Statute of LImitations Running on Bank Officers Who Perpetrated Mortage Crisis

For more information please call 954-495-9867 or 520-405-1688

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see http://www.courant.com/opinion/letters/hc-go-after-mortgage-fraud-perps-20150427-story.html

It appears that the statute of limitations might be running out this year on any claim against the officers of the banks that created the fraudulent securitization process. Eric Holder, outgoing Attorney general, made an unusual comment a few months back where he said that private suits should be brought against such officers. The obvious question is why didn’t he bring further action against these individuals and the only possible answer I can think of is that it was because of an agreement not to prosecute while these officers and their banks “cooperated” in resolving the mortgage crisis and the downturn of the US economy.

People keep asking me what the essential elements of the fraud were and how homeowners can use it. That question involves a degree of complexity that is not easily addressed here but I will try to do so in a few articles.

The first point of reference is that the investment banks sold mortgage backed securities to investors under numerous false premises. The broker dealers sold shares or interests in REMIC Trusts that existed only on paper and were registered nowhere. This opened up the possibility for the unthinkable: an IPO (initial public offering) of securities of an “entity” that would not complain if they never received the proceeds of the sale. And in fact, as I have been advised by accountants and other people who were privy to the inner workings of the Securitization fail (See Adam Levitin) the money from the offering was never turned over to the Trustee of the “Trust” which only existed on paper by virtue of words written by the broker dealers themselves. They created a non existent entity that had no business and sold securities issued by that entity without turning over the proceeds of sale to the entity whose securities had been sold. It was the perfect plan.

Normally if a broker dealer sold securities in an IPO the management and shareholders would have been screaming “fraud” as soon as they learned their “company” was not receiving the proceeds of sale. Here in the case of REMIC Trusts, there was no management because the Trustee had no duties and was prohibited from pretending that it did have any duties. And here in the case of REMIC Trusts, there were no shareholders to complain because they were contractually bound (they thought) to not interfere with or even ask questions about the workings of the Trust. And of course when Clinton signed the law back in 1998 these securities were deregulated and redefined as private contracts and NOT securities, so the SEC couldn’t get involved either.

It was the perfect hoax. brokers and dealers got to sell these “non-securities” and keep the proceeds themselves and even register ownership of interests in the Trust in the name of the same broker dealer who sold it to pension funds and other investors. Back in 2007-2008 the banks were claiming that there were no trusts involved because they knew that was true. But then they got more brazen, especially when they realized that this was an admission of fraud and theft from investors.

Now we have hundreds of thousands of foreclosures in which a REMIC Trust is named as the foreclosing party when it never operated even for a second. It never had any money, it never received any income and it never had any expenses. So it stands to reason that none of the loans claimed to be owned by the Trusts could ever have been purchased by entities that had no assets, no money, no management, and no operations. We have made a big deal about the cutoff date for entry of a particular loan into the loan pool owned by the trust. But the real facts are that there was no loan pool except on paper in self-serving fabricated documents created by the broker dealers.

Investors thought they were giving money to fund a Trust. The Trust was never funded. So the money from investors was used in any way the broker dealer wanted. The investors thought they were getting an ownership interest in a valid note and mortgage. They never got that because their “Trust” did not acquire the loans. But their money was used, in part, to fund loans that were put on a fast track automated underwriting platform so nobody in the position of underwriter could be disciplined or jailed for writing loans that were too rigged to succeed. Then the broker dealers, knowing that the mortgage bonds were worthless bet that the value of the bonds would decrease, which of course was a foregone conclusion. And the bonds and the underlying loans were insured in the name of the broker dealer so the investors are left standing out in the wind with nothing to show for their investment — an interest in a worthless unfunded trust, and no direct claim for the repayment of loans that were funded with their money.

The reason why the foreclosing parties need a foreclosure sale is to create the appearance that the original loan was a valid loan contract (it wasn’t because no consideration actually flowed from the “lender” to the “borrower” and because the loan was table funded, which as a pattern is described in Reg Z as “predatory per se”). By getting foreclosures in the name of the Trust they have a Judge’s stamp of approval that the Trust was either the lender or the successor to the lender and that makes it difficult for anyone to say otherwise. And THAT is why TILA was passed with the rescission option.

