PTSD: A Breakdown of Securitization in the Real World

Posted on March 18, 2019 by Neil Garfield

By using the methods of magicians who distract the viewer from what is really happening the banks have managed to hoodwink even the victims and their lawyers into thinking that collection and foreclosure on “securitized” loans are real and proper. Nobody actually stops to ask whether the named claimant is actually going to receive the benefit of the remedy (foreclosure) they are seeking.

When you break it down you can see that in many cases the investment banks, posing as Master Servicers are the parties getting the monetary proceeds of sale of foreclosed property. None of the parties in the chain have lost any money but each of them is participating in a scheme to foreclose on the property for fun and profit.

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It is worth distinguishing between four sets of investors which I will call P, T, S and D.

The P group of investors were Pension funds and other stable managed funds. They purchased the first round of derivative contracts sometimes known as asset backed securities or mortgage backed securities. Managers of hedge funds that performed due diligence quickly saw that that the investment was backed only by the good faith and credit of the issuing investment bank and not by collateral, debts or mortgages or even notes from borrowers. Other fund managers, for reasons of their own, chose to overlook the process of due diligence and relied upon the appearance of high ratings from Moody’s, Standard and Poor’s and Fitch combined with the appearance of insurance on the investment. The P group were part of the reason that the Federal reserve and the US Treasury department decided to prop up what was obviously a wrongful and fraudulent scheme. Pulling the plug, in the view of the top regulators, would have destroyed the investment portfolio of many if not most stable managed funds.

The T group of investors were traders. Traders provide market liquidity which is so highly prized and necessary for a capitalist economy to maintain prosperity. The T group, consisting of hedge funds and others with an appetitive for risk purchased derivatives on derivatives, including credit default swaps that were disguised sales of loan portfolios that once sold, no longer existed. Yet the same portfolio was sold multiple time turning a hefty profit but resulted in a huge liability when the loans soured during the process of securitization of the paper (not the debt). The market froze when the loans soured; nobody would buy more certificates. The Ponzi scheme was over. Another example that Lehman pioneered was “minibonds” which were not bonds and they were not small. These were resales of the credit default swaps aggregated into a false portfolio. The traders in this group included the major investment banks. As an example, Goldman Sachs purchased insurance on portfolios of certificates (MBS) that it did not own but under contract law the contract was perfectly legal, even if it was simply a bet. When the market froze and AIG could not pay off the bet, Hank Paulson, former CEO of Goldman Sachs literally begged George W Bush to bail out AIG and “save the banks.” What was saved was Goldman’s profit on the insurance contract in which it reaped tens of billions of dollars in payments for nonexistent losses that could have been attributed to people who actually had money at risk in loans to borrowers, except that no such person existed.

The S group of investors were scavengers who were well connected with the world of finance or part of the world of finance. It was the S group that created OneWest over a weekend, and later members of the S group would be fictitious buyers of “re-securitized” interests in prior loans that were subject to false claims of securitization of the paper. This was an effort to correct obvious irregularities that were thought to expose a vulnerability of the investment banks.

The D group of investors are dummies who purchased securitization certificates entitling them to income indexed on recovery of servicer advances and other dubious claims. The interesting thing about this is that the Master Servicer does appear to have a claim for money that is labeled as a “servicer advance,” even if there was no advance or the servicer did not advance any funds. The claim is contingent upon there being a foreclosure and eventual sale of the property to a third party. Money paid to investors from a fund of investor money to satisfy the promise to pay contained in the “certificate” or “MBS” or “Mortgage Bond,” is labeled, at the discretion of the Master Servicer as a Servicer Advance even though the servicer did not advance any money.

This is important because the timing of foreclosures is often based entirely on when the “Servicer Advances” are equal to or exceed the equity in the property. Hence the only actual recipient of money from the foreclosure is not the P investors, not any investors and not the trust or purported trustee but rather the Master Servicer. In short, the Master servicer is leveraging an unsecured claim and riding on the back of an apparently secured claim in which the named claimant will receive no benefits from the remedy demanded in court or in a non-judicial foreclosure.

NOTE that securitization took place in four parts and in three different directions:

  1. The debt to the T group of investors.
  2. The notes to the T and S group of traders
  3. The mortgage (without the debt) to a nominee — usually a fictitious trust serving as the fictitious name of the investment bank (Lehman in this case).
  4. Securitization of spillover money that guaranteed receipt of money that was probably never due or payable.

Note that the P group of investors is not included because they do not ever collect money from borrowers and their certificates grant no right, title or interest in the debt, note or mortgage. When you read references to “securitization fail” (see Adam Levitin) this is part of what the writers are talking about. The securitization that everyone is talking about never happened. The P investors are not owners or beneficiaries entitled to income, interest or principal from loans to borrowers. They are entitled to an income stream as loans the investment bank chooses to pay it. Bailouts or even borrower payoffs are not credited to the the P group nor any trust. Their income remains the same regardless of whether the borrower is paying or not.

