Rescission and Subject Matter Jurisdiction

Posted on August 10, 2016 by Neil Garfield
rescission-600x400-600x330
I was recently requested to review a 6th Circuit Opinion in which the court stated that the rescission was barred by res judicata — i.e. that the matter had already been litigated and that the homeowner was therefore barred from bringing it up again.
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The Court never considered that it was wrong in the first place and that the decisions that ignored the rescission were themselves void for lack of subject matter jurisdiction. The Court started with the premise that the bank must win on this rather than from the point of view that the law should be applied, not personal preferences. Thus such decisions come down to “because I said so” rather than through any legal analysis.
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I think the court has missed the point completely. A deed has no statute of limitations. Even a mortgage deed or deed of trust has no statute of limitations. It only expires after the contractual terms end. A rescission, especially if it is recorded, has no expiration. All of these things can ONLY be removed by (a) a proper pleading (b) proof that the offending document should be canceled and removed from the chain of title and (c) filed within the time limit prescribed by statute.
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The court has turned this on its head. There is no lawsuit required to make rescission effective. There is no tender. There are no conditions whatsoever — see Jesinoski v Countrywide (SCOTUS). It is effective as a matter of law and if recorded remains a permanent impediment to any subsequent instrument claiming clear title (as though the rescission did not exist) in any instrument executed or recorded after the rescission was sent and/or recorded.
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The borrower is obligated to do nothing. The borrower can do nothing because even if it was the borrower that wanted to remove the rescission it would need to be done through court procedure. Otherwise, any person properly relying upon what appears in the title chain in the county records might act based upon their proper belief that the rescission exist would then find themselves having spent or lent money to a homeowner who in fact either had no title to the home or was already encumbered by the very instruments that were rendered void by operation of law. I can already see how foreign investors and lenders could get stuck by that having read the Federal, State and local laws and thinking themselves perfectly protected, and ending up with nothing.
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The time limit is set on the bank, not the borrower. It is set by the statute as 20 days from receipt of the rescission to (1) comply or (2) file suit to vacate or cancel the rescission. This is a burden on the bank, not the borrower. To construe the statute any other way would be to violate the terms of the statute and to violate the specific explicit instructions from the US Supreme Court. Any decision or ruling that the bank or creditor could contest after 20 days would mean that the rescission is not effective when mailed as set forth by the Statute and Jesinoski. Such a ruling would mean that the rescission is not effective by operation of law; it would mean that the rescission is effective ONLY if and when the bank files suit to vacate or cancel the rescission and loses. How one would logically say that the rescission is not effective until there is a lawsuit is incomprehensible.
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Rescission therefore is a fact and not a claim, pleading or defense. It may be raised as a defense merely to show that the court lacks subject matter jurisdiction, to wit: that the note and mortgage were rendered VOID by operation of law and as specifically stated in Reg Z which carries the full force of law. It follows that nobody can make a claim based upon void instruments. It also follows that the void instrument (i.e., the mortgage or deed of trust) must be removed from the chain of title as a void instrument. Hence quiet title is appropriate.
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Rescission is an event and the recording of it preserves the rights and benefits of rescission against the whole world. What courts and lawyers have failed to comprehend is that the rescission may not be ignored or even canceled or vacated or waived by the homeowner who sent it and recorded it. With a deed you can file a corrective deed but all parties to it must join in the correction. Otherwise it remains. The converse is also true. if as a matter of law the mortgage or deed of trust has been rendered void by operation of law, then it is void for all purposes and against all claims to the contrary from all claimants of every kind, especially if it is recorded.
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The court here has essentially adopted the strategy of the banks. By creating multiple layers of transmission, assignment, delivery and endorsement it gradually appears that the end successor indeed owns the debt, loan, note and mortgage. But if you start at the base of the chain and come to realize that the originator was not the lender and that the first transferee was merely a conduit who paid no money either for the origination nor the acquisition of the loan, one can easily see how the borrower’s rights have been egregiously violated.
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This court has done the same thing. It is taking the original ruling that the erroneous ruling (without subject matter jurisdiction) ignoring but not removing the rescission somehow was valid because the court later said that the claims as precluded by having been previously litigated,a decision later affirmed by appellate court. They can say it but it is erroneous, false and void for lack of subject matter jurisdiction. This is the rule of men rather than the rule of law. If the trial court had ignored the deed, mortgage or deed of trust without proper pleading and proof of a claim upon which such relief could be granted, the same result would apply.
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This is not some technicality. Allowing parties who have no interest or injury to apply for relief that properly belongs to other parties opens up floodgates of malicious practices in the marketplace in which the courts will face in full circle the absurdity of their own prior rulings when they believed that the banks must be right even if what they did was wrong.
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That the previous decisions considered the arguments of the homeowner and rejected them is irrelevant as long as the issue is lack of subject matter jurisdiction. If there was no such jurisdiction then none of the decisions are effective as a matter of law.

