Held Hostage by a Home: The Devastation of Foreclosure

Posted on May 8, 2016 by Neil Garfield
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Held Hostage by a Home

Depending on reader response- this column may become an ongoing Sunday feature on LivingLies. Let us know what you think.
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Although Neil Garfield eloquently describes the legal dynamics of foreclosure, there is also a human battle waged in millions of homes nationwide that remains hidden behind walls of shame, fear and anger. Families are torn apart by the stress and uncertainty that financial burdens bring. A home, no matter how modest or grand, is a foundation of family life- and when it is torn away by companies without legal standing to do so- the pain is compounded because of the injustice.
Most families who fall behind on their debts, do not do so deliberately. Usually financial debt is caused by job loss, illness, divorce, or simply being induced into obtaining more credit than the family can service-by companies who carry no risk (due to securitization). Most families would embrace the opportunity to have one second chance to pay back any outstanding balance on their home and make good on their debts-but loan servicers have no incentive to work with the homeowner.
Unfortunately, the way the mortgage industry works, it is no longer beneficial for the servicer to service your loan- when they can foreclose instead. A huge financial windfall awaits a servicer that can engineer a default. Instead of receiving approximately .125% of the monthly payment, the servicer is entitled to keep all fees, late interest, and other default charges (and the entire proceeds if they are collecting on behalf of a trust that does not exist). Until loan servicing issues are addressed, servicers will continue their predatory tactics to push homeowners into foreclosure. I should know because I am the victim of a predatory servicer. This is my story.
I am being held hostage by my home. The red brick and mortar of the quintessential American home has become my prison. For the past seven years I have had the rope of the commercial code truss my freedom, happiness, career and dreams. The blindfold has been removed but I still can’t trust what I see- banks that operate like organized crime syndicates supported by courts that refuse to acknowledge the fraud. I have been gagged and silenced by a bank, as my story, like millions of others goes unheard. Hopefully, the ability to warn others what a bank is capable of- will be cathartic.
What most people don’t understand before taking on foreclosure is that unless you have unlimited wealth, you will be taken hostage during litigation. The Notices of Default filed against you will keep you from repurchasing a different house, will destroy your credit, may prevent you from obtaining employment, may cause creditors to rescind credit extended, and may exhaust all of your savings and retirement. Your neighbors will likely shun you and your “friends” may distance themselves from you. Your opportunities to rebuild and recover from a financial setback will be compromised. I won’t even get into the emotional costs (divorce, volatile home environment, stressed parenting). Rarely is a case settled at the trial level. Most cases that should be settled with two or three years may go on for a decade or so if you continue to battle on.
Eight years ago, If I had been told what my future would hold if I dared to challenge my loan servicer- I would have held a block party for the bank and handed them the keys to the house. My greatest regret in life is that I decided to hold the bank accountable for reneging on my loan modification. It has cost me my life savings, my health, my marriage, and worst of all- instead of enjoying the childhoods of my children- I have spent every day depressed and anxious while battling a soul-less banking cartel with unlimited financial resources and power. My children have no idea who I am, or who I was before my life became a war game and I took up the position of General. In fact, I have no idea who I am outside of being held hostage by my home.
Why don’t I walk away? Surely losing 13 years of my life would be better than another decade? Because I am a fool. Because I have sacrificed and lost almost everything- to quit would be even worse than to go down defeated. There becomes a point in time- when you can’t turn back. For 13 years I have spent over 200k in order to receive an answer to one very simple question: WHO OWNS MY NOTE???? My servicer and the courts believe I have no right to an answer.
There are thousands of unconscionable foreclosure stories in America- that are unfathomably egregious and completely unnecessary- mine included. I had the ability and desire to pay the bank any amount they requested. I only wanted to sell my home and move on with my life. However, the bank did not want payment- they wanted the house. Neil Garfield has stated that the reason the banks want the foreclosure more than they want payment is because not only does the bank profit handsomely from a foreclosure, but it allows them to neatly tie up the fraud and seal the deal. Once a home is foreclosed upon- rarely does the homeowner sue for wrongful foreclosure.
The ordeal of foreclosure is by design, created by banks to cause the maximum amount of damage- both financially and emotionally. There is absolutely no good faith that arises when the bank can profit from a foreclosure. I have often wondered how people who work in the foreclosure industry sleep at night. Ayn Rand thought about these people also and wrote in Atlas Shrugs, “The man who lies to the world, is the world’s slave from then on…There are no white lies, there is only the blackest of destruction, and a white lie is the blackest of all.” To live knowing you have destroyed the lives of families and committed moral crimes in order to receive a paltry paycheck, would be a worse hell than even I have faced.
Last week the Center of Disease Control and Prevention (CDC) reported that the suicide rates for middle-age whites jumped an alarming 40 percent from 1999 to 2010. The suicide rate for both younger and older Americans remained virtually unchanged, however, the rate spiked for those in middle age (35 to 64 years old) with a 28 percent increase from 1999 to 2010. According to the CDC, there were more than 38,000 suicides in 2010 making it the tenth leading cause of death in America overall. Among African Americans, Hispanics and even the oldest white Americans, death rates have continued to fall. What could be responsible for this drastic change in suicide demographics?
The middle-class suicide spike began with the onset of the tech bubble implosion where middle-class families saw their retirement funds evaporate. Locked into company 401ks where the funds are illiquid, many 401ks don’t allow the ability to place stop-losses. A stop-loss is an order that is placed, usually on a stock, to sell when the price declines to a certain level. So while the wealthy and knowledgeable were able to stop some of the bleed, mid-level employees in company-sponsored retirement programs were disproportionately impacted.
By 2008 the middle class found themselves mired in home loans that were unaffordable, in houses where they owed more than the home was worth, and subjected to a volatile job market and economy. In effect, the middle class died in 2008 and has not rebounded.  Consider the way life has changed since 2001. We are under surveillance all day, we pay a disproportionate amount of our income to taxes that go to support wars and programs most of us do not want, the economy is rigged in favor of the wealthy, and the cost of living has skyrocketed while wages remain flat. Most people in this demographic went to college, both partners work full-time jobs, and are responsible for raising their own children while caring for aging parents on limited incomes.

