The Rain in Spain May Start Falling Here

Posted on May 14, 2012 by Neil Garfield

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Editor’s Comment:

It is typical politics. You know the problem and the cause but you do nothing about the cause. You don’t fix it because you view your job in government as justifying the perks you get from private companies rather than reason the government even exists — to provide for the protection and welfare of the citizens of that society. It seems that the government of each country has become an entity itself with an allegiance but to itself leaving the people with no government at all.

And the average man in the streets of Boston or Barcelona cannot be fooled or confused any longer. Hollande in France was elected precisely because the people wanted a change that would align the government with the people, by the people and for the people. The point is not whether the people are right or wrong. The point is that we would rather make our own mistakes than let politicians make them for us in order to line their own pockets with gold.

Understating foreclosures and evictions, over stating recovery of the housing Market, lying about economic prospects is simply not covering it any more. The fact is that housing prices have dropped to all time lows and are continuing to drop. The fact is that we would rather kick people out of their homes on fraudulent pretenses and pay for homeless sheltering than keep people in their homes. We have a government that is more concerned with the profits of banks than the feeding and housing of its population. 

When will it end? Maybe never. But if it changes it will be the result of an outraged populace and like so many times before in history, the new aristocracy will have learned nothing from history. The cycle repeats.

Spain Underplaying Bank Losses Faces Ireland Fate

By Yalman Onaran

Spain is underestimating potential losses by its banks, ignoring the cost of souring residential mortgages, as it seeks to avoid an international rescue like the one Ireland needed to shore up its financial system.

The government has asked lenders to increase provisions for bad debt by 54 billion euros ($70 billion) to 166 billion euros. That’s enough to cover losses of about 50 percent on loans to property developers and construction firms, according to the Bank of Spain. There wouldn’t be anything left for defaults on more than 1.4 trillion euros of home loans and corporate debt. Taking those into account, banks would need to increase provisions by as much as five times what the government says, or 270 billion euros, according to estimates by the Centre for European Policy Studies, a Brussels-based research group. Plugging that hole would increase Spain’s public debt by almost 50 percent or force it to seek a bailout, following in the footsteps of Ireland, Greece and Portugal.

“How can you only talk about one type of real estate lending when more and more loans are going bad everywhere in the economy?” said Patrick Lee, a London-based analyst covering Spanish banks for Royal Bank of Canada. “Ireland managed to turn its situation around after recognizing losses much more aggressively and thus needed a bailout. I don’t see how Spain can do it without outside support.”

Double-Dip Recession

Spain, which yesterday took over Bankia SA, the nation’s third-largest lender, is mired in a double-dip recession that has driven unemployment above 24 percent and government borrowing costs to the highest level since the country adopted the euro. Investors are concerned that the Mediterranean nation, Europe’s fifth-largest economy with a banking system six times bigger than Ireland’s, may be too big to save.

In both countries, loans to real estate developers proved most toxic. Ireland funded a so-called bad bank to take much of that debt off lenders’ books, forcing writedowns of 58 percent. The government also required banks to raise capital to cover what was left behind, assuming expected losses of 7 percent for residential mortgages, 15 percent on the debt of small companies and 4 percent on that of larger corporations.

Spain’s banks face bigger risks than the government has acknowledged, even with lower default rates than Ireland experienced. If losses reach 5 percent of mortgages held by Spanish lenders, 8 percent of loans to small companies, 1.5 percent of those to larger firms and half the debt to developers, the cost will be about 250 billion euros. That’s three times the 86 billion euros Irish domestic banks bailed out by their government have lost as real estate prices tumbled.

Bankia Loans

Moody’s Investors Service, a credit-ratings firm, said it expects Spanish bank losses of as much as 306 billion euros. The Centre for European Policy Studies said the figure could be as high as 380 billion euros.

At the Bankia group, the lender formed in 2010 from a merger of seven savings banks, about half the 38 billion euros of real estate development loans held at the end of last year were classified as “doubtful” or at risk of becoming so, according to the company’s annual report. Bad loans across the Valencia-based group, which has the biggest Spanish asset base, reached 8.7 percent in December, and the firm renegotiated almost 10 billion euros of assets in 2011, about 5 percent of its loan book, to prevent them from defaulting.

The government, which came to power in December, announced yesterday that it will take control of Bankia with a 45 percent stake by converting 4.5 billion euros of preferred shares into ordinary stock. The central bank said the lender needs to present a stronger cleanup plan and “consider the contribution of public funds” to help with that.

