PTSD: A Breakdown of Securitization in the Real World

By using the methods of magicians who distract the viewer from what is really happening the banks have managed to hoodwink even the victims and their lawyers into thinking that collection and foreclosure on “securitized” loans are real and proper. Nobody actually stops to ask whether the named claimant is actually going to receive the benefit of the remedy (foreclosure) they are seeking.

When you break it down you can see that in many cases the investment banks, posing as Master Servicers are the parties getting the monetary proceeds of sale of foreclosed property. None of the parties in the chain have lost any money but each of them is participating in a scheme to foreclose on the property for fun and profit.

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THIS ARTICLE IS NOT A LEGAL OPINION UPON WHICH YOU CAN RELY IN ANY INDIVIDUAL CASE. HIRE A LAWYER.
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It is worth distinguishing between four sets of investors which I will call P, T, S and D.

The P group of investors were Pension funds and other stable managed funds. They purchased the first round of derivative contracts sometimes known as asset backed securities or mortgage backed securities. Managers of hedge funds that performed due diligence quickly saw that that the investment was backed only by the good faith and credit of the issuing investment bank and not by collateral, debts or mortgages or even notes from borrowers. Other fund managers, for reasons of their own, chose to overlook the process of due diligence and relied upon the appearance of high ratings from Moody’s, Standard and Poor’s and Fitch combined with the appearance of insurance on the investment. The P group were part of the reason that the Federal reserve and the US Treasury department decided to prop up what was obviously a wrongful and fraudulent scheme. Pulling the plug, in the view of the top regulators, would have destroyed the investment portfolio of many if not most stable managed funds.

The T group of investors were traders. Traders provide market liquidity which is so highly prized and necessary for a capitalist economy to maintain prosperity. The T group, consisting of hedge funds and others with an appetitive for risk purchased derivatives on derivatives, including credit default swaps that were disguised sales of loan portfolios that once sold, no longer existed. Yet the same portfolio was sold multiple time turning a hefty profit but resulted in a huge liability when the loans soured during the process of securitization of the paper (not the debt). The market froze when the loans soured; nobody would buy more certificates. The Ponzi scheme was over. Another example that Lehman pioneered was “minibonds” which were not bonds and they were not small. These were resales of the credit default swaps aggregated into a false portfolio. The traders in this group included the major investment banks. As an example, Goldman Sachs purchased insurance on portfolios of certificates (MBS) that it did not own but under contract law the contract was perfectly legal, even if it was simply a bet. When the market froze and AIG could not pay off the bet, Hank Paulson, former CEO of Goldman Sachs literally begged George W Bush to bail out AIG and “save the banks.” What was saved was Goldman’s profit on the insurance contract in which it reaped tens of billions of dollars in payments for nonexistent losses that could have been attributed to people who actually had money at risk in loans to borrowers, except that no such person existed.

The S group of investors were scavengers who were well connected with the world of finance or part of the world of finance. It was the S group that created OneWest over a weekend, and later members of the S group would be fictitious buyers of “re-securitized” interests in prior loans that were subject to false claims of securitization of the paper. This was an effort to correct obvious irregularities that were thought to expose a vulnerability of the investment banks.

The D group of investors are dummies who purchased securitization certificates entitling them to income indexed on recovery of servicer advances and other dubious claims. The interesting thing about this is that the Master Servicer does appear to have a claim for money that is labeled as a “servicer advance,” even if there was no advance or the servicer did not advance any funds. The claim is contingent upon there being a foreclosure and eventual sale of the property to a third party. Money paid to investors from a fund of investor money to satisfy the promise to pay contained in the “certificate” or “MBS” or “Mortgage Bond,” is labeled, at the discretion of the Master Servicer as a Servicer Advance even though the servicer did not advance any money.

This is important because the timing of foreclosures is often based entirely on when the “Servicer Advances” are equal to or exceed the equity in the property. Hence the only actual recipient of money from the foreclosure is not the P investors, not any investors and not the trust or purported trustee but rather the Master Servicer. In short, the Master servicer is leveraging an unsecured claim and riding on the back of an apparently secured claim in which the named claimant will receive no benefits from the remedy demanded in court or in a non-judicial foreclosure.

NOTE that securitization took place in four parts and in three different directions:

  1. The debt to the T group of investors.
  2. The notes to the T and S group of traders
  3. The mortgage (without the debt) to a nominee — usually a fictitious trust serving as the fictitious name of the investment bank (Lehman in this case).
  4. Securitization of spillover money that guaranteed receipt of money that was probably never due or payable.

Note that the P group of investors is not included because they do not ever collect money from borrowers and their certificates grant no right, title or interest in the debt, note or mortgage. When you read references to “securitization fail” (see Adam Levitin) this is part of what the writers are talking about. The securitization that everyone is talking about never happened. The P investors are not owners or beneficiaries entitled to income, interest or principal from loans to borrowers. They are entitled to an income stream as loans the investment bank chooses to pay it. Bailouts or even borrower payoffs are not credited to the the P group nor any trust. Their income remains the same regardless of whether the borrower is paying or not.

Wells Fargo as MBS trustee ‘looted’ trusts to pay legal fees

http://www.reuters.com/article/us-otc-pimco-idUSKBN19X2NV

(Reuters) – Several Pimco investment funds are accusing the mortgage-backed securities trustee Wells Fargo of misusing noteholder money to pay its own legal expenses.

In a newly filed complaint in Manhattan State Supreme Court, the Pimco funds are asking for a declaratory judgment that Wells Fargo is not entitled to use MBS trust money to fund its defense against noteholder claims that the bank breached its duties as an MBS trustee. Pimco’s lawyers at Bernstein Litowitz Berger & Grossmann allege that Wells Fargo has improperly reserved about $95 million across 20 MBS trusts.

The Pimco complaint is the latest wrinkle in increasingly complex litigation between MBS noteholders and trustees. Pimco is one of several major institutional investors pursuing Wells Fargo, Deutsche Bank, HSBC and other MBS trustees for supposedly failing to take action against MBS sponsors as the trusts began to lose money. As I’ve reported, noteholders have managed to get past trustee dismissal motions in several big cases in state and federal court, but still face the considerable obstacle of providing loan-specific proof that trustees were obliged to demand the repurchase of deficient underlying mortgages and didn’t live up to that obligation.

The trustees have aggressively defended the cases. In May, for example, Wells Fargo’s lawyers at Jones Day filed third-party complaints in Manhattan federal court against the advisory arms of three of the funds suing the trustee, claiming that the advisory firms knew as much as Wells Fargo about problems in the MBS market and should be jointly liable if the trustee is socked with a judgment for tort damages.

The new Pimco complaint alleges that Wells Fargo is improperly paying its lawyers in the trustee breach cases with money that rightfully belongs to noteholders. The trustee’s litigation reserves were exposed in April, according to the complaint, when an entity called New Residential Investment Corp exercised rights to call in Wells-overseen trusts with an unpaid principal balance of about $309.5 million. The complaint alleges that Wells Fargo withheld $57.2 million to establish “trustee reserve accounts” to cover legal expenses stemming from litigation over its conduct as trustee. (Nomura analysts disclosed the Wells Fargo reserve accounts in a report in June.)

Pimco contends Wells Fargo is not permitted, under the MBS contracts for the 11 trusts at issue in its suit, to use trust money to defend against allegations of willful wrongdoing, bad faith or negligence. Those are precisely the claims at issue in noteholder litigation against the MBS trustee, according to the complaint. “Neither the (MBS contracts) nor the law permit Wells Fargo’s taxing of the investors it was supposed to protect to indemnify itself and to finance its actual and expected defense costs,” the complaint said.

Pimco’s suit isn’t the first time a noteholder has raised questions about the funding of an MBS trustee’s defense in this wave of investor litigation. In March, lawyers for Royal Park Investment (RPI) moved for a court order requiring MBS trustee Deutsche Bank to disclose any legal fees and expenses it had billed to MBS trusts at issue in RPI’s case against the trustee. Like Pimco in the new Wells Fargo case, RPI and its lawyers from Robbins Geller Rudman & Dowd claimed that the trust contracts did not indemnify Deutsche Bank for claims of negligence or misconduct.

Deutsche Bank’s lawyers from Morgan Lewis & Bockius countered that the trust agreements expressly indemnify the MBS trustee from fees and costs associated with its duties as trustee. The judge overseeing the dispute, U.S. Magistrate Barbara Moses of Manhattan, ruled that RPI’s request was outside the scope of her jurisdiction. She suggested that if RPI wanted to pursue the matter, it should file a preliminary injunction motion – although she also warned at oral argument that if she were RPI, “I wouldn’t be terribly optimistic about the outcome of that motion.” (There’s no indication in the RPI docket that Robbins Geller filed a preliminary injunction motion on Deutsche Bank’s legal fees.)

Wells Fargo sent an email statement on the new Pimco suit. The bank said that as an MBS trustee, it “is entitled to indemnification of its legal fees and expenses under the contractual agreements at issue. We believe the lawsuit filed by the Pimco funds has no merit and will be vigorously defending the claim.”

Pimco counsel Blair Nicholas of Bernstein Litowitz declined to provide a statement.

The Neil Garfield Show: Why the Trusts are Busts

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The settlements with the banks are a scam. Yesterday RBS settled with US authorities for skullduggery in the name of “so-called residential mortgage-backed securities.”  They took in over $30 billion and only have to pay about 20% of the theft ($5.5 billion).  No criminal charges apply.

The importance of this particular report is the way it was written. Attorney Neil Garfield says, “this is the first time I have seen “so-called residential mortgage-backed securities” used in mainstream reporting.” The significance is that the term “so-called” while penned by the author of the article indicates skepticism as to whether the certificates were ever backed by mortgages. And if they were not, then the certificates were in fact securities that could be regulated as securities, free from the 1998 exemption that classified them as private contracts.

Of maximum importance to homeowners and foreclosure defense lawyers is that they make the obvious connection, to wit: if the securities were not mortgage-backed, there is only one logical conclusion— the trust never owned the mortgages that were described generically in the prospectus. If the trust had owned mortgage loans, then the securities would have been mortgage backed, in which case there would have no charges against RBS much less a settlement.

THAT means that the Trusts could never be named as Plaintiff in judicial states or beneficiary in non-judicial states without misrepresenting the nature of the so-called trust that existed only on paper and frequently incomplete paper that did not include signatures or exhibits. The mortgage loan schedule was never attached in any trust. The MLS attached to the PSA was specifically disclaimed in the prospectus as being there by way of example only and that none of the “loans” described in the MLS actually existed, but would be replaced by real loans.

This leads in turn to a single logical conclusion. Assuming the Trust existed on paper that was properly completed, the Trust either (a) never received, directly or indirectly, the original loan documents or (b) the trust did receive the loan paperwork but has received no authority to do anything with it. The Trust is therefore not a creditor, not a lender, not a servicer and not an agent for a creditor from whom the trust could have received authority to enforce. The trust, therefore, becomes a sham conduit used solely for the purpose of foreclosures and otherwise was completely ignored.

In terms of litigation, if you would like to discuss how to address this in discovery, please contact Neil Garfield for a consultation.  He can explain the relevance of the existence of the trust, real world transactions and how attorneys and homeowners can leverage these findings.

Attorney Charles Marshall can be reached at:

cmarshall@marshallestatelaw.com

619-807-2628

 

Neil F. Garfield can be contacted at info@lendinglies.com

MAIN NUMBER: 202-838-NEIL (6345).

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SEC/DOJ go after MBS Traders for Fraud- while the Big Bank Instigators go Free

By Ben Lane/Housing Wire

https://www.housingwire.com/articles/40445-former-nomura-rmbs-trader-found-guilty-of-securities-wire-fraud-conspiracy

Nearly two years ago, the Securities and Exchange Commission and the U.S. Attorney’s Office for the District of Connecticut charged three former Nomura Securities International residential mortgage-backed securities traders with fraud, alleging that they “repeatedly lied” to customers about the pricing information of mortgage bonds and defrauded customers out of millions of dollars.

Earlier this year, the Department of Justice hit the three RMBS traders, Michael Gramins, Ross Shapiro, and Tyler Peters with additional charges, including one count of conspiracy, two counts of securities fraud and six counts of wire fraud.

The three traders went on trial last month, and a jury handed down a verdict this week.

All in all, only Gramins was found guilty – and only on one charge.

According to the U.S. Attorney’s Office for the District of Connecticut, Gramins was found guilty on one count of conspiracy, and not guilty of one count of securities fraud and five counts of wire fraud.

The jury could not reach a verdict on one count of securities fraud and one count of wire fraud.

The jury also found Shapiro not guilty of two counts of securities fraud and six counts of wire fraud, but could not reach a verdict on the conspiracy count.

The jury found Peters not guilty of all nine counts of the indictment.

The traders were originally charged with misrepresenting the bids and offers being provided to Nomura for mortgage bonds, as well as the prices that Nomura bought and sold the securitizations and the spreads the firm earned facilitating RMBS trades.

The original indictment stated that Shapiro, Gramins, and Peters supervised the RMBS desk at Nomura in New York.

Shapiro served as the managing director, and oversaw all of Nomura’s trading in RMBS. Gramins was the executive director of the RMBS Desk and principally oversaw Nomura’s trading of bonds composed of sub-prime and option ARM loans.

Peters was the senior-most vice president of the RMBS desk and focused on Nomura’s trading of bonds composed of prime and Alt-A loans.

The indictment claimed that Shapiro, Gramins, and Peters also engaged in fraudulently deflating the price at which Nomura could sell a RMBS bond to induce their customers to sell bonds at cheaper prices, thereby causing Nomura and the three defendants to profit illegally.

The SEC claimed that the lies and omissions made to customers by Shapiro, Gramins, and Peters generated at least $5 million in additional revenue for Nomura, and the lies and omissions by the subordinates they trained generated at least $2 million in additional profits for the firm.

But when it came to their trial, the jury didn’t agree, finding Gramins guilty on just on count.

Gramins now faces a maximum sentence of five years.

“This has been a demanding prosecution, and I thank the jury for its service,” U.S. Attorney Deirdre Daly said. “Our investigation into fraudulent trading practices in the RMBS and other financial markets has had a marked impact on the industry and will continue.”

S&P: Mortgage-backed security market making a comeback in 2017 First quarter issuance doubled 2016’s total

First quarter issuance doubled 2016’s total

By Ben Lane at Housingwire.com

http://www.housingwire.com/articles/39794-sp-mortgage-backed-security-market-making-a-comeback-in-2017

Editor’s Note: Does anyone else seek stark similarities between what happened in 2007/08 and what is happening now?  This is evidence that the housing bubble is complete.  By now we know how this will play out in the near future.

money

Back in February, DBRS predicted that the residential mortgage-backed security market could see a resurgence in 2017 thanks to rising interest rates, which both drive down refinances and make securitization a more financially appealing option.

As it turns out, that’s exactly what’s happening.

A new report from Standard & Poor’s Global Ratings shows that RMBS-related issuance, which S&P defines as prime, re-performing/nonperforming, rental bonds, servicer advances, and risk-sharing deals, doubled in the first quarter of 2017 compared to last year.

According to S&P’s report, there was $14 billion in RMBS-related issuance in 2017’s first quarter, up from $7 billion in the same time period in 2016.

As a result of the strong first quarter, S&P said that it is increasing its 2017 forecast for RMBS issuance from $35 billion to $50 billion.

It should be noted that even if 2017’s total RMBS issuance reaches $50 billion, it would still be below 2015’s total of $54 billion. But $50 billion would top 2016’s total of $34 billion and 2014’s total of $38 billion.

According to the S&P report, 2017’s first quarter issuance consisted of $5 billion in credit risk-sharing deals from Fannie Mae and Freddie Mac and $4 billion of re-performing/non-performing loans.

S&P noted that the rise in jumbo issuance and non-conforming issuance is “positive for markets as issuers are now supplying enough issuance to support the development of a secondary market.”

And if that continues, a “broader scope of mainstream fixed-income investors” should be attracted to the market, S&P adds.

“Given this RMBS issuance surge, we are adjusting our 2017 forecast up to $50 billion and will have to continue monitoring the various components,” S&P states in the report. “The $5 billion of (risk-sharing) issuance suggests it reaching an issuance pace that has allowed it to be an ongoing investment program for many market participants.”

S&P’s report also compared securitization volume for consumer loans (auto loans, credit cards, commercial loans) and residential mortgages over the last 15 years.

The report shows that all four loan categories have grown substantially since 2001, but the volume of securitization in each category is down.

“Compared to 2007 leverage levels, residential mortgages today are $1 trillion less, whereas the other three loan products have substantially more leverage,” S&P notes in its report.

“Looking at the share of those that are securitized, all markets have seen lower utilization of securitization, with auto loans at 17.5% securitized, credit cards at 13%, CMBS at 17%, and non-agency RMBS at only 8%,” the report continues. “For the various products, these utilization rates are significantly lower than rates used in 2001, 2004, or 2007.”

