Theory vs Fact and What to do About It in Court

NOTICE: The information contained on this blog is based upon fact when stated as fact and theory when stated as theory. We are well aware that the facts presented on this blog are contrary to the facts as presented by mainstream media,  the executive branch of government and even the judicial branch of government.  We do not consider anything to be fact unless it is corroborated in at least three ways.  Some of the information is based upon extensive interviews with industry insiders who have shared information based upon a promise of anonymity. Some of the information is based upon intensive research into specific companies and specific people including the hiring of investigative services. Some of the information is based upon personal knowledge of Neil Garfield during his tenure on Wall Street and in his investment banking activities related to the trading of commercial and residential real estate. All fact patterns presented as true in this blog are additionally subjected to the test of logic and the presence or absence of a contrary explanation.

THE TRUE NARRATIVE OF SECURITIZATION

Think about it. When the bond sells or is repurchased, what happens to the loans. The bond “derives” its value from the loans (hence “derivative”). So if you sell the bond you have sold a share of the underlying loans, right? Wrong — but only wrong if you believe the spin from Wall Street, and the Federal Reserve cover for quantitative easing (expansion of the money supply not required by demand caused by increased economic activity). Otherwise you would be entirely correct.

If you buy a share of General Motors you can’t claim direct ownership over the cars and equipment. That is because GM is a corporation. A corporation is a valid “legal fiction”. When you create a corporation you are creating a legal person. Now let’s suppose you give your broker the money to buy a share of General Motors, does that give the broker to claim ownership over your investment? Of course not — with one major glaring exception. The exception is that securities are often held in”street name” rather than titled to you as the buyer. You can always demand that the stock certificate be issued in your name, but if you don’t then it will be held in the name of the brokerage house that executed the transaction for you. So on paper it looks like the share of GM is titled to the brokerage house and not you. It is standard practice and there is nothing wrong with it in theory until you take away accountability for malfeasance.

Before brokers were allowed to incorporate, the owners or partners were individually liable for everything that happened in the brokerage company. So they were not likely to claim your security held in street name as their own. In fact, the paper crash in the late 19060’s was directly related to the fact that the securities held in street name did not match up with the statements of investors who had accounts with the brokerage houses who screwed up the paperwork so badly, that some firms crashed and to this day there are unresolved certificates in which the identity of the actual owner is unknown.

And if they sold your share of GM, the proceeds were supposed to be yours. In the yesteryear of Wall Street rules they would only execute a sell of your share of GM if you ordered it. It can be fairly stated that the reason why the financial system broke down is that brokers had nothing stopping them from claiming ownership over the investors money (thus stealing both the money and the identity of the investor) and nothing stopping them from claiming ownership over a loan that was issued by a borrower and used by the broker to sell, trade and profit from exotic securities using the investors’ money without accounting to either the investor or the borrower (or the regulators) of the details of such trades.

Today it is still supposed to be true that the brokers are “honest” intermediaries just like your commercial bank that handles your checking account, but as it turns out neither the investment banks nor the commercial bank have a culture of caring for or about their customers or depositors. The system has broken down.

And so the moral hazard of having corporations managed by officers who are not likely to go to jail or go bankrupt when the system of gambling with customer money goes bad, they suffer nothing. They get paid bonuses for any upside event but they never feel the pain when things go bad. Back “in the day” there were three things stopping bankers from defrauding the public: personal responsibility, agency regulation and industry pressure from peers who feared the public would stop doing business with them if it became known that their deposits were being “managed” in ways most people could not be true.

Now we can return to the question of what is the legal result of a transfer of a mortgage backed bond. You have given the brokerage house the money to buy the bond (let’s say you are a pension fund). The brokerage house should have given your money to the “legal person” that issues or owns the bond. So if you are the first buyer of the bond, then the money should go to the trustee of the New York common law trust (REMIC) that issues the bond to you — except that it is in reality issued in “street name” — I.e., in the name of the brokerage house. This is contrary to the intent of the prospectus and PSA given to investors but it is left intentionally vague as to  whether this path is legally mandated. The courts are all caught up in the paperwork instead of looking at the actual transactions and matching those transactions with common law principles that have been presumptively true for centuries.

The 1998 law exempts mortgage back bonds from being called securities so it could be argued that they should not be issued in street name, a process applicable to securities trading. Without the devices of “Selling Forward” (selling what you don’t have — yet) and issuing ownership in “Street name” it would have been very difficult for any of this mayhem to have grown to such pornographic proportions.

NOW HERE IS WHERE THE CRIME STARTED: No trust agreement was ever created, so this gave the bankers wiggle room in case they wanted to avoid trust law. The creation of the trust is said to be in the PSA and prospectus and one could be implied from the wording, but it is difficult in plain language to confirm the intent to create a trust. Nonetheless it became part of Wall Street parlance to refer tot he special purpose vehicles qualifying for special tax treatment under REMIC statutes as “trusts.”

No bond was issued in most cases. The bond issued by the “trust” in reality was merely notated on the books of the investment banking brokerage. Nearly all bonds therefore have no paper certificate even available (called non certificated). The “private label” bonds are so full of legal holes that they could not hold air, much less water.

No money was given to the trustee or the trust. No assets were deposited into the trust. The trust never acquired or originated any loans because it didn’t pay for them. It didn’t pay for them because it had no money to pay for them. The money you gave to purchase a bond never went to the trustee or the trust. In fact the trustee failed to start a file on your “trust” and therefore never assigned it to their trust department. The trustee also never started a depository account for the trust. It would have been named “XYZ Bank in trust for ABC trust”. That never happened except when they were piloting the scheme that become the largest Economic crime in human history.

Banks diverted your money from the trust into their own pockets. Without telling you, they put the money into a commingled undifferentiated account. The notation was made that the investor was credited with the purchase of one bond but the bond was never issued and the trust didn’t get the money so there was no deal or transaction between you and the trust. You gave the brokerage firm your money for the bond but you never got the bond. The issuance of the bond from the trust was a fiction perpetrated by the brokerage house. Since neither the trustee nor the trust had any records nor an account where your money could be deposited, it never came into legal existence, but more importantly it lacked the funds to buy or originate residential mortgage loans.

Money was controlled by the investment banks, not the trusts or the trustees. That money was sitting in the the brokerage account along with thousands of investors who thought they were buying millions of bonds in thousands of trusts. Having voluntarily ignored the existence of the allegedly existing trust, it doesn’t matter whether the trust did or did not exist because it was never funded and therefore was a nullity. In reality, the investors were not owners of a trust or beneficiaries of a trust, they were common law general partners in a scheme that rocked the world.

From the start the money chain never matched the paperwork. The brokerage house wired money to the depository account (checking account) of the closing agent (usually a title agent) “on the ground” who also received closing papers from Great Loans, Inc. (not a real name, but represents the “originators” as they came to be called whose name showed up on all the settlement papers and disclosures required for a real estate closing with a “lender). The payee on the note and the mortgagee on the mortgage was named “lender” even though they had never made a loan.

Donald Duck was your lender. The entire lender side of the closing was fictitious. The originators were not just naked nominees, they were fictitious nominees for a fictitious lender who was never disclosed. Under Reg Z and TILA this is a “table funded loan” and it is illegal because the borrower, by law, is required to be given information about the identity of his lender and all the fees, commissions and other compensation paid to various parties.

The investment bank owes the borrower all of its compensation, plus treble damages, attorney fees and costs. A table funded loan is one in which the borrower is deprived of the choice guaranteed by the Federal Truth in Lending Act. It is defined as “predatory per se” which means that all you need to show is that the closing parties, including the closing agent, engaged in a pattern of conduct in which the identity of the real lender was withheld.

Terms of payment and repayment were never disclosed to the lenders and never disclosed to the borrowers. The borrower is also supposed to know, as part of the disclosures of compensation, the terms of repayment. In this case the prospectus and PSA disclose a repayment scheme that makes you, the investor, a co-obligor on repaying your own investment. This is because the terms of the “bond” clearly state that the brokerage house can pay the interest or principal on your investment out of your own funds. That provision is used by the FBI in thousands of PONZI scheme investigations as a red flag for the presence of fraud.

The Terms of the loan were never disclosed to the investor or the buyer. The behavior of the banks can only be considered as legal or excusable if the enabling language existed to allow trading using your money as an investor/depositor/lender. The behavior of the banks does not match up with either the paper trail or the money trail of actual transactions.

AND HERE IS WHERE IT GETS INTERESTING. The closing agent knows they got money not from the originator and not even from the party that later claims to have made the loan. But they go ahead anyway, issue worthless title insurance, and they close the loan, distributing money as stated in the closing settlement papers; but what is not disclosed in the closing settlement papers is that the terms of repayment for the bond are different from the terms of repayment on the note. And another thing not disclosed is what happened to your money that was supposedly invested in the purchase of a bond payable by a “trust” that didn’t have the money to originate or acquire loans because the brokerage house never tendered it to the trust. The trustee knew it was playing a part in a fictional play and the only thing they were interested in was getting their paycheck for pretending to be the trustee, when in fact there was no trust account, no trust assets, and no bond actually issued by the trust.