So through a series of conduits and sham entities, the Wall Street investment banks lied to the investors and lied to the borrowers about who was in the deal and who was making money off the deal and how much. They lied to the investors, lied to the public, lied to regulatory agencies and lied to borrowers about the quality of the loan products they were selling which could not succeed and in which the broker dealers had a direct interest in making sure that the loans did not succeed. That was the whole reason why the Truth In Lending Act and Reg Z came into existence back in the 1960’s. Holder’s comments are a clue to what private lawyers should do and how much money there is in these cases against the leaders of the those investment banks. Both borrowers and lawyers should be taking a close look at how they get even for the fraud perpetrated upon the American consumer and the American taxpayer.

It is obvious that someone had to be making a lot of money in order to spend hundreds of millions of dollars advertising and promoting 2% loans. There is no profit there unless someone is stealing the money and tricking borrowers into signing loan papers that instantly clouded their title and created two potential liabilities — one to the payee on the note who never had any economic interest in the deal and one to the investors whose money was used to fund the loan. Most investors still don’t realize what happened to their money and many are still getting payments as though the Trust was real — but they are not getting payments or reports from the REMIC Trust.

And most borrowers don’t realize that their identity was stolen, that their loan was cloned, and that each version of their loan that was sold netted another 100% profit to the investment banks, who also sold the bonds to the Federal Reserve after they had already sold the same bonds to investors. Thus the investment banks screwed the investors, screwed the borrowers and screwed the taxpayers while their plan resulted in a cataclysmic failure of the economies around the world. Investors mostly don’t realize that they are never going to see the money they were promised and that the banks are keeping the investors’ money as if it belonged to the bank. Most investors also don’t realize that the investment banks were their servant and that all that money the bank made really belongs to the investor, thus zeroing out the liability of the borrower but creating an enormous profit to the investors. Most borrowers don’t realize that they certainly don’t owe money to any of the foreclosing parties, but that they might have some remote liability to the clueless investors whose money was used to fund this circus.

Who Are the Creditors?

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Since the distributions are made to the alleged trust beneficiaries by the alleged servicers, it is clear that both the conduct and the documents establish the investors as the creditors. The payments are not made into a trust account and the Trustee is neither the payor of the distributions nor is the Trustee in any way authorized or accountable for the distributions. The trust is merely a temporary conduit with no business purpose other than the purchase or origination of loans. In order to prevent the distributions of principal from being treated as ordinary income to the Trust, the REMIC statute allows the Trust to do its business for a period of 90 days after which business operations are effectively closed.

The business is supposed to be financed through the “IPO” sale of mortgage bonds that also convey an undivided interest in the “business” which is the trust. The business consists of purchasing or originating loans within the 90 day window. 90 days is not a lot of time to acquire $2 billion in loans. So it needs to be set up before the start date which is the filing of the required papers with the IRS and SEC and regulatory authorities. This business is not a licensed bank or lender. It has no source of funds other than the IPO issuance of the bonds. Thus the business consists simply of using the proceeds of the IPO for buying or originating loans. Since the Trust and the investors are protected from poor or illegal lending practices, the Trust never directly originates loans. Otherwise the Trust would appear on the original note and mortgage and disclosure documents.

Yet as I have discussed in recent weeks, the money from the “trust beneficiaries” (actually just investors) WAS used to originate loans despite documents and agreements to the contrary. In those documents the investor money was contractually intended to be used to buy mortgage bonds issued by the REMIC Trust. Since the Trusts are NOT claiming to be holders in due course or the owners of the debt, it may be presumed that the Trusts did NOT purchase the loans. And the only reason for them doing that would be that the Trusts did not have the money to buy loans which in turn means that the broker dealers who “sold” mortgage bonds misdirected the money from investors from the Trust to origination and acquisition of loans that ultimately ended up under the control of the broker dealer (investment bank) instead of the Trust.

The problem is that the banks that were originating or buying loans for the Trust didn’t want the risk of the loans and frankly didn’t have the money to fund the purchase or origination of what turned out to be more than 80 million loans. So they used the investor money directly instead of waiting for it to be processed through the trust.