The report states auto, credit card, and residential loans each saw an increase in the first quarter, which could be the start of some institutions increasing their securitization utilization. On the other hand, it may reflect the issuers taking advantage of “near-ideal issuance conditions and demand,” the report states.

 

California Suspends Dealings with Wells Fargo

The real question is when government agencies and regulators PLUS law enforcement get the real message: Wells Fargo’s behavior in the account scandal is the tip of the iceberg and important corroboration of what most of the country has been saying for years — their business model is based upon fraud.

Wells Fargo has devolved into a PR machine designed to raise the price of the stock at the expense of trust, which in the long term will most likely result in most customers abandoning such banks for fear they will be the next target.

Get a consult! 202-838-6345

https://www.vcita.com/v/lendinglies to schedule CONSULT, leave message or make payments.
THIS ARTICLE IS NOT A LEGAL OPINION UPON WHICH YOU CAN RELY IN ANY INDIVIDUAL CASE. HIRE A LAWYER.
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see http://www.sacbee.com/news/politics-government/capitol-alert/article104739911.html

John Chiang, California Treasurer, has stopped doing business with Wells Fargo because of the scheme involving fraud, identity theft and customer gouging for services they never ordered on accounts they never opened. It is once again time for Government to scrutinize the overall business plan and business map of Wells Fargo and indeed all of the top (TBTF) banks.

Wells Fargo is attempting to do crisis management, to wit: making sure that nobody looks at other schemes inside the bank.

It is the Consumer Financial Protection Bureau (CFPB) that was conceived by Senator Elizabeth Warren who has revealed the latest example of big bank fraud.

The simple fact is that in this case, Wells Fargo management made an absurd demand on their employees. Instead of the national average of 3 accounts per person they instructed managers and employees to produce 8 accounts per customer. Top management of Wells Fargo have been bankers for decades. They knew that most customers would not want, need or accept 5 more accounts. Yet they pressed hard on employees to meet this “goal.” Their objective was to defraud the investing public who held or would buy Wells Fargo stock.

In short, Wells Fargo is now the poster child for an essential defect in business structure of public companies. They conceive their “product” to be their stock. That is how management makes its money and that is how investors holding their stock like it until they realize that the entire platform known as Wells Fargo has devolved into a PR machine designed to raise the price of the stock at the expense of trust, which in the long term will most likely result in most customers abandoning such banks for fear they will be the next target. Such companies are eating their young and producing a bubble in asset values that, like the residential mortgage market, cannot be sustained by fundamental facts — i.e., real earnings on a real trajectory of growth.

So the PR piece about how they didn’t know what was going on is absurd along with their practices. Such policies don’t start with middle management or employees. They come from the top. And the goal was to create the illusion of a rapidly growing bank so that more people would buy their stock at ever increasing prices. That is what happens when you don’t make the individual members of management liable under criminal and civil laws for engaging in such behavior.

There was only one way that the Bank could achieve its goal of 8 accounts per customer — it had to be done without the knowledge or consent of the customers. Now Wells Fargo is trying to throw 5,000 employees under the bus. But this isn’t the first time that Wells Fargo has arrogantly thrown its customers and employees under the bus.

The creation of financial accounts in the name of a person without that person’s knowledge or consent is identity theft, assuming there was a profit motive. The result is that the person is subjected to false claims of high fees, their credit rating has a negative impact, and they are stuck dealing with as bank so large that most customers feel that they don’t have the resources to do anything once the fraud was discovered by the Consumer Financial protection Board (CFPB).

Creating a loan account for a loan that doesn’t exist is the same thing. In most cases the “loan closings” were shams — a show put on so that the customer would sign documents in which the actual party who loaned the money was left out of the documentation.

This was double fraud because the pension funds and other investors who deposited money with Wells Fargo and the other banks did so under the false understanding that their money would be used to buy Mortgage Backed Securities (MBS) issued by a trust with assets consisting of a loan pool.

The truth has emerged — there were no loan pols in the trusts. The entire derivative market for residential “loans” is built on a giant lie.  But the consequences are so large that Government is afraid to do anything about it. Wells Fargo took money from pension funds and other “investors,” but did not give the proceeds of sale of the alleged MBS to the proprietary vehicle they created in the form of a trust.

Hence the trust was never funded and never acquired any property or loans. That means the “mortgage backed securities” were not mortgage backed BUT they were “Securities” under the standard definition such that the SEC should take action against the underwriters who disguised themselves as “master Servicers.”

In order to cover their tracks, Wells Fargo carefully coached their employees to take calls and state that there could be no settlement or modification or any loss mitigation unless the “borrower” was at least 90 days behind in their payments. So people stopped paying an entity that had no right to receive payment — with grave consequences.

The 90 day statement was probably legal advice and certainly a lie. There was no 90 day requirement and there was no legal reason for a borrower to go into a position where the pretender lender could declare a default. The banks were steering as many people, like cattle, into defaults because of coercion by the bank who later deny that they had instructed the borrower to stop making payments.

So Wells Fargo and other investment banks were opening depository accounts for institutional customers under false pretenses, while they opened up loan accounts under false pretenses, and then  used the identity of BOTH “investors” and “borrowers” as a vehicle to steal all the money put up for investments and to make money on the illusion of loans between the payee on the note and the homeowner.

In the end the only document that was legal in thee entire chain was a forced sale and/or judgment of foreclosure. When the deed issues in a forced sale, that creates virtually insurmountable presumptions that everything that preceded the sale was valid, thus changing history.

The residential mortgage loan market was considerably more complex than what Wells Fargo did with the opening of the unwanted commercial accounts but the objective was the same — to make money on their stock and siphon off vast sums of money into off-shore accounts. And the methods, when you boil it all down, were the same. And the arrogant violation of law and trust was the same.

 

Holland and Knight Published General Information on Securitizations

While I was researching securitization of BOAT LOANS I came across the following apparently published by Holland and Knight. Several of their statements could prove helpful especially where one is confronting that law firm as an adversary. I copied some of the more relevant statements.

I also stumbled across this PowerPoint presentation from the American Securitization Forum in 2009 which is available on the Internet. Securitization101ASF2009

see http://mx.nthu.edu.tw/~chclin/Class/Securitization.htm

MAJOR PLAYERS

The major “players” in the securitization game, all of whom require legal representation to some degree, are as follows (this terminology is typical, but different terms are used; for example the “originator” is often referred to as the “issuer” or “seller”):

Originator – the entity that either generates Receivables in the ordinary course of its business, or purchases and assembles portfolios of Receivables (in that sense, not a true “originator”). Its counsel works closely with counsel to the Underwriter/Placement Agent and the Rating Agencies in structuring the transaction and preparing documents and usually gives the most significant opinions. It also retains and coordinates local counsel in the event that it is not admitted in the jurisdiction where the Originator’s principal office is located, and in situations where significant Receivables are generated and the security interests that secure the Receivables are governed by local law rather than the law of the state where the Originator is located.

Issuer – the special purpose entity, usually an owner trust (but can be another form of trust or a corporation, partnership or fund), created pursuant to a Trust Agreement between the Originator (or in a two step structure, the Intermediate SPE) and the Trustee, that issues the Securities and avoids taxation at the entity level. This can create a problem in foreign Securitizations in civil law countries where the trust concept does not exist (see discussion below under “Foreign Securitizations”).

Trustees – usually a bank or other entity authorized to act in such capacity. The Trustee, appointed pursuant to a Trust Agreement, holds the Receivables, receives payments on the Receivables and makes payments to the Securityholders. In many structures there are two Trustees. For example, in an Owner Trust structure, which is most common, the Notes, which are pure debt instruments, are issued pursuant to an Indenture between the Trust and an Indenture Trustee, and the Certificates, representing undivided interests in the Trust (although structured and treated as debt obligations), are issued by the Owner Trustee. The Issuer (the Trust) owns the Receivables and grants a security interest in the Receivables to the Indenture Trustee. Counsel to the Trustee provides the usual opinions on the Trust as an entity, the capacity of the Trustee, etc.

Investors – the ultimate purchasers of the Securities. Usually banks, insurance companies, retirement funds and other “qualified investors.” In some cases, the Securities are purchased directly from the Issuer, but more commonly the Securities are issued to the Originator or Intermediate SPE as payment for the Receivables and then sold to the Investors, or in the case of an underwriting, to the Underwriters.

Underwriters/Placement Agents – the brokers, investment banks or banks that sell or place the Securities in a public offering or private placement. The Underwriters/Placement Agents usually play the principal role in structuring the transaction, frequently seeking out Originators for Securitizations, and their counsel (or counsel for the lead Underwriter/Placement Agent) is usually, but not always, the primary document preparer, generating the offering documents (private placement memorandum or offering circular in a private placement; registration statement and prospectus in a public offering), purchase agreements, trust agreement, custodial agreement, etc. Such counsel also frequently opines on securities and tax matters.

Custodian – an entity, usually a bank, that actually holds the Receivables as agent and bailee for the Trustee or Trustees.

Rating Agencies – Moody’s, S&P, Fitch IBCA and Duff & Phelps. In Securitizations, the Rating Agencies frequently are active players that enter the game early and assist in structuring the transaction. In many instances they require structural changes, dictate some of the required opinions and mandate changes in servicing procedures.

Servicer – the entity that actually deals with the Receivables on a day to day basis, collecting the Receivables and transferring funds to accounts controlled by the Trustees. In most transactions the Originator acts as Servicer.

Backup Servicer – the entity (usually in the business of acting in such capacity, as well as a primary Servicer when the Originator does not fill that function) that takes over the event that something happens to the Servicer. Depending upon the quality of the Originator/Servicer, the need and significance of the Backup Servicer may be important. In some cases the Trustee retains the Backup Servicer to perform certain monitoring functions on a continuing basis.

CREDIT ENHANCEMENT

Credit enhancements are required in every Securitization. The nature and amount depends on the risks of the Securitization as determined by the Rating Agencies, Underwriters/Placement Agents and Investors. They are intended to reduce the risks to the Investors and thereby increase the rating of the Securities and lower the costs to the Originator. Typical forms of credit enhancement are:

1. Over-collateralization – transferring to the Issuer, Receivables in amounts greater than required to pay the Securities if the proceeds of the Receivables were received as anticipated). The amount of over-collateralization (usually 5% to 10%) is determined by the Rating Agencies and the Underwriters/Placement Agents, and this in turn will depend upon the quality of the Receivables, other credit enhancement that may be available, the risk of the structure (such as the possible bankruptcy of the Originator/Servicer), the nature and condition of the industry in which the Receivables are generated, general economic conditions and, in the case of foreign-based Securitizations, the “Sovereign risk” (see discussion below under “Foreign Securitizations”). If all goes well, it is repurchased at the end of the transaction (see “Anatomy of a Securitization”)or returned as part of the residual interest. This form of credit enhancement is required in virtually all Securitizations.

2. Senior/subordinated structure – issuance of subordinated or secondary classes of Securities, which are lower-rated (and bear higher interest rates) and sold to other Investors or held by the Originator. In the event of problems, the higher rated (senior) Securities receive payments prior to the lower rated (subordinated) Securities. It is not uncommon for there to be a number of classes of Securities that are each subordinated to the more highly rated, resulting in a complex “waterfall” of payments of principal and interest. In the common structure described above, senior and subordinated classes of Notes would be paid, in order of priority, prior to classes of Certificates, and Certificates prior to any residual interest in the Issuer. This form of credit enhancement has become routine, but cannot be used in a grantor trust structure, which is why the owner trust has become most common.

3. Early amortization – if certain negative events occur, all payments from Receivables are applied to the more senior securities until paid. Very common.

4. Cash collateral account – the Originator deposits funds in account with Trustee to be used if proceeds from Receivables are not sufficient. Adjustable depending upon events. May be in the form of a demand “loan” by the Originator to the account. (e.s.)

5. Reserve fund – subordinated Securities retained by the Originator or Trustee and pledged for the benefit of the Trust (and, therefore, the Investors).

6. Security bond – guarantee (or wrap) of all payments due on the Securities. Issued by AAA-rated monoline insurance companies (if available).

7. Liquidity provider – in effect, a guarantee by the Originator (or its parent) or another entity of all or a portion of payments due on the Securities. (e.s.)

8. Letter of credit (for portion of amounts due on Securities) – not used much anymore because of costs. These were common in the late 1980’s when issued by Japanese banks at low rates.

LEGAL OPINIONS

Legal opinions are very important documents in every Securitization and result in considerable negotiations among counsel for the Originator, Underwriter/Placement Agent and Rating Agencies. The opinions given by the Originator’s counsel are the most extensive, frequently running 50 or more pages because of the need for reasoned opinions, as courts have not ruled upon many of the underpinnings of the Securitization structure. In addition to the usual opinions regarding due organization, good standing, corporate power, litigation, etc, others deal with the validity and priority of security interests, true sale vs. secured loan, substantive consolidation in bankruptcy, fraudulent transfer, tax consequences and compliance with securities laws and ERISA. Opinions are also given by counsel for the Trustees and frequently by counsel to the Underwriter/Placement Agent in regard to tax and securities matters. As indicated above, local counsel opinions may be required as well.

For reasons of structuring and such opinions, in addition to attorneys who are experienced in Securitizations, expertise is required in the areas of securities law, tax law, bankruptcy and the UCC. Expertise is also required in many instances in the substantive laws relating the business of the Originator and the nature of the Receivables.

Securitization for Lawyers: How it was Written by Wall Street Banks

For more information on foreclosure offense, expert witness consultations and foreclosure defense please call 954-495-9867 or 520-405-1688. We offer litigation support in all 50 states to attorneys. We refer new clients without a referral fee or co-counsel fee unless we are retained for litigation support. Bankruptcy lawyers take note: Don’t be too quick admit the loan exists nor that a default occurred and especially don’t admit the loan is secured. FREE INFORMATION, ARTICLES AND FORMS CAN BE FOUND ON LEFT SIDE OF THE BLOG. Consultations available by appointment in person, by Skype and by phone.

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Continuing with my article THE CONCEPT OF SECURITIZATION from yesterday, we have been looking at the CONCEPT of Securitization and determined there is nothing theoretically wrong with it. That alone accounts for tens of thousands of defenses” raised in foreclosure actions across the country where borrowers raised the “defense” securitization. No such thing exists. Foreclosure defense is contract defense — i.e., you need to prove that in your case the elements of contract are absent and THAT is why the note or the mortgage cannot be enforced. Keep in mind that it is entirely possible to prove that the mortgage is unenforceable even if the note remains enforceable. But as we have said in a hundred different ways, it does not appear to me that in most cases, the loan contract ever existed, or that the acquisition contract in which the loan was being “purchased” ever occurred. But much of THAT argument is left for tomorrow’s article on Securitization as it was practiced by Wall Street banks.

So we know that the concept of securitization is almost as old as commerce itself. The idea of reducing risk and increasing the opportunity for profits is an essential element of commerce and capitalism. Selling off pieces of a venture to accomplish a reduction of risk on one ship or one oil well or one loan has existed legally and properly for a long time without much problem except when a criminal used the system against us — like Ponzi, Madoff or Drier or others. And broadening the venture to include many ships, oil wells or loans makes sense to further reduce risk and increase the likelihood of a healthy profit through volume.

Syndication of loans has been around as long as banking has existed. Thus agreements to share risk and profit or actually selling “shares” of loans have been around, enabling banks to offer loans to governments, big corporations or even little ones. In the case of residential loans, few syndications are known to have been used. In 1983, syndications called securitizations appeared in residential loans, credit cards, student loans, auto loans and all types of other consumer loans where the issuance of IPO securities representing shares of bundles of debt.

For logistical and legal reasons these securitizations had to be structured to enable the flow of loans into “special purpose vehicles” (SPV) which were simply corporations, partnerships or Trusts that were formed for the sole purpose of taking ownership of loans that were originated or acquired with the money the SPV acquired from an offering of “bonds” or other “shares” representing an undivided fractional share of the entire portfolio of that particular SPV.

The structural documents presented to investors included the Prospectus, Subscription Agreement, and Pooling and Servicing Agreement (PSA). The prospectus is supposed to disclose the use of proceeds and the terms of the payback. Since the offering is in the form of a bond, it is actually a loan from the investor to the Trust, coupled with a fractional ownership interest in the alleged “pool of assets” that is going into the Trust by virtue of the Trustee’s acceptance of the assets. That acceptance executed by the Trustee is in the Pooling and Servicing Agreement, which is an exhibit to the Prospectus. In theory that is proper. The problem is that the assets don’t exist, can’t be put in the trust and the proceeds of sale of the Trust mortgage-backed bonds doesn’t go into the Trust or any account that is under the authority of the Trustee.