Filed under: foreclosure | Tagged: , , , , , , , , , , | 7 Comments »

Barofsky Challenges Geithner Doctrine: Crushing the Bank Oligopoly

Posted on February 8, 2013 by Neil Garfield

See Financial Times for full article

Editor’s Comment: Barofsky’s characterization of the Geithner doctrine is accurate and appalling at the same time. The decision was made across the board that the stability and illusion of financial health on Wall Street was and is more important than anything else is what led to a prolonged recession and, from the reports being published it could be another 10-20 years before we work our way out of this mess.

President Obama made TRUTH a cornerstone of his campaign but the public wasn’t told the truth at any point. In fact the government was actively complicit in creating illusion and fraud. In doing so, they have created a precedent that will inevitably lead to bank behavior that will escalate the fraud and the damage on the world’s economies.

A creature of Wall Street, Geithner assumed that the money making machines on Wall Street were essential to stabilizing the financial system. He merely took over where Hank Paulson left off. At the point where the investment banks were converted to commercial banks, THAT was the time to strike with receivers, resolution of the megabanks that were holding trillions out of the U.S. economy and doing the same around the world.

The assumption by Paulson was that with a capital infusion the banks would lend more thus propping up the economy. It never happened. Instead people got notices in the mail freezing their home equity lines of credit and lowering their borrowing limits on all sorts of loans including credit cards. If the proof is in the pudding, then Geithner and Paulson were dead wrong.

The fraud extended from the closing tables where fictitious loans were documented and real loans were undocumented, to the diversion of investor money from the investment pools and to the investment banks. In short, the money was sucked out of the economy and the government, regulators and courts are either not doing doing anything about it, or making it easier for banks to get away with it, encouraging the moral hazard that occurs when greed fails to meet consequences.

The devastating effects on millions of homeowners and tens of millions of consumers, social services and taxpayers are not even on the table. Victims of fraud, pension funds, sovereign wealth funds, and individual retirement funds were stuck paying for Wall Street lies.

The same fraud — appraisal fraud, ratings fraud, and fraud in the inducement, fraud in the execution occurred with each of the borrowers, who never saw the benefit of the bargain they thought they had reached with what turned out to be a series of nominees (fictitious lenders). The Geithner doctrine stopped the government from intervening, stopped anything that smelled of restitution for the pension funds, dismissed the claims and losses of homeowners as though they didn’t matter and prevented an influx of wealth and capital that was badly needed by the economy.

The problem is that the central bankers have been scared into accepting a shadow banking system that is literally ten times the size of the real banking system. It’s a lie 10:1. The banks we call healthy are in fact subject to closure and receivership because the assets they are showing on their balance sheets are not worth nearly what they are reporting — and they never will be unless we all expand the money supply by ten times the current world monetary supplies.

But the existence of another curative solution is systematically disregarded on “moral”or “practical grounds.” Following the law, the banks should be forced into receivership if they don’t have the capital necessary to stay open, based upon the inflated values that started with appraisal fraud and ratings fraud, and now is sitting in bank balance sheets as accounting fraud.

By clawing back as much money as possible for investors in the bogus mortgage bonds, the amount owed to the investors would be reduced by payment instead of loss. And account receivables to each investor would be correspondingly reduced. And the accounts payable by the borrowers would be correspondingly reduced due directly to payment instead of forgiveness. It is simple arithmetic.

The banking oligopoly would be crushed and government could go back to being influenced by much smaller competing special interests. The pensioners would be assured that their pensions will keep coming, and homeowners could be restored to their homes or and possibly receive cash payments or credits for payment on the accounts receivable thus providing an enormous fiscal stimulus to an economy that is 70% based upon consumer spending.

If I understand this, along with Neil Barofsky and a gaggle of economists and financiers, why won’t the government even consider it?

Neil Barofsky: Geithner Doctrine Lives on in Libor Scandal

By Neil Barofsky, the former special inspector-general of the troubled asset relief programme and is currently a senior fellow at NYU School of Law. He is the author of ‘Bailout’, released in paperback this week.

Now that Tim Geithner has resigned as US Treasury secretary, it is time to survey the damage wrought from four years of his approach to the financial crisis. The “Geithner doctrine” made the preservation of the largest banks, no matter the consequences, a top priority of the US government. Aside from moral hazard, it has also meant the perversion of the US criminal justice system. The US faces a two-tiered system of justice that, if left unchecked by the incoming Treasury and regulatory teams, all but assures more excessive risk-taking, more crime and more crises. (e.s.)

