The Logic of Wall Street “Securitization:” The transaction that never existed

Posted on August 14, 2014 by Neil Garfield

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The logic of Wall Street schemes is simple: Create the trusts but don’t use them. Lie to everyone and assure everyone that Trusts were used to “securitize” loans. The strategy is so successful and the lie is so big and has been going on for so long, that most people believe it.

You see it in the decisions of the appellate courts who render opinions like the recent 3rd district in California which expresses the premise that the borrower was loaned money by the originator. Once you start with THAT premise, the outcome is no surprise. But start with reverse premise — that the borrower was NOT loaned money BY THE ORIGINATOR and you end up with a very different result.

We could assume that Wall Street is reckless in lending money. They can afford to be reckless because they are using investor money. And, so the story goes, the boys on Wall Street got a little wild with loans that they would never have approved for themselves.

Without risk of any loss, Wall Street investment banks make money regardless of whether the loan succeeds or goes into default.

But Wall Street is not content with earning fees. The basic credo is a question: “How can we make YOUR money OUR money.” And they have successfully devised and followed that goal for many years. As one insider told me in an interview that must remain anonymous, “It is like a magic trick. You create a trust and everyone is looking at the trust and everyone is looking at transactions affecting the trust, when in fact all the action is occurring off record, off the books and away from scrutiny by investors, trustees, rating agencies, insurers, borrowers, and of course, the courts.”

So the question becomes “what happens to investor money after it is received by the investment bank?” If the money passes from the bank account of the managed fund (pension) fund to the bank account of the investment bank that sold bonds issued by a Trust then the Trust would receive the money. It didn’t.

The Trust would then issue funds for the origination or acquisition of loans. In return it would get the loan documents and they would be placed with the Depositor or Depository — pretty much the way ordinary loans are done. It didn’t. Instead we had millions of loan documents lost or destroyed and then re-created for litigation purposes. Why would an entire industry have engaged in that behavior? Was it really a “volume” problem where there was too much paper or was it something more sinister?

The problem is that the investment bank that acts as broker in selling the bonds is in control of the loans and investments of the Trusts. Since the fees of the investment bank are based on the existence of transactions in which the Trust issues money in exchange for investment certificates, the Wall Street bank is incentivized to make that Trust money move regardless of the quality of the investment. And since the Trust has no say in the actual underwriting decision to originate or acquire the loan, the investment bank is the only one in charge. That leaves the fox guarding the hen house.

But that doesn’t satisfy Wall Street either. They realized that they can create “proprietary profits” for the investment banks by creating a yield spread premium. A yield spread premium is the difference in value between two different loans to the same party for the same transaction — one is the honest one and the other is fictitious.

At closing the borrower is steered into the fictitious one which is far more risky and expensive than the one the borrower is actually qualified to receive.

At the investor level the “trust” is ordered to take loans that are far less valuable than they appear. This means that the Trust buys the investment bonds or shares that the investment bank has created with nobody checking the quality or ownership of the investment. The Pooling and Servicing Agreement contains provisions that effectively bars the Trustee or the investors from knowing or even inquiring about these transactions. Look at any PSA and you will see it.

The bottom line is that the worse the loan terms for the borrower and the more likely it is that the loan will fail, the lower the value of the loan. But if it is sold as though it was an ordinary conventional loan at 5%, then the price, charged for a crappy loan is much higher than its true value. Same scenario as the inflated appraisals of real property and homes.

So the investment bank inserts itself as the Seller of the loan to the trust. At their proprietary trading desk the investment bank sells its ownership interest in the loan to the trust for the higher “value” because the investment bank is making the decisions on what loans the trust will buy. Meanwhile they have created loans that are worth far less and even have principal due on the “notes” that is far less than what the trust is forced to “pay.”

Checking with informed sources, it is evident that those proprietary transactions were fictitious and allowed the investment banks to report huge “profits” while everyone else was losing their shirts trading bonds, equities and anything else. The transaction at the proprietary trading desk of the investment bank was fictitious because the trust did not issue any payment to the investment bank, who never formally owned the loan in the first place.

You don’t see investment banks anywhere in the chain of title whether you review public records or even MERS. So you have the investment bank selling a loan they don’t own to a trust that never paid for it. The entire transaction is recorded but does not exist.

In the case of a 15% $300,000 loan to a “borrower”, it is “SOLD” as a 5% conventional loan giving the investment bank a reason to declare that it made a profit on a “proprietary trade.” How much profit? Figure it out — on the back of a napkin you can see how the investment banks “sold” the $300,000 loan but “received” $900,000 from the Trust leaving the investors with an instant $600,000 loss and the probability of losing the rest of the $300,000 as well. This is exactly opposite to the provisions of the Prospectus and PSA.

Upon examination, my sources tell me, the money to cover that declared “trading” profit does exist at the investment bank. That is because the investment bank took the money from investors, never funded the trust, and pocketed the $600,000 in advance of the “proprietary trade, which they could cause to be recorded and reported at any time, since the investment bank was in total control.

Enter moral hazard.

The only incentive that the investment bank to stay honest is to report good results so the managed funds buy more bonds. But that does not protect investors. The investment bank creates a classic PONZI scheme in which it uses investor money to make the monthly payments on the bonds or shares and reports that “all is well.” The report disclaims reliability, credibility and authenticity. Wells Fargo has an especially strong disclaimer on the distribution report to investors. The disclaimers were ignored as “boiler plate” by fund managers who made the investment on behalf of the their pensioners or mutual fund shareholders.

All the fund managers needed to know was that they were getting paid — but they did not realize that a significant part of the payment came from their own investment dollars advanced to the investment bank, as broker for the purchase of trust bonds or shares.

So the investment bank makes much less money on good investments for the trust than on really bad investments. In fact they have the incentive to make certain the loan fails. Not only do they get the yield spread premium described above, the investment bank, is trading on inside information in which only the investment bank knows the truth. It places bets against the viability of the loan and bets further against the value of the mortgage bonds, and buys contracts for insurance, betting that the value of the bond will fall in a “credit event” without the necessity of an actual default.

SO IF THE INVESTMENT BANK DID NOT GIVE THE TRUST THE MONEY FROM INVESTORS, WHERE DID THE INVESTORS’ MONEY GO?

That is the trillion dollar question. And THIS is where the Courts have it completely wrong. Either we are a nation of laws or a nation governed by the financial industry. The banks bet on themselves, and so far, they were right to do so.

The money given to the investment banks was spread out over a long list of intermediaries owned or controlled by the investment bank. AND then SOME of it was spread out funding loans to borrowers. But the investment bank obviously could not name itself on the note and mortgage. That would have revealed that the tax advantages of a REMIC trust were nonexistent because the trust was not involved in the transaction.

So an elaborate, complicated, circuitous route was chosen for the “approval” of loans for origination or acquisition. First you have a nominee, which is often MERS plus a “lender” who was also a nominee even though they were called lender. The “lender” was subject to an assignment and assumption agreement that prohibited the “lender” from exercising any control over the closing on the loan that was being “originated.” In short, they were being paid to pretend to be a lender — hence the term pretender lender.

The closing agent, whose fee depends upon actually closing, and the mortgage broker, whose fee depends upon actually closing, and the title company, whose fee depends upon the actual closing, have no interest in protecting the borrower from what is about to transpire.

The closing agent gets money from any one of a variety of sources OTHER THAN THE “LENDER.” The closing agent applies those funds to the closing as though the “Lender” made the loan. As stated by one mortgage document specialist for a large “originator”, “We knew that table funded loans were predatory and illegal, but we didn’t take that seriously. And the borrowers didn’t know who the lender was — that was the point. We used table funded loans to conceal the actual lender.”

Those funds came from the investors, although the money did not come through the trust. It came from the investment bank which was acting in the capacity, as they tell it, as a depository bank — which is why the Federal government allowed them to become commercial banks able to act as depositories. And every effort was made to prevent any evidence as to whose money was actually involved in the loan. Since it was the investor money that was used to originate or acquire the loan, it should have been the investors who were named as owner of the loan and recorded as such in the public records.

If you look at the PSA, it requires funding of the trust, of course. But it also requires that its acquisition of loans contain all the elements of a holder in due course, thus barring any claims from borrowers about irregularities at the closing, violations of state and federal law, etc. In summary the only defenses a borrower could raise against a holder in due course is that they paid or that they never signed the note. So a person who pays money in good faith without knowledge of the borrower’s defenses is pretty well protected. In litigation with borrowers, borrowers would be told they must sue the intermediaries that caused the problems with their loans.

The fact that no foreclosure of a loan subject to “claims of securitization” alleges HDC (holder in due course) status is very substantial corroboration that the Trust did not pay for the loan in good faith without knowledge of the borrower’s defenses.

The banks have been betting on a lot of things and winning every bet. In court they are betting that they will be treated as holders in due course and not as simply holders either with or without any right to enforce where they might be required to prove the actual loan of money from the originator, or the payment of money for an assignment and endorsement. And THAT is why the appellate court is assuming that the loan actually occurred — you, know, the loan that is underlying the execution of the note and mortgage, because the borrower didn’t know the truth.

The factual problem is that the presumptions and assumptions relied upon by the courts are in direct conflict with the real facts. The legal problem is that starting with the original loan, many cases, and always with the assignment of loan, is that somewhere in the chain (and probably at more than one point in the “chain”) there is no underlying transaction for the paper upon which the bankers rely in foreclosure.

Some OTHER transaction occurred, which is why the note is evidence of a loan that does not exist between the “lender” and the “borrower” and why the assignment is evidence of a transaction that does not exist between the assignor and assignee. The mistake being made is basic law: the courts are confusing “evidence” of a transaction with the transaction itself. In so doing they are escalating the status of the forecloser from a mere holder to a holder in due course without any actual claim or allegation of HDC status. Once that is done, the borrower is doomed.

The doom should fall on the investment bank and all the intermediaries that participated in this scheme. They left the investors with no coverage — the investors money was used in ways that were expressly prohibited by the offering, the PSA, and even the rules governing investments by stable managed funds whose risk is required to be extremely low in any investment. The investors are the involuntary lenders with no note and no mortgage.

The good news is that nearly all borrowers would be happy to execute a note and mortgage to investors who actually funded their loan or even a trust that was identified by the investors to represent them. The terms would be based upon current economic reality and would thus mitigate the damages to both the investor lenders and the borrowers. The balance, as we have already seen, lies in lawsuits for damages against the investment banks and their intermediaries demanding refunds, damages and even punitive damages. Those lawsuits are being brought by investors, borrowers, insurers, and guarantors and in some cases by counterparties to credit default swaps.

Without the execution of a real note and real mortgage, the foreclosures are fatally defective. So the bad news is that as long as the courts assume and then presume and then enter judgment for the foreclosing party, the Judge is inadvertently sealing a greater loss applied against the investor lender, removing the tax advantages of a REMIC trust, and creating another bar to liability and accountability of the investment bank who effectively has been lying and cheating its way through the system — using legal “presumptions” that are directly contrary to the facts.

Filed under: AMGAR, CASES, CORRUPTION, discovery, evidence, expert witness, Fannie MAe, foreclosure, foreclosure defenses, GTC | Honor, investment banking, Investor, MBS TRUSTEE, MODIFICATION, Mortgage, Motion Practice and Discovery, Motions, originator, Pleading, securities fraud, TRUST BENEFICIARIES, trustee | Tagged: acquisition, borrowers, investment banks, investors, origination, PSA, REMIC, risk, trust | 30 Comments »

Is Donald Duck Your Lender?

Posted on March 14, 2014 by Neil Garfield

I was asked a question a few days ago that runs to the heart of the problem for the banks in enforcing false claims for foreclosure and false claims of losses that should really allocated to the investors so that the investor would get the benefits of those loss mitigation payments. This is the guts of the complaints by insurers, investors, guarantors et al against the investment banks — that there was fraud, not breach of contract, because the investment bank never intended to follow the plan of securitization set forth in the prospectus and pooling and servicing agreement. The question asked of me only reached the issue of whether borrowers could claim credit for third party payments to the creditor. But the answer, as you will see, branches much further out than the scope of the question.

If you look at Steinberger in Arizona and recent case decisions in other jurisdictions you will see that if third party payments are received by the creditor, they must be taken into account — meaning the account receivable on their books is reduced by the amount of the payment received. If the account receivable is reduced then it is axiomatic that the account payable from the borrower is correspondingly reduced. Each debt must be taken on its own terms. So if the reduction was caused by a payment from a third party, it is possible that the third party might have a claim against the borrower for having made the payment — but that doesn’t change the fact that the payment was made and received and that the debt to the trust or trust beneficiaries has been reduced or even eliminated.

The Court rejected the argument that the borrower was not an intended third party beneficiary in favor of finding that the creditor could only be paid once on the debt. I am finding that most trial judges agree that if loss-sharing payments were made, including servicer advances (which actually come from the broker dealer to cover up the poor condition of the portfolio), the account is reduced as to that creditor. The court further went on to agree that the “servicer” or whoever made the payment might have an action for unjust enrichment against the borrower — but that is a not a cause of action that is part of the foreclosure or the mortgage. The payment, whether considered volunteer or otherwise, is credited to the account receivable of the creditor and the borrower’s liability is corresponding reduced. In the case of servicer payments, if the creditor’s account is showing the account current because it received the payment that was due, then the creditor cannot claim a default.

A new “loan” is created when a volunteer or contractual payment is received by the creditor trust or trust beneficiaries. This loan arises by operation of law because it is presumed that the payment was not a gift. Thus the party who made that payment probably has a cause of action against the borrower for unjust enrichment, or perhaps contribution, but that claim is decidedly unsecured by a mortgage or deed of trust.

