BLOOMBERG: Mortgage Crisis Still Unresolved, New Crisis Looming

No two financial crises are ever quite the same. The next one won’t be like the last. But history teaches lessons, and there’s no excuse for ignoring them.

Regulators have done a lot to reform the financial system since the 2008 crisis, but they still haven’t fixed the market where the trouble started: U.S. mortgages. It’s an omission they need to put right before the next crisis hits.

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see https://www.bloomberg.com/view/articles/2018-04-30/america-s-mortgage-market-is-still-broken

David Shipley, Senior Editor for Bloomberg Views has hit the nail on the head. While there are some errors in his article, they are understandable.

He’s right when he says that the servicers lacked the necessary incentives and resources and still lack those incentives and resources. But when he talks about “delinquencies” he fails to grasp the fact that those “delinquencies” are based upon a debt that neither the servicer nor its client is authorized to administer.

This failure of perception is understandable. It is difficult to to accept the fact that the debt went up in smoke and therefore no creditor has authorized the administration or collection of the debt. It is challenging to accept the notion that the banks engineered this scheme so they could step in as if they were creditors without actually saying so.

But he gets very close when he says

Private-label mortgages (which aren’t guaranteed by the government) were packaged into securities with extremely poor mechanisms for deciding who — investors, packagers or lenders — would take responsibility for bad or fraudulent loans.

The whole idea was to make it unclear who would be injured by nonpayment of a debt. That was how the banks, as intermediaries, transformed themselves into apparent principals and how entities created the illusion of self proclaimed servicers. Or as Shipley puts it

The parties involved in securitizations became embroiled in legal battles about who owed what to whom — litigation that goes on to this day.

So even amongst the principals of the scheme coined as “securitization fail” (Adam Levitin) there is no agreement and in fact fierce court battles as to the identity of the injured party. In other words their pleadings in court constitute admissions that are inconsistent with the pleadings in foreclosure cases. If there is no identified party with injury then there is no legal standing.

What is clear now is that the money taken from investors was not used to fund REMIC trusts, that the REMIC Trusts never bought any debts and in fact never bought any of the dubious paper that was issued in connection with origination or transfer of the “loans.” Those investors were largely not becoming beneficiaries of the trust; instead they were becoming creditors of the trust.

Knowing that, investors are stuck — if they blow the whistle on the diversion of their money into a completely different “investment” than the one they thought they were buying, they are undermining their potential claim based upon the “security” offered by the mortgages. And they are undercutting the value of the certificates they bought. That is what threatens a large segment of the shadow banking market.

The fix that Shipley thinks should happen will never come to fruition because the government has been convinced that a fix would eviscerate the shadow banking market where derivatives are traded. Nobody knows what the outcome will be if that market fails.

But in the meanwhile current policy reflects a decision to let investors and borrowers take the entire brunt of the scheme that ultimately left the banks in solid control and rising profits despite small settlements compared to the amount of money siphoned out of the US economy. So the Federal reserve and American taxpayers continue the bailout by lending support to the false presumption that the RMBS derivatives are based upon mortgage loans owned by a trust.

Shipley narrowly misses the point when he says

Advancing payments to investors when loans go delinquent — a core responsibility of servicers — demands a lot of cash. It also requires ample capital to absorb possible losses on servicing rights, an asset whose value can quickly evaporate if defaults and prepayments eat into expected fees.

Think about it. Why would a company guarantee payments from a third party? Who would take that risk on loans known to be at best fragile? Where is the money coming from to make those payments? Is it really the “servicer.” And if the money is “recovered” as “servicer advances” when the property is liquidated, is the foreclosure really a disguised suit to force the recovery of servicer advances rather than a true foreclosure — contrary to the interests of the certificate holders?

And if Ocwen was actually entitled to receive and expected to receive recovery of servicer advances why would it be teetering on the edge of bankruptcy? The more likely scenario is that subservicers like Ocwen have nothing at all to do with servicer advances. They don’t make them, they don’t initiate them and they don’t collect them. The Wall Street playbook has the real puppet masters hidden behind several layers of curtains. Ocwen, like so many others, is just there to get tossed under the bus to make people happy that they extracted a pound of flesh — except there was no skin in the game.

