Banks Restarting Private Label “Securitizations”

Posted on January 30, 2013 by Neil Garfield

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Editor’s Comment: As we travel down the road of misguided policy and judicial decisions, the banks are starting up a major effort to sell more mortgage securities under private label, which means that (a) they are not required to register them with the SEC and (b) they will continue to veil the secret movement of money making it more difficult for any borrower to know the identity of the lender in a residential loan transaction, contrary to the requirements of Federal and State laws.

The whole purpose of the Truth in Lending Act was to give the consumer an opportunity to choose between one vendor of loans and another. The banks obliterated that choice in the first round of the mortgage meltdown and you can be sure that the only reason they are doing it again is because they intend to make the same gargantuan “profits” in this second round, so far, at $25 Billion.

One of the reasons why they feel emboldened to do this is because the basic laws have not been changed regarding the definition of a security, which excludes mortgage bonds and the hedges like insurance and credit default swaps, courtesy of laws passed in 1998. Another reason is that the Wall Street club still has enough strength to sell the mortgage bonds through intermediaries who trumpet higher returns for stable funds, which we have all seen went from stable in the layman sense to completely unstable and underfunded. The pension funds that got hit the hardest will be the first ones to announce that the pensioners are not going to get the full amount of their payments because of losses in the fund, vested or not.

The “qualified mortgage” regulations passed by the Federal Agency, which might lose its head literally if Cordray’s appointment remains rejected by the Courts, still have plenty of daylight in them to push through false appraisals and false data on the ability of the borrower to pay, and the viability of the loan over its entire term. The easily projected fall in prices to the values charted by Case-Schiller together with reset provisions on adjustable mortgages and “teaser” rates that could be paid only if the majority of the required payment was added on to the principal due on the mortgage, made the crash inevitable and remains unaddressed by law or regulations.

So despite the 0.1% contraction of the economy in the last quarter of 2012, we have the banks again ramping up to make trillions more while the economy stagnates from lack of oxygen — the money diverted from the economy by the banks whose officers have escaped prosecution and whose antics in corrupting the title system of the all the states, have created massive uncertainty over the end result.

Wall Street is allowed to exist as the engine of growth, stability and confidence in our economy. As intermediaries, they are required to meet the needs of the times in terms of providing capital in a capitalist society. Instead, they have become principals without anyone noticing. And their motive is not to intermediate but to make a profit, taking advantage of every loophole in laws, rules or the enforcement thereof. A receding economy won’t stop the banks from making money as long as they are permitted to lie.

If the economy is contracting, Wall Street activity should be expected to drop as the need for capital declines. Instead we see that over the last 4 years and we will see over the coming four years and beyond, an increase in profits for Wall Street firms which are owned by shareholders and directed by officers whose main goal is to create and enlarge their own wealth.

A lot of this has been made possible by the average citizen who can’t be expected to understand the complexities of finance or the law. Of paramount importance in the process is the shame heaped upon borrowers who are all seen as deadbeats despite all evidence to the contrary. And lastly, all this is possible because of the general assumption, often mistakenly used as a conclusive presumption in court, that the borrower received a loan, didn’t pay it back, therefore is in default and based upon the terms of their contract, their homes are sold at auction to satisfy as much of the debt as possible.

The idea that the money demanded as the balance of principal and interest due might be totally misstated, and that the repayment provisions loan is NOT represented by the note and mortgage (or deed of trust), seems impossible to both borrowers and judicial participants alike. The banks laid a trap in setting up bad paperwork because there was no real paperwork that would actually track the movement of money in bona fide transactions with money exchanging hands. Lawyers and pro se litigants cried foul and yet the foreclosures kept proceeding because the judge figured that the bad behavior of the banks was a separate matter from the “obvious” fact that the borrower took a loan and didn’t repay it.

It’s true that the money arrived at the closing table, but beyond that, there is nothing but misdirection, lies and fraud. The money arrived at the closing table from a source that was never disclosed to the borrower, preventing the borrower from any choice in the matter.

The nominee used to play the part of “lender” was not even allowed to touch the money — Wall Street having determined that some “originators” might find it too tempting to let the tens of millions going through their own account go by without skimming some of it or even taking all of it. Wall Street thought this way because it was what they were doing when they sold the original mortgage bonds.

The money was never put in a trust, as specifically provided for  in the enabling documents which might or might not have legally created a common law trust. The bankers took out as much as 1/2 of the investor money as trading profits when they arranged fictitious sales of actual and fictitious loans to the unfunded trust without consideration. The consideration was passed from investors directly to the investment bank that underwrote the sale of the mortgage bonds.