The Secret Yield Spread Premium in which the banks stole part of your money when you gave them money to buy into mortgage bundles immediately reduced the amount invested to a level that guaranteed that you would never be repaid. Many different types of loans were made this way. In fact, 96% of all loans made during the mortgage meltdown period were initiated this way. The brokerage house had an affiliated company that was called an aggregator. The aggregator would collect up all the loans that were REPORTEDLY closed, whether they really closed or not. This information came from the loan originator who in effect was billing for services rendered: pretending to be a lender at a closing I which it had no interest. The collection of loans included as many toxic loans as could be found because on average, the collection of loans would have a higher expected interest rate than without the toxic loans. Toxic loans (loans that are known will die in default) carry a very high rate of interest even if the first payment is a teaser payment of one-tenth the amount of the actual augment of principal and interest that would ordinarily apply, and which was applied later when the loans were foreclosed.

The undisclosed yield spread premium is certainly due back to the borrower with treble damages under current law. An investment carrying a higher rate of return usually is worth more on the open market than one with a lower rate of return — assuming the risk on both is comparable. The brokerage house managed to use its influence and money to get the rating agencies to say that these collections of mortgages (bundles) were “investment grade” securities (forgetting that the 1998 law exempted these bonds as “securities”). So for example, let’s take your investment and see what happened. The brokerage house pretended to report that your money had gone into the trust which we already know did not happen. The interest rate of return you were expecting from the highest grade “investment securities” was lower than the average rate of return on investments on average. After all you knew the risk was zero, so the return is lower.

PLAIN LANGUAGE: Brokers took a part of your investment money and created a fictitious transaction in which they always made a large profit (15%-30%). The brokerage house took the bundle of loans created by the aggregator with an inflated rate of return caused by including toxic mortgages with 15% interest rates, and SOLD those loans to itself in “street name” for fair market value which was inflated because of the toxic loans being part of the package. Yes, that is right. The brokerage house created a fictional transaction in which it pretended the bonds were issued and then sold the bundle of mortgages at a fictions profit. They sold the mortgages to themselves and then booked the transaction as a “proprietary trading” profit which is one of many pieces of compensation that was never disclosed to the borrower.

Under law that compensation is due back to the borrower along with treble damages, interest, and all other payments plus attorney fees and costs. The proprietary trading profit reported by the banks was fictional just as all the other elements of the transaction were fictional. It is called a yield spread premium which is the difference in the fair market value of the same loan at two different interest rates. YSPs are common at ground level with the borrower and his mortgage broker etc., but never before present in any large scale operation up at the lender level, where you are, since you have given the brokerage house money to execute a transaction, to wit: purchase mortgage backed bond from a particular trust.

WHAT HAPPENED TO TITLE? It was defective from the start. Neither the originator nor MERS or anyone else had an actual interest in the proceeds of payments on that mortgage. They were just play-acting. But here in the real world they got away with playing with real money (so far). If your money had gone into the trust with the trustee managing the trust assets (because there were trust assets), then the name of the trust should have been placed on the note as payee because the trust made the loan. And the name of the trust should have been on the mortgage as mortgagee or beneficiary under a deed of trust because the trust made the loan. Instead, the brokerage firms set up an elaborate maze of companies under cover or sponsorship from the big banks all pretending to be trading a loan for which both the note and mortgage were known to be defective.

And then the banks claimed to have taken a loss on the bonds (never issued to begin with) for which they were richly rewarded by receiving payments of insurance and credit default swaps, bailout and of course the Federal Reserve program of buying $85 billion PER MONTH in bonds that the Board of Governors knows were never issued from a trust that never existed. And instead of giving you your money back with interest they said “see, there is the huge loss on these bonds and the underlying loans” and they to,d you to eat the loss. But you responded with “Hey. I gave you money to buy those bonds. You were my agent. I don’t care how complex the exotic maze, if you were the agent who took my money then you were the agent who diverted my money and then said it is all the same thing. You brokers owe me my money back.

Meanwhile the aggregators who are really the same brokerage companies are being sued by Fannie, Freddie, investors and other state and federal agencies for selling worthless paper whose value dropped to pennies on the dollar despite the value of the underlying mortgages. And the aggregators are being forced to buy back the crap they sold. So we have the trust, the trustee and you, the investor who never had any investment of value, and the instrument you were supposed to get (mortgage backed bonds) paid off in a dozen different ways.

Which leaves you with the question of every investor in these bogus bonds. What is the value or even the utility of a worthless bond which even if it had been real, has already been aid off? How can the note provisions survive to be enforced on a debt that has been paid off several times over? Why are courts allowing lawsuits, including Foreclosures, on bogus claims where the creditor, the alleged lender, and the alleged trustee of the issuer have no interest in the outcome of litigation and have given warning to all Servicers NOT to use their names in the foreclosure suits — because they have no trust account, they have no account receivable, they have no bond receivable and they have no note receivable?

And why are the courts ignoring the fact that even if the bonds were real, the Federal Reserve now owns most of them. The short answer is that nothing happens to the bond or the loan because they were never connected the way they were supposed to be. The signature of the borrower did not give rise to any debt. The loan from the brokerage house did not give rise to any debt because the broker got paid. And if the principal debt was extinguished at the loan closing (most cases) or after the loan closing, there is no amount due. And even if the insurance and other payments were not enough to any off the loans, the receipt of even one nickel should have reduced the amount due to you the investor and you would have expected a nickel less from the borrower.

HBC,FNMA.OB,FMCC.OB,BAC,JPM,

RBS | Tue, Aug 6

HSBC faces $1.6B payout over mortgage bonds    • HSBC (HBC) faces having to pay $1.6B in a lawsuit from the Federal Housing Finance Agency over soured mortgage bonds that the bank sold to Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB). The bank made the disclosure yesterday.    • The figure is well above the $900M that analysts at Credit Suisse had estimated.    • In total the FHFA has sued 18 banks over mortgage bonds; should HSBC’s calculations for its liabilities be applied to some of the defendants with the largest exposure, including Bank of America (BAC), JPMorgan (JPM) and RBS (RBS), they would have to pay over $7B each. Should these banks make payments in proportion with a recent UBS deal, the bill would above $4B.

Full Story: http://seekingalpha.com/currents/post/1194872?source=ipadportfolioapp

Rating Agencies Finally Drawing Fire They Richly Deserve — But Will They be Prosecuted?

“The Justice Department claims that the faulty projections were not simply naïveté, but rather a deliberate effort to produce inflated, fraudulent ratings. “The complaint asserts that S.& P. staff chose not to update computer programs because the changes would have led to harsher ratings, and a potential loss of business,” (e.s.)

“I was there. It is not possible that companies like S&P, Fitch and other rating agencies didn’t know how to do securities analysis — they invented it. The S&P Book was widely used as a shorthand method of evaluating a stock or bond for decades before I arrived on Wall Street. They were known and trusted for their data and their crunching of data. It isn’t possible that they wouldn’t know that the ratings were artificially inflated. They were only concerned with collecting fees and covering their behinds with “plausible deniability.”What they gave up was the their reputation for truth and clarity. Now they can’t be trusted.

And the same goes triple for the investment banks who brought those bogus mortgage bonds to market. Wall Street is a small place. Everyone but the customers and borrowers knew what was going on and everyone knew a huge bust was coming. If they knew and the regulators knew, why did they allow it play out when the warning signs were already clear in the early 2000’s.” Neil F Garfield, www.livinglies.me

CHECK OUT OUR EXTENDED DECEMBER SPECIAL!

What’s the Next Step? Consult with Neil Garfield

For assistance with presenting a case for wrongful foreclosure or to challenge whoever is taking your money every month, please call 520-405-1688, customer service, who will put you in touch with an attorney in the states of Florida, Tennessee, Georgia, California, Ohio, and Nevada. (NOTE: Chapter 11 may be easier than you think).

Editor’s Analysis: When you see movies like Too Big to Fail and read any of the hundreds of books published on the great recession, you must be left with a sense of outrage  and/or disappointment that our government and our major banks tacitly approved of the illegal activities undertaken by all the participants in what turned out to be a PONZI scheme covered over by a fraudulent scheme they called “Securitization.”

Despite some people raising the concern that the homeowners were hit hardest by the criminal enterprise, any concern for them vanished in the face of an invalid assumption by Hank Paulson and Ben Bernanke that the economy would fail and society would fall apart if they didn’t bail out the banks. If anything, the behavior of the banks was the equivalent of NOT bailing them out because they never honored their part of the bargain — increasing the flow of capital into the economy through loans and investments. While that understanding should have been reduced to writing, it was obvious that the banks would lend out money with extra capital infused into their balance sheet. Except they didn’t.

