Empty Paper Bags: Loans Never Entered Pools

Hat Tip to Ken McLeod, private investigator serving livinglies


99% of the Loans Never Were Transferred into Trusts

Editor’s Comment: The truth is coming out piece by piece. In this complaint a thorough examination revealed what we have been saying all along — the loans were NOT pooled, bundled or put into any trust. That means the entire securitization chain is a scam, supporting a Ponzi scheme that should result in criminal prosecutions.

What effect is there on mortgage documentation? Well for starters we already know that the payee, lender and secured parties were acting as sham entities even when they were otherwise real entities, like Wells Fargo.

The banks had to make some OTHER connection between the so-called pools that were in actuality unfunded trusts — and that explains why instead of producing real, accurate, truthful documentation they resorted to fabricated, robo-signed, robo-notarized documents executed by $10 per hour people whose only purpose was to act as “authorized signor” or “assistant secretary” neither of which designations is recognized by law. If you went to the bank to open an account or take a loan and insisted on signing with those designation they would refuse to open the account and rightfully so. But in millions of foreclosures, the reverse was NOT the case — they relied upon such bogus documents in order to sell bogus mortgage bonds backed by unfunded pools, SPVs, Trusts, REMICS or whatever else you want to call them.

The investors are clearly taking up the cause of homeowners and they have more clout, credibility and now the proof that their money was channeled in ways neither contemplated nor agreed as per the false pooling and servicing agreements and false prospectuses that were offered by Wall Street.

We are left with defective instruments that in the end bear no connection with those pools but which have documentation fraudulently obtained from homeowner borrowers in order to get money fraudulently obtained from investor lenders. They siphoned off the money using a variety or ruses and paid the investors as though the pools were real and funded with money or assets when in fact they were empty paper sacks.

They they traded on the loans pretending that they, the banks were the owners, and they sold them multiple times. Then they foreclosed on the properties alleging they were authorized agents of the pools when the pools did not exists. No trust exists if it is unfunded. When they were done, they took the profits and put it into their own pockets, leaving both the investors high and dry and doing the same for homeowner borrowers.

They took the losses and tried to throw them at the investors and used the losses in trading to beg for Federal bailout claiming that they were on the verge of collapse, which was true as to many of them, since they were reporting assets on their balance sheet that did not exist, and they were therefore both overvalued in the stock market, over-rated in the bond market, and always on the tip of collapse. This isn’t the final nail in the coffin of the mega banks but it certainly ties things down.

For homeowner borrowers, it is just as I said — the money was never channeled through trusts and instead of was kept by the banks to use for reporting trading profits in which the left hand sold to the right hand, plus fees, expenses and various other charges. They paid the investors out of continuing sales of bogus mortgage bonds — the classic signature of a PONZI scheme.

Thus the homeowner borrower attorneys take note: the origination documents are 99% invalid, the foreclosures are 99% invalid, and that means that the secured part of the obligation was never perfected and is fatally defective so that it can never be perfected without a signature of the homeowner borrower. That makes the obligation unsecured — money potentially owed to unknown creditors who were not disclosed contrary to the requirements of TILA, RESPA and state deceptive lending laws.

The obligation remains, but there are no creditors who are making the claim because they could subject themselves to predatory lending claims, fraud and other charges resulting in treble damages. The note is a recital of a transaction that never existed. It recites a loan from the payee or lender when neither of them funded or even purchased the loan. Make the allegation and ask for the discovery. They will collapse.

Click to access HSH-v-Barclays-Consolidated-Complaint.pdf

Salient Quotes from Complaint

1. This action arises out of Defendants’ conduct in connection with the offer and sale to Plaintiffs of certain residential mortgage-backed securities (“RMBS”). Plaintiffs purchased approximately $46 million in RMBS certificates (the “Certificates”) in connection with three securitizations issued and/or underwritten by Defendants. These three securitizations are commonly known by their abbreviated names, SABR 2005-FR4, SABR 2006-FR1 and SABR 2007-NC2 (collectively, the “Securitizations”). Plaintiffs’ holdings in the Securitizations, including purchase dates and amounts invested, are detailed in Table 1, infra Section I.