You have to think about the whole default thing the way the actual events played out. The creditor is the trust or the group of trust beneficiaries. They are owed payments as per the prospectus and pooling and servicing agreements. If those payments are current there is no default on the books of creditor. If the balance has been reduced by loss- sharing or insurance payment, the balance due and the accrued interest are correspondingly reduced. And THAT means the notice of default and notice of sale and acceleration are all wrong in terms of the figures they are using. The insurmountable problem that is slowly being recognized by the courts is that the default, from the perspective of the creditor trust or trust beneficiaries is a default under a contract between the trust beneficiaries and the trust.

This is the essential legal problem that the broker dealers (investment banks) caused when they interposed themselves as owners instead of what they were supposed to be — intermediaries, depositories, and agents of the investors (trust beneficiaries). The default of the borrower is irrelevant to whether the trust beneficiaries have suffered a loss due to default in payment from the trust. The borrower never promised that he or she or they would make payment to the trust or the trust beneficiaries — and that is the fundamental flaw in the actual mortgage process that prevailed for more than a dozen years. There would be no flaw if the investment banks had not committed fraud and instead of protecting investors, they diverted the money, ownership of the note and ownership of the mortgage or deed of trust to their own controlled vehicles. If the plan had been followed, the trusts and trust beneficiaries would have direct rights to collect from borrowers and foreclose on their property.

If the investment banks had not intended to divert the money, income, notes and mortgages or deeds of trust from the creditor trust or trust beneficiaries, then there would have no allegations of fraud from the investors, insurers and government guarantee agencies.

If the investment banks had done what was represented in the prospectus and pooling and servicing agreements, then the borrower would have known that the loan was being originated for or on behalf of the trust or beneficiaries and so would the rest of the world have known that. The note and mortgage would have shown, at origination, that the loan was payable to the trust and the mortgage or deed of trust was for the benefit of the trust or trust beneficiaries, as required by TILA and all the compensation earned by people associated with the origination of the loan would have had to have been disclosed (or returned to the borrower for failure to disclose). That would have connected the source of the loan — the trust or trust beneficiaries — to the receipt of the funds (the homeowner borrowers).

Instead, the investment banks hit on a nominee strawman plan where the disclosures were not made and where they could claim that (1) the investment bank was the owner of the debt and (2) the note and mortgage or deed of trust were executed for the benefit of a nominee strawman for the investment bank, who then claimed an insurable interest as owner of the debt. As owner of the debt, the investment banks received loss sharing payments from the FDIC. As agents for the investors those payments should have been applied to the balance owed the investors with a corresponding reduction in the balance due from the borrower —- if the payments were actually made and received and were not hypothetical or speculative. The investment banks did the same thing with the bonds, collecting payments from insurers, counterparties to credit default swaps, and guarantees from government sponsored entities.

When I say nominee or strawman I do not merely mean MERS which would have been entirely unnecessary unless the investment banks had intended to defraud the investors. What I am saying is that even the “lender” for whom MERS was the “nominee” falls into the same trapdoor. That lender was also merely a nominee which means that, as I said 7 years ago, they might just as well have made out the note and mortgage to Donald Duck, a fictitious character.

Since no actual lender was named in the note and mortgage and the terms of repayment were actually far different than what was stated on the borrower’s promissory note (i.e., the terms of the mortgage bond were the ONLY terms applicable to the plan of repayment to the creditor investors), the loan contract (or quasi loan contract, depending upon which jurisdiction you are in) was never completed. Hence the mortgage and note should never have been accepted into the file by the closing agent, much less recorded.

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Filed under: AMGAR, CASES, CORRUPTION, escrow agent, evidence, expert witness, Fannie MAe, foreclosure, foreclosure defenses, foreclosure mill, GARFIELD KELLEY AND WHITE, GTC | Honor, investment banking, Investor, MBS TRUSTEE, MODIFICATION, Mortgage, Neil Garfield Show, Pleading, securities fraud, Servicer, TRUST BENEFICIARIES, trustee | Tagged: and deed of trust, Donald Duck, investment banks, investors, loss mitigation, loss sharing, Mortgage, Pooling and Servicing Agreement, promissory note, Prospectus, third party payments | 61 Comments »

JP Morgan Corners Gold Market — where did they get the money?

Posted on February 3, 2014 by Neil Garfield

Zerohedge.com notes that JP Morgan has cornered the market in gold derivatives. They ask how the CFTC, who supposedly regulates the commodities markets could have let this happen. I ask some deeper questions. If JPM has cornered the market on those derivatives, is this a reflection that they, perhaps in combination with others, have cornered the market on actual gold reserves? Zerohedge.com leaves this question open.

I suggest that this position in derivatives (private contracts that circumvent the actual futures market) is merely a reflection of a much larger position — the actual ownership or right to own gold reserves that could total more than a trillion dollars in gold. And the further question is that if JPM has actually purchased gold or rights to own gold, where did the money come from? And the same question could be asked about other commodities like tin, aluminum and copper where Chase and Goldman Sachs have already been fined for manipulating market prices.

This is the first news corroborating what I have previously reported — that trillions of dollars have been diverted from investors and stolen from homeowners by the major banks, parked off shore, and then laundered through investments in natural resources including precious metals. This diversion occurred as an integral part of the mortgage madness and meltdown. It was intentional and knowing behavior — not bad judgment. It was bad because of what happened to anyone who wasn’t an insider bank (see Thirteen Bankers by Simon Johnson). But to attribute stupidity to a group of bankers who now have more money, property and investments than anyone else in the world is pure folly. What Is stupid about pursuing a strategy that brings a geometric increase in wealth and power? This was no accident.

And the answer is yes, all of this is relevant to foreclosure litigation. The question is directed at the source of funds for JP Morgan, Chase, Goldman Sachs and the other main players on Wall Street. And the answer is that they stole it. In the complicated world of Wall Street finance, the people at the Department of Justice and the SEC and other regulatory agencies, there are scant resources to investigate this threat to the entire financial system, the economy in each of the world marketplaces, and thus to national security for the U.S. And other nations.

It would be naive in the context of current litigation over mortgages and Foreclosures to expect any judge to allow pleading, discovery or trial on evidence that traces these investments backward from gold derivatives to the origination or acquisition of mortgages. Perhaps one of the regulators who read this blog might make some inquiries but there is little hope that they will connect the dots. But it is helpful to know that there is plenty of corroboration for the position that the REMIC Trusts could not have originated or acquired mortgages because they were never funded with the money given to the broker dealers who sold “mortgage bonds” issued by those Trusts with no chance of repayment because the money was never used to fund the trusts.

The unfunded trusts could not originate or acquire the loans because they never had the money. In fact, they never had a trust account. Thus in a case where the Plaintiff is US Bank as trustee is not only wrong because the PSA and their own website says that trustees don’t initiate Foreclosures — that is reserved to the servicers who appear to have the actual powers of a trustee. The real argument is that the trust was never a party to the loan because the trust was never party to a transaction in which any loan was acquired or originated.

Investors and governmental agencies have sued the broker dealers accusing them of fraud (not bad judgment) and mismanagement of money — all of which lawsuits are being settled almost as quickly as they are filed. The issue is not just bad loans and underwriting of bad loans. That would be breach of contract and could not be subject to claims of fraud. The fraud is that the investment banks took the money from investors and then used it for their own purposes. The first step was skimming a large percentage of the investor funds from the top, in addition to fake underwriting fees on the fake issuance of mortgage bonds from an unfunded trust.

And here is where the first step in mortgage transactions and foreclosure litigation reveals itself — compensation that was never disclosed closed to the borrower in violation of he the Truth in lending Act. While most judges consider the 3 year statute of limitations to run absolutely, it will eventually be recognized by the courts that the statute doesn’t start to run until discovery of the undisclosed compensation by an undisclosed party who was a principal player in permeating the loan. This will be a fight but eventually success will visit someone like Barbara Forde in Scottsdale or in one of the cases my firm handles directly or where we provide litigation support.

The reason it is relevant is that by tracing the funds, it can be determined that the actual “lender” was a group of investors who thought they were buying mortgage bonds and who did not know their money had been diverted into the pockets of the broker dealers, and then used to create fictitious transactions that the banks falsely reported as trading profits. In order to do this the broker dealers had to create the illusion of mortgage loans that were industry standard loans and they had to divert the apparent ownership of those loans from the investors through fraudulent paper trails based on the appearance of transactions that in fact never happened. In truth, contrary to their duties under the prospectus and pooling and servicing agreement, the broker dealers created a false “proprietary” trade in which the investment bank was the actual trader on both sides of the transaction.

They booked some of these “trades” as profits from proprietary trading, but the truth is that this was a yield spread premium that falls squarely within the definition of a yield spread premium — for which the investment bank is liable to be named as a party to the closing of the loan with borrowers. As such, the pleading and proof would be directed at the fact that the investment bank was hiding their identity or even their existence along with the fact that their compensation consisted of a yield spread premium that sometimes was greater than the principal amount of the loan. Under federal law under these facts (if proven) and the pleading would establish that the investment bank should be a party to the claim, affirmative defenses or counterclaim of borrowers for “refund” of the undisclosed compensation, treble damages, interest and attorney fees. I might add that common law doctrines that are not vulnerable to defenses of the statute of limitations under TILA or RESPA, could be used to the same effect. See the Steinberger decision.

Lawyers take note. Instead of getting lost in the weeds of the sufficiency of documentation, you could be pursuing a claim that is likely to more than offset the entire loan. I make this suggestion to attorneys and not to pro se litigants who will probably never have the ability to litigate this issue. My firm offers litigation support to those law firms who have competent litigators who can appear in court and argue this position after our research, drafting and scripting of litigation strategies. Once taught and practiced, those firms should no longer require us to provide support except perhaps for our expert witnesses (including myself). For more information on litigation support services offered to attorneys call 850-765-1236 or write to neilfgarfield@hotmail.com.

I conclude with this: it is unlikely that any judge would seriously entertain discharging liability or stop enforcement of a mortgage merely because of a defect in the documentation. These defects should be used — but only as corroboration for a more serious argument. That the attempted enforcement of the documentation is a cover-up of a fraud against the investors and the borrower; this requires artful litigating to show the judge that your client has a legitimate claim that offsets the alleged debt to the investors who are seeking damage awards not from the borrowers but from the investment bankers. As long as the Judge believes that the right lender and the right borrower are in his court, the judge is not likely to make rulings that would create additional uncertainties in a market that is already unstable.

I have always maintained that a pincer action by investor lenders and homeowner borrowers would bring home the point. The real culprits have been left out of foreclosure litigation. Tying investment banks to the loan closing would enable the homeowner to show that the intermediaries are in fact inserting themselves as parties in interest — to the detriment of the real parties. The investors are bringing their claims against the broker dealers. Now it is time for the borrowers to do their part. This could lead to global settlements in which borrowers and investors are able to mitigate (or even eliminate) their losses.

Filed under: CDO, CORRUPTION, evidence, expert witness, Fannie MAe, foreclosure, foreclosure defenses, foreclosure mill, GARFIELD KELLEY AND WHITE, GTC | Honor, investment banking, Investor, MBS TRUSTEE, MODIFICATION, Mortgage, Motions, Pleading, securities fraud, Servicer, TRUST BENEFICIARIES, trustee | Tagged: broker dealers, gold, gold derivatives, Goldman Sachs, investment banks, JP Morgan, REAL PARTY IN INTEREST, yield spread premium | 4 Comments »

Why Investors (Pension Funds) Should Link With Borrowers in Suits Against Investment Banks

Posted on January 18, 2013 by Neil Garfield

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Editor’s Analysis and Strategic Tips: At a glance, anyone should be able to see that the issues upon which investors are suing the investment banks over bogus mortgage bonds are virtually identical to the issues present in every foreclosure case. It is not hard to see why: they are both the only real parties in interest, they were both told the same lies, and they were both victims of a scheme that was common to investors and borrowers alike in which title, money and insurance were intentionally diverted from the streams of money pouring through Wall Street. Both are injured parties resulting from the scheme and both should be compensated for the fraud at the bottom, in the middle and on top of the chain of lies.

And now they share one more thing adding insult to injury — they both are filing suits that are going nowhere, except in sporadic circumstances. It’s true that the tide is turning in many states, most recently Georgia, but the fact is that most foreclosures are “completed” using false documents, false demands for money and false credit bids.

In the article below it is revealed that Judges are ruling that investors can’t simply say they were defrauded by bogus mortgage bonds, but rather they must file a separate lawsuit on each loan that did not measure up to industry standards at the time of the alleged underwriting. This is interesting because now if the investors proceed, a borrower can look up to see whether his loan is being targeted by the investors, what they are saying about it, and whether there is discovery that can be shared between investor and borrower.

As long as 5 years ago I suggested that the only way the mortgage mess could truly be cleaned up is if the borrowers and lenders (investors) put their hands together and went after the investment banks and all the tentacles spreading out from those institutions now of ill repute.

A pincer action between investors coming from one end alleging they are the real parties in interest and the borrowers coming from another direction could and I think most likely would be successful.

The “curious” paragraphs that require 25% of the investors (who don’t know each other because the investment bank won’t give them names) to enforce put-backs reveals that the investment banks never really intended to do anything about bad loans but rather intended to screw the investors.

But if investors and borrowers complained that the lending was not actually performed by the originators who were mere nominees for undisclosed parties and that the note and mortgage were fatally defective for lack of consideration, ANY investor could join that suit because it wouldn’t be about put-backs, it would be about fraud, theft and PONZI schemes.

And if the investors alleged that the money was put into a general fund instead of a trust fund for the REMIC they thought they were buying into, then the investors would not be bound by the constraints of the REMIC documents because the investment banks ignored those entities when they were moving the money around, doing and moving the documents and closing and selling paper that was fatally defective.

At that point both the lender and the borrower would be complaining that the mortgage documents were not real and they could directly create a clearinghouse where new mortgages were established based upon true fair market values and BOTH could still go after the investment banks for consequential and punitive or treble damages.

This would of course raise the myth or test the myth that the mega banks are too big to fail. I think that is simply not true and never was true. In fact, it is the major banks who are refusing to execute their promise to lend and revive the economy. The money siphoned out of the economy properly should be paid to the lenders (investors) and thus reduce the balance due on the lender’s receivables.

