Answer, Affirmative Defenses and Counterclaim by April Charney

IN THE CIRCUIT COURT OF THE
FOURTH JUDICIAL CIRCUIT, IN AND
FOR DUVAL COUNTY, FLORIDA

CASE NO.:16-2007-CA-00852-XXXX-MA
DIVISION: CV-D

DEUTSCHE BANK NATIONAL TRUST COMPANY
Plaintiff,
vs.

ERICO LOGAN, ET AL,
Defendant.
______________________________/

DEFENDANTS ERICO LOGAN AND GLORIA BROOK’S ANSWER
AFFIRMATIVE DEFENSES; COUNTERCLAIMS AND DEMAND FOR JURY TRIAL

COME NOW, the separate Defendants and for their answer, affirmative defenses, counterclaims and demand for jury trial , state:
COUNT I
Denied that the plaintiff has stated a cause of action to reestablish a promissory note pursuant to F. S. 673.3091.
Admit execution of note, deny that the note was executed and delivered in favor of plaintiff or plaintiff’s assignor.
Denied. The plaintiff has not stated a cause of action to reestablish a promissory note pursuant to F. S. 673.3091.
Denied. The plaintiff has not stated a cause of action to reestablish a promissory note pursuant to F. S. 673.3091.
Denied. The plaintiff has not stated a cause of action to reestablish a promissory note pursuant to F. S. 673.3091.
Denied. The plaintiff has not stated a cause of action to reestablish a promissory note pursuant to F. S. 673.3091.
Defendant admits that the plaintiff does not own the mortgage or the note, admits that the plaintiff does not hold the note; however that plaintiff does not have legal possession of and cannot obtain possession of the subject note or determine its whereabouts. The plaintiff has not stated a cause of action to reestablish a promissory note pursuant to F. S. 673.3091.
Denied.
Denied and move to strike on account of Paragraph 9 of the plaintiff’s complaint does not contain a fact allegation.
Denied. The plaintiff has not stated a cause of action to foreclose a mortgage.
Admit.
Denied.
Admited.
Denied.
Denied.
Denied.
Denied.
Denied.
Denied.
Denied.
Denied.
22. Defendant denies that this plaintiff has stated a cause of action for foreclosure because on the date this lawsuit was filed the plaintiff was not the true owner of the claim sued upon; is not the real party in interest and is not shown to be authorized to bring this foreclosure action.
23. Defendants request the court dismiss this action pursuant to Rules 1.210(a) and 1.140(7) of the Florida Rules of Civil Procedure because it appears on the face of the complaint and the documents attached to the plaintiff’s March 12, 2007 notice of filing that a person other than the Plaintiff is the true owner of the claim sued upon on the date this action was commenced and that the Plaintiff was not the real party in interest at the commencement of this action, had no interest in the subject mortgage and note at the date on which the subject complaint for foreclosure was filed and is not shown to be authorized to bring this foreclosure action.
24. This action was commenced on January 29, 2007, but the assignment upon which the plaintiff is relying to support its claims is based on an assignment dated February 5, 2007, which post dates the filing of the complaint.
25. Additionally, the plaintiff has filed a separate assignment that conflicts with the February 5, 2007 assignment because on August 14, 2007, the date of the purported second assignment, the assignor had already transferred its interest in the subject mortgage and note to another entity and further because there was a lack of any consideration for the August 14, 2007 assignment.
26. The filing of these two assignments by the plaintiff, neither of which support the plaintiff’s claim of ownership of the subject mortgage on the date this foreclosure was filed, are a sham and a fraud on the court.
27. Plaintiff came into the this court alleging that it owned the subject loan on January 29, 2007, the date this action was commenced when the plaintiff was fully aware that was not true. This is fraud on the court.
28. Fla.R.Civ.P. Rule 1.130(a) requires a Plaintiff to attach copies of all bonds, notes, bills of exchange, contracts, accounts, or documents upon which action may be brought to its complaint.
29. Although the plaintiff alleges in its complaint that it is the owner of the promissory note and the mortgage that are the subject of this foreclosure action, the note and mortgage and assignments attached to the plaintiff’s complaint and to the plaintiff’s notice of filing conflict with these allegations and therefore the contents of actual mortgage and note cancel out the inconsistent and conflicting assignments and allegations as to the ownership of the note and mortgage at the commencement of this action.
30. When exhibits are inconsistent with the plaintiff’s allegations of material fact as to who the real party in interest is, such allegations cancel each other out. Fladell v. Palm Beach County Canvassing Board, 772 So.2d 1240 (Fla. 2000); Greenwald v. Triple D Properties, Inc., 424 So. 2d 185, 187 (Fla. 4th DCA 1983); Costa Bella Development Corp. v. Costa Development Corp., 441 So. 2d 1114 (Fla. 3rd DCA 1983).