The distribution payments came from the Servicer directly to the investors and not through the Trust, which is not allowed to conduct business after the 90 day cutoff. It was only a small leap to ignore the trust at the beginning — I.e. During the business period (90 days). On paper they pretended that the Trust was involved in the origination and acquisition of loans. But in fact the Trust entities were completely ignored. This is what Adam Levitin called “securitization fail.” Others call it fraud, pure and simple, and that any further action enforcing the documents that refer to fictitious transactions is an attempt at making the courts an instrument for furthering the fraud and protecting the perpetrator from liability, civil and criminal.

And that brings us to the subject of servicer advances. Several people  have commented that the “servicer” who advanced the funds has a right to recover the amounts advanced. If that is true, they ask, then isn’t the “recovery” of those advances a debit to the creditors (investors)? And doesn’t that mean that the claimed default exists? Why should the borrower get the benefit of those advances when the borrower stops paying?

These are great questions. Here is my explanation for why I keep insisting that the default does not exist.

First let’s look at the actual facts and logistics. The servicer is making distribution payments to the investors despite the fact that the borrower has stopped paying on the alleged loan. So on its face, the investors are not experiencing a default and they are not agreeing to pay back the servicer.

The servicer is empowered by vague wording in the Pooling and Servicing Agreement to stop paying the advances when in its sole discretion it determines that the amounts are not recoverable. But it doesn’t say recoverable from whom. It is clear they have no right of action against the creditor/investors. And they have no right to foreclosure proceeds unless there is a foreclosure sale and liquidation of the property to a third party purchaser for value. This means that in the absence of a foreclosure the creditors are happy because they have been paid and the borrower is happy because he isn’t making payments, but the servicer is “loaning” the payments to the borrower without any contracts, agreements or any documents bearing the signature of the borrower. The upshot is that the foreclosure is then in substance an action by the servicer against the borrower claiming to be secured by a mortgage but which in fact is SUPPOSEDLY owned by the Trust or Trust beneficiaries (depending upon which appellate decision or trial court decision you look at).

But these questions are academic because the investors are not the owners of the loan documents. They are the owners of the debt because their money was used directly, not through the Trust, to acquire the debt, without benefit of acquiring the note and mortgage. This can be seen in the stone wall we all hit when we ask for the documents in discovery that would show that the transaction occurred as stated on the note and mortgage or assignment or endorsement.

Thus the amount received by the investors from the “servicers” was in fact not received under contract, because the parties all ignored the existence of the trust entity. It was a voluntary payment received from an inter-meddler who lacked any power or authorization to service or process the loan, the loan payments, or the distributions to investors except by conduct. Ignoring the Trust entity has its consequences. You cannot pick up one end of the stick without picking up the other.

So the claim of the “servicer” is in actuality an action in equity or at law for recovery AGAINST THE BORROWER WITHOUT DOCUMENTATION OF ANY KIND BEARING THE BORROWER’S SIGNATURE. That is because the loans were originated as table funded loans which are “predatory per se” according to Reg Z. Speaking with any mortgage originator they will eventually either refuse to answer or tell you outright that the purpose of the table funded loan was to conceal from the borrower the parties with whom the borrower was actually doing business.

The only reason the “servicer” is claiming and getting the proceeds from foreclosure sales is that the real creditors and the Trust that issued Bonds (but didn’t get paid for them) is that the investors and the Trust are not informed. And according to the contract (PSA, Prospectus etc.) that they don’t know has been ignored, neither the investors nor the Trust or Trustee is allowed to make inquiry. They basically must take what they get and shut up. But they didn’t shut up when they got an inkling of what happened. They sued for FRAUD, not just breach of contract. And they received huge payoffs in settlements (at least some of them did) which were NOT allocated against the amount due to those investors and therefore did not reduce the amount due from the borrower.

Thus the argument about recovery is wrong because there really is no such claim against the investors. There is the possibility of a claim against the borrower for unjust enrichment or similar action, but that is a separate action that arose when the payment was made and was not subject to any agreement that was signed by the borrower. It is a different claim that is not secured by the mortgage or note, even if the  loan documents were valid.