Any accounting from the MASTER SERVICER would show that the bond receivable, which ought to be roughly equal to the notes receivable, is deficient, with the gap representing money diverted from the money chain by the investment banks contrary to the express terms of the offering made to the investors as stated in the prospectus and PSA.

By simply comparing notes with the borrowers, the investors could have iron clad case. Unsecured loans that were toxic and fraudulent from the beginning could be converted to secured loans that are conventional and worth every penny written on the documents that describe them — like the note, mortgage etc. The investors should be mitigating damages instead of letting investment banks bang them over the head repeatedly with compounding lies. The mitigation of those damages should reduce the loan balances to what they should have been in the first place without appraisal fraud.

As it stands now every mortgage transaction is suspect as to validity, enforceability and security. Getting the investors and borrowers together could change all that, and provide substantial fiscal stimulus to the economy without the government spending a dime — in fact, quite the opposite, the government could recover hundreds of billions of dollars paid in guarantees on the bogus bonds and loans.

Every day we wait, the damages to our economy the corruption of our title records and the confidence in our economy as presenting a fair playing field is compounded.

Dear Pension Fund Manager: I know you think of the borrowers as ants living in a remote world, but many of those “Ants” are the same people expecting pension benefits that will need to be reduced because of lack of money caused by your losses to the investment banks who still have the money.

Isn’t it time you got rid of your bias against homeowners and borrowers and realized that it is in your self interest to treat the borrowers, especially those who are fighting in the court system, with respect and dignity.

If you don’t these pensioners are going to come after you for not doing all you could to recover the funding for the pension fund you manage. You are being set up by the investment banks and they are in the process of throwing you under the bus without you realizing it.

From http://www.nakedcapitalism.com

New Ruling on Mortgage Putbacks a Potential Huge Win for Banks

Even though, for most people, the housing crisis is a thing of the past, the fight over who should bear the cost of sloppy and openly fraudulent mortgage origination and securities sales continues to grind through the courts.

We’ve written now and again about mortgage putback cases, which are also called representation and warranty, or “rep and warranty” litigation. Investors in mortgage-backed securities were not quite as dumb as the crisis aftermath had made them look. The sponsors of the securitizations made promises in the offering documents (called representations and warranties) about the quality of the loans. It turns out they lied.

Normally, when a loan is found to be worse than the sponsors promised, the remedy is a putback. The originator is required to take the bad loan back and replace it, either with cash or buy replacing it with a loan that was of the quality that the investors were promised. However, the mortgage securitizations put hurdles in front of the investors: it took a minimum level of investors (usually 25%) to demand putbacks and it was hard for any investor to know who else had bought a particular deal. Even then, the trustee (who was the party who was responsible for putting back the loan) almost always ignored and fought investor putback requests. They have ongoing relationships with the sponsors, so they don’t want to ruffle big meal tickets, plus the margins for acting as a mortgage securitization trustee are thin, so they don’t lift a finger unless they absolutely have to.

Investors have thus been going to court to enforce their putback rights. We haven’t been enthusiastic about these suits. It isn’t that the investors weren’t harmed or that the banks really didn’t lie about their wares. But we have always been of the view that ultimately, if these suits get anywhere, the plaintiff would have to show on a loan by loan basis that the default was due not to normal underwriting losses (as in death, disability, job loss) but specifically because the loan was bad (as the loan was so badly underwritten that default was highly likely). That is, the plaintiffs don’t just have to show that their contracts were breached (the loans were worse than they were supposed to be) but that the breach was what caused damages.

What makes these cases potential duds, or at best unlikely to produce damages within hailing distance of investor losses is the fact that they will likely require a loan by loan fight. Imagine the cost of each side doing discovery on a loan, and telling its version of the story as to why the borrower defaulted. Multiply that by thousands of loans and the cost of proving how much you are owed becomes very costly relative to what the plaintiff might recoup. That’s why the people we know who have experience in rep and warranty litigation have expected these cases to settle for comparatively small percentages of likely losses suffered (now having said that, in an important ruling last year in Syncora v. EMC, the judge agreed that misrepresentations about loan quality would increase the risk of an insured loan pools, meaning Syncora would not need to get into a huge analysis of how many loans defaulted and why. But that ruling was based on insurance statues, so that doesn’t help mortgage bond investors).

The cases that are furthest along are those involved monoline insurers, since they had stronger putback rights in their contracts than bond investors. In MBIA v Countrywide, the judge agreed to allow MBIA to construct a sample of the loans (the two sides will now fight over what is an adequate sample) but even within that sample, we’d expect both sides to do a loan level analysis, which would probably include loan level discovery. Ugh.

Alison Frankel of Reuters points to a new ruling which could make this investor-unfriendly picture even uglier. A new ruling has told bond investors to file separate cases on each loan they think was misrepresented. No, I am not making that up. From her post:

I did a double take Wednesday, when I noticed a pair of new suits by Lehman Brothers Holdings in federal court in Colorado. The complaints, which are almost identical, claim that the mortgage originator Universal American Mortgage breached representations and warranties about loans it sold to Lehman, which subsequently suffered losses as a result of those breaches. But here’s the thing: Each suit addresses only one supposedly deficient loan! Lehman’s lawyers at Akerman Senterfitt allege that Lehman sustained about $100,000 in damages on one of the loans and $120,000 on the other — numbers that are light years apart from the multibillion-dollar claims we’ve seen from groups of mortgage-backed securities investors who band together to assert contract breaches in thousands of loans at a time.

The Lehman complaints each also contained a curious paragraph, noting that the claims at issue were previously asserted as counts in an eight-loan put-back case Lehman was litigating in federal court in Miami. The judge in that case, Lehman said, had decided after a pretrial conference last week that “each loan must be filed separately, rather than joined within one action.”

That notation sent me to the docket in the Florida case, and to the order entered by U.S. District Judge James King on Jan. 9. It’s true: King ruled that every allegedly deficient loan has to be addressed in its own suit, not in a block case. “The lack of commonality among the various factual circumstances pertinent to each of the eight individual loans makes them all but impossible to be adjudicated together,” King wrote. “That lack of commonality flows from, among other things, the facts that each of these loans was made at a different time, to different borrowers, in different locations involving different purchases of different real properties; most fundamentally, each loan requires separate proof as to whether a breach occurred, what damages, if any, flowed from any such breach, and what the amounts of any such damages are.”

To add insult to injury, the eight loan case was far enough along that it was scheduled to go to trial in March. And even though this conclusion may seem barmy to some readers, it may have precedential value since few investor putback cases have gotten very far:
Universal American’s lawyer, Philip Stein of Bilzin Sumberg Baena Price & Axelrod, told me Wednesday that if other judges

following King’s lead, the ruling could have profound implications for put-back litigation, since it significantly increases the cost of asserting breach-of-contract claims. (Stein also blogged about the order at Bilzin’s Mortgage Crisis Watch site.) Few put-back cases, Stein said, have reached final pretrial conferences, so few judges have considered the kind of commonality challenges he raised back in 2011 in Universal American’smotion to dismiss the Lehman suit. The judge denied the dismissal motion in order to permit discovery, Stein said, but was receptive when Universal American revived its argument at a pretrial hearing on Jan. 4.

If this ruling does establish what Frankel correctly calls “a new paradigm”, you’d need your head examined to ever invest in anything other than government guaranteed mortgage bonds. And of more immediate import, investors who had hoped they would recover some of their losses will find, yet again, that they’ve spent a lot on lawyers to find out that they don’t have much protection under the law.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: banks, borrowers, Custodial funds, fraud, investment banks, investors, Master Servicer, REMIC, trust, trust account | 297 Comments »

The Documents Fannie and Freddie Never Received

Posted on June 22, 2012 by Neil Garfield

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Editor’s Comment:

Go to the link below which will take you to the article posted on StopForeclosureFraud where you will see a list of documents (just like the Pooling and Servicing Agreements that everyone ignored) that should have been received by Freddie, Fannie, Ginnie, FHA et al. Since we now know that the securitization chain of documents was nonexistent until the dealers were called upon to fabricate them for cases in litigation, we know that the absolute minimum requirements for Fannie and Freddie approval were absent.

This means, contrary to the assertions of 99% of the securitization “auditors”, and contrary to the appearance of a loan on a Fannie or Freddie website, that the loan was never delivered to those agencies nor any of the documents required. Just as the REMICs never received the loans, Freddie never received the loans. And since Freddie never received the loans it became the master trustee of “trusts” that never received the loans and were therefore empty.

All this means is that we have to go back to the first day of the alleged transaction. Investor lenders, operating through dealers, (investment banks) were advancing money for the “purchase” of residential mortgage loans. The money was advanced to the closing agent who paid off the party claiming to be the prior mortgagee, giving the balance to the seller of the property or to the borrower (if the transaction was supposedly a refinance). The nightmare for the banks is that if we go back to that first day the parties named as “lender”, “beneficiary”, “mortgagee” are the only parties of record with an apparent recorded interest in the property. Their problem is that contrary to conventional foreclosure practice, those entities (many of which do not exist anymore) never funded nor even handled the money as a conduit for the loan. Thus the note and mortgage are fatally defective and cannot be enforced.

This would mean that the loan never made it into any pool. That would mean that all of the deals made by the dealers (investment banks) based on the existence of that loan would fall apart leaving them with an enormous liability since they had sold the same deal dozens of times. And that is the sole reason why the bailout, insurance, credit default swaps, guarantees and other credit enhancements were so large. The banks used their ability to control the people with their hands on the levers of power within our government to pay for the malfeasance of the banks that have wrecked our economy and our society.

As Iceland has already proven and Europe is in the process of proving, the only answer is to take the stolen money back from the banks, put it back into the private sector, and put it back into government budgets.

Freddie Mac Designated Counsel/Trustee For Foreclosures and Bankruptcies 2012

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Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: bailout, beneficiary, credit default swaps, credit enhancements, Fannie, FHA, Freddie, Ginnie, guarantees, ICELAND, insurance, investment banks, lender, mortgagee, Pooling and Servicing Agreement, securitization, StopForeclosureFraud | 30 Comments »

It’s Down to Banks vs Society

Posted on June 15, 2012 by Neil Garfield

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We are trying to rescue the creditors and restart the world that is dominated by the creditors. We have to rescue the debtors instead before we are going to see the end of this process. — Economist Steve Keen

Bankers Are Willing to Let Society Crash In Order to Make More Money

Editor’s Comment:

I was reminded last night of a comment from a former bond trader and mortgage bundler that the conference calls are gleeful about the collapse of economies and societies around the world. Wall Street will profit greatly on both the down side and then later when asset prices go so low that housing falls under distressed housing programs and 125% loans become available in bulk. They think this is all just swell. I don’t.

The obvious intent on the part of the mega banks and servicers is to bring everything down with a crash using every means possible. When you look at the offers state and federal government programs have offered for the banks to modify, when you see the amount of money poured into these banks by our federal government in order to prop them up, you cannot conclude otherwise: they want our society to end up closed down not only by foreclosure but in any other way possible. They withhold credit from everyone except the insider’s club.

So now it is up to us. Either we take the banks apart or they will take us apart. I had a recent look at many modification proposals. In the batch I saw, the average offer from the homeowner was to accept a loan 20%-30% higher than fair market value and 50%-75% higher than foreclosure is producing. It seems we are addicted to the belief that this can’t be true because no reasonable person would act like that. But the answer is that the system is rigged so that the intermediaries (the megabanks) control what the investors and homeowners see and hear, they make far more money on foreclosures than they do on modifications, and they make far money on all the “bets” about the failure of the loan by foreclosing and not modifying.

The reason for the unreasonable behavior, as it appears, is that it is perfectly reasonable in a lending environment turned on its head — where the object was to either fund a loan that was sure to fail, or keep a string attached that would declare it as part of a failed “pool” that would trigger insurance and swaps payments.Steve Keen: Why 2012 Is Shaping Up To Be A Particularly Ugly Year

At the high level, our global economic plight is quite simple to understand says noted Australian deflationist Steve Keen.

Banks began lending money at a faster rate than the global economy grew, and we’re now at the turning point where we simply have run out of new borrowers for the ever-growing debt the system has become addicted to.

Once borrowers start eschewing rather than seeking debt, asset prices begin to fall — which in turn makes these same people want to liquidate their holdings, which puts further downward pressure on asset prices:

The reason that we have this trauma for the asset markets is because of this whole relationship that rising debt has to the level of asset market. If you think about the best example is the demand for housing, where does it come from? It comes from new mortgages. Therefore, if you want to sustain he current price level of houses, you have to have a constant flow of new mortgages. If you want the prices to rise, you need the flow of mortgages to also be rising.

Therefore, there is a correlation between accelerating and rising asset markets. That correlation applies very directly to housing. You look at the 20-year period of the market relationship from 1990 to now; the correlation of accelerating mortgage debt with changing house prices is 0.8. It is a very high correlation.

Now, that means that when there is a period where private debt is accelerating you are generally going to see rising asset markets, which of course is what we had up to 2000 for the stock market and of course 2006 for the housing market. Now that we have decelerating debt — so debt is slowing down more rapidly at this time rather than accelerating — that is going to mean falling asset markets.

Because we have such a huge overhang of debt, that process of debt decelerating downwards is more likely to rule most of the time. We will therefore find the asset markets traumatizing on the way down — which of course encourages people to get out of debt. Therefore, it is a positive feedback process on the way up and it is a positive feedback process on the way down.

He sees all of the major countries of the world grappling with deflation now, and in many cases, focusing their efforts in exactly the wrong direction to address the root cause:

Europe is imploding under its own volition and I think the Euro is probably going to collapse at some stage or contract to being a Northern Euro rather than the whole of Euro. We will probably see every government of Europe be overthrown and quite possibly have a return to fascist governments. It came very close to that in Greece with fascists getting five percent of the vote up from zero. So political turmoil in Europe and that seems to be Europe’s fate.