31. Plaintiff was not the real party in interest on the date this action was commenced and is not shown to be authorized to bring this action.
32. Because the facts revealed by the exhibits attached to the plaintiff’s complaint and in the Plaintiff’s notice of filing are inconsistent with Plaintiff’s allegations as to ownership of the subject note and mortgage, those allegations are neutralized and Plaintiff’s complaint is rendered objectionable. Greenwald v. Triple D Properties, Inc., 424 So.2d 185,187 (Fla. 4th DCA 1983).
AFFIRMATIVE DEFENSES
1. FAILURE OF CONTRACTUAL CONDITION PRECEDENT: NO NOTICE OF DEFAULT: Plaintiff failed to provide Separate Defendants with a Notice of Default and Intent to Accelerate as required by and/or that complies with Paragraph 22 of the subject mortgage.  As a result, Separate Defendants have been denied a good faith opportunity, pursuant to the mortgage and the servicing obligations of the Plaintiff, to avoid acceleration and this foreclosure.
2.   NO HUD COUNSELING NOTICE: Plaintiff failed to comply with the foreclosure prevention loan servicing requirement imposed on Plaintiff pursuant to the National Housing Act, 12 U.S.C. 1701x(c)(5) which requires all private lenders servicing non-federally insured home loans, including the Plaintiff, to advise borrowers, including this separate Defendant, of any home ownership counseling Plaintiff offers together with information about counseling offered by the U.S. Department of Housing and Urban Development.  The U.S. Department of Housing and Urban Development has determined that 12 U.S.C. 1701x(c)(5) creates an affirmative legal duty on the part of the Plaintiff. Plaintiff’s non-compliance with the law’s requirements is an actionable event that makes the filing of this foreclosure premature based on a failure of a statutory condition precedent to foreclosure which denies Plaintiff’s ability to carry out this foreclosure.  Plaintiff cannot legally pursue foreclosure unless and until Plaintiff demonstrates compliance with 12 U.S.C. 1701x(c)(5).
3. PLAINTIFF FAILED TO COMPLY WITH APPLICABLE POOLING AND SERVICING AGREEMENT LOAN SERVICING REQUIREMENTS: Plaintiff failed to provide separate Defendants with legitimate and non predatory access to the debt management and relief that must be made available to borrowers, including this Defendant pursuant to and in accordance with the Pooling and Servicing Agreement filed by the plaintiff with the Securities and Exchange Commission that controls and applies to the subject mortgage loan. Plaintiff’s non-compliance with the conditions precedent to foreclosure imposed on the plaintiff pursuant to the applicable pooling and servicing agreement is an actionable event that makes the filing of this foreclosure premature based on a failure of a contractual and/or equitable condition precedent to foreclosure which denies Plaintiff’s ability to carry out this foreclosure.
a. Defendants assert that the special default loan servicing requirements contained in the subject pooling and servicing agreement, to be filed in pertinent part and which is on file at: http://www.secinfo.com , are incorporated into the terms of the mortgage contract between the parties as if written therein word for word and the defendants are entitled to rely upon the servicing terms set out in that agreement.
b. Alternatively or additionally, the defendants are third party beneficiaries of the Plaintiff’s pooling and servicing agreement and entitled to enforce the special default servicing obligations of the plaintiff specified therein.
c. Plaintiff cannot legally pursue foreclosure unless and until Plaintiff demonstrates compliance with the foreclosure prevention servicing imposed by the subject pooling and servicing agreement under which the plaintiff owns the subject mortgage loan.
d. The Plaintiff failed, refused or neglected to comply with prior to the commencement of this action with the servicing obligations specifically imposed on the plaintiff by the PSA in many particulars, including, but not limited to:
1. Plaintiff failed to service and administer the subject mortgage loan in compliance with all applicable federal state and local laws.
2. Plaintiff failed to service and administer the subject loan in accordance with the customary an usual standards of practice of mortgage lenders and servicers.
3. Plaintiff failed to extend to defendants the opportunity and failed to permit a modification, waiver, forbearance or amendment of the terms of the subject loan or to in any way exercise the requisite judgment as is reasonably required pursuant to the PSA.
e. Plaintiff’s failure to meet the servicing obligations imposed by the PSA cause the filing by plaintiff of this foreclosure to be in premature, in bad faith and a breach by plaintiff of its obligation to defendants implied in the mortgage contract and as specified in writing in the PSA, to act in good faith and to deal fairly with defendants.