And the world didn’t end, but there was chaos all over the world because the banks were and continue sitting on a bounty that has not been subject to any audit or accounting.

As I expected, the rating agencies are now being sued not for negligence but for intentionally skewing the ratings knowing that stable managed funds were restricted from investing in anything but the safest securities (meaning the highest rating from a qualified rating agency). It is the same story as the appraisers of real property who were pressured into inflating and then re-inflating the prices of property whose value was left far behind. Both the rating agencies and the appraisers who participated in this illicit scheme caved in to threats from Wall Street that they would never see any business again if they didn’t “play ball.”

The very structure and the actual movement of money and documents would tip off an amateur securities analyst. Starting with the premise of securitization and an understanding of how it works (easily obtained from numerous sources) any analysis would have revealed that something was wrong. Securities analysis is not just sitting at a desk crunching numbers. It is investigation.

Any investigation at random picking apart the loan deals, the diversion of title from the REMIC trusts, the diversion of money from the investors to a mega-account in which the investors’ money was indiscriminately commingled, thus avoiding the REMICs entirely, would lead to the inevitable conclusion that even the highest rated tranches and the highest rated bonds, were a complete sham. Indeed internal memos at S&P shows that it was well understood by all — they even made up a song about it.

The analysis by the people at S&P omitted key steps so they wouldn’t be accused of knowing what was going on. It is the same as the underwriting of the loans themselves where the underwriting process was reduced to a computer platform in which the aggregator approved the loan — not he originator — and the investment banker wired the funds for the loan on behalf of the Investors, but the documents showed that it was the originator, who was not allowed to touch any of the money funded for loans, whose name was placed on the note and mortgage. Why?

Any good analyst would have and several did ask why this was done. They got back a double-speak answer that would have resulted in an unrated or low-rated mortgage bond, with a footnote that the REMICs may never have been funded and that therefore without other sources of capital they could not possibly have purchased the loans. Which means of course that the REMICs named in foreclosures over the past 5-6 years.

Some of the best analysts on Wall Street saw at a glance that this was a PONZI scheme and a fraudulent play on the word “Securitization.” Simply tracing the parties to their real function would and still will reveal that all of them were acting in nominee capacities and not as true agents of the investors or participants in the securitization scheme.

And the nominees include but are not limited to the REMIC itself, the Trustee for the REMIC, the subservicer, the Master Servicer, the Depositor, the aggregator, the originator, and the law firms, foreclosure mills and companies like LPS and DOCX who sprung up with published price sheets on fabrication of documents and forgeries of of those documents to convince a court that the foreclosure was real and valid. The whole thing was a sham.

If I saw it at a glance after being out of Wall STreet for many years, you can bet that the new financial and securities analysts at the rating agencies also saw it. Instead they buried their true analysis behind a mountain of fabricated data that in itself was a nominee for the real data and then crunched the numbers in the way that the Wall Street firms dictated.

The fact that there were algorithms that took the world’s fastest computers a full weekend to process without the ability to audit the results should have and did in fact alert many people that the bogus mortgage bonds were unratable because there was no way to confirm their assumptions or their outcome.

The government is very close, now that it is moving in on the ratings companies. They are close to revealing that this was not excessive risk taking it was excessive taking — theft — and that the rating companies should lose their status as rating companies, the officers and analysts who signed off should be prosecuted, and the receiver appointed over the assets should claw back the excessive fees paid to the ratings companies from officers of the ratings companies and, following the yellow brick road, the CEO’s of the investment banks.

We have found out, thanks to the greed and deception practiced by the banks on officers at the highest level of your government what will happen if the credit markets free up without the TARP money being used to free up those markets. It isn’t pretty but it isn’t apocalypse either. The proof is in. The mega banks should be taken down piece by piece and their function should be spread out over a wide swath of more than 7,000 community banks, credit unions and savings and loan associations — all of whom have access to the utilities at SWIFT, VISA, MasterCard, check 21, and other forms of interbank electronic funds transfer.

If the administration really wants a correction and really wants to increase confidence in the marketplaces around the world and the financial system supporting those markets, then it MUST take the harshest action possible against the people and companies who engineered this world-wide crisis. Eventually the truth will all be out for everyone to see. Which side of history do we mean to be aligned — the bank oligopoly or a capitalist, free, democratic society.

BY WILLIAM ALDEN, DealBook NY TIMES

DOCUMENTS IN S.&P. CASE SHOW ALARM Documents included in the Justice Department’s lawsuit against Standard & Poor’s provide a glimpse at the company’s inner working in the run-up to the financial crisis. “Tensions appeared to be escalating inside the firm’s headquarters in Lower Manhattan as it publicly professed that its ratings were valid, even as the home loans bundled into mortgage-backed securities, or M.B.S., were failing at accelerating rates,” Mary Williams Walsh and Ron Nixon write in DealBook. “Together, the documents show a portrait of some executives pushing to water down the firm’s rating models in the hope of preserving market share and profits, while others expressed deep concerns about the poor performance of the securities and what they saw as a lowering of standards.”

Some of the documents also showed some of the snark among the rank-and-file over the impending crisis. One analyst in March 2007 borrowed from the Talking Heads, creating new lyrics to “Burning Down the House,” according to the complaint: “Subprime is boi-ling o-ver. Bringing down the house.” In a confidential memo reproduced in the complaint, one executive said: “This market is a wildly spinning top which is going to end badly.”

At the heart of the civil case are the computer models S.&P. used to rate complex mortgage securities. The Justice Department claims that the faulty projections were not simply naïveté, but rather a deliberate effort to produce inflated, fraudulent ratings. “The complaint asserts that S.& P. staff chose not to update computer programs because the changes would have led to harsher ratings, and a potential loss of business,” Peter Eavis writes. But S.&P., which says the lawsuit is without merit, disagrees with the government’s characterization of the models. Catherine J. Mathis, an S.& P. spokeswoman, said the Justice Department had not “shown actual adjustment to the models or other changes that were not analytically justified.”

Indeed, the government faces an uphill battle in making its case that S.&P. intentionally inflated ratings. “The government will have to prove that ratings were in fact faulty, and published intentionally so as to deceive investors in the securities. In response, S.& P. could simply argue that the company was just as blinded by the financial crisis as anyone else, and that questionable e-mails are simply the work of lower-level employees who were not involved in the decision-making,” Peter J. Henning and Steven M. Davidoff write. “Even if the Justice Department can prove the agency acted to deceive investors, it still has to deal with something lawyers call reliance. In other words, did investors rely on these ratings to make their decisions?”

R.B.S APPROACHES SETTLEMENT OVER RATE-RIGGING The Royal Bank of Scotland said on Wednesday that it was in advanced discussions with authorities on both side of the Atlantic over settling accusations that it manipulated Libor. “Although the settlements remain to be agreed, R.B.S. expects they will include the payment of significant penalties as well as certain other sanctions,” the bank said.

A settlement, which could be announced as soon as Wednesday, is expected to include a penalty of about 400 million pounds, or $626 million, according to several news reports. “As part of the anticipated deal, R.B.S.’s Japanese unit is expected to plead guilty to a crime in the U.S., although the Justice Department isn’t expected to charge any individuals, according to one of the people briefed on the talks,” The Wall Street Journal writes. John Hourican, the head of R.B.S.’s investment bank, is also expected to resign, the reports said.

S&P Analyst Joked of ‘Bringing Down the House’ Ahead of Collapse
http://www.bloomberg.com/news/2013-02-05/s-p-analyst-joked-of-bringing-down-the-house-ahead-of-collapse.html

Case Details Internal Tension at S.&P. Amid Subprime Problems
http://dealbook.nytimes.com/2013/02/05/case-details-internal-tension-at-s-p-amid-subprime-problems/

Justice Sues S&P, But What Purpose are Ratings Agencies Serving Anyway?
http://business.time.com/2013/02/06/justice-sues-sp-but-what-purpose-are-ratings-agencies-serving-anyway/

S&P charged with fraud in mortgage ratings
http://www.wsws.org/en/articles/2013/02/06/rate-f06.html

BOA Deathwatch: $2.43 Billion Settlement — Tip of the Iceberg

“If we know with certainty that misrepresentation to investors lies at the heart of the so-called securitization scheme, why is it so hard for Judges and lawyers to believe that misrepresentation to homeowners lies at the heart of the origination of the loans that were the most important part of the securitization scheme? In fact, why is it so hard for Judges and Lawmakers and Regulators to conceive and believe that Wall Street didn’t securitize the loans at all and only pretended to do so?” — Neil F Garfield, livinglies.me

EDITOR’S ANALYSIS: The settlement sounds big, but Bank of America has already announced that it had “put aside” another $42 billion for the defective acquisitions of Merrill Lynch, an underwriter in the fake securitization scheme, and Countrywide, a sham aggregator of residential mortgage loans.