Rajoy Measures

The Bank of Spain has lost its prestige for failing to supervise banks sufficiently, said Josep Duran i Lleida, leader of Catalan party Convergencia i Unio, which often backs Prime Minister Mariano Rajoy’s government. Governor Miguel Angel Fernandez Ordonez doesn’t need to resign at this point because his term expires in July, Duran said.

Rajoy has shied away from using public funds to shore up the banks, after his predecessor injected 15 billion euros into the financial system. He softened his position earlier this week following a report by the International Monetary Fund that said the country needs to clean up the balance sheets of “weak institutions quickly and adequately” and may need to use government funds to do so.

“The last thing I want to do is lend public money, as has been done in the past, but if it were necessary to get the credit to save the Spanish banking system, I wouldn’t renounce that,” Rajoy told radio station Onda Cero on May 7.

Santander, BBVA

Rajoy said he would announce new measures to bolster confidence in the banking system tomorrow, without giving details. He might ask banks to boost provisions by 30 billion euros, said a person with knowledge of the situation who asked not to be identified because the decision hadn’t been announced.

Spain’s two largest lenders, Banco Santander SA (SAN) and Banco Bilbao Vizcaya Argentaria SA (BBVA), earn most of their income outside the country and have assets in Latin America they can sell to raise cash if they need to bolster capital. In addition to Bankia, there are more than a dozen regional banks that are almost exclusively domestic and have few assets outside the country to sell to help plug losses.

In investor presentations, the Bank of Spain has said provisions for bad debt would cover losses of between 53 percent and 80 percent on loans for land, housing under construction and finished developments. An additional 30 billion euros would increase coverage to 56 percent of such loans, leaving nothing to absorb losses on 650 billion euros of home mortgages held by Spanish banks or 800 billion euros of company loans.

Housing Bubble

“Spain is constantly playing catch-up, so it’s always several steps behind,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy, a consulting firm in London specializing in sovereign-credit risk. “They should have gone down the Irish route, bit the bullet and taken on the losses. Every time they announce a small new measure, the goal posts have already moved because of deterioration in the economy.”

Without aggressive writedowns, Spanish banks can’t access market funding and the government can’t convince investors its lenders can survive a contracting economy, said Benjamin Hesse, who manages five financial-stock funds at Fidelity Investments in Boston, which has $1.6 trillion under management.

Spanish banks have “a 1.7 trillion-euro loan book, one of the world’s largest, and they haven’t even started marking it,” Hesse said. “The housing bubble was twice the size of the U.S. in terms of peak prices versus 1990 prices. It’s huge. And there’s no way out for Spain.”

Irish Losses

House prices in Spain more than doubled in a decade and have dropped 30 percent since the first quarter of 2008. U.S. homes, which also doubled in value, have lost 35 percent. Ireland’s have fallen 49 percent after quadrupling.

Ireland injected 63 billion euros into its banks to recapitalize them after shifting property-development loans to the National Asset Management Agency, or NAMA, and requiring other writedowns. That forced the country to seek 68 billion euros in financial aid from the European Union and the IMF.

The losses of bailed-out domestic banks in Ireland have reached 21 percent of their total loans. Spanish banks have reserved for 6 percent of their lending books.

“The upfront loss recognition Ireland forced on the banks helped build confidence,” said Edward Parker, London-based head of European sovereign-credit analysis at Fitch Ratings. “In contrast, Spain has had a constant trickle of bad news about its banks, which doesn’t instill confidence.”

Mortgage Defaults

Spain’s home-loan defaults were 2.7 percent in December, according to the Spanish mortgage association. Home prices are propped up and default rates underreported because banks don’t want to recognize losses, according to Borja Mateo, author of “The Truth About the Spanish Real Estate Market.” Developers are still building new houses around the country, even with 2 million vacant homes.

Ireland’s mortgage-default rate was about 7 percent in 2010, before the government pushed for writedowns, with an additional 5 percent being restructured, according to the Central Bank of Ireland. A year later, overdue and restructured home loans reached 18 percent. At the typical 40 percent recovery rate, Irish banks stand to lose 11 percent of their mortgage portfolios, more than the 7 percent assumed by the central bank in its stress tests. That has led to concern the government may need to inject more capital into the lenders.