The balance of the investor money was used for fees and costs that were problematic at their best and then finally the balance was used to fund loans (and bets against the loans) that were completely undocumented in terms of the actual financial transactions that took place. None of the paperwork upon which the banks rely in reporting their assets or enforcing invalid notes and mortgages is supported by any transaction in which the named parties exchanged actual money. Thus none of the paperwork could be considered valid or enforceable (lack of consideration). They can sue but they can’t win if the borrower denies the transaction, the note, the debt, the mortgage and lays claim to false disclosures.

The banks understood this fatal error and thus created massive efforts at robo-signing, surrogate signing, fabrication, forgery, and fraud in supporting the alleged transfer of the loan from a nominee who originated the loan but who never funded the loan, up the false securitization chain. In simple words the mountain of paperwork produced by the banks covers a cup that is empty. There was no money involved in ANY of the transactions from origination through assignments that were offered but could not be accepted because they were specifically prohibited by the PSA and Prospectus.

Lawyers and pro se litigants went down the rabbit hole after the false paperwork leaving the judge with the simple proposition that there was a loan, it wasn’t paid back, and therefore the enforcement provisions apply. Nobody asked WHY there was need for false paperwork. What was the false paperwork hiding?

It was hiding an empty cup in which the borrower signed loan documents and never received a loan pursuant to those documents. The borrower received a loan from other parties whose identity was intentionally concealed, and if the various compensation and profit and fees had been disclosed as required by TILA the borrower would have been alerted tot he fact that half or all of his loan was generating fees, profits and costs either equal to or even more than the loan itself. Even an unsophisticated borrower confronted with these facts would get nervous about a transaction where he knew that the real parties were making excessive profits had this been disclosed as required by law.

Hence our strategy of DENY and DISCOVER, which will be the subject of tonight’s discussion on the member teleconference. If you go after the money first, demanding proof of payment and proof of loss you stand a good chance of knocking out both the filing of the foreclosure and the ability of the forecloser to submit a credit bid — simply because they are not the creditor. By going after the money first, the attack on the paperwork becomes both relevant and corroborative of the principal attack over consideration between the borrower and nominee lender who seemed to be the lender at the closing of the loan.

If you assume all of the above is correct, then it is malpractice for any lawyer to admit the debt, the security, the balance due, the note, the mortgage and the enforceability of the note and mortgage. And it is malpractice for a lawyer doing real estate closings to fail to question title and demand a guarantee of title from a qualified source.

As seen in California this will cause even a non-judicial state to  go judicial in practice because the forecloser has a case to prove and in most cases it can’t because it can never show that it ever took the loan in as a loan receivable — which in accounting, is inevitable because there is no place for an entry debiting a cash or other asset account to make the loan.

The entire loan is off balance sheet and solely appears on the income statement as a fee for service transaction in which the apparent lender was really a nominee for undisclosed parties who promised the real lenders one set of terms in the bogus mortgage bonds and an entirely different set of terms in the note signed by the borrower which was unsupported by consideration.

The bottom line is that the discovery should be directed at all parties who have knowledge of the actual transfer of money and documents, including internal documents. The Master servicer, the investment banker, the Trustee of the so-called trust should all be subpoenaed if necessary to determine what records they have and who handled them. And the principal record you want to see is a copy of a canceled check or wire transfer receipt (and wire transfer instructions).

‘Private Label’ Gains Appeal in Mortgage Market
http://blogs.wsj.com/developments/2013/01/29/private-label-gains-appeal-in-mortgage-market/

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , , , , , , | 21 Comments »