The writing of the securitization documents was done by a handful of law firms under the direction of a few individual lawyers, most of whom I have not been able to identify. One of them is located in Chicago. There are some reports that 9 lawyers from a New Jersey law firm resigned rather than participate in the drafting of the documents. The reports include emails from the 9 lawyers saying that they refused to be involved in the writing of a “criminal enterprise.”

I believe the report is true, after reading so many documents that purport to create a securitization scheme. The documents themselves start off with what one would and should expect in the terms and provisions of a Prospectus, Pooling and Servicing Agreement etc. But as you read through them, you see the initial terms and provisions eroded to the point of extinction. What is left is an amalgam of options for the broker dealers selling the mortgage backed bonds.

The options all lead down roads that are absolutely opposite to what any real party in interest would allow or give their consent or agreement. The lenders (investors) would never have agreed to what was allowed in the documents. The rating agencies and insurers and guarantors would never have gone along with the scheme if they had truly understood what was intended. And of course the “borrowers” (homeowners) had no idea that claims of securitization existed as to the origination or intended acquisition their loans. Allan Greenspan, former Federal Reserve Chairman, said he read the documents and couldn’t understand them. He also said that he had more than 100 PhD’s and lawyers who read them and couldn’t understand them either.

Greenspan believed that “market forces” would correct the ambiguities. That means he believed that people who were actually dealing with these securities as buyers, sellers, rating agencies, insurers and guarantors would reject them if the appropriate safety measures were not adopted. After he left the Federal Reserve he admitted he was wrong. Market forces did not and could not correct the deficiencies and defects in the entire process.

The REAL document is the Assignment and Assumption Agreement that is NOT usually disclosed or attached as an exhibit to the Prospectus. THAT is the agreement that controls everything that happens with the borrower at the time of the alleged “closing.” See me on YouTube to explain the Assignment and Assumption Agreement. Suffice it to say that contrary to the representations made in the sale of the bonds by the broker to the investor, the money from the investor goes into the control of the broker dealer and NOT the REMIC Trust. The Broker Dealer filters some of the money down to closings in the name of “originators” ranging from large (Wells Fargo, Countrywide) to small (First Magnus et al). I’ll tell you why tomorrow or the next day. The originators are essentially renting their names the same as the Trustees of the REMIC Trusts. It looks right but isn’t what it appears. Done properly, the lender on the note and mortgage would be the REMIC Trust or a common aggregator. But if the Banks did it properly they wouldn’t have had such a joyful time in the moral hazard zone.

The PSA turned out to be the primary document creating the Trusts that were creating primarily under the laws of the State of New York because New York and a few other states had a statute that said that any variance from the express terms of the Trust was VOID, not voidable. This gave an added measure of protection to the investors that the SPV would not be used for any purpose other than what was described, and eliminated the need for them to sue the Trustee or the Trust for misuse of their funds. What the investors did not understand was that there were provisions in the enabling documents that allowed the brokers and other intermediaries to ignore the Trust altogether, assert ownership in the name of a broker or broker-controlled entity and trade on both the loans and the bonds.

The Prospectus SHOULD have contained the full list of all loans that were being aggregated into the SPV or Trust. And the Trust instrument (PSA) should have shown that the investors were receiving not only a promise to repay them but also a share ownership in the pool of loans. One of the first signals that Wall Street was running an illegal scheme was that most prospectuses stated that the pool assets were disclosed in an attached spreadsheet, which contained the description of loans that were already in existence and were then accepted by the Trustee of the SPV (REMIC Trust) in the Pooling and Servicing Agreement. The problem was that the vast majority of Prospectuses and Pooling and Servicing agreements either omitted the exhibit showing the list of loans or stated outright that the attached list was not the real list and that the loans on the spreadsheet were by example only and not the real loans.

Most of the investors were “stable managed funds.” This is a term of art that applied to retirement, pension and similar type of managed funds that were under strict restrictions about the risk they could take, which is to say, the risk had to be as close to zero as possible. So in order to present a pool that the fund manager of a stable managed fund could invest fund assets the investment had to qualify under the rules and regulations restricting the activities of stable managed funds. The presence of stable managed funds buying the bonds or shares of the Trust also encouraged other types of investors to buy the bonds or shares.

But the number of loans (which were in the thousands) in each bundle made it impractical for the fund managers of stable managed funds to examine the portfolio. For the most part, if they done so they would not found one loan that was actually in existence and obviously would not have done the deal. But they didn’t do it. They left it on trust for the broker dealers to prove the quality of the investment in bonds or shares of the SPV or Trust.

So the broker dealers who were creating the SPVs (Trusts) and selling the bonds or shares, went to the rating agencies which are quasi governmental units that give a score not unlike the credit score given to individuals. Under pressure from the broker dealers, the rating agencies went from quality culture to a profit culture. The broker dealers were offering fees and even premium on fees for evaluation and rating of the bonds or shares they were offering. They HAD to have a rating that the bonds or shares were “investment grade,” which would enable the stable managed funds to buy the bonds or shares. The rating agencies were used because they had been independent sources of evaluation of risk and viability of an investment, especially bonds — even if the bonds were not treated as securities under a 1998 law signed into law by President Clinton at the behest of both republicans and Democrats.

Dozens of people in the rating agencies set off warning bells and red flags stating that these were not investment grade securities and that the entire SPV or Trust would fail because it had to fail.  The broker dealers who were the underwriters on nearly all the business done by the rating agencies used threats, intimidation and the carrot of greater profits to get the ratings they wanted. and responded to threats that the broker would get the rating they wanted from another rating agency and that they would not ever do business with the reluctant rating agency ever again — threatening to effectively put the rating agency out of business. At the rating agencies, the “objectors” were either terminated or reassigned. Reports in the Wal Street Journal show that it was custom and practice for the rating officers to be taken on fishing trips or other perks in order to get the required the ratings that made Wall Street scheme of “securitization” possible.

This threat was also used against real estate appraisers prompting them in 2005 to send a petition to Congress signed by 8,000 appraisers, in which they said that the instructions for appraisal had been changed from a fair market value appraisal to an appraisal that would make each deal work. the appraisers were told that if they didn’t “play ball” they would never be hired again to do another appraisal. Many left the industry, but the remaining ones, succumbed to the pressure and, like the rating agencies, they gave the broker dealers what they wanted. And insurers of the bonds or shares freely issued policies based upon the same premise — the rating from the respected rating agencies. And ultimate this also effected both guarantors of the loans and “guarantors” of the bonds or shares in the Trusts.

So the investors were now presented with an insured investment grade rating from a respected and trusted source. The interest rate return was attractive — i.e., the expected return was higher than any of the current alternatives that were available. Some fund managers still refused to participate and they are the only ones that didn’t lose money in the crisis caused by Wall Street — except for a period of time through the negative impact on the stock market and bond market when all securities became suspect.

In order for there to be a “bundle” of loans that would go into a pool owned by the Trust there had to be an aggregator. The aggregator was typically the CDO Manager (CDO= Collateralized Debt Obligation) or some entity controlled by the broker dealer who was selling the bonds or shares of the SPV or Trust. So regardless of whether the loan was originated with funds from the SPV or was originated by an actual lender who sold the loan to the trust, the debts had to be processed by the aggregator to decide who would own them.

In order to protect the Trust and the investors who became Trust beneficiaries, there was a structure created that made it look like everything was under control for their benefit. The Trust was purchasing the pool within the time period prescribed by the Internal Revenue Code. The IRC allowed the creation of entities that were essentially conduits in real estate mortgages — called Real Estate Mortgage Investment Conduits (REMICs). It allows for the conduit to be set up and to “do business” for 90 days during which it must acquire whatever assets are being acquired. The REMIC Trust then distributes the profits to the investors. In reality, the investors were getting worthless bonds issued by unfunded trusts for the acquisition of assets that were never purchased (because the trusts didn’t have the money to buy them).

The TRUSTEE of the REMIC Trust would be called a Trustee and should have had the powers and duties of a Trustee. But instead the written provisions not only narrowed the duties and obligations of the Trustee but actual prevented both the Trustee and the beneficiaries from even inquiring about the actual portfolio or the status of any loan or group of loans. The way it was written, the Trustee of the REMIC Trust was in actuality renting its name to appear as Trustee in order to give credence to the offering to investors.

There was also a Depositor whose purpose was to receive, process and store documents from the loan closings — except for the provisions that said, no, the custodian, would store the records. In either case it doesn’t appear that either the Depositor nor the “custodian” ever received the documents. In fact, it appears as though the documents were mostly purposely lost and destroyed, as per the Iowa University study conducted by Katherine Ann Porter in 2007. Like the others, the Depositor was renting its name as though ti was doing something when it was doing nothing.

And there was a servicer described as a Master Servicer who could delegate certain functions to subservicers. And buried in the maze of documents containing hundreds of pages of mind-numbing descriptions and representations, there was a provision that stated the servicer would pay the monthly payment to the investor regardless of whether the borrower made any payment or not. The servicer could stop making those payments if it determined, in its sole discretion, that it was not “recoverable.”

This was the hidden part of the scheme that might be a simple PONZI scheme. The servicers obviously could have no interest in making payments they were not receiving from borrowers. But they did have an interest in continuing payments as long as investors were buying bonds. THAT is because the Master Servicers were the broker dealers, who were selling the bonds or shares. Those same broker dealers designated their own departments as the “underwriter.” So the underwriters wrote into the prospectus the presence of a “reserve” account, the source of funding for which was never made clear. That was intentionally vague because while some of the “servicer advance” money might have come from the investors themselves, most of it came from external “profits” claimed by the broker dealers.

The presence of  servicer advances is problematic for those who are pursuing foreclosures. Besides the fact that they could not possibly own the loan, and that they couldn’t possibly be a proper representative of an owner of the loan or Holder in Due Course, the actual creditor (the group of investors or theoretically the REMIC Trust) never shows a default of any kind even when the servicers or sub-servicers declare a default, send a notice of default, send a notice of acceleration etc. What they are doing is escalating their volunteer payments to the creditor — made for their own reasons — to the status of a holder or even a holder in due course — despite the fact that they never acquired the loan, the debt, the note or the mortgage.

The essential fact here is that the only paperwork that shows actual transfer of money is that which contains a check or wire transfer from investor to the broker dealer — and then from the broker dealer to various entities including the CLOSING AGENT (not the originator) who applied the funds to a closing in which the originator was named as the Lender when they had never advanced any funds, were being paid as a vendor, and would sign anything, just to get another fee. The money received by the borrower or paid on behalf of the borrower was money from the investors, not the Trust.

So the note should have named the investors, not the Trust nor the originator. And the mortgage should have made the investors the mortgagee, not the Trust nor the originator. The actual note and mortgage signed in favor of the originator were both void documents because they failed to identify the parties to the loan contract. Another way of looking at the same thing is to say there was no loan contract because neither the investors nor the borrowers knew or understood what was happening at the closing, neither had an opportunity to accept or reject the loan, and neither got title to the loan nor clear title after the loan. The investors were left with a debt that could be recovered probably as a demand loan, but which was unsecured by any mortgage or security agreement.

To counter that argument these intermediaries are claiming possession of the note and mortgage (a dubious proposal considering the Porter study) and therefore successfully claiming, incorrectly, that the facts don’t matter, and they have the absolute right to prevail in a foreclosure on a home secured by a mortgage that names a non-creditor as mortgagee without disclosure of the true source of funds. By claiming legal presumptions, the foreclosers are in actuality claiming that form should prevail over substance.

Thus the broker-dealers created written instruments that are the opposite of the Concept of Securitization, turning complete transparency into a brick wall. Investor should have been receiving verifiable reports and access into the portfolio of assets, none of which in actuality were ever purchased by the Trust, because the pooling and servicing agreement is devoid of any representation that the loans have been purchased by the Trust or that the Trust paid for the pool of loans. Most of the actual transfers occurred after the cutoff date for REMIC status under the IRC, violating the provisions of the PSA/Trust document that states the transfer must be complete within the 90 day cutoff period. And it appears as though the only documents even attempted to be transferred into the pool are those that are in default or in foreclosure. The vast majority of the other loans are floating in cyberspace where anyone can grab them if they know where to look.

ALERT: COMMUNITY BANKS AND CREDIT UNIONS AT GRAVE RISK HOLDING $1.5 TRILLION IN MBS

I’ve talked about this before. It is why we offer a Risk Analysis Report to Community Banks and Credit Unions. The report analyzes the potential risk of holding MBS instruments in lieu of Treasury Bonds. And it provides guidance to the bank on making new loans on property where there is a history of assignments, transfers and other indicia of claims of securitization.

The risks include but are not limited to

  1. MBS Instrument issued by New York common law trust that was never funded, and has no assets or expectation of same.
  2. MBS Instrument was issued by NY common law trust on a tranche that appeared safe but was tied by CDS to the most toxic tranche.
  3. Insurance paid to investment bank instead of investors
  4. Credit default swap proceeds paid to investment banks instead of investors
  5. Guarantees paid to investment banks after they have drained all value through excessive fees charged against the investor and the borrowers on loans.
  6. Tier 2 Yield Spread Premiums of as much as 50% of the investment amount.
  7. Intentional low underwriting standards to produce high nominal interest to justify the Tier 2 yield spread premium.
  8. Funding direct from investor funds while creating notes and mortgages that named other parties than the investors or the “trust.”
  9. Forcing foreclosure as the only option on people who could pay far more than the proceeds of foreclosure.
  10. Turning down modifications or settlements on the basis that the investor rejected it when in fact the investor knew nothing about it. This could result in actions against an investor that is charged with violations of federal law.
  11. Making loans on property with a history of “securitization” and realizing later that the intended mortgage lien was junior to other off record transactions in which previous satisfactions of mortgage or even foreclosure sales could be invalidated.

The problem, as these small financial institutions are just beginning to realize, is that the MBS instruments that were supposedly so safe, are not safe and may not be worth anything at all — especially if the trust that issued them was never funded by the investment bank who did the underwriting and sales of the MBS to relatively unsophisticated community banks and credit unions. In a word, these small institutions were sitting ducks and probably, knowing Wall Street the way I do, were lured into the most toxic of the “bonds.”

Unless these small banks get ahead of the curve they face intervention by the FDIC or other regulatory agencies because some part of their assets and required reserves might vanish. These small institutions, unlike the big ones that caused the problem, don’t have agreements with the Federal government to prop them up regardless of whether the bonds were real or worthless.

Most of the small banks and credit unions are carrying these assets at cost, which is to say 100 cents on the dollar when in fact it is doubtful they are worth even half that amount. The question is whether the bank or credit union is at risk and what they can do about it. There are several claims mechanisms that can employed for the bank that finds itself facing a write-off of catastrophic or damaging proportions.

The plain fact is that nearly everyone in government and law enforcement considers what happens to small banks to be “collateral damage,” unworthy of any effort to assist these institutions even though the government was complicit in the fraud that has resulted in jury verdicts, settlements, fines and sanctions totaling into the hundreds of billions of dollars.

This is a ticking time bomb for many institutions that put their money into higher yielding MBS instruments believing they were about as safe as US Treasury bonds. They were wrong but not because of any fault of anyone at the bank. They were lied to by experts who covered their lies with false promises of ratings, insurance, hedges and guarantees.

Those small institutions who have opted to take the bank public, may face even worse problems with the SEC and shareholders if they don’t report properly on the balance sheet as it is effected by the downgrade of MBS securities. The problem is that most auditing firms are not familiar with the actual facts behind these securities and are likely a this point to disclaim any responsibility for the accounting that produces the financial statements of the bank.

I have seen this play out before. The big investment banks are going to throw the small institutions under the bus and call it unavoidable damage that isn’t their problem. despite the hard-headed insistence on autonomy and devotion to customer service at each bank, considerable thought should be given to banding together into associations that are not controlled by regional banks are are part of the problem and will most likely block any solution. Traditional community bank associations and traditional credit unions might not be the best place to go if you are looking to a real solution.

Community Banks and Credit Unions MUST protect themselves and make claims as fast as possible to stay ahead of the curve. They must be proactive in getting a credible report that will stand up in court, if necessary, and make claims for the balance. Current suits by investors are producing large returns for the lawyers and poor returns to the investors. Our entire team stands ready to assist small institutions achieve parity and restitution.

FOR MORE INFORMATION OR TO SCHEDULE CONSULTATIONS BETWEEN NEIL GARFIELD AND THE BANK OFFICERS (WITH THE BANK’S LAWYER) ON THE LINE, EXECUTIVES FOR SMALL COMMUNITY BANKS AND CREDIT UNIONS SHOULD CALL OUR TALLAHASSEE NUMBER 850-765-1236 or OUR WEST COAST NUMBER AT 520-405-1688.