Filed under: burden of persuasion, burden of pleading, BURDEN OF PROOF, CORRUPTION, evidence, expert witness, Fabrication of documents, foreclosure, foreclosure defenses, forensic investigation, forgery, investment banking, Investor, legal standing, MBS TRUSTEE, Mortgage, Pleading, prima facie case, Servicer, TRIAL OBJECTIONS, TRUST BENEFICIARIES | Tagged: , , , , , , , , , , | 11 Comments »

Holland and Knight Published General Information on Securitizations

Posted on November 12, 2015 by Neil Garfield

While I was researching securitization of BOAT LOANS I came across the following apparently published by Holland and Knight. Several of their statements could prove helpful especially where one is confronting that law firm as an adversary. I copied some of the more relevant statements.

I also stumbled across this PowerPoint presentation from the American Securitization Forum in 2009 which is available on the Internet. Securitization101ASF2009

see http://mx.nthu.edu.tw/~chclin/Class/Securitization.htm

MAJOR PLAYERS

The major “players” in the securitization game, all of whom require legal representation to some degree, are as follows (this terminology is typical, but different terms are used; for example the “originator” is often referred to as the “issuer” or “seller”):

Originator – the entity that either generates Receivables in the ordinary course of its business, or purchases and assembles portfolios of Receivables (in that sense, not a true “originator”). Its counsel works closely with counsel to the Underwriter/Placement Agent and the Rating Agencies in structuring the transaction and preparing documents and usually gives the most significant opinions. It also retains and coordinates local counsel in the event that it is not admitted in the jurisdiction where the Originator’s principal office is located, and in situations where significant Receivables are generated and the security interests that secure the Receivables are governed by local law rather than the law of the state where the Originator is located.

Issuer – the special purpose entity, usually an owner trust (but can be another form of trust or a corporation, partnership or fund), created pursuant to a Trust Agreement between the Originator (or in a two step structure, the Intermediate SPE) and the Trustee, that issues the Securities and avoids taxation at the entity level. This can create a problem in foreign Securitizations in civil law countries where the trust concept does not exist (see discussion below under “Foreign Securitizations”).

Trustees – usually a bank or other entity authorized to act in such capacity. The Trustee, appointed pursuant to a Trust Agreement, holds the Receivables, receives payments on the Receivables and makes payments to the Securityholders. In many structures there are two Trustees. For example, in an Owner Trust structure, which is most common, the Notes, which are pure debt instruments, are issued pursuant to an Indenture between the Trust and an Indenture Trustee, and the Certificates, representing undivided interests in the Trust (although structured and treated as debt obligations), are issued by the Owner Trustee. The Issuer (the Trust) owns the Receivables and grants a security interest in the Receivables to the Indenture Trustee. Counsel to the Trustee provides the usual opinions on the Trust as an entity, the capacity of the Trustee, etc.

Investors – the ultimate purchasers of the Securities. Usually banks, insurance companies, retirement funds and other “qualified investors.” In some cases, the Securities are purchased directly from the Issuer, but more commonly the Securities are issued to the Originator or Intermediate SPE as payment for the Receivables and then sold to the Investors, or in the case of an underwriting, to the Underwriters.

Underwriters/Placement Agents – the brokers, investment banks or banks that sell or place the Securities in a public offering or private placement. The Underwriters/Placement Agents usually play the principal role in structuring the transaction, frequently seeking out Originators for Securitizations, and their counsel (or counsel for the lead Underwriter/Placement Agent) is usually, but not always, the primary document preparer, generating the offering documents (private placement memorandum or offering circular in a private placement; registration statement and prospectus in a public offering), purchase agreements, trust agreement, custodial agreement, etc. Such counsel also frequently opines on securities and tax matters.

Custodian – an entity, usually a bank, that actually holds the Receivables as agent and bailee for the Trustee or Trustees.

Rating Agencies – Moody’s, S&P, Fitch IBCA and Duff & Phelps. In Securitizations, the Rating Agencies frequently are active players that enter the game early and assist in structuring the transaction. In many instances they require structural changes, dictate some of the required opinions and mandate changes in servicing procedures.

Servicer – the entity that actually deals with the Receivables on a day to day basis, collecting the Receivables and transferring funds to accounts controlled by the Trustees. In most transactions the Originator acts as Servicer.

Backup Servicer – the entity (usually in the business of acting in such capacity, as well as a primary Servicer when the Originator does not fill that function) that takes over the event that something happens to the Servicer. Depending upon the quality of the Originator/Servicer, the need and significance of the Backup Servicer may be important. In some cases the Trustee retains the Backup Servicer to perform certain monitoring functions on a continuing basis.

CREDIT ENHANCEMENT

Credit enhancements are required in every Securitization. The nature and amount depends on the risks of the Securitization as determined by the Rating Agencies, Underwriters/Placement Agents and Investors. They are intended to reduce the risks to the Investors and thereby increase the rating of the Securities and lower the costs to the Originator. Typical forms of credit enhancement are:

1. Over-collateralization – transferring to the Issuer, Receivables in amounts greater than required to pay the Securities if the proceeds of the Receivables were received as anticipated). The amount of over-collateralization (usually 5% to 10%) is determined by the Rating Agencies and the Underwriters/Placement Agents, and this in turn will depend upon the quality of the Receivables, other credit enhancement that may be available, the risk of the structure (such as the possible bankruptcy of the Originator/Servicer), the nature and condition of the industry in which the Receivables are generated, general economic conditions and, in the case of foreign-based Securitizations, the “Sovereign risk” (see discussion below under “Foreign Securitizations”). If all goes well, it is repurchased at the end of the transaction (see “Anatomy of a Securitization”)or returned as part of the residual interest. This form of credit enhancement is required in virtually all Securitizations.