‘The New Ireland’

Spain, like Ireland, can’t simply let its financial firms fail. Ireland tried to stick banks’ creditors with losses and was overruled by the EU, which said defaulting on senior debt would raise the specter of contagion and spook investors away from all European banks. Ireland did force subordinated bondholders to take about 15 billion euros of losses.

The EU was protecting German and French banks, among the biggest creditors to Irish lenders, said Marshall Auerback, global portfolio strategist for Madison Street Partners LLC, a Denver-based hedge fund.

“Spain will be the new Ireland,” Auerback said. “Germany is forcing once again the socialization of its banks’ losses in a periphery country and creating sovereign risk, just like it did with Ireland.”

Spanish government officials and bank executives have downplayed potential losses on home loans by pointing to the difference between U.S. and Spanish housing markets. In the U.S., a lender’s only option when a borrower defaults is to seize the house and settle for whatever it can get from a sale. The borrower owes nothing more in this system, called non- recourse lending.

‘More Pressure’

In Spain, a bank can go after other assets of the borrower, who remains on the hook for the debt no matter what the price of the house when sold. Still, the same extended liability didn’t stop the Irish from defaulting on home loans as the economy contracted, incomes fell and unemployment rose to 14 percent.

“As the economy deteriorates, the quality of assets is going to get worse,” said Daragh Quinn, an analyst at Nomura International in Madrid. “Corporate loans are probably going to be a bigger worry than mortgages, but losses will keep rising. Some of the larger banks, in particular BBVA and Santander, will be able to generate enough profits to absorb this deterioration, but other purely domestic ones could come under more pressure.”

Spain’s government has said it wants to find private-sector solutions. Among those being considered are plans to let lenders set up bad banks and to sell toxic assets to outside investors.

Correlation Risk

Those proposals won’t work because third-party investors would require bigger discounts on real estate assets than banks will be willing to offer, RBC’s Lee said.

Spanish banks face another risk, beyond souring loans: They have been buying government bonds in recent months. Holdings of Spanish sovereign debt by lenders based in the country jumped 32 percent to 231 billion euros in the four months ended in February, data from Spain’s treasury show.

That increases the correlation of risk between banks and the government. If Spain rescues its lenders, the public debt increases, threatening the sovereign’s solvency. When Greece restructured its debt, swapping bonds at a 50 percent discount, Greek banks lost billions of euros and had to be recapitalized by the state, which had to borrow more from the EU to do so.

In a scenario where Spain is forced to restructure its debt, even a 20 percent discount could spell almost 50 billion euros of additional losses for the country’s banks.

“Spain will have to turn to the EU for funds to solve its banking problem,” said Madison Street’s Auerback. “But there’s little money left after the other bailouts, so what will Spain get? That’s what worries everybody.”

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Ratings Arbitrage a/k/a Fraud

Posted on May 13, 2010 by Neil Garfield

Investment banks bundled mortgage loans into securities and then often rebundled those securities one or two more times. Those securities were given high ratings and sold to investors, who have since lost billions of dollars on them.

Editor’s Note: The significance of this report cannot be overstated. Not only did the investment bankers LOOK for and CREATE loans guaranteed to fail, which they did, they sold them in increasingly complex packages more than once. So for example if the yield spread profit or premium was $100,000 on a given loan, that wasn’t enough for the investment bankers. Without loaning or investing any additional money they sold the same loans, or at least parts of those loans, to additional investors one, two three times or more. In the additional sales, there was no cost so whatever they received was entirely profit. I would call that a yield spread profit or premium, and certainly undisclosed. If the principal of the loan was $300,000 and they resold it three times, then the investment bank received $900,000 from those additional sales, in addition to the initial $100,000 yield spread profit on sale of the loan to the “trust” or special purpose vehicle.

So the investment bank kept $1 million dollars in fees, profits or compensation on a $300,000 loan. Anyone who has seen “The Producers” knows that if this “show” succeeds, i.e., if most of the loans perform as scheduled and borrowers are making their payments, then the investment bank has a problem — receiving a total of $1.3 million on a $300,000 loan. But if the loans fails, then nobody asks for an accounting. As long as it is in foreclosure, no accounting is required except for when the property is sold (see other blog posts on bid rigging at the courthouse steps documented by Charles Koppa).

If they modify the loan or approve the short sale then an accounting is required. That is a bad thing for the investment bank. But if they don’t modify any loans and don’t approve any short-sales, then questions are going to be asked which will be difficult to answer.