Lastly I should state why I have put the “servicer”in quotes. They are not the servicer if they derive their “authority” from the PSA. They could only be the “servicer” if the Trust acquired the loans. In that case they PSA would affect the servicing of the actual loan. But if the money did not come from the Trust in any manner, shape or form, then the Trust entity has been ignored. Accordingly they are neither the servicer nor do they have any powers, rights, claims or obligations under the PSA.

But the other reason comes from my sources on Wall Street. The service did not and could not have made the “servicer advances.” Another bit of smoke and mirrors from this whole false securitization scheme. The “servicer advances” were advances made by the broker dealer who “sold” (in a false sale) mortgage bonds. The brokers advanced money to an account in which the servicer had access to make distributions along with a distribution report. The distribution reports clearly disclaim any authenticity of the figures used, the status of the loans, the trust or the portfolio of loans (non-existent) as a whole. More smoke and mirrors. So contrary to popular belief the servicer advances were not made by the servicers except as a conduit.

Think about it. Why would you offer to keep the books on a thousand loans and agree to make payments even if the borrowers didn’t pay? There is no reasonable fee for loan processing or payment processing that would compensate the servicer for making those advances. There is no rational business reason for the advance. The reason they agreed to issue the distribution report along with money that was actually under the control of the broker dealer is that they were being given an opportunity, like sharks in a feeding frenzy, to participate in the liquidation proceeds after foreclosure — but only if the loan actually went into foreclosure, which is why most loan modifications are ignored or fail.

Who had a reason to advance money to the creditors even if there was no payment by the borrower? The broker dealer, who wanted to pacify the investors who thought they owned bonds issued by a REMIC Trust that they thought had paid for and owned the loans as holder in due course on their behalf. But it wasn’t just pacification. It was marketing and sales. As long as investors thought the investments were paying off as expected, they would buy more bonds. In the end that is what all this was about — selling more and more bonds, skimming a chunk out of the money advanced by investors — and then setting up loans that had to fail, and if by some reason they didn’t they made sure that the tranche that reportedly owned the loan also was liable for defaults in toxic waste mortgages “approved” for consumers who had no idea what they were signing.

So how do you prove this happened in one particular loan and one particular trust and one particular servicer etc.? You don’t. You announce your theory of the case and demand discovery in which you have wide latitude in what questions you can ask and what documents you can demand — much wider than what will be allowed as areas of inquiry in trial. It is obvious and compelling that asked for proof of the underlying authority, underlying transaction or anything else that is real, your opposition can’t come up with it. Their case falls apart because they don’t own or control the debt, the loan or any of the loan documents.

Securitization for Lawyers

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The CONCEPT of securitization does not contemplate an increase in violations of lending laws passed by States or the Federal government. Far from it. The CONCEPT anticipated a decrease in risk, loss and liability for violations of TILA, RESPA or state deceptive lending laws. The assumption was that the strictly regulated stable managed funds (like pensions), insurers, and guarantors would ADD to the protections to investors as lenders and homeowners as borrowers. That it didn’t work that way is the elephant in the living room. It shows that the concept was not followed, the written instruments reveal a sneaky intent to undermine the concept. The practices of the industry violated everything — the lending laws, investment restrictions, and the securitization documents themselves. — Neil F Garfield, Livinglies.me

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“Securitization” is a word that provokes many emotional reactions ranging from hatred to frustration. Beliefs run the range from the idea that securitization is evil to the idea that it is irrelevant. Taking the “irrelevant” reaction first, I would say that comes from ignorance and frustration. To look at a stack of Documents, each executed with varying formalities, and each being facially valid and then call them all irrelevant is simply burying your head in the sand. On the other hand, calling securitization evil is equivalent to rejecting capitalism. So let’s look at securitization dispassionately.

First of all “securitization” merely refers to a concept that has been in operation for hundreds of years, perhaps thousands of years if you look into the details of commerce and investment. In our recent history it started with “joint stock companies” that financed sailing expeditions for goods and services. Instead of one person or one company taking all the risk that one ship might not come back, or come back with nothing, investors could spread their investment dollars by buying shares in a “joint stock company” that invested their money in multiple sailing ventures. So if some ship came in loaded with goods it would more than offset the ships that sunk, were pirated, or that lost their cargo. Diversifying risk produced more reliable profits and virtually eliminated the possibility of financial ruin because of the tragedies the befell a single cargo ship.