2. Senior/subordinated structure – issuance of subordinated or secondary classes of Securities, which are lower-rated (and bear higher interest rates) and sold to other Investors or held by the Originator. In the event of problems, the higher rated (senior) Securities receive payments prior to the lower rated (subordinated) Securities. It is not uncommon for there to be a number of classes of Securities that are each subordinated to the more highly rated, resulting in a complex “waterfall” of payments of principal and interest. In the common structure described above, senior and subordinated classes of Notes would be paid, in order of priority, prior to classes of Certificates, and Certificates prior to any residual interest in the Issuer. This form of credit enhancement has become routine, but cannot be used in a grantor trust structure, which is why the owner trust has become most common.

3. Early amortization – if certain negative events occur, all payments from Receivables are applied to the more senior securities until paid. Very common.

4. Cash collateral account – the Originator deposits funds in account with Trustee to be used if proceeds from Receivables are not sufficient. Adjustable depending upon events. May be in the form of a demand “loan” by the Originator to the account. (e.s.)

5. Reserve fund – subordinated Securities retained by the Originator or Trustee and pledged for the benefit of the Trust (and, therefore, the Investors).

6. Security bond – guarantee (or wrap) of all payments due on the Securities. Issued by AAA-rated monoline insurance companies (if available).

7. Liquidity provider – in effect, a guarantee by the Originator (or its parent) or another entity of all or a portion of payments due on the Securities. (e.s.)

8. Letter of credit (for portion of amounts due on Securities) – not used much anymore because of costs. These were common in the late 1980’s when issued by Japanese banks at low rates.

LEGAL OPINIONS

Legal opinions are very important documents in every Securitization and result in considerable negotiations among counsel for the Originator, Underwriter/Placement Agent and Rating Agencies. The opinions given by the Originator’s counsel are the most extensive, frequently running 50 or more pages because of the need for reasoned opinions, as courts have not ruled upon many of the underpinnings of the Securitization structure. In addition to the usual opinions regarding due organization, good standing, corporate power, litigation, etc, others deal with the validity and priority of security interests, true sale vs. secured loan, substantive consolidation in bankruptcy, fraudulent transfer, tax consequences and compliance with securities laws and ERISA. Opinions are also given by counsel for the Trustees and frequently by counsel to the Underwriter/Placement Agent in regard to tax and securities matters. As indicated above, local counsel opinions may be required as well.

For reasons of structuring and such opinions, in addition to attorneys who are experienced in Securitizations, expertise is required in the areas of securities law, tax law, bankruptcy and the UCC. Expertise is also required in many instances in the substantive laws relating the business of the Originator and the nature of the Receivables.

Filed under: foreclosure | Tagged: , , , | 103 Comments »

Foreclosure Offense and Defense for Borrower’s and Their Lawyers

Posted on June 21, 2008 by Neil Garfield

Start with GARFIELD’S GLOSSARY ABOVE: HERE IS ARE SOME OF THE RECENT ADDITIONS TO THE GLOSSARY AND TACTICAL CONSIDERATIONS:

Deed of Trust
An instrument signed by a borrower, lender and trustee that conveys the legal title to real property as security for the repayment of a loan. The written instrument in place of mortgage in some states.

AS APPLIED THE CREATION OF THE TRUSTEE AND THE POWERS GRANTED TO THAT TRUSTEE (AND LATER APPLIED) PROBABLY VIOLATE THE DUE PROCESS REQUIREMENTS OF BOTH THE U.S. CONSTITUTION AND THE APPLICABLE STATE CONSTITUTION WHICH ORDINARILY ADOPT IDENTICAL OR NEARLY IDENTICAL LANGUAGE REGARDING DUE PROCESS. THE ABILITY TO POST A SALE NOTICE, ESPECIALLY UNDER THE MORTGAGE MELTDOWN CONTEXT, PROBABLY ALSO VIOLATED THE FIDUCIARY OBLIGATION OF THE TRUSTEE GIVING RISE TO A CLAIM FOR DAMAGES FROM THE BORROWER, THAT IS ORDINARILY COVERED BY THE ERRORS AND OMISSIONS INSURANCE POLICY COVERING THE TRUSTEE. See Non-Judicial sale, Default, Asset Backed Security (ABS).

Default — PRIMARY DEFENSES IN MORTGAGE FORECLOSURE ACTIONS AND BANKRUPTCY ACTIONS:

SEE APPRAISAL, SPECIAL PURPOSE VEHICLE (SPV), STRUCTURED INVESTMENT VEHICLE (SIV), ASSET BACKED SECURITY (ABS)

In a conventional mortgage transaction, a mortgage is in default when any of its terms are breached. While there are cases where the default consists of compromising the security (e.g. failure to insure — favorite among predatory lenders who “force place” insurance at exorbitant rates without just cause), the most common default claimed is in the event that the borrower fails to make the payments as agreed to in the original promissory note.