You make plans and then life happens, my wife says. All these brilliant schemes were fraudulent and probably criminal. All such schemes eventually get the spotlight on them. Now, with criminal investigations ongoing in a dozen states and the federal government, the accounting and the questions are coming anyway—despite the efforts of the titans of the universe to avoid that result.

All those Judges that sarcastically threw homeowners out of court questioning the veracity of accusations against pretender lenders, can get out the salt and pepper as they eat their words.

“Why are they not in jail if they did these things” asked practically everyone on both sides of the issue. The answer is simply that criminal investigations do not take place overnight, they move slowly and if the prosecutor has any intention of winning a conviction he must have sufficient evidence to prove criminal acts beyond a reasonable doubt.

But remember the threshold for most civil litigation is merely a preponderance of the evidence, which means if you think there is more than a 50-50  probability the party did something, the prima facie case is satisfied and damages or injunction are stated in a final judgment. Some causes of action, like fraud, frequently require clear and convincing evidence, which is more than 50-50 and less than beyond a reaonsable doubt.

From the NY Times: ————————

The New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities, according to two people with knowledge of the investigation.

by LOUISE STORY

Andrew Cuomo, the attorney general of New York, sent subpoenas to eight Wall Street banks late Wednesday.

The investigation parallels federal inquiries into the business practices of a broad range of financial companies in the years before the collapse of the housing market.

Where those investigations have focused on interactions between the banks and their clients who bought mortgage securities, this one expands the scope of scrutiny to the interplay between banks and the agencies that rate their securities.

The agencies themselves have been widely criticized for overstating the quality of many mortgage securities that ended up losing money once the housing market collapsed. The inquiry by the attorney general of New York, Andrew M. Cuomo, suggests that he thinks the agencies may have been duped by one or more of the targets of his investigation.

Those targets are Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch, which is now owned by Bank of America.

The companies that rated the mortgage deals are Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. Investors used their ratings to decide whether to buy mortgage securities.

Mr. Cuomo’s investigation follows an article in The New York Times that described some of the techniques bankers used to get more positive evaluations from the rating agencies.

Mr. Cuomo is also interested in the revolving door of employees of the rating agencies who were hired by bank mortgage desks to help create mortgage deals that got better ratings than they deserved, said the people with knowledge of the investigation, who were not authorized to discuss it publicly.

Contacted after subpoenas were issued by Mr. Cuomo’s office late Wednesday night notifying the banks of his investigation, spokespeople for Morgan Stanley, Credit Suisse and Deutsche Bank declined to comment. Other banks did not immediately respond to requests for comment.

In response to questions for the Times article in April, a Goldman Sachs spokesman, Samuel Robinson, said: “Any suggestion that Goldman Sachs improperly influenced rating agencies is without foundation. We relied on the independence of the ratings agencies’ processes and the ratings they assigned.”

Goldman, which is already under investigation by federal prosecutors, has been defending itself against civil fraud accusations made in a complaint last month by the Securities and Exchange Commission. The deal at the heart of that complaint — called Abacus 2007-AC1 — was devised in part by a former Fitch Ratings employee named Shin Yukawa, whom Goldman recruited in 2005.

At the height of the mortgage boom, companies like Goldman offered million-dollar pay packages to workers like Mr. Yukawa who had been working at much lower pay at the rating agencies, according to several former workers at the agencies.

Around the same time that Mr. Yukawa left Fitch, three other analysts in his unit also joined financial companies like Deutsche Bank.

In some cases, once these workers were at the banks, they had dealings with their former colleagues at the agencies. In the fall of 2007, when banks were hard-pressed to get mortgage deals done, the Fitch analyst on a Goldman deal was a friend of Mr. Yukawa, according to two people with knowledge of the situation.

Mr. Yukawa did not respond to requests for comment.

Wall Street played a crucial role in the mortgage market’s path to collapse. Investment banks bundled mortgage loans into securities and then often rebundled those securities one or two more times. Those securities were given high ratings and sold to investors, who have since lost billions of dollars on them.

Banks were put on notice last summer that investigators of all sorts were looking into their mortgage operations, when requests for information were sent out to all of the big Wall Street firms. The topics of interest included the way mortgage securities were created, marketed and rated and some banks’ own trading against the mortgage market.