I can see England going into a credit crunch year, because if you think America’s debt is scary, you have not seen England’s level of debt. America has a maximum ratio of private debt to GDP adjusted over 300%; England’s is 450%. America’s financial sector debt was 120% of GDP, England’s is 250%. It is the hot money capital of the western world.

And now that we are finally seeing decelerating debt over there plus the government running on an austerity program at the same time, which means there are two factors pulling on demand out of that economy at once. I think there will be a credit crunch in England, so that is going to take place as well.

America is still caught in the deleveraging process. It tried to get out, it seemed to be working for a short while, and the government stimulus seemed to certainly help. Now, that they are going back to reducing that stimulus, they are pulling up the one thing that was keeping the demand up in the American economy and it is heading back down again. We are now seeing the assets market crashing once more. That should cause a return to decelerating debt — for a while you were accelerating very rapidly and that’s what gave you a boost in employment — so you are falling back down again.

Australia is running out of steam because it got through the financial crisis by literally kicking the can down the road by restarting the housing bubble with a policy I call the first-time vendors boost. Where they gave first time buyers a larger amount of money from the government and they handed over times five or ten to the people they bought the house off from the leverage they got from the banking sector. Therefore, that finally ran out for them.

China got through the crisis with an enormous stimulus package. I think in that case it is increasing the money supply by 28% in one year. That is setting off a huge property bubble, which from what I have heard from colleagues of mine is also ending.

Therefore, it is a particularly ugly year for the global economy and as you say, we are still trying to get business back to usual. We are trying to rescue the creditors and restart the world that is dominated by the creditors. We have to rescue the debtors instead before we are going to see the end of this process.

In order to successfully emerge on the other side of this this painful period with a more sustainable system, he believes the moral hazard of bailing out the banks is going to have end:

[The banks] have to suffer and suffer badly. They will have to suffer in such a way that in a decade they will be scared in order to never behave in this way again. You have to reduce the financial sector to about one third of its current size and we have to also ultimately set up financial institutions and financial instruments in such a way that it is no longer desirable from a public point of view to borrow and gamble in rising assets processes.

The real mistake we made was to let this gambling happen as it has so many times in the past, however, we let it go on for far longer than we have ever let it go on for before. Therefore, we have a far greater financial parasite and a far greater crisis.

And he offers an unconventional proposal for how this can be achieved:

I think the mistake [central banks] are going to make is to continue honoring debts that should never have been created in the first place. We really know that that the subprime lending was totally irresponsible lending. When it comes to saying “who is responsible for bad debt?” you have to really blame the lender rather than the borrower, because lenders have far greater resources to work out whether or not the borrower can actually afford the debt they are putting out there.

They were creating debt just because it was a way of getting fees, short-term profit, and they then sold the debt onto unsuspecting members of the public as well and securitized their way out of trouble. They ended up giving the hot potato to the public. So, you should not be honoring that debt, you should be abolishing it. But of course they have actually packaged a lot of that debt and sold it to the public as well, you cannot just abolish it, because you then would penalize people who actually thought they were being responsible in saving and buying assets.

Therefore, I am talking in favor of what I call a modern debt jubilee or quantitative easing for the public, where the central banks would create ‘central bank money’ (we cannot destroy or abolish the debt, which would also destroy the incomes of the people who own the bonds the banks have sold). We have to create the state money and give it to the public, but on condition that if you have any debt you have to pay your debt down — no choice. Therefore, if you have debt, you can reduce the debt level, but if you do not have debt, you get a cash injection.

Of course, this would then feed into the financial sector would have to reduce the value of the debts that it currently owns, which means income from debt instruments would also fall. So, people who had bought bonds for their retirement and so on would find that their income would go down, but on the other hand, they would be compensated by a cash injection.

The one part of the system that would be reduced in size is the financial sector itself. That is the part we have to reduce and we have to make smaller. That is the one that I am putting forward and I think there is a very little chance of implementing it in America for the next few years not all my home country [Australia] because we still think we are doing brilliantly and all that. But, I think at some stage in Europe, and possibly in a very short time frame, that idea might be considered.

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Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: Ace Securities Home Equity Loan Trust, AIG, Arizona Department of HOusing, bankruptcy, credit default swaps, DEUTSCHE BANK, Fannie, Federal reserve, Find the Fraud, forced placed insurance, Freddie, HAMP, homeowners, investment banks, investors, Judge Williams, Master Servicer, MBIA, MERS, Michael Olenick, Michael Trailor, Naked Capitalism, Ocwen, pension fund, Ponzi scheme, REMIC, servicers, State Agencies, subservicer, Tim Geithner | 38 Comments »

Fine Print: The Real Story on the “$25 Billion” Multistate Settlement

Posted on June 13, 2012 by Neil Garfield

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One of the things I heard from a high ranking official in state government is that only a tiny fraction of the “settlement” is translating into actual dollars from the banks to anyone. In Arizona the $1.3 billion is subject to an “earn-down” as it was described to me and the net amount turned out to be $97 million and then on the website for the attorney general of the state, the $97 million became $47 million.

So I brought up my calculator and discovered that out of the “settlement” the banks were paying themselves around $1.2 billion out of the $1.3 billion (some say it is $1.6 billion, but the net left for the state remains unchanged at $97 million) and that some of the balance of the money is “unaccounted for.” By the way this has NOTHING to do with the Arizona Department of Housing, which is as close to non-political as you can get in any government.

So in plain language, the banks are taking money from their left pocket and putting int heir right pocket and saying it was a deal. This sounds a lot like the fake claims of securitization and assignment of debt on housing, student loans, credit cards, auto loans etc. In the end, no money will move except a tiny percentage because since the banks are simply paying themselves out of their own money how bad can the accounting be for them?

In Arizona, the legislature decided, as per the terms of the “settlement” to take the money and use it as part of general operating funds leaving distressed homeowners with nothing. So now there is something of an uproar in Arizona. Here is a $1.3 billion settlement that could have reversed a downward economic spiral for the state that will be felt for decades, and we end up with only 7% of that figure and then at least half, if not all of that is being taken for uses other than homeowner relief that is essential for economic recovery.

My guess is that they will say they are stopping the move to use the homeowner relief funds for perks to corporate donors and then quietly go out and do it anyway. What is your guess?

——————————————–

By Howard Fischer, Capitol Media Services

State officials agreed Tuesday to delay the transfer of $50 million of disputed mortgage settlement funds, at least for the time being.

Assistant Attorney General David Weinzweig made the offer during a hearing where challengers were hoping to get a court order blocking the move while its legality is being decided by Maricopa County Superior Court Judge Mark Brain. Attorney Tim Hogan of the Arizona Center for Law in the Public Interest, who represents those opposed to the transfer, readily agreed.

“You don’t want to rush the judge,” said Hogan, whose clients are people he believes would be helped by the funds.

“You want him to take his time on important questions like this,” Hogan said. “And so it’s reasonable to agree not to transfer the funds for a certain period of time to give the judge the opportunity to do that.”

The move sets the stage for a hearing in August on the merits of the issue.

Weinzweig told Brain he believes the transfer, ordered by state lawmakers earlier this year, is legal. Anyway, he said, Hogan’s clients have no legal standing to challenge what the Legislature did.

The fight surrounds a $26 billion nationwide settlement with five major lenders who were accused of mortgage fraud.

Arizona’s share is about $1.6 billion, with virtually all of that earmarked for direct aid to those who are “under water” on their mortgages — owing more than their property is worth — or have already been forced out of their homes.

But the deal also provided $97 million directly to the state Attorney General’s Office. The terms of that pact said the cash was supposed to help others with mortgage problems as well as investigate and prosecute fraud.

Lawmakers, however, seized on language which also said the money can be used to compensate the state for the effects of the lenders’ actions. They said the result of the mortgage crisis was lower state revenues, giving them permission to take $50 million from the settlement to balance the budget for the fiscal year that begins July 1.

Hogan’s suit is based on his contention that the settlement terms put the entire $97 million in trust and makes Attorney General Tom Horne, who was authorized by state law to sign the deal, responsible for ensuring the cash is properly spent.

Horne urged lawmakers not to take the funds. But once the budget deal was done, he went along and took the position that, regardless of whether the cash could have been better spent elsewhere, the transfer demand is legal.

Whatever Brain rules is likely to be appealed.

The challenge was brought on behalf of two people who would benefit by the state having more money to help homeowners avoid foreclosure. The lawsuit said both are currently “at risk” of losing their homes.

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Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: Ace Securities Home Equity Loan Trust, AIG, Arizona Department of HOusing, bankruptcy, credit default swaps, DEUTSCHE BANK, Fannie, Federal reserve, Find the Fraud, forced placed insurance, Freddie, HAMP, homeowners, horne, investment banks, investors, Judge Williams, Master Servicer, MBIA, MERS, Michael Olenick, Michael Trailor, Naked Capitalism, Ocwen, pension fund, Ponzi scheme, REMIC, servicers, State Agencies, subservicer, Tim Geithner | 29 Comments »

State Programs with Real Money Going Unused

Posted on June 13, 2012 by Neil Garfield

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Millions for Principal Reduction and Moving Expenses and No Applicants

Editor’s Comment:

I had the pleasure of listening last night to Michael Trailor, the Director of the Arizona Department of Housing. It was like a breath of fresh air. He was a home builder for decades and when the market crashed he went into this obscure post of this obscure state agency that turns out to have its counterparts in many if not all states. Each of these agencies has received money and authority to help homeowners and they are willing to pay down principal reductions, buy the loans and then modify and pay for moving expenses in short sales and other events.

Trailor is a plain-speaking non-politician who tells it like it is. His agency has programs based upon the premise that principal reduction is the only thing that works and he has working relationships with some small banks where his agency literally pays the principal down while the Bank shares in that loss. The small banks see the sense in it. He can’t get cooperation from the big banks and servicers.

In the meeting at Darrell Blomberg’s Tuesday Strategist presentation (every week at Macayo’s restaurant in downtown Phoenix), we heard straight talk and we heard about a number of programs that I had advocated before Trailor became director. My suggestions fell on deaf ears. Trailor’s programs are of the same variety and creativity with the objective of saving the Arizona economy from destruction.

He reported that three states got together under the same program to make the offer of sharing the reduction of principal because the banks said that Arizona was not big enough on its own to motivate the banks to participate in the program. So he got three states — Arizona, California and Nevada. The banks did the old familiar two-step with him and his counterparts in the other states and essentially refused to pparticipate. Every borrower knows that two-step by heart.

I made some suggestions for programs that could be introduced in bankruptcy court, where the power of the Banks is much less. Right now if they don’t want to modify the loan, they can’t be forced. If they don’t want to SELL the loan and then modify it as the beneficiary or mortgagee, the mega bank can and does say no (while the small bank can and does say yes).

That’s right. His agency said they would buy the loan from the bank for 100 cents on the dollar, and then modify the loan the principal and payments to something the borrower could afford and that would not lead to future foreclosures (the fate of practically all modifications). The mega banks killed the idea. Don’t you wonder why banks would contrary to the interest of a ‘lender” who can minimize their losses with government money that has already been allocated but is not yet spent?

This is exactly what I predicted back in 2008. The small banks agree because it is the smart thing to do and THEY are actually owed the money. The mega banks refuse to go along with the deal because hanging on the now invisible and non-existent trunk of an existing debt-tree are hundreds of branches of swaps, insurance and credit enhancements upon which Wall Street has made and is continuing to make billions of dollars in “trading profits” at the expense of the investors and to the detriment of the homeowners.

In other words, they sold the loan multiple times — up to 40 times as I read the data. So hanging on your $200,000 loan could be as much as $8 MILLION in derivatives, swaps etc. That could mean $8 million in claims on the proceeds of sale of the obligation or note or satisfaction of the note or obligation.

Here is my suggestion for those homeowners’ attorneys that have started a bankruptcy proceeding. Where the so-called creditor has sent out a notice of sale and has filed a motion to lift the automatic stay, apply for assistance from the Arizona Department of Housing or whatever the equivalent is in your state. If the agency agrees to assist in refinancing or buying the loan so the homeowner can stay and pay, then the bank would need to explain the basis on which they are responding negatively. After all they are being offered 100 cents on the dollar — why isn’t that enough?

Make sure you notify the Trustee and Court of the pending application made to the agency and don’t use it in a silly fashion promising things that the agency will not corroborate.

I believe that Trailor’s agency and his counterparts would respond with some program that would essentially be an offer to the supposed creditor — provided that the true creditor steps forward and can prove that they are the actual party to whom the money from the homeowner’s obligation is owed. Darrell and I are starting talks with Trailor’s agency to get specific programs that will work in bankruptcy court and maybe other situations.

Once the Notice of Sale is sent, the “creditor” has committed itself to selling. How can they turn around and say no when they are being offered the full amount? In that court, once the “lender” has committed to selling the property they can hardly say they don’t want to sell the loan — especially if they are receiving 100 cents on the dollar. The offer would be accepted by the Trustee, I am fairly certain, and the Judge since there really is no choice.

Now here is where the fun begins. The Judge would agree as would the U.S. Trustee that only the party to whom the money is owed can get the money. Some of you might recall my frequent diatribes about who can submit a credit bid — only the actual creditor to whom the original loan is now owed or an authorized representative who submits the bid on behalf of THAT creditor.

So assuming the Trustee and Judge agree that the “creditor” who filed the Motion to Lift Stay MUST sell the loan or release it upon receiving full payment, then they are stuck with coming up with the real creditor, which is going to be impossible in many cases, difficult in virtually all other cases. Trailor is sitting on hundreds of millions of dollars to help homeowners and he can’t use it because nobody will play ball under circumstances that he “naively” thought would be a no-brainer.

For those versed in bankruptcy you know the rest. The “lender” must admit that it is not the lender, that is has no authority to represent the creditor, that it doesn’t know who the creditor is or even if one still exists. The mortgage can be attacked as not being a perfected lien on the property and the obligation is wiped out or reduced by the final order entered in the bankruptcy court.