Every stock certificate or corporate or even government bond is the product of securitization. In our capitalist society, securitization is essential to attract investment capital and therefore growth. For investors it is a way of participating in the risk and rewards of companies run by officers and directors who present a believable vision of success. Investors can invest in one company alone, but most, thanks to capitalism and securitization, are able to invest in many companies and many government issued bonds. In all cases, each stock certificate or bond certificate is a “derivative” — i.e., it DERIVES ITS VALUE from the economic value of the company or government that issued that stock certificate or bond certificate.

In other words, securitization is a vehicle for diversification of investment. Instead of one “all or nothing” investment, the investors gets to spread the risk over multiple companies and governments. The investor can do this in one of two ways — either manage his own investments buying and selling stocks and bonds, or investing in one or more managed funds run by professional managers buying and selling stocks and bonds. Securitization of debt has all the elements of diversification and is essential to the free flow of commerce in a capitalistic economy.

Preview Questions:

  • What happens if the money from investors is NOT put in the company or given to the government?
  • What happens if the certificates are NOT delivered back to investors?
  • What happens if the company that issued the stock never existed or were not used as an investment vehicle as promised to investors?
  • What happens to “profits” that are reported by brokers who used investor money in ways never contemplated, expected or accepted by investors?
  • Who is accountable under laws governing the business of the IPO entity (i.e., the REMIC Trust in our context).
  • Who are the victims of misbehavior of intermediaries?
  • Who bears the risk of loss caused by misbehavior of intermediaries?
  • What are the legal questions and issues that arise when the joint stock company is essentially an instrument of fraud? (See Madoff, Drier etc. where the “business” was actually collecting money from lenders and investors which was used to pay prior investors the expected return).

In order to purchase a security deriving its value from mortgage loans, you could diversify by buying fractional shares of specific loans you like (a new and interesting business that is internet driven) or you could go the traditional route — buying fractional shares in multiple companies who are buying loans in bulk. The share certificates you get derive their value from the value of the IPO issuer of the shares (a REMIC Trust, usually). Like any company, the REMIC Trust derives its value from the value of its business. And the REMIC business derives its value from the quality of the loan originations and loan acquisitions. Fulfillment of the perceived value is derived from effective servicing and enforcement of the loans.

All investments in all companies and all government issued bonds or other securities are derivatives simply because they derive their value from something described on the certificate. With a stock certificate, the value is derived from a company whose name appears on the certificate. That tells you which company you invested your money. The number of shares tells you how many shares you get. The indenture to the stock certificate or bond certificate describes the voting rights, rights to  distributions of income, and rights to distribution of the company is sold or liquidated. But this assumes that the company or government entity actually exists and is actually doing business as described in the IPO prospectus and subscription agreement.

The basic element of value and legal rights in such instruments is that there must be a company doing business in the name of the company who is shown on the share certificates — i.e., there must be actual financial transactions by the named parties that produce value for shareholders in the IPO entity, and the holders of certificates must have a right to receive those benefits. The securitization of a company through an IPO that offers securities to investors offer one additional legal fiction that is universally enforced — limited liability. Limited liability refers to the fact that the investment is at risk (if the company or REMIC fails) but the investor can’t lose more than he or she invested.

Translated to securitization of debt, there must be a transaction that is an actual loan of money that is not merely presumed, but which is real. That loan, like a stock certificate, must describe the actual debtor and the actual creditor. An investor does not intentionally buy a share of loans that were purchased from people who did not make any loans or conduct any lending business in which they were the source of lending.

While there are provisions in the law that can make a promissory note payable to anyone who is holding it, there is no allowance for enforcing a non-existent loan except in the event that the purchaser is a “Holder in Due Course.” The HDC can enforce both the note and mortgage because he has satisfied both Article 3 and Article 9 of the Uniform Commercial Code. The Pooling and Servicing Agreements of REMIC Trusts require compliance with the UCC, and other state and federal laws regarding originating or acquiring residential mortgage loans.