The facts keep getting reported, but nobody seems to question the meaning of those facts or their consequences. The Wall Street Journal reports that dozens of lawsuits are still pending against BOA from insurers, credit default swap counter-parties and investor-lenders, each alleging that “countrywide wasn’t honest about the quality of mortgage backed securities it issued before the financial crisis. While it is true that pressure was exerted from Hank Paulson to make sure that BOA acquired Merrill and Countrywide to prevent a general financial collapse (you won’t have an economy by Monday if we don’t step in” (quote from Paulson and Bernanke to President George W Bush, it is equally true that BOA management pronounced the deals as the “deal of a lifetime.”

The very fact that BOA failed to peak under the hood before buying the car is ample corroboration of the handshake mentality being leveraged against each other as Banks scrambled to the top of the heap without concern for either their own companies or the country. Their lack of concern for their companies comes from the fact that they were receiving cash bonuses of pornographic size while those acquisitions went sour. Back in the days when management of the investment banks required general partnerships in which the partners could be personally liable, none of this could have happened. If the Bank fell, management didn’t care because they would still be rich whereas in the old days they would have been wiped out.

The settlement announced on Friday gives a very small percentage of money back to investor lenders and shareholders in the bank, both of which consist of groups of people who were largely investing for retirement. Next year, the writing on the wall is clear as a bell: either pension benefits are going to be slashed or there will be another major government bailout of the pension funds, some of which is already provided by law in government guarantees.

Either way, the people are going to be screaming at a continuation of an endless financial crisis that could be stopped on a dime by one simple magic bullet: admitting that the mortgage bonds were pure trash backed by no loans, and thus paving the way for the removal of the “mortgages” or Deeds of trust” that were recorded to secure the loans. But nobody wants to do that because ideology is still controlling the policies and the practical consequences of those policies is that more undeserving banks will be getting free homes for which they neither funded the origination nor the acquisition of the loans because the “originator” was never the lender.

Politically, the Banks are losing traction as representatives of both major political parties step away from the Banks, even while accepting huge donations from them. It is clear that the candidates who are receiving huge donations are probably bound by promises to back the banking industry as they desperate try to avoid the correct legal conclusion that virtually none of the loans were made payable to the lender, and none of the mortgages or deeds of trust were secured by a perfected lien.

It isn’t just that the the loan losses will fall on the Banks that were pulling the strings on the puppets at closings with the investors and closings with the homeowners; their real problems stem from the false claim that they were are holding valuable paper (mortgage backed bonds) whose value would not survive the worksheet of a first year auditor.

With only nominees on the note and mortgage and the obligation being owed to an as yet undefined group of investors whose money was used, contrary to written agreement and oral assurances, to be place bets at the window of the banks and hedge funds around the world and fund managers who were supposedly investing in triple A rated “Stable” securities that were “insured”, the investor lawsuits corroborate what we have been saying for 6 years: if the existing laws of property and contract are applied, neither the promissory note (at least 40% of which were intentionally destroyed) nor the mortgages (deeds of trust) are enforceable for collection or foreclosure.

The homeowner owes money to an undefined group of creditors, the balance of which is unknown because the Banks control the accounting and the accounting leaves out significant insurance proceeds, payments from credit default swap counter-parties, and federal buyouts and bailouts. The Banks are fighting to retain control of that accounting because if some third party starts auditing the money trail they are going to find that the “assets”  claimed by the banks are actually liabilities owed back to the parties that paid 100 cents on the dollar for the entire pool of mortgage bonds, none of which were actually backed by a legal obligation or an enforceable lien.

In short, if borrowers litigate they are fighting to get to the point where the banks and servicers are over a barrel and must settle — but only after making it as difficult as possible. Hence the strategy described in my seminars called “Deny and Discover”.

Because at the end of the day when  the number of cases won by borrowers exceeds the number of successful foreclosures (or perhaps far before that time) the assets are going to disappear and the liabilities are going to pop up in the banks. The consequence is that these banks will either have greatly diminished equity or negative equity — i.e., the BANKS will be Underwater! The FDIC and Federal reserve will thus be required to step in an “resolve these behemoth banks selling off the salable parts to smaller, manageable banks that are not so big they can’t be regulated.

As I survey the landscape, I see no hope for BOA, Citi, Chase or even Wells Fargo to survive the bloodbath that is coming, nor should they. The value of their stock will drop to worthless, which it is now anyway but not recognized, and the value of those regional or community banks and credit unions that pick up the pieces will correspondingly rise. The loans will vanish because the investors have no practical way of determining whose money went into any particular loan; the reason for that is that the money trail avoids the document trail like the plague. There were not trust accounts or other financial accounts in the name of the empty pools that issued the worthless mortgage bonds.

This is where ideology, law and practicality clash because of a lack of understanding of the consequences. The homeowners are getting a house not “free” but unencumbered by the originators who faked them out with false payees, false lenders and false secured parties. But the tax code already takes care of that. This isn’t forgiveness of debt. This reduction, in fact possibly overpayment of the debt was caused by the banks trading with investor money as though the money and the loans were the property of the banks, which they were not.

The effect on homeowners is that they will be required to recognize “income” from the elimination of the obligation, which is taxable and subject to Federal tax liens. The amount of that lien or obligation will be far less than the amount of the original loan, but the government will receive a portion of the savings through taxes, the investor-lenders will be compensated as the megabanks are resolved, and the crisis caused by a disappearing middle class will be over.

That will give us time to devote our attention to student loans and those “Defaults” which were also subject to false claims of securitization and in which the government guarantee was supposedly divided up without government consent as the originator, not caring about loan repayment, pushed students into larger and larger loans. What the participants in THAT fake securitization chain don’t realize is that under existing applicable law, it is my opinion that an election was made: either they had a loan receivable on the books for which there could be government guarantee, or they could reduce the risk by splitting the loans up into pieces and get paid handsomely for simply originating the loan. Simple logic says that the banks could not have both the guarantee from the government PLUS the elimination for risk through securitization in table funded loans that most probably also ignored the closing documents with investor lenders who advanced money for pools in which student loans were supposedly “assigned.”

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Editor’s Notes:  

It comes as no surprise that BofA, now the unproud owner of Countrywide, would repeatedly appeal a judgment in which a moral man tried to avoid moral hazard at Countrywide and was fired for it. Corporations do that all the time to gain the advantage of achieving a smaller settlement or to dissuade others from doing the same thing. I feel appalled that this guy in Gretchen’s story is still waiting for his compensation and that if BofA has its way, he will be deprived of it altogether. BofA of coruse says that when they acquired CW there just wasn’t a job left for him. Bullcrap:

“But a juror in the case rejected this argument. “There was no doubt in my mind that the guys at Countrywide had not only done something wrong legally and ethically, but they weren’t very bright about it,” said that juror, Sam Usher, a former human resources executive at General Motors who spoke recently about the officials who testified. “If somebody in an organization is a whistle-blower, then you not only treat him with respect, you also make sure that whatever he was concerned about gets taken care of. These folks went in the other direction.” (e.s., see full article below and link).

“These folks went in the other direction” is an understatement. And while most of the media is stepping back from foreclosure stories except for reporting the numbers, this story brings back the raw, mean, lawless intent of Countrywide and other leaders of the securitization scam. Let me first remind you that for the most part, the “securitization” never occurred. Any loan declared to be part of a pool that was “securitized” or otherwise transferred into the pool is a damn lie. Very few people understand how that even COULD be true, much less believe that it is an accurate statement. But it is true. There was no securitization in most cases.

If a loan was securitized it would have been underwritten by a bona fide lender and then sold to an aggregator, and from there sold to a REMIC “trust” or special purpose vehicle. Certificates of ownership of the loan together with a promise to pay the owner of the loan a sum of money with interest would have been issued to qualified investors like pension funds and other institutional investors upon which our society depends for social services and a safety net (which in the case of pension funds is largely funded by the workers themselves). Of course the investors would have paid the investment banker for those loans including a small fee for brokering the transaction. And everyone lives happily ever after because Tinker Bell certified the transactions.

So if the loan was securitized, then both the document trail and the money trail would show that the loan was properly owned and funded by the “lender,”, the lender assigned the loan in exchange for payment from the aggregator and the aggregator assigned the loan in exchange for payment into the pool (REMIC, trust, or whatever you want to call it). The problem for the banks is that none of that happened in most cases. And their solution to that problem, instead of acting like trustworthy banks, is to delay and fabricate and forge and intimidate. (PRACTICE NOTE: THESE ARE THE DOCUMENTS AND PROOF OF PAYMENT YOU WANT IN DISCOVERY)

The real story is that the loan was not underwritten by a bona fide lender whose role involved any risk of loss on the loan. In fact, in most cases there was no financial transaction between the lender named on the note and mortgage and the borrower. The financial transaction actually occurred between the borrower and an undifferentiated commingled group of investors who THOUGHT they were buying into REMICs but whose money was used for anything BUT the REMICs. Their money was in an account far from the securitization chain described above controlled by an investment bank who was taking “trading profits” and fees out of the money as though it was their own private piggy bank.

