Banks Fighting Subpoenas From FHFA Over Access to Loan Files

Whilst researching something else I ran across the following article first published in 2010. Upon reading it, it bears repeating.

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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WHAT IF THE LOANS WERE NOT ACTUALLY SECURITIZED?

In a nutshell this is it. The Banks are fighting the subpoenas because if there is actually an audit of the “content” of the pools, they are screwed across the board.

My analysis of dozens of pools has led me to several counter-intuitive but unavoidable factual conclusions. I am certain the following is correct as to all residential securitized loans with very few (2-4%) exceptions:

  1. Most of the pools no longer exist.
  2. The MBS sold to investors and insured by AIG and the purchase and sale of credit default swaps were all premised on a general description of the content of the pool rather than a detailed description with the individual loans attached on a list.
  3. Each Prospectus if it carried any spreadsheet listing loans, contained a caveat that the attached list was by example only and not the real loans.
  4. Each distribution report contained a caveat that the parties who created it and the parties who delivered it did not guarantee either authenticity or reliability of the report. They even had specific admonitions regarding the content of the distribution report.
  5. NO LOAN ACTUALLY MADE IT INTO ANY POOL. The evidence is clear: nothing was done to assign, indorse or deliver the note to the investors directly or indirectly until a case went into litigation AND a hearing was scheduled. By that time the cutoff date had been breached and the loan was non-performing by their own allegation and therefore was not acceptable into the pool.
  6. AT ALL TIMES LEGAL TITLE TO THE PROPERTY WAS MAINTAINED BY THE HOMEOWNER EVEN AFTER FORECLOSURE AND SALE. The actual creditor who submitted a credit bid was not the creditor. The sale is either void or voidable.
  7. AT ALL TIMES LEGAL TITLE TO THE LOAN WAS MAINTAINED BY THE ORIGINATING “LENDER”. Since there was no assignment, indorsement or delivery that could be recognized at law or in fact, the originating lender still owns the loan legally BUT….
  8. AT ALL TIMES THE OBLIGATION WAS BOTH CREATED AND EXTINGUISHED AT, OR CONTEMPORANEOUSLY WITH THE CLOSING OF THE LOAN. Since the originating lender was in fact not the source of funds, and did not book the transaction as a loan on their balance sheet (in most cases), the naming of the originating lender as the Lender and payee on the note, both created a LEGAL obligation from the borrower to the Lender and at the same time, the LEGAL obligation was extinguished because the LEGAL Lender of record was paid in full plus exorbitant fees for pretending to be an actual lender.
  9. Since the Legal obligation was both created and extinguished contemporaneously with each other, any remaining obligation to any OTHER party became unsecured since the security instrument (mortgage or deed of trust) refers only to the promissory note executed by the borrower.
  10. At the time of closing, the investor-lenders were the real parties in interest as lenders, but they were not disclosed nor were the fees of the various intermediaries who brought the investor-lender money and the borrower’s loan together.
  11. ALL INVESTOR-LENDERS RECEIVED THE EQUIVALENT OF A BOND — A PROMISE TO PAY ISSUED BY A PARTY OTHER THAN THE BORROWER, PREMISED UPON THE PAYMENT OR RECEIVABLES GENERATED FROM BORROWER PAYMENTS, CREDIT DEFAULT SWAPS, CREDIT ENHANCEMENTS, AND THIRD PARTY INSURANCE.
  12. Nearly ALL investor-lenders have been paid sums of money to satisfy the promise to pay contained in the bond. These payments always exceeded the borrowers payments and in many cases paid the obligation in full WITHOUT SUBROGATION.
  13. NO LOAN IS IN ACTUAL DEFAULT OR DELINQUENCY. Since payments must first be applied to outstanding payments due, payments received by investor-lenders or their agents from third party sources are allocable to each individual loan and therefore cure the alleged default. A Borrower’s Non-payment is not a default since no payment is due.
  14. ALL NOTICES OF DEFAULT ARE DEFECTIVE: The amount stated, the creditor, and other material misstatements invalidate the effectiveness of such a notice.
  15. NO CREDIT BID AT AUCTION WAS MADE BY A CREDITOR. Hence the sale is void or voidable.
  16. ANY BALANCE DUE FROM THE BORROWER IS SUBJECT TO DEDUCTIONS FOR THIRD PARTY PAYMENTS.
  17. ANY BALANCE DUE FROM THE BORROWER IS SUBJECT TO AN EQUITABLE CLAIM FOR UNJUST ENRICHMENT THAT IS UNSECURED.
  18. ANY BALANCE DUE FROM THE BORROWER IS SUBJECT TO AN EQUITABLE CLAIM FOR A LIEN TO REFLECT THE INTENTION OF THE INVESTOR-LENDER AND THE INTENTION OF THE BORROWER.  Both the investor-lender and the borrower intended to complete a loan transaction wherein the home was used to collateralize the amount due. The legal satisfaction of the originating lender is not a deduction from the equitable satisfaction of the investor-lender. THUS THE PARTIES SEEKING TO FORECLOSE ARE SUBJECT TO THE LEGAL DEFENSE OF PAYMENT AT CLOSING BUT THE INVESTOR-LENDERS ARE NOT SUBJECT TO THAT DEFENSE.
  19. The investor-lenders ALSO have a claim for damages against the investment banks and the string of intermediaries that caused loans to be originated that did not meet the description contained in the prospectus.
  20. Any claim by investor-lenders may be subject to legal and equitable defenses, offsets and counterclaims from the borrower.
  21. The current modification context in which the securitization intermediaries are involved in settlement of outstanding mortgages is allowing those intermediaries to make even more money at the expense of the investor-lenders.
  22. The failure of courts to recognize that they must apply the rule of law results not only in the foreclosure of the property, but the foreclosure of the borrower’s ability to negotiate a settlement with an undisclosed equitable creditor, or with the legal owner of the loan in the property records.