BLK | Thu, Nov 14

BlackRock with ETF push to smaller banks • The roughly 7K regional and community banks in the U.S. have securities portfolios totaling $1.5T, the majority of which is in MBS, putting them at a particularly high interest rate risk, and on the screens of regulators who would like to see banks diversify their holdings. • “This is going to be a multiple-year trend and dialogue,” says BlackRock’s (BLK) Jared Murphy who is overseeing the iSharesBonds ETFs campaign. • The funds come with an expense ratio of 0.1% and the holdings are designed to limit interest rate risk. BlackRock scored its first big sale in Q3 when a west coast regional invested $100M in one of the funds. • At issue are years of bank habits – when they want to reduce mortgage exposure, they typically turn to Treasurys. For more credit exposure, they habitually turn to municipal bonds. “Community bankers feel like they’re going to be the last in the food chain to know if there are any problems with a corporate issuer,” says a community bank consultant.

Full Story: http://seekingalpha.com/currents/post/1412712?source=ipadportfolioapp

SEC Waking Up: Madoff Conspirators Face Charges — Now About Those Mortgage Bonds

If you are seeking legal representation or other services call our South Florida customer service number at 954-495-9867 and for the West coast the number remains 520-405-1688. In Northern Florida and the Panhandle call 850-765-1236. Customer service for the livinglies store with workbooks, services and analysis remains the same at 520-405-1688. The people who answer the phone are NOT attorneys and NOT permitted to provide any legal advice, but they can guide you toward some of our products and services. Get advice from attorneys licensed in the jurisdiction in which your property is located. We do provide litigation support — but only for licensed attorneys.

 

See LivingLies Store: Reports and Analysis

 

After a long slumber of non-regulation and failure to bring charges for securities fraud the SEC is finally getting into the “game” — the culture of fraud on Wall Street. When the Madoff story broke it was inconceivably large. $60 Billion generated through a PONZI scheme — selling securities or taking money under a prospectus that promised that the flow of money would be invested for the benefit of the investors. The hallmark of such schemes is that they eventually fail when people stop buying the securities or depositing money. At that point the money deposited with the fraudster eventually fails to provide the funds necessary to keep paying investors the return they were promised and fails to cash out investors who want their money back. It fails because the scheme was either not to invest the money at all or to seek cover under investments that clearly were never going to be in compliance with the prospectus or any other standard of investment.

 

So now we ask again, what about the MBS players? Mortgage-backed securities dwarfed the Madoff scheme. $13 trillion-$20 trillion or more was taken from investors under a prospectus that promised funding of mortgages of the highest quality. Like Madoff, the investment bankers took what they wanted before they used the money to pay back investors or fund mortgages. And when they did fund mortgages they intentionally inserted false entities as lenders — entities with no relationship to the investors. The effect was a conversion of the intended investment into an unsecured loan to either the investment bank or the borrower and no claim to bring against the borrower,directly or indirectly. The secured interest was destroyed and then claimed by the Banks. The claim for repayment was also converted to the benefit of the Banks, who then “traded” in their proprietary account in which the gains were kept by the Bank and the losses were tossed over the fence to the investors under a pooling and servicing agreement that was ignored except for laying off the losses on the investors.

 

When investors stopped buying MBS the scheme promptly collapsed. Investment banks still continued to advance money to investors directly or indirectly through the subservicers. They did this for the same reason any PONZI operator pays his “investors” (victims) — to keep them buying into the investment pool and to create the illusion that nothing is wrong. At the same time the Banks were advancing money on alleged mortgage loans, they were declaring loans in default, foreclosing and claiming losses in their “ownership” of the mortgage bonds they had sold to pension funds. Eventually even the taxpayer became an unwitting and unwilling investor to save the world from the brink of economic collapse. It was believed the Banks were in trouble because they had recklessly lost money in risky trades. This was never true.

 

And now the massive deluge of Foreclosures continues the fraud. Just as the investors were not represented at the closing of alleged mortgage loans, they are not represented in Foreclosures. The banks are foreclosing in their own names — cutting off the investors completely when the bank takes title to the property at the foreclosure sale — and cutting off insurers, CDS counter parties, guarantors, and other co-venturers and co-obligors from seeking refunds or forcing the repurchase of the loans that were never subject to any form of underwriting standards of the industry.

 

The money they took off the top, the money they received from third parties who waived rights to collect from the borrower, was converted from a trade on behalf of their principals — the investors (victims) who thought that their money was being deposited with the investment bank to fund a REMIC trust. The investor money became the bank’s money. The investors’ ownership of loans, notes, mortgages, and bonds became the property ofthe banks and so it stays today, except for the settlements with investors who are suing and except for the long list of fines and penalties leveled on the banks for pennies on the dollar. The pending BOA Article 77 hearing in which the insurers are pointing to the incestuous relationship between the “trustees” of the REMIC trusts and the investment banks is starting to come back and haunt both the trustee, who knew there was no funded trust, and the bank that was merely Madoff by another name.

 

So the payments due to investors stopped or were cut back without credit for the money received by the investment banks as agents of the investors. Thus the account receivable of the investor is kept away from the courts because it would show vastly different balances than the balance claimed by the servicer’s and banks. The balance is much lower than what is represented in court. And it probably has been eliminated entirely when the net is cast over principals and agents’ receipt of funds. The Foreclosures are wrong. They simply continue the fraud and ratify by judges’ orders the theft of money, loans and what should have been notes payable to the investors or the REMIC trust that was never funded — and therefore could never have purchased the loans.
If the money was applied properly most of the investors would be covered by the money that still remains in the banks that they are claiming as their own capital. Applied properly in accordance with generally accepted accounting principles, this would reduce the account receivable from the loans. It would also by definition reduce the corresponding account payable from the borrowers, making modification and settlement easy —but for the interference of the servicers and investment banks who are trying desperately to hold onto their ill-gotten gains.

Federal Reserve Money Laundering For Dirty Banks

Since the Fed can create unlimited money, why not pay off every mortgage in the land? That’s only $9.7 trillion, and if the Fed wanted to unleash an orgy of spending, that would certainly do it. Trillions in losses would be filled with “free money,” since the Fed would pay the full value of all mortgages. —- Charles Hugh Smith, Of Two Minds

It is really up to each of us to demand, require and force an accounting for the money that has been taken out of the system and stolen from creditors and borrowers BEFORE we allow another foreclosure. — Neil F Garfield, www.livinglies.me

Editor’s Note: The article below by Charles Hugh Smith from Of Two Minds, strikes with great clarity at the heart of the nonsense we are calling “foreclosure”, and which is corrupting title for decades, taking the confidence in the U.S. economy and the U.S. dollar down with it.

This is the first article I have received that actually addressed the issue that the mortgages, especially the worst ones, were paid off in full. They were paid in full because the supposed mortgage bonds that included shares of the mortgage loans were sold to the Federal Reserve 100 cents on the dollar. Now either those mortgage bonds were real or they were not real. There is nothing in between. What we know for a fact is that the entire financial industry is treating them as real.

The ownership of the bonds was transferred from the trusts, therefore, to the Federal Reserve. While there is little documentation we can see that reveals this, there is no other logical way for the Federal reserve to even claim that it was “buying” the mortgage bonds and the loans.

Either each trust became a trust solely for the Federal Reserve, or the Federal Reserve, bought the bonds directly from the investors.  But since everyone is treating the trusts as valid REMIC entities that do not exist for tax or other business purposes, then the trust did not own the bonds, and only the investors owned the bonds. But they were not paid. The Banks were paid and still allowed to foreclose — but for who?

If the banks took payments on behalf of the REMICs, then they owe a distribution to the investors whose losses, contrary to the reports from the banks become fully cured. That means the creditor on on the mortgage bond has been paid off in whole or in part. That in turn means, since a creditor can only be paid once on a debt, that the amount that SHOULD have been credited to the investors  SHOULD have reduced the receivable. The reduction in the receivable to the creditor should correspondingly reduce the payable due from the borrower. Thus no “principal reduction” should be required because the loan is already PAID.

Why then, is anyone allowing foreclosure of the mortgage loans except in the name of the Federal Reserve? This article explains it. For the full article go to Smith Article on Rule of Law

From the Smith Article:
In a nation in which rule of law existed in more than name, here’s what should have happened:

1. The scam known as MERS, the mortgage industry’s placeholder of fictitious mortgage notes, would be summarily shut down.

2. All mortgages in all instruments and portfolios, and all derivatives based on mortgages, would be instantly marked-to-market.

3. All losses would be declared immediately, and any institution that was deemed insolvent would be shuttered and its assets auctioned off in an orderly fashion.

4. Regardless of the cost to owners of mortgages, every deed, lien and note would be painstakingly delineated or reconstructed on every mortgage in the U.S., and the deed and note properly filed in each county as per U.S. law.

That none of this has happened is proof-positive that the rule of law no longer exists in America. The term is phony, a travesty of a mockery of a sham, nothing but pure propaganda. Anyone claiming otherwise: get the above done. If you can’t or won’t, then the rule of law is merely a useful illusion of a rapacious, corrupt, extractive, predatory neofeudal Status Quo.

The essence of money-laundering is that fraudulent or illegally derived assets and income are recycled into legitimate enterprises. That is the entire Federal Reserve project in a nutshell. Dodgy mortgages, phantom claims and phantom assets, are recycled via Fed purchase and “retired” to its opaque balance sheet. In exchange, the Fed gives cash to the owners of the phantom assets, cash which is fundamentally a claim on the future earnings and productivity of American citizens.

Some might argue that the global drug mafia are the largest money-launderers in the world, and this might be correct. But $1.1 trillion is seriously monumental laundering, and now the Fed will be laundering another $480 billion a year in perpetuity, until it has laundered the entire portfolio of phantom mortgages and claims.

The rule of law is dead in the U.S. It “cost too much” to the financial sector that rules the State, the Central Bank and thus the nation. Once the Fed has laundered all the phantom assets into cash assets and driven wages down another notch, then the process of transforming a nation of owners into a nation of serfs can be completed.

Here’s the Fed’s policy in plain English: Debt-serfdom is good because it enriches the banks. All hail debt-serfdom, our goal and our god!

In case you missed this:

The Royal Scam (August 9, 2009):

Once all the assets in the country had been discounted, the insiders then repatriated their money and bought their neighbor’s fortunes for pennies on the dollar, finding cheap, hungry, competitive labor, ready to compete with even 3rd world wages. The prudent, hard-working, and savers (the wrong people) were wiped out, and the money was transferred to the speculators and insiders (the right people). Massive capital like land and factories can not be expatriated, but are always worth their USE value and did not fall as much, or even rose afterwards as with falling debt ratios and low wages these working assets became competitive again. It’s not so much a “collapse” as a redistribution, from the middle class and the working to the capital class and the connected. …And the genius is, they could blame it all on foreigners, “incompetent” leaders, and careless, debt-happy citizens themselves.

But how is this legal plunder to be identified? Quite simply. See if the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime. Frederic Bastiat, 1850

REMIC Status Under Fire: HUGE LOSSES FROM TAX LIABILITIES

If, however, the transaction does not coincide with the parties’ bona fide intentions, courts will ignore the stated intentions.19  The analysis of ownership cannot merely look to the agreements the parties entered into because the label parties give to a transaction does determine its character.20  Consequently, the analysis must examine the underlying economics and the attendant facts and circumstances to determine who owns the mortgage notes for tax purposes.21

(Bradley T. Borden & David Reiss are professors at Brooklyn Law School.1)

“They take aggressive positions, and they figure that if enough of them take an aggressive position, and there’s billions of dollars at stake, then the IRS is kind of estopped from arguing with them because so much would blow up. And that is called the Wall Street Rule. That is literally the nickname for it.”2

Editor’s Note: We have been discussing the sham nature of securitization and assignment claims for years. The IRS and others have begun to take notice. The effect will be staggering unless “the Wall Street rule” is established. The article below from two professors at Brooklyn Law School is a mirror of the Fordham Law Review Article written 7 years ago entitled “Will the Real Party in Interest Please Stand Up.”

The author’s state “This calamity is compounded by the fact that those professional advisers should have known that the REMICs they created were flawed from the start.  If these losses are realized, those professionals will face suits for damages so large that they could put them out of business.” We are talking about bankers, insurers, lawyers, accounting firms and all the other players that were engaged in the make-believe game of securitization.

The scheme was not flawed in my opinion, it was intentional and based on the sole premise of every PONZI scheme artist: they thought they could get away with it and they still think so. Madoff, whose PONZI scheme is now being traced to the early 1970″s, Drier who used Solow’s name to create the appearance of legitimate transactions that were faked from start to finish, are all in the same pot. When you look closely, there isn’t any difference. They took money, they used it not the way the lender or investor intended, and they ended up lavishing on themselves huge bonuses, salaries and other gains (off-shore) that make Madoff and Dreir look like small potatoes.

A REMIC allows for the pooling of mortgage loans that can then be issued as a mortgage-backed security.  It is a pass-through entity for tax purposes, meaning that unlike corporations, they do not pay income tax and their owners thereby avoid the double taxation they would face from receiving corporate dividends.  A REMIC is intended to be a passive investment.

Because of its passive nature, a REMIC is limited as to how and when it can acquire mortgage.  In particular, a REMIC must in most cases acquire its mortgages within 90 days of its start-up.3  The Internal Revenue Code provides for draconian penalties for REMICs that fail to comply with applicable legal requirements.”

“By failing to transfer possession of the note to the pool backing the securities, Countrywide failed to comply with the requirements necessary to obtain REMIC status.  Numerous other filings and reports suggest that Countrywide’s practice was typical of many major lenders during the early 2000s.  Thus, although we rely on the facts in the Kemp case in this brief article, it has very broad application.”

The article maintains a focus on the paperwork which is a common occurrence in these analyses, assuming that the REMIC existed and was somehow funded with cash and/or “assets.” But this was not the case and so the scenario that these authors paint are actually understated. The money appears to have been diverted from the REMIC from the very start, with no bank account or other “account” held by a financial institution or trustee in control of it.

The authors give the banks the benefit of the doubt when they describe the actions as negligent. They stop at the doorway leading to the PONZI scheme that went into full swing at the beginning of the 2000’s. BY diverting the money and then diverting the documents away from the REMICs, the banks were able to assert “ownership” of the loan thus enabling them to collect insurance, credit default swap and Federal bailout proceeds for themselves instead of the REMICs or the REMIC investors.

The reason why so many notes were lost, destroyed, stolen or whatever is that if the insurers, investors, and counterparties on hedge products had actually seen the notes rather than data describing the notes, they would have known that the wrong parties were named on all the instruments, and that the REMICs were violating the rules to avoid double-taxation on a regular basis — all without the investors knowledge. Further, the profits from tier 2 yield spread premiums, which were huge (especially in loans classified as subprime) together with the payoffs from entities who contractually agreed to waive subrogation, left the investors with no way to know, much less understand, that trillions of dollars were being paid on notes, whether they were in default or not — because they were in pools where the Master Servicer ordered a write-down of the pool.

Like any PONZI scheme, two things are true here i the scheme that is papered over with false claims of securitization and assignments: the deal falls apart when people stop buying the bogus mortgage bonds and when it comes time to pay up or prove the transaction, there is no money to cover it. So the banks painted themselves into a corner that is causing the long arm of the law to close in on them due to upcoming statutes of limitations: in an ironic twist, if the loans turn out to be performing or were false declared to be in default or were false declared to be devalued, then the money received by the banks is due back to the insurers and other parties who paid.

And that is why the insurers and counterparties are suing the banks — based upon the misrepresentation of the quality of the loans or even the existence of the loans, and the fact that the payment was predicated upon a good faith belief that defaults had occurred when in fact they had not.

Since the loans were aggregated into false mortgage bonds, the banks were able to sell the same pool  multiple times which they called leveraging. And THAT is why a modified loan represents a huge loss to them. When the number of modified, reinstated or  settled loans reaches critical mass, the recipients of the insurance, credit default swap and federal bailouts must pay that money back under either contract law or tort law (fraud). In monetary terms a $30 million commercial loan might have been sold a few times with the “lender” receiving tens of millions of dollars, or even hundreds of millions of dollars (depending upon how bold they became).

So the “lender” must do everything within its power to maintain the appearance of a default even if there was no default or else they not only give up their claim for default interest, they must give up multiples of the original loan that they received from third parties based upon false pretenses.

It gets worse. Having received the insurance, credit default swap and federal bailout money, the original debt has been extinguished because the “creditor” has been paid in full according to the paperwork existing at the time of the payment from these co-obligors. The parties that paid would ordinarily have a claim for contribution against the borrower, but in most cases they contracted that right away. Hence the commercial property could emerge debt free and definitely unencumbered by a mortgage.

Whether we are discussing residential loans or commercial property loans, the borrower should do their homework and realize that they actually have more leverage than the lender who is pressing for foreclosure. We already have had one case where a whistle-blower received a huge sum of money for reporting these practices and the IRS collected enormous tax revenues from one deal.