The S.E.C.’s civil case against Goldman is the most prominent action so far. But other actions could be taken by the Justice Department, the F.B.I. or the Financial Crisis Inquiry Commission — all of which are looking into the financial crisis. Criminal cases carry a higher burden of proof than civil cases. Under a New York state law, Mr. Cuomo can bring a criminal or civil case.

His office scrutinized the rating agencies back in 2008, just as the financial crisis was beginning. In a settlement, the agencies agreed to demand more information on mortgage bonds from banks.

Mr. Cuomo was also concerned about the agencies’ fee arrangements, which allowed banks to shop their deals among the agencies for the best rating. To end that inquiry, the agencies agreed to change their models so they would be paid for any work they did for banks, even if those banks did not select them to rate a given deal.

Mr. Cuomo’s current focus is on information the investment banks provided to the rating agencies and whether the bankers knew the ratings were overly positive, the people who know of the investigation said.

A Senate subcommittee found last month that Wall Street workers had been intimately involved in the rating process. In one series of e-mail messages the committee released, for instance, a Goldman worker tried to persuade Standard & Poor’s to allow Goldman to handle a deal in a way that the analyst found questionable.

The S.& P. employee, Chris Meyer, expressed his frustration in an e-mail message to a colleague in which he wrote, “I can’t tell you how upset I have been in reviewing these trades.”

“They’ve done something like 15 of these trades, all without a hitch. You can understand why they’d be upset,” Mr. Meyer added, “to have me come along and say they will need to make fundamental adjustments to the program.”

At Goldman, there was even a phrase for the way bankers put together mortgage securities. The practice was known as “ratings arbitrage,” according to former workers. The idea was to find ways to put the very worst bonds into a deal for a given rating. The cheaper the bonds, the greater the profit to the bank.

The rating agencies may have facilitated the banks’ actions by publishing their rating models on their corporate Web sites. The agencies argued that being open about their models offered transparency to investors.

But several former agency workers said the practice put too much power in the bankers’ hands. “The models were posted for bankers who develop C.D.O.’s to be able to reverse engineer C.D.O.’s to a certain rating,” one former rating agency employee said in an interview, referring to collateralized debt obligations.

A central concern of investors in these securities was the diversification of the deals’ loans. If a C.D.O. was based on mostly similar bonds — like those holding mortgages from one region — investors would view it as riskier than an instrument made up of more diversified assets. Mr. Cuomo’s office plans to investigate whether the bankers accurately portrayed the diversification of the mortgage loans to the rating agencies.

Gretchen Morgenson contributed reporting

Filed under: bubble, CDO, CORRUPTION, Eviction, expert witness, Fannie MAe, foreclosure, foreclosure mill, Forensic Analysis Workshop, GTC | Honor, HERS, investment banking, Investor, MODIFICATION, Mortgage, Motion Practice and Discovery, politics, securities fraud, Securitization Survey, Servicer, STATUTES, trustee, workshop | Tagged: , , , , , , , , , , , , , , , , , , , , , , , , , , , | 11 Comments »

RESECURITIZATION: ADDING MORE LAYERS FOR THE FORENSIC ANALYST, EXPERT, LAWYER AND LITIGANT

Posted on March 31, 2010 by Neil Garfield

NEWS REPORTS HAVE BEEN SPORADICALLY REFERRING TO THE OLD DERIVATIVES BEING RE-PACKAGED AND SOLD AGAIN. This is called resecuritization. It takes the old pools, or what’s left of them, puts them together with other old pools, and creates a brand new Special Purpose vehicle that issues brand spanking new mortgage backed bonds.

The backing in this case is the old mortgage backed bond which in turn is evidence of the ownership or “beneficial ownership” of the underlying loans.

This produces the desired effect of making more money while at the same time leading litigators down blind alleys and the equally desirable effect of showing the Judge that you were full of crap. Of course if you do the proper discovery and explain with expert witness declarations or even testimony what is going on, then the Judge will either give you the go-ahead to pursue your line of inquiry or not, leading to an interesting appeal. Witness the following:

Fitch Rates J.P. Morgan Resecuritization Trust 2009-12

Business Wire, Nov 30, 2009

NEW YORK — Fitch Ratings has rated the J.P. Morgan Resecuritization Trust 2009-12. This transaction consists of nine non-crossed groups. Each group is a resecuritization of a residential mortgage backed securities certificate. Fitch is not rating Group 3, 6, and 9 certificates.