In short, the PSA requires that the Trust become a Holder in Due Course in order for the Trustee of the Trust to accept the loan as part of the pool owned by the Trust on behalf of the Trust Beneficiaries who have received a “certificate” of fractional ownership in the Trust. Anything less than HDC status is unacceptable. And if you were the investor you would want nothing less. You would want loans that cannot be defended on the basis of violation of lending laws and practices.

The loan, as described in the origination documents, must actually exist. A stock certificate names the company that is doing business. The loan describes the debtor and creditor. Any failure to describe the the debtor or creditor with precision, results in a failure of the loan contract, and the documents emerging from such a “closing” are worthless. If you want to buy a share of IBM you don’t buy a share of Itty Bitty Machines, Inc., which was just recently incorporated with its assets consisting of a desk and a chair. The name on the certificate or other legal document is extremely important.

In loan documents, the only exception to the “value” proposition in the event of the absence of an actual loan is another legal fiction designed to promote the free flow of commerce. It is called “Holder in Due Course.” The loan IS enforceable in the absence of an actual loan between the parties on the loan documents, if a third party innocent purchases the loan documents for value in good faith and without knowledge of the borrower’s defense of failure of consideration (he didn’t get the loan from the creditor named on the note and mortgage).  This is a legislative decision made by virtually all states — if you sign papers, you are taking the risk that your promises will be enforced against you even if your counterpart breached the loan contract from the start. The risk falls on the maker of the note who can sue the loan originator for misusing his signature but cannot bring all potential defenses to enforcement by the Holder in Due Course.

Florida Example:

673.3021 Holder in due course.

(1) Subject to subsection (3) and s. 673.1061(4), the term “holder in due course” means the holder of an instrument if:

(a) The instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; and
(b) The holder took the instrument:

1. For value;
2. In good faith;
3. Without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series;
4. Without notice that the instrument contains an unauthorized signature or has been altered;
5. Without notice of any claim to the instrument described in s. 673.3061; and
6. Without notice that any party has a defense or claim in recoupment described in s. 673.3051(1).
673.3061 Claims to an instrument.A person taking an instrument, other than a person having rights of a holder in due course, is subject to a claim of a property or possessory right in the instrument or its proceeds, including a claim to rescind a negotiation and to recover the instrument or its proceeds. A person having rights of a holder in due course takes free of the claim to the instrument.
This means that Except for HDC status, the maker of the note has a right to reclaim possession of the note or to rescind the transaction against any party who has no rights to claim it is a creditor or has rights to represent a creditor. The absence of a claim of HDC status tells a long story of fraud and intrigue.
673.3051 Defenses and claims in recoupment.

(1) Except as stated in subsection (2), the right to enforce the obligation of a party to pay an instrument is subject to:

(a) A defense of the obligor based on:

1. Infancy of the obligor to the extent it is a defense to a simple contract;
2. Duress, lack of legal capacity, or illegality of the transaction which, under other law, nullifies the obligation of the obligor;
3. Fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms;
This means that if the “originator” did not loan the money and/or failed to perform underwriting tests for the viability of the loan, and gave the borrower false impressions about the viability of the loan, there is a Florida statutory right of rescission as well as a claim to reclaim the closing documents before they get into the hands of an innocent purchaser for value in good faith with no knowledge of the borrower’s defenses.

 

In the securitization of loans, the object has been to create entities with preferred tax status that are remote from the origination or purchase of the loan transactions. In other words, the REMIC Trusts are intended to be Holders in Due Course. The business of the REMIC Trust is to originate or acquire loans by payment of value, in good faith and without knowledge of the borrower’s defenses. Done correctly, appropriate market forces will apply, risks are reduced for both borrower and lenders, and benefits emerge for both sides of the single transaction between the investors who put up the money and the homeowners who received the benefit of the loan.

It is referred to as a single transaction using doctrines developed in tax law and other commercial cases. Every transaction, when you think about it, is composed of numerous actions, reactions and documents. If we treated each part as a separate transaction with no relationship to the other transactions there would be no connection between even the original lender and the borrower, much less where multiple assignments were involved. In simple terms, the single transaction doctrine basically asks one essential question — if it wasn’t for the investors putting up the money (directly or through an entity that issued an IPO) would the transaction have occurred? And the corollary is but for the borrower, would the investors have been putting up that money?  The answer is obvious in connection with mortgage loans. No business would have been conducted but for the investors advancing money and the homeowners taking it.