The article below shows that out of the $13 trillion in mortgages, most of it followed a path of false paper and diverted money; the liability for the professionals that put these deals together might include a criminal conspiracy — but even without that the REMIC rules are very clear. Violation means double taxation, and with interest and penalties that alone could be enough to change the landscape of banks, insurers, law firms and accountants.

That failure appears to cause the trusts to fail both the definitional requirement and the timing requirement that are necessary to elect REMIC status. They fail the definition requirement because they do not own obligations, and what they do own does not appear to be secured by interests in real property.

Wall Street Rules Applied to REMIC Classification

By Bradley T. Borden & David Reiss 

(Bradley T. Borden & David Reiss are professors atBrooklyn Law School.1)

“They take aggressive positions, and they figure that if enough of them take an aggressive position, and there’s billions of dollars at stake, then the IRS is kind of estopped from arguing with them because so much would blow up. And that is called the Wall Street Rule. That is literally the nickname for it.”2

Investors in mortgage-backed securities, built on the shoulders of the tax-advantaged Real Estate Mortgage Investment Conduit (“REMIC”), may be facing extraordinary tax losses because of how bankers and lawyers structured these securities.  This calamity is compounded by the fact that those professional advisers should have known that the REMICs they created were flawed from the start.  If these losses are realized, those professionals will face suits for damages so large that they could put them out of business.  That is, unless the Wall Street Rule is applied.

The issue of REMIC failure for tax purposes is important in at least three contexts:

(1) in any potential effort by the IRS to clean up this industry;

(2) in civil lawsuits brought by REMIC investors against promoters, underwriters, and other parties who pooled mortgages and sold mortgage-backed securities; and

(3) state and federal prosecutors and regulators who consider bringing criminal or civil claims against promoters, underwriters, and other parties who pooled mortgages and sold MBSs.

A History of REMIC-able Growth

The first mortgage-backed securities (“MBS”) were issued by entities related to the federal government, like Fannie Mae and Freddie Mac, in the early 1970s.  These MBS paid out to investors from their proportional share of ownership of a securitized pool of mortgages’ cash flow.  Starting in the late 1970s, private issuers such as commercial banks and mortgage companies began to issue residential mortgage-backed securities.  These “private label” securities are issued without the governmental or quasi-governmental guaranty that a federally related issuer would give.  Private label securitization gained momentum during the savings-and-loan crisis in the early 1980s, when Wall Street firms were able to expand market share at the expense of the beleaguered thrift sector.

Before 1986, mortgage-backed securities had various tax-related inefficiencies.  First among them, such securities were taxable at the entity level, thus investors faced double taxation.  Wall Street firms successfully lobbied Congress to do away with double taxation in 1986.  This legislation created the REMIC, which was not taxed at the entity level.  This one change automatically boosted its yields over other types of mortgage-backed securities.  Unsurprisingly, REMICs displaced these other types of mortgage-backed securities and soon became the dominant choice of entity for such transactions.

A REMIC allows for the pooling of mortgage loans that can then be issued as a mortgage-backed security.  It is a pass-through entity for tax purposes, meaning that unlike corporations, they do not pay income tax and their owners thereby avoid the double taxation they would face from receiving corporate dividends.  A REMIC is intended to be a passive investment.

Because of its passive nature, a REMIC is limited as to how and when it can acquire mortgage.  In particular, a REMIC must in most cases acquire its mortgages within 90 days of its start-up.3  The Internal Revenue Code provides for draconian penalties for REMICs that fail to comply with applicable legal requirements.

In the 1990s, the housing finance industry, still faced with the patchwork of state and local laws relating to real estate, sought to streamline the process of assigning mortgages from one mortgage pool to another.  Industry players, including Fannie and Freddie and the Mortgage Bankers Association, advocated for The Mortgage Electronic Recording System (“MERS”), which was up and running by the end of the decade.

A MERS mortgage contains a statement that “MERS is a separate corporation that is acting solely as nominee for the Lender and Lender’s successors and assigns. MERS is the mortgagee under this Security Instrument.”4

MERS is not named on any note endorsement.  This new system saved lenders a small but not insignificant amount of money every time a mortgage was transferred.  However, the legal status of this private recording system was not clear and had not been ratified by Congress.  Notwithstanding that fact, nearly all of the major mortgage originators participated in MERS and MERS registered millions of mortgages within a couple of years of being up and running.

Beginning in early 2000s, MERS and other parties in the mortgage securitization industry began to relax many of the procedures and practices they originally used to assign mortgages among industry players.  Litigation documents and decided cases reveal how relaxed the procedures and practices became.  Hitting a crescendo right before the global financial crisis hit, the practices became egregiously negligent.

The practices at Countrywide Home Loans Inc. (then one of the nation’s largest loan originators in terms of volume and now part of Bank of America) illustrate the outrageous behavior of mortgage securitizers that was typical during that period.

Kemp-temptable Practices

 In re Kemp demonstrates that securitizers did not follow the rules applicable to REMICs when issuing mortgage-backed securities.

On May 31, 2006, Countrywide Home Loans Inc., lent $167,000 to John Kemp.5  At that time, Kemp signed a note listing Countrywide Home Loans Inc., as the lender; no indorsement appeared on the note.

An unsigned allonge (a piece of paper attached to a negotiable note that allows for the memorialization of additional assignments if there is not sufficient room on the note itself to do so) of the same date accompanied the note and directed Kemp to “Pay to the Order of Countrywide Home Loans Inc., d/b/a America’s Wholesale Lender.”

On the same day, Kemp signed a mortgage in the amount of $167,000, which listed the lender as America’s Wholesale Lender.  The mortgage named MERS as the mortgagee and authorized it to act solely as nominee for the lender and the lender’s successors and assigns.  The mortgage referenced the note Kemp signed, and it was recorded in the local county clerk’s office on July 13, 2006.

On June 28, 2006, Countrywide Home Loans Inc., as seller, entered into a Pooling and Servicing Agreement (PSA) with CWABS, Inc., as depositor; Countrywide Home Loans Servicing LP as master servicer; and Bank of New York as trustee.  The PSA provided that Countrywide Home Loans Inc., sold, transferred, or assigned to the depositor “all the right, title and interest of [Countrywide Home Loans, Inc.] in and to the Initial Mortgage Loans, including all interest and principal received and receivable by” Countrywide.

The PSA further provided that the depositor would then transfer the Initial Mortgage Loans, which include Kemp’s loan, to the trustee in exchange for certificates referred to as Asset-backed Certificates, Series 2006-8.  The depositor apparently then sold the certificates to investors.

The PSA also provided that the depositor would deliver “the original Mortgage Note, endorsed by manual or facsimile signature in blank in the following form: ‘Pay to the order of ________ without recourse’, with all intervening endorsements from the originator to the Person endorsing the Mortgage Note.”

Although Kemp’s note was supposed to be subject to the PSA, it was never endorsed in blank or delivered to the depositor or trustee as required by the PSA.  At that time, no one recorded a transfer of the note or the mortgage with the county clerk.

On March 14, 2007, MERS assigned Kemp’s mortgage to Bank of New York as trustee for the Certificate Holders CWABS Inc. Asset-backed Certificates, Series 2006-8.  The assignment purported to assign Kemp’s mortgage “[t]ogether with the Bond, Note or other obligation described in the Mortgage, and the money due and to become due thereon, with interest.”  That assignment was recorded on March 24, 2008.

On May 9, 2008, Kemp filed a voluntary bankruptcy petition.  On June 11, 2008, Countrywide, identifying itself as servicer for the Bank of New York, filed a secured proof of claim noting Kemp’s property as collateral for the claim.  In response, Kemp filed an adversary complaint on October 16, 2008, against Countrywide Home Loans, Inc., seeking to expunge its proof of claim.

At trial, Countrywide Home Loans, Inc., produced a new undated Allonge to Promissory Note, which directed Kemp to “Pay to the Order of Bank of New York, as Trustee for the Certificate-holders CWABS, Inc., Asset-backed Certificates, Series 6006-8.”  A supervisor and operational team leader for the apparent successor entity of Countrywide Home Loans Servicing LP testified that the new allonge was prepared in anticipation of the litigation and was signed weeks before the trial.  That same person testified that the Kemp’s original note never left the possession of Countrywide Home Loans, Inc., but instead, it went to its foreclosure unit.  She also testified that the new allonge had not been attached to Kemp’s note and that customarily, Countrywide Home Loans, Inc., maintained possession of the notes and related loan documents.  In a later submission, Countrywide Home Loans, Inc., represented that it had the original note with the new allonge attached, but it provided no additional information regarding the chain of title of the note.  It also produced a Lost Note Certificate dated February 1, 2007, providing that Kemp’s original note had been “misplaced, lost or destroyed, and after a thorough and diligent search, no one has been able to locate the original Note.”

The court therefore concluded that at the time of the filing of the proof of claim, Kemp’s mortgage had been assigned to the Bank of New York, but Countrywide had not transferred possession of the associated note to the Bank of New York.

By failing to transfer possession of the note to the pool backing the securities, Countrywide failed to comply with the requirements necessary to obtain REMIC status.  Numerous other filings and reports suggest that Countrywide’s practice was typical of many major lenders during the early 2000s.  Thus, although we rely on the facts in the Kemp case in this brief article, it has very broad application.

Sloppiness and REMICs Rules Don’t Mix Well

Even though a minority of securitizers may have followed the terms contained in the applicable Pooling and Servicing Agreements, there is very low tolerance for deviation in the REMIC rules.  This suggests that compliance in a minority of situations would not prevent the IRS from finding that individual REMICs fail to comply with their strict requirements in an overwhelming number of cases.  And the failure of a very small number of mortgages to comply with the rules would be sufficient to cause a putative REMIC to lose its preferred-tax status.

Federal tax treatment of REMICs is important in two respects.  First, it treats regular interests in REMICs as debt instruments.6 Second, federal tax law specially classifies REMICs as something other than tax corporations, tax partnerships, or trust and generally exempts them from federal income taxation.7

These two aspects of REMICs work hand in hand to provide REMICs favorable tax treatment.  REMICs must compute taxable income, but because the regular interests are treated as debt instruments, REMICs deduct amounts that constitute interest payments to the holders of residual interests.8

Without these rules, a REMIC could be a tax corporation and the regular interests could be equity interests.  If that were the case, the REMIC would not be able to deduct payments made to the regular interest holders and would owe federal income tax on its taxable income.  That is how the REMIC classification provides significant tax benefits.

To obtain REMIC classification, a trust must satisfy several requirements.  Of particular interest is the requirement that within three months after the trusts startup date, substantially all of its assets must be qualified mortgages.9  The regulations provide that substantially all of the assets of a trust are qualified mortgages if no more than a de minimis amount of the trust’s assets are not qualified mortgages.10 

The regulations do not define what constitutes a de minimis amount of assets, but they provide that substantially all of the assets are permitted assets if no more than one percent of the aggregate basis of all of the trust’s assets is attributed to prohibited assets.11  If the aggregate basis of the prohibited assets exceeds the one percent threshold, the trust may nonetheless be able to demonstrate that it owns no more than a de minimis amount of prohibited assets.12 Thus, almost all of a REMIC’s assets must be qualified mortgages.

A ‘qualified mortgage’ is an obligation that is principally secured by an interest in real property.13  The trust must acquire the obligation by contribution on the startup date or by purchase within three months after the startup date.14  Thus, to be a qualified mortgage, an asset must satisfy both a definitional requirement (be an obligation principally secured by an interest in real property) and a timing requirement (be acquired within three months after the startup date).

Industry practices raise questions about whether trusts satisfied either the definitional requirement or the timing requirement.  The general practice was for trusts and loan originators to enter into PSAs, which required the originator to transfer the mortgage note and mortgage to the trust.  Nonetheless, as with Kemp, reports and court documents indicate that originators and trusts frequently did not comply with the terms of the PSAs and the originator typically retained the mortgage notes and mortgages.

That failure appears to cause the trusts to fail both the definitional requirement and the timing requirement that are necessary to elect REMIC status. They fail the definition requirement because they do not own obligations, and what they do own does not appear to be secured by interests in real property.

They fail the timing requirement because they do not acquire the requisite interests within the three-month prescribed time frame.  And even if the trusts acquired some obligations principally secured by interests in real property, many of their assets would not satisfy the REMIC requirements.  This would result in the trusts owning more than a de minimis amount of prohibited assets.  If more than a de minimis amount of a trust’s assets are prohibited assets, then it would not be eligible for REMIC status.

The Un-MERS-iful Stringency of the REMIC Regulations

Federal tax law does not rely upon the state-law definition of ownership, but it looks to state law to determine parties’ rights, obligations, and interests in property.15  Tax law can also disregard the transfer (or lack of transfer) of formal title where the transferor retains many of the benefits and burdens of ownership.16

Courts focus on whether the benefits and burdens of ownership pass from one party to another when considering who is the owner of property for tax purposes.17  As the Tax Court has stated, to “properly discern the true character of [a transaction], it is necessary to ascertain the intention of the parties as evidenced by the written agreements, read in light of the attending facts and circumstances.”18

If, however, the transaction does not coincide with the parties’ bona fide intentions, courts will ignore the stated intentions.19  Thus, the analysis of ownership cannot merely look to the agreements the parties entered into because the label parties give to a transaction does determine its character.20  Consequently, the analysis must examine the underlying economics and the attendant facts and circumstances to determine who owns the mortgage notes for tax purposes.21 

Courts in many states have considered the legal rights and obligations of REMICs with respect to mortgage notes and mortgages they claim to own.  The range of issues state courts have considered with respect to REMIC mortgage notes and mortgages range from standing to foreclose,22 entitlement to notice of bankruptcy proceeding against a mortgagor,23 to ownership of a mortgage note under a state’s commercial code.24 As these cases indicate, at least with respect to the question of security interest, the courts are split with some ruling in favor of MERS and others ruling in favor of other parties whose interests are adverse to MERS. Apparently, no court has considered how significant these rules are with respect to REMIC classification. Standing to foreclose and participate in a bankruptcy proceeding will likely affect the analysis of whether REMIC trust assets are secured by an interest in real property, but they probably do not affect the analysis of whether the REMIC trusts own obligations. This analysis turns on the ownership of the mortgage notes.

In re Kemp addressed the issue of enforceability of a note under the uniform commercial code (UCC) for bankruptcy purposes.25 The court in that case held that a note was unenforceable against the maker of the note and the maker’s property under New Jersey law on two grounds.26 The court held that because the owner of the note, the Bank of New York, did not have possession and the lack of proper indorsement upon sale made the note unenforceable.27 Recognizing that the mortgage note came within the UCC definition of negotiable instrument,28 the court then considered who is a party entitled to enforce a negotiable instrument.29

Only the following three types persons are entitled to enforce a negotiable instrument:

1) “the holder of the instrument,”

2) “a nonholder in possession of the instrument who has the right of a holder,” or

3)  “a person not in possession of the instrument who is entitled to enforce the instrument pursuant to UCC § 3-309 or 3-418(d).”30

The Kemp court then explained why the Bank of New York did not come within the definition of a party entitled to enforce the negotiable instrument.

This analysis illustrates how courts may reach results that undercut arguments that REMICs were the owners of the mortgage notes and mortgages for tax purposes.  But even if the majority of states rule in favor of REMICs, the few that do not can destroy the REMIC classification of many MBS that were structured to be – and promoted to investors as – REMICs.

Because rating agencies require that REMICs be geographically diversified in order to spread the risk of default caused by local economic conditions, REMICs hold notes and mortgages from multiple jurisdictions.  Most, if not all, REMICs own mortgages notes and mortgages from states governed by laws that the courts determine do not support REMIC eligibility for the mortgages from those jurisdictions.  This diversification requirement ensures that REMICs will have more than a de minimis amount of mortgages notes that do not come within the definition of qualified mortgage under the REMIC regulations.

IRS-ponsible Industry Regulation

Law firms issued opinions that MBS transactions would qualify as REMICs.  They did so even though they knew or should have known that an insufficient percent of trust assets would satisfy the definition of qualified mortgage under the REMIC rules.  Nonetheless, the IRS does not appear to be engaged in auditing REMICs.  Its reasons for not challenging REMIC status at this time may be justified as they study the issue and observe the outcome of the numerous actions against REMICs and originators.

Because REMICs did not file the correct returns and may have committed fraud, the statute of limitations for earlier years will remain open indefinitely, giving the IRS adequate time to pursue REMIC litigation after it obtains the information it needs.  If the IRS does not take action at the appropriate time, however, it will be a serious failure and will result in the loss of billions of dollars of tax revenue for the federal government.

More troubling still is the IRS’s failure to address the wide-scale abuse and problems that existed during the years leading up to the financial meltdown.  The IRS’s failure to adequately police REMICs is one more reason that the mortgage industry was able to overly inflate the housing market.  And that, inexorably, led to the crash and our tepid recovery from it.