f. Instead, plaintiff’s servicing failures as set forth herein render plaintiff’s actions in filing this premature foreclosure to be in bad faith and not acceptable loan servicing under the written contracts between the parties which include the mortgage, the PSA incorporated therein or by which defendants are third party beneficiaries thereof and the promissory note.
g. Plaintiff intentionally failed to act in good faith or to deal fairly with these Defendants by failing to follow the applicable standards of residential single family mortgage lending and servicing as described in these Affirmative Defenses thereby denying these Defendants access to the residential mortgage lending and servicing protocols applicable to the subject note and mortgage.
4. ILLEGAL CHARGES ADDED TO BALANCE: Plaintiff has charged and/or collected payments from Defendants for attorney fees, legal fees, foreclosure costs, late charges, property inspection fees, title search expenses, filing fees, broker price opinions, appraisal fees, and other charges and advances, and predatory lending fees and charges that are not authorized by or in conformity with the terms of the subject note and mortgage or the controlling pooling and servicing agreement which specifies the waiver of late payments and other collection charges as part of the forbearance and loan modification default loan servicing. Plaintiff wrongfully added and continues to unilaterally add these illegal charges to the balance Plaintiff claims is due and owing under the subject note and mortgage.
5. FAILURE OF GOOD FAITH AND FAIR DEALING: UNFAIR AND UNACCEPTABLE LOAN SERVICING: Plaintiff intentionally failed to act in good faith or to deal fairly with the subject Defendants by failing to follow the applicable standards of residential single family mortgage servicing as described in these Affirmative Defenses thereby denying Defendant s access to the residential mortgage servicing protocols applicable to the subject note and mortgage.
6. UNCLEAN HANDS: The Plaintiff comes to court with unclean hands and is prohibited by reason thereof from obtaining the equitable relief of foreclosure from this Court. The Plaintiff’s unclean hands result from the Plaintiff’s improvident and predatory intentional failure to comply with material terms of the mortgage and note; the failure to comply with the default loan servicing requirements that apply to this loan, all as described herein above. As a matter of equity, this Court should refuse to foreclose this mortgage because acceleration of the note would be inequitable, unjust, and the circumstances of this case render acceleration unconscionable. This court should refuse the acceleration and deny foreclosure because Plaintiff has waived the right to acceleration or is estopped from doing so because of misleading conduct and unfulfilled contractual and equitable conditions precedent.
WHEREFORE, Defendants demands the Plaintiff’s complaint be dismissed with prejudice and for fraud on the court, and for their attorney’s fees and costs and for all other relief to which this Court finds Defendants entitled.
7. PLAINTIFF LACKS STANDING: DEUTSCHE BANK NATIONAL TRUST COMPANY is not the true owner of the claim sued upon, is not the real party in interest and is not shown to be authorized to bring this foreclosure action.
COUNTERCLAIMS
COUNT I: DECLARATORY AND INJUNCTIVE RELIEF
1. This is an action for declaratory and injunctive relief against the Plaintiff.
2. Plaintiff failed to provide Separate Defendants with a Notice of Default and Intent to Accelerate as required by and/or that complies with Paragraph 22 of the subject mortgage.
3. Plaintiff failed to comply with the foreclosure prevention loan servicing requirement imposed on Plaintiff pursuant to the National Housing Act, 12 U.S.C. 1701x(c)(5) which requires all private lenders servicing non-federally insured home loans, including the Plaintiff, to advise borrowers, including this separate Defendant, of any home ownership counseling Plaintiff offers together with information about counseling offered by the U.S. Department of Housing and Urban Development.
4. Plaintiff cannot legally pursue foreclosure unless and until Plaintiff demonstrates compliance with 12 U.S.C. 1701x(c)(5).
5. Plaintiff failed to provide separate Defendants with legitimate and non predatory access to the debt management and relief that must be made available to borrowers, including this Defendant pursuant to and in accordance with the Pooling and Servicing Agreement filed by the plaintiff with the Securities and Exchange Commission that controls and applies to the subject mortgage loan.