Mortgage Securities It Holds Pose Sticky Problem for Fed

Posted on July 23, 2010 by Neil Garfield
STICKIER THAN THEY THINK: These are not the only mortgage securities they hold and they all amount to ownership of the risk on every loan they purchased. The purchase of course was accomplished in one of many ways — direct and indirect.
But when you come down to it, between the GSE’s (which are now departments of the Federal Government), TARP, and the outright purchase by the Fed, SOMEONE received 100 cents on the dollar for every loan, whether in default or otherwise.
Add in insurance, credit default swaps and credit “enhancements” (i.e., commingling of money contrary to the explicit terms of the borrowers’ promissory notes) like over-collateralization and cross collateralization, it would be a fair statement to say that everyone of the mortgages CLAIMED to be in pools that were subject to various securitization instruments, have been paid in whole or in part.
THAT IS WHAT I MEAN BY THIRD PARTY PAYMENTS. The legal issue is who got the money and why? The practical impact is that if those payments were related to individual mortgages, which indeed they must have been, then they were received into what should have been an escrow account and allocated to each loan.
Now add the fact that very nearly NONE of the loans were in fact the subject of an actual assignment, recorded instrument, endorsement or delivery while they were performing and before the cutoff date in the securitization enabling documentation, and you really have an interesting conclusion: the loans never made it into the pool, which makes securitization a giant Ponzi scheme that paid investors long enough out of their own money to lend credibility to the scheme.
But it is also true that borrowers made payments and where those went, and in what amounts is a clouded mystery because every lawsuit I know of that has asked for the accounting is stalled. So with nothing in the pools, nothing in the mortgage bonds, and the CDO’s based upon the mortgage bonds, and the credit default swaps referencing the mortgage bonds, and the synthetic CDOs consisting of CDS instruments referring to the mortgage bonds, they were all worthless from beginning to end. In short, the government bought nothing from bankers who had already made a ton of money, most of it parked off-shore.
The real reason the government can’t sell these securities is that nobody will pay for them. Any due diligence down to the loan level will reveal that the loans were never subject to legally required execution, delivery and recording of transfer or assignment documents, together with indorsements etc. In some cases, this is correctable — at considerable legal expense. In most cases, they are not correctable. The bottom line is really simple: the obligation was created, the note was extinguished, and the security instrument became unenforceable, and separated from the note. The illusion that it is otherwise is what is keeping us in stagnation, preventing a solution.
July 22, 2010

Mortgage Securities It Holds Pose Sticky Problem for Fed

By BINYAMIN APPELBAUM

WASHINGTON — The Federal Reserve provided most of the money for new mortgages in the United States last year, effectively lending more than $1 trillion to American homeowners.

Now the legacy of that extraordinary intervention is hanging over the central bank as it faces growing demands for an encore to help revive the flagging economy.

While officials and economists generally regard the program as successful in supporting the housing market, it has left the Fed holding a vast pile of mortgage securities — basically i.o.u.’s from homeowners — that it does not want and cannot sell.

Holding the securities could cost the Fed a lot of money and hamper its ability to fight inflation, while selling the securities could drain needed money from the still-weak economy.

Fed officials have expressed confidence that they can finesse the dilemma by gradually selling the securities as the economy starts to recover. But they are not eager to expand the challenge they face by beginning a new round of asset-buying, one tool the Fed could use to try to stimulate growth.

“In my view, any judgment to expand the balance sheet further should be subject to strict scrutiny,” Kevin M. Warsh, a Fed governor, said in a speech last month in Atlanta. He warned that new purchases could undermine the Fed’s “most valuable asset”: its credibility.

Some Democrats want the Fed to pump more money into the economy to help reduce unemployment, one of the central bank’s basic responsibilities. In testimony before Congress this week, Chairman Ben S. Bernanke said that the Fed retained that option, but did not now plan to expand on the steps it had already taken.

In part, Bernanke and other Fed officials say they believe that new asset purchases would be less effective now that private investors have returned to the market.

The Fed became one of the world’s largest mortgage investors because no one else was interested. During the fall 2008 financial crisis, investors stopped buying the mortgage securities issued by the housing finance companies Fannie Mae and Freddie Mac. The two companies buy mortgages made by banks and other lenders, providing money for new rounds of lending, then package those loans into securities for sale to investors, replenishing their own coffers.

Two days before Thanksgiving 2008, the Fed announced that it would buy $500 billion in securities issued by the two companies. By the time the program wound down in March 2010, it had spent more than twice that amount. The central bank now owns mortgage securities with a face value of $1.1 trillion.

A wide range of economists say the Fed’s program — so big that purchases outstripped the issuance of new securities in some months — helped to preserve the availability of mortgage loans and helped to hold interest rates near record lows. Rates that exceeded 6 percent in late 2008 remain below 5 percent today.

But the Fed now must deal with the cleanup.

The central bank could hold the securities until the borrowers repaid or refinanced their loans. Brian P. Sack, an executive at the Federal Reserve Bank of New York, estimated in March that borrowers would repay $200 billion by the end of 2011. And in the meantime, the Fed is collecting regular interest payments.

  • HOW IS THIS MONEY REACHING THE FED? WHO IS GETTING PAID FOR HANDLING IT?

    WHY IS NOT THE FED’S INTEREST RECORDED IN THE PROPERTY RECORDS OF THE COUNTY IN WHICH THE PROPERTY IS LOCATED (ANSWER — BECAUSE THEY DON’T HOLD THE SECURITY, JUST THE RECEIVABLE, CALLED “SPLITTING NOTE FROM MORTGAGE”).

  • IF THE FED OWNS THESE LOANS WHY DON’T THEY SHOW UP AS A PARTY IN FORECLOSURES?

  • WHO IS THE TRUSTEE ON DEEDS OF TRUST?

  • WHO ARE THE BENEFICIARIES?