 

When you face foreclosure or bankruptcy this often pushes people over the tipping point. This was not the life that most middle-class people contemplated and are ill equipped to deal with. The middle class bought into the premise if you go to college and work hard you will gain financial security- not knowing the system was rigged. These individuals were also typically raised in middle class homes and were unprepared for the financial struggles not typically equated with the middle class.
“It’s a loss of hope, a loss of expectations of progress from one generation to the next,” said Angus Deaton, a Nobel Prize–winning economist who had studied the data. The middle class is not only being financially impacted by the economy but the strain on the middle class is psychological. The study noted that white women between 25 and 55 have been dying at accelerating rates over the past decade, a spike in mortality not seen since the AIDS epidemic in the early 1980s. According to recent studies of death certificates, the trend is worse for women in the middle of the United States, even worse in rural areas, and worst of all for those in the lower middle class. Drug and alcohol overdose rates for working-age white women have quadrupled. Suicides are up by as much as 50 percent.
According to the Federal Reserve, 47 percent of those who responded to a recent survey said they are living so close to financial ruin that they couldn’t come up with $400 to meet an emergency, not without first borrowing the money or selling something. Almost half of all Americans are fighting a losing battle to keep their heads above water.
This situation was the subject of a paradigm shifting article in the May issue of Atlantic magazine, “The Secret Shame of the Middle Class,” that was written by Neal Gabler, a well-known book author and film critic. Gabler reveals that despite his successful career, impressive resume and outward appearance of prosperity, he is financially insolvent and must often “juggle creditors to make it through the week.”
The writer attempts to provide reasons for the crisis. He lists predatory credit card companies, the ever-rising cost of living, wage stagnation, poor decision-making, bad luck and a national plague of financial illiteracy. But one cash depleting issue Gabler overlooks is taxation — and the fact that the middle class that pays almost 50% of their income to some type of tax- while the wealthy are able to exploit the system and pay very little if any tax.
Rising health-care costs, job insecurity, climbing foreclosures, and rising energy costs are decimating the middle class. The middle class American now “leases” their lives and most will have no assets to show upon their deaths. They are tenants in their own homes (read your Mortgage- you are a tenant), lease their cars, and are dependent on their employer who is likely facing financial troubles of their own. The housing markets are starting to look a lot like they did in 2007 (except there are more renters now). It is easy to see why the middle class that provides the support for both upper and lower classes is at its breaking point.
Signs of Big Trouble
Families with no savings, piles of credit card debt, and mortgages on homes they should not have been qualified for coupled with flat-lining incomes, low-paying jobs, skyrocketing health-care costs and exorbitant college costs are in dire straits. Wall Street banks with complicit buy-ins from the courts and law enforcement have created an untenable situation where the middle class has nowhere to turn. The banks prey on the vulnerability of people who suffered a temporary setback but are doing everything in their power to correct the situation in good faith. Homeowners are a small obstacle to big banks with unlimited financial resources who retain the best attorneys in the country to defend their predatory and illegal schemes.

It is evident that the government and courts are either unable or unwilling to rein in the powerful banks. Home ownership has dropped to its lowest rate since 1967, and one in every three American families is dealing with a debt collector. One more major recession and the suicide rates will further skyrocket. Without the middle class who is going to take care of the lower classes? The middle class is fighting for its life- and when all else fails apparently they take their own lives.
People are angry, people are desperate and people want solutions. If the middle class really wants to do something to stop this downward trajectory- the first thing to do would be to close your accounts with the major banks that service loans (Wells Fargo, CitiMortgage, Bank of America). If able, refinance your home with a credit union who holds your mortgage in-house and does not securitize loans. The middle class could effectively starve the beast that oppresses them if they would unite.
There are economic indicators that the housing market is reverting back to the 2007 lending policies that were the norm prior to the bubble that popped in 2008. Many banks are offering zero-down loans while Fannie Mae and Freddie Mac have lowered their loan qualifications in an attempt to spur on the lower and middle class housing market. The banks are resorting to desperate tactics as homebuyers have stopped purchasing. There can be no doubt that those who have lived through a foreclosure or the foreclosure of a family member will ever trust a big bank again. I know that personally, I will NEVER borrow from a big bank again.
The suicide report showed a marked increase in mortality of middle-aged white non-Hispanic men and women in the United States between 1999 and 2013 was unique to the United States; no other rich country saw a similar event. Self-reported declines in health, mental health, and ability to conduct activities of daily living, and increases in chronic pain and inability to work, as well as clinically measured deteriorations in liver function, all point to growing distress in this population. Research confirms that this situation is due to economic causes and life quality deterioration. All indications show that economic conditions are even worsening for the middle class.
It is noteworthy that other countries have had similar financial problems that mirror the United States, however, the suicide rates and middle-class morbidity have not increased in any other developed country but the United States. The American capitalist machine is feeding off the hopes and dreams of the middle class and yet the middle class is unable to obtain any relief through government agencies or access due process within the courts. This reality is impacting the lives of millions of Americans who deserve much better.