Now the banks and servicers are going to fight this one tooth and nail because while the loan might be $200,000, there is an average of around $4 million in derivatives and exotic credit enhancements hanging on this loan. If it is paid off, then all accounts must settle. There are going to be gains and losses, but the net effect might well be that the bank “Sold” the loan 20 times. And the best part of it is that you don’t need t prove the theft. If will simply emerge from the failure of the “lender” to conform with the order of the court approving the deal.

This is a classic case of the scam used in the “The Producers” which has been done on Broadway and movies. You sell 10,000% of a show you know MUST fail. They select “Springtime for Hitler” right after World War II and expect it to crash. After all it is musical comedy. But the show is a spectacular success. So whereas the news of the show’s closing would have sent investors to their accountants to write it off for tax purposes, now they were all clamoring for an accounting for their share of the profits. Since the producers had sold the show 100 times over it was impossible to pay the investors and they went to jail.

THAT is the problem here. It is only if the show closes with a foreclosure that the investors will not ask for the accounting. If the show succeeds (the loan is paid off) then all the investors will want their share of the payments that are due — unless they had the misfortune of taking the wrong side of a “bet” that the loan would fail. Not many investors did that. But the investment banks that sold the show (the loan) many times over used those bets as a way of selling the show over and over again.

If I’m lying I’m dying. That is what is happening and when people realize that as homeowners they are sitting on leverage worth 20 times their loan and they use it against the banks and servicers, they will get some very nice results. Agencies like Arizona’s Department of Housing can save the day like the cavalry just by making the offer and getting a judge to enforce it and watch in merriment how the “lenders” insist that they don’t want the payment and they can’t be forced to take it. That is what happens when you turn the conventional and reasonable lending model on its head.

So now the banks and servicers must come up with a whole new set of fabricated, forged and fraudulent documents in which the investors assigned their interest in the obligation or note or mortgage to some other entity that is now the “creditor” — but the question that will be asked by every Trustee and Judge in bankruptcy court “who paid for this, how much did they pay, and how do we know a transaction actually happened.” That is the problem with a VIRTUAL TRANSACTION. At some point, like every PONZI scheme, the house of cards falls down.

Check with Arizona Department of Housing

Of course if you are not in Arizona check with the equivalent agency in your state. Chances are they have hundreds of millions of dollars and no place to spend it for homeowners because the banks won’t agree to no-brainer solutions that any bank can and does accept if they were playing the “Securitization game.” Don’t expect the agency to march into court and save the day. The agency is not going to litigate your case for you. But they probably will give you plenty of support and encouragement and offers of real money to end this nightmare of foreclosures. You must do the work, fill out applications and get the process underway before you can go to the court with a motion that says we have a settlement vehicle pending with a state agency and you can prove it is true.

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How the Servicers and Investment Banks Cheat Investors and Homeowners

Posted on June 12, 2012 by Neil Garfield

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Master Servicers and Subservicers Maintain Fictitious Obligations

Editor’s Comment:

This article really is about why discovery and access to the information held by the Master Servicer and subservicer, investment bank and Trustee for the REMIC (“Trust”) is so important. Without an actual accounting, you could be paying on a debt that does not exist or has been extinguished in bankruptcy because it was unsecured. In fact, if it was extinguished in bankruptcy, giving them the house or payment might even be improper. Pressing on the points made in this article in order to get full rights in discovery (interrogatories, admissions and production) will yield the most beneficial results.

Michael Olenick (creator of FindtheFraud) on Naked Capitalism gets a lot of things right in the article below. The most right is that servicers are lying and cheating investors in addition to cheating homeowners.

The subservicer is the one the public knows. They are the ones that collect payments from the “borrower” who is the homeowner. In reality, they have no right to collect anything from the homeowner because they were appointed as servicer by a party who is not a creditor and has no authority to act as agent for the creditor. They COULD have had that authority if the securitization chain was real, but it isn’t.

Then you have the Master Servicers who are and should be called the Master of Ceremonies. But the Master Servicer is basically a controlled entity of the investment bank, which is why everyone is so pissed — these banks are making money and getting credit while the rest of us can’t operate businesses, can’t get a job, and can’t get credit for small and medium sized businesses.

Cheating at the subservicer level, even if they were authorized to take payments, starts with the fees they charge against the account, especially if it becomes (delinquent” or in “default” or “Nonperforming.” At the same time they are telling the investors that the loan is a performing loan and they are making payments somewhere in the direction of the investors (we don’t actually know how much of that payment actually gets received by investors), they are also declaring defaults and initiating a foreclosure.

What they are not reporting is that they don’t have the paperwork on the loan, and that the value of the portfolio is either simply over-stated, which is bad enough, or that the portfolio is worthless, which of course is worse. Meanwhile the pension fund managers do not realize that they are sitting on assets that may well have a negative value and if they don’t handle the situation properly, they might be assessed for the negative value.

It gets even worse. Since the money and the loans were not handled, paid or otherwise organized in the manner provided in the pooling and servicing agreement and prospectus, the SPV (“Trust”) does not exist and has no assets in it — but it might have some teeth that could bite the hand that fed the banks. If the REMIC was not created and the trust was not created or funded, then the investors who in fact DID put up money are in a common law general partnership. And since the Credit Default Swaps were traded using the name of entities that identified groups of investors, the investors might be hit with an assessment to cover a loss that the “pool” can’t cover because they only have a general partnership created under common law. Their intention to enter into a deal where there was (a) preferential tax status (REMIC) and (b) limited liability would both fall apart. And that is exactly what happened.

The flip side is that the credit default swaps, insurance, credit enhancements, and so forth could have and in most cases did produce a surplus, which the banks claimed as solely their own, but which in fact should have at least been allocated to the investors up to the point of the liability to them (i.e., the money taken from them by the investment bank).

AND THAT is why borrowers should be very interested in having the investors get their money back from the trading, wheeling and dealing made with the use of the investors’ money. Think about it. The investors gave up their money for funding mortgages and yours was one of the mortgages funded. But the vehicle that was used was not a simple one. The money taken from the investors was owed by the REMIC in whose name the trading in the secret derivative market occurred.

Now think a little bit more. If the investors get their rightful share of the money made from the swaps and insurance and credit enhancements, then the liability is satisfied — i.e., the investor got their money back with interest just like they were expecting.

But, and here is the big one, if the investor did get paid (as many have been under the table or as part of more complex deals) then the obligation to them has been satisfied in full. That would mean by definition that the obligation from anyone else on repayment to the investor was extinguished or transferred to another party. Since the money was funded from investor to homeowner, the homeowner therefore does not owe the investor any money (not any more, anyway, because the investor has been paid in full). The only valid transfer would be FROM the REMIC partnership not TO it. But the fabricated, forged and fraudulent documents are all about transferring the loan TO the REMIC that was never formed and never funded.

It is possible that another party may be a successor to the homeowner’s obligation to the investor. But there are prerequisites to that happening. First of all we know that the obligation of the homeowner to the investor was not secured because there was no agreement or written instrument of any kind in which the investor and the borrower both signed and which set forth terms that were disclosed to both parties and were the subject of an agreement, much less a mortgage naming the investor. That is why the MERS trick was played with stating the servicer as the investor. That implies agency (which doesn’t really exist).

Second we know that the SWAPS and the insurance were specifically written with expressly worded such that AIG, MBIA etc. each waived their right to get payment from the borrower homeowner even though they were paying the bill.

Third we know that most payments were made by SWAPS, insurance and the Federal Reserve deals, in which the Fed also did not want to get involved in enforcing debts against homeowners and that is why the Federal Reserve has never been named as the creditor even though they in fact, would be the creditor because they have paid 100 cents on the dollar to the investment bank who did NOT allocate that money to the investors.

Since they did not allocate that money to the investors, as servicers (subservicer and Master Servicer), they also did not allocate the payment against the homeowner borrower’s debt. If they did that, they would be admitting what we already know — that the debt from homeowner to investor has been extinguished, which means that all those other credit swaps, insurance and enhancements that are STILL IN PLAY, would collapse. That is what is happening in our own cities, towns, counties and states and what is happening in Europe. It is only by keeping what is now only a virtual debt alive in appearance that the banks continue to make money on the Swaps and other exotic instruments. But it is like a tree without the main trunk. We have only branches left. Eventually in must fall, like any other Ponzi scheme or House of Cards.

So by cheating the investors, and thus cheating the borrowers, they also cheated the Federal Reserve, the taxpayers and European banks based upon a debt that once existed but has long since been extinguished. If you waded through the above (you might need to read it more than once), then you can see that your feeling, deep down inside that you owe this money, is wrong. You can see that the perception that the obligation was tied to a perfected mortgage lien on the property was equally wrong. And that we now have $700 trillion in nominal value of derivatives that has at least one-third in need of mark-down to zero. The admission of this inescapable point would immediately produce the result that Simon Johnson and others so desperately want for economic reasons and that the rest of us want for political reasons — the break-up of banks that are broken. Only then will the market begin to function as a more or less free trading market.

How Servicers Lie to Mortgage Investors About Losses

By Michael Olenick

A post last week reviewed a botched foreclosure for a mortgage loan in Ace Securities Home Equity Loan Trust 2007-HE4 dismissed with prejudice, meaning that the foreclosure cannot be refilled; a total loss for investors. Next, we reviewed why the trust has not yet recorded the loss despite the six month old verdict.

As an experiment, I gave my six year-old daughter four quarters. She just learned how to add coins so this pleased her. Then I told her I would take some number of quarters back, and asked her how many I should take. Her first response was one – smart kid – then she changed her mind to two, because we’d each have two and that’s the most “fair.” Having mastered the notion of loss mitigation and fairness, and because it’s not nice to torture six year-old children with experiments in economics, I allowed her to keep all four.

When presented with a similar question – whether to take a partial loss via a short-sale or principal reduction, or whether to take a larger loss through foreclosure – the servicers of ACE2007-HE4 repeatedly opt for the larger losses. While the dismissal with prejudice for the Guerrero house is an unusual, the enormous write-off it comes with through failure to mitigate a breach – to keep overall damages as low as possible – is common. When we look more closely at the trust, we see the servicer again and again, either through self-dealing or laziness, taking actions that increase losses to investors. And this occurs even though the contract that created the securitization, a pooling and servicing agreement, requires the servicer to service the loans in the best interest of the investors.

Let’s examine some recent loss statistics from ACE2007-HE4. In May, 2012 there were 15 houses written-off, with an average loss severity of 77%. Exactly one was below 50% and one, in Gary, IN, was 145%; the ACE investors lent $65,100 to a borrower with a FICO score of 568 then predictably managed to lose $94,096. In April, there were 23 homes lost, with an average loss severity of 82%, three below 50%, though one at 132%, money lent to a borrower with an original FICO score of 588.

Of course, those are the loans with finished foreclosures. There are 65 loans where borrowers missed at least four consecutive payments in the last year with yet there is no active foreclosure. Among those are a loan for $593,600 in Allendale, NJ, where the borrower has not made a payment in about four years, though they have been in and out of foreclosure a few times during that period. It’s not just the judicial foreclosure states; a $350,001 loan in Compton, CA also hasn’t made a payment in over a year and there is no pending foreclosure.

There is every reason to think the losses will be higher for these zombie borrowers than on the recent foreclosures. First, every month a borrower does not pay the servicer pays the trust anyway, though the servicer is then reimbursed the next month, mainly from payments of other borrowers still paying. This depletes the good loans in the trust, so that the trust will eventually run out of money leaving investors holding an empty bag. And on top of that, when the foreclosure eventually occurs, the servicer also reimburses himself for all sorts of fees, late fees, the regular servicing fee, broker price opinions, etc. Longer times in foreclosure mean more fees to servicers. Second, the odds are decent that the servicers are holding off on foreclosing on these homes because the losses are expected to be particularly high. Why would servicers delay in these cases? Perhaps because they own a portfolio of second mortgages. More sales of real estate that wipe out second liens would make it harder for them to justify the marks on those loans that they are reporting to investors and regulators. Revealing how depressed certain real estate markets were if shadow inventory were released would have the same effect.

These loans will eventually end up either modified or foreclosed upon, but either way there will be substantial losses to the trust that have not been accounted for. Of course, this assumes that the codes and status fields are accurate; in the case of the Guerreros’ loan the write-off – with legal fees for the fancy lawyers who can’t figure out why assignments are needed to the trust – is likely to be enormous. How much? Nobody except Ocwen knows, and they’re not saying.

Knowing that an estimated loss of 77%, is if anything an optimistic figure, even before we get to the unreported losses on the Guerrero loan, it seems difficult to understand why Ocwen wouldn’t first try loss mitigation that results in a lower loss severity. If they wrote-off half the principal of the loan, and decreased interest payments to nothing, they’d come out ahead.

Servicers give lip service to the notion that foreclosure is an option of last resort but, only when recognizing losses, do their words seem to sync with their behavior. But it’s all about the incentives: servicers get paid to foreclose and they heap fees on zombie borrowers, but even with all sorts of HAMP incentives, they don’t feel they get paid enough to do the work to do modifications. Servicers are reimbursed for the principal and interest they advance, the over-priced “forced placed insurance” that costs much more and pays out much less than regular insurance, “inspections” that sometimes involve goons kicking in doors before a person can answer, high-priced lawyers who can’t figure out why an assignment is needed to bind a property to a trust, and a plethora of other garbage fees. They’re like a frat-boy with dad’s credit-card, and a determination to make the best of it while dad is still solvent.

Despite the Obama campaign promise to bring transparency to government and financial markets, the investors in trusts remain largely unknown, so we’re not sure who bears the brunt of the cost of Ocwen’s incompetence in loss mitigation (to be fair Ocwen is not atypical; most servicers are atrocious). But, ACE2007-HE4 has a few unique attributes allowing us to guess who is affected.