The recent parade of banking scandals, such as the manipulation of Libor rates by Barclays, Royal Bank of Scotland and other major banks, can be traced back to the lax system of regulation before the financial crisis – and the weak response once disaster struck.

Take the response of the New York Federal Reserve to Barclays’ admission in 2008 that it was submitting false Libor rates and was not alone in doing so. Mr Geithner’s response was to in effect bury the tip. He sent a memo to the Bank of England suggesting some changes to the rate-setting process and then convened a meeting of regulators where he reportedly described only the risk but not the actual manipulation of the rate. He then put the government imprimatur on the rate via bailout programmes. His inaction helped permit a global crime to continue for another year.

When it was UBS’s turn to settle its Libor charges, even though a significant amount of the illegal activity took place at the parent company level, only a Japanese subsidiary was required to take a plea. Eric Holder, US attorney-general, demonstrated his embrace of the Geithner doctrine (a phrase coined by blogger Yves Smith) in explaining the UBS decision. He said that a more aggressive stance against the parent company could have a negative “impact on the stability of the financial markets around the world”.

This week we saw the latest instalment of the saga. In fining RBS £390m, the DoJ only indicted one of the bank’s Asian subsidiaries, avoiding the more damaging result that would have stemmed from charging the parent company.

Instead of seeking deterrence and justice, the US government increasingly appears to have fully absorbed the Geithner doctrine into its charging decisions by seeking a result that has a minimal impact on the target bank but will generate the best-looking press release. Some banks today are still too big to fail – and they are still too big to jail.

The lack of robust enforcement is of course not limited to the Libor scandal. It was seen in the recent settlement talks with HSBC, when Treasury officials reportedly pressed the DoJ to consider the broad economic consequences that would follow an indictment. After hearing these arguments the DoJ chose not to criminally charge HSBC.

And, of course, it is seen in the stunning dearth of criminal prosecutions arising out of the crisis. This was all but preordained given who the government turned to when the crisis struck: the same captured regulators who had blindly advanced bankers’ self-serving calls for a “light touch” before the crisis and who unsurprisingly embraced the Geithner doctrine afterwards. Having done so, of course, there would be no criminal prosecutions while the banks still teetered on the brink of collapse. The risk of causing them to fail, and thereby undoing all of the bailout efforts, was too high.

But that these arguments continue to resonate with officials in 2013 shows that the Geithner doctrine, perhaps justified by the conditions in 2008-09, has planted deep roots in our system of government.

This forbearance will have potentially devastating long-term effects, as each settlement on favourable terms reinforces the perception that, for a select group of executives and institutions, crime pays. It is only rational. They know that they will get to keep all of the ill-gotten profits if they go undetected, and on the small chance that they’re caught, most probably only the shareholders will pay – and only a relatively minor fine at that. The lack of meaningful consequences for those committing these frauds encourages future fraudulent conduct. Ultimately, the financial crisis was a game of incentives gone wild, and the lack of accountability in the aftermath of the crisis has only reinforced those bad incentives.

Breaking those incentives requires ditching the Geithner doctrine, which has led to the banks becoming even larger and more systemically significant than they were before the crisis. As a result, the DoJ’s fear of destabilising the global economy through aggressive prosecutions may indeed be well-founded. But that must not be the end of the story.

To reclaim our system of justice, the global threat posed by the failure of any of our largest financial institutions must be neutralised once and for all. They must be reduced in size, their safety nets must be dramatically constricted and their capital requirements enhanced far beyond the current standards. Then, and only then, can the same set of rules apply to all.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , , , , , , , | 97 Comments »

White Paper: Many Causes of Foreclosure Crisis

Posted on May 9, 2012 by Neil Garfield

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Editor’s Comment:

I attended Darrell Blomberg’s Foreclosure Strategists’ meeting last night where Arizona Attorney General Tom Horne defended the relatively small size of the foreclosure settlement compared with the tobacco settlement. To be fair, it should be noted that the multi-state settlement relates only to issues brought by the attorneys general. True they did very little investigation but the settlement sets the guidelines for settling with individual homeowners without waiving anything except that the AG won’t bring the lawsuits to court. Anyone else can and will. It wasn’t a real settlement. But the effect was what the Banks wanted. They want you to think the game is over and move on. The game is far from over, it isn’t a game and I won’t stop until I get those homes back that were ripped from the arms of homeowners who never knew what hit them.

So this is the first full business day after AG Horne promised me he would get back to me on the question of whether the AG would bring criminal actions for racketeering and corruption against the banks and servicers for conducting sham auctions in which “credit bids” were used instead of cash to allow the banks to acquire title. These credit bids came from non-creditors and were used as the basis for issuing deeds on foreclosure, each of which carry a presumption of authenticity.  But the deeds based on credit bids from non-creditors represent outright theft and a ratification of a corrupt title system that was doing just fine before the banks started claiming the loans were securitized.