3. Through investigation of a large sample of publicly recorded mortgage documents, Plaintiffs have discovered that more than 99% of the mortgages in each of the three Securitizations were improperly or never assigned. In particular, many of these mortgages remain in the name of the loan’s originator or its nominee, and have never been assigned to the Trusts. While others were purportedly assigned to the Trusts, this was long after the securities were issued, contrary to the representations in the Offering Documents. Similarly, the promissory notes were not properly assigned in approximately 81.9% of the sampled loans.

9. By reviewing a large sample of loans in the Securitizations and comparing the representations made about them in the Offering Documents to publicly available data concerning those same loans, Plaintiffs have discovered that the Offering Documents understated CLTV by more than 10 percent in approximately 37% of the loans, based on the sampled loans.

Plaintiffs’ investigation has also revealed that the Offering Documents overstated owner occupancy rates by approximately 14.3% – 19.2%, based on the sampled loans.

14. Prior to their issuance of the Certificates, the Issuer Defendants were specifically informed that large numbers of loans in the Securitizations did not conform to the underwriting guidelines of the originators, including with respect to CLTV ratios and owner-occupancy rates, in reports from their due diligence vendor, Clayton Services Inc. (“Clayton”), and had no compensating factors. Despite having been expressly advised that many of the loans failed to comply with underwriting guidelines, the Issuer Defendants nevertheless included large percentages of these non-compliant loans in the Securitizations, and falsely represented their quality and characteristics to Plaintiffs and other investors.

32. HSH is the subrogee of both Carrera and of Rasmus as to their rights and claims relating to their purchases of certain of the Certificates. At all relevant times, a majority of the credit risk associated with the Certificates was borne by HSH, because Rasmus’s and Carrera’s ability to repay their debts was dependant on the value of, and/or cashflow expectancy from, the assets each held, which included the Certificates. HSH’s rights of subrogation flow from its acquisition of Certificates from Rasmus and Carrera at or near par value subsequent to the losses.

This acquisition was necessary in order to protect HSH’s economic interests, which were at risk due to HSH’s contractual obligation in their role as Liquidity Provider, Capital Noteholder and/or Letter of Credit Provider to cover certain debts, and/or absorb certain losses, of Rasmus and Carrera.

53. Through investigation of publicly recorded mortgage documents, Plaintiffs have discovered that, contrary to the Issuer Defendants’ statements in the Offering Documents, virtually all of the mortgages and promissory notes that were represented to have been assigned to the Trusts were not in fact assigned to the Trusts at the time the Certificates were issued.

Plaintiffs have conducted two separate investigations, with a combined sample size of more than 2,000 mortgages from the Securitizations, and have found that not one of the sampled mortgages, which were all represented to have been assigned into the Trusts prior to issuance of the Certificates, was in fact timely assigned to the Trust.

55. This belief was an essential part of the contracts to sell the Certificates. Plaintiffs would not have purchased so-called “mortgage-backed” securities that were not actually backed by the mortgages represented to be in the pool, for at least two reasons: (1) when these securities are not backed by actual mortgages or notes, the Trust is left without any recourse against a borrower that ceases to make payments; and (2) valid and timely assignments of the notes and mortgages are essential to the Trusts’ tax status as REMICs, and therefore are necessary to avoid highly punitive tax consequences.

60. Plaintiffs have investigated and analyzed loan-level information for each of the Securitizations to determine the accuracy of certain representations made in the Prospectus Supplement, including the assignment of mortgages and notes to the Trusts.

61. In two separate investigations, Plaintiffs have conducted a review of publicly available mortgage documents at county clerk’s offices across the country for the mortgages and/or notes that were represented to have been deposited into the Trusts.

62. Both investigations have independently revealed that over 99% of the mortgages and notes were not properly and/or timely assigned to the RMBS Trusts.

64. This investigation revealed that of the 987 total mortgages sampled, none were assigned to the Trusts at the time of the issuance, as was represented in the Offering Documents, and only seven were assigned to the Trusts within three months thereafter, as is required by REMIC tax laws. Thus, over 99% of the sampled mortgages were either improperly assigned to the Trusts more than three months after issuance or were never assigned at all – in direct contradiction to the representations in the Offering Documents provided by Defendants and relied upon by Plaintiffs.