ACE2007-HE4 is named in a lawsuit filed by the Federal Housing Finance Agency (FHFA), which has sued ACE, trustee Deutsche Bank, and a few others citing material misrepresentations in the prospectus of this trust. As pointed out in the prior article, both the Guerreros’ first and second loans were bundled into the same trust – so there were definitely problems – though the FHFA does not seem to address that in their lawsuit.

With respect to ACE2007-HE4, the FHFA highlights an investigation by the Financial Industry Regulatory Authority (FINRA), which found that Deutsche Bank “‘continued to refer customers to its prospectus materials to the erroneous [delinquency] data’”even after it ‘became aware that the static pool information underreported historical delinquency rates.”

The verbiage within the July 16, 2010 FINRA action is more succinct: “… investors in these 16 subsequent RMBS securitizations were, and continue to be, unaware that some of the static pool information .. contains inaccurate historical data which underreported delinquencies.” FINRA allowed Deutsche Bank to pay a $7.5 million fine without either admitting or denying the findings, and agreed never to bring another action “based on the same factual findings described herein.”

Despite the finding and the fine, FINRA apparently forgot to order Deutsche Bank to knock off the conduct, and since FINRA did not reserve the right to circle back for a compliance check maybe Deutsche Bank has the right to produce loss reports showing whatever they wish to.

It is unlikely that Deutsche Bank had trouble paying their $7.5 million fine since the trust included an interest swap agreement that worked out pretty well for them. Note that these swap agreements were a common feature of post 2004 RMBS. Originators used to retain the equity tranche, which was unrated. When a deal worked out, that was nicely profitable because the equity tranche would get the benefit of loss cushions (overcollateralization and excess spread). Deal packagers got clever and devised so-called “net interest margin” bonds which allowed investors to get the benefit of the entire excess spread for a loan pool. The swaps were structured to provide a minimum amount of excess spread under the most likely scenarios. But no one anticipated 0% interest rates.

From May, 2007, when the trust was issued, to Oct., 2007, neither party paid one another. In Nov., 2007, Deutsche Bank paid the trust $175,759.04. Over the next 53 months that the swap agreement remained in effect the trust paid Deutsche Bank $65,122,194.92, a net profit of $64,946,435.88. Given that Deutsche traders were handing out t-shirts reading “I’m Short Your House” when this trust was created, I can see why they’d bet against steep interest rates over the next five years, as the Federal Reserve moved to mitigate the economic fallout of their mischievousness with low interest rates.

In any event, getting back to Fannie Mae and Freddie Mac (the FHFA does not disclose which), one of the GSEs purchased $224,129,000 of tranche A1 at par; they paid full freight for this fiasco. Since this trust is structured so that losses are born equally by all A-level tranches once the mezzanine level tranches are destroyed by losses, which they have been, to find the party taking the inflated losses you just need to look in the nearest mirror. Fannie and Freddie are, of course, wards of the state so it is the American taxpayer that gets to pay out the windfall to the Germans. In this we’re like Greece, albeit with lousier beaches and the ability to print more money.

If the mess with the FHFA and FINRA were not enough, ACE2007-HE4 is also an element in the second 2007 Markit index, ABX.HE.AAA.07-2, a basket of tranches of subprime trusts that – taken as a whole – show the overall health of all similar securities. This is akin to being one of the Dow-Jones companies, where a company has its own stock price but that price also affects an overall index that people place bets on. Tranche A-2D, the lowest A-tranche, is one of the twenty trusts in the index. Since ACE2007-HE4 is structured so that all A-tranches wither and die together once the mezzanine level tranches are destroyed it has the potential to weigh in on the rest of the index. Therefore, the reporting mess – already known to both the FHFA and FINRA – stands to be greatly magnified.

The problems with this trust are numerous, and at every turn, the parties that could have intervened to ameliorate the situation failed to take adequate measures.

First there is the botched securitization, where a first and second lien ended up in the same trust. Then, there is failure to engage in loss mitigation, with the result that refusing to accept the Guerrero’s short-sale offers or pleas for a modification, resulting in a more than 100% loss. Next, there is defective record-keeping related to that deficiency and others like it. And the bad practices ensnarled Fannie /Freddie when they purchased almost a quarter billion dollars of exposure to these loans. Then there’s the mismanaged prosecution by FINRA, where they did not require ongoing compliance, monitoring, or increasing fines for non-compliance. There’s the muffed FHFA lawsuit, where the FHFA did not notice either the depth of the fraud, namely two loans for the same property in the same trust, and that the reporting fraud they cited continues. I’m not sure if the swap agreement was botched, but you’d think FINRA and the FHFA would and should do almost anything to dissolve it while it was paying out massive checks every month. Finally, returning full circle, there’s the fouled up foreclosure that the borrowers fought only because negotiations failed that resulted in a the trust taking a total loss on the mortgage plus paying serious legal fees.

It is an understatement to say this does not inspire confidence in any public official, except Judge Williams, the only government official with the common sense to lose patience with scoundrels. We’d almost be better off without regulators than with the batch we’ve seen at work.

US taxpayers would have received more benefit by burning dollar bills in the Capitol’s furnace to heat the building than we received from bailing out Fannie, Freddie, Deutsche Bank, Ocwen, and the various other smaller leaches attached to the udder of public funds. We could and should have allowed the “free market” they worship to work its magic, sending them to their doom years ago. That would have left investors in a world-o-hurt but, in hindsight, that’s where they’re ending up anyway with no money left to fix the fallout. It is long past time public policy makers did something substantive to rein in these charlatans.

My six year-old daughter understands the concept of limiting losses to the minimum, and apportionment of those losses in the name of fairness. Maybe Tim Geithner should take a lesson from her about this “unfortunate” series of events, quoting Judge Williams, before wasting any more money that my daughter will eventually have to repay.

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Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: Ace Securities Home Equity Loan Trust, AIG, bankruptcy, credit default swaps, DEUTSCHE BANK, Fannie, Federal reserve, FHFA, Find the Fraud, Finra, forced placed insurance, Freddie, HAMP, homeowners, insurance, investment banks, investors, Judge Williams, Master Servicer, MBIA, MERS, Michael Olenick, Naked Capitalism, Ocwen, pension fund, Ponzi scheme, REMIC, servicers, subservicer, Tim Geithner | 75 Comments »

Az Statute on Mortgage Fraud Not Enforced (except against homeowners)

Posted on May 17, 2012 by Neil Garfield

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Editor’s Comment:

With a statute like this on the books in Arizona and elsewhere, it is difficult to see why the Chief Law Enforcement of each state, the Attorney General, has not brought claims and prosecutions against all those entities and people up and down the fraudulent securitization chain that brought us the mortgage meltdown, foreclosures of more than 5 million people, suicides, evictions and claims of profits based upon the fact that the free house went to the pretender lender.

Practically every act described in this statute was committed by the investment banks and all their affiliates and partners from the seller of the bogus mortgage bond (sold forward, which means that the loans did not yet exist) all the way down to the people at the closing table with the homeowner borrower.

I’d like to see a script from attorneys who confront the free house concept head on. The San Francisco study and other studies clearly show that many if not most foreclosures resulted in a “sale” of property without any cash offered by the buyer who submitted a credit bid when they had not established themselves as creditors nor had they established the amount due. And we now know that they failed to establish themselves as creditors because they neither loaned the money nor purchased the loan in any transaction in which they parted with money. So the consideration for the sale was not present or if you want to put it in legalese that would effect those states that allow review of the adequacy of consideration at the auction.

I’d like to see a lawyer go to court and say “Judge, you already know it would be wrong for my client to get a free house. I am here to agree with you and state further that whether you rule for the borrower or this pretender lender here, you are going to give a free house to somebody.

“Because this party initiated a foreclosure proceeding without being the creditor, without spending a dime on the loan or purchase of the loan, and without any right to represent the multitude of people and entities that should be paid on this loan. This pretender, this stranger to this transaction stands in the way of a mediated settlement or HAMP modification in which the borrower is more than happy to do a traditional workout based upon the economic realities.

“And they they maintain themselves as obstacles to mediation or modification because they have too much to hide about the origination of this loan.

“All I seek is that you recognize that we deny the loan on which this party is pursuing its claims, we deny the default and we deny the balance. That puts the matter at issue in which there are relevant and material facts that are in dispute.

“I say to you that as a Judge you are here to call balls and strikes and that your ruling can only be that with issues in dispute, the case must proceed.”

“The pretender should be required to state its claim with a complaint, attach the relevant documents and the homeowner should be able to respond to the complaint and confront the witnesses and documents being used. And that means the pretender here must be subject to the requirements of the rules of civil procedure that include discovery.

“Experience shows that there have been no trials on the evidence in all the foreclosures ever brought during this period and that the moment a judge rules on discovery in favor of the borrower, the pretender offers settlement. Why do you think that is?”

“If they had a good reason to foreclose and they had the authority to allege the required the elements of foreclosure and they had the proof to back it up they would and should be more than willing to put a stop to all these motions and petitions from borrowers. But they don’t allow any case to go to trial. They are winning on procedure because of the assumption that the legitimate debt is unpaid and that the borrower owes it to the party making the claim even if there never was transaction with the pretender in which the borrower was a party, directly or indirectly.”

“Neither the non-judicial powers of sale statutes nor the rules of civil procedure based upon constitutional requirements of due process can be used to thwart a claim that has merit or raises issues that have merit. You should not allow the statute and rules to be applied in a manner in which a stranger to the transaction who could not even plead a case in good faith would win a foreclosed house at auction without court review and a hearing on the merits.”

Residential mortgage fraud; classification; definitions in Arizona

Section 1. Title 13, chapter 23, Arizona Revised Statutes, is amended by adding section 13-2320, to read: 13-2320.

A. A PERSON COMMITS RESIDENTIAL MORTGAGE FRAUD IF, WITH THE INTENT TO DEFRAUD, THE PERSON DOES ANY OF THE FOLLOWING:

KNOWINGLY MAKES ANY DELIBERATE MISSTATEMENT, MISREPRESENTATION OR MATERIAL OMISSION DURING THE MORTGAGE LENDING PROCESS THAT IS RELIED ON BY A MORTGAGE LENDER, BORROWER OR OTHER PARTY TO THE MORTGAGE LENDING PROCESS.
KNOWINGLY USES OR FACILITATES THE USE OF ANY DELIBERATE MISSTATEMENT, MISREPRESENTATION OR MATERIAL OMISSION DURING THE MORTGAGE LENDING PROCESS THAT IS RELIED ON BY A MORTGAGE LENDER, BORROWER OR OTHER PARTY TO THE MORTGAGE LENDING PROCESS.
RECEIVES ANY PROCEEDS OR OTHER MONIES IN CONNECTION WITH A RESIDENTIAL MORTGAGE LOAN THAT THE PERSON KNOWS RESULTED FROM A VIOLATION OF PARAGRAPH 1 OR 2 OF THIS SUBSECTION.
FILES OR CAUSES TO BE FILED WITH THE OFFICE OF THE COUNTY RECORDER OF ANY COUNTY OF THIS STATE ANY RESIDENTIAL MORTGAGE LOAN DOCUMENT THAT THE PERSON KNOWS TO CONTAIN A DELIBERATE MISSTATEMENT, MISREPRESENTATION OR MATERIAL OMISSION.

Those convicted of one count of mortgage fraud face punishment in accordance with a Class 4 felony. Anyone convicted of engaging in a pattern of mortgage fraud could be convicted of a Class 2 felony

Filed under: foreclosure | Tagged: adequacy of consideration, Arizona Revised Statutes, attorney general, Auction, AZ statute on mortgage fraud not enforced, bogus mortgage bond, borrower, chapter 23, claims of profits, class 2 felony, class 4 felony, closing table, cOMPLAINT, constitutional requirements, credit bid, creditors, default, discovery, due process, Evictions, foreclosure proceedings, foreclosures, free house, good faith, HAMP, hearing on the merits, homeowner, investment banks, lender, material facts in dispute, mediated settlement, mediation, modification, mortgage fraud, mortgage meltdown, pretender lender, Residential mortgage fraud; classifications; definitions in Arizona, rules of civil procedure, San Francisco, Section 1, section 13-2320, securitization chain, stranger to this transaction, suicides, Title 13, traditional workout | 5 Comments »

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.”

Filed under: foreclosure | Tagged: AG Biden, Ally, Ally Financial Inc., attorneys general, BAC, bank loan bundling, Bank of America Corp, Bank of New York Mellon Corp, BEAR STEARNS, Beau Biden, Bermuda, Beth Kaswan, Biden-Schneiderman, BK, bond trustees, bondholders, bundling of mortgage loans into securities, Catherine Cortez Masto, Citigroup Inc, common law, countrywide, credit default swaps, credit enhancements, DBK, DELAWARE, DEUTSCHE BANK, Eric Schneiderman, follow the money, foreclosure practices, GMAC, IMG Enterprises LLC, Internal revenue Code, investment banks, investors, investors suing banks, Isaac Gradman, JP Morgan Chase & Co, Justice Department, K&L Gates LLP, Laurence Platt, Master Servicer, missing promissory note, mortgage backed securities, mortgage default, mortgage securing terms of the note, mortgage settlement, nonexistent pool, note as evidence of debt, notes with defects, Oklahoma Police Pension and Retirement System, pension funds, Prospectus, REMIC, Renee Calabro, residential home borrowers, Rick Simon, Schniedermann AG, Scott + Scott LLP, Securities and Exchange Commission, securitization, shoddy foreclosures, Talcott Franklin, taxpayer bailout, Teri Charest, toxic loans, unsecured debt, US Bankcorp, Washington Mutual, Wells Fargo & Co, WFC, yield spread premium | 95 Comments »

Hiding Behind Advice of Counsel No Better Than Ratings

Posted on May 4, 2012 by Neil Garfield

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Editor’s Comment:

In an article entitled “Legal Beagles in Cross Hairs” WSJ reports that the SEC and many others in law enforcement have on-going investigations into the role of attorneys not misconduct of their clients. For the most part it is an attorney’s solemn duty to represent and advocate the position of his or her client to the utmost of their ability without violating the law. Everyone is entitled to a lawyer no matter how reprehensible their conduct might have been when they committed the act.