Loan File Issue Brought to Forefront By FHFA Subpoena
Posted on July 14, 2010 by Foreclosureblues
Wednesday, July 14, 2010

foreclosureblues.wordpress.com

Editor’s Note….Even  U.S. Government Agencies have difficulty getting
discovery, lol…This is another excellent post from attorney Isaac
Gradman, who has the blog here…http://subprimeshakeout.blogspot.com.
He has a real perspective on the legal aspect of the big picture, and
is willing to post publicly about it.  Although one may wonder how
these matters may effect them individually, my point is that every day
that goes by is another day working in favor of those who stick it out
and fight for what is right.

Loan File Issue Brought to Forefront By FHFA Subpoena

The battle being waged by bondholders over access to the loan files
underlying their investments was brought into the national spotlight
earlier this week, when the Federal Housing Finance Agency (FHFA), the
regulator in charge of overseeing Fannie Mae and Freddie Mac, issued
64 subpoenas seeking documents related to the mortgage-backed
securities (MBS) in which Freddie and Fannie had invested.
The FHFA
has been in charge of overseeing Freddie and Fannie since they were
placed into conservatorship in 2008.

Freddie and Fannie are two of the largest investors in privately
issued bonds–those secured by subprime and Alt-A loans that were often
originated by the mortgage arms of Wall St. firms and then packaged
and sold by those same firms to investors–and held nearly $255 billion
of these securities as of the end of May. The FHFA said Monday that it
is seeking to determine whether issuers of these so-called “private
label” MBS misled Freddie and Fannie into making the investments,
which have performed abysmally so far, and are expected to result in
another $46 billion in unrealized losses to the Government Sponsored
Entities (GSE).

Though the FHFA has not disclosed the targets of its subpoenas, the
top issuers of private label MBS include familiar names such as
Countrywide and Merrill Lynch (now part of BofA), Bear Stearns and
Washington Mutual (now part of JP Morgan Chase), Deutsche Bank and
Morgan Stanley. David Reilly of the Wall Street Journal has written an
article urging banks to come forward and disclose whether they have
received subpoenas from the FHFA, but I’m not holding my breath.

The FHFA issued a press release on Monday regarding the subpoenas
(available here). The statement I found most interesting in the
release discusses that, before and after conservatorship, the GSEs had
been attempting to acquire loan files to assess their rights and
determine whether there were misrepresentations and/or breaches of
representations and warranties by the issuers of the private label
MBS, but that, “difficulty in obtaining the loan documents has
presented a challenge to the [GSEs’] efforts. FHFA has therefore
issued these subpoenas for various loan files and transaction
documents pertaining to loans securing the [private label MBS] to
trustees and servicers controlling or holding that documentation.”

The FHFA’s Acting Director, Edward DeMarco, is then quoted as saying
““FHFA is taking this action consistent with our responsibilities as
Conservator of each Enterprise. By obtaining these documents we can
assess whether contractual violations or other breaches have taken
place leading to losses for the Enterprises and thus taxpayers. If so,
we will then make decisions regarding appropriate actions.” Sounds
like these subpoenas are just the precursor to additional legal
action.