In the Mortgage Meltdown context, the entire concept of default has been redefined by

(1) disengagement of the borrower’s obligations from the security instrument and note

(2) substitution (novation) of parties with respect to all or part of the risk of default

(3) substitution (novation) of parties with respect to the obligations and provisions of the security instrument (mortgage) and promise to pay (promissory note)

(4) merger of mortgage obligations with other borrowers

(5) addition of third parties responsibility to comply with mortgage terms, especially payment of revenue initiated in multiple mortgage notes and

(6) a convex interrelationship between

(a) the stated payee of the note who no longer has any interest in it

(b) the possessor of the note who is most frequently unknown and cannot be found and therefore poses a threat of double liability for the obligations under the note and

(c) cross guarantees and credit default swaps, synthetic collateralized asset obligations and other exotic equity and debt instruments, each of which promises the holder an incomplete interest in the original security instrument and the revenue flow starting with the alleged borrower and ending with various parties who receive said revenue, including but not limited to parties who are obligated to make payments for shortfalls of revenues.

It may fairly be argued that there is no claim for default without (1) ALL the real parties in interest being present to assert their claims, (2) a complete accounting for revenue flows related to a particular mortgage and note including payments from third parties, sinking funds, reserve funds from proceeds of sale of multiple ABS instruments referencing multiple portfolios of assets in which your particular mortgage and note may or may not be affiliated and (3) production of the ORIGINAL NOTE (probably intentionally destroyed because of markings on it or other tactical reasons or in the possession of an SIV in the Cayman Islands or other safe haven.

In ALL cases, including recent ones in Ohio, New York, Maryland and others, it is apparent that the “lender” is either not the lender or upon challenge, cannot prove it is or ever was the lender. Wells Fargo definitely engaged in the practice of pre-selling loans upon execution of loan applications rather than assignment AFTER a loan had actually been created. In nearly all cases the Trustee or MERS or mortgage service operation has no knowledge of where the original note is, has no interest in the note or mortgage, and has no knowledge of the identity, location or even a contact person who could provide information on the real parties in interest in a particular mortgage note.

The “clearing and settlement” of “sale” or “assignments’ of mortgages, notes, ABS instruments and collateral exotic derivatives whose value is derived from the original ABS of the SPV which received representations from an unidentified SIV (probably off-shore).

The abyss created in terms of identifying the actual owner of the mortgage and note was intentionally created to avoid liability for fraudulent representations on the sale of the derivative securities to investors. The borrower’s signature on an application or closing documents was part of the single transaction process of the sale of ABS unregulated security instruments to qualified investors based upon fraudulent appraisals of (1) the underlying real property, (2) the financial condition of the “borrower” and (3) the securities offered to investors.

Thus the claim of “default” is by a party who has no standing to assert it, no knowledge to prove it, no possession of the original note, and no authority to pursue it. IT IS FOR THIS REASON THAT THE SCHEDULES FILED IN BANKRUPTCY SHOULD NEVER NAME THE ORIGINATING LENDER AS A SECURED CREDITOR FOR A LIQUIDATED AMOUNT. THE “LENDER” MAY BE EFFECTIVELY BLOCKED FROM GETTING RELIEF FROM STAY IF (A) THE SCHEDULES DO NOT SHOW THE CREDITOR AS A SECURED CREDITOR AND INSTEAD SHOW THE CREDITOR AS AS NOMINAL PARTY THAT MIGHT ASSERT A CLAIM FOR AN UNLIQUIDATED AMOUNT AND (B) THE SCHEDULES SHOULD SHOW JOHN DOE ET AL AS PERSONS, ENTITIES OR PARTIES THAT MIGHT ALSO EXPRESS AN INTEREST IN THE BORROWER’S BANKRUPTCY ESTATE FOR AN UNLIQUIDATED AMOUNT SUBJECT TO RESCISSION REMEDIES UNDER TILA, STATUTORY LAWS, COMMON LAW AND SECURITIES LAWS, AND SUBJECT TO REFUNDS, REBATES AND DAMAGES.

IT IS ALSO FOR THIS REASON THAT WE RECOMMEND THAT JOHN DOE BE SUED FOR QUIET TITLE AND SERVED BY PUBLICATION, NAMING ALL KNOWN PARTIES WHO WOULD EXPRESS AN INTEREST, NONE OF WHOM CAN PRODUCE A SINGLE ALLEGATION OR PIECE OF EVIDENCE SUPPORTING THEIR LEGAL STANDING OR LEGAL COMPETENCY AS WITNESSES.

Filed under: bubble, CDO, CORRUPTION, currency, EMS, Eviction, foreclosure, GTC | Honor, inflation, interest rates, Investor, Mortgage, securities fraud | Tagged: , , , , , , , , , , | 1 Comment »

Mortgage Meltdown: Fed Knew 4-5 years Ago — and Told Lenders

Posted on June 16, 2008 by Neil Garfield

If you dig deep enough you will find that it wasn’t hard for regulators to figure out that we were heading for a “shock.” It wasn’t hard to figure out that there were abuses traveling downline to borrowers and upline to investors. And it wasn’t hard to figure out that the securities issued at both ends of the mortgage meltdown — the notes issues by borrowers and the bonds issued by SPV’s were over-rated and over-priced just as the underlying real property was over-appraised.