The “assignment” (sometimes erroneously referred to as an allonge or endorsement) was offered and accepted between the named lender (who was not the real lender) and the mortgage aggregator WITHOUT PAYMENT. The assignment says “for value received” but the value was received by the borrower and the investment bank and so there was no payment by the aggregator for an assignment from a “lender” that wasn’t the lender anyway and who never had one penny in the deal, nor any legal right to declare that they were the owner of the loan.

The “aggregator” was a fictitious entity meant to deceive any inquiring eyes. My eyes were inquiring and for a long while I believed in the existence of the aggregator — but then I was late on getting the real scoop on Santa and tooth fairy too. But it misdirects the attention of the audience like any illusionist. Meanwhile various “affiliates of the investment bank are busy creating “exotic instruments” that make believe that the bank owns the loan and thus has the power to sell it, when in fact we all know that the investors own the note but even they don’t quite understand how they own the note — a fact complicated by the fact that the “aggregator” was a fiction and the money came from a Superfund escrow account in which ALL the money from ALL the investors was commingled and the moment of funding of each loan was a different moment in the SuperFund account because money was coming and going and so were investors. This is what enabled the banks to (a) sell something they didn’t own (they called it selling forward, but it wasn’t selling forward, it was fraud) (b) sell it over and over again, by calling the “exotic instrument” something else, changing a few pieces of information about the loan data and presto!, Bear Stearns had “leveraged” the loan 42 times.

Translation: They sold something they didn’t have 42 times. And the risk of loss was that if someone in the chain of sales ever demanded delivery, they needed to go out and buy the loans which they figured was a sure thing because in all probability the loans were not worth the paper they were written on and in the open market, they could be purchased for pennies while Bear Stearns et al was selling the loans 42 times over at 100 cents on the dollar.

The last “assignment” for “value received” into the “pool” also had similar problems. First, the aggregator was a fictitious entity, second there was no value paid, and third they had already sold the loan 42 times. Add to that the assignment simply never took place to either the aggregator or the pool unless there was litigation and you have a real mess on your hands, which is where distraction and delay and illusion and raw intimidation come into play — all present in the case of one Michael Winston, a former executive at Countrywide Financial.

The repeated sales of the loans, the repeated collection of insurance for losses that never occurred, and repeated collection of proceeds of credit default swaps (a/k/a sales with a different name) means quite simply that the loan was paid in full from the start and that there is no balance due and probably never was any balance due and even if there was a balance due it was never due to the people who are now foreclosing. So why are they foreclosing? Because if they get to complete a foreclosure it completes the illusion that the investors were owed the money from the borrower instead of the bank that stole their money in the first place. So they pursue foreclosures while their PR machines grind out the illusion of modifications and mediation and short-sales. Nobody is getting good title or a title policy worth the paper it is written upon, but who cares?

He Felled a Giant, but He Can’t Collect

By GRETCHEN MORGENSON

“TAKING on corporate Goliaths for their wrongdoing should not be so daunting.”

That’s the view of Michael Winston, a former executive at Countrywide Financial, the subprime lending machine that was swallowed up by Bank of America in 2008. Mr. Winston won a wrongful-dismissal and retaliation case against the company in February 2011, but is still waiting to receive his $3.8 million award. Bank of America is fighting back and has appealed the jury verdict twice.

After hearing a month of testimony from a parade of top Countrywide officials, including the company’s founder, Angelo Mozilo, a California state jury sided with Mr. Winston. An executive with decades of expertise in management strategy, he contended that he was pushed out for, among other things, refusing to follow questionable orders from his superiors.

But for the last year and a quarter, Mr. Winston, 61, has been in legal limbo. Bank of America lost one appeal in the court that heard the case and has filed another that is pending in state appellate court.

Mr. Winston, meanwhile, has been unable to find work that is commensurate with his experience. “The devastation caused by Countrywide to me, my family, my team, the work force, customers, shareholders, taxpayers and citizens around the world is incalculable,” he said.

Before joining Countrywide, Mr. Winston held high-powered strategy posts at Motorola, McDonnell Douglas and Lockheed. He was global head of worldwide leadership and organizational strategy at Merrill Lynch in New York but resigned from that post in 2003 to care for his parents, who were terminally ill.

At Countrywide, he said, one of his problems was his refusal in fall 2006 to misrepresent the company’s corporate governance practices to analysts at Moody’s Investors Service. The ratings agency had expressed concerns about succession planning at Countrywide and other governance issues that the company hoped to allay.

Mr. Winston says a Countrywide executive asked him to write a report outlining Countrywide’s extensive succession planning for use by Moody’s. He refused, noting that he had no knowledge of any such plan. The company began to diminish his duties and department shortly thereafter. He was dismissed after Bank of America took over Countrywide.

Of course, it is not unusual for big corporate defendants to appeal jury awards. Bank of America argues in its court filings that the jury erred because Mr. Winston’s battles with his Countrywide superiors had nothing to do with his dismissal. Bank officials testified that he was let go because there was no job for him at the acquiring company.

“We believe that the jury’s finding of liability on the single claim of wrongful termination in retaliation is not supported by any evidence, let alone ‘substantial evidence’ as is required by law,” a Bank of America spokesman said.

In court filings, the bank also said that the jury appeared to be “swayed by emotion and prejudice, focusing on unsubstantiated and unsupported statements by plaintiff and his counsel slandering Countrywide and its executives.”

But a juror in the case rejected this argument. “There was no doubt in my mind that the guys at Countrywide had not only done something wrong legally and ethically, but they weren’t very bright about it,” said that juror, Sam Usher, a former human resources executive at General Motors who spoke recently about the officials who testified. “If somebody in an organization is a whistle-blower, then you not only treat him with respect, you also make sure that whatever he was concerned about gets taken care of. These folks went in the other direction.”

The credibility of all testimony in the case was central to jurors’ deliberations, Mr. Usher said. Instructions to the jury went into great detail on this point, advising them that they were “the sole and exclusive judges of the believability of the witnesses and the weight to be given the testimony of each witness.” The instructions added: “A witness, who is willfully false in one material part of his or her testimony, is to be distrusted in others.”

Mr. Usher said that those who testified against Mr. Winston “didn’t have a lot of credibility.”

That’s putting it mildly, said Charles T. Mathews, a former prosecutor in the Los Angeles County district attorney’s office who represented Mr. Winston. He said he was so disturbed by what he characterized as persistent perjury by various Countrywide officials that he forwarded annotated copies of court transcripts to Steve Cooley, the Los Angeles district attorney, for possible investigation.

“We won a multimillion-dollar verdict against Countrywide, but it sticks in my guts that they lied through their teeth and continue to escape accountability,” Mr. Mathews wrote to Mr. Cooley, urging him to investigate.

Whether perjury or not, the testimony ran into withering challenges.

Countrywide’s top human resources executive testified that Mr. Winston was a problematic employee and not a team player. But a performance evaluation she had written shortly before the company started to reduce his duties was produced in the case. It said Mr. Winston had “done well to build relationships with key members of senior management and continues to do so.”

The evaluation went on: “Michael strives to be a team player,” and “is absolutely focused on process improvement in his areas and has been working tirelessly to do so since he’s been on board.”

Mr. Mathews also contends that Mr. Mozilo, in a rare courtroom appearance, misrepresented his views of Mr. Winston. First, Mr. Mozilo testified that he did not know Mr. Winston, even though testimony and documents showed that he had attended presentations with him, personally given Mr. Winston a pair of Countrywide cuff links and told another employee that Mr. Winston’s leadership programs were “exactly what Countrywide needs.”

Mr. Mozilo’s testimony that he was unimpressed with Mr. Winston and his work was also refuted by another Countrywide executive who said that Mr. Mozilo was enthusiastic enough about Mr. Winston’s programs to suggest that he present them to the company’s board.

Asked about Mr. Mozilo’s testimony, David Siegel, a lawyer who represents him, said in an e-mail that there was no merit to the accusation that Mr. Mozilo was not truthful.

A spokeswoman for Mr. Cooley’s office confirmed last week that it had received the court transcripts and said that one of its prosecutors was reviewing them. She declined to comment further.

“God forbid our system continues to ignore these people and their acts,” Mr. Mathews said in an interview last week. “I am optimistic but the price of justice can be different depending on what your wallet says.”


