ACCEPTANCE OF THE ASSIGNMENT AND STATUS OF THE ASSIGNMENT

OK so you feel a little lost. That is because most of us are jumping in at the end of a long series of events and documents.

The most important point for you to make in order to jar the Judge’s thinking is that the closing with the borrower took place in the middle of the chain of securitization and within the context of the securitization documents executed without the borrower, before the borrower existed even as a prospective customer for the loan product.

Those documents provide the context in which loans will be offered, approved, assigned, accepted, replaced, returned, insured etc. Thus the key documents that creates the securitization structure for the creation and pooling of loans precede the offering of a loan product to the borrower. The closing documents of the borrower are in the middle of the securitization chain not at the beginning. The assignment is near the end of the securitization chain in practice, contrary to the usual conditions and prohibitions contained in the original enabling documents that created the securitization structure and process.

NOTE: Do not make any assumptions that your loan was securitized. Even if it was securitized it is entirely possible, if not probable, that the “assignment” is barred by a cutoff date in the securitization documents, or that the assignment was not executed with the form and content required by the securitization documents. Thus even if there is an assignment, you should not assume that it was or could be accepted. It is highly possible if your loan appears to be securitized, or even if there is a “Trustee” under an alleged securitization structure that a party making a claim on an assignment is unaware of the absence of acceptance or even that there is no authority for the Trustee to accept the assignment.You can be certain that if the other party is unaware of these defects, that the Judge is equally unaware.

The key to understanding this evolving process is that the Judge is looking at your transaction as the beginning point. That is simply flat wrong and you need to make that point as clearly as you can.

The beginning was the creation of the securitization structure.

  • The first transactions that occurred was the sale of securities to unsuspecting investors.
  • The second transaction that occurred was that the investor money was put into an account at an investment banking firm.
  • The third transaction was that the investment banker divided the money between fees for itself and then distributing the funds to aggregators or a Depository Institution.
  • The fourth transaction was the closing with the borrower. The loan was funded with the money from the investor but because of the disparity between the interest payable to the investor and the interest payable by the borrower, a yield spread was created, adding huge sums to what the investment banker took as fees without disclosure to the ivnestors or the borrowers.
  • The fifth was the assignment AND ACCEPTANCE of the loan (See below) into between 1 and 3 asset pools, each bearing distinctive language describing the pool such that they appeared to be different assets than already presumed to exist in the first pool.
  • The sixth was the receipt of insurance or counter-party payments on behalf of the pool pursuant to the documents creating the securitization structure.
  • The seventh was the resecuritization of the pooled assets between one and three times.
  • The eighth was the federal bailout payments and receipts allocable to the balances owed on the loans that were claimed to be part of the pool.
  • The ninth are the foreclosures by parties who never handled any money who allegedly represent investors who no longer have any interest in the loan.

Through the creation of multiple entities that never existed before securitization of mortgage loans, the intermediaries are able to support the illusion that they never received payment from outside parties on the obligations owed from borrowers.

Most loans are assigned only after they are delinquent or even after foreclosure has been ordered. By definition, the documents creating the securitized pool usually prohibit such an assignment from being accepted into the pool. Therefore, although an assignment was executed, it is entirely possible that it accomplished nothing of legal consequence.

Also, even if the loan was ever in a securitized pool of assets, no assumptions should be made regarding the CURRENT STATUS of the “assigned” loan. Most documents that create the securitization structure, require the assignor to take back a non-performing loan and replace it with either cash or a comparable performing loan. Therefore, it is at the very least a question of fact as to whether the loan is still in the pool whether the assignment was effective or not.

I think the fundamental issue that we have been weak on presenting is ACCEPTANCE OF THE ASSIGNMENT and STATUS OF THE ASSIGNMENT. The pretender lenders have been successful thus far in directing the court’s attention to the note, Deed of Trust (Mortgage) and the assignment and away from the facts dealing with the obligation itself and the securitization. The error is in allowing the opposition and the Court to focus its attention on the creation of the obligation and the assignment of the note. In an ABCDE chain, this is the equivalent of looking at B and D and ignoring A,C and E.

Securitization involves many documents. In broad brush, it involves the

  • Closing documents between loan originators, servicers, Special Purpose Vehicles, aggregators, etc. including the pooling and services agreement, the assignment and assumption agreement, the Master Services Agreement  [if separate], none of which includes the borrower as party or references any specific debtor or borrower because the debtor is unknown when the securitization structure is created
  • pre-application documents before the borrower was even a prospect,
  • the pre-closing documents and effect of documents that are not referenced at closing
  • the closing documents with the borrower
  • the assignment(s)
  • the conditions imposed on the assignment (conditional assignment because the assignment was pursuant to the pre-application and pre-closing documents)
  • and post closing documents involving third party payments and resecuritization of the loan or resecuritization involving additional insurance, credit enhancements, federal bailouts etc.

It should be argued aggressively that the opposing party needs to prove its case and not have the benefit of the Court assuming that a prima facie case exists. The putative creditor in each case at bar is claiming their standing by virtue of an assignment. But that assignment only exists by virtue of a larger structure of securitization in which the documents describe the conditions under which such an assignment is acceptable and further conditions if the loans ceases to perform. Provisions requiring insurance, credit default swaps, credit enhancements, and others add co-obligors to the borrower’s transaction which takes place not at the beginning of the chain, but rather in the middle of the chain.