CDO managers were inventing derivatives on derivatives using “embedded leverage” to create new CDOs (CDO2, CDO3 etc) for the riskiest part of portfolios to make them look safer than they were and to get higher ratings than what they were worth. This pattern of dark matter being infused into the financial system created inevitable pressure on all facilitators including “lenders” to produce “product. And it was widely known that the argument being used was specious: first, they were spreading the risk they were mulltiplying it when these instruments came under pressure and second, the default rates used for ratings were average default rates when the CDO’s were composed of tranches heavily weighted with subprime loans. The real default rate was accordingly much higher than the projected default rate, giving the CDO managers room to wiggle on the value of the securities they were issuing. THE SIGNIFICANCE OF THIS IS THAT FED REGULATORS WERE BRINGING HEDGE FUND MANAGERS AND CDO MANAGERS IN FOR MEETINGS IN WHICH THEY WERE “ENCOURAGED” TO REIN IN THEIR ENTHUSIASM. ALL PARTIES KNEW THAT THE LOANS TO THE BORROWERS WERE HIGH RISK SECURITIES, AND ALL PARTIES KNEW THAT THE ABS INVESTMENTS AND THE DERIVATIVES OF THOSE ABS INSTRUMENTS WERE GOING TO FAIL. EVERYONE KNEW EXCEPT THE BUYERS OF THE ABS INSTRUMENTS AND THE BUYERS OF REAL ESTATE THAT WAS HYPER-INFLATED IN ORDER TO MOVE THE HUGE INVENTORY OF CASH THAT WAS CASCADING THROUGH WALL STREET.

The “lenders’ were being advised by regulators to hold back on these increasingly risky loans, to return to normal loan underwriting standards. But the “lenders” were encouraged, compensated and they thought protected by the securitization process. Thus their perception of risk (zero) coupled with their greed for fees, kept the process going and they in turn passed on the pressure to mortgage brokers and appraisers. THUS THE ARGUMENT THAT THE LENDER DID NOT KNOW FOR SURE, THAT THE LENDER CAN HIDE BEHIND PLAUSIBLE DENIABILITY IS A SHAM. 

Witness this article written in January, 2007 reflecting more than 3 years of Fed concern over the direction the financial markets were taking and showing that financial institutions were well aware of the Fed’s displeasure with what they were doing. 

FRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFRFR

 

Central banks can’t determine how much leverage is out there

Submitted by cpowell on Wed, 2007-01-31 03:35. Section:    

After the Flood:
How Central Banks Fret
About Failures
Once Liquidity Dries Up

By John Plender
Financial Times, London
Tuesday, January 30, 2007

http://www.ft.com/cms/s/539c92d0-b006-11db-94ab-0000779e2340.html

In September 1998 Bill McDonough, the then president of the Federal Reserve Bank of New York, corralled representatives of 14 leading banks into the Fed’s offices at 33 Liberty Street in Manhattan’s financial district and urged them to bail out the ailing Long-Term Capital Management hedge fund. It was a classic central banker’s response to a potential systemic crisis.

“Gentle pressure” is the euphemism often employed to describe such central bank bullying to persuade competing banks to collaborate in the common interest. The interesting question, in the light of huge structural upheavals in financial markets since 1998, is whether the nature of systemic risk has changed and whether a central bank could pull off the same trick today.

In the period between the break-up of the Bretton Woods semi-fixed exchange rate system in the early 1970s and the near-collapse of LTCM in 1998, financial crises were frequent. Yet for the best part of a decade an eerie stability has prevailed. Big financial institutions have collapsed, notably Refco, the derivatives dealer, and the Amaranth hedge fund. Yet neither initiated a systemic shock, even though Amaranth’s $6bn losses were greater than those of LTCM.

Many private sector bankers believe that the newer markets in credit default swaps, which investors use as insurance against corporate default, and collateralised debt obligations, packages of debt instruments used to back the issue of new securities, are inherently stabilising. That is because they spread risk more widely around the system. At the same time technology, which facilitates trading in complex new financial instruments, serves to make markets more efficient.

This, together with a big surge in global liquidity, has contributed to a dramatic decline in financial institutions’ concern about risk to the point where some companies are issuing securities at a zero or negative risk premium. The risk premium is the additional return over the return on risk-free government bonds that investors normally require as a reward for taking risk.

The credit euphoria in the markets, which has caused the yields of riskier bonds to move closer to the risk-free bond yield, is partly driven by the prime brokerage divisions of investment banks competing ferociously for hedge fund business. They have loosened lending standards and margin requirements relating to the amount of collateral they require to support a given amount of hedge fund debt.

Even central bankers, traditionally cautious about the consequences of financial innovation, see some advantages in the new world of high-octane derivatives trading. Tim Geithner, president of the New York Fed, points out that past crises would cause less damage today if they were to recur because of the greater dispersion of credit risk, the improvements in risk management, the size of the capital cushions maintained by banks and the improvements in many parts of the payment and settlements infrastructure.

That said, neither he nor any other leading central banker believes that we are witnessing the end of volatility or the demise of the credit cycle, though some youthful bankers in the private sector are prepared to argue that case.