More generally, by overlooking the serious defects in the transactions, courts and governmental agencies encourage the type of behavior that led to the financial crisis.  Lawmakers, law enforcement agencies and the judiciary cede their governing functions to private industry if they allow players to disregard the law and stride to create law through their own practices.

If we allow the Wall Street Rule to apply, then Wall Street rules.  If the rule of law is respected, then Main Street can look forward to the equal protection of the law and returned prosperity without fear of bubbles inflating because powerful special interests can flout the law that applies to the rest of us.

Notes

1          This brief article is drawn from a forthcoming study by the authors.  © 2012 Bradley T. Borden and David Reiss.

Professor David Reiss is the founding director of the Community Development Clinic at Brooklyn Law School and teaches property law and real estate law. His articles expound upon the secondary mortgage markets, predatory lending, and housing policy and he is a regular commentator in the news on these topics.

Professor Bradley Borden is a leading authority on taxation of real property transactions and flow-through entities. He teaches Partnership Taxation, Taxation of Real Estate Transactions, and a general income tax course. He is also a prolific writer whose articles appear in numerous journals and is the author or co-author of several books. He is also a regular commentator on these topics in the news.

2          Lee Shepard,  Bain Capital Tax Documents Draw Mixed Reaction, ALL THINGS CONSIDERED, (NPR Business broadcast Aug. 28, 2012) (discussing taxation of private equity management compensation), available at http://www.npr.org/player/v2/mediaPlayer.html?action=1&t=1&islist=false&id=160196045&m=160201502 (emphasis added).

3          26 U.S.C. § 860G(a)(3), (9).

4          See, e.g., Brook Boyd, Real Estate Financing § 14.05[9] (2005).

5          See In re Kemp, 440 B.R. 624, 627 (Bkrtcy D.N.J. 2010).

6          SeeIRC §§ 860B(a), 860C(b)(1)(A).

7          SeeIRC § 860A(a).

8          SeeIRC §§ 163(a), 860C(b)(1)(A).

9          SeeIRC § 860D(a)(4).

10        SeeTreas. Reg. § 1.860D-1(b)(3)(i).

11        SeeTreas. Reg. § 1.860D-1(b)(3)(ii).

12        See Treas. Reg. § 1.860D-1(b)(3)(ii).

13        SeeIRC § 860G(a)(3)(A).

14        SeeIRC § 860G(a)(3)(A)(i), (ii).

15        See, e.g., Burnet v. Harmel, 287 U.S. 103, 110 (1932).

16        See Bailey v. Comm’r, 912 F.2d 44, 47 (2d Cir. 1990).

17        Grodt & McKay Realty, Inc. v. Comm’r, 77 T.C. 1221, 1237 (1981).

18        See Haggard v. Comm’r, 24 T.C. 1124, 1129 (1955), aff’d 241 F.2d 288 (9th Cir. 1956).

19        See Union Planters National Bank of Memphis v. United States, 426 F.2d 115, 117 (6th Cir. 1970).

20        See Helvering v. F. & R. Lazarus & Co.308 U.S. 252, 255 (1939).

21        See Helvering v. F. & R. Lazarus & Co., 308 U.S. 252, 255 (1939).

22        See Bain v. Metropolitan Mortgage Group, Inc., 2012 WL 3517326 (Wash. 2012) (holding that MERS was not a beneficiary under Washington Deed of Trust Act because it did not hold the mortgage note); Eaton v. Federal National Mortgage Association, 462 Mass. 569 (Mass. 2012); Ralph v. Met Life Home Loans, ____ (5th D. Idaho August 10, 2011) (holding that MERS was not the beneficial owner of a deed of trust, so its assignment was a nullity and the assignee could not bring a nonjudicial foreclosure against the borrower); Fowler v. Recontrust Company, N.A., 2011 WL 839863 (D. Utah March 10, 2011) (holding that MERS is the beneficial owner under Utah law); Jackson v. Mortgage Electronic Registration Systems, Inc., 770 N.W.2d 487 (Minn. 2009) (holding that MERS, as nominee, could institute a foreclosure by advertisement, i.e., a nonjudicial foreclosure, based upon Minnesota “MERS statute” that allows nominee to foreclose).

23        See Landmark National Bank v. Kesler, 289 Kan. 528, 216 P.3d 158 (Kan. 2009) (holding that MERS had no interest in the property and was not entitled to notice of bankruptcy or to intervene to challenge it).

24        See In re Kemp, 440 B.R. 624 (Bkrtcy.D.N.J. 2010).

25        See In re Kemp, 440 B.R. 624 (Bkrtcy.D.N.J. 2010). A claim in bankruptcy is disallowed after an objection “to the extent that . . . such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured.” See id. at 629 (citing 11 U.S.C. § 502(b)(1). New Jersey adopted the UCC in ____. See ____. This article cites to the UCC generally instead of specifically to the New Jersey UCC to illustrate the general applicability of the holding.

26        See In re Kemp at 629–30.

27        See In re Kemp at 629–30.

28        See In re Kempat 630.

29        See In re Kempat 630.

30        SeeUnif. Commercial Code § 3-301.

DELAWARE TO MERS: NOT IN OUR STATE!

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Delaware sues MERS, claims mortgage deception

Posted on Stop Foreclosure Fraud

Posted on27 October 2011.

Delaware sues MERS, claims mortgage deceptionSome saw this coming in the last few weeks. Now all HELL is about to Break Loose.

This is one of the States I mentioned MERS has to watch…why? Because the “Co.” originated here & under Laws of Delaware…following? [see below].

Also look at the date this TM patent below was signed 3-4 years after MERS’ 1999 date via VP W. Hultman’s secretary Kathy McKnight [PDF link to depo pages 29-39].

New York…next!

Delaware Online-

Delaware joined what is becoming a growing legal battle against the mortgage industry today, charging in a Chancery Court suit that consumers facing foreclosure were purposely misled and deceived by the company that supposedly kept track of their loans’ ownership.

By operating a shadowy and frequently inaccurate private database that obscured the mortgages’ true owners, Merscorp made it difficult for hundreds of Delaware homeowners to fight foreclosure actions in court or negotiate new terms on their loans, the suit filed by the Attorney General’s Office said.

[DELAWARE ONLINE]

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CAL. AG DROPS OUT OF TALKS WITH BANKS: AMNESTY OFF THE TABLE

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EDITOR’S NOTE: California has approximately a 1/3 share of all foreclosures. So Harris’ decision to drop out of the talks is a huge blow to the mega banks who were banking (pardon the pun) on using it to get immunity from prosecution. The answer is no, you will be held accountable for what you did, just like anyone else. As I have stated before when the other AG’s dropped out of the talks (Arizona, Nevada et al), this growing trend is getting real traction as those in politics have discovered an important nuance in the minds of voters: they may have differing opinions on what should be done about foreclosures but they all hate these monolithic banks who are siphoning off the lifeblood of our society. And there is nothing like hate to drive voting.

This is a process, not an event. We are at the end of the 4th inning in a 9-inning game that may go into overtime. The effects of the mortgage mess created by the banks are being felt at the dinner table of just about every citizen in the country. The politics here is creating a huge paradox and irony — the largest source of campaign donations has turned into a pariah with whom association will be as deadly at the polls as organized crime.

The fact that so many attorneys general of so many states are putting distance between themselves and the banks means a lot. It means that the banks are in serious danger of indictment and conviction on criminal charges for fraud, forgery, perjury and potentially many other crimes.

IDENTITY THEFT: One crime that is being investigated, which I have long felt was a major element of the securitization scam for the “securitization that never happened” is the theft of identities. By signing onto what appeared to be mortgage documents, borrowers were in fact becoming issuers or pawns in the issuance of fraudulent securities to investors. Those with high credit scores were especially valued for the “cover” they provided in the upper tranches of the CDO’s that were “sold” to investors. An 800 credit score could be used to get a AAA  rating from the rating agencies who were themselves paid off to provide additional cover.

But it all comes down to the use of people’s identities as “borrowers” when in fact there was no “Lending” going on. What was going on was “pretend lending” that had all the outward manifestations of a loan but none of the substance. Yes money exchanged hands, but the real parties never met and never signed papers with each other. In my opinion, the proof of identity theft will put the borrowers in a superior position to that of the investors in suits against the investment bankers.

NO UNDERWRITING=NO LOAN: There was no underwriting committee, there was no underwriting, there was no review of the appraisal, there was no confirmation of the borrower’s income and there was no decision about the risk and viability of the so-called loan, because it wasn’t about that. The risk was already eliminated when they sold the bogus mortgage bonds to investors and thus saddled pension funds with the entire risk of loss on empty “mortgage backed pools.” So if the loan wasn’t paid, the players at ground level had no risk. Their only incentive was to get the signature of the borrower. That is what they were paid for — not to produce quality loans, but to produce signatures.

Little did we know, the more loans that defaulted, the more money the banks made — but they were able to mask the gains with apparent losses as an excuse to extract emergency money from the US Treasury using taxpayer dollars without accounting for the “loss” or what they did with the money. Meanwhile the gains were safely parked off shore in “off-balance sheet” transaction accounts.

The question that has not yet been asked, but will be asked as prosecutors and civil litigators drill down into these deals is who controls that off-shore money? My math is telling me that some $2.6 trillion was siphoned off (second level — hidden — yield spread premium) the investors money before the balance was used to fund “loans.”

When all is said and done, those loans will be seen for what they really were — part of the issuance of unregistered fraudulent securities. And you’ll see that the investors didn’t get any more paperwork than the borrowers did as to what was really going on. The banks want us to focus on the the paperwork when in fact it is the actual transactions involving money that we should be following. The paperwork is a ruse. It is faked.

NOTE TO LAW ENFORCEMENT: FOLLOW THE MONEY. IT WILL LEAD YOU TO THE TRUTH AND THE PERPETRATORS. YOUR EFFORTS WILL BE REWARDED.

California AG Harris Exits Multistate Talks
in News > Mortgage Servicing
by MortgageOrb.com on Monday 03 October 2011
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The multistate attorneys general group working toward a foreclosure settlement with the nation’s biggest banks suffered a blow Friday, when California’s Kamala Harris announced her departure from negotiations.

Harris notified Iowa Attorney General Tom Miller and U.S. Associate Attorney General Thomas Perrelli of her decision in a letter that was obtained and published by the New York Times Friday. According to the letter, Harris is exiting the talks because she opposes the broad scope of the settlement terms under discussion.

“Last week, I went to Washington, D.C., in hopes of moving our discussions forward,” Harris wrote. “But it became clear to me that California was being asked for a broader release of claims than we can accept and to excuse conduct that has not been adequately investigated.”

“[T]his not the deal California homeowners have been waiting for,” Harris adds one line later.

Harris, who earlier this year launched a mortgage fraud task force, says she will continue investigating mortgage practices – including banks’ bubble-era securitization activities – independent of the multistate group.

“I am committed to doing as thorough an investigation as is needed – and to taking the time that is necessary – to set the stage for achieving appropriate accountability for misconduct,” she wrote.

Harris also told Miller and Perrelli that she intends to advocate for legislation and regulations that increase transparency in the mortgage markets and “eliminate incentives to disregard borrowers’ rights in foreclosure.”

Harris’ departure is considered significant given the high number of distressed loans in California. In August, approximately one in every 226 housing units in the state had a foreclosure filing of some kind, according to RealtyTrac data.

FRAUD: The Significance of the Game Changing FHFA Lawsuits

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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

MERS: A FAILED ATTEMPT AT BYPASSING STATE AND FEDERAL AUTHORITY

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Fannie-Freddie’s Hypocritical Suit Against Banks Making Loans that GSEs Helped Create

Fannie-Freddie’s Hypocritical Suit Against Banks Making Loans that GSEs Helped Create

EDITOR’S NOTE:  Practically everything that the government is doing with respect to the economy and the housing market in particular is hypocritical. If we look to the result to determine the intent of the government you can see why nothing is being done to improve DOMESTIC market conditions. By removing the American consumer from the marketplace (through elimination of available funds in equity, savings or credit) the economic prospects for virtually every marketplace in the world is correspondingly diminished. The downward pressure on economic performance worldwide creates a panic regarding debt and currency. By default (and partially because of the military strength of the United States) people are ironically finding the dollar to be the safest haven during a bad storm.

 The result is that the federal government is able to borrow funds at interest rates that are so low that the investor is guaranteed to lose money after adjusting for inflation. The climate that has been created is one in which investors are far more concerned with preservation of capital than return on capital. In a nutshell, this is why the credit markets are virtually frozen with respect to the average potential consumer, the average small business owner, and the average entrepreneur or innovator who would otherwise start a new business and fuel rising employment.

 While it is true that the lawsuits by Fannie and Freddie are appropriate regardless of their past hypocritical behavior, they are really only rearranging the deck chairs on the Titanic. Ultimately there must be a resolution to our current economic problems that is based in reality rather than the power to manipulate events. The scenario we all seek  would cleanup the rising title crisis, end the foreclosure crisis, and restore a true marketplace in the purchase and sale of real estate. We have all known for decades that the housing market drives the economy.

 There is obviously very little confidence that the government and market makers in the United States are going to seek any resolution based in reality. Therefore while investors are parking their money in dollars they are also driving up the price of gold and finding other innovative ways to preserve their wealth. As these innovations evolve it is almost certain that an alternative to the United States dollar will emerge. The driving force behind this innovation is the stagnation of the credit markets and the world marketplace. My opinion is that the United States is pursuing a policy that virtually guarantees the creation of a new world reserve currency.

 The creation of MERS was a private attempt to substitute private business plans for public laws. It didn’t work. The lawsuits by the government-sponsored entities together with lawsuits from investors who were duped into being lenders and homeowners who were duped into being borrowers in a rigged market are only going to result in money judgments and money settlements. With a nominal value of credit derivatives at over $600 trillion and the actual money supply at under $50 trillion there is literally not enough money in the world to fix this problem. The problem can only be fixed by recognizing and applying existing law to existing transactions.

 This means that MERS, already discredited, must be treated as a nonexistent entity in the world of real estate transactions. Nobody wants to do that because the failure to disclose an actual creditor on the face of a purported lean or encumbrance on land is a fatal defect in perfecting the lien. This is true throughout the country and it is obvious to anyone who has studied real property transactions and mortgages. If you don’t have the name and address of the creditor from whom you can obtain a satisfaction of mortgage, then you don’t have a mortgage that attaches to the land as a lien. It is this realization that is forming a number of lawsuits from the investors who advanced money for mortgage bonds. Those advances were the funds that were used to finance pornographic Wall Street profits with the balance used to fund absurd mortgage products.

 This is basic property law and public policy. There can be no confidence or consistency in the marketplace without a buyer or a lender knowing that they can rely upon the information contained in a government title Registry at the county recording office. Any other method requires them to take the word of someone without the authority of the government. This is a fact and it is the law. But the banks are successfully using politics to sidestep the basic essential elements of law. Under their theory the fact that the mortgage lien was never perfected would be ignored so that bank and non-bank institutions could become the largest landholders in the country without ever having spent a dime on loaning any money or purchasing the receivables. Politics is trumping law.

 The narrative and the debate are being absolutely controlled by Wall Street interests. We say we don’t like what the banks did and many say they don’t like banks at all. But it is also true that the same people who say they don’t like banks are willing to let the banks keep their windfall and make even more money at the expense of the taxpayer, the consumer and the homeowner. There are trillions of dollars available for investment in business expansion, government projects, and good old American innovation to drive a healthy economy. It won’t happen until we begin to drive the debate ourselves and force government and banking to conform to rules and laws that have been in existence for centuries.

from STOP FORECLOSURE FRAUD…………….

Lets NOT forget both Fannie and Freddie, like most of the named banks they are suing, each are shareholders of MERS.

Again, who gave the green light to eliminate the need for assignments and to realize the greatest savings, lenders should close loans using standard security instruments containing “MOM” language back in April 26, 1999?

This was approved by Fannie Mae and Freddie Mac which named MERS as Original Mortgagee (MOM)!

Open Market-

“U.S. is set to sue dozen big banks over mortgages,” reads the front-page headline in today’s New York Times. The “deck” below the headline explains that that the Federal Housing Finance Agency, which oversees the government-sponsored enterprises Fannie Mae and Freddie Mac, is “seen as arguing that lenders lacked due diligence” in the loans they made.

A more apt description would probably be that Fannie and Freddie are suing the banks for selling them the very loans the GSEs helped designed and that government mandates encourage — and are still encouraging them to make. These conflicted actions are just one more of the government’s contributions to the uncertainty that is helping to keep unemployment at 9 percent.