–Group 1 is a resecuritization of 55.26% interest in CHL 2007-9, Class A-6;

–Group 2 is a resecuritization of 6.97% interest in WFMBS 2006-AR12, Class II-A-1;

–Group 4 is a resecuritization of 11.08% interest in CHL 2005-29, Class A-1;

–Group 5 is a resecuritization of 12.55% interest in FHASI 2007-2, Class I-A-4;

–Group 7 is a resecuritization of 30.33% interest in WFMBS 2007-11, Class A-85;

–Group 8 is a resecuritization of 4.92% interest in WFMBS 2007-11, Class A-96.

As resecuritizations, the certificates will receive their cash flows from the underlying classes of certificates. The underlying certificates represent beneficial ownership interest in fixed-rate and adjustable-rate, conventional, first lien residential mortgage loans, substantially all of which have original terms to stated maturity of 30 years.

This transaction contains certain classes designated as Base Certificates and others as Exchangeable Certificates. Group 1 A-1 certificate is a Base Certificate and can be exchanged for certain combinations of A-3 through A-16. The A-1, A-2, A-3, A-4 and A-6 certificates in group 2, 7 and 8 are Base Certificates and can be exchanged for certain combinations of A-3 through A-19. The class A-3, A-4 and A-6 certificates in group 4 are Base Certificates and can be exchanged for class A-1. The class A-1 certificate in group 5 is a Base Certificate and can be exchanged for certain combinations of A-3 through A-8. Classes C-A-1 through C-A-8 can be exchanged for certain combinations of certificates from group 7 and group 8.

ResiLogic, the regression-based model used by Fitch, takes into account multiple risk factors which can broadly be placed into three categories in the following order of influence: seasoned loan risks, economic risks, and collateral risks. For seasoned loan risks, the delinquency status and volatility are the most important with regards to Frequency of Foreclosure (FOF), while change in home price index and loan age are the most important with regards to Loss Severity (LS). Economic risk is solely comprised of state and MSA level risk multipliers as well as a national multiplier. In the category of collateral risk, the credit score, credit sector, and combined loan-to-value (CLTV) ratio are the most heavily-weighted risk factors in calculating the FOF. Closing balance, loan-to-value (LTV) ratio and loan coupon are the most heavily-weighted risk factors in calculating Loss Severity. Due to concerns over recent pool performance and volatility, loss levels were adjusted higher than the ResiLogic model results for Group 5.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, HERS, Investor, Mortgage, securities fraud, Servicer | Tagged: , , , , , , , , , , , , , , , , , , | 2 Comments »

Foreclosure Defense and Offense: Rating Agencies and Appraisals

Posted on June 4, 2008 by Neil Garfield

Taking the entire Mortgage Meltdown process as a single transaction starting with the origination of the loan to the borrower and ending with the sale of an asset backed security to an investor, a pattern of deception and confusion emerges — providing the borrower with an arsenal of offensive and defensive strategies to avoid foreclosure, recover damages and even free their property from the mortgage altogether. In foreclosure defense and particularly offense for “lender” liability, keep in mind that there was a chain of entities who all knowingly conspired (under a cloak of what they deemed “plausible deniability”).

This chain was never disclosed to the borrower — thus the disclosure obligations set forth in TILA, state law, RICO, common law and other resources were never met and the right to rescission was blocked by lack of information, to wit: the borrower in most cases does not know who to send the rescission letter to because in all likelihood there are now multiple parties who have an interest in the security instrument, the note and the risk of loss, none of whom were disclosed to the borrower at or after closing. 

These participants are subject to liability for monetary damages and many are insured as well as having deep pockets of their own. They also de-linked several aspects of what had been a single event — the purchase of a home with a first mortgage on residential property using money in part loaned by a lender who took the risk of non-payment, followed underwriting guidelines set by the banking industry and regulators, and therefore had a direct stake in the outcome of the loan and a specific desire to avoid default on the loan. 

The de-linking of teht ransaction and overlapping with other parts of the entire single “mortgage meltdown” chain resulted in separation of the security interest from the the obligation to pay, adding obligors who had liability for payment, and adding receivers of income. Thus the classic and relatively simple foreclosure that involved non-payment by the borrower to the lender, was converted in a complex series of transactions leaving the investor who bought the asset backed security with the right to the income and some rights to the security interests, and others with the the right to the security interest but no right to payment, and still others who made payments to the investor or who were liable for non-payment to the investor who acquired the right to payment from the underlying mortgage and note from which his asset backed security derived its value.