According to Gerald Corrigan, a former president of the New York Fed who is now a partner in Goldman Sachs, there is a virtual consensus among leading practitioners and central bankers that “the statistical probability of a major financial shock with systemic features has got lower over time”. But there is also agreement that another major shock is likely and that the potential damage could be greater. Mr Corrigan gives three reasons for this increased toxicity: speed, complexity and tighter linkages across institutions and markets, as the system has become more integrated thanks to financial innovation.

“The trouble,” he adds, “is that we do not have the capacity to anticipate the timing and triggers of such a shock — every now and then stuff happens. And if we could anticipate the timing and triggers, the shocks wouldn’t happen.”

There is no shortage of potential accidents, ranging from an over-abrupt unwinding of global financial imbalances to a dollar collapse. A particular concern, raised at the World Economic Forum at Davos by Jean-Claude Trichet, president of the European Central Bank, is the likelihood that credit spreads – the gap between the yield on risky bonds and the risk-free rate – could widen sharply if perceptions of risk change, inflicting large losses on traders. The collapse of a hedge fund or bank might then cause widespread disruption in the markets.

In the euphoria that has accompanied the explosive growth of credit derivatives and collateralised debt instruments, there is not just a possibility that risk is being seriously underpriced. Much trading in credit derivatives assumes that liquidity — the ready availability of funds — will remain when any adjustment in credit markets takes place. Liquidity permits traders to close positions rapidly when risks and potential losses are escalating.

Christopher Whalen of Institutional Risk Analytics, a consultancy, argues that, given the lower risk premiums in credit markets, it may no longer be prudent to assume credit default swap contracts will be liquid when the adjustment comes. In other words, traders may be unable to escape from positions where losses are ballooning because nobody will be willing to deal. He notes that a hedge fund that sells insurance protection against default may depend indirectly upon another under-regulated hedge fund having the resources to meet that guarantee.

Maintaining confidence in counterparties, adds Mr. Whalen, is absolutely required for the game to continue; and the stability of the entire credit derivatives market rests on the notion that hedge funds will somehow have access to sufficient liquidity to meet their obligations. For some, that looks a dangerously optimistic assumption.

Jim O’Neill, head of global economic research at Goldman Sachs, recently remarked that “liquidity is there until it is not — that is the reality of modern markets.” The liquidity glut, he thinks, could reverse at any time. So much for what some claim is a secular increase in liquidity.

Optimists downplay the risk to the system of the potentially problematic credit derivatives, which are still only 7 percent of estimated total notional over-the-counter (that is, unquoted) derivatives contracts. Yet the New York Fed’s Tim Geithner emphasises that despite this underwhelming percentage, credit risk in the OTC derivatives market is large relative to more traditional forms of credit and is also quite large relative to the capital cushions and earnings of the major banks and investment banks.

He adds that these exposures are harder to measure because investments in credit derivatives contain “embedded leverage” where one’s exposure to profit or loss is multiplied many times compared to the same investment in the underlying conventional security.

The problem for central bankers is that “embedded leverage” has expanded phenomenally and does not appear on balance sheets, so it is impossible to quantify embedded leverage across the financial system.

In other words, no one can be sure how much capital to set aside as insurance against these leveraged bets going wrong. While risk management techniques have improved, they remain flawed in fundamental respects.

It is widely acknowledged, for example, that mathematical models of risk, which are used to stress-test derivatives, give too much weight to the low volatility of recent times. In other words, they use the recent past as a guide to predicting the future. In financial markets this is the one sense in which history is bunk, since financial shocks have a habit of coming from unexpected quarters.

These risk models can ignore the potential occurrence of very low-probability scenarios with potentially extreme outcomes, in which one big loss can wipe out several years of positive returns. Statistically driven models and risk metrics are poor at capturing these low-probability financial blow-outs. If stress-testing does throw up an outcome that looks scary, people in financial institutions tend to declare the result “unrealistic” because a conservative assessment of risk would put them at a competitive disadvantage to more “realistic” competitors.

Academics such as Harry Kat of the Cass Business School at the City University in London have produced evidence that many hedge funds are, in fact, pursuing trading strategies that can be relied on to produce positive returns most of the time as compensation for a very rare negative return. They are encouraged to do this by a fee structure that does not require the fund managers to pay back their earlier profit share to investors if an extreme event strikes and wipes out the fund.

At the same time, big financial institutions have no incentive to incorporate the potential costs and risks to the system of their own collapse in their market pricing. They prefer others to incur the costs of providing the “public good” of financial stability, while under-insuring against the risk of failure and under-investing in systems to enhance financial stability. So central banks and governments pick up the tab in the event of a systemic collapse.

Considerable work has been done by banking authorities and private sector institutions to address these problems, notably through the work of the Counterparty Risk Management Policy Group II headed by Gerald Corrigan. He characterises the objective as being to strengthen the shock-absorbers of the global financial system. The group’s recommendations were aimed primarily at the private sector, ranging from strengthening corporate governance to improvements in transaction processing.

Meantime, US and European financial watchdogs launched a probe before Christmas into lending to hedge funds and margin practices. This involves looking at risk-management in individual firms and telling them where they stand in relation to best practice, but without necessarily being prescriptive.