The fact that servicers and trustees have been stonewalling even these

powerful agencies on loan files should come as no surprise based on

the legal battles private investors have had to wage thus far to force

banks to produce these documents. And yet, I’m still amazed by the

bald intransigence displayed by these financial institutions. After

all, they generally have clear contractual obligations requiring them

to give investors access to the files (which describe the very assets

backing the securities), not to mention the implicit discovery rights

these private institutions would have should the dispute wind up in

court, as it has in MBIA v. Countrywide and scores of other investor

suits.

At this point, it should be clear to everyone–servicers and investors
alike–that the loan files will have to be produced eventually, so the
only purpose I can fathom for the banks’ obduracy is delay. The loan
files should, as I’ve said in the past, reveal the depths of mortgage
originator depravity, demonstrating convincingly that the loans never
should have been issued in the first place. This, in turn, will force
banks to immediately reserve for potential losses associated with
buying back these defective mortgages. Perhaps banks are hoping that
they can ward off this inevitability long enough to spread their
losses out over several years, thereby weathering the storm caused (in
part) by their irresponsible lending practices. But certainly the
FHFA’s announcement will make that more difficult, as the FHFA’s
inherent authority to subpoena these documents (stemming from the
Housing and Economic Recovery Act of 2008) should compel disclosure
without the need for litigation, and potentially provide sufficient
evidence of repurchase obligations to compel the banks to reserve
right away. For more on this issue, see the fascinating recent guest
post by Manal Mehta on The Subprime Shakeout regarding the SEC’s
investigation into banks’ processes for allocating loss reserves.

Meanwhile, the investor lawsuits continue to rain down on banks, with
suits by the Charles Schwab Corp. against Merrill Lynch and UBS, by
the Oregon Public Employee Retirement Fund against Countrywide, and by
Cambridge Place Investment Management against Goldman Sachs, Citigroup
and dozens of other banks and brokerages being announced this week. If
the congealing investor syndicate was looking for political cover
before staging a full frontal attack on banks, this should provide
ample protection. Much more to follow on these and other developments
in the coming days…
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Posted by Isaac Gradman at 3:46 PM

MERS, POOLING AND SERVICING AGREEMENT, ACCOUNTING….GREAT , NOW WHAT?

SUBMITTED BY M SOLIMAN

EDITOR’S NOTE: Soliman brings out some interesting and important issues in his dialogue with Raja.

  • The gist of what he is saying about sales accounting runs to the core of how you disprove the allegations of your opposition. In a nutshell and somewhat oversimplified: If they were the lender then their balance sheet should show it. If they are not the lender then it shows up on their income statement. Now of course companies don’t report individual loans on their financial statements, so you need to force discovery and ask for the ledger entries that were made at the time of the origination of the loan.
  • If you put it another way the accounting and bookkeeping amounts to an admission of the real facts of the case. If they refuse to give you the ledger entries, then you are entitled to a presumption that they would have shown that they were not acting as a lender, holder, or holder in due course. If they show it to you, then it will either show the admission or you should inquire about who prepared the response to your discovery request and go after them on examination at deposition.
  • Once you show that they were not a lender, holder or holder in due course because their own accounting shows they simply booked the transaction as a fee for acting as a conduit, broker or finder, you have accomplished several things: one is that they have no standing, two is that they are not a real party in interest, three is that they lied at closing and all the way up the securitization chain, and four is that you focus the court’s attention on who actually advanced the money for the loan and who stands to suffer a loss, if there is one.
  • But it doesn’t end there. Your discovery net should be thrown out over the investment banking firm that underwrote the mortgage backed security, and anyone else who might have received third party insurance payments or any other payments (credit default swaps, bailout etc.) on account of the failure of the pool in which your loan is claimed to be an “asset.”
  • Remember that it is my opinion that many of these pools don’t actually have the loans that are advertised to be in there. They never completed or perfected the transfer of the obligation and the reason they didn’t was precisely because they wanted to snatch the third party payments away from the investors.
  • But those people were agents of the investors and any payment they received on account of loss through default or write-down should be credited and paid to the investor.
  • Why should you care what the investor received? Because those are payments that should have been booked by the investors as repayment of their investment. In turn, the percentage part of the pool that your loan represents should be credited proportionately by the credit and payment to the investor.
  • Those payments, according to your note should be allocated first to payments due and outstanding (which probably eliminates any default), second to fees outstanding attributable to the borrower (not the investor) and third to the borrower which normally would be done as a credit against principal, which would reduce the amount of principal outstanding and thus reduce the number of people who think they are under water and are not.

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MERS, POOLING AND SERVICING AGREEMENT, ACCOUNTING….GREAT , NOW WHAT?

I am really loving this upon closer inspection Raja! The issues of simple accounting rules violations appear narrow, yet the example you cite here could mean A DIFFERENCE AND SWAY IN ADVANTAGE.