Strangely the author of the Times piece, Nelson Schwartz, ignores the findings of a recent blockbuster

[OPEN MARKET]

After The Storm – Foreclosure Fraud & Robo-Signing Continues by Nye Lavalle

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EDITOR’S NOTE: THE ONLY THING MISSING IS THE LARGEST QUESTION OF ALL: WERE THE MORTGAGE LIENS EVER PERFECTED? DO THEY EXIST?

I also contest the issue of whether the banks were ever intending to do things right. I know from interviews I conducted that several lawyers who were assigned the task of drafting papers and procedures for securitization simply quit, citing illegality and even criminality of these acts. I believe the intention was always to defraud the investors, defraud the borrowers and take the principal as fees. This diverges from past corruption where fees were excessive or where the investment was bad. Here, the intent, in my opinion, was to create a bad investment and use leverage on the banks name and reputation to sell something that didn’t exist.

The proof is in the pudding. Analyzing these pols and the securitization scheme set forth in the PSAs, it is quite clear that the worse the loan, the worse the mortgage bond, the more Wall Street made. The higher the certainty of a loss to the investor, the higher the probability of the borrower being defaulted, the higher the profits and fees. Just do the math. If the investors wanted a 5% return, they wanted $50,000 per year as interest on their money if they invested $1 million. Wall Street delivered the $50,000 by making high risk loans averaging 10% instead of 5%. The result was that they could take $500,000 and fund a 10% loan, and take $500,000 and put it in their own pockets.

The Banks are still leveraging on their prior reputation for risk aversion and sticking by the rules of underwriting. And people are still buying the myth that the banks were just out to make loans. They were not. They were out to make profits, stealing the investors money, stealing the borrowers down payment and other money, stealing the houses and leaving both sides with nothing. Why won’t people use the age-old instruction: “look to the result to determine the intent?”

SEE NYE LAVALLE 62650988-After-the-Storm-Final

“In the best-­‐case scenario, concerns about mortgage documentation irregularities may prove overblown. In this view, which has been embraced by the financial industry, a handful of employees failed to follow procedures in signing foreclosure-­related affidavits, but the facts underlying the affidavits are demonstrably accurate.

Foreclosures could proceed as soon as the invalid affidavits are replaced with properly executed paperwork.

The worst-­‐case scenario is considerably grimmer.

In this view, which has been articulated by academics and homeowner advocates, the ‘robosigning’ of affidavits served to cover up the fact that loan servicers cannot demonstrate the facts required to conduct a lawful foreclosure. In essence, banks may be unable to prove that they own the mortgage loans they claim to own.

The risk stems from the possibility that the rapid growth of mortgage securitization outpaced the ability of the legal and financial system to track mortgage loan ownership.”

After The Storm – Foreclosure Fraud & Robo-Signing Continues by Nye Lavalle

Foreclosure
Fraud
&
Robo-­Signing
Continues…

A Year Ago, A Storm of Allegations And Reports Highlighting Robo-­Signing And Foreclosure Fraud Swept Across America Causing Major Banks To Halt Foreclosures Nationwide While Congressional, State, And Federal Investigations Were Launched. A Year Later, While Investigations Are Still Ongoing, Regulators Have Failed To Correct The Underlying Issues Behind Foreclosure Fraud And Robo-­Signing. The Overwhelming Evidence Presented In This Paper Is That Not Only Were American Homeowners And Borrowers Defrauded In The World’s Greatest Financial Scam, But American’s Wealth And Security Were Placed At Risk. To Date, There Has Been Only One Criminal Conviction Of An Executive Of A Major Mortgage Company And Other Criminal Convictions Have Been Halted. Still, As Shown In This Paper, Foreclosure Fraud And Robo-­Signing Continue While Some Courts Address The Issue And Others Ignore The Ramifications Of This Massive Fraud. What Is Now Known Is That These Scams Were Not Unique, But Industry-­Wide. The Mortgage-­Backed Securities Turned Out To Be Non-­Mortgage & Note Backed Empty Trusts. To Conceal This Massive Ponzi Scheme Perpetuated Against Americans, The Nation’s Mortgage Industry Continues To Manufacture, Fabricate, & Destroy Evidence, Despite The Inherent Risks And Ramifications Since Over 90% of Borrowers Don’t Challenge Their Foreclosures.

SPECTRE OF FRAUD OF ALL TYPES HAUNTING BOFA, CITI, CHASE, WELLS ET AL

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New York AG Schneiderman Comes out Swinging at BofA, BoNY
Posted By igradman On August 5, 2011 (4:28 pm) In Attorneys General

This is big.  Though we’ve seen leading indicators over the last few weeks that New York Attorney General Eric Schneiderman might get involved in the proposed Bank of America settlement over Countrywide bonds, few expected a response that might dynamite the entire deal.  But that’s exactly what yesterday’s filing before Judge Kapnick could do.

Stating that he has both a common law and a statutory interest “in protecting the economic health and well-being of all investors who reside or transact business within the State of New York,” Schneiderman’s petition to intervene takes a stance that’s more aggressive than that of any of the other investor groups asking for a seat at the table.

Rather than simply requesting a chance to conduct discovery or questioning the methodology that was used to arrive at the settlement, the AG’s petition seeks to intervene to assert counterclaims against Bank of New York Mellon for persistent fraud, securities fraud and breach of fiduciary duty.

Did you say F-f-f-fraud?  That’s right.  The elephant in the room during the putback debates of the last three years has been the specter of fraud.  Sure, mortgage bonds are performing abysmally and the underlying loans appears largely defective when investors are able to peek under the hood, but did the banks really knowingly mislead investors or willfully obstruct their efforts to remedy these problems?  Schneiderman thinks so.  He accuses BoNY of violating:

Executive Law § 63(12)’s prohibition on persistent fraud or illegality in the conduct of business: the Trustee failed to safeguard the mortgage files entrusted to its care under the Governing Agreements, failed to take any steps to notify affected parties despite its knowledge of violations of representations and warranties, and did so repeatedly across 530 Trusts. (Petition to Intervene at 9)

By calling out BoNY for failing to enforce investors’ repurchase rights or help investors enforce those rights themselves, the AG has turned a spotlight on the most notoriously uncooperative of the four major RMBS Trustees.  Of course, all of the Trustees have engaged in this type of heel-dragging obstructionism to some degree, but many have softened their stance.

since investors started getting more aggressive in threatening legal action against them.  BoNY, in addition to remaining resolute in refusing to aid investors, has now gone further in trying to negotiate a sweetheart deal for Bank of America without allowing all affected investors a chance to participate.  This has drawn the ire of the nation’s most outspoken financial cop.

And lest you think that the NYAG focuses all of his vitriol on BoNY, Schneiderman says that BofA may also be on the hook for its conduct, both before and after the issuance of the relevant securities.  The Petition to Intervene states that:

Countrywide and BoA face liability for persistent illegality in:
(1) repeatedly breaching representations and warranties concerning loan quality;
(2) repeatedly failing to provide complete mortgage files as it was required to do under the Governing Agreements; and
(3) repeatedly acting pursuant to self-interest, rather than
investors’ interests, in servicing, in violation of the Governing Agreements. (Petition to Intervene at 9)

Though Countrywide may have been the culprit for breaching reps and warranties in originating these loans, the failure to provide loan files and the failure to service properly post-origination almost certainly implicates the nation’s largest bank.  And lest any doubts remain in that regard, the AG’s Petition also provides, “given that BoA negotiated the settlement with BNYM despite BNYM’s obvious conflicts of interest, BoA may be liable for aiding and abetting BNYM’s breach of fiduciary duty.” (Petition at 7) So much for Bank of America’s characterization of these problems as simply “pay[ing] for the things that Countrywide did.

As they say on late night infomercials, “but wait, there’s more!”  In a step that is perhaps even more controversial than accusing Countrywide’s favorite Trustee of fraud, the AG has blown the cover off of the issue of improper transfer of mortgage loans into RMBS Trusts.  This has truly been the third rail of RMBS problems, which few plaintiffs have dared touch, and yet the AG has now seized it with a vice grip.

In the AG’s Verified Pleading in Intervention (hereinafter referred to as the “Pleading,” and well worth reading), Schneiderman pulls no punches in calling the participating banks to task over improper mortgage transfers.  First, he notes that the Trustee had a duty to ensure proper transfer of loans from Countrywide to the Trust.  (Pleading ¶23).  Next, he states that, “the ultimate failure of Countrywide to transfer complete mortgage loan documentation to the Trusts hampered the Trusts’ ability to foreclose on delinquent mortgages, thereby impairing the value of the notes secured by those mortgages. These circumstances apparently triggered widespread fraud, including BoA’s fabrication of missing documentation.”  (Id.)  Now that’s calling a spade a spade, in probably the most concise summary of the robosigning crisis that I’ve seen.

The AG goes on to note that, since BoNY issued numerous “exception reports” detailing loan documentation deficiencies, it knew of these problems and yet failed to notify investors that the loans underlying their investments and their rights to foreclose were impaired.  In so doing, the Trustee failed to comply with the “prudent man” standard to which it is subject under New York law.  (Pleading ¶¶28-29)

The AG raises all of this in an effort to show that BoNY was operating under serious conflicts of interest, calling into question the fairness of the proposed settlement.  Namely, while the Trustee had a duty to negotiate the settlement in the best interests of investors, it could not do so because it stood to receive “direct financial benefits” from the deal in the form of indemnification against claims of misconduct.  (Petition ¶¶15-16) And though Countrywide had already agreed to indemnify the Trustee against many such claims, Schneiderman states that, “Countrywide has inadequate resources” to provide such indemnification, leading BoNY to seek and obtain a side-letter agreement from BofA expressly guaranteeing the indemnification obligations of Countrywide and expanding that indemnity to cover BoNY’s conduct in negotiating and implementing the settlement.  (Petition ¶16)  That can’t be good for BofA’s arguments that it is not Countrywide’s successor-in-interest.

I applaud the NYAG for having the courage to call this conflict as he sees it, and not allowing this deal to derail his separate investigations or succumbing to the political pressure to water down his allegations or bypass “third rail” issues.  Whether Judge Kapnick will ultimately permit the AG to intervene is another question, but at the very least, this filing raises some uncomfortable issues for the banks involved and provides the investors seeking to challenge the deal with some much-needed backup.  In addition, Schneiderman has taken pressure off of the investors who have not yet opted to challenge the accord, by purporting to represent their interests and speak on their behalf.  In that regard, he notes that, “[m]any of these investors have not intervened in this litigation and, indeed, may not even be aware of it.” (Pleading ¶12).

As for the investors who are speaking up, many could take a lesson from the no-nonsense language Schneiderman uses in challenging the settlement.  Rather than dancing around the issue of the fairness of the deal and politely asking for more information, the AG has reached a firm conclusion based on the information the Trustee has already made available: “THE PROPOSED SETTLEMENT IS UNFAIR AND INADEQUATE.” (Pleading at II.A)  Tell us how you really feel.

[Author’s Note: Though the proposed BofA settlement is certainly a landmark legal proceeding, there is plenty going on in the world of RMBS litigation aside from this case. While I have been repeatedly waylaid in my efforts to turn to these issues by successive major developments in the BofA case, I promise a roundup of recent RMBS legal action in the near future.  Stay tuned…]

Article taken from The Subprime Shakeout – http://www.subprimeshakeout.com

 

NO END IN SIGHT: MINNESOTA SHUTS DOWN COMPLETELY

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EDITOR’S NOTE: It’s frustrating. Many of us did the math and came up with the only possible conclusion. State and local governments would default, starting now, in increasing numbers. They default on essential, social and other services leaving he citizens without any government at all. We wanted it to stop before it came to this. But for reasons that defy rational thinking, very few people are willing to connect the current economic crisis with the fall of the housing market, despite the fact that the housing industry has been a bell-weather for the economy for many decades.

If the housing crisis was a slump caused by the common economic factors of demand (over-exuberance) and supply (over-building) fueled by negligent lending practices we could say with some assurance that it will simply play out and we will recover. But we are not recovering and things are getting worse — all because the Wall Street banks are not being held to task for committing the largest fraud in world  history and because the fraud is continuing in the form of bogus foreclosures with bogus auction sales, depriving middle America of the last vestige of economic power in what is hailed as a free-market economy.

States don’t have a chance of recovery. Their status is that they were robbed of their treasury by investments in bogus mortgages bonds, pillaged by the illusion of a housing boom in which they made commitments that could not be sustained because the housing market was doomed, and deprived of revenue from employed workers, small business success, and tax and fee evasions, amounting to billions of dollars in each state. Arizona lost a minimum of $3 billion according to government experts there and yet they are gridlocked on whether to collect the taxes, fees and fines together with the damages caused to the state budget by the Great Securitization illusion.

None of this needs to happen, although we have gone so far kicking the can down the road that some of the damage is irreparable. States could recover in an instant if they applied their resources to the enforcement of taxes, fees, fines and damages using existing law. Their budgets, while damaged, could be restored to normal levels in a normal recession.

But this is not normal recession and there is no free economy. Wall Street banks grabbed control of our government at the Federal, State and local level using a scheme so complex that they could claim anything they wanted to claim — including using state non-judicial and judicial proceedings to effectuate t he largest illegal land grab in history. This will go down in history as not only the largest fraud ever committed, and the largest ceding of power to the business sector, but the largest for all time to come as well. There won’t be another one like this for 500 years.

People ask me why the law isn’t being applied. Even the most unsophisticated consumer understands that if they tried to use a straw-man at the closing of a transaction without disclosing what they were doing the other party to the transaction (the banks in this case) would cry foul, refuse to complete the transaction and probably refer the matter for criminal prosecution. Yet if the perpetrator is a bank, the rules are suspended, the law is not applied, and the continuing devastation of our society continues.

The Banks have the ear of government. They say that no matter how badly they acted, they should not be brought down because if they are, the entire financial system will collapse. Not true. The entire financial system consists of both huge entities crossing international borders and at least 7,000 large and small community banks and credit unions with the exact same access to electronic services, ATM convenience and every other aspect of commercial banking.

The sky is falling because the Banks are getting away with it and they continue to suck the life-blood out of our economy, changing our society forever, if we let them. Those public servants who fear their jobs will disappear if they take action are mistaken. They are dealing with a group of people without conscience and without any regard for the nation’s vital economic and security interests. They will use their tactics of undermining the narrative and preventing the application of basic law to achieve their aims. It is up to borrowers, collectively, to correct the damages because government won’t do it, even if it means, like in Minnesota, that they waive their claims against the perpetrators of this fraud.

This is why I have sponsoring a group that is forming a cooperative that will save America using conventional means to inform consumers that they have remedies, that opposing the banks is a a deeply moral act of advanced citizenship. And through this Cooperative, members will be able to meet those who are offering help, assistance and services to defeat the final corruption of our society starting with the corruption of title.

Is your title safe? The answer is no. Is the economy safe? The answer is no. Are we secure from unreasonable search and seizure? No. Are we protected by due process. No- not if the banks are the ones taking our liberties and privileges away despite a constitution that, once upon a time, promissed a country that would be governed by a nation of laws, not men.

No End in Sight as Minnesotans Grapple With State Shutdown

By

ST. PAUL — The state of Minnesota screeched to a stop on Friday.

State parks were barricaded, and campers, Boy Scout troops and everyone else were sent on their way.

Heading into a holiday weekend in a state that savors its summers outdoors, licenses for fishing, hunting, trapping, boats and ATVs were unavailable for purchase. And all around the State Capitol — the place where all the troubles began — the streets were eerily empty and official buildings locked, plastered with hand-taped signs that offered a gentle explanation: “This building is closed until further notice due to the current state government service interruption.”

Right up to the midnight deadline on Thursday, Minnesotans, who have been known to boast of their professional, efficient government, had held out hope that the state’s divided leadership could reach a deal on how to solve a looming budget deficit. But in the end, the fundamentally different fiscal approaches of the Republicans and the Democrats here did not change, and Minnesota began its broadest shutdown of services in state history with no end in sight.

“Now we’re just waiting and hoping this will be short-lived,” said Mark Crawford, the manager at Lake Maria State Park who on Thursday had to inform scores of campers that they needed to pack up and leave and then, on Friday, became one of 22,000 state employees out of work without pay. “We’ll have to change our lifestyle for a little bit,” said Mr. Crawford, who is 60 and has worked in the parks for 35 years.

Since 2002, there have been six such shutdowns around the nation, including one in 2005 in Minnesota. Some lasted a few hours, others for days. But this time, the two sides appear far apart, the anger is palpable, and no one is confident of a quick resolution. By Friday evening, a spokeswoman for Gov. Mark Dayton, a Democrat, said no negotiations had been scheduled for the holiday weekend.