The significance of this in foreclosure defense is that the party alleging non-payment by the borrower is NOT and CANNOT allege non-payment to the entity or person (investor) who is entitled to that payment. The usual person entering the foreclosure process is the trustee posting notice of sale or the originating lender filing foreclosure. But they do not know if the investment bank, an insurer or some other third party, including another borrower was contributing to the flow of payments that the investor received, nor do they know the allocation of those funds which the investor received.

Thus the party entitled to income from the borrower’s note may or may not have been paid by the borrower (through overcharges and other TILA violations in addition to regular monthly payments, or by third parties whose obligation derived in part from the note signed by the borrower and in part by hundreds or thousands of other notes in cross collateralization agreements or cross guarnatees, indemnifications, indentures and covneants between the lender, mortgage agregator, investment banker, seller of teh security and the investor who bought the security. 

You can therefore take the position that if the default alleged is non-payment, the entity or person making the allegation must prove the non-payment and that proving that the borrower did not make one or more payments does not prove that the party (investor) entitled to payment did not get paid in whole or in part. Thus no default has been alleged without alleging that no payment was received by the holder of the original note and mortgage and the party to whom payment was to be received as a result of the income stream from this mortgage combined with thousands of other mortgages.

Production of the original note and mortgage becomes critical and a condition precedent to any action, sale, motion for summary judgment, judgement of foreclosure, sale or rights of redemption. Equally important and perhaps more so is the production of the documents that assigned, sold or otherwise transferred the security interest, the income from the note or the risk of non-payment to one or more parties. You will find that in many cases, those are all different third parties with different interests and agendas.

Perhaps the most important, we are finding in Ohio and other states, that NOBODY can come up with documents that directly link a particular borrower with any of these third parties holding primary or secondary rights to the security instrument, the note, or the risk of loss. In those cases, we are seeing borrowers walk away with their home free and clear of any encumbrances and lawyers getting paid fat bonuses or contingency fees for eliminating the risk of foreclosure, and feeing the borrower from the entanglement in a complex transaction that was never disclosed to him/her/them.

The appraisers, who are usually insured by errors and omissions policies, state the fair market value of real property through supposedly independent analysis of comparable statistics and other factors. The standards are governed by the regulatory board in each state that licenses them, although there might still be some states who do not license appraisers. In states without licensing, they are governed by common law and other applicable law concerning deceptive business practices.

The rating agencies state the quality of a security that is used to determine the fair market value of the security. They too are supposedly using objective means, analysis and due diligence to issue their rating. In the world of the mortgage meltdown, rating agency objectivity broke down y virtue of two main factors: (a) the rating agencies were competing for customers and revenue and (b) in a related factor, the rating agency analysts were receiving gifts, pressure from clients (issuers) and pressure from management to “accommodate” the client (issuer). A Nationally Recognized Statistical Rating Organization (or “NRSRO”) is a credit rating agency which issues credit ratings that the U.S. Securities and Exchange Commission (SEC) permits other financial firms to use for certain regulatory purposes.

The nine organizations currently designated as NRSROs are:

Ratings by NRSRO are used for a variety of regulatory purposes in the United States. In addition to net capital requirements (described in more detail below), the SEC permits certain bond issuers to use a shorter prospectus form when issuing bonds if the issuer is older, has issued bonds before, and has a credit rating above a certain level. SEC regulations also require that money market funds (mutual funds that mimick the safety and liquidity of a bank savings deposit, but without FDIC insurance) comprise only securities with a very high rating from an NRSRO. Likewise, insurance regulators use credit ratings from NRSROs to ascertain the strength of the reserves held by insurance companies.

The following article described the efforts of the New York Attorney general to address the break down of objectivity caused by competition for fees.

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Bond-Rating 
Shifts Loom 
In Settlement

N.Y.’s Cuomo Plans 
Overhaul of How 
Firms Get Paid
By AARON LUCCHETTI
June 4, 2008; Page C1

The three major bond-rating firms are set to overhaul the way they collect fees as part of a settlement with New York state’s attorney general, Andrew Cuomo, that could be announced as soon as this week, people familiar with the matter said.

If a deal is reached, it could change the $5 billion-a-year bond-rating industry as fundamentally as Mr. Cuomo’s predecessor Eliot Spitzer did six years ago with his settlement with Wall Street firms over stock-research analysts whose recommendations were compromised by investment-banking ties.