6. Plaintiff’s non-compliance with the conditions precedent to foreclosure imposed on the plaintiff pursuant to the applicable pooling and servicing agreement is an actionable event that makes the filing of this foreclosure premature based on a failure of a contractual and/or equitable condition precedent to foreclosure which denies Plaintiff’s ability to carry out this foreclosure.
7. The special default loan servicing requirements contained in the subject pooling and servicing agreement are incorporated into the terms of the mortgage contract between the parties as if written therein word for word and the defendants are entitled to rely upon the servicing terms set out in that agreement.
8. Defendants are third party beneficiaries of the Plaintiff’s pooling and servicing agreement and entitled to enforce the special default servicing obligations of the plaintiff specified therein.
9. Plaintiff cannot legally pursue foreclosure unless and until Plaintiff demonstrates compliance with the foreclosure prevention servicing imposed by the subject pooling and servicing agreement under which the plaintiff owns the subject mortgage loan.
10. The section of the Pooling and Servicing Agreement (PSA) is a public document on file and online at http://www.secinfo.com and the entire pooling and servicing agreement is incorporated herein.
11. The Plaintiff failed, refused or neglected to comply, prior to the commencement of this action, with the servicing obligations specifically imposed on the plaintiff by the PSA in many particulars, including, but not limited to:
a. Plaintiff failed to service and administer the subject mortgage loan in compliance with all applicable federal state and local laws.
b. Plaintiff failed to service and administer the subject loan in accordance with the customary an usual standards of practice of mortgage lenders and servicers.
c. Plaintiff failed to extend to defendants the opportunity and failed to permit a modification, waiver, forbearance or amendment of the terms of the subject loan or to in any way exercise the requisite judgment as is reasonably required pursuant to the PSA.
12. The Plaintiff has no right to pursue this foreclosure because the Plaintiff has failed to provide servicing of this residential mortgage loan in accordance with the controlling servicing requirements prior to filing this foreclosure action.
13. Defendants have a right to receive foreclosure prevention loan servicing from the Plaintiff before the commencement or initiation of this foreclosure action.
14. Defendants are in doubt regarding their rights and status as borrowers under the National Housing Act and also under the Pooling and Servicing Agreement filed by the plaintiff with the Securities and Exchange Commission. Defendants are now subject to this foreclosure action by reason of the above described illegal acts and omissions of the Plaintiff.
15. Defendants are being denied and deprived by Plaintiff of their right to access the required troubled mortgage loan servicing imposed on the plaintiff and applicable to the subject mortgage loan by the National Housing Act and also under the Pooling and Servicing Agreement filed by the plaintiff with the Securities and Exchange Commission.
16. Defendants are being illegally subjected by the Plaintiff to this foreclosure action, being forced to defend the same and they are being charged illegal predatory court costs and related fees, and attorney fees. Defendants are having their credit slandered and negatively affected, all of which constitutes irreparable harm to Defendants for the purpose of injunctive relief.
17. As a proximate result of the Plaintiff’s unlawful actions set forth herein, Defendants continue to suffer the irreparable harm described above for which monetary compensation is inadequate.
18. Defendants have a right to access the foreclosure prevention servicing prescribed by the National Housing Act and under the Pooling and Servicing Agreement filed by the plaintiff with the Securities and Exchange Commission which right is being denied to them by the Plaintiff.
19. These acts were wrongful and predatory acts by the plaintiff, through its predecessor in interest, and were intentional and deceptive.
20. There is a substantial likelihood that Defendants will prevail on the merits of their counterclaims.
WHEREFORE, Defendants request the Court dismiss the Plaintiff’s complaint with prejudice, enter a judgment pursuant to Fla. Stat. 86 declaring that the Plaintiff is legally obligated to provide the Defendants with access to the special troubled loan servicing prescribed by the National Housing Act and under the Pooling and Servicing Agreement filed by the plaintiff with the Securities and Exchange Commission and enjoining the Plaintiff from charging foreclosure fees and costs and from commencing or pursuing this foreclosure until such servicing is provided to this Defendant, for attorney’s fees and for all other relief to which Defendant proves themselves entitled.

