnie Mae the owner of the Notes with a blank endorsement and relinquishing the Notes to Ginnie. So to call the debt due Ginnie needed to meet UCC9 requirement in showing the court value was paid.

    How to get around this issue is not letting the court know that Ginnie owns the Notes as the loans are foreclosed as if they never been placed into a MBS and ownership of the Note has changed and the servicers process the non-judicial foreclosure instead of presenting proof of ownership!

    Ginnie ran into a problem with my loan on this issue because a proper recording of the Deed of Trust was not done, so when the loan was sold right after closing the loan from the originator to Washington Mutual Bank (WAMU) they could not and did not record a assignment of Deed of Trust. So the servicer in Wells Fargo Bank could not claim it was acting for WAMU in Mar 2010 because WAMU had not existed since Sept 25, 2008, as it was declared a failed bank.TARP with the VA HAMP that Wells was made to pay $6,000 for not processing the modification, but also explain why the category “No Standing” after 2yrs of waiting for the Independent Foreclosure Review Board in the last moment eliminated the standing wrong because the banks had no ownership of the debts! The Gov told borrowers to seek damage on your own, when leading borrower on when the correct advice should have been to file bankruptcy to gain protects as with the over 400 victims of Wells who had modification calculated wrong when having bankruptcy protection.

    It clear that not correctly calculating a loan is the same as not reviewing/underwriting the required modification are the same crime!

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