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The graph is shocking. And for obvious reasons I’m very interested in the mortality of white Americans in the 45-54 age range since I am in this class. If anyone knows about the costs of fighting an unlawful foreclosure it is me. I have filed three bankruptcies during 13 years of ongoing litigation to save my home (despite simply wanting to sell the home that I no longer resided in and cash out my equity). The bank has also filed at least 9 Notices of Default (destroying my ability to obtain credit for over a decade) and illegally foreclosed on me once (in violation of an automatic stay). I have spent every single discretionary dollar I have had believing that the courts would honor the rule of law. I was so confident when I set out to settle the illegal acts by my servicer that I naively believed the situation would be remedied within a year (when it could still take up to another decade to settle this issue).
I was raised in a white upper-middle class family. Your credit score was considered as important as your IQ and success was measured by your position and income. However, by 2001 I found out it doesn’t matter how successful you are- if you are dependent on an employer- it can all be snatched out of your hands (I was fired while on an approved medical leave from a large pharmaceutical company just to add irony). Unable to replace my high salary I fell into financial arrears. I lost my friends, my social standing, my ability to obtain credit, and my ability to rebuild. Even more tragically, the stress decimated my family and destroyed my marriage. I have never recovered. I hope that I don’t become one of these statistics but there are no guarantees I won’t.
Fighting a foreclosure is ugly, ugly business. Unfortunately, in our society, litigation is reserved for those well enough off to fight back. The majority of low-income households have literally no hope of fighting back without competent and aggressive legal counsel (and legal counsel is expensive). Both middle and lower classes are extremely vulnerable to any fluctuation of the economy. A job loss can result in losing everything and purchasing a house you can’t afford further exacerbates your financial stress.
It appears the banks deliberately started giving out loans like candy to anyone with a pulse, knowing they would securitize these debts, keep the investors’ money meant to fund the loan, collect the monthly payments and then foreclose- while knowing very few in the lower and middle classes would be able to fight back. The researchers state they can only hypothesize why records of white middle class Americans are committing suicide in increasing numbers? Although my statistical skills are sub-par I can tell you exactly what is behind the statistics- the illusion of the American dream has been exposed and not one elected official is willing to do what is necessary to correct the situation while the elite are still able to milk the market while it climbs and crashes. This is a tragedy not seen since people jumped off of skyscrapers with the stock market crash in 1929- it is just more subtle and stealth.
One theory about what is causing rising mortality among whites is the “dashed expectations” hypothesis. According to Johns Hopkins University sociologist Andrew Cherlin, whites today are more pessimistic than their forebears about their opportunities to advance in life. They are also more pessimistic than their black and Hispanic contemporaries.
“The idea that today’s generations will do better than their parents’ generation is part of the American Dream. It has always been true until now,” Cherlin said. “It may still be true for college-educated Americans, but not for the high-school-educated people we used to call the working class.”  The demise of the middle class is broad in its effects, but it appears to be culminating in places that are particularly vulnerable — such as cities where the drinking water is polluted with lead for years, or a small city that saw its biggest manufacturer move overseas, or in a household destroyed by job loss and foreclosure. It’s no big mystery why the wounded middle class is turning to Trump and his anti-establishment rhetoric and hitting a nerve.
Things aren’t going to get better for sometime due to the apathy and disconnect of Washington and your elected officials. Before you pursue litigation please consider if you possess the endurance needed to fight a bank with unlimited sources. In almost every successful case- an Appeal will be necessary. Consider the evidence you possess- is it enough to defeat the servicer’s claims? Do you have the financial means to finish the fight? Can you detach enough from the outcome that when your due process rights are trampled and the banks resort to forgery to defeat you- you won’t fall apart?
As much as I hate to say this- most people who have viable cases end up in some type of modification or agreement. The costs become too high for most homeowners to endure. Sadly the judges are now unfazed by forgeries, falsified documents, and fraud on the court- and there is nothing unusual about dummied up documents (although the banks are committing felonies with impunity). It is up to the people who have the means and temperament to fight foreclosure to do so on behalf of those whose voices have been silenced. Going the distance also requires that you don’t give in and sign a confidentiality agreement. Precedents in favor of the homeowner are desperately needed.
Every case you have read on Living Lies was because an attorney and the client refused to give in and both incurred serious losses in order to prevail. In cases like these, both attorney and client looked under every rock and crevice for evidence, they studied every law, act and statute. There are few attorneys who are willing to stand up for the homeowner and take the case all the way to trial. These world-class attorneys have sometimes faced ridicule by their peers but can’t be deterred. South Florida has some of the best foreclosure attorneys in the country including Neil Garfield, Tom Ice, Patrick Giunta, James “Randy” Ackley, Matthew Weidner, Mark Stopa, Bruce Jacobs and others (please read the blogs of these attorneys). Through the professionalism, proficiency and passion of these attorneys- the judges are now becoming wise to court manipulation and the fraudulent deeds of the banks.
With the knowledge Neil Garfield has shared with his readers on Living Lies- YOU have a better chance of prevailing than most Americans do who rely solely on their attorneys to take care of every aspect of their case (attorneys simply do not have the time). Eric Mains wrote a blog for Living Lies entitled “Why your Foreclosure Attorney Just became Your Business Partner”. The post provides excellent information for people who are willing and able to take on their loan servicers.
There is no doubt that the banks must receive much harsher monetary penalties to dissuade them from engaging in criminal conduct. It is also time that the representatives of the banks and foreclosure mills they employ be criminally prosecuted for the destruction they have caused to millions of families by fabricating documents, deliberately deceiving homeowners (through disinformation, false modifications, refusal to accept payments) and intentionally setting homeowners up to fail.
My advice to anyone contemplating foreclosure would be to NEVER allow a bank to steal your happiness or harm your family- walk away.  If you decide to pursue litigation your eyes will be opened that the attorneys for the banks are no different than college-educated thugs and that the courts are owned and paid for by the big banks. This lesson in itself will completely shake your belief system to the core. I would recommend in most cases that you save your family, your sanity and your money and go fight a war you can win.
Not to discourage you- but I have now been held hostage for 13 years. I have no home (except the house that has sat empty during 6 years of litigation now), no retirement, no marriage and my physical health is now starting to suffer (my mental suffering endures). I have wasted the best years of my life fighting a heartless bank with unlimited power and unlimited resources- because I actually believed our judicial system guaranteed my due process rights (wrong).  My ONLY hope is that the judge overhearing my case can put his own biases aside, apply the rule of law- and allow a jury of my peers to hear what a bank hell-bent on orchestrating the theft of my home is capable of.
They haven’t stolen my home-yet, but they may have stolen my life.

Update: March 25, 2018: If you have been victimized by a predatory foreclosure attorney- please write me at lendingliesconsulting@gmail.com.  I would like to hear your story.

 

Filed under: foreclosure | Tagged: , , , , , , | 48 Comments »

Fannie and Freddie Slammed by Massachusetts AG

Posted on May 16, 2014 by Neil Garfield

Martha Coakley gets it. Read her letter. Being a politician she does not say that the abstract fear of strategic defaults on all loans across the board is absurd. Well, actually she does say it. Principal reductions and ending patently illegal policies preventing homeowners from buying back their own property at auction are at the center of the solution to the foreclosure mess along with one more thing: things will change when we get the answer to the question IF THESE POLICIES HURT LENDERS, INVESTORS AND BORROWERS, WHY WOULD ANYONE LISTEN TO A THIRD PARTY WHO BENEFITS?

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As the new head of the Federal Agency administrating Fannie and Freddie, Watts, replacing DeMarco, signals a major change in policy and regulations. The question is whether he means it. There is no doubt at the White House that the economy will continue to be dragged down by foreclosures. Their answer to the problem lies in modifications with “principal reductions” and loosening some standards for lending and securitization.

While the modification policies should be changed, this isn’t enough. Modification has been used as a tool of Wall Street to lure unwary borrowers into the illusion of immediate relief only to be faced with terms that are worse than the borrowers had before when underwriting was virtually nonexistent — albeit with some fees and other “skin in the game” restrictions that could slow up some of the continuing securitization fraud.

The issue is still the same and the fear is still there — will the entire system collapse if we stop putting the full brunt of the foreclosure mess on the backs of unsophisticated homeowners who were induced to buy loan products that were filled with false pretenses, false assumptions and nonexistent review, verification and other underwriting procedures.

At this point, considering the rampant appraisal fraud, homeowners should be given an opportunity to regain equity and have some skin in the game — as opposed to the all or nothing proposition they are fighting in court with complete strangers to their transactions 000 alleged by parties relying on evidentiary presumptions rather than real facts of each transaction.

In 2007 I proposed amnesty for everyone and that everyone share in the the losses from civil and perhaps criminal fraud caused by the banks taking money from investors and applying it to loans that were guaranteed to fail and then scaring government into thinking that the world would end if they were called on this predatory and illegal practice on the basis of being too big too fail.

Too big to fail is a myth. First, the banks can’t collapse because they are cash rich off shore. Trillions were siphoned out of pension funds, taxpayers and insurers and guarantors taking so much money that the federal reserve had to engage in various schemes of direct and disguised quantitative easing (like buying mortgage bonds that were worthless at 100% of par value). The losses claimed by the banks were also fictional.

At this point everyone at the levers of power knows the truth. The trusts were never funded and the trusts never acquired the loans. This places the investors in the position of being undifferentiated and unattached creditors for loans they funded but were never  given proper documentation in the form of notes payable tot he investors and mortgages pledging collateral to the investors, leaving them as unsecured creditors.

