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,

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.”

How to Negotiate a Modification

See how-to-negotiate-a-short-sale

See Michael Moore — Modifications

See Template-Lawsuit-STOP-foreclosure-TILA-Mortgage-Fraud-predatory-lending-Set-Aside-Illegal-Trustee-Sale-Civil-Rico-Etc Includes QUIET TITLE and MOST FEDERAL STATUTES — CALIFORNIA COMPLAINT

See how-to-buy-a-foreclosed-house-its-a-business-its-an-opportunity-its-a-risk

My statements here relate to general information and not legal advice. Generally we are of the opinion that the loan modification programs are a farce. First they end up in foreclosure in 6-7 months — more than 50-60% of the time. Then you have the problem that you signed new papers that will at least attempt to waive the rights and defenses you have now. A trial program is a trial program — it is not permanent. It is usually a smokescreen for the “lenders” (actually pretender lenders) to appear to comply with the federal mandate and thus collect the bonus from the Federal government for entering into a modification agreement. And let’s not forget that the entities with whom you would enter into this “new” agreement probably have no rights, ownership or authority over your mortgage — they are only pretending. Their game plan is that they have nothing to lose and everything to gain because they never advanced any money on the funding of your mortgage.

So the very first thing you want to do is ask for proof of real documents that can be reviewed by a forensic analyst which will demonstrate they have the power to change the terms, and assuming they can’t produce that, their agreement that any deal you enter into with them will be taken to court in a Quiet Title Action in which they will allow you to get a judgment that says you own the house free and clear except for whatever the new deal is with the new lender. The New Lender is necessary because the REAL Lender is quite gone and possibly unidentifiable.

Any failure to agree to such terms is a clear signal you are wasting your time and they are jockeying you into default, which is the only way they collect insurance on your mortgage through the credit default swaps purchased on the pool containing your mortgage. They actually make money if you default because they were allowed to buy insurance many times over on the same debt. So on your $300,000 mortgage they might actually receive (no joke) $9 million if you default. That means they have far more incentive to trick you into default than to REALLY modify your mortgage terms. and THAT means you need to be careful about what they are REALLY doing — a modification or deception. If it’s deception don’t fall into self deception and wish it weren’t so. Go after them with whatever you can. The law is on your side as to title, terms and predatory and fraudulent loan practices.

Your strategy is simple: (1) present a credible threat and (2) demonstrate that you have knowledgeable people (forensic analyst, expert witness, lawyer).

Your tactics are equally simple: (1) Present an expert declaration or affidavit that raises issues of fact regarding the representations of counsel or the pleadings of your opposition, (2) Pursue expedited discovery (ask for things that they should have had before they started the foreclosure process — a full accounting from the real creditor/lender, documentation showing chain of title/possession, documentation regarding the money that exchanged hands from the bond investor all the way down the securitization chain to the homeowner) and (3) ask for an evidentiary hearing on the factual issues.

It would probably be a good idea if you went through a local licensed attorney who really knows this stuff — like a graduate of Max Gardner’s seminars or a graduate of the Garfield Continuum. This attorney can create some credible threats like the fact that youa re claiming, under TILA, your right to undisclosed fees on your mortgage, including the SECOND yield spread premium paid in the securitization chain when the pool aggregator sold the “assets” to the SPV pool that sold bonds to investors — investors who were the the sole source of cash advanced to make this nightmare come true. Picking the right lawyer is critical. Anyone who has not studied securitization, anyone who has not been working hard in the area of foreclosure defense AND offense, should not be used because they simply don’t know enough to achieve a satisfactory result.