Maine Case Affirms Judgment for Homeowner — even with admission that she signed note and mortgage and stopped paying

While this case turned upon an  inadequate foundation for introduction of “business records” into evidence, I think the real problem here for Keystone National Association was that they did not and never did own the loan — something revealed by the usual game of musical chairs that the banks use to confuse and obscure the identity of the real creditor.

When you read the case it demonstrates that the Maine Supreme Judicial Court was not at all sympathetic with Keystone’s “plight.” Without saying so directly the court’s opinion clearly reveals its doubt as to whether Keystone had any plight or injury.

Refer to this case and others like it where the banks treated the alleged note and mortgage as being the object of a parlor game. The attention paid to the paperwork is designed by the banks to distract from the real issue — the debt and who owns it. Without that knowledge you don’t know the principal and therefore you can’t establish authority by a “servicer.”

The error in courts across the country has been that the testimony and records of the servicer are admissible into evidence even if the authority to act as servicer did not emanate from the real party in interest — the debt holder (the party to whom the MONEY is due.

Note that this ended in judgment for the homeowner and not an involuntary dismissal without prejudice.

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Hat Tip to Bill Paatalo

Keybank – maine supreme court

Here are some meaningful quotes from the Court’s opinion:

KeyBank did not lay a proper foundation for admitting the loan servicing records pursuant to the business records exception to the hearsay rule. See M.R. Evid. 803(6).

KeyBank’s only other witness was a “complex liaison” from PHH Mortgage Services, which, he testified, is the current loan servicer for KeyBank and handles the day-to-day operations of managing and servicing loan accounts.

The complex liaison testified that he has training on and personal knowledge of the “boarding process” for loans being transferred from prior loan servicers to PHH and of PHH’s procedures for integrating those records. He explained that transferred loans are put through a series of tests to check the accuracy of any amounts due on the loan, such as the principal balance, interest, escrow advances, property tax, hazard insurance, and mortgage insurance premiums. He further explained that if an error appears on the test report for a loan, that loan will receive “special attention” to identify the issue, and, “[i]f it ultimately is something that is not working properly, then that loan will not . . . transfer.” Loans that survive the testing process are transferred to PHH’s system and are used in PHH’s daily operations.

The court admitted in evidence, without objection, KeyBank’s exhibits one through six, which included a copy of the original promissory note dated April 29, 2002;3 a copy of the recorded mortgage; the purported assignment of the mortgage by Mortgage Electronic Registration Systems, Inc., from KeyBank to Bank of America recorded on January9, 2012; the ratification of the January 2012 assignment recorded on March 6, 2015; the recorded assignment of the mortgage from Bank of America to KeyBank dated October 10, 2012; and the notice of default and right to cure issued to Kilton and Quint by KeyBank in August 2015. The complex liaison testified that an allonge affixed to the promissory note transferred the note to “Bank of America, N.A. as Successor by Merger to BAC Home Loans Servicing, LP fka Countrywide Home Loans Servicing, LP,” but was later voided.

Pursuant to the business records exception to the hearsay rule, M.R. Evid. 803(6), KeyBank moved to admit exhibit seven, which consisted of screenshots from PHH’s computer system purporting to show the amounts owed, the costs incurred, and the outstanding principal balance on Kilton and Quint’s loan. Kilton objected, arguing that PHH’s records were based on the records of prior servicers and that KeyBank had not established that the witness had knowledge of the record-keeping practices of either Bank of America or Countrywide. The court determined that the complex liaison’s testimony was insufficient to admit exhibit seven pursuant to the business records exception.

KeyBank conceded that, without exhibit seven, it would not be able to prove the amount owed on the loan, which KeyBank correctly acknowledged was an essential element of its foreclosure action. [e.s.] [Editor’s Note: This admission that they could not prove the debt any other way means that their witness had no personal knowledge of the amount due. If the debt was in fact due to Keystone, they could have easily produced a  witness and a copy of the canceled check or wire transfer receipt wherein Keystone could have proven the debt. Keystone could have also produced a witness as to the amount due if any such debt was in fact due to Keystone. But Keystone never showed up. It was the servicer who showed up — the very party that could have information and exhibits to show that the amount due is correctly proffered because they confirmed the record keeping of “Countrywide” (whose presence indicates that the loan was subject to claims of securitization). But they didn’t because they could not. The debt never was owned by Keystone and neither Countrywide nor PHH ever had authority to “service” the loan on behalf of the party who owns the debt.]

the business records will be admissible “if the foundational evidence from the receiving entity’s employee is adequate to demonstrate that the employee had sufficient knowledge of both businesses’ regular practices to demonstrate the reliability and trustworthiness of the information.” Id. (emphasis added).

