Like I said, the loans never made into the “pools”

Posted on May 9, 2012 by Neil Garfield

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Editor’s Comment:

When I first suggested that securitization itself was a lie, my comments were greeted with disbelief and derision. No matter. When I see something I call it the way it is. The loans never left the launch pad, much less flew into a waiting pool of investor money. The whole thing was a scam and AG Biden of Đelaware and Schniedermann of New York are on to it.

The tip of the iceberg is that the note was not delivered to the investors. The gravitas of the situation is that the investors were never intended to get the note, the mortgage or any documentation except a check and a distribution report. The game was on.

First they (the investment banks) took money from the investors on the false pretenses that the bonds were real when anyone with 6 months experience on Wall street could tell you this was not a bond for lots of reasons, the most basic of which was that there was no borrower. The prospectus had no loans because there were no loans made yet. The banks certainly wouldn’ t take the risks posed by this toxic heap of loans, so they were waiting for the investors to get conned. Once they had the money then they figured out how to keep as much of it as possible before even looking for residential home borrowers. 

None of the requirements of the Internal Revenue Code on REMICS were followed, nor were the requirements of the pooling and servicing agreement. The facts are simple: the document trail as written never followed the actual trail of actual transactions in which money exchanged hands. And this was simply because the loan money came from the investors apart from the document trail. The actual transaction between homeowner borrower and investor lender was UNDOCUMENTED. And the actual trail of documents used in foreclosures all contain declarations of fact concerning transactions that never happened. 

The note is “evidence” of the debt, not the debt itself. If the investor lender loaned money to the homeowner borrower and neither one of them signed a single document acknowledging that transaction, there is still an obligation. The money from the investor lender is still a loan and even without documentation it is a loan that must be repaid. That bit of legal conclusion comes from common law. 

So if the note itself refers to a transaction in which ABC Lending loaned the money to the homeowner borrower it is referring to a transaction that does not now nor did it ever exist. That note is evidence of an obligation that does not exist. That note refers to a transaction that never happened. ABC Lending never loaned the homeowner borrower any money. And the terms of repayment intended by the securitization documents were never revealed to the homeowner buyer. Therefore the note with ABC Lending is evidence of a non-existent transaction that mistates the terms of repayment by leaving out the terms by which the investor lender would be repaid.

Thus the note is evidence of nothing and the mortgage securing the terms of the note is equally invalid. So the investors are suing the banks for leaving the lenders in the position of having an unsecured debt wherein even if they had collateral it would be declining in value like a stone dropping to the earth.

And as for why banks who knew better did it this way — follow the money. First they took an undisclosed yield spread premium out of the investor lender money. They squirreled most of that money through Bermuda which ” asserted” jurisdiction of the transaction for tax purposes and then waived the taxes. Then the bankers created false entities and “pools” that had nothing in them. Then the bankers took what was left of the investor lender money and funded loans upon request without any underwriting.

Then the bankers claimed they were losing money on defaults when the loss was that of the investor lenders. To add insult to injury the bankers had used some of the investor lender money to buy insurance, credit default swaps and create other credit enhancements where they — not the investor lender —- were the beneficiary of a payoff based on the default of mortgages or an “event” in which the nonexistent pool had to be marked down in value. When did that markdown occur? Only when the wholly owned wholly controlled subsidiary of the investment banker said so, speaking as the ” master servicer.”

So the truth is that the insurers and counterparties on CDS paid the bankers instead of the investor lenders. The same thing happened with the taxpayer bailout. The claims of bank losses were fake. Everyone lost money except, of course, the bankers.

So who owns the loan? The investor lenders. Who owns the note? Who cares, it was worth less when they started; but if anyone owns it it is most probably the originating “lender” ABC Lending. Who owns the mortgage? There is no mortgage. The mortgage agreement was written and executed by the borrower securing terms of payment that were neither disclosed nor real.

Bank Loan Bundling Investigated by Biden-Schneiderman: Mortgages

By David McLaughlin

New York Attorney General Eric Schneiderman and Delaware’s Beau Biden are investigating banks for failing to package mortgages into bonds as advertised to investors, three months after a group of lenders struck a nationwide $25 billion settlement over foreclosure practices.

The states are pursuing allegations that some home loans weren’t correctly transferred into securitizations, undermining investors’ stakes in the mortgages, according to two people with knowledge of the probes. They’re also concerned about improper foreclosures on homeowners as result, said the people, who declined to be identified because they weren’t authorized to speak publicly. The probes prolong the fallout from the six-year housing bust that’s cost Bank of America Corp., JPMorgan Chase & Co. (JPM) and other lenders more than $72 billion because of poor underwriting and shoddy foreclosures. It may also give ammunition to bondholders suing banks, said Isaac Gradman, an attorney and managing member of IMG Enterprises LLC, a mortgage-backed securities consulting firm.

“The attorneys general could create a lot of problems for the banks and for the trustees and for bondholders,” Gradman said. “I can’t imagine a better securities law claim than to say that you represented that these were mortgage-backed securities when in fact they were backed by nothing.”

Countrywide Faulted

Schneiderman said Bank of America Corp. (BAC)’s Countrywide Financial unit last year made errors in the way it packaged home loans into bonds, while investors have sued trustee banks, saying documentation lapses during mortgage securitizations can impair their ability to recover losses when homeowners default. Schneiderman didn’t sue Bank of America in connection with that criticism.

The Justice Department in January said it formed a group of federal officials and state attorneys general to investigate misconduct in the bundling of mortgage loans into securities. Schneiderman is co-chairman with officials from the Justice Department and the Securities and Exchange Commission.