Those credit bids and the deeds issued upon foreclosure were sham transactions — just as the transactions originated with borrowers were based upon the lies and false pretenses of the acting lenders who were paid for their acting services. By pretending that the loan came from these thinly capitalised sham companies (all closed with no forwarding address), the banks and servicers started the lie that the loan was sold up the tree of securitization. Each transaction we are told was a sale of the loan, but none of them actually involved any money exchanging hands. So much for, “value received.”

The purpose of these loans was to create a process that would cover up the theft of the investor money that the investment bank received in exchange for “mortgage bonds” based upon non-existent transactions and the title equivalent of wild deeds.

So the answer to the question is that borrowers did not make bad decisions. They were tricked into these loans. Had there been full disclosure as required by TILA, the borrowers would never have closed on the papers presented to them. Had there been full disclosure to the investors, they never would have parted with a nickel. No money, no lender, no borrower no transactions. And practically barring lawyers from being hired by borrowers was the first clue that these deals were upside down and bogus. No, they didn’t make bad decisions. There was an asymmetry of information that the banks used to leverage against the borrowers who knew nothing and who understood nothing.  

“Just sign everywhere we marked for your signature” was the closing agent’s way of saying, “You are now totally screwed.” If you ask the wrong question you get the wrong answer. “Moral hazard” in this context is not a term anyone knowledgeable uses in connection with the borrowers. It is a term used to express the context in which unscrupulous Bankers acted without conscience and with reckless disregard to the public, violating every applicable law, rule and regulation in the process.

Why Did So Many People Make So Many Ex Post Bad Decisions? The Causes of the Foreclosure Crisis

Public Policy Discussion Paper No. 12-2


by Christopher L. Foote, Kristopher S. Gerardi, and Paul S. Willen

This paper presents 12 facts about the mortgage market. The authors argue that the facts refute the popular story that the crisis resulted from financial industry insiders deceiving uninformed mortgage borrowers and investors. Instead, they argue that borrowers and investors made decisions that were rational and logical given their ex post overly optimistic beliefs about house prices. The authors then show that neither institutional features of the mortgage market nor financial innovations are any more likely to explain those distorted beliefs than they are to explain the Dutch tulip bubble 400 years ago. Economists should acknowledge the limits of our understanding of asset price bubbles and design policies accordingly.

To ready the entire paper please go to this link: www.bostonfed.org/economic/ppdp/2012/ppdp1202.htm

Filed under: foreclosure | Tagged: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | 23 Comments »

SEPARATION OF DEED OF TRUST FROM NOTE: Bellistri Opinion

Posted on April 28, 2010 by Neil Garfield

There is a lot of conflicting opinions about this. My opinion is that the confusion arises not from the law, not from application of the law and not from what is written on the note or deed of Trust. If you look at the Bellistri Missouri case the issue is well settled. And the problem is not what is written, it is what is assumed to be written. The Bellistri case, 284SW 3d 619, (Missouri Appeal, cert. reportedly denied) coupled with its quote from Restatement 3rd is simple: put one name on the note and another on the DOT as beneficiary (particularly when the beneficiary is MERS and therefore an undisclosed principal) and you have direct evidence that the intention of the parties was to separate the note from the mortgage. The burden of proof thus shifts to the alleged creditor.

Conflict comes not from the law or the wording on the instruments but from the inherent question of “why would anyone want to do that?” There are of course many answers to that question in a securitized mortgage context. But it is the existence of the question that causes people to lean toward the idea that no reasonable person would have intended that and to assume that the parties, including the borrower, would never have intended WHAT WAS WRITTEN.

I think the point of the Bellistri case is simple: factually, the note and DOT are split and according to the Restatement 3rd, they can never be put back together again. The note, while still enforceable as an instrument by itself, is no longer secured by an encumbrance on the property. The “mistake” is that of the drafter of the instruments. They want to say, much later in time, what we NOW mean is that the beneficiary is X, who is not the payee on the note,, but X has received an assignment of the note. Thus NOW the beneficiary and the payee are the same which means we can foreclose.

So the question put to the Judge is can a note and security instrument, initially made out to two different parties be LATER joined and if so, what does that mean for enforcement. My first comment is that once you have established that facially the note and DOT were split, your prima facie case is met and the burden goes to the “lender” to prove they are the creditor along with a whole bunch of other things that are not unlike the elements of proving up a lost or destroyed note. You can’t just say it happened. You must explain and prove HOW it happened.