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Your Client’s Securitized Mortgage: a Basic Roadmap Part 1 [2009-11-19]

Your Client’s Securitized Mortgage: A Basic Roadmap

PART 1: The Parties and Their Roles

The first issue in reviewing a structured residential mortgage transaction is to differentiate between a private-label deal and an “Agency” (or “GSE”) deal. An Agency (or GSE) deal is one involving Fannie Mae, Freddie Mac, or Ginnie Mae, the three Government Sponsored Enterprises (also known as the GSEs). This paper will review the parties, documents, and laws involved in a typical private-label securitization. We also address frequently-occurring practical considerations for counsel dealing with securitized mortgage loans that are applicable across-the-board to mortgages into both private-label and Agency securitizations.
The parties, in the order of their appearance are:

Originator.
The “originator” is the lender that provided the funds to the borrower at the loan closing or close of escrow. Usually the originator is the lender named as “Lender” in the mortgage Note. Many originators securitize loans; many do not. The decision not to securitize loans may be due to lack of access to Wall Street capital markets, or this may simply reflect a business decision not to run the risks associated with future performance that necessarily go with sponsoring a securitization, or the originator obtains better return through another loan disposition strategy such as whole loan sales for cash.

Warehouse Lender. The Originator probably borrowed the funds on a line of credit from a short-term revolving warehouse credit facility (commonly referred to as a “warehouse lender”); nevertheless the money used to close the loan were technically and legally the Originator’s funds. Warehouse lenders are either “wet” funders or “dry” funders. A wet funder will advance the funds to close the loan upon the receipt of an electronic request from the originator. A dry funder, on the other hand, will not advance funds until it actually receives the original loan documents duly executed by the borrower.

Responsible Party.
Sometimes you may see another intermediate entity called a “Responsible Party,” often a sister company to the lender. Loans appear to be transferred to this entity, typically named XXX Asset Corporation.

Sponsor. The Sponsor is the lender that securitizes the pool of mortgage loans. This means that it was the final aggregator of the loan pool and then sold the loans directly to the Depositor, which it turn sold them to the securitization Trust. In order to obtain the desired ratings from the ratings agencies such as Moody’s, Fitch and S&P, the Sponsor normally is required to retain some exposure to the future value and performance of the loans in the form of purchase of the most deeply subordinated classes of the securities issued by the Trust, i.e. the classes last in line for distributions and first in line to absorb losses (commonly referred to as the “first loss pieces” of the deal).

Depositor. The Depositor exists for the sole purpose of enabling the transaction to have the key elements that make it a securitization in the first place: a “true sale” of the mortgage loans to a “bankruptcy-remote” and “FDIC-remote” purchaser. The Depositor purchases the loans from the Sponsor, sells the loans to the Trustee of the securitization Trust, and uses the proceeds received from the Trust to pay the Sponsor for the Depositor’s own purchase of the loans. It all happens simultaneously, or as nearly so as theoretically possible. The length of time that the Depositor owns the loans has been described as “one nanosecond.”

The Depositor has no other functions, so it needs no more than a handful of employees and officers. Nevertheless, it is essential for the “true sale” and “bankruptcy-remote”/“FDIC-remote” analysis that the Depositor maintains its own corporate existence separate from the Sponsor and the Trust and observes the formalities of this corporate separateness at all times. The “Elephant in the Room” in all structured financial transactions is the mandatory requirement to create at least two “true sales” of the notes and mortgages between the Originator and the Trustee for the Trust so as to make the assets of the Trust both “bankruptcy” and “FDIC” remote from the originator. And, these “true sales” will be documented by representations and attestations signed by the parties; by attorney opinion letters; by asset purchase and sale agreements; by proof of adequate and reasonably equivalent consideration for each purchase; by “true sale” reports from the three major “ratings agencies” (Standard & Poors, Moody’s, and Fitch) and by transfer and delivery receipts for mortgage notes endorsed in blank.

Trustee. The Trustee is the owner of the loans on behalf of the certificate holders at the end of the securitization transaction. Like any trust, the Trustee’s powers, rights, and duties are defined by the terms of the transactional documents that create the trust, and are subject to the terms of the trust laws of some particular state, as specified by the “Governing Law” provisions of the transaction document that created the trust. The vast majority of the residential mortgage backed securitized trusts are subject to the applicable trust laws of Delaware or New York. The “Pooling and Servicing Agreement” (or, in “Owner Trust” transactions as described below, the “Trust Indenture”) is the legal document that creates these common law trusts and the rights and legal authority granted to the Trustee is no greater than the rights and duties specified in this Agreement. The Trustee is paid based on the terms of each structure. For example, the Trustee may be paid out of interest collections at a specified rate based on the outstanding balance of mortgage loans in the securitized pool; the Master Servicer may pay the Trustee out of funds designated for the Master Servicer; the Trustee may receive some on the interest earned on collections invested each month before the investor remittance date; or the Securities Administrator may pay the Trustee out of their fee with no charges assessed against the Trust earnings. Fee amounts ranger for as low as .0025% to as high as .009%.

Indenture Trustee and Owner Trustee. Most private-label securitizations are structured to meet the Internal Revenue Code requirements for tax treatment as a “Real Estate Mortgage Investment Conduit (“REMIC”). However some securitizations (both private-label and GSE) have a different, non-REMIC structure usually called an “Owner Trust.” In an Owner Trust structure the Trustee roles are divided between an Owner Trustee and an Indenture Trustee. As the names suggest, the Owner Trustee owns the loans; the Indenture Trustee has the responsibility of making sure that all of the funds received by the Trust are properly disbursed to the investors (bond holders) and all other parties who have a financial interest in the securitized structure. These are usually Delaware statutory trusts, in which case the Owner Trustee must be domiciled in Delaware.

Primary Servicer. The Primary Servicer services the loans on behalf of the Trust. Its rights and obligations are defined by a loan servicing contract, usually located in the Pooling and Servicing Agreement in a private-label (non-GSE) deal. The trust may have more than one servicer servicing portions of the total pool, or there may be “Secondary Servicers,” “Default Servicers,” and/or “Sub-Servicers” that service loans in particular categories (e.g., loans in default). Any or all of the Primary, Secondary, or Sub-Servicers may be a division or affiliate of the Sponsor; however under the servicing contract the Servicer is solely responsible to the Trust and the Master Servicer (see next paragraph). The Servicers are the legal entities that do all the day-to-day “heavy lifting” for the Trustee such as sending monthly bills to borrowers, collecting payments, keeping records of payments, liquidating assets for the Trustee, and remitting net payments to the Trustee.

The Servicers are normally paid based on the type of loans in the Trust. For example, a typical annual servicing fee structure may be: .25% annually for a prime mortgage; .375% for an Alt-A or Option ARM; and .5% for a subprime loan. In this example, a subprime loan with an average balance over a given year of $120,000 would generate a servicing fee of $600.00 for that year. The Servicers are normally permitted to retain all “ancillary fees” such as late charges, check by phone fees, and the interest earned from investing all funds on hand in overnight US Treasury certificates (sometimes called “interest earned on the float”).

Master Servicer. The Master Servicer is the Trustee’s representative for assuring that the Servicer(s) abide by the terms of the servicing contracts. For trusts with more than one servicer, the Master Servicer has an important administrative role in consolidating the monthly reports and remittances of funds from the individual servicers into a single data package for the Trustee. If a Servicer fails to perform or goes out of business or suffers a major downgrade in its servicer rating, then the Master Servicer must step in, find a replacement and assure that no interruption of essential servicing functions occurs. Like all servicers, the Master Servicer may be a division or affiliate of the Sponsor but is solely responsible to the Trustee. The Master Servicer receives a fee, small compared to the Primary Servicer’s fee, based on the average balance of all loans in the Trust.

Custodian. The Master Document Custodian takes and maintains physical possession of the original hard-copy Mortgage Notes, Mortgages, Deeds of Trust and certain other “key loan documents” that the parties deem essential for the enforcement of the mortgage loan in the event of default.

  • This is done for safekeeping and also to accomplish the transfer and due negotiation of possession of the Notes that is essential under the Uniform Commercial Code for a valid transfer to the Trustee to occur.
  • Like the Master Servicer, the Master Document Custodian is responsible by contract solely to the Trustee (e.g., the Master Document Custodial Agreement). However unlike the Master Servicer, the Master Document Custodian is an institution wholly independent from the Servicer and the Sponsor.
  • There are exceptions to this rule in the world of Fannie Mae/Freddie Mac (“GSE”) securitizations. The GSE’s may allow selected large originators with great secure storage capabilities (in other words, large banks) to act as their own Master Document Custodians. But even in those cases, contracts make clear that the GSE Trustee, not the originator, is the owner of the Note and the mortgage loan.
  • The Master Document Custodian must review all original documents submitted into its custody for strict compliance with the specifications set forth in the Custodial Agreement, and deliver exception reports to the Trustee and/or Master Servicer as to any required documents that are missing or fail to comply with those specifications.
  • In so doing the Custodian must in effect confirm that for each loan in the Trust there is a “complete and unbroken chain of transfers and assignments of the Notes and Mortgages.”
  • This does not necessarily require the Custodian to find assignments or endorsements naming the Depositor or the Trustee. The wording in the Master Document Custodial Agreement must be read closely. Defined terms such as “Last Endorsee” may technically allow the Custodian to approve files in which the last endorsement is from the Sponsor in blank, and no assignment to either the Depositor or the Trustee has been recorded in the local land records.
  • In many private-label securitizations a single institution fulfills all of the functions related to document custody for the entire pool of loans. In these cases, the institution might be referred to simply as the “Custodian” and the governing document as the “Custodial Agreement.”