The next month, five mortgage servicers — Bank of America Corp., Wells Fargo & Co. (WFC), Citigroup Inc. (C), JPMorgan Chase & Co. and Ally Financial Inc. (ALLY) — reached a $25 billion settlement with federal officials and 49 states. The deal pays for mortgage relief for homeowners while settling claims against the servicers over foreclosure abuses. It didn’t resolve all claims, leaving the lenders exposed to further investigations into their mortgage operations by state and federal officials.

Top Issuers

The New York and Delaware probes involve banks that assembled the securities and firms that act as trustees on behalf of investors in the debt, said one of the people and a third person familiar with the matter.

The top issuers of mortgage securities without government backing in 2005 included Bank of America’s Countrywide Financial unit, GMAC, Bear Stearns Cos. and Washington Mutual, according to trade publication Inside MBS & ABS. Total volume for the top 10 issuers was $672 billion. JPMorgan acquired Bear Stearns and Washington Mutual in 2008.

The sale of mortgages into the trusts that pool loans may be void if banks didn’t follow strict requirements for such transfers, Biden said in a lawsuit filed last year over a national mortgage database used by banks. The requirements for transferring documents were “frequently not complied with” and likely led to the failure to properly transfer loans “on a large scale,” Biden said in the complaint.

“Most of this was done under the cover of darkness and anything that shines a light on these practices is going to be good for investors,” Talcott Franklin, an attorney whose firm represents mortgage-bond investors, said about the state probes.

Critical to Investors

Proper document transfers are critical to investors because if there are defects, the trusts, which act on behalf of investors, can’t foreclose on borrowers when they default, leading to losses, said Beth Kaswan, an attorney whose firm, Scott + Scott LLP, represents pension funds that have sued Bank of New York Mellon Corp. (BK) and US Bancorp as bond trustees. The banks are accused of failing in their job to review loan files for missing and incomplete documents and ensure any problems were corrected, according to court filings.

“You have very significant losses in the trusts and very high delinquencies and foreclosures, and when you attempt to foreclose you can’t collect,” Kaswan said.

Laurence Platt, an attorney at K&L Gates LLP in Washington, disagreed that widespread problems exist with document transfers in securitization transactions that have impaired investors’ interests in mortgages.

“There may be loan-level issues but there aren’t massive pattern and practice problems,” he said. “And even when there are potential loan-level issues, you have to look at state law because not all states require the same documents.”

Fixing Defects

Missing documents don’t have to prevent trusts from foreclosing on homes because the paperwork may not be necessary, according to Platt. Defects in the required documents can be fixed in some circumstances, he said. For example, a missing promissory note, in which a borrower commits to repay a loan, may not derail the process because there are laws governing lost notes that allow a lender to proceed with a foreclosure, he said.

A review by federal bank regulators last year found that mortgage servicers “generally had sufficient documentation” to demonstrate authority to foreclose on homes.

Schneiderman said in court papers last year that Countrywide failed to transfer complete loan documentation to trusts. BNY Mellon, the trustee for bondholders, misled investors to believe Countrywide had delivered complete files, the attorney general said.

Hindered Foreclosures

Errors in the transfer of documents “hampered” the ability of the trusts to foreclose and impaired the value of the securities backed by the loans, Schneiderman said.

“The failure to properly transfer possession of complete mortgage files has hindered numerous foreclosure proceedings and resulted in fraudulent activities,” the attorney general said in court documents.

Bank of America faced similar claims from Nevada Attorney General Catherine Cortez Masto, who accused the Charlotte, North Carolina-based lender of conducting foreclosures without authority in its role as mortgage servicer due improper document transfers. In an amended complaint last year, Masto said Countrywide failed to deliver original mortgage notes to the trusts or provided notes with defects.

The lawsuit was settled as part of the national foreclosure settlement, Masto spokeswoman Jennifer Lopez said.

Bank of America spokesman Rick Simon declined to comment about the claims made by states and investors. BNY Mellon performed its duties as defined in the agreements governing the securitizations, spokesman Kevin Heine said.

“We believe that claims against the trustee are based on a misunderstanding of the limited role of the trustee in mortgage securitizations,” he said.

Biden, in his complaint over mortgage database MERS, cites a foreclosure by Deutsche Bank AG (DBK) as trustee in which the promissory note wasn’t delivered to the bank as required under an agreement governing the securitization. The office is concerned that such errors led to foreclosures by banks that lacked authority to seize homes, one of the people said.

Renee Calabro, spokeswoman for Frankfurt-based Deutsche Bank, declined to comment.

Investors have raised similar claims against banks. The Oklahoma Police Pension and Retirement System last year sued U.S. Bancorp as trustee for mortgage bonds sold by Bear Stearns. The bank “regularly disregarded” its duty as trustee to review loan files to ensure there were no missing or defective documents transferred to the trusts. The bank’s actions caused millions of dollars in losses on securities “that were not, in fact, legally collateralized by mortgage loans,” according to an amended complaint.

“Bondholders could have serious claims on their hands,” said Gradman. “You’re going to suffer a loss as bondholder if you can’t foreclose, if you can’t liquidate that property and recoup.”

Teri Charest, a spokeswoman for Minneapolis-based U.S. Bancorp (USB), said the bank isn’t liable and doesn’t know if any party is at fault in the structuring or administration of the transactions.

“If there was fault, this unhappy investor is seeking recompense from the wrong party,” she said. “We were not the sponsor, underwriter, custodian, servicer or administrator of this transaction.”

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