But the simple answer to the question as per the Restatement 3rd, is “NO.” The reason why they cannot be joined later is not just because Restatement 3rd says so, it is the reason Restatement 3rd says that, to wit: if you allowed, particularly in a non-judicial setting, parties not named on the note and not named as beneficiary to later act because of a claim as being both, you are introducing uncertainty into the marketplace which is the precise reason we have the law of contracts, property records and such. The moral hazard is raised from possibility to near certainty when you KNOW from the beginning that the payee and the beneficiary are two different parties and the beneficiary is not the real party so the knowledge includes, from the beginning, that there is at least one additional undisclosed party.

Let’s take the simplest example we can given the complexity of securitized residential mortgages. ABC is named the Payee on the note. MERS is named the beneficiary. MERS obviously has some understanding with a third party DEF not to make a claim on the loan (according to their website). So we must presume that they have that understanding and that maybe it is in writing in some general type of contract which was neither disclosed nor revealed to exist at the time of the closing with the borrower. DEF defaults in its payment obligations to MERS. MERS now says we refuse to perform under our contract with DEF. Borrower knows nothing of DEF nor of DEF’s payment default to MERS. Borrower pays the note in full to ABC. ABC returns the note as paid in full. Borrower wants a release and reconveyance (satisfaction) so the title record is clear.

Now it MIGHT be that DEF=ABC. But we don’t know that. So for purposes of your case, you MUST assume that DEF is simply an undisclosed third party. Borrower asks MERS for the release and reconveyance.  MERS refuses because it wasn’t paid by DEF and because it has no idea whether you paid the right person. With MERS refusing to execute a document releasing the lien, Borrower now has a defect in title that is unmarketable.

Borrower files a quiet title suit against MERS. MERS says it was named as beneficiary but that the DOT clearly states it serves only as nominee and therefore has no power to do anything. Now you have, on record, that the beneficiary is not MERS but the undisclosed third party DEF. The court MIGHT grant the final judgment, but it would then be adjudicating the rights of other parties who are not present in court, thus leaving the title clouded and possibly still unmarketable.

Another possibility is that the Court would inquire or allow discovery to allow the identification of DEF. Assuming MERS wishes to comply, there is still a problem. Data entry is NOT performed by MERS employees. Data entry is performed by “members” with passwords and user ID’s. Thus all MERS can say is that at a particular point in time MERS computer records show DEF, which was assigned to ABC or perhaps yet another party. The assignment is executed by Jane Jones as “limited signing officer” for MERS. MERS can’t say they know Jane Jones or anything about her because she doesn’t work for MERS. Therefore the only competent evidence from MERS is the data in fields populated by unknown sources of data input, and references to documents that were never seen or kept by MERS. The evidence from MERS thus has little or no probative value.

So now the Court or borrower goes to DEF and says “Who is Jane Jones?” DEF replies they don’t know because the assignment document was prepared by a foreclosure processing firm in Jacksonville, Florida named DOCX. DOCX has no contract with ABC or DEF or MERS. They were just following orders from yet a fourth party who is unidentified, and whose instructions were relayed through a fifth firm that serves as the correspondent or document manager once the loan goes into foreclosure (perhaps ordered by the servicer, BAC).

Thus the reason that a note and DOT can never be joined at any time other than the creation of those documents and executed contemporaneously with the funding of the obligation is that the contract and its performance is not based upon a condition subsequent (because such a condition would render the contract inchoate until the condition subsequent arrived or which would extinguish the obligation, note and mortgage). For there to be enforceability there must be certainty in the contract. Certainty can only be achieved if the terms and parties who are expected to perform are identified with sufficient clarity that any reasonable person would say they are known.

A borrower who signs papers without having a known party who is required by law to execute a satisfaction (release and reconveyance) has in effect executed documentation without a counterparty. The document is therefore void. Since the document (note, DOT, etc.) is only evidence of the obligation that arose because the borrower did in fact receive a benefit from the funding of the loan, the obligation survives while the note and/or DOT do not. However, in order to achieve certainty in the marketplace, the obligation is not secured unless and until some party identifies itself as the creditor and establishes a subsequent encumbrance through judgment lien, equitable or constructive trust or some other means.

Such a creditor action would be subject to rigorous requirements of pleading and proof. In the context of a securitized residential mortgage, the creditor can only be the party(ies) who advanced actual money, from which money the borrower’s loan was funded. In the context of mortgage-backed securities, a creditor who pleads that he expected a secured loan, must also plead all the documents and transactions that gave rise to advancing the money. This would mean that the creditor would be required to disclose and account for credit enhancements, insurance, credit default swaps, over-collateralization, cross-collateralization, and payments received from all sources pursuant to the terms under which the creditor advanced said funds.

Those terms are included in the prospectus and bond indenture which incorporate the pooling and service agreement, Depositor Agreement, Assignment and Assumption Agreements etc. In other words, the actual terms upon which the creditor advanced money were different from the actual terms accepted by the borrower. A court in equity would thus be required to allocate equity and liability for the various unpaid and paid obligations of multiple parties whose existence was unknown to borrower at the time of the loan closing, and whose existence even now would be at best dimly understood by the borrower or any other person who was not extremely well-versed in the securitization of credit.