“There’s a lot of concern about whether this is going to be for a weekend or whether it will stretch into August,” said Liz Kuoppala, the executive director of the Minnesota Coalition for the Homeless, which, along with a long list of other groups (on behalf of people with H.I.V., battered women, mentally ill Minnesotans) pleaded on Friday before a retired State Supreme Court justice who has been designated to consider exceptions to the state financing freeze. “Part of the hardest part for people in the homeless shelters and elsewhere,” she said, “is not knowing what’s going to happen and what’s going to be paid for and what’s not.”

In a way, the standstill here may have begun last November, when the voters turned power in St. Paul upside down and picked leaders whose ideas about budgets, even during the campaign, could not have been more different from one another.

Republicans, who took control of both chambers of the Legislature for the first time in almost four decades, called for reining in spending as a way to pull the state’s budget, facing a $5 billion deficit, into control. But Mr. Dayton, who became the state’s first Democratic governor in 20 years, called for collecting more in income taxes from the very highest earners to spare cuts in services to Minnesota’s most vulnerable residents.

As the state’s new budget year approached, the opposing sides had negotiated privately, day after day, under a polite “cone of silence,” in which no one shared a peep about what the other side was asking for.

All vows of silence — and politeness — had vanished by Friday after talks fell apart and Minnesota found itself the only state in the nation closing down. At least 45 states had agreed to spending plans by Friday, officials at the National Conference of State Legislatures said, and the handful of states still finishing their work did not appear at risk of shutdown.

The entire episode left some Minnesotans baffled, posing questions to anyone they came across on Friday. Were highway rest stops open? (No.) Were courts open? (Yes.) Was the Minnesota Zoo open? (No.) Was the local swimming pool open? (Yes; only state functions were affected.)

Even as the state found itself with no approved budget, certain state services deemed essential never stopped. State police patrol and prison operations went on, as did payments to the state’s schools and payments for food stamps, welfare benefits and some programs for the disabled.

Other social services programs, though, including assistance for child care and some services for the blind, had received no such exemption as of Friday, officials said. Nor did the state’s lottery, racetracks, or about 100 road construction projects that were already under way around Minnesota. Torn-up patches, marked only by lonely orange cones, were common sights on Friday.

But even within state agencies, officials found themselves sorting through what must keep going and what ought not. Most prison guards stayed put, for instance, but the state Department of Corrections said it was ending family and volunteers’ visits and yoga classes for prisoners and — if the shutdown lasts long enough for service to lapse — prisoners will see no more cable television.

For many here, though, the largest question was how Minnesota’s leaders might ever reach some accord.

For all the talk of compromise and suggestions by Republicans at one point on Thursday that a deal might be close, it appeared by Friday that the central philosophical divide — between holding the line on spending and raising taxes to maintain services for those most in need — had never really been crossed. Each group retreated to its own side.

“This is a night of deep sorrow for me because I don’t want to see this shutdown occur,” Mr. Dayton told reporters shortly before the midnight deadline on Thursday. “But I think there are basic principles and the well-being of millions of people in Minnesota that would be damaged not just for the next week or whatever long it takes, but the next two years and beyond with these kind of permanent cuts in personal care attendants and home health services and college tuition increases.”

That evening, hundreds of protesters demanding a solution to the impasse gathered outside the Capitol, and Republican lawmakers, describing themselves as discouraged and disheartened, held what some described as a “sit-in” in their chambers urging the governor to call a special session so some state services might be kept running temporarily.

“We’re talking about runaway spending that we can’t afford,” Kurt Zellers, the Republican House speaker, said. “And we will not saddle our children and grandchildren with mounds of debts with promises for funding levels that will not be there in the future.”

David Maki-Waller, 41 and a resident of Northfield, was also thinking of his children on Friday, but of a more immediate problem: how to keep the four of them (15, 11 and 8-year-old twins) entertained over the long weekend now that the family’s reservation to camp at Frontenac State Park — secured months ago — had been canceled along with everyone else’s.

“They’ve been asking me for a Plan B,” Mr. Maki-Waller said. “What are we going to do this weekend? I don’t know. Everyone wanted to go camping.”

Lori Moore contributed reporting from New York.

BANKS PAYING OFF HOME LOANS? TO WHAT ACCOUNT WILL THESE “SETTLEMENTS” BE CREDITED?

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“The game is on: a race to foreclose and get the properties in the name of some entity that is “bankruptcy remote.” While investors and homeowners continue to sort out what happened to them and why they are in the hole, the banks move forward grabbing as much as they can. But the banks can’t change law and can’t change the fact that no matter what they do they can’t make those mortgages good without another signature from the homeowner, past, present and future. That means that foreclosures will ease up if the current trend in the courts continue. But it also means that BOA et al will be taking an increasing number of hits on their balance sheet requiring them to raise additional capital or go out of business.”— Neil Garfield

EDITOR’S ANALYSIS: Think about it. BOA now announces it will cost $20 billion for it to clean up the mortgage mess. That is a BOA figure, which means it is the figure BOA wants everyone to use. But it is false. There will be more such announcements and then more again — for as the courts increasingly knock down any argument that the mortgages are enforceable or even unpaid, the value of the bogus mortgage-backed securities will fall. Those MBS were supposedly backed by mortgages. But we now know that the the mortgages never made it into the SPV (Trust or Pool) that was “backing” the SPV’s obligation to the investor who was the beneficial owner of the “assets” — assets that were not there!

Think about it some more. BOA says it is paying investors money for defaulted mortgages. Why are they paying? And why are they paying the money to investors? In the courts BOA has steadfastly maintained that the investors were not the creditors — and here they are paying them off as though the investors were the creditors. That being the case, from the investor’s standpoint it is therefore true that the investor is accepting this money in lieu of payment from the borrower. But the borrower is not receiving a credit against his “unpaid account” for this payment. Why not? It is also true that the investors are never going to see a nickle from the foreclosures — this settlement being a reason to give up those claims, which they know they can’t prosecute successfully.

If the “assets” on BOA’s books were stated correctly, then the investors would surely NOT take a pennies on the dollar settlement. The fact remains that the banks are still playing games through the media and with these friendly settlements that make the problem look far smaller than it is. And the fact remains that the number of hits BOA will take on bogus mortgages that supposedly were in bogus pools is going to increase from both ends — the homeowners and the investors. The more educated homeowners and investors get, the more they are looking back to the original transactions and realizing that virtually everything was an outright lie.

The game is on: a race to foreclose and get the properties in the name of some entity that is “bankruptcy remote.” While investors and homeowners continue to sort out what happened to them and why they are in the hole, the banks move forward grabbing as much as they can. But the banks can’t change law and can’t change the fact that no matter what they do they can’t make those mortgages good without another signature from the homeowner, past, present and future. That means that foreclosures will ease up if the current trend in the courts continue. But it also means that BOA et al will be taking an increasing number of hits on their balance sheet requiring them to raise additional capital or go out of business.

Which brings me to the next point of analysis that I was withholding until now. Once BOA makes that payment, what happens to the obligation, note and mortgage? BOA pays Investor and now investor as creditor releases the claim to BOA and assigns it (presumably) to BOA. But the real reason the investors are getting paid off is that the loans were not properly originated, serviced or even foreclosed. So the same question comes up — what were the investors assigning. The Banks would have us believe that the more they assign an “asset” the more real it becomes and maybe that is true from a PR perspective. But legally, BOA is receiving nothing, because the investors had nothing other than a claim for unjust enrichment against the homeowner because they had no rights under mortgages that were never properly created or transferred.

So who owns the obligation from the original borrower and is that obligation secured? Despite all the complexity and skullduggery the answer is actually quite simple. If the mortgage was never assigned then the originating lender — the one on the note and mortgage — is still the mortgagee of record. But the mortgage is now wholly separate from the obligation (and probably always was). So the mortgage secures nothing. The right of investors to seek damages for unjust enrichment is completely different than a mortgage obligation and must be enforced in a completely different manner than mortgages —certainly not in non-judicial proceedings.  And it won’t be “secured” until it becomes a judgment lien subject to state laws on homestead etc.

BOA will say that it has been subrogated to the rights of the investor to foreclose. But that could only be true if the investor actually had the right to foreclose. They didn’t have the right to foreclose because they didn’t own the mortgage — and it is only through the mortgage that the right to foreclose exists. And it is only through a valid enforceable mortgage that the right arises. There is no security instrument (mortgage) that secures the right to unliquidated damages from an unjust enrichment claim. That simple fact eliminates the mortgages, the foreclosures and the value carried on the books of BOA et al.

So homeowners, past, present and future should be asking whether the figures used in their foreclosure are right and should be doing so through discovery that reaches into the loan level accounting. Is the loan in default from the creditor’s perspective? Probably not if they were getting paid from the servicer even while the servicer was declaring it in default. Having made the payment they certainly cured the default, and if the payments from the servicer were regular then the loan was never in default. The borrower’s non-payment triggered the liability of the servicer, the guarantors, the insurers etc.

Many of these arrangements were kept from the borrower at closing, which is of course a TILA violation making the loan subject to rescission. The fact that the borrower did not pay is not a default unless the payment is due after the default date and remains uncured.

Here we see that the payment was in fact made to the creditor even though the borrower did not make the payment. So now it is the servicer that may have a claim against the borrower but not under the original obligation, note and mortgage because the servicer is not in the contract and never acquired the contract to repay the loan. The servicer only has a partial claim for the payments it made, while the rest still belongs to the creditor. So if the servicer asserts a claim against the homeowner for default, the obligation is split into at least 2 parts — the investors and the servicer. Can both be secured by the mortgage? That is the question that must be answered in the courts. I think not.

Bank of America Settles Claims Stemming From Mortgage Crisis

By and

Just how much will it cost the big banks to atone for the mortgage mess?

Bank of America announced Wednesday that it would take a whopping $20 billion hit to put the fallout from the subprime bust behind it and satisfy claims from angry investors. But for its peers, the settlements may just be starting.

Heavyweight investors that forced Bank of America to hand over billions to cover the cost of home loans that later defaulted are now setting their sights on companies like JPMorgan Chase, Citigroup and Wells Fargo, raising the prospect of more multibillion-dollar deals.

“Bank of America has charted a path that our clients expect other banks will follow,” said Kathy D. Patrick, the lawyer who represented BlackRock, Pimco, the Federal Reserve Bank of New York and 19 other investors who hold the soured mortgage securities assembled by the Bank of America.

Ms. Patrick’s clients are seeking $8.5 billion from Bank of America — a settlement that needs a judge’s approval and could still face objections from investors seeking a better deal. A date to review the blueprint has been set for Nov. 17 with Justice Barbara R. Kapnick in New York Supreme Court.

All told, analysts say the financial services industry faces potential losses of tens of billions from future claims — real money even by the eye-popping standards of the nation’s biggest banks. Indeed, even that $20 billion announced Wednesday will not be enough to completely stanch the bleeding at Bank of America — it says litigation over troubled mortgages could cost it another $5 billion in the future.

The proposed settlement is more than just another financial blow to a company staggering from the collapse of the mortgage bubble. It also represents a major acknowledgment of just how flawed the mortgage process became in the giddy years leading up to the financial crisis of 2008, typified by the excesses at Countrywide Financial, the subprime mortgage lender Bank of America acquired in 2008.

Ms. Patrick and her clients claim that Countrywide created securities from mortgages originated with little, if any, proof of assets or income. Then, they argue, Bank of America did not properly service these mortgages, failed to heed pleas for help from homeowners teetering on the brink of foreclosure and frequently misplaced documents.

Most of the loans in the pools covered by the settlement were underwritten at the height of the mortgage mania: in 2005, 2006 and 2007. But with borrowers soon unable to meet their monthly payments, defaults soared.

For the banking industry, the reckoning could not come at a worse time. On Wall Street, trading revenue has been devastated by the economic uncertainty in Europe, the anemic recovery in the United States, and the stock market swoon of the last two months.

What’s more, new regulations have already taken a big bite out of profits. Despite a modest amount of relief on Wednesday, when the Federal Reserve completed new rules governing debit card swipe fees, the banks stand to lose billions when the regulations take effect next month.

If all this were not enough, further weakness in the housing and job markets has reduced lending by the banks to businesses and consumers alike, cutting yet one more source of profits.

Nevertheless, investors appeared to endorse the proposed settlement, with Bank of America shares rising nearly 3 percent, to $11.14, a move mirrored by shares of other big financials.

Some experts said the settlement could prove good news for consumers and the broader economy, speeding the foreclosure process for hundreds of thousands of homeowners while potentially making it easier to obtain modifications of existing mortgages.

By providing a template for cleaning up past claims and setting standards for future practices, the settlement could make it easier for banks to bundle and sell mortgages again, a business that has been all but dead since the financial crisis.

“That is important for providing funding for people to buy homes, grow their businesses and create jobs,” said Michael S. Barr, a former assistant Treasury secretary who now teaches law at the University of Michigan.

The accord does not resolve an investigation by all 50 state attorneys general into allegations of mortgage service abuses by Bank of America and other major lenders that could ultimately cost the industry billions more in fines and penalties. Nor does it cover liability from soured home equity loans or bonds the bank created with mortgages from lenders other than Countrywide.

Of the $20 billion that Bank of America announced Wednesday, $8.5 billion will go to investors who bought the most troubled securities backed by Countrywide mortgages. Another $5.5 billion will cover future claims by Fannie Mae, Freddie Mac and private investors that also bought troubled mortgage bonds from the bank.

The remaining $6.4 billion represents a noncash charge to reflect the drop in the value of Countrywide, as well as the increased cost of more rigorous servicing requirements and additional legal expenses.

Those charges will cause Bank of America to record a loss of $8.6 billion to $9.1 billion for the second quarter. The company, however, tried to portray the settlement as one more step in putting Countrywide’s poisonous legacy behind it, rather than a surrender.

“We did fight for the last several months,” said Brian T. Moynihan, chief executive of Bank of America, in a conference call with analysts. “But when you look at this over all, it’s a better decision for the company. It was much more adverse to the company if we kept fighting. We’ve been battling it out.”

The fight began last October when eight investors holding mortgage securities representing $104 billion in home loans spread across 115 deals charged that Countrywide and Bank of America had passed off troubled mortgage loans as safe investments, and failed to properly collect money for the investors from homeowners. Pimco and BlackRock, two of the original eight investors, had been longtime clients of Ms. Patrick’s firm, Gibbs & Bruns, and first approached the firm for help in the spring of 2010.

In early January, Bank of America announced that it had settled for $2.5 billion similar claims from Fannie Mae and Freddie Mac, the government-controlled mortgage giants. That provided valuable data for Ms. Patrick’s group to use in assessing just how many mortgages were improperly presented as safe investments or not serviced correctly.

By March, said Ms. Patrick, the group had grown to 22 firms with holdings in 530 deals that represented $424 billion in underlying mortgages.

Meanwhile, Bank of America’s stock was falling, sinking nearly 20 percent this year in part because of the fallout from the mortgage debacle, which encouraged the Charlotte, N.C.-based bank to resolve claims. Rather than just address mortgages held by Ms. Patrick’s investors, however, Bank of America decided to reimburse investors in all 530 deals — nearly all of the subprime loans that were assembled and sold to private investors on behalf of Countrywide.

The $8.5 billion settlement on $424 billion worth of mortgages suggests that 2 percent of Countrywide’s loans may have been underwritten or serviced improperly. A much bigger segment of those mortgages — about a quarter — are either in default or severely delinquent now. Bank of America attributes many of the foreclosures and defaults to the downturn in the economy.

In addition to the financial terms, the settlement also requires Bank of America to adhere to more rigorous servicing standards, on top of new requirements imposed by federal regulators.

Home loans from 300,000 borrowers will be removed from Bank of America’s servicing arm, and placed among 10 special sub-servicers, with the goal of fast-tracking a resolution of their cases. Borrowers will get answers on any possible modification within 60 days, have a single point of contact and avoid having to resubmit documents.

Now, the pressure will be on Bank of America’s main rivals to reach similar accords. JPMorgan Chase, Wells Fargo and Citigroup also face potentially billions of dollars in legal claims.

In a research note published on Wednesday, Keith Horowitz of Citigroup said the Bank of America deal was likely to set the high-water mark for other potential settlements. Using the 2 percent loss rate as a guide, he projected that Chase could face about a $9 billion hit on its portfolio of troubled mortgage bonds. Wells Fargo, Mr. Horowitz estimated, could face losses reaching $4 billion, though that could be lower because of tighter underwriting standards. Other analysts previously put Citigroup’s exposure at about $3 billion.

If that is the case, analysts say that all three of those banks appear to have set aside enough money in reserve or have the earnings power to eventually cover the cost of resolving the claims, without having to raise more capital or sell stock.

“This tells us the shape of the biggest dollar litigation settlements from the crash,” said Peter Swire, a former special assistant for housing policy in the Obama administration, and now a law professor at Ohio State University. “The doomsday scenarios for this private litigation would have threatened the solvency of the biggest banks. That risk has dropped a lot.”

Gretchen Morgenson contributed reporting.

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