 

With business records there are three essential points of reference when several entities are involved as “lenders,” “successors”, or “servicers”, to wit:

  1. The records and record keeping practices of the initial “lender.” [If there are none then that would point to the fact that the “lender” was not the lender.] Here you are looking for the first entries on a valid set of business records in which the loan and fees and costs were posted. Generally speaking this does not exist in most loans because the money came a third party source who knows nothing of the transaction.
  2. The records and record keeping practices of any “successors.” Note that this is a second point where the debt is separated from the paper. If a successor is involved there would correspondence and agreements for the purchase and sale of the debt. What you fill find, though, is that there is only a naked endorsement, assignment or both without any correspondence or agreements. This indicates that the paper transfer of any rights to the “loan” was strictly for the purpose of foreclosing and bore new relationship to reality — i.e., ownership of the debt.
  3. The records and record keeping practices of any “servicers.” In order for the servicer to be authorized, the party owning the debt must have directly or indirectly given authorization and come to an agreement on fees, as well as given instructions as to what functions the servicer was to perform. What you will find is that there is no valid document from an owner of the debt appointing the servicer or giving any instructions, like what to do with the money after it is collected from homeowners. Instead you find tenuous documentation, with no correspondence or agreements, that make assertions for foreclosure. The game of musical chairs has bothered judges for a decade: “Why do the servicers keep changing” is a question I have heard from many judges. The typical claims of authorization are derived from Powers of Attorney or a Pooling and Servicing agreement for an entity that neither e exists nor does it have any operating history.

SIGTARP HAMP FINDINGS: SERVICERS REVOKING COMPLIANT HAMP PLANS

Why are modifications being undermined when they would so obviously preserve the value of the “loan?” The answer is because the real party in interest in the foreclosures is the servicer, not the trust, which doesn’t own the loan anyway, nor even the investor/beneficiaries, who reap very little out of the proceeds of foreclosure.

The servicer wants the loan to fail. The investor expects the servicer and trustee of the REMIC trust to make sure value is preserved. But that isn’t the game. If the property goes to foreclosure sale then the “servicer” can make its claim for “recovery” of “servicer advances.” The fact that “servicer advances” are made from a pool of funds established by investor money and the fact that the servicer accesses these funds to make payments, regardless of whether the borrower pays or not — all of that makes no difference in the game.

In that context a modified loan is worthless. A failed loan is the gold standard.

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HAMP Modifications Sabotaged to Fail by the Usual Suspects

By William Hudson

https://www.sigtarp.gov/Audit%20Reports/Homeowners_Wrongfully_Terminated_Out_of_HAMP.pdf

On January 27, 2016 The Special Inspector General over the Troubled Asset Relief Program (SIGTARP) released data on the poorly executed and enforced Home Affordable Mortgage Program (“HAMP”) that shows that the banks not only have the right to modify loans they don’t own, but have no interest in helping homeowners save their homes through modification when they can set the homeowner up to fail.

HAMP was created to provide sustainable and affordable mortgage assistance to homeowners at risk of foreclosure but has instead forced many homeowners into foreclosure by requiring homeowners to miss payments, revoking approved modifications and a slew of other unethical practices.

The Inspector General writes that, “mortgage servicers administering HAMP will continue to need strict oversight in upcoming years because apparently the servicers are unable to implement and properly administer the program without resorting to sabotaging compliant homeowners.”

The audit notes that  the “largest seven mortgage servicers in HAMP over the most recent four quarters show disturbing and what should be unacceptable results, as 6 of 7 of the mortgage servicers had wrongfully terminated homeowners who were in “good standing”  with their HAMP modifications.”