  • WHO ARE THE MORTGAGEES ON MORTGAGE DEEDS?

“We’ve been earning a fairly high income from our holdings and remitting that to the Treasury,” Mr. Bernanke told Congress on Wednesday.

But holding the securities could make it harder to control inflation as the economic recovery gains strength, said Vincent Reinhart, the former head of the Fed’s monetary policy division, now a resident scholar at the American Enterprise Institute.

The Fed bought the securities by pumping new money into the economy, stimulating growth. It could be difficult to reverse that effect without draining the money from the economy by selling the securities, Mr. Reinhart said.

“They created reserves, and those reserves ultimately can be inflationary,” Mr. Reinhart said. “The chief risk of keeping the balance sheet big and raising rates is that you might not be able to raise rates successfully” because the impact would be mitigated by the effect of the extra money still sloshing around the system.

Holding the securities also could cost the Fed a lot of money.

The Fed paid some of the highest prices on record for mortgage securities, basically accepting very low rates of interest on its investments. As the economy recovers and interest rates rise, the Fed will need to accept increasingly large discounts to make the securities attractive to other investors.

David Zervos, head of global fixed-income strategy at the investment bank Jefferies & Company, estimates that the value of the portfolio will drop almost $50 billion each time interest rates increase by one percentage point.

Selling the securities at a loss would reduce the Fed’s ability to transfer profits to the Treasury Department. Large enough losses could reduce the amount of capital held by the Fed, although it can always create more money.

But perhaps the greatest risk is that investors will begin to doubt the Fed’s willingness to raise interest rates, knowing that each increase will damage its own balance sheet.

“It compromises their integrity and their inflation-fighting mandate, because fighting inflation would be a direct detriment to their portfolio,” Mr. Zervos said.

The Fed could avoid these problems by selling the securities now, before interest rates start to rise. But doing so would reverse the benefits of the original program, draining money from the economy while it still is weak. It would also fly in the face of the demands for the Fed to do more for the economy.

A fire sale also could damage the banking industry by driving down the value of the comparable mortgage securities that banks hold in large quantities.

So far the Federal Open Market Committee, comprising the board of governors and a rotating selection of presidents from the regional reserve banks, has chosen to wait.

The approach favored by most of the committee, according to the minutes of its June meeting, is to start raising interest rates before beginning to sell the securities. By waiting “until the economic recovery was well established,” the minutes said, the Fed would limit the impact of the asset sales on the broader market.

Filed under: bubble, CASES, CDO, CORRUPTION, evidence, expert witness, Fannie MAe, foreclosure, foreclosure mill, GTC | Honor, HERS, investment banking, Investor, MODIFICATION, Mortgage, Motions, Pleading, securities fraud, Servicer, STATUTES, trustee | Tagged: , , , , , , , | 22 Comments »

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

Posted on June 21, 2010 by Neil Garfield

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

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

EDITOR’S NOTE:  POINTS TO BE MADE:

  • Investors’ are proving the case for appraisal fraud, aligning themselves with borrowers. They are doing the borrower’s work. Get yourself copies of these complaints, discovery etc., send them to me and use them in your own case.
  • The little guy is starting to get attention. The court’s are getting the point that these loans were fraudulent. In my surveys I have found that appraisal fraud accounts for nearly all the loans 2003-2008, and that the amount of the fraud was a s much as 150% in some cases with an average of around 35%. The moment you closed, whatever down payment you made was lost and you were underwater.
  • The obligation to present a proper appraisal is on the lender not the borrower.
  • Just like the investors, borrowers were deprived of vital information about their loan that would have prevented any reasonable person from closing. Thus whether the Court’s like it or not, rescission, is a proper remedy, if not under TILA then under fraud statues and common law doctrines of fraud. Combine that with damages available, and the prospect of getting loan reduction and adjustment of loan terms comes into clearer view.
  • THE CONNECTION BETWEEN THE INVESTOR’S ADVANCE OF FUNDS AND THE HOME APPRAISAL IS PRESUMED AND ALLEGED. THUS THE ARGUMENT THAT THE INVESTOR WAS THE CREDITOR AND THE BORROWER IS THE DEBTOR IS CORROBORATED BY THE PLEADINGS OF THE INVESTORS.
June 18, 2010

The Inflatable Loan Pool

By GRETCHEN MORGENSON

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Filed under: bubble, CASES, CDO, CORRUPTION, Eviction, evidence, expert witness, foreclosure, foreclosure mill, GTC | Honor, HERS, investment banking, Investor, MODIFICATION, Mortgage, Motions, Pleading, securities fraud, Servicer, STATUTES, trustee | Tagged: , , , , , , , , , , , , , , | 24 Comments »

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