But now the government is committed financially to a policy of continuing fraud started by the banks which is the same thing that is happening in court. The issue is not whether a deadbeat homeowner will get a free house (that is a choice presented by the banks in a false set of presumptions). despite the dire straits of investors in worthless and fraudulent mortgage bonds, homeowners are mostly willing to offer new notes and new mortgages that reflect economic reality. No, those deadbeats are nothing of the sort. They are hard working, play by the rules people who simply want a fair deal and they are willing to shoulder the loss forced on them by the banks.

Want to test it out? Call us about our AMGAR project — 7 years in the making — in which we call the bluff of the banks. It takes money, but the investors are starting to line up to help, and the homeowners with independent assets to offer the money rather than the foreclosure are racking up wins in case after case. Watch the banks back peddle as they reject the money in favor of their much needed foreclosure judgment and sale so they can report the loan was a bust — and therefore the money the banks received in servicer payments to the investors, insurance tot he banks, guarantees and other proceed from other obligors won’t need to be paid back.

And if played properly, the tax revenue due from the banks for violations of the REMIC provisions, part of which will fall on investors who fail to make their case against the broker dealers who sold them that mortgage crap, will more than offset the lack of revenue on Federal and State levels. All they need to do is give up on too big to fail and give up on thinking that killing the middle class is a good idea because the burden must fall somewhere. In fraud, the burden falls on the perpetrators not the victims although it is rare that restitution ever equals the loss. Virtually every foreclosure is merely the court’s complicity in the continuing fraud.

Remember the playbook of the bank attorneys into undermine your confidence until the very last second when they submit their voluntary dismissal in court. Call their bluff, offer the money based upon YOUR terms or the terms of an investor who is willing to make the commitment. Your terms require proof of ownership and proof of balance after credits for third party payments. you will find they don’t own the loan and the balance of the loan has already been paid down or paid off entirely.

Don’t just file motions to enforce discovery. File motions with affidavits from forensic analysts that explain why you need what you are asking for. You’ll get the order. And as soon as you get the order, the offers of settlement will start pouring in.

For information and further assistance please call 520-405-1688 or 954-495-9867. We provide help and guidance to professionals that know foreclosure defense, foreclosure offense, modifications, short-sales, Hardest Hit Funds and other Federal, State and private programs. Remember to ask about AMGAR. It is time to strike back. Let the other side start feeling the pain.

see http://www.nytimes.com/2014/05/14/business/Melvin-Watt-shifts-course-on-fannie-mae-and-freddie-mac.html?ref=business&_r=0

 

Filed under: AMGAR, CORRUPTION, discovery, evidence, expert witness, Fannie MAe, foreclosure, foreclosure defenses, forms, GTC | Honor, investment banking, Investor, MBS TRUSTEE, MODIFICATION, Mortgage, Motions, Neil Garfield Show, originator, Pleading, securities fraud, Servicer, taxes, Title, TRUST BENEFICIARIES, trustee | Tagged: , , , , , , , | 24 Comments »

How to Win the Case

Posted on July 20, 2013 by Neil Garfield

There many ways to win a case, so what I am saying in this article should be taken in the context of a larger reality where lawyers are winning hearings and winning the entire case using their own style, strategies and tactics. And it is equally true that any case management plan, regardless of the brilliance behind it, can still result in a loss. So this article should not be taken as my way or the highway, but rather just my way.

The first thing to keep in mind is that the argument that many lawyers are using at the beginning of the case should really be reserved until the end if the case — closing argument at trial, or argument at motions in limine, motions for summary judgment etc.

The narrative at the end of the case must be based upon evidence that you have built, brick by brick, and which has been admitted in evidence or at least is presumed correct by the time you make your arguments. The error of pro se litigants and many lawyers is that in the absence of knowledge and experience in trial law, they attempt to insert the final narrative at the beginning of the case, when it is neither credible on its face nor supported by anything in the record. Evidence, for the most part, consists of facts that are admitted into evidence or presumed true. In early motion practice and discovery requests and motions there is no evidence except that the Plaintiff’s complaint is usually presumed or deemed to be true for purposes of the motion and argument.

If you wish to challenge the foreclosure complaint or the notice of sale in non-judicial states it is necessary for you to know the facts and know the defects of the case presented by your opposition. Announcing your narrative at the beginning merely telegraphs your case plan and locks you into an argument about why you are saying what you are saying.

For that reason I question the wisdom of filing counterclaims against the foreclosing party since your claim probably does not arise until it is determined that the foreclosure action was wrongful. This is a matter some considerable debate amongst lawyers who believe that the borrower’s claims are compulsory counterclaims that are waived unless filed in the first action that litigates the validity of the foreclosure. So it is a tricky call and only a licensed practicing attorney can give you an opinion upon which you could rely in your strategy. My belief is that most of the issues presented by the planned counterclaim should fit nicely into affirmative defenses and set up the claim for wrongful foreclosure, Slander of title etc.

So knowing your theory of the case is important as a guidepost for your early discovery and motion practice. But what you need to do is attack the basic facts and presumptions alleged by your opposition. Where do you start? In judicial states there are frequently rules requiring the verification of the complaint. Taking the deposition of the person who verified the complaint is a good idea.

Making them bring the documents and media upon which they relied might require the place of deposition to be their place of work and for lawyers to arrange for video deposition. The interesting reaction of your opposition is likely to be a motion for protective order. At this hearing you can probably get an order requiring that the person show up, perhaps permitting access to the workplace for your forensic ediscovery expert, and to bring documents “upon which she or he relied.”

My experience is that the presumptions in favor of the banks start cracking during the fight about deposing the verifier and the designated representative (the next deposition duces Tecum). The Bank will want to block access to the person who signed the verification. They will want to limit the inquiry to the designated corporate representative. Keep in mind that you also want to depose the witness who will testify at trial find out why that witness is different from the one they produced as the corporate representative with the “most” knowledge at deposition and why both if them are different than the person who verified the complaint.

By demonstrating the stonewalling and delays imposed by the bank who supposedly has an interest in getting to foreclosure sale, judges recognize that there is something odd about the case. Asking for and offering an expedited discovery schedule in a motion for status conference will also help set the stage for your accusation that the delaying party is the plaintiff or the foreclosing party. Being the aggressor can convey the impression that the borrower is not the perpetrator, but rather the victim of wrongful behavior.

Early subpoenas and motions will remove the impression that are just buying time. Strategies for buying time even if allowed by the court, basically show that you are admitting the debt, note, mortgage, foreclosure sale and credit bid but want your client to get a few months of free rent. You are digging the wrong hole if your case strategy encourages the judge to believe that the debt, note and mortgage, and the assignments are all valid and that the borrower is looking for a break.

Early proactive litigation can highlight the fact that the bank is backing up and only wants to fight uncontested cases. It is a way to take control of the narrative gradually, so that when it comes to the motions for summary judgment (including your own cross motion), you have an opening for victory as Mark Stopa has done in Florida at least make it clear that there are material issues of fact in dispute.