Discovery Hints: Goldman Sachs may not be the only firm in SEC cross hairs

REGISTER NOW FOR DISCOVERY AND MOTION PRACTICE WORKSHOP 5/23-24

Editor’s Notes: These lawsuits from the SEC, the Class Action lawyers etc., are already producing fall-out — dozens of articles and production of secret emails etc. that can only help your case. Follow them closely as they will inevitably lead to admissible evidence of what you can only argue generally now.Use Google and other search engines and subscribe to securitization sites.

In motion practice your credibility will be enhanced if you can refer to other cases where government agencies, attorneys general, U.S. Attorneys etc. have filed cases alleging the same thing you are alleging. To the extent that it is truthful to say so, you can point to various elements of proof that are coming out of those cases. This will vastly enhance your ability to gain the Judge’s attention — but don’t try to prove YOUR case simply on the basis that it appears to be true in OTHER cases. Use these other cases to establish your foundation for discovery requests and why they MUST come up with all the documents, ledgers, accounting and bookkeeping data, distribution reports, emails etc. related to the pool in which your particular loan is located.

Goldman Sachs may not be the only firm in SEC cross hairs

The agency’s fraud suit against the Wall Street giant may foreshadow similar cases against other financial firms and trigger a wave of private litigation.

By E. Scott Reckard, Los Angeles Times

April 22, 2010 | 3:32 p.m.

The government’s fraud lawsuit against Goldman, Sachs & Co. could portend cases against other financial giants that turned subprime mortgages into complex securities while also accelerating a surge in private litigation against Wall Street.

In announcing the Goldman case, Securities and Exchange Commission enforcement chief Robert Khuzami said the agency was looking into similar transactions at other firms. As the SEC struggles to shed its image as the snoozing securities cop that missed Bernard L. Madoff’s vast Ponzi scheme, the agency is likely to bring additional cases, said Alan Bromberg, a securities law professor at Southern Methodist University.

“The SEC has become pretty aggressive, so it’s a good bet,” Bromberg said. Goldman, he said, was probably chosen as the first target because of its prominence. “It is the biggest and by most estimates the best firm on Wall Street.”

Goldman Sachs is accused of failing to disclose that a hedge fund that helped it create complex securities had actually placed a bet that the investment would fail. Goldman has said it provided full disclosure to sophisticated investors who knew that some other knowledgeable party was betting against them.

The suit against Goldman will undoubtedly encourage similar claims by investors, said Boston University securities law expert Elizabeth Nowicki.

Private lawyers “are going to start filing these suits like they’re going out of style,” she said.

It’s not unusual for SEC cases to pave the way for private lawsuits. For example, the SEC’s announcement that it was investigating conflicts of interest by securities analysts in 2001 triggered a wave of private litigation making the same allegation.

In the case of the mortgage-linked investments known as collateralized debt obligations, a variation of which is at the heart of the Goldman Sachs case, lawyers for investors had already begun their assault.

UBS, Morgan Stanley, Merrill Lynch and Deutsche Bank face private lawsuits alleging they misled investors in CDOs or similar investments. The firms, like Goldman, have denied any wrongdoing.

“The question is whether the SEC has uncovered the tip of the iceberg,” Nowicki said.

The issue is especially important, she said, because the high-risk investments caused such huge losses for financial firms and investors around the world, magnifying the effect of the collapse of the housing and mortgage markets.

“Without these devastating transactions we would have had a regular downturn in the housing markets and not a near depression,” said Nowicki, a former SEC attorney who practiced securities law on Wall Street and has testified as an expert witness in disclosure cases.

The financial crisis has spawned hundreds of lawsuits, with the targets shifting from the lenders that made dubious home loans to the Wall Street firms that transformed mortgage bonds backed by subprime loans into supposedly solid investments, Jonathan Pickhardt, a securities-law attorney, wrote in a recent legal journal article.

The suits that deal with CDOs include allegations that some of the firms creating and marketing CDOs stuffed troubled assets into them without disclosure, especially as mortgage defaults surged in 2007; improperly influenced CDO management firms that were hired to pick assets independently; and withheld key information from credit-rating firms.

The bar of proof appears higher in CDO cases than in the SEC’s suits last year against former executives of Countrywide Financial Corp. of Calabasas and New Century Financial Corp. of Irvine, two major companies brought down by the mortgage meltdown.

That’s because the suits against the executives, including Countrywide co-founder Angelo Mozilo, accuse them of misleading individual shareholders and other members of the investing public. Mozilo and the other defendants in these cases have denied the allegations.

In contrast, the participants in the CDO transactions were, as UBS put it in statements responding to two CDO-related lawsuits, “professional and knowledgeable” banks and sophisticated investors who knew what they were buying.

Making it tougher still to prove fraud, the transactions in the SEC action against Goldman and a private suit targeting Merrill Lynch involved so-called synthetic CDOs. Such creations don’t contain actual mortgage bonds. Instead they hold insurance-like instruments tied to a portfolio of mortgage bonds. The CDOs essentially sold insurance on the bonds. Other investors bought that insurance, betting that home-loan defaults would lower the value of both the bonds and the CDOs themselves.

As a result, the structure of synthetic CDOs required outside investors to bet that the CDOs would incur losses.

For example, in a case brought by Rabobank, a large Dutch financial firm, against Merrill Lynch, now part of Bank of America Corp., the Wall Street firm said the CDO contract contained standard language obliging investors to conduct their own research on the deal and not rely on information provided by Merrill.

scott.reckard@latimes.com

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