These failure rates demonstrate that servicer misconduct is continuing to contribute to homeowners falling out of HAMP by terminating the agreement when homeowners are making timely payments.  This practice is an obvious attempt to put homeowners at risk of losing their home so that when the foreclosure occurs, the servicer can swoop in and steal the home while keeping all of the homeowner’s equity, payments and improvements.

This study provides further documentation that homeowners are being forced out of the HAMP program for no reason and that servicers are using HAMP as another tool to steal homes.  If the servicer can keep the homeowner in a state of vulnerability, create further arrearages and provide the homeowner contradictory and confusing information- their chances of taking back the home increase exponentially. This is the modification business model of the major loan servicers.

The servicers are running the show and the government is apparently impotent to stop them from their illegal tactics. The treasury admits that they have no idea how many other homeowners were forced out of HAMP.  I can attest that I was one of the homeowners forced out of a loan modification in which I was 100% compliant. For a year I repeatedly applied for modifications, sending in documentation and spending hours and hours going through CitiMortgage’s futile application process.  Either CitiMortgage representatives are completely incompetent or their modification process is intentionally set-up to create such a diabolical application process that most borrowers give up.

Thirteen applications later and a year later I was granted an “approved repayment plan” that required three timely payments before becoming permanent.  If all three payments were made  by the first of each month I would be given a permanent modification with no need for further qualification.  After making the third timely payment by certified mail I didn’t hear back from CitiMortgage. By then I was familiar with their lack of competence and accountability so I continued to make payments hoping I would hear from them any day.

When I received the “approved repayment plan” I celebrated thinking that I was finally free from seven years of servicer torment.  The modification would allow me to immediately sell the home in which I had several buyers- and make Citi 100% whole including being paid over 15k in fees they had assessed.  At the time I received the loan modification I had over 100k in equity.  I would have paid CitiMortgage any amount they claimed I owed to be free of their tyrannical servicing practices.

Not trusting CitiMortgage to honor their word- I called CitiMortgage and once again confirmed that “approved” meant “approved” and that I could prepare the home for sale. The CitiMortgage agent promised me that as long as all three payments were made it was a done deal.  I didn’t want any surprises down the road if they changed their minds.  The home needed some updating prior to being placed on the market so I took 35k from my retirement account and went to work renovating the home top to bottom.  By the time my third payment was made I had a beautifully restored home and two anxious buyers for the property.  I was close to grasping the golden ring…..until CitiMortgage grasped the ring right out of my hands.

When I didn’t hear from Citimortgage I continued to make the modification payments for three more months while waiting to hear from them about the new loan terms. Unbeknownst to me the modification payments I had made were not being applied to my loan but placed in a suspense account while CitiMortgage was continuing to add on late payments and other delinquent fees.  I had not agreed to this arrangement but was powerless to complain.

I finally received a letter from CitiMortgage stating my check (my fifth payment) was being returned to me with no reason provided. I knew CitiMortgage was up to something, so I checked the internet to discover that CitiMortgage was dual-tracking me and had filed to foreclose on me while compliant with the modification plan. To add further injury,  I received two more offers from CitiMortgage that week offering to modify my loan! CitiMortgage did not want full payment- they wanted my house and the financial windfall that follows a successful foreclosure.

It has now been six years and the house has sat vacant since Citi revoked my modification.  All the work I did has been reversed by humidity and vacancy.  I no longer have any equity in the property.  I sued CitiMortgage over this egregious bait and switch scheme and even provided evidence to the court that I was granted an “approved repayment plan” with no contingencies.  The judge in my case, with 20 percent of his retirement in CitiMortgage, did not recuse himself but instead threw out my entire complaint and provided no reason for his decision.  Not only did CitiMortgage get away with this fraud, the corrupt judge dismissed my case on summary judgement stating there was no controversy.  Even when you have irrefutable evidence of fraud- if you have a biased and unethical judge you will not prevail.   I reported my experience to SigTarp, the CFPB, FCC and the Office of the Comptroller- and not one agency bothered to respond to my complaint or sanction CitiMortgage for this blatant contract violation.  I requested that CitiMortgage return the modification payments they fraudulently extorted from me- and of course they refused.