65. Specifically, approximately 38% to 61% of the mortgages sampled have never been assigned to the Trusts. Moreover, based on the sampled loans, approximately 38% to 61% of the mortgages were assigned to the Trusts more than three months after the Securitization closed. The overwhelmingly large percentages of mortgages for each of the Securitizations that were never assigned to the Trusts, and those that were not assigned at or three months after issuance, are set forth below in Table 2.

70. Additionally, in a separate investigation Plaintiffs analyzed a different sample of 600 mortgages from SABR 2005-FR4, 600 mortgages from SABR 2006-FR1, and 400 mortgages from SABR 2007-NC2. This investigation independently confirmed that the vast majority of the mortgages in the pools underlying the Securitizations were never assigned to the Trusts. Moreover, this second investigation also showed that of the mortgages that were eventually assigned to the Trusts, none were assigned prior to the issuance of the Certificates, as was represented in the Offering Documents, or within three months thereof, as is required by the REMIC tax laws. The results of this additional investigation and analysis are shown in Table 4 below.

74. The assignment of the mortgages and notes into the Trust is perhaps the single most essential part of the mortgage-backed securitization process. Without these assignments, the securities are not truly “mortgage-backed” at all.

76. Moreover, apart from foreclosure, the only other remedy available to the Trust to collect on the obligation where a borrower ceases to make payments is to bring an action in contract under the promissory note. However, the Issuer Defendants’ failure to transfer the notes into the Trusts prevents the Trusts from pursuing this remedy, meaning that where the mortgage and note have not been assigned, the Trusts have no legal recourse if a borrower ceases to make payments to the Trust and must incur a significant loss.

103. Accurate appraisals are crucial to the accuracy of CLTV ratios, as the value of the property (i.e., the denominator of the CLTV ratio) is the lower of either the purchase price or the appraised value of the property. If an appraisal is inflated, it will change the CLTV ratio such that the credit risk of the loan is understated.

104. As with owner-occupancy data, even small inaccuracies in CLTV ratios are material to investors, such as Plaintiffs, because they can have a significant impact on the risk of investing in the Certificates.

110. Apparent from this data is the fact that the appraised values reported in the Offering Documents for the pooled properties were significantly higher than the actual property values. These overstatements led to a material understatement of the CLTV ratios, and a corresponding understatement of the investment risk.

117. Clayton scored each loan it reviewed on a scale of 1 to 3. A score of “1” meant that the loan complied with the underwriting guidelines of the originator. A score of “2” meant that the loan did not comply with the originator’s underwriting guidelines, but had unspecified “compensating factors.” A score of “3” meant that the loan failed to comply with the originator’s underwriting guidelines and did not possess any compensating factors.

118. Approximately 27.3% of the loan files Clayton reviewed for the Issuer Defendants received a score of 3. Clayton provided detailed reports to the Issuer Defendants containing the scores of the reviewed loans prior to and during the preparation of the Offering Documents.

125. All of the loans in the three Securitizations came from two originators: Fremont and New Century. SABR 2005-FR4 and SABR 2006-FR1 were both entirely comprised of loans originated by Fremont and SABR 2007-NC2 was populated solely with loans originated by New Century.

131. The U.S. Senate Permanent Subcommittee on Investigations issued a 646-page report entitled “Wall Street and the Financial Crisis” (the “Levin Report”) which found that Fremont and New Century, in particular, were both “well known within the industry for issuing poor quality loans.”

133. New Century ranks number one on the Office of the Comptroller of the Currency’s (the “OCC”) “Worst Ten in the Worst Ten” list of the nation’s most egregious originators. This means that more foreclosures were instituted on mortgages originated by New Century in 2005 through 2007 in the ten cities with the highest foreclosure rates than any other originator in the country. This is the result of New Century’s dramatic departure from its own underwriting guidelines, which were supposed to prevent loans from being made to borrowers who clearly did not have the ability to repay them.

138. Ms. Lindsay further testified that appraisers faced extreme pressure from their superiors, and deliberately distorted data “…that would help support the needed value rather than using the best comparables….”

see HSH-v-Barclays-Consolidated-Complaint