But the SEC seems to be leading the way, starting with indictments and convictions of attorneys that kicks aside the clients’ defense of “I did it on advice of counsel.” in wide ranging probes law enforcement agencies are after the attorneys who said it was OK — upon receiving lavish payments, that what the Banks did in setting the securitization structure for the cash trail and setting up the securitization procedure for the document trail and then setting up the contents of the documents that would provide coverage for intentional acts of theft, forgery, fabrication and a variety of other acts.

The attorneys who gave letters of opinion to the investment banks blessing securitization of home and commercial mortgages as they were presented and launched are in deep hot water. This is especially true since the law firms that engaged in these “blessings” had lawyers quitting their jobs leaving behind memorandums to the partners that the law firm itself was committing crimes. The similarity between the blessing of the law firm and the ratings of Moody’s, S&P, Fitch is surprising to some people.

And the attorneys who suggested severance settlements conditioned on employed lawyers or other witnesses on a sudden onset of amnesia are also in the cross-hairs, getting stiff long-term sentences. These are all potential witnesses in what could be come nationwide probes that were blocked by “advice of counsel” claims and brings to mind those many cases where the lawyer for Wells, US Bank, or BOA was fined and sanctioned for lying to the court about facts which they most certainly knew or should have known — like the name of their client.

As these probes continue it may be seen as scapegoating the attorneys or as chilling the confidentiality of the relationship between lawyer and client. But that rule of confidentiality and the defines of advice of counsel vanishes when the conduct of the attorney or indeed a whole law firm is that of a co-conspirator. It is especially unavailable when you have a foreclosure mill that is forging, fabricating and filing documents on behalf of extremely well paying clients.

It would therefore seem to be an appropriate time to file complaints with law enforcement including police and regulatory authorities that are well-written, honed down to a sharp point and which attach at least some evidence beyond the mere allegation of wrong-doing on the part of the attorney or law firm. If appropriate lay people can file the same complaints as grievances with the state Bar Association that is required to regulate and discipline the behavior of lawyers. And attorneys for homeowners and judges who hear these cases are under an obligation to report evidence of wrongdoing or else face disciplinary charges of their own resulting in suspension or disbarment.

Legal Eagles in Cross Hairs

By JEAN EAGLESHAM

The Securities and Exchange Commission is intensifying its scrutiny of lawyers who gave a green light to certain mortgage-bond deals before the financial crisis or have tried to thwart investigations by the agency, according to people familiar with the matter.

The move is at an early stage and might not result in any enforcement action by the SEC because of the difficulty proving lawyers went beyond their legal duty to clients, these people cautioned. In the past, SEC officials generally have gone after lawyers only when accusing them of active involvement in securities fraud or serious misconduct, such as faking documents in a probe.

In recent months, though, some SEC officials have grown frustrated by what they claim is direct obstruction of a few investigations and a larger number of probes where lawyers coach clients in the art of resisting and rebuffing. The tactics include witnesses “forgetting” what happened and companies conducting internal investigations that scapegoat junior employees and let senior managers off the hook, agency officials say. “The problem of less-than-candid testimony … is a serious one,” Robert Khuzami, the SEC’s director of enforcement, said at a conference last month. The stepped-up scrutiny is aimed at both internal and outside lawyers.

Claudius Modesti, enforcement chief at the Public Company Accounting Oversight Board, an accounting watchdog created by the Sarbanes-Oxley Act, said at the same event: “We’re encountering lawyers who frankly should know better.”

The SEC enforcement staff has recently reported more lawyers to the agency’s general counsel, who can take administrative action against lawyers for alleged professional misconduct.

The SEC hasn’t disclosed the number of referrals. Only one lawyer has ever been banned for life from representing clients before the agency because of professional misconduct.

Earlier this year, Kenneth Lench, head of the SEC’s structured-products enforcement unit, said the agency needed to “seriously consider” charges against lawyers in “appropriate cases.” Mr. Lench said he saw “some factual situations where I seriously question whether the advice that was given was done in good faith.”

In July, the Commodity Futures Trading Commission gained the new power to take civil action against anyone, including lawyers, who makes “any false or misleading statement of a material fact.”

The agency, which oversees the futures and options market, hasn’t taken any action yet under the expanded power, according to a person familiar with the matter. A CFTC spokesman declined to comment.

“Frankly, I wish we had the power the CFTC has,” Mr. Khuzami said.

The SEC’s focus on advice provided by lawyers in mortgage-bond deals is part of the wider push by officials to punish alleged wrongdoing tied to the financial crisis. So far, the SEC has filed crisis-related civil suits against 102 firms and individuals, and more cases are coming, according to people familiar with matter.

Some former government officials say stepping up regulatory scrutiny of lawyers for their work on cases snared in investigations by the SEC could send a chilling message. “The government needs to be careful not to deter lawyers from being zealous advocates for their clients,” says John Wood, a former U.S. Attorney for the Western District of Missouri.

The only lawyer hit with a lifetime ban by the SEC for his work on behalf of a client is Steven Altman of New York. The client was a witness in an SEC investigation, and the agency alleged that Mr. Altman suggested in a recorded phone conversation that the client’s recollection of certain events might “fade” if she got a year of severance pay.

Last year, an appeals court rejected Mr. Altman’s bid to overturn the 2010 ban. Jeffrey Hoffman, a lawyer for Mr. Altman, couldn’t be reached for comment.

In December, a federal grand jury in Los Angeles indicted lawyer David Tamman on 10 criminal counts related to helping a former client cover up an alleged $20 million fraud. Prosecutors claim Mr. Tamman changed and backdating documents, removed incriminating documents from investor files and lied to SEC investigators in sworn testimony.

“The truth is that my client was set up and made a scapegoat,” says Stanley Stone, a lawyer for Mr. Tamman, adding that his client acted under the advice and guidance of senior lawyers at his former law firm, Nixon Peabody LLP. “We’re going to prove at trial that what was done was not criminal,” Mr. Stone says.

A Nixon Peabody spokeswoman says Mr. Tamman was fired in 2009 “as soon as we learned that he was under SEC investigation and he failed to explain his actions to us.” The law firm has asked a judge to throw out a wrongful-termination suit filed by Mr. Tamman.

A criminal trial last year shows how the SEC could face daunting hurdles in bringing enforcement actions against lawyers for providing bad advice.

“A lawyer should never fear prosecution because of advice that he or she has given to a client who consults him or her,” U.S. District Judge Roger Titus in Maryland ruled when dismissing all six charges against Lauren Stevens, a former lawyer at drug maker GlaxoSmithKline PLC. GSK +0.19%

Ms. Stevens was accused by prosecutors of lying to the FDA and concealing and falsifying documents related to an investigation by the U.S. agency. The federal judge refused to let a jury decide the case, saying that would risk a miscarriage of justice.

Reid Weingarten, a lawyer for Ms. Stevens, couldn’t be reached. A spokeswoman for the Justice Department declined to comment.

Despite the government’s defeat, “the mere fact she was charged sends a strong signal to other lawyers about the risks of being seen as less than forthcoming in their representation s to the government,” says Mr. Wood, the former federal prosecutor in Missouri. He now is a partner at law firm Hughes Hubbard & Reed LLP.

Filed under: foreclosure | Tagged: accounting watchdog, Attorney Misconduct, Bank of America, Bar Association, behavior of lawyers, BOA, CFTC, Claudius Modesti, Commodity Futures Trading Commission, David Tamman, discipline lawyers, disclosure, document trail, fabrication, financial crisis, Fitch, foreclosure, foreclosure defense, foreclosure fraud, foreclosure offense, foreclosures, forgery, GlaxoSmithKline PLC, home and commercial mortgages, Hughes Hubbard & Reed LLP, investment banks, Jeffrey Hoffman, John Wood, Justice Department, Kenneth Lench, Lauren Stevens, Lender Liability, Moody's, Mortgage, mortgage-bond deals, mortgages, Nixon Peabody LLP, predatory lending, professional misconduct, Public Company Accounting Oversight Board, regulate lawyers, Reid Weingarten, Robert Khuzami, S&P, Sarbanes-Oxley Act, SEC, Securities and Exchange Commission, securitization procedure, securitization structure, Stanley Stone, Steven Altman, U.S. Attorney for the Western District of Missouri, U.S. District Judge Roger Titus, US BANK, Wells Fargo | 47 Comments »

INVESTORS SUE FOR INFLATED HOME APPRAISALS, WHY DON’T YOU?

Posted on June 21, 2010 by Neil Garfield

The model concluded that roughly one-third of the loans were for amounts that were 105 percent or more of the underlying property’s value. Roughly 5.5 percent of the loans in the pools had appraisals that were lower than they should have been.

In one pool with 3,543 loans, for example, the CoreLogic model had enough information to evaluate 2,097 loans. Of those, it determined that 1,114 mortgages — or more than half — had loan-to-value ratios of 105 percent or more. The valuations on those properties exceeded their true market value by $65 million,

EDITOR’S NOTE: POINTS TO BE MADE:

Investors’ are proving the case for appraisal fraud, aligning themselves with borrowers. They are doing the borrower’s work. Get yourself copies of these complaints, discovery etc., send them to me and use them in your own case.

The little guy is starting to get attention. The court’s are getting the point that these loans were fraudulent. In my surveys I have found that appraisal fraud accounts for nearly all the loans 2003-2008, and that the amount of the fraud was a s much as 150% in some cases with an average of around 35%. The moment you closed, whatever down payment you made was lost and you were underwater.

The obligation to present a proper appraisal is on the lender not the borrower.

Just like the investors, borrowers were deprived of vital information about their loan that would have prevented any reasonable person from closing. Thus whether the Court’s like it or not, rescission, is a proper remedy, if not under TILA then under fraud statues and common law doctrines of fraud. Combine that with damages available, and the prospect of getting loan reduction and adjustment of loan terms comes into clearer view.

THE CONNECTION BETWEEN THE INVESTOR’S ADVANCE OF FUNDS AND THE HOME APPRAISAL IS PRESUMED AND ALLEGED. THUS THE ARGUMENT THAT THE INVESTOR WAS THE CREDITOR AND THE BORROWER IS THE DEBTOR IS CORROBORATED BY THE PLEADINGS OF THE INVESTORS.

June 18, 2010

The Inflatable Loan Pool

By GRETCHEN MORGENSON

AMID the legal battles between investors who lost money in mortgage securities and the investment banks that sold the stuff, one thing seems clear: the investment banks appear to be winning a good many of the early skirmishes.

But some cases are faring better for individual plaintiffs, with judges allowing them to proceed even as banks ask that they be dismissed. Still, these matters are hard to litigate because investors must persuade the judges overseeing them that their losses were not simply a result of a market crash. Investors must argue, convincingly, that the banks misrepresented the quality of the loans in the pools and made material misstatements about them in prospectuses provided to buyers.

Recent filings by two Federal Home Loan Banks — in San Francisco and Seattle — offer an intriguing way to clear this high hurdle. Lawyers representing the banks, which bought mortgage securities, combed through the loan pools looking for discrepancies between actual loan characteristics and how they were pitched to investors.

You may not be shocked to learn that the analysis found significant differences between what the Home Loan Banks were told about these securities and what they were sold.

The rate of discrepancies in these pools is surprising. The lawsuits contend that half the loans were inaccurately described in disclosure materials filed with the Securities and Exchange Commission.

These findings are compelling because they involve some 525,000 mortgage loans in 156 pools sold by 10 investment banks from 2005 through 2007. And because the research was conducted using a valuation model devised by CoreLogic, an information analytics company that is a trusted source for mortgage loan data, the conclusions are even more credible.

The analysis used CoreLogic’s valuation model, called VP4, which is used by many in the mortgage industry to verify accuracy of property appraisals. It homed in on loan-to-value ratios, a crucial measure in predicting defaults.

An overwhelming majority of the loan-to-value ratios stated in the securities’ prospectuses used appraisals, court documents say. Investors rely on the ratios because it is well known that the higher the loan relative to an underlying property’s appraised value, the more likely the borrower will walk away when financial troubles arise.

By back-testing the loans using the CoreLogic model from the time the mortgage securities were originated, the analysis compared those values with the loans’ appraised values as stated in prospectuses. Then the analysts reassessed the weighted average loan-to-value ratios of the pools’ mortgages.

That means inflated appraisals were involved in six times as many loans as were understated appraisals.

David J. Grais, a lawyer at Grais & Ellsworth in New York, represents the Home Loan Banks in the lawsuits. “The information in these complaints shows that the disclosure documents for these securities did not describe the collateral accurately,” Mr. Grais said last week. “Courts have shown great interest in loan-by-loan and trust-by-trust information in cases like these. We think these complaints will satisfy that interest.”

The banks are requesting that the firms that sold the securities repurchase them. The San Francisco Home Loan Bank paid $19 billion for the mortgage securities covered by the lawsuit, and the Seattle Home Loan Bank paid $4 billion. It is unclear how much the banks would get if they won their suits.

Among the 10 defendants in the cases are Deutsche Bank, Credit Suisse, Merrill Lynch, Countrywide and UBS. None of these banks would comment.

As outlined in the San Francisco Bank’s amended complaint, it did not receive detailed data about the loans in the securities it purchased. Instead, the complaint says, the banks used the loan data to compile statistics about the loans, which were then presented to potential investors. These disclosures were misleading, the San Francisco Bank contends.

The selling document for that pool said that all of the mortgages had loan-to-value ratios of 100 percent or less, the complaint said. But the CoreLogic analysis identified 169 loans with ratios over 100 percent. The pool prospectus also stated that the weighted average loan-to-value ratio of mortgages in the portion of the security purchased by Home Loan Bank was 69.5 percent. But the loans the CoreLogic model valued had an average ratio of almost 77 percent.