Many more cases can potentially address broader issues of pleading sufficiency with repsect to securities and accounting rules violations prohibiting foreclosures.

Sale accounting is the alternative to debt or financing arrangements which is what the lender seeks to avoid in this economic downturn. Both approaches to accounting are clearly described and determinable by GAAP. In sales accounting there is no foreclsure. In debt for GAAP accounting your entitled to foreclose.

Its when you mix the two you r going to have problems. Big problems.

Pleading sufficiency is (by this layperson) the need for addressing a subject matter in light of the incurable defects in proper jurisdiction. The subject can be convoluted and difficult, I realize that.

Where the matter is heard should allow ample time to amend as a plaintiff. This is given to the fact the lender can move quicklly and seek dismissal.

The question is how far must a consumer plaintiff reach to allege that serverity of the claims, based on adverse event information, as in foreclosure.

This is significant in order to establish that the lender or a lender defendants’ alleged failure to disclose information. Therein will the court find the claim to be sufficently material.

In possession hearings the civil courts have granted the plaintiffs summary judgment and in actions brought against the consumer. The courts are often times granting the defendants’ motion to dismiss, finding that these complaints fail to adequately suffice or address the judicial fundamental element of materiality.

I can tell you the accounting rules omissions from the commencement of the loan origination through a foreclosure is one continual material breach. Counsel is lost to go to court without pleading this fact.

The next question is will the pleading adequately allege the significance of the vast number of consumer homeowner complaints. One would think yes considering the lower court level is so backlogged and a t a time when budget cuts require one less day of operations.

These lower courts however are hearing post foreclosure matters of possession. there is the further possibility that the higher Court in deciding matters while failing to see any scienter. Its what my law cohorts often refer to as accountability for their actions. That is what the “Fill in the Dots” letter tells me at first glance.

I believe it’s only in a rare case or two that a securities matter is heard in the Ninth Circuit. Recently however, there the conclusion was in fact that scienter allegations raised by the opposition were sufficient based on plaintiff’s allegations that the “high level executives …would know the company was being sued in a product liability action,” and in line with the many, customer complaints (I assume that were communicated to the company’s directors…)

The FASB is where the counterproductive rule changes always seem to take place and where lobbyist and other pro life and pro bank enthusiasts seem to spend their days. No need to fret however as gain on sale accounting is specific and requires the lender to have SOLD your loan in order to securitize it as part of a larger bulk pool.

The document I am reading, submitted by Raja tells me something is very concerning to the “lender parties” that they believe is downstream and headed their way. I’ll try and analyze each line item for you as to what it says and what they really are trying to do. I think for now though its value is for determining the letter as an admission of “we screwed up!”

M.Soliman

THE NEED TO MISLEAD: How to Use Expert Declaration: MBIA Sues Credit Suisse with Details on Securitization

MBIA V CSFB-DLJ

Here you have a lawsuit that corroborates everything we have been telling you on Livinglies PLUS an example of how to use the third party report of an expert in pleadings. The content of the lawsuit is a clear explanation of the securitization process — the catch is that these are not just allegations — they are predicated on the expert report or declaration of people who are knowledgeable in securitization. The use of the expert findings takes the argument from theoretical to factual.

Your hidden agenda is to lead the Judge into the unavoidable conclusion that these securitized loans were based upon lies to borrowers, lies to investors, lies to insurers, lies to rating agencies and anyone else they needed to mislead in order to get these so-called mortgage-backed securities sold and insured.

The differences between this lawsuit and others that have been filed are many. MBIA is suing here because they were defrauded into insuring securitized mortgage loans that did not meet the criteria and representations concerning underwriting standards. The accusation is essentially that Credit Suisse, through its multiple subsidiaries and affiliates, lied to MBIA about the risk of defaults and therefore the risk of loss. And they are saying that the DLJ obligation to buy back the loans was breached.

Most importantly, the lawsuit describes the process of securitization with multiple pools created for multiple sales, each with its own set of fees and profits. While this lawsuit is yet another example of why borrowers and investors and insurers could join forces, it serves as an excellent resource for the content of an expert declaration, the allegations of a lawsuit alleging fraudulent underwriting representations, and the damage caused by reasonable reliance on the representations of multiple parties in multiple layers each designed to create “plausible deniability.”

My suggestion is that the description of this process be included in the expert report, that the allegations of the complaint be made simple, and that the tactical approach should be to allow the Judge to come to his/her own conclusion as to what happened. The important point here is that you make your appearance in court raising questions of fact that entitle you to discovery and to force answers to basic questions like who is the lender NOW and how much has been paid by whom on the obligation.

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