The absence of early proactive discovery and motions speaks loudly that the homeowner really has no defense because otherwise they would have pursued the proof.

Getting experienced trial attorneys who understand this article is not easy. Most cases settle, and most people are at least initially happy to remove the stressor imminent foreclosure and eviction. But without presenting a credible threat to the opposition, the settlement, if it happens at all is not going to offer much in terms of relief. And the cost of just getting free rent is not retaining your house and not having offset and complaints for damages for wrongful foreclosure. When you sit and do nothing you are conforming to the playbook of the bank. In the end they get the foreclosure, they evict the homeowner and the homeowner gets nothing except a black mark on their credit history.

We offer a forms library that will help reduce the work and cost of an attorney if he or she uses them as templates. Write to neilfgarfield@hotmail.com to inquire. But there are also dozens of free forms and templates you can get from foreclosure defense forms n the left side of this blog. THEY SHOULD NOT BE USED WITHOUT CONSULTING AN ATTORNEY LICENSED TO PRACTICE IN THE JURISDICTION IN WHICH THEN PROPERTY IS LOCATED.

Filed under: CASES, CORRUPTION, Eviction, evidence, expert witness, foreclosure, foreclosure mill, forms, MODIFICATION, Mortgage, Motions, Pleading, securities fraud, Servicer | Tagged: , , , , | 201 Comments »

FRAUD: The Significance of the Game Changing FHFA Lawsuits

Posted on September 15, 2011 by Neil Garfield

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COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary GET COMBO TITLE AND SECURITIZATION ANALYSIS – CLICK HERE

FHFA ACCUSES BANKS OF FRAUD: THEY KNEW THEY WERE LYING

“FHFA has refrained from sugar coating the banks’ alleged conduct as mere inadvertence, negligence, or recklessness, as many plaintiffs have done thus far.  Instead, it has come right out and accused certain banks of out-and-out fraud.  In particular, FHFA has levied fraud claims against Countrywide (and BofA as successor-in-interest), Deutsche Bank, J.P. Morgan (including EMC, WaMu and Long Beach), Goldman Sachs, Merrill Lynch (including First Franklin as sponsor), and Morgan Stanley (including Credit Suisse as co-lead underwriter).  Besides showing that FHFA means business, these claims demonstrate that the agency has carefully reviewed the evidence before it and only wielded the sword of fraud against those banks that it felt actually were aware of their misrepresentations.”

It is no stretch to say that Friday, September 2 was the most significant day for mortgage crisis litigation since the onset of the crisis in 2007.  That Friday, the Federal Housing Finance Agency (FHFA), as conservator for Fannie Mae and Freddie Mac, sued almost all of the world’s largest banks in 17 separate lawsuits, covering mortgage backed securities with original principal balances of roughly $200 billion.  Unless you’ve been hiking in the Andes over the last two weeks, you have probably heard about these suits in the mainstream media.  But here at the Subprime Shakeout, I like to dig a bit deeper.  The following is my take on the most interesting aspects of these voluminous complaints (all available here) from a mortgage litigation perspective.

Throwing the Book at U.S. Banks

The first thing that jumps out to me is the tenacity and aggressiveness with which FHFA presents its cases.  In my last post (Number 1 development), I noted that FHFA had just sued UBS over $4.5 billion in MBS.  While I noted that this signaled a shift in Washington’s “too-big-to-fail” attitude towards banks, my biggest question was whether the agency would show the same tenacity in going after major U.S. banks.  Well, it’s safe to say the agency has shown the same tenacity and then some.

FHFA has refrained from sugar coating the banks’ alleged conduct as mere inadvertence, negligence, or recklessness, as many plaintiffs have done thus far.  Instead, it has come right out and accused certain banks of out-and-out fraud.  In particular, FHFA has levied fraud claims against Countrywide (and BofA as successor-in-interest), Deutsche Bank, J.P. Morgan (including EMC, WaMu and Long Beach), Goldman Sachs, Merrill Lynch (including First Franklin as sponsor), and Morgan Stanley (including Credit Suisse as co-lead underwriter).  Besides showing that FHFA means business, these claims demonstrate that the agency has carefully reviewed the evidence before it and only wielded the sword of fraud against those banks that it felt actually were aware of their misrepresentations.

Further, FHFA has essentially used every bit of evidence at its disposal to paint an exhaustive picture of reckless lending and misleading conduct by the banks.  To support its claims, FHFA has drawn from such diverse sources as its own loan reviews, investigations by the SEC, congressional testimony, and the evidence presented in other lawsuits (including the bond insurer suits that were also brought by Quinn Emanuel).  Finally, where appropriate, FHFA has included successor-in-interest claims against banks such as Bank of America (as successor to Countrywide but, interestingly, not to Merrill Lynch) and J.P. Morgan (as successor to Bear Stearns and WaMu), which acquired potential liability based on its acquisition of other lenders or issuers and which have tried and may in the future try to avoid accepting those liabilities.    In short, FHFA has thrown the book at many of the nation’s largest banks.

FHFA has also taken the virtually unprecedented step of issuing a second press release after the filing of its lawsuits, in which it responds to the “media coverage” the suits have garnered.  In particular, FHFA seeks to dispel the notion that the sophistication of the investor has any bearing on the outcome of securities law claims – something that spokespersons for defendant banks have frequently argued in public statements about MBS lawsuits.  I tend to agree that this factor is not something that courts should or will take into account under the express language of the securities laws.

The agency’s press release also responds to suggestions that these suits will destabilize banks and disrupt economic recovery.  To this, FHFA responds, “the long-term stability and resilience of the nation’s financial system depends on investors being able to trust that the securities sold in this country adhere to applicable laws. We cannot overlook compliance with such requirements during periods of economic difficulty as they form the foundation for our nation’s financial system.”  Amen.

This response to the destabilization argument mirrors statements made by Rep. Brad Miller (D-N.C.), both in a letter urging these suits before they were filed and in a conference call praising the suits after their filing.  In particular, Miller has said that failing to pursue these claims would be “tantamount to another bailout” and akin to an “indirect subsidy” to the banking industry.  I agree with these statements – of paramount importance in restarting the U.S. housing market is restoring investor confidence, and this means respecting contract rights and the rule of law.   If investors are stuck with a bill for which they did not bargain, they will be reluctant to invest in U.S. housing securities in the future, increasing the costs of homeownership for prospective homeowners and/or taxpayers.

You can find my recent analysis of Rep. Miller’s initial letter to FHFA here under Challenge No. 3.  The letter, which was sent in response to the proposed BofA/BoNY settlement of Countrywide put-back claims, appears to have had some influence.

Are Securities Claims the New Put-Backs?

The second thing that jumps out to me about these suits is that FHFA has entirely eschewed put-backs, or contractual claims, in favor of securities law, blue sky law, and tort claims.  This continues a trend that began with the FHLB lawsuits and continued through the recent filing by AIG of its $10 billion lawsuit against BofA/Countrywide of plaintiffs focusing on securities law claims when available.  Why are plaintiffs such as FHFA increasingly turning to securities law claims when put-backs would seem to benefit from more concrete evidence of liability?