So neither “derivative” nor “securitization” is a dirty word. Nor is it some nefarious scheme from people from the dark side — in theory. Every REMIC Trust is the issuer in an initial public offering known as an “IPO” in investment circles. A company can do an IPO on its own where it takes the money and issues the shares or it can go through a broker who solicits investors, takes the money, delivers the money to the REMIC Trust and then delivers the Trust certificates to the investors.

Done properly, there are great benefits to everyone involved — lenders, borrowers, brokers, mortgage brokers, etc. And if “securitization” of mortgage debt had been done as described above, there would not have been a flood of money that increased prices of real property to more than twice the value of the land and buildings. Securitization of debt is meant to provide greater liquidity and lower risk to lenders based upon appropriate underwriting of each loan. Much of the investment came from stable managed funds which are strictly regulated on the risks they are allowed in managing the funds of pensioners, retirement accounts, etc.

By reducing the risk, the cost of the loans could be reduced to borrowers and the profits in creating loans would be higher. If that was what had been written in the securitization plan written by the major brokers on Wall Street, the mortgage crisis could not have happened. And if the actual practices on Wall Street had conformed at least to what they had written, the impact would have been vastly reduced. Instead, in most cases, securitization was used as the sizzle on a steak that did not exist. Investors advanced money, rating companies offered Triple AAA ratings, insurers offered insurance, guarantors guarantees loans and shares in REMIC trusts that had no possibility of achieving any value.

Today’s article was about the way the IPO securitization of residential loans was conceived and should have worked. Tomorrow we will look at the way the REMIC IPO was actually written and how the concept of securitization necessarily included layers of different companies.

VISA IPO FRAUD

VISA Fraud Costing New Stockholders and Consumers Billions of Dollars

The media and lazy stock analysts have failed to read what was right in front of them. Visa faces some challenging times and in-fighting between the stockholders, the junior financial institutions members and stockholders on the one hand, and the handful of controlling mega-banks on the other hand. The prospects of government anti-trust units and private actions against VISA and other networks has never been higher. It’s not the first time and it won’t the the last.

ATM Fraud and Anti-Competitive Practices

When will the media and analysts report that Visa et al are foregoing $180 million per year in profit for the sole purpose of keeping a death grip on potential competition from small financial institutions, exposing the gaping hole in the “service” offering of a few large financial institutions that control Visa policies? 

This is costing Visa shareholders at least a couple of billion dollars, and restricting the prospects of the company in the global economy. 

It is also costing the American consumers who use ATMs a whopping $5 billion per year in EXCESS fees. And it is costing the American Economy something on the order of $75 billion in revenues to small business owners, in addition to the billions in profits that small financial institutions should be making, and the resulting impact of restricting the ability of small institutions to invest money locally (for lack of deposits they could otherwise attract).

Visa and MasterCard, and NYCE, and STAR and Pulse, are all networks that are essentially controlled directly or indirectly by just a few large financial institutions for the benefit of themselves and contrary to the interests of their junior member financial institutions, the customers of smaller financial institutions, small merchants, artificially inflating costs to the operators of the terminals, the customers/cardholders that use the terminals and depressing their own revenues at the expense of what are now public shareholders.

These institutions have been using the networks to force small financial institutions to use their services (community banks and credit unions), while using their “rule-making authority” (largely regarded as quasi governmental, even though it isn’t), to make sure the smaller banks and credit unions can’t compete on a level playing field in providing ATM convenience. 

The ATM “Scrip” terminal, which performs all ATM functions and allows the merchant to fund the withdrawal from his cash drawer, is a very inexpensive, simple and small-footprint way of extending the reach of small banks and credit unions into stores and other locations that are more convenient to customers, at lower cost to the bank and the customer, and which would enhance sales at smaller merchants. 

It’s use at about 25,000 “off the radar” locations in the United States and hundreds of thousands of locations around the world also increases the volume of transactions, revenues and profit at the network level, so why wouldn’t the networks promote it? Instead they changed their policy in 1997 and have ever since been aggressively publishing bulletins containing “rules” prohibiting ATM Scrip Terminals and threatening banks with $10,000 fines per day. 