In essence, the goal of the authorities in dealing with potential shocks is damage-control and containment. As far as the co-ordination of bailouts is concerned, persuading bankers that they have a collective interest in rescuing competing financial institutions has never been easy, since most central banks have no legal powers to enforce such action. In a very different environment from that of 1998, it is a moot point whether a rescue would work when an institution deemed too big to fail finds itself in trouble.

Sir John Gieve, deputy governor of the Bank of England, has publicly questioned whether it would now be possible to put a failing firm’s bankers into a room and persuade them to do their stuff. He points out that firms nowadays often do not know who holds their shares and debt, and many investors are looking to take the hit and get out as quickly as possible. Others add that some banks’ proprietary trading desks might have short positions in a failing firm as well as outstanding loans, which could dilute their interest in joining a rescue.

Yet this is not something on which all central bankers agree. Tim Geithner acknowledges the difficulties of putting the lending banks in a room, but points out that we are now several decades into the securitisation of bank loans and dispersion of credit risk and there is no general increase in bankruptcies or decline in average recovery rates, though he adds that there are many other factors that may help explain this.

As for the conflicting interests within banks in relation to a failing firm, he adds that structurally, the banks have long positions in credit overall. It is worth noting too, that the New York Fed also has a big advantage in lender-of-last-resort operations relative to many European countries, including the UK, in that monetary policy decision-making and banking supervision are in the same institution, which minimises problems of communication and co-ordination.

Whoever is right, the one certainty is that lightning will eventually strike. The systemic crisis could arise in a conventional corner of the markets. But given the novelty, opacity and complexity of derivatives trading, and challenges that central banks face in trying to understand the risks involved, there is a high chance that the lightning will go there.

Filed under: CDO, currency, Eviction, foreclosure, GTC | Honor, Mortgage | Tagged: , , , , , , , , | Leave a comment »

Foreclosure Offense: Quiet Title and Rescission (TILA and otherwise)

Posted on June 2, 2008 by Neil Garfield

HERE IS AN OUT-OF-THE BOX OFFENSIVE PROCEDURE WE PROPOSE. YOUR COMMENTS APPRECIATED. IT IS BASED UPON THE ASSUMPTION THAT THE LENDER ASSIGNED OR TRANSFERRED OR SOLD THE MORTGAGE AND NOTE RIGHT AFTER THE CLOSING ON YOUR TRANSACTION. LOGICALLY THEN THE PERSON TO WHOM YOU WOULD ADDRESS YOUR TILA, FRAUD, AND DECEPTIVE AND UNFAIR PRACTICES CLAIMS WOULD BE ADDRESSED TO THE NEW OWNER OF THE MORTGAGE AND NOTE. BUT YOU DON’T KNOW WHO THAT IS. AND IN THE TILA AUDIT, IF IT IS DOEN PROPERLY, THE DOCUMENTS ARE REQUESTED AND USUALLY IGNORED. SOOOOOO……

QUIET TITLE:

In essence the reverse of a traditional foreclosure where the owner of the property forecloses the claim of the people against whom he he has filed suit claiming the property free and clear of all encumbrances. 

The significance in foreclosure OFFENSE is that the loan has been assigned, sold and transferred multiple times and broken up into thousands of pieces along with many others that were intermingled in portfolios, sometimes with cross guarantees from one portfolio to another. 

This process started before the first payment was due on the mortgage loan and before the victim/borrower came to know the real facts of the loan withheld from him in an asymmetric information environment (see asymmetric information) in an inter-temporal transaction (see inter-temporal transaction). 

Thus the true owner, against whom rescission could be claimed became unknown to the victim/borrower. The quiet title action sues “John Doe” identified as all persons having an ownership interest in the mortgage lien on the subject property. The allegation is made that while the victim/borrower has been notified of a transaction, the victim/borrower, petitioner has not been advised of who the entities or people are who own this interest. And since there are TILA and other fraudulent violations, the victim/ borrower/petitioner wishes to rescind. Efforts to determine the true owners have led the Petitioner to determine that there may be thousands of entities or owners, none of whom have been disclosed to Petitioner despite attempts to secure said information (contained in the TILA report and demand). 

SERVICE OF PROCESS IS BY PUBLICATION.

If the court demands that the mortgage servicing company be named as nominal Defendant or Respondent, the mortgage servicing company has only one job: to produce information and proof of ownership of the loan. It is doubtful that anyone, least of all the mortgage servicing entity will be able to fulfill this condition. 

Thus the default judgment will be entered, the victim stops paying the mortgage, and has a recorded judgment relieving his property of any mortgage lien and offsetting the note with the refunds and damages payable to the victim, thus satisfying the entire principal of the note and awarding attorney fees to the victim/petitioner.