[Andrew Cuomo]

Terms of Mr. Cuomo’s settlement with Moody’s Corp.’s Moody’s Investors Service; McGraw-Hill Cos.’ Standard & Poor’s unit; and Fimalac SA’s Fitch Ratings deal with what many critics claim has been a chronic problem with bond ratings: They are paid for by the entities being rated. That financial dependence has been blamed for the industry’s failure to predict that risky subprime mortgages would crumble, resulting in losses and shaken confidence.

The accord attempts to change the incentive structure for the ratings firms. Now, while more than one ratings firm reviews most deals, not all of them always rate the deal and get paid. That gives the firms an incentive to go easy on their rating in order to win the business.

Under the Cuomo settlement, which would cover the hardest-hit portions of the mortgage market, the firms would get paid for their review, even if they didn’t end up getting hired to rate the deal. This would mean the firms would get paid even if they were tough. The plan, which requires final agreement by Mr. Cuomo’s office and the rating firms, wouldn’t dictate the exact fees rating firms could charge. But the firms would be required to charge more than a nominal fee for their preliminary work.

The bond-rating firms also have tentatively agreed to disclose on a quarterly basis the fees they are paid for nonprime-mortgage-backed securities, which include subprime mortgages and so-called Alt-A mortgages that have less documentation or don’t conform with prime-mortgage standards.

Such disclosures are seen as a potential red flag to help investors detect instances where bond issuers or their bankers may have essentially pitted different rating firms against each other in order to get a higher rating.

In an interview late last year, Brian Clarkson, then the president and chief operating officer of Moody’s Investors Service, acknowledged that “there is a lot of rating shopping that goes on…What the market doesn’t know is who’s seen” certain transactions but wasn’t hired to rate those deals. Last month, Mr. Clarkson, who once ran the Moody’s group overseeing mortgages and other structured-finance products, stepped down, effective in July.

The settlement is unlikely to satisfy critics who have urged that bond-rating firms stop being paid altogether by bond issuers or that the firms be permitted to rate any deal they choose, regardless of whether the issuer cooperates. Following the settlement, bond issuers still would get a strong say over which firms published the final rating, as well as those invited to look over a pool of loans in the first place.

For Moody’s, S&P and Fitch, the agreement largely eliminates the possibility of a nasty showdown with Mr. Cuomo, whose office has been investigating the industry for about nine months, poring through thousands of pages in documents and emails and interviewing senior executives at each of the three big rating firms, people familiar with the matter said.

Mr. Cuomo has leverage over the bond-rating industry partly because Moody’s and S&P are based in New York. The attorney general also has one of the most powerful legal tools in the nation: the 1921 Martin Act, which spells out a broad definition of securities fraud without requiring that prosecutors prove intent to defraud.

In a statement, Deven Sharma, S&P’s president, said the firm “is pleased to work with New York Attorney General Andrew M. Cuomo and other rating agencies on these important measures, which we believe will help ensure our ratings process continues to be of the highest quality.”

Rating-company shares rose after The Wall Street Journal reported news of the settlement talks Tuesday afternoon. In 4 p.m. composite trading on the New York Stock Exchange, Moody’s was at $38.45, up $1.80, or 4.9%. McGraw-Hill was up 38 cents at $41.20.

As the probe proceeded, attorneys in Mr. Cuomo’s office concluded that rating firms could be more effective if Wall Street had less control over which ones were paid, these people said. As part of the deal, the firms would cooperate with Mr. Cuomo’s continuing investigation into investment banks and other financial firms that issued mortgage-backed securities later plagued by high levels of defaults. The New York attorney general is trying to determine if banks intentionally overlooked or hid flaws in loans that were securitized and sold to investors.

The decision not to seek fines from the three major bond-rating firms partly reflects Mr. Cuomo’s firm but less-confrontational style than that of Mr. Spitzer. The 50-year-old Mr. Cuomo, elected in 2006, has promised to aggressively pursue financial wrongdoing, and the likely pact shows he believes investor confidence can be shored up without an all-out attack on the bond-rating industry.

Mr. Cuomo’s settlement will likely be structured in a way that doesn’t contradict rules being proposed by the Securities and Exchange Commission. It will take up to six months to implement and may also need to address antitrust concerns at investment banks or among smaller rating firms. “Without knowing all the details, I’m concerned it would entrench the three large rating firms,” said David Schroeder, chief operating officer of DBRS, a Toronto rating firm not included in the settlement talks.

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