IT is unclear, of course, how these court cases will turn out. But it certainly is true that the more investors dig, the more they learn how freewheeling the Wall Street mortgage machine was back in the day. Each bit of evidence clearly points to the same lesson: investors must have access to loan details, and the time to analyze them, before they are likely to want to invest in these kinds of securities again.

Filed under: bubble, CASES, CDO, CORRUPTION, Eviction, evidence, expert witness, foreclosure, foreclosure mill, GTC | Honor, HERS, investment banking, Investor, MODIFICATION, Mortgage, Motions, Pleading, securities fraud, Servicer, STATUTES, trustee | Tagged: CoreLogic, Credit Suisse, David J. Grais, DEUTSCHE BANK, GRETCHEN MORGENSON, HERS, Home Loan Banks, investment banks, investors, Merrill Lynch, mortgage securities, San Francisco Home Loan Bank, Seattle Home Loan Bank, UBS, VP4 | 24 Comments »

SEC Charges Goldman Sachs With Fraud: Complaint Reveals Discovery Tips

Posted on April 16, 2010 by Neil Garfield

see comp-pr2010-59 SEC Complaint V GS Fraud

“The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest and civil penalties from both defendants.” Editor’s Note: Here is where the rubber meets the road. This same pool of illegal fraudulent profit is also subject to being defined as an undisclosed yield spread premium due to the borrowers. Some enterprising class action lawyer has some low hanging fruit here — the class is already defined for you by the SEC — all those homeowners subject to loan documents that were pledged or transferred into a pool which was received or incorporated by reference into this Abacus vehicle)

SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 21489 / April 16, 2010

Securities and Exchange Commission v. Goldman, Sachs & Co. and Fabrice Tourre, 10 Civ. 3229 (BJ) (S.D.N.Y. filed April 16, 2010)

The SEC Charges Goldman Sachs With Fraud In Connection With The Structuring And Marketing of A Synthetic CDO

The Securities and Exchange Commission today filed securities fraud charges against Goldman, Sachs & Co. (“GS&Co”) and a GS&Co employee, Fabrice Tourre (“Tourre”), for making material misstatements and omissions in connection with a synthetic collateralized debt obligation (“CDO”) GS&Co structured and marketed to investors. This synthetic CDO, ABACUS 2007-AC1, was tied to the performance of subprime residential mortgage-backed securities (“RMBS”) and was structured and marketed in early 2007 when the United States housing market and the securities referencing it were beginning to show signs of distress. Synthetic CDOs like ABACUS 2007-AC1 contributed to the recent financial crisis by magnifying losses associated with the downturn in the United States housing market.

According to the Commission’s complaint, the marketing materials for ABACUS 2007-AC1 — including the term sheet, flip book and offering memorandum for the CDO — all represented that the reference portfolio of RMBS underlying the CDO was selected by ACA Management LLC (“ACA”), a third party with expertise in analyzing credit risk in RMBS. Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc. (“Paulson”) [Editor’s Note: Brad Keiser in his forensic analyses has reported that Paulson may have been a principal in OneWest which took over Indymac and may have ties with former Secretary of Treasury Henry Paulson, former GS CEO], with economic interests directly adverse to investors in the ABACUS 2007-AC1 CDO played a significant role in the portfolio selection process. After participating in the selection of the reference portfolio, Paulson effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (“CDS”) with GS&Co to buy protection on specific layers of the ABACUS 2007-AC1 capital structure. Given its financial short interest, Paulson had an economic incentive to choose RMBS that it expected to experience credit events in the near future. GS&Co did not disclose Paulson’s adverse economic interest or its role in the portfolio selection process in the term sheet, flip book, offering memorandum or other marketing materials.
The Commission alleges that Tourre was principally responsible for ABACUS 2007-AC1. According to the Commission’s complaint, Tourre devised the transaction, prepared the marketing materials and communicated directly with investors. Tourre is alleged to have known of Paulson’s undisclosed short interest and its role in the collateral selection process. He is also alleged to have misled ACA into believing that Paulson invested approximately $200 million in the equity of ABACUS 2007-AC1 (a long position) and, accordingly, that Paulson’s interests in the collateral section process were aligned with ACA’s when in reality Paulson’s interests were sharply conflicting. The deal closed on April 26, 2007. Paulson paid GS&Co approximately $15 million for structuring and marketing ABACUS 2007-AC1. By October 24, 2007, 83% of the RMBS in the ABACUS 2007-AC1 portfolio had been downgraded and 17% was on negative watch. By January 29, 2008, 99% of the portfolio had allegedly been downgraded. Investors in the liabilities of ABACUS 2007-AC1 are alleged to have lost over $1 billion. Paulson’s opposite CDS positions yielded a profit of approximately $1 billion.

The Commission’s complaint, which was filed in the United States District Court for the Southern District of New York, charges GS&Co and Tourre with violations of Section 17(a) of the Securities Act of 1933, 15 U.S.C. §77q(a), Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. §78j(b) and Exchange Act Rule 10b-5, 17 C.F.R. §240.10b-5. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest and civil penalties from both defendants.

The Commission’s investigation is continuing into the practices of investment banks and others that purchased and securitized pools of subprime mortgages and the resecuritized CDO market with a focus on products structured and marketed in late 2006 and early 2007 as the U.S. housing market was beginning to show signs of distress.

Filed under: brad keiser, CASES, CDO, CORRUPTION, Eviction, expert witness, Fannie MAe, foreclosure, foreclosure mill, Forensic Analysis Workshop, GTC | Honor, HERS, Investor, MODIFICATION, Mortgage, Motion Practice and Discovery, securities fraud, Securitization Survey, Servicer, workshop | Tagged: 10b-5, 15 U.S.C. §77q(a), 15 U.S.C. §78j(b) and Exchange Act Rule 10b-5, 17 C.F.R. §240.10b-5, ABACUS 2007-AC1, ACA, ACA Management LLC ("ACA"), CDO, discovery, Exchange Act Rule 10b-5, Fabrice Tourre, flip book, fraud, Goldman Sachs, HERS, investment banks, marketing material, material misstatements and omissions, offering memorandum, Paulson & Co. Inc. ("Paulson"), portfolio, resecuritized CDO market, residential mortgage-backed securities ("RMBS"), RMBS, SEC, Section 10(b) of the Securities Exchange Act of 1934, Section 17(a) of the Securities Act of 1933, subprime, term sheet, Tourre | 36 Comments »

SEC JUST NOW SEEKING KEY INFORMATION ON MELTDOWN

Posted on December 18, 2009 by Neil Garfield

THANK YOU ALLAN AGAIN!!!

Submitted on 2009/12/17 at 2:00am

Editor’s Note: Allan is right about his frustration with a government that is so slow on the draw. Yet if history teaches us anything it is that government, especially our govenment, tends tomove very slowly except for “emergency” situations, when most of the actions are flawed.

It would be a good idea to contact the SEC, ask for their form and give them as much information a you can. Remember, every homeowner involved with a securitized mortgage was a “CDO Player.” Hearing from you will balance the scales a little. The SEC will soon take notice that homeowners were sold security the same way that pension funds were sold securities at the other end of the securitization chain. THAT is where the scheme unravels. And smart securities class action lawyers will finally see that there is more money in this unravelling than anything they have ever worked on in their lives.

Business
SEC JUST NOW SEEKING KEY INFORMATION ON MELTDOWN

by Jake Bernstein and Jesse Eisinger, ProPublica
– December 16, 2009 3:30 pm EST

This story is part of an ongoing investigation with NPR’s Planet Money [1].

Former SEC chairman Christopher Cox, right. (Chip Somodevilla/Getty Images)
Former SEC chairman Christopher Cox, right. (Chip Somodevilla/Getty Images)

Almost three years since banks started taking losses that led to the worst financial crisis since the Great Depression, the Securities and Exchange Commission is still asking basic questions about what happened.

Were you there?

If you were involved in the CDO business during the end days of the boom, please contact us.

(917) 512-0258 cdos@propublica.org [2]

The SEC is conducting an information-gathering sweep of the key players in the market for collateralized debt obligations, the bundles of mortgage securities whose sudden collapse in price was at the center of the meltdown of the global banking system.

In a letter dated Oct. 22, the SEC sent what amounts to a questionnaire to a number of collateral managers, the middlemen between the investment banks that created the complex financial products and the investors who bought them.

Collateralized debt obligations are made up of dozens if not hundreds of securities, which in turn are backed by underlying loans, such as mortgages. Investment banks underwrite the structures and recruit their investors. Collateral managers, brought in by the investment banks but paid by fees from the assets, select the securities and manage the structures on behalf of the investors. CDO managers have a fiduciary duty to manage the investments fairly for investors.

Since 2005, $1.3 trillion worth of CDOs have been issued, with a record $521 billion in 2006, according to the securities industry lobbying group SIFMA. The collapse in value of mortgage CDOs triggered the 2008 financial collapse.

ProPublica and NPR have confirmed that the SEC letter was sent to several managers, although the distribution list was likely industrywide. At the height of the boom in 2006, only 28 managers controlled about half of all CDOs, according to Standard and Poor’s.

Banks began disclosing the first big losses on CDOs in early 2007. The infamous Bear Stearns hedge funds ran into problems [3] beginning that summer. By that August, the credit markets began seizing up. Merrill Lynch and Citigroup were among the hardest hit by losses on bad investments in mortgage-based securities and CDOs.

The SEC’s letter focuses on information regarding “trading, allocation and valuations and advisers’ disclosure,” though it also asks for other details on how the managers ran their businesses. The letter requests information on CDOs issued since Jan. 1, 2006.

The letter asks collateral managers for information about what investments they made on their own behalf and how they valued these investments. Securities experts say the letter indicates that the agency is still gathering basic information about the CDO market, despite its centrality to the banking crisis.

“One wonders why this letter, especially given the general nature of it, is just now being sent. And why wasn’t it sent several years ago, as the CDO market was exploding?” says Lynn Turner, who was the SEC’s chief accountant in the late 1990s. “It makes it look like the SEC is several years behind the markets.”

Even Wall Street executives and securities lawyers who were involved in the CDO business at its height have privately expressed surprise that the SEC was only now contacting them for such rudimentary information.

The SEC declined to comment on the letter. As a policy, a spokesman said, the agency doesn’t comment on its regulatory actions. The SEC has jurisdiction over CDO managers,and enforces rules against securities manipulation, among other violations. The letter does not use the words “inquiry” or “investigation.”

Interviews with market participants and former regulators point to several areas that the SEC might be investigating. Some managers had their own in-house investment funds and may have taken positions that were in conflict with those of the investors in the structures that they managed. In some cases, their hedge funds may have bet against the very slices of the securities they were managing on behalf of the investors in the structure.

Underwriting investment banks often had influence over the investment choices some CDO managers made, giving rise to another possible conflict of interest. The agency may be looking at whether that influence was proper or not.

“The possibility for conflicts and self-dealing is huge,” says Turner, the former SEC chief accountant.

To date, the agency has little to show for its probes into the causes of the crisis that engulfed global financial markets just over a year ago. In June 2007, Christopher Cox, then the SEC chairman, testified before Congress that the agency had “about 12 investigations” [4] under way concerning CDOs and collateralized loan obligations and similar products. A little more than a year later, Cox told Congress that the number of investigations into the financial industry, including the subprime mortgage origination business, had ballooned to over 50 separate inquiries. [5]

There could be multiple reasons why investigations are proceeding slowly. Such cases are complex and require enormous resources and expertise. Regulators also face the hurdle of proving intent to defraud.

Under Cox’s stewardship, the SEC fell into disarray [6], and it was harshly criticized by Congress and its own inspector general, particularly for its failure to catch [7] the Ponzi scheme of Bernie Madoff. The turnover of the new administration, which ushered in new leadership at the much-criticized agency, has also likely slowed efforts. In recent months, under new Chairman Mary Schapiro, the SEC has made insider-trading inquiries a high priority.

So far, there have been few indictments or civil complaints. In a sign of how long these cases can take, the mortgage company New Century Financial Corporation disclosed in March 2007 that it was the subject of an SEC investigation [8] into possible insider stock sales and accounting irregularities. It wasn’t until last week — Dec. 7 — that the SEC filed a formal complaint against former executives of the company. The government’s highest-profile prosecution involving the financial collapse – the case against two managers of the Bear Stearns hedge fund for alleged securities and wire fraud – failed to gain a conviction when a jury decided [9] that the men were simply bad businessmen rather than criminals.

Were you involved in the CDO business in the latter stages of the boom? We want to talk to you. E-mail us at CDOS@propublica.org [10] or call us at (917) 512-0258 (917) 512-0258.

Write to Jesse Eisinger at Jesse.Eisinger@propublica.org [11].

Write to Jake Bernstein at Jake.Bernstein@propublica.org [12].

Want to know more? Follow ProPublica on Facebook [13] and Twitter [14], and get ProPublica headlines delivered by e-mail every day [15].

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

FINALLY somebody’s paying George Santayana heed. “Those who cannot learn from history are doomed to repeat it.” My bet’s on repeating it, given how our political system works like a pendulum. How many bubbles did we experience in the last 10 years? What happens to regulation and resolve when there is a political changeover?

ALLAN
B e M o v e d @ A O L . c o m

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage | Tagged: CDO, Chairman Cox, Chairman Mary Schapiro, collateral managers, collateralized debt obligations, investment banks, meltdown, NPR, Propublica, questionaire, SEC, securities, SIFMA | 6 Comments »

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Litigation Release No. 21489 / April 16, 2010

Securities and Exchange Commission v. Goldman, Sachs & Co. and Fabrice Tourre, 10 Civ. 3229 (BJ) (S.D.N.Y. filed April 16, 2010)

The SEC Charges Goldman Sachs With Fraud In Connection With The Structuring And Marketing of A Synthetic CDO

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