One reason may be the procedural hurdles that investors face when pursuing rep and warranty put-backs or repurchases.  In general, they must have 25% of the voting rights for each deal on which they want to take action.  If they don’t have those rights on their own, they must band together with other bondholders to reach critical mass.  They must then petition the Trustee to take action.  If the Trustee refuses to help, the investor may then present repurchase demands on individual loans to the originator or issuer, but must provide that party with sufficient time to cure the defect or repurchase each loan before taking action.  Only if the investor overcomes these steps and the breaching party fails to cure or repurchase will the investor finally have standing to sue.

All of those steps notwithstanding, I have long argued that put-back claims are strong and valuable because once you overcome the initial procedural hurdles, it is a fairly straightforward task to prove whether an individual loan met or breached the proper underwriting guidelines and representations.  Recent statistical sampling rulings have also provided investors with a shortcut to establishing liability – instead of having to go loan-by-loan to prove that each challenged loan breached reps and warranties, investors may now use a statistically significant sample to establish the breach rate in an entire pool.

So, what led FHFA to abandon the put-back route in favor of filing securities law claims?  For one, the agency may not have 25% of the voting rights in all or even a majority of the deals in which it holds an interest.  And due to the unique status of the agency as conservator and the complex politics surrounding these lawsuits, it may not have wanted to band together with private investors to pursue its claims.

Another reason may be that the FHFA has had trouble obtaining loan files, as has been the case for many investors.  These files are usually necessary before even starting down the procedural path outlined above, and servicers have thus far been reluctant to turn these files over to investors.  But this is even less likely to be the limiting factor for FHFA.  With subpoena power that extends above and beyond that of the ordinary investor, the government agency may go directly to the servicers and demand these critical documents.  This they’ve already done, having sent 64 subpoenas to various market participants over a year ago.  While it’s not clear how much cooperation FHFA has received in this regard, the numerous references in its complaints to loan level reviews suggest that the agency has obtained a large number of loan files.  In fact, FHFA has stated that these lawsuits were the product of the subpoenas, so they must have uncovered a fair amount of valuable information.

Thus, the most likely reason for this shift in strategy is the advantage offered by the federal securities laws in terms of the available remedies.  With the put-back remedy, monetary damages are not available.  Instead, most Pooling and Servicing Agreements (PSAs) stipulate that the sole remedy for an incurable breach of reps and warranties is the repurchase or substitution of that defective loan.  Thus, any money shelled out by offending banks would flow into the Trust waterfall, to be divided amongst the bondholders based on seniority, rather than directly into the coffers of FHFA (and taxpayers).  Further, a plaintiff can only receive this remedy on the portion of loans it proves to be defective.  Thus, it cannot recover its losses on defaulted loans for which no defect can be shown.

In contrast, the securities law remedy provides the opportunity for a much broader recovery – and one that goes exclusively to the plaintiff (thus removing any potential freerider problems).  Should FHFA be able to prove that there was a material misrepresentation in a particular oral statement, offering document, or registration statement issued in connection with a Trust, it may be able to recover all of its losses on securities from that Trust.  Since a misrepresentation as to one Trust was likely repeated as to all of an issuers’ MBS offerings, that one misrepresentation can entitle FHFA to recover all of its losses on all certificates issued by that particular issuer.

The defendant may, however, reduce those damages by the amount of any loss that it can prove was caused by some factor other than its misrepresentation, but the burden of proof for this loss causation defense is on the defendant.  It is much more difficult for the defendant to prove that a loss was caused by some factor apart from its misrepresentation than to argue that the plaintiff hasn’t adequately proved causation, as it can with most tort claims.

Finally, any recovery is paid directly to the bondholder and not into the credit waterfall, meaning that it is not shared with other investors and not impacted by the class of certificate held by that bondholder.  This aspect alone makes these claims far more attractive for the party funding the litigation.  Though FHFA has not said exactly how much of the $200 billion in original principal balance of these notes it is seeking in its suits, one broker-dealer’s analysis has reached a best case scenario for FHFA of $60 billion flowing directly into its pockets.

There are other reasons, of course, that FHFA may have chosen this strategy.  Though the remedy appears to be the most important factor, securities law claims are also attractive because they may not require the plaintiff to present an in-depth review of loan-level information.  Such evidence would certainly bolster FHFA’s claims of misrepresentations with respect to loan-level representations in the offering materials (for example, as to LTV, owner occupancy or underwriting guidelines), but other claims may not require such proof.  For example, FHFA may be able to make out its claim that the ratings provided in the prospectus were misrepresented simply by showing that the issuer provided rating agencies with false data or did not provide rating agencies with its due diligence reports showing problems with the loans.  One state law judge has already bought this argument in an early securities law suit by the FHLB of Pittsburgh.  Being able to make out these claims without loan-level data reduces the plaintiff’s burden significantly.

Finally, keep in mind that simply because FHFA did not allege put-back claims does not foreclose it from doing so down the road.  Much as Ambac amended its complaint to include fraud claims against JP Morgan and EMC, FHFA could amend its claims later to include causes of action for contractual breach.  FHFA’s initial complaints were apparently filed at this time to ensure that they fell within the shorter statute of limitations for securities law and tort claims.  Contractual claims tend to have a longer statute of limitations and can be brought down the road without fear of them being time-barred (see interesting Subprime Shakeout guest post on statute of limitations concerns.

Predictions

Since everyone is eager to hear how all this will play out, I will leave you with a few predictions.  First, as I’ve predicted in the past, the involvement of the U.S. Government in mortgage litigation will certainly embolden other private litigants to file suit, both by providing political cover and by providing plaintiffs with a roadmap to recovery.  It also may spark shareholder suits based on the drop in stock prices suffered by many of these banks after statements in the media downplaying their mortgage exposure.

Second, as to these particular suits, many of the defendants likely will seek to escape the harsh glare of the litigation spotlight by settling quickly, especially if they have relatively little at stake (the one exception may be GE, which has stated that it will vigorously oppose the suit, though this may be little more than posturing).  The FHFA, in turn, is likely also eager to get some of these suits settled quickly, both so that it can show that the suits have merit with benchmark settlements and also so that it does not have to fight legal battles on 18 fronts simultaneously.  It will likely be willing to offer defendants a substantial discount against potential damages if they come to the table in short order.

Meanwhile, the banks with larger liability and a more precarious capital situation will be forced to fight these suits and hope to win some early battles to reduce the cost of settlement.  Due to the plaintiff-friendly nature of these claims, I doubt many will succeed in winning motions to dismiss that dispose entirely of any case, but they may obtain favorable evidentiary rulings or dismissals on successor-in-interest claims.  Still, they may not be able to settle quickly because the price tag, even with a substantial discount, will be too high.