RESCISSION:

The right to reverse the transaction. Ordinarily rescission involves giving back everything you received in exchange for getting back everything you gave. In this setting it means the right to get back ALL the interest, points, closing costs and attorney fees and other costs at or after closing that you incurred as a result of the transaction. Rescission rights exist under Federal Statutory Law (Truth in Lending Act – TILA, State Deceptive Business practice Acts, and at common law. Remember that rescission doesn’t mean you give back the house. It doesn’t even mean you have to give back the money to the lender against whom you are rescinding — THAT obligation commences AFTER the lender admits to the rescission or it is otherwise decreed and then it is reduced by the refunds of points, interest, closing costs you paid plus damages and attorney fees you suffered as a result of the issues raised in this post. Rescission might not even mean you owe any money at all to the lender. It could mean that the mortgage lien is extingunished and so is the note. It could convert a secured debt, non-dischargeable in bankruptcy to an unsecured debt wholly dischargeable in bankruptcy. And unless the party coming into court or the auction as a “representative” of the lender can prove that they have received their instructions and authorization from a party who is authorized to give those instructions, then they lack authorization, they lack legal standing and they are probably committing a fraud on you, the court and everyone else. 

companion tranche

A specific tier or segment of REMIC security. A REMIC tranche that is structured to absorb a disproportionate amount of the volatility caused by variations in the prepayments of the underlying collateral. Companion tranches are created to be more volatile so that other tranches in the same REMIC, called PAC or TAC tranches, may have more stable cash flows. Hence the name companion. Also called support tranches. The significance in Foreclosure defense is that this is one of the devices used in the covenants or indentures of ASBs that assures payment to the holder of the security. Since the holder of the security is the “owner” of the mortgage and note, it is reasonable to assume that either the holder of the mortgage has been paid by a third party or that a third party assumed the liability.

compliance risk

One of nine risks defined by the Office of the Comptroller of the Currency (OCC). The risk to earnings or capital arising from violations of or nonconformance with laws, rules, regulations, prescribed practices, or ethical standards. This risk is incorporated in the Federal Reserve definition of legal risk. Participants in the Mortgage Meltdown of 2001-2008 were virtually all out of compliance and upon filing of an administrative complaint to the OCC, could be prosecuted for violations.

conventional mortgage

A mortgage loan based solely upon the value of the mortgaged real estate and the creditworthiness of the borrower. A mortgage loan without insurance or guarantees from a government agency. The significance is that with securitization of the loans there is (a) insurance to the holder of the CLO (b) guarantees of payment from third parties and (c) in practice, guarantees from the Federal Government (witness the Federal Reserve bailout of Bear Stearns and the Federal Reserve policy of allowing investment bankers who are holding CLOs to use those CLOs for loans at the Fed window). The securitized transactions thus converted the original transaction from a conventional loan to a complex consumer credit, insured, guaranteed, pooled security transaction falling far outside of the TILA exemption regarding residential home mortgages eligibility for rescission. 

INTER-TEMPORAL TRANSACTIONS:

Transactions in which the commencement of the terms at the execution of the deal contains terms, risks or provisions that differ from a later time. The significance of this insider term in the MORTGAGE MELTDOWN is a classic real story: the victim is a black man with a perfect (800) FICO score has lived in his house many years and has only 5% left to pay off on his mortgage. He is approached by carefully trained predatory salesman for subprime lender — a lender that the victim had no need for because his credit, finances and personal reputation were excellent. Victim could therefore have qualified for any conventional loan on conventional terms. Victim does not know because it is not disclosed to him that he is being approached with a subprime lending program and that he qualifies for much better terms that are being offered to him — nor that he would be better off NOT refinancing since he is so close to paying off his house. He is convinced to get a new mortgage for interest only payments set at 1% while another 9% accrues. $20,000 in mortgage broker and yield spread premium rebates (kickbacks) are paid up front along with the mortgage proceeds. Within a few months he starts getting notices of increases in his payments which eventually are larger than his entire income. Qualification of the loan by the “lender” was at the payment rate at 1% interest, not at the future rates that would be applied, for which his income would NOT qualify. Victim ends up with risk of foreclosure and blemished credit score. Happy ending. Legal aid stepped in and unwrapped the deal. Many borrowers are seduced into accepting these deals believing that the extra money they are getting out of the mortgage proceeds will help them indefinitely to make future payments. It is the lender’s obligation to disclose that this is not the case, that the borrower’s income does not cover the amount of future payments which the lender understands and the borrower does not (see asymmetric information). 

MORTGAGE MELTDOWN:

An series of events (stemming from the 1983 introduction of derivative securities) created by a tacit cartel of investment bankers and other financial institutions in which borrowers were (approved) “loaned” money on purchase money mortgages based upon false appraisals in the context of contemporaneous securitized transactions where the investment capital was procured by fraud in unregulated security offerings to “qualified” investors, based upon false assurance, false ratings, false insurance backing, and false appraisals of underlying property, income of borrowers and many other factors. The logistics of this scam were revealed in pieces and have threatened the very existence of many financial institutions and the financial markets themselves. Indexes, such as LIBOR, were indirectly manipulated by U.S. financial institutions to hide the true facts. Despite a brief period in which certain arcane “auction markets” froze up (in places and events unknown to the public, business has resumed as usual. The lack of regulation from a responsible, accountable agency or group of agencies has spawned hundreds of lawsuits and millions of foreclosures, many producing counterclaims for far more than the original mortgage and note. No immediate fundamental change is in process in the regulatory scheme, hence it may be expected that the mortgage meltdown will replay in one form or another shortly. 

NINJA LOAN

NO INCOME, NO JOB, NO ASSETS: NO DOCUMENTS, NO VERIFICATION, NO REVIEW BY RISK ANALYSIS COMMITTEE.

Filed under: CDO, Eviction, foreclosure, GTC | Honor, Mortgage | Tagged: , , , , , , , , , | 10 Comments »

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