Filed under: CDO, CORRUPTION, Eviction, expert witness, foreclosure, foreclosure mill, Forensic Analysis Workshop, GTC | Honor, HERS, Investor, MODIFICATION, Mortgage, Motion Practice and Discovery, securities fraud, Securitization Survey, Servicer, workshop | Tagged: , , , , , , , , , , , , , , , , , , , , , , , | 26 Comments »

Magnetar Echoes Livinglies call for Alignment of Investors, Servicers and Borrowers

Posted on April 22, 2010 by Neil Garfield

see Magnetar%20Mortage%20Recovery%20Backstop%20Whitepaper%20Jun09.pdf

Magnetar Mortage Recovery Backstop Whitepaper Jun09

Two things jump out at me with this paper from June, 2009.

First it is obvious that the “real money” investors are defined as those seeking low risk and willing to take lower yield. The fact that they are called “Real Money Investors” underscores my point about the identity of the creditor. Those “traditional” investors are no longer available to buy the mortgage backed securities or any other resecuritized derivative package based upon mortgage backed securities. Legal restrictions requiring the securities to be investment grade would prevent them from jumping back in even if they wanted to do so, which they obviously don’t.

Thus the inevitable conclusion drawn almost a year ago and borne out by history, is that the fair market value of the securities, trading as pennies on the dollar, is reflective of a lack of demand for mortgage backed securities no matter how high the yield (i.e., no matter how low the price).

Second there is a growing realization that the interests of the investor and the borrowers are actually aligned in many ways and that the solution to mortgage modification, principal reduction, and other aspects of the mortgage mess and the foreclosure crisis lies in recognizing certain realities and then dealing with them in an equitable manner. The properties were never worth the amount of the appraisal in most instances and now they are worth even less than they were when the loan deals were closed. The securities were also “appraised” far too high thus creating a giant yield spread premium for the investment bank-created seller of mortgage backed securities.

In my opinion, based upon a sampling of the data available, it is entirely possible that the “true” fair market value of those securities in the best of circumstances is probably less than 40% of the initial offering price. It is this well-hidden analysis that is not getting the attention of the Obama administration and which completely explains why servicers are obstructing modifications under instruction from investment banking intermediaries like the “Trustee”.

Leaving the servicers and other parties as the middlemen “in the middle” to sort this out is another license to steal creating another mark-up applied against both borrowers and investors as the “real money” parties. The status quo is what is causing the stagnation in lieu of recovery. Until everyone accepts basic notions of “real party in interest” and eliminates those who don’t fit that description, the moral hazards will remain and escalate.

As concluded in this paper, either judicial or executive intervention is required to kick the middlemen out of the way and let the light in. When investors and borrowers are able to compare notes and work with each other the figures for both will be enhanced, foreclosures will decline, losses will be taken, and yes it is highly probable that the number of investor lawsuits will proliferate against those who defrauded them.

The lender is identified as the investor in this paper (indirectly) and the party who defrauded them is not some greedy borrower with stars in his eyes, it was the usual suspect — a financial wizard making a sales pitch that was so complex, the buyer basically was forced to rely upon the integrity of the investment banking house for appropriate pricing. That is where the system fell apart. Moral hazard escalated to moral mess.

Filed under: bubble, CASES, CDO, CORRUPTION, credit unions, currency, Eviction, expert witness, foreclosure, foreclosure mill, Forensic Analysis Workshop, GTC | Honor, HERS, investment banking, Investor, MODIFICATION, Mortgage, Motion Practice and Discovery, securities fraud, Securitization Survey, Servicer, trustee, workshop | Tagged: , , , , , , , , , , , , , , , , , , , , , | 4 Comments »

Moral Hazard in Non-Judicial Sale: Trustee commits violations of FDCPA and other statutes!

Posted on April 11, 2010 by Neil Garfield

From Eaine B

Editor’s Note: I have long advocated sending letters, objections to sale and complaints against “trustees” named (or substituted) on deeds of trust who initiate foreclosure proceedings. Indeed, it is highly probable that because of statutes attempting to protect the trustee from liability, the trustee is at best usually named only as a nominal party in a lawsuit challenging the legality of the non-judicial sale, demanding the identity and contact information of the creditor and getting a full accounting from the real creditor.

I would argue that this reader’s comment is more on target than they even know. Because that is the point — knowledge. If the “trustee” knowingly proceeds when it KNOWS there is a question of title, a question of who is the creditor, and knows that this loan was sold to third parties that have not been disclosed to the Trustor nor the Trustee, then the trustee is more than a nominal party, to wit: they are a co-venturer in a  fraudulent scheme.