On the other hand, trial on these cases would be a publicity nightmare for the big banks, not to mention putting them at risk a massive financial wallop from the jury (fraud claims carry with them the potential for punitive damages).  Thus, these cases will likely end up settling at some point down the road.  Whether that’s one year or four years from now is hard to say, but from what I’ve seen in mortgage litigation, I’d err on the side of assuming a longer time horizon for the largest banks with the most at stake.

Article taken from The Subprime Shakeout – www.subprimeshakeout.com
URL to article: the-government-giveth-and-it-taketh-away-the-significance-of-the-game-changing-fhfa-lawsuits.html

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FOR WHOM THE BELL TOLLS? NEXT ROUND

Posted on October 4, 2010 by Neil Garfield

SERVICES YOU NEED

I’m afraid I need to throw little water on our parade here. Yes its true that the bell has rung — but it isn’t the end of the boxing match, it’s just the end of the current round. We bloodied them up a bit but they have their own strategies and they are not as stupid as we would like — just as we are not as stupid as they would like. They are setting up a trap-door for us. BEWARE!

The current round of “we’re stopping” foreclosures is nothing more than a PR stunt much like the “stress test” that was done at the time that everyone thought the whole financial system would collapse. Then the stress test results came out and not surprisingly the results were favorable — the banks were OK and the system was not in imminent danger of collapse — or so we were led to believe. Some of us believed it some didn’t but the strategy worked.

You can expect that the banks are going to come out very soon and state that based upon their review and inspection of the documents etc. they have found that in most cases the paperwork is in order. They will apologize for using improper procedure (lying on affidavits) but the foreclosures will now go forward with the correct information on the affidavits, assignments, endorsements,, powers of attorney etc. Don’t try to make more of this than it is. They will make fools out of you if you go into court expecting the Judge to throw the book at them and declare you the winner.

Some of you might make the mistake of believing them. It’s the same lie recycled. AND you still are required to prove it. But you just made some headway in being able to prove it as Judge’s give due consideration to the fact that these foreclosure mills were manufacturing paper rather than doing the proper due diligence before initiating foreclosure. The presumptions in favor of the banks just got weaker  but they are not gone. Presumptions in your favor as homeowners and borrowers are still some distance away. There is still the nagging wrongful belief that the borrowers are immoral in defending these actions, walking away from underwater homes, and otherwise finding relief from fraudulent transactions that rarely get any front page news unless the BANKS do something. No it isn’t fair. It’s reality.

Use this event strategically to press for discovery. Don’t argue with the them about their representation that the information on the affidavit was true but that they just used the wrong procedure. Your reply should be that you understand that incorrect procedure does not change facts, but it DOES make it an issue that needs to be investigated. Their credibility is now an issue by their own admission and if the information they are presenting is all correct they should have no problem with allowing you to conduct discovery.

The essential problem for them is still the same: ANY affidavit will be wrongful and fabricated and based upon wrongful and fabricated documentation created long after you closed on the loan. The borrower never signed a note payable to any pool and the pool never received a proper assignment and didn’t want it. What they wanted was the money, not the documents. But that means they were just splitting up the receivables and not the ownership of the loan. So in each case the obligation from the borrower runs to some obligee that is neither the payee on the note nor the mortgagee or beneficiary of the security isntrument. It exists but it is unsecured and subject to set off from loss mitigation payments from third parties.

They can’t get away from the fact that the loan documents were intentionally destroyed or lost, that they never had any assignments, endorsements or powers of attorney executed, that they never sent the paperwork anywhere and that representations in SEC documents that the loans were transferred and fit the descriptions contained in those self-serving documents are just plain wrong. They are lies. Your goal should  be to get a live person swearing under oath under penalty of perjury about the facts of your loan, the status in the securitization infrastructure, and the location of the documents that prove those assertions, as well as the time that such documents were created, where, and who the people were that signed them.

As for the docket, well, if every time a lawyer does discovery he ends up proving the the case of the other side the requests for discovery will stop. Press hard and use these admissions of GMAC, BOA, Chase (and the others to come) as proof of your right and need to more information about the identity of the creditor and getting an accounting from that creditor and not just from the servicer. Do NOT think this news cycle will put you over the top  to win your case.

Also I am concerned about the whole wrongful foreclosure thing. People might get surprised if they don’t know what they are doing. I don’t think you can get damages for wrongful foreclosure just because the paperwork was wrong. I think the elements of the tort are a full breach of duty and that would mean proving that the pretender lender had no colorable right to foreclose either because the “lender” was a complete fake and/or because nobody could foreclose. This is like legal malpractice cases where there is a case within the case. You have to prove they did wrong AND that they caused you damage which means that but for them you would never have lost the house or have had a cloud on your title. In my opinion most Judges won’t agree that because they lied you are entitled to damages for wrongful foreclosure. But you might get them for frivolous pleadings under Federal Rule 11, Florida Statute 57.105 or the equivalent. As far as I know the recovery would be limited to attorney fees and costs, which isn’t a bad idea for lawyers.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , | 11 Comments »

If the Bank of England wants this information, how can this court deem it irrelevant?

Posted on March 21, 2010 by Neil Garfield

SEE ALSO BOE PAPER ON ABS DISCLOSURE condocmar10

If the Bank of England wants this information, how can this court deem it irrelevant? NOTE: BOE defines investors as note-holders.
information on the remaining life, balance and prepayments on a loan; data on the current valuation and loan-to-value ratios on underlying property and collateral; and interest rate details, like the current rate and reset levels. In addition, the central bank said it wants to see loan performance information like the number and value of payments in arrears and details on bankruptcy, default or foreclosure actions.
Editor’s Note: As Gretchen Morgenstern points out in her NY Times article below, the Bank of England is paving the way to transparent disclosures in mortgage backed securities. This in turn is a guide to discovery in American litigation. It is also a guide for questions in a Qualified Written Request and the content of a forensic analysis.
What we are all dealing with here is asymmetry of information, which is another way of saying that one side has information and the other side doesn’t. The use of the phrase is generally confined to situations where the unequal access to information is intentional in order to force the party with less information to rely upon the party with greater information. The party with greater information is always the seller. The party with less information is the buyer. The phrase is most often used much like “moral hazard” is used as a substitute for lying and cheating.
Quoting from the Bank of England’s “consultative paper”: ” [NOTE THAT THE BANK OF ENGLAND ASSUMES ASYMMETRY OF INFORMATION AND, SEE BELOW, THAT THE INVESTORS ARE CONSIDERED “NOTE-HOLDERS” WITHOUT ANY CAVEATS.] THE BANK IS SEEKING TO ENFORCE RULES THAT WOULD REQUIRE DISCLOSURE OF
borrower details (unique loan identifiers); nominal loan amounts; accrued interest; loan maturity dates; loan interest rates; and other reporting line items that are relevant to the underlying loan portfolio (ie borrower location, loan to value ratios, payment rates, industry code). The initial loan portfolio information reporting requirements would be consistent with the ABS loan-level reporting requirements detailed in paragraph 42 in this consultative document. Data would need to be regularly updated, it is suggested on a weekly basis, given the possibility of unexpected loan repayments.
42 The Bank has considered the loan-level data fields which
it considers would be most relevant for residential mortgage- backed securities (RMBS) and covered bonds and sets out a high-level indication of some of those fields in the list below:
• Portfolio, subportfolio, loan and borrower unique identifiers.
• Loan information (remaining life, balance, prepayments).
• Property and collateral (current valuation, loan to value ratio
and type of valuation). Interest rate information (current reference rate, current rate/margin, reset interval).
• Performance information (performing/delinquent, number and value of payments in arrears, arrangement, litigation or
bankruptcy in process, default or foreclosure, date of default,
sale price, profit/loss on sale, total recoveries).
• Credit bureau score information (bankruptcy or IVA flags,
bureau scores and dates, other relevant indicators (eg in respect of fraudulent activity)).