My situation appears to be the norm, not the exception.  SigTarp reported that one out of every three homeowners in HAMP re-defaults on their payments. They suggest that the Treasury, “research and analyze whether, and to what extent, the conduct of HAMP mortgage servicers contributed to homeowners redefaulting on HAMP permanent mortgage modifications.”  I can tell them from experience that examining the behaviors and motivations of the servicers would be a great place to start. I can almost guarantee in most modification cases that it isn’t the homeowner who defaults.  In the first place, a homeowner who prevails in obtaining a loan modification may work diligently for years before being granted a modification and persevere against great odds! I would estimate I spent around 45 hours on the phone, faxing and following up with CitiMortgage before receiving my modification.  In fact, dealing with CitiMortgage became my occupation.  The homeowner who receives a modification, in most cases, has fought a long and hard battle for the modification and has no idea that the bank can refuse to honor the agreement.

To get the true story about what is going on, the Treasury could begin by sending out questionnaires to prior homeowners in HAMP that were compliant when their modifications were revoked for no other reason than the servicer wanting to take another stab at stealing the home.  SIGTARP’s concerns over servicer misconduct contributing to homeowner redefaults in HAMP was revealed through the Treasury’s on-site visits to the largest seven mortgage servicers in HAMP over the last year and apparently reveal disturbing and unacceptable results, finding that 6 of 7 of the mortgage servicers had wrongfully terminated homeowners who were in “good standing”.

It doesn’t take a rocket scientist to assume that servicers are up to their same old tricks and forcing compliant homeowners out of HAMP.  Servicers have no incentive to not unjustly enrich themselves at the expense of the homeowner when a successful foreclosure is more lucrative than modifying a mortgage.  The usual six non-compliant culprits are named in the report:

WRONGFUL TERMINATIONS OF HOMEOWNERS FROM HAMP BY SERVICERS:

Q4 2014 TO Q3 2015    

Servicer                                       Wrongful Termination of Homeowner  From HAMP

Bank of America, N.A.                                        X

CitiMortgage Inc                                                  X

JPMorgan Chase Bank, N.A.                              X

Nationstar Mortgage LLC                                    X

Ocwen Loan Servicing, LLC                               X

Select Portfolio Servicing, Inc.

Wells Fargo Bank, N.A.                                       X

According to SIGTARP, homeowners who make their modified mortgage payments on time, or who do not fall three months behind on those payments are entitled to remain in HAMP. However, the Treasury’s results found that, within the last year, Bank of America,CitiMortgage, JP Morgan Chase, Nationstar, Ocwen and Wells Fargo all claimed that homeowners had redefaulted out of HAMP by missing three payments when, in reality, they had not.

These six mortgage servicers account for 74% of non-GSE HAMP modifications funded by TARP since the start of the program. Upon further reading, and despite the fact that the Treasury has done nothing to stop this misconduct, the servicers are engaging in a process of holding the homeowner’s payments in suspense accounts (so they can continue accruing late fees and other delinquent charges), reversing and reapplying the homeowner’s payments improperly and terminating homeowners who have not defaulted on the required three payments.

This misconduct is also probably much larger in scale than it appears because the Treasury only samples 100 redefaulted homeowners per servicer each quarter.  It is possible that the number of homeowners impacted is much, much larger.  This has been going on since the inception of the program and the Treasury’s response over time has been anemic and unresponsive.  The servicers appear to have an understanding that if they don’t comply there is no consequence other than a little bad publicity (as if a little more bad publicity would impact them at this point).

The potential profit of a fraudulent foreclosure is incentive enough to kick compliant homeowners out of the HAMP program. It should be known that many of the servicers making offers to modify do not have legal standing to make an offer to modify the loan in the first place and are simply engaging in a process to get the homeowner further into default.

In my particular case, all I wanted was to modify my mortgage, sell my home, and go forward with my life.  CitiMortgage did NOT want payment- they WANTED the HOME and used modification as a tool to  obtain this goal.  A modification is nothing short of a tool of deception used by servicers to steal a home.  Servicers use modification for these purposes:

1.  Intimidate the unsophisticated or vulnerable Homeowner- Create Fear and