Typically non-judicial action commences under a “substitute trustee”.  One would ask why it was necessary to call in a “substitute trustee” from the bullpen, when the current one is just fine. The only possible answer is that the old trustee either doesn’t want any part of this, or won’t do it without following industry standards to confirm ownership etc. It would seem fairly obvious that if the existing trustee is still in business and continues to qualify as a trustee, the only rational reason to change trustees is because the actors wish to do business with people who won’t ask questions.

Often the “substitution of trustee” is backdated, undated or dated after the notice of sale, notice of default etc., so there is a simple procedural angle to set back the sale if you are actually reading the documents, and getting a title report.

More substantively, the “substitute trustee” is granted that position by a party who in all probability does not have the power to grant it — but that requires a forensic analysis, title report, and probably a lawsuit to establish. For example, if some person unknown to MERS assumes the title of “assistant Vice president of Mortgage Electronic Registration Systems” and signs the substitution of trustee or any other document, they probably lack the power to do so, or they lack the documentation showing they have the power to do so.

This actually runs to the core of moral hazard in non-judicial states. Anyone who knows you have missed payments, could file a “substitution of Trustee” document in the county records, send you a notice of default, notice of sale and sell your property to the highest bidder — all BEFORE your real servicer (who we know is only a pretender lender) even knows about it. It is a scam waiting to happen. The scammer then takes the money and runs. Meanwhile you have most likely given up and left the house so it is now abandoned. This scenario can only happen in non-judicial states, where the statute authorizing a non-judicial foreclosure sale ASSUMES that the right party is doing the right thing under proper authority.

When mortgages were simple, and securitization was only an idea, the opportunity for abuse in non-judicial states was present but generally controllable because your true lender had control of the loan, they knew when you were delinquent, and they would be in touch with you, during which time it might come out that you had already received a notice of sale from a “substitute trustee.”

In the world of securitization where the potential real parties in interest are almost infinite in number, where the credit report is used rather than the title report, and where various layers of companies are used to create plausible deniability, insulation from liability and the ability to move things around “off-balance sheet” or “off record” at the county recorder’s office, the potential for abuse is practically infinite. And true to form, my experience is that virtually every foreclosure in a non-judicial state contains at least the taint of this abuse and often facially shows the failure to use proper documentation.

Comment submitted by Eaine B—–

Trustee commits violations of Fair Debt Collections Practice Act!
A good cause of action against Northwest Trustee Services Inc, Routh Crabtree Olsen PS is that I have found they sell your private information to the public. Go to http://www.usa-foreclosoure.com and find your foreclosure….then buy for $39.00 a copy of the title report that is supposed to be private between the trustee and the beneficiary. Any public person can order your report online. This is mail and interstate violations. Make a complaint to the Bar association, and the FTC and your state Attorney General.
Call the title company on the top of the form and ask them. Then perhaps you can file a suit against Routh Crabtree Olsen and Northwest Trustee Services Inc for violations of 15 USC 1692 Fair Debt Collection Practices Act violation. It’s triple damages. Most likely they will have sent you a letter from Routh Crabtree Olsen. One I got even quotes the 15 USC 1692. So obviously THEY know about it. The owner of Routh, Crabtree and Olsen is Stephen Routh and Lance Olsen. Routh has various companies in AK, MT, AZ, CA etc. Just look at the list on the various web sites. http://www.usa-foreclosure.com has the same address as Routh Crabtree Olsen and Northwest Trustee Services and as Routh in AK.
Also, the process serving company that they use is owned by them.

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

Posted on March 21, 2010 by Neil Garfield

SEE ALSO BOE PAPER ON ABS DISCLOSURE condocmar10

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

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

March 19, 2010, NY Times

Pools That Need Some Sun

By GRETCHEN MORGENSON

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

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

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

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

None of the banks would comment on the litigation.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Mortgage Meltdown: Fed Lacker Says “Moral Hazard Ahead”

Posted on June 10, 2008 by Neil Garfield
   

Insider Joins Critics of the Fed, 
Faulting Credit-Crisis Programs

Richmond’s Lacker 
Amplifies Volcker; 
Moral Hazard Fears
By GREG IP
June 6, 2008; Page A3

In a striking insider’s critique, a Federal Reserve policy maker said lending programs the central bank has created to combat the credit crisis distort private markets, encourage risky behavior and could endanger the Fed’s independence.

Federal Reserve Bank of Richmond President Jeffrey Lacker’s remarks, made Thursday in a speech in London and amplified in an interview, show that concerns that outsiders, including former Fed Chairman Paul Volcker, have raised about the Fed’s actions — in particular its rescue of the investment bank Bear Stearns Cos. — are shared by some inside the Fed.