O Max Gardner, III and Richard D. Shepherd
October, 2009

Reg Z TILA Amendment requires new owners and assignees of mortgage loans to notify consumers of the sale or transfer

The Federal Reserve Board has issued an interim final rule under Regulation Z to implement the recent Truth in Lending Act (TILA) amendment that requires new owners and assignees of mortgage loans to notify consumers of the sale or transfer.

While mostly helpful in foreclosure defense,  the rule leaves open the question of ownership of the loans. Because of the practice of “assignment” of the loans to a special purpose vehicle, the Fed stopped there in its inquiry. If it had taken one step further it would have seen that the indenture to the mortgage backed bond conveyed an ownership interest in the loans supposedly assigned. it also leaves open the problem of whether the loans were accepted into the pool or were time-barred or were defective for failure to meet the requirements of recordation or recordable form set forth in the enabling documents.

The TILA requirement has been in effect since the May 20, 2009, enactment of the Helping Families Save Their Homes Act of 2009. Compliance with the specifics of the new rule is optional until January 19, 2010. As a result, new owners may (but need not) rely on the new rule immediately to ensure they are in compliance with TILA. Violations give rise to liability for statutory damages, including up to $4,000 per violation in individual actions or up to $500,000 in a class action.

The transfer notice requirement applies to all closed-end and open-end consumer-purpose mortgage loans secured by a consumer’s principal residence. It requires any person that acquires more than one mortgage loan in any 12-month period to provide a transfer notice without regard to whether the new owner would otherwise be a “creditor” subject to TILA. Mere servicers of mortgage loans and investors in mortgage-backed securities or other interests in pooled loans do not acquire legal title to loans and are not subject to the new rule. However, trusts or other entities acquiring legal title to the securitized loans are subject to the rule. The notice requirement is triggered by a transfer of the underlying loan, regardless of whether the assignment is recorded. Thus, assignees are not exempt from the duty to provide notice merely because the mortgage (as opposed to the note) is in the name of Mortgage Electronic Registration Systems (MERS), for example.

The new rule does not affect the separate notification requirement under the Real Estate Settlement Procedures Act (RESPA) for servicing transfers on mortgage loans. Accordingly, new owners who acquire both legal title to a mortgage loan and the servicing rights will need to satisfy both the TILA and RESPA notification requirements.

  • The notice must be given on or before the 30th calendar date after the date the new owner acquires the loan, with the acquisition date deemed to be the date that the acquisition is recognized in the new owner’s books and records. In the case of short-term repurchase agreements, the acquirer is not required to give the notice if the transferor has not treated the transfer as a loan sale on its own books and records. However, if a repurchase does not occur, the acquirer must give the notice within 30 days after it recognizes the transfer as an acquisition on its books and records.
  • The notice must be given even where the new and former owners are affiliates, but a combined notice may be sent where one company acquires a loan and subsequently transfers it to another company so long as the content and timing requirements are satisfied as to both entities.
  • The notice must contain the information specified by the new rule, including contact information for any agents used by an owner to receive legal notices and resolve payment issues.
  • The required information also includes a disclosure of the location where ownership of the debt is recorded. If a transfer has not been recorded in the public records at the time the notice is provided, a new owner may satisfy this requirement by stating that fact.

Trusts, Trustees and Beneficiaries

From http://www.mattweidner.com

These statutes provide numerous regulations and requirements that entities engaging in trust activities should comply with, but the regulations are largely being ignored by the entities engaging in trust activities and both courts and the enforcing agency, the Florida Department of Financial Services,

Editor’s Note: Matt Weidner is onto something here that has been pointed out by many lawyers across the country. His central point is that if you want to call yourself a Trustee in foreclosures then there had better be a trust. If there is a trust the state laws, rules and regulations govern them and the trustees. Most of these laws are being ignored by the pretender lenders with impunity — Judges routinely ignore arguments concerning the authority of the Trust to do business in the state, the right of the Trustee to proceed with foreclosure, and the accountability to both the borrower and the investor, both of whom might be beneficiaries under the Trust. Greenwich Financial filed suit against Countrywide and BOA to underscore the point that the investors are the creditors and that if there is a trust, it is the investor who is the beneficiary. Yet, as Charles Koppa has pointed out numerous times, the prices on the courthouse steps are routinely manipulated against the interests of any beneficiaries.

But the real question in my mind is whether these “trusts” actually meet the definition of that term. for there to be a working trust and an authorized trustee, there must be a trustor (the one who creates the trust), a beneficiary (the one who receives the benefits from the trust) and a “res” which is something of value that is put into the trust and which is owned, rather than passed through the t rust.

The trustor must have some property interest (tangible or intangible) that is being conveyed to the trustee to hold in trust for the beneficiaries. I’ve looked at the pooling and services agreements, prospectuses, assignments and assumption agreement and individual assignments, alleged powers of attorney and the promotional literature of the Special Purpose vehicles that issued mortgage backed securities (bonds) to investors who end up holding a piece of paper called a “certificate.”

In my opinion, there is no trust, even though one is named. In my opinion there is no trustee, even though one is named. Beneficiaries are not named and the res of the trust which supposedly is a pool of loans has been conveyed in percentage slices to the investors who bought the certificates.

There is no Trustor identified in most cases although there have been arguments of the pretender lenders that the investors are the trustors and the beneficiaries. There is also the argument that the pooling and service agreement allocating a “pool” which more often than not initially contains fictitious assets contains a  Trustor somewhere in the document.

In my opinion the party designated as a Trustee is merely a candidate for an agency relationship that might arise if several conditions are met, as defined in the prospectus. The agent has no liability or obligations of any kind until those conditions happen at some time in the future.

And since the res of the trust allegedly includes a pool of loans that was owned by some vaguely defined pool aggregator or “trustee” and since the percentage interests in that pool was conveyed to the investors, it is my opinion that there is no res in the so-called trust (i.e., there is nothing being held in trust). If there is nothing held in trust, then even if the trust technically exists, the trustee has no powers. This is congruent with the REMIC provisions of the Internal Revenue Code that allow the SPVs to be formed as pass through entities in which no tax event occurs and therefore no tax applies.

So back to Weidner’s point, if the trust is real, it isn’t following the laws governing their creation and use, OR, to my point, the trust isn’t real anyway. It is for these reasons, among others, that you MUST identify the investors, get in touch with them, compare notes and get an accounting from them. If the Courts ever force the pretender lenders to disclose the identity of these creditors and allow you to pursue interaction with them, then, and only then, will the alleged default be validated, the demand on the note verified, and the possibility of financial double jeopardy eliminated.

CHAPTER 650 & 660 FLORIDA STATUTES AND FORECLOSURE IN FLORIDA
Florida Statutes Chapters 658 which regulates Banks and Trust Companies and can be found at http://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&URL=Ch0658/titl0658.htm&StatuteYear=2009&Title=-%3E2009-%3EChapter%20658 and chapter 660, the section of Florida Statutes which specifically regulates trust business in Florida and which can be found at http://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&URL=Ch0660/titl0660.htm&StatuteYear=2009&Title=-%3E2009-%3EChapter%20660 are two important consumer protection statutes that are being widely ignored by regulators and courts across the state.

The definition of trust activities provided in statute is very broad and specifically includes many of the activities national banks and foreign corporations engage in related to mortgage foreclosure activities. An analysis of foreclosure cases filed in counties across the state will reveal that a recognizable percentage of the cases are filed “as trustee” for some other party or entity.http://www.myfloridacfo.com/are ignoring the laws and the application of these laws to entities that are violating them. These statutes provide numerous regulations and requirements that entities engaging in trust activities should comply with, but the regulations are largely being ignored by the entities engaging in trust activities and both courts and the enforcing agency, the Florida Department of Financial Services,

Homeowners who are subject to foreclosure and foreclosure defense attorneys are encouraged to carefully review the cited statutes and consider the application of the statutes to each individual case. Lenders who are engaging in trust activities but who are not properly licensed or registered to do business in the state should be prevented from prevailing in foreclosure actions on equitable grounds based on their failure to comply with these important consumer protection and state interest laws.