COUNT II: ILLEGAL CONSUMER COLLECTION
Defendants reassert and reallege, as their Statement of Facts, paragraphs 2 through 20, inclusive as set out in Count I of these counterclaims.
22. Defendants are consumers and the obligation between the parties which is the debt owned pursuant to the subject note and mortgage is a consumer debt as defined in F. S. Section 559.55(1).
23. Plaintiff has engaged in consumer collection conduct which amounts to a violation of F.S. Section 559.72(9) as set out below and Defendants, as a proximate result thereof, have sustained economic damages for which the Defendants are entitled to compensation from the Plaintiff, pursuant to F.S. Section 559.77.
24. Plaintiff’s collection activities described herein violated F.S. 559.72(9) in that the Plaintiff is claiming, attempting and threatening to collect and enforce this consumer mortgage debt by this foreclosure action when the Plaintiff knows that the right to pursue foreclosure does not exist.
25. These acts were wrongful and predatory acts by the plaintiff, through its predecessor in interest, and were intentional and deceptive.
26. Additionally, the reason the Plaintiff does not have a legal right to pursue this foreclosure is because the Plaintiff has failed to first comply with the foreclosure prevention loan servicing obligations imposed on Plaintiff prescribed by the National Housing Act and under the Pooling and Servicing Agreement filed by the plaintiff with the Securities and Exchange Commission.
27. These foreclosure prevention loan servicing obligations are imposed on the Plaintiff pursuant to the National Housing Act, 12 U.S.C. Section 1710(a) and the Pooling and Servicing Agreement filed by the plaintiff with the Securities and Exchange Commission.
28. The Plaintiff is claiming, attempting and threatening to collect fees and charges including, but not limited to, attorney fees, legal fees, foreclosure costs, late charges, property inspection fees, title search expenses, filing fees, broker price opinions, appraisal fees, and other charges and advances, and predatory lending fees and charges all of which are not authorized by or in conformity with the terms of the subject note and mortgage.
29. Plaintiff wrongfully added and continues to unilaterally add these illegal charges to the balance Plaintiff claims is due and owing under the subject note and mortgage.
30. Plaintiff continues to claim, attempt, and threaten to enforce this mortgage debt through acceleration and foreclosure when the Plaintiff knows that such conduct is in bad faith because the Plaintiff has charged and collected money from defendants that they did not owe; forced defendants into deepening indebtedness and then failed to meet the contractual and statutory conditions precedent before filing this action to collect this consumer debt.
31. As a result of the Plaintiff’s failure to properly service this mortgage loan before filing this foreclosure action, Defendants have been damaged and Defendants seek to recover their actual or statutory damages from the Plaintiff under F.S. 559.77.
WHEREFORE, Defendants demand the Plaintiff’s complaint be dismissed with prejudice, for an award of damages in defendants’ favor and against the plaintiff for their actual or statutory damages whichever is greater and for their attorney’s fees and costs and for all other relief to which this Court finds Defendants entitled.
DEMAND FOR TRIAL BY JURY
Defendants hereby demands trial by jury.
WHEREFORE, Defendants demand the Plaintiff’s complaint be dismissed with prejudice for failure to state a cause of action and for fraud on the court, and for judgment against the plaintiff for their damages, for an award of attorney’s fees and costs and for all other relief to which this Court finds Defendants entitled.
CERTIFICATE OF SERVICE
The undersigned certifies that a true copy of this document has been mailed to Sean Moloney and to Linda Chelvam, Law Offices of Marshall C. Watson, P.A. 1800 N.W. 49th Street, Suite 120, Fort Lauderdale, FL 33309, Attorney for Plaintiff this ______________________________.
JACKSONVILLE AREA LEGAL AID, INC.
_______________________________ APRIL CARRIE CHARNEY, Esquire Fla. Bar No.: 310425
126 West Adams Street
Jacksonville, Florida 32202
Telephone: (904) 356-8371, ext.373
Facsimile: (904) 224-7050
april.charney@jaxlegalaid.org
Attorney for Defendants