[Jeffrey Lacker]

Those people, including presidents of some of the 12 regional Fed banks, remain a minority. Nonetheless, their views will matter in the months ahead as the Fed, the Bush administration and Congress grapple with the implications of the Fed’s unprecedented actions.

“The danger is that the effect of recent credit extension on the incentives of financial-market participants might induce greater risk taking,” a phenomenon called moral hazard, “which in turn could give rise to more frequent crises, in which case it might be difficult to resist further expanding the scope of central-bank lending,” Mr. Lacker said, according to a text of his remarks. (Read the full speech.1)

In an interview, Mr. Lacker said that “before this recent episode, there [were] well-understood and well-articulated boundaries around when we would lend”: to manage short-term interest rates, to help banks deal with temporary shortages of cash, or to facilitate the closure of a bank taken over by regulators.

“The innovative credit programs and other things we’ve done have gone beyond previously accepted boundaries. We’ll be wrestling with the consequences.” The new program could put the Fed’s independence at risk, he said. “It crosses a line into what is essentially fiscal policy to direct credit to particular sectors, creating expectations of similar treatment.”

Fed officials are debating how quickly, if at all, they should withdraw some of the lending programs they have created to stabilize markets. If some of those programs become permanent, they might entail the Fed expanding its oversight of the financial system. Federal Reserve Bank of New York President Timothy Geithner, who helped arrange the Bear Stearns rescue, is to address its implications for the country’s regulatory structure in a speech Monday.

Since August, the Fed has taken numerous unconventional steps to improve conditions in credit markets, including vastly expanding loans to banks. Separately, it has temporarily lent safe Treasurys from its own portfolio to investment banks in exchange for their riskier securities. Most controversially, it lent $29 billion to Bear Stearns and opened its discount window to investment banks for the first time.

In a separate Thursday speech, Charles Plosser, president of the Federal Reserve Bank of Philadelphia, made points similar to Mr. Lacker’s, highlighting to the possibility that a central bank’s actions can distort markets and prices and “effectively subsidize risk-taking by systemically important financial institutions.”

“Policy interventions in financial markets run the risks of increasing moral hazard and inhibiting efficient price discovery,” he told the Society for Financial Econometrics in New York. “Moreover, interventions intended to quell instability can, by creating moral hazard, actually make instability more severe in the long run.” Mr. Plosser suggested policymakers outline in advance conditions under which they would lend to financial institutions and commit “to act in a systematic way” consistent with those guidelines. Mr. Plosser, former dean of the William E. Simon Graduate School of Business Administration at the University of Rochester, became president of the Philadelphia Fed in August.

In a speech scheduled for delivery to the European Economics and Financial Center in London, Mr. Lacker said the Fed should lend more when a sudden demand for, or shortfall of, cash drives short-term rates higher. But he said the past year’s credit crisis results from something different: Investors are fundamentally reassessing the creditworthiness and appeal of many types of securities and institutions.

When a central bank makes loans to such institutions or accepts their debt as collateral, it “distorts economic allocations by artificially supporting the prices of some assets and the liabilities of some market participants.”

Mr. Bernanke considers concerns raised by Mr. Lacker to be valid, but he has argued that the problems involved in the Bear Stearns loan were preferable to the chaos and disorder that would have resulted from the firm’s bankruptcy.

As for the Fed’s other steps, officials have argued that they represent a more effective use of the Fed’s existing authority rather than an expansion of that authority and that they are similar to tools in use by the European Central Bank.

Asked if he approved of the Bear Stearns deal, Mr. Lacker said: “It was an excruciating choice. I wasn’t close to all the data they had…so I’m not going to second-guess it.”

Still, he said that because of the Fed’s $29 billion loan to Bear, it is “going to be natural for firms to ask for what they view as similar accommodation.”

Mr. Lacker said the Fed has already “gotten questions from firms saying, ‘I’d like to take over this other firm. Can you help like you helped with Bear?'” He declined to name or describe the firms, adding, “We’ve turned them down” because helping them “wasn’t appropriate.”

To convince the markets that it won’t routinely prop up troubled firms, the Fed eventually will have to let fail some institutions that lie beyond its stated boundaries for intervention, Mr. Lacker said.

Those boundaries “are going to be more credible if we take actions, and those actions are going to be more credible the more costly they are” in terms of disruptions to the market.

Mr. Lacker, who holds a doctorate in economics from the University of Wisconsin, joined the staff of the Richmond Fed in 1989 and has been its president since August 2004. He regularly dissented in votes on interest-rate decisions in 2006, favoring higher rates. He isn’t currently one of the five regional Fed bank presidents with a vote on rates.

Write to Greg Ip at greg.ip@wsj.com2

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