How to Search for the Trust or SPV Claiming Your Loan to Be Part of the SPV Pool

Thank You ABBY!

This post is from Abby. You can catch her email in comments where she originally posted. Just one word of caution: Just because the Trustee or officer of the SPV pool claims to have your loan doesn’t mean they really do. In fact they may only have a spreadsheet with no documentation, no original notes, no copies of the note, no copy of the deed, deed of trust or mortgage deed. They may have something they called an allonge and are treating it as though it was an assignment. The attempted transfer will almost ALWAYS violate the terms of the the SPV mortgage backed bonds and almost certainly violate the terms of the pooling and service agreement which is the document governing the pools created by aggregators before they were “sold” to the SPV. For one thing these documents usually state that the execution of the transfer documentation must be in recordable form and some of them even say they should be recorded. There are many other terms as well that conflict with each other and conflict with the actions of the intermediary participants in the securitization chain.

This is why this research is so important — but you should not be doing it to prove your case. You should be doing it to make them justify their position.

By delving deep in discovery or seeking an order compelling them to answer the QWR or DVL, they will eventually anger the judge by their stonewalling. Judicial anger is behind some of the most favorable decisions on record so far. The Judge gets there by recognizing that he/she has been duped and now the truth is coming out that these foreclosing parties are illegiitimate: they are not creditors, they are not lenders, they are not beneficiaries. They are simply interlopers seeking a windfall leaving the homeowners and the investor who advanced the funds in the dark. Shine the light and they scatter like roaches in the middle of the night.

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WANT TO SEARCH FOR THE TRUST YOUR LOAN WENT INTO??

Some steps below to use the SEC website to locate your loan and the trust it is in (mortgage pool).

This example uses WAMU (Washington Mutual).
Typically, Chase had JPMAC (JP Morgan Acquisition Corp) as the name of trusts.

http://www.sec.gov/

1. click on above link
2. if you have not yet created a free account and it asks you for login info…create the account
3. click on ’search’ in upper right corner
4. in the blue area, type in WAMU in the ‘company name’ field
5. click find companies at bottom
6. this brings up all the WAMU filings
7. search around for one that is the year you got your WAMU refi
8. it will be tedious, but you have to click on each CIK number (in red) over on left, and that will take you to a whole big list of more filings for that particular trust
9. go through and click on any ‘fwp’….read/scan to see if it lists any loan numbers….some will….check to see if your loan number is in it.
10. when you click on an ‘fwp’, which means free writing prospectus, you will see even more files…try to avoid looking at the ones that have .txt ending (the other, usually an html file, will have any infor you may need.

Note: you may want to also search around in years just prior to or just after your loan was done.

Some of these deals were set up even prior to you getting your loan.

Again, another place you may find the trust name is on your recorded docs, in MERS or on a Power of Attorney filed at the county recorder by the Securities trustee in your local county (if required by law).

Foreclosure Defense and Offense: ALL 2001-2008 WERE ASSIGNED AND SECURITIZED

WHAT’S IN A NAME: WHY THE WORDS “ASSET BACKED SECURITIES” IN THE PLAINTIFF’S NAME OF A FORECLOSURE CASE SHOULD MAKE YOU DIG

In view of the fact that the bulk of mortgages, especially those created in connection with refinance and home equity lines which were initiated between 2002 and 2007, were only a small cog in a much larger machine, anyone even vaguely familiar with foreclosure litigation knows that the plaintiff in the foreclosure action is often styled as something along the lines of “So and so as Trustee for XYZ Asset-Backed Securities”. There is much more to this denomination than meets the eye, and whether or not such a plaintiff even has the right to institute a foreclosure case at all is a question which anyone defending such a foreclosure should be asking right up front.

There are numerous articles on this blog which explain the threshold concept of why the plaintiff in these types of cases winds up being a trustee for a group of otherwise unidentified holders of securities. The “Cliff Notes” version is presented here for the purpose of this article and to give the reader a place to begin their inquiry. However, it is strongly recommended that the reader delve into the wealth of information on the blog in order to have a more complete understanding of the entire transaction of which the mortgage was only literally “the pimple on the elephant” before taking the actual step of defending a foreclosure based on any of the matters herein.

In the case of the “asset-backed security” plaintiff, the sceanario went something like this:

(a) borrower seeks refi or HELOC (home equity line of credit) from mortgage broker, asking broker for best loan program available given borrower’s income, credit history, and ability to repay the loan;

(b) mortgage broker either initially tells borrower that they qualify for a fixed rate loan with an even payment throughout the loan and later changes this to “the only thing available to you is an adjustable rate loan”, or makes this representation at the outset if the borrower has sketchy credit, low income, etc.;

(c) mortgage broker presents borrower with loan application;

(d) loan is “approved” either on original appraisal or “revised” or “amended” appraisal if original was not sufficient to create the necessary loan-to-value to approve the loan;

(e) loan is also “approved” on basis of borrower’s qualifying for “teaser rate” only, not the adjustable rate later in the life of the loan which the originating lender knew the borrower could not qualify for, but did not care about as the loan was already either presold to aggregator or would be after closing;

(f) assignment of the mortgage to aggregator has either already been made at the time of the initial approval for the loan, at the time of the application, or is made shortly after closing;

(g) closing takes place. Original “lender” (which in certain cases was nothing more than a front for a securities brokerage) has already sold or assigned the mortgage or will do so shortly;

(h) mortgage is assigned to an aggregator, “bundler”, or other third-party for further resale;

(i) aggregator sells mortgage, with hundreds or thousands of others, in “bundles” to investment bankers;

(j) investment bankers create series of “mortgage-backed securities” to be sold to investors with false, unsupported, or outright fraudulent AAA ratings, as underlying stability of the borrowers (who oftentimes were not and could not have been approved for the life of the adjustable rate loan) is dubious at best, and probably nonexistent as borrowers did not qualify as having ability to repay loan after “teaser” rate expired and higher rate kicked in;

(k) borrowers default in droves, causing loss of value of security;

(l) trustee or other third party is appointed to represent the holders of the “mortgage-backed securities” to foreclose on the collateral (the property).

Thus, the name of the plaintiff in a foreclosure lawsuit can reveal a lot about where the underlying mortgage went and how it got there. With these types of actions, one knows, right away, that there had to have been multiple assignments of the mortgage from the time of initiation to the point where the mortgage became collateral for an “asset-backed security”. As such, the first series of questions to be asked are those surrounding the assignment process:

(a) for each assignment, was there a valid assignment given by one with full authority to transfer the interest in the mortgage?

(b) was the assignment recorded?

(c) was there any consideration for the assignment (e.g. were any monies paid to purchase the mortgage at a discount, thus creating a payment against the obligation on the mortgage note)?

The answers to these threshold questions will directly impact how the defense of the foreclosure will proceed. If all of the assignments in the chain were valid, then the ultimate assignee (here, the Trustee for the Certificate Holders of the Asset-Backed securities) took the mortgage subject to all defenses which the borrower could have raised against the originating “lender”. As such, on proof of a valid chain of assignments, defenses which the borrower may have had against the originating lender under the Federal TILA, HOEPA, and RESPA Statutes; state Consumer Protection statutes; and other laws (see blog glossaries for definitions of these terms) can be asserted against the “trustee” plaintiff. Obviously, if the assignments are nonexistent or problematic, the borrower can assert that the “trustee” plaintiff does not have the legal capacity to even institute the foreclosure action in the first instance (known as “lack of standing or capacity” in legal lingo).

The next level of inquiry in any multiple-assignment process involves a determination of whether any payments by any of the assignees to the assignor in connection with the assignment can be characterized as payments against the underlying obligation of the note to which the mortgage attaches. The originating “lender” is obviously not going to assign the mortgage to an aggregator for no money. As such, there is the possibility that the foreclosing plaintiff may have wrongfully claimed the borrower to be in default, which results not only in a fraud being perpetrated upon the borrower, but also on the court as well. Unrecorded or unapplied paydowns against the note result in the foreclosing plaintiff not only seeking monies which it is not owed, but also in effect causing the theft of property to which the plaintiff is not entitled.

These threshold issues should be addressed at the outset of any foreclosure proceeding where there is an “asset-backed security” plaintiff, as the results of the inquiry may open up numerous additional avenues of defense and potential affirmative claims as well. Obviously the more diligent one is with their inquiry, the better potential for an effective, multi-level defense against the foreclosure.

A word of caution, however, which we have echoed in other blog articles: although these concepts may appear deceptively simple, asserting them properly in a foreclosure action as a defense, affirmatively in a separate legal action, or inside of a Federal bankruptcy proceeding is both a science and an art best left to attorneys who are versed in the technical terminology and the proper procedural rules in order to render these defenses effective. We thus repeat the recurring caveat to all non-lawyers reading these articles:

DON’T TRY THIS AT HOME!

Jeff Barnes, Esq.

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