FORECLOSURE DEFENSE: THE RELEVANCE OF SECURITIZATION

SEE GARFIELD’S GLOSSARY AND TACTICAL GUIDELINES 

http://livinglies.me/glossary-mortgage-meltdown-and-foreclosure/

THE UNDERLYING THEME OF THE MORTGAGE MELTDOWN WHICH HAS SIGNIFICANCE TO FORECLOSURE DEFENSE IS THAT FOR EACH “LOAN” TRANSACTION THERE WERE CORRESPONDING INVESTMENTS IN ONE OR MORE ASSET BACKED SECURITY, BOTH (MORTGAGE AND ABS) DEPENDENT ON EACH OTHER FOR THEIR CREATION.

THE SPREADING OF RISK, THE OBLIGATION FOR PAYMENT, AND THE SEPARATION OF THE OBLIGATION TO PAY FROM THE TERMS OF THE SECURITY INSTRUMENT (MORTGAGE) GIVE RISE TO NUMEROUS OFFENSIVE AND DEFENSIVE CLAIMS, DEFENSES, JURISDICTIONAL ISSUES, AND BUSINESS QUALIFICATION ISSUES IN VARIOUS STATES BY THE BORROWER WHO IS AT RISK OF FORECLOSURE OR WHO HAS BEEN DAMAGED BY THE LOAN TRANSACTION.

THE THEORY IS FURTHER EXPANDED BY THE NOTION THAT THE ESSENTIAL NATURE OF THE LOAN TRANSACTION WAS CONVERTED FROM A STANDARD PURCHASE MONEY FIRST, SECOND AND/OR THIRD MORTGAGE TO THE SALE OF TWO SECURITIES ON A SINGLE CHAIN — THE ABS INVESTOR WHO SUPPLIED THE MONEY AND THE PROPERTY INVESTOR WHO SUPPLIED THE SIGNATURES. 

PAYMENT:

In the context of the mortgage meltdown experience, payment was converted from one source to many. See SPV (Structured Purpose Vehicle). This was necessary because of the the purpose of the SPV and the collateralized securities issued from it to investors — the spreading of risk. It is therefore possible for an investor owning an ABS (Asset Backed Security) issued from an SPV to be paid in full without a single payment from any particular borrower. Thus the payment obligation on the note and mortgage at the loan closing was one of many options by which the obligation could be met. There is no doubt that efforts were made to make payments from the funds created in SPV’s through sale of their CDO/CMOs, and that contribution from third parties in the securitized chain starting with the “lender” all the way through guarantees, buy-back obligations and cross collateralization and credit swap vehicles. It is for this reason, among others, that the loan closing was itself the sale of a security based upon an inflated asset appraisal to support an inflated security rating, in which the borrower and the investor in the ABS were “assured” of a passive return on their investment through ever-increasing housing prices. Thus the securitized chain consists of two securities at its base — the “loan” and the ABS — and a myriad of other derivative securities and hedge products together with insurance policies that guaranteed the quality of the underwriting process at the lender level and at the investment banking level. 

Whether those who paid have any claims against any other obligors — including but not limited to the borrower — is unknown. But it is highly probable that those claims are unsecured and therefore dischargeable in bankruptcy. And it is highly probable that such claims are subject to offset, counterclaims and affirmative defenses based upon violations of TILA, RESPA, RICO, common law fraud and state unfair and deceptive business or lending practices together with state and federal securities regulation at the lender underwriting level and at the investment banking underwriting level.