My rule of thumb is that I don’t like any modification unless it has the following attributes:

1. Forgiveness of all late fees, late payments etc. No tacking on fees, payments, interest or anything else to the end of the loan.
2. Removal of all negative comments from your credit rating.
3. Reduction of the principal due on your obligation in the form of a new note or an amendment executed by all relevant parties. The amount of the reduction should be no less than 30%, probably no more than 75% and should average across the board something like 40%-60%. So if your mortgage was $300,000 your reduction should be between $90,000 (leaving you with a $210,000 obligation) and $225,000 (leaving you with a $75,000 obligation).
a. How do you know what to ask for? First step is on the appraisal. Had you known that the appraisal used in your deal was unsustainable, you probably would have taken a different attitude toward the deal and would have insisted on other terms. Assuming you had a zero-down mortgage loan(s) [i.e., including 1st and 2nd mortgage] then you probably, on average have spent some $15,000-$20,000 in household improvements that cannot be recouped, but which were also spent based upon the apparent value of the house.
b. So you look at the current appraisal and let’s say in your community the actual sales prices of homes closest to you are down by 50% from what they were in 2007 or when you went to the “closing” on your loan.
(1) Write down the purchase price of your home or the original appraisal when you closed the “loan.”
(2) Deduct the Decline in Appraised Value, which in our example is a decline of 50%. If you had a zero down payment loan, this would translate as the original amount of the note minus the 50% $150,000-$160,000) reduction in value. This leaves $140,000-$150,000.
(3) Deduct the $15,000-$20,000 you spent on household improvements. This leaves $120,000 to $135,000.
(4) Deduct your attorney’s fees which will probably be around $15,000, hopefully on contingency at least in part. This leaves $105,000 to $120,000.
(5) Deduct any other related expenses such as the cost of a forensic audit (which INCLUDES TILA, RESPA, Securities, Title, Appraisal, Chain of Possession, and other factors like fabrication and forgery) that should cost around $2500, and any expense incurred retaining an expert to prepare and execute an expert declaration or expert affidavit that should cost around $1000-$1500. [Caution a declaration from someone who has no idea what is in the document, or who has very little exposure to discovery, depositions, court testimony etc. could be less than worthless. Your credibility will be diminished unless you pick the right forensic analyst and the right expert]. This leaves a balance of $101,000 to $116,000.
(6) If you did make a down payment or cash payments for “non-standard” options then you should deduct that too. So if you made a 20% down payment ($60,000, in our example) that would be a deduction too so you can recover that loss which resulted from the false appraisal and false presentation of the appraisal by the “lender” who was paid undisclosed fees to lie to you. In our example here I am going to assume you have a zero down payment. But if we used the example in this paragraph there would be an additional $60,000 deduction that could reduce your initial demand for modification to a principal reduction of $40,000.
(7) So your opening demand should be a note with a principal balance of $101,000 with a settlement probably no higher than $150,000. I would recommend a 15 year fixed rate mortgage because you will be done with it a lot sooner and convert you from debt to wealth. But a mortgage of up to 40 years is acceptable in order to keep your payments to a minimum if that is a critical issue.
4. Interest rate of 3%-4% FIXED.
5. Judge’s execution of final judgment ratifying the deal and quieting title against he world except for you as the owner of the property and the new lender who might have a new note and a new mortgage or who might just walk away completely when you present these terms. There are tens of thousands of homes in a grey area where they have not made a payment in years, the “lender” has not foreclosed, or the “lender” initiated foreclosure and then abandoned it. These people should be filing quiet title actions of their own and finish the job of getting the home free and clear from an encumbrance procured by fraud.

If you want to “up the stakes” then add the damages and rebates recoverable for TILA violations for predatory lending, undisclosed fees etc. That will ordinarily take you into negative territory where the “lender” owes you money and not vica versa. In that case your lawyer woudl write a demand letter for damages instead of an offer of modification. The other thing here is the typical demand for your current financial information. My position would be that this modification or settlement is not based upon NEED but rather, it is based upon LENDER LIABILITY. And if they are asking for proof of your financial condition on a SISA (stated income, stated asset) or NINJA (No Income, No Job, NO Assets) loan then the mere request for financial information is a request for modification. That triggers your unconditional right to ask “who are you and why are you the entity that is attempting to modify or settle this claim?”

By the way the “rule of thumb” came from the old common law doctrine that one could beat his wife and children with a stick no greater in diameter than the size of your thumb. In this case don’t let my use of the “rule of thumb” restrain you from using a bigger stick.

Neil F. Garfield, Esq.

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