The Bank is also considering making it an eligibility requirement that each issuer provides a summary of the key features of the transaction structure in a standardised format.
This summary would include:
• Clear diagrams of the deal structure.
• Description of which classes of notes hold the voting rights and what proportion of noteholders are required to pass a resolution.
• Description of all the triggers in the transaction and the consequences of them being breached.
• What defines an event of default.
• Diagramatic cash-flow waterfalls, making clear the priority
of payments of principal and interest, including how these
can change in consequence to any trigger breaches.
52 The Bank is also considering making it an eligibility
requirement that cash-flow models be made available that
accurately reflect the legal structure of an asset-backed security.
The Bank believes that for each transaction a cash-flow model
verified by the issuer/arranger should be available publicly.
Currently, it can be unclear as to how a transaction would
behave in different scenarios, including events of default or
other trigger events. The availability of cash-flow models, that
accurately reflect the underlying legal structure of the
transaction, would enable accurate modelling and stress
testing of securities under various assumptions.

March 19, 2010, NY Times

Pools That Need Some Sun

By GRETCHEN MORGENSON

LAST week, the Federal Home Loan Bank of San Francisco sued a throng of Wall Street companies that sold the agency $5.4 billion in residential mortgage-backed securities during the height of the mortgage melee. The suit, filed March 15 in state court in California, seeks the return of the $5.4 billion as well as broader financial damages.

The case also provides interesting details on what the Federal Home Loan Bank said were misrepresentations made by those companies about the loans underlying the securities it bought.

It is not surprising, given the complexity of the instruments at the heart of this credit crisis, that it will require court battles for us to learn how so many of these loans could have gone so bad. The recent examiner’s report on the Lehman Brothers failure is a fine example of the in-depth investigation required to get to the bottom of this debacle.

The defendants in the Federal Home Loan Bank case were among the biggest sellers of mortgage-backed securities back in the day; among those named are Deutsche Bank; Bear Stearns; Countrywide Securities, a division of Countrywide Financial; Credit Suisse Securities; and Merrill Lynch. The securities at the heart of the lawsuit were sold from mid-2004 into 2008 — a period that certainly encompasses those giddy, anything-goes years in the home loan business.

None of the banks would comment on the litigation.

In the complaint, the Federal Home Loan Bank recites a list of what it calls untrue or misleading statements about the mortgages in 33 securitization trusts it bought. The alleged inaccuracies involve disclosures of the mortgages’ loan-to-value ratios (a measure of a loan’s size compared with the underlying property’s value), as well as the occupancy status of the properties securing the loans. Mortgages are considered less risky if they are written against primary residences; loans on second homes or investment properties are deemed to be more of a gamble.

Finally, the complaint said, the sellers of the securities made inaccurate claims about how closely the loan originators adhered to their underwriting guidelines. For example, the Federal Home Loan Bank asserts that the companies selling these securities failed to disclose that the originators made frequent exceptions to their own lending standards.

DAVID J. GRAIS, a partner at Grais & Ellsworth, represents the plaintiff. He said the Federal Home Loan Bank is not alleging that the firms intended to mislead investors. Rather, the case is trying to determine if the firms conformed to state laws requiring accurate disclosure to investors.

“Did they or did they not correspond with the real world at the time of the sale of these securities? That is the question,” Mr. Grais said.

Time will tell which side will prevail in this suit. But in the meantime, the accusations illustrate a significant unsolved problem with securitization: a lack of transparency regarding the loans that are bundled into mortgage securities. Until sunlight shines on these loan pools, the securitization market, a hugely important financing mechanism that augments bank lending, will remain frozen and unworkable.

It goes without saying that after swallowing billions in losses in such securities, investors no longer trust what sellers say is inside them. Investors need detailed information about these loans, and that data needs to be publicly available and updated regularly.

“The goose that lays the golden eggs for Wall Street is in the information gaps created by financial innovation,” said Richard Field, managing director at TYI, which develops transparency, trading and risk management information systems. “Naturally, Wall Street opposes closing these gaps.”

But the elimination of such information gaps is necessary, Mr. Field said, if investors are to return to the securitization market and if global regulators can be expected to prevent future crises.

While United States policy makers have done little to resolve this problem, the Bank of England, Britain’s central bank, is forging ahead on it. In a “consultative paper” this month, the central bank argued for significantly increased disclosure in asset-backed securities, including mortgage pools.

The central bank is interested in this debate because it accepts such securities in exchange for providing liquidity to the banking system.

“It is the bank’s view that more comprehensive and consistent information, in a format which is easier to use, is required to allow the effective risk management of securities,” the report stated. One recommendation is to include far more data than available now.

Among the data on its wish list: information on the remaining life, balance and prepayments on a loan; data on the current valuation and loan-to-value ratios on underlying property and collateral; and interest rate details, like the current rate and reset levels. In addition, the central bank said it wants to see loan performance information like the number and value of payments in arrears and details on bankruptcy, default or foreclosure actions.

The Bank of England recommended that investor reports be provided on “at least a monthly basis” and said it was considering making such reports an eligibility requirement for securities it accepts in its transactions.

The American Securitization Forum, the advocacy group for the securitization industry, has been working for two years on disclosure recommendations it sees as necessary to restart this market. But its ideas do not go as far as the Bank of England’s.

A group of United States mortgage investors is also agitating for increased disclosures. In a soon-to-be-published working paper, the Association of Mortgage Investors outlined ways to increase transparency in these instruments.

Among its suggestions: reduce the reliance on credit rating agencies by providing detailed data on loans well before a deal is brought to market, perhaps two weeks in advance. That would allow investors to analyze the loans thoroughly, then decide whether they want to buy in.

THE investors are also urging that loan-level data offered by issuers, underwriters or loan servicers be “accompanied by an auditor attestation” verifying it has been properly aggregated and calculated. In other words, trust but verify.

Confidence in the securitization market has been crushed by the credit mess. Only greater transparency will lure investors back into these securities pools. The sooner that happens, the better.

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