SPECIAL PURPOSE VEHICLE (SPV)

THE “ENTITY” CREATED BY THE INVESTMENT BANKING FIRM TO HOLD AN INTEREST IN THE CASH FLOW AND/OR OWNERSHIP OF THE NOTE AND/OR OWNERSHIP OF THE SECURITY INSTRUMENTS (BY ASSIGNMENT, WHICH ARE RARELY RECORDED IN PROPERTY RECORDS) AND/OR OWNERSHIP OF THE RISK OF LOSS. It is the SPV that is the “company” which “issues” securities for the purpose of selling those securities (stock, bonds etc.) to qualified investors. The typical “security” that has been issued during the mortgage meltdown is the mortgage backed security (MBS) and more specifically, the collateralized debt obligation (CDO) and more specifically the collateralized mortgage obligation. The terms CDO and CMO are frequently used itnerchangeably but CDO connotes a larger class of securities that CMO.

CMO/CDOs vary in structure and underlying assets, but the basic principle is the same. Essentially a CDO is a corporate or other legal entity (LLC, LLP, Trust etc.) constructed to hold assets as collateral and to sell packages of cash flows to investors. A CDO is constructed as follows:

  • The SPV issues different classes of bonds and equity and the proceeds are used to purchase the portfolio of credits. The bonds and equity are entitled to the cash flows from the portfolio of credits, in accordance with the Priority of Payments set forth in the transaction documents. The senior notes are paid from the cash flows before the junior notes and equity notes. In this way, losses are first borne by the equity notes, next by the junior notes, and finally by the senior notes. In this way, the senior notes, junior notes, and equity notes offer distinctly different combinations of risk and return, while each reference the same portfolio of debt securities. These levels of risk are called “tranches”. 
  • A TYPICAL PROVISION OF THE CMO/CDO ISSUED BY THE SPV IS THAT THE PROCEEDS OF SALE CAN BE USED FOR PAYMENT OF THE PROMISED RETURN. THE SIGNIFICANCE OF THIS IN FORECLOSURE DEFENSE IS THAT THE PARTY TO WHOM PAYMENT IS TO BE MADE IS RECEIVING FUNDS FROM AN INTERMINGLING OF (A) THE FUND CREATED FROM THE SALE OF THE SPV SECURITIES (B) INCOME FROM THE LOWER TRANCHES (C) GUARANTEES OF THE SELLER OF THE SECURITIES, THE ORIGINATING LENDER (D) CLAIMS AGAINST THE SECURITY RATING AGENCY WHICH OFTEN RATED THE CMO/CDO ONLY IN ACCORDANCE WITH THE TOP TRANCHE WHICH MISSTATED THE RISK ASSOCIATED WTH THE ENTIRE SECURITY. THIS OVERSTATEMENT OF THE VALUE OF THE SECURITY IS IDENTICAL TO THE APPRAISER’S OVERSTATEMENT OF THE VALUE OF THE PROPERTY AND THE LENDER’S OVERSTATEMENT OF THE RISKS AND THEREFORE THE VALUE OF THE LOAN. 
  • In both cases (rating agency and appraiser) the public was deceived by intentional inflation of value. In both cases, there were specific financial incentives for the rating agency to overrate the security and for the appraiser to overvalue the property an for the lender to overrate the borrower’s financial ability or willingness to pay in accordance with the terms of the note and mortgage. In neither case was the potential liability and the potential litigation over these inherently bad practices ever disclosed to either the borrower or the investor. 

 

collateralized loan obligation (CLO) A multi-tranche security secured by a pool of corporate loans. Similar to the more familiar CMO, except that in a CBO the tiers or tranches are created with differing levels of credit quality. The CBO structure creates at least one tier of investment-grade bonds, thus providing liquidity to a portfolio of junk bonds.
collateralized mortgage obligation (CMO) A type of MBS created by dividing the rights to receive the principal and interest cash flows from an underlying pool of mortgages into separate classes or tiers. The tiers or classes are usually called tranches. In other words, it is a multiclass bond backed or collateralized by mortgage loans or mortgage pass-through securities. A given tranche is typically not redeemed until all bonds with earlier priority have been redeemed. By dividing the cash flows into one or more tranches with shorter terms, the risk resulting from the potential volatility from future changes in prevailing rates is shifted away from the shorter-term tranche or tranches and onto the longer-term tranches and the residual tranche.
commingled funds Money pooled for a common purpose. Often funds pooled for investments. See Quiet Title, Temporary Injunction. 
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