The networks enforce this policy through intimidation, and have aggressively adopted policies inhibiting fair competition between their controlling large financial institution, on the one hand —  and all the rest of the depository institutions in the country who would compete with them for deposits and loans customers if they could offer convenient low-cost or no-cost ATM access. 

This puts VISA and other network squarely in the cross hairs of DOJ and private actions for anti-competitive practices (hardly the first time they were accused of that).  

By adopting policies that are plainly contrary to its own business model in order to benefit a few large institutions VISA has decreased its revenues and profits and now threatens to decrease its prospect for maintaining or expanding market share, because the rest of the world is going toward ATM Scrip Terminals. 

Beginning in April 1997, these policies were adopted, after previously allowing, even welcoming the ATM Scrip terminal into the world of ATM convenience. The networks began systematically putting hundreds of companies and processors out of business who allow the scrip terminal to operate. 

By the way, CU24, a credit union network, NYCE and other networks expressly permit “scrip” terminals but do not promote them.  Others don’t exclude it but actively make it difficult for anyone to operate ATM Scrip terminals. The average U.S. surcharge for ATM Scrip is now under $1.00. The average ATM surcharge for the big machines is around $3.00 now. Hence the larger financial institutions, whose death grip on the system prevents smaller institutions from competing with them, are picking up $3 per transactions for those few customers of community banks and credit unions while offering free ATM service to their own customers. The small banks and credit unions can do the same thing but are prevented from doing so by the “rules” of the networks. 

These networks, including Visa with all of its other potholes, have passed rules against it. It is simply a contrived barrier to entry into the ATM convenience model, and all the resulting benefits of getting new customers, depositors and loans prospects.  

It is a barrier to small banks and credit unions who could put out 20  ATM Scrip terminals at a total cost of $20,000 into 20 locations closer to the work and homes of its customers. The networks, particularly VISA, require the small financial institution to invest their $20,000 into One machine which of course presents no competition at all to BOA, Chase etc. 

20 machines strategically placed by each small financial institution would present an intolerable competitive problem for the large banks, so they have squelched it. The cost of that policy now extends, as a result of the VISA IPO, from the financial services marketplace, to investors in Visa equities, who will be deprived of seeing their company’s revenues and profits artificially restricted by a policy that has nothing to do with the business of their company and everything to do with the business of third parties whose interests are antithetical to the interests of Visa’s business model.

Instead of carrying and operating costs of perhaps $200 per year for 20 ATM scrip terminals, small financial institutions face the daunting prospect of paying around $12,000 per month! This is a figure that would all but obliterate those smaller institutions that are profitable and would create solvency problems in credit unions.  

Thus they are required to restrict their ATM presence to one or two terminals when they could be placing dozens if not hundreds out in the competitive geographic area, producing millions of transactions, and substantial revenues to Visa et al. 

How many transactions? The answer is that back in 1997, there were nearly 13 million ATM Scrip transactions per month in the U.S. alone. Now the figure is under 1 million, and that is “sub rosa”. Allowing for the continuation of what had been meteoric growth of the ATM Scrip business, the number of transactions could today could easily exceed 200 million per month. Allowing 8 cents as the revenue of the network for each of these transactions means that Visa et al are foregoing total revenues of at least $16 million per month, most of which is profit. 

Thus somewhere around $180 million in net profit before taxes is being diverted from the networks (mostly VISA) to the benefit of third parties whose business directly benefits from these policies.

Requiring the use of big bulky, machines with vaults, cash dispensers, and other bells and whistles increases the operating cost, cash management, and insurance costs to hundreds of dollars per month, from what would be about $10 per year for the smaller “scrip” terminal. 

How will these networks explain to their member banks and now their shareholders why they are restricting electronic access to depository accounts (which is, after all, their business) and thus eliminating large revenue opportunities and profit on the bottom line? 

And if they do not change their “rules,” then the prospect of other networks or direct agreements between processor, banks and merchants becomes more likely, particularly in view of the fact that the “scrip” terminal is the dominant player in all emerging markets around the world. 

Will stockholders be pleased to learn that Visa profits and market share are shrinking because of the interests of a few large customers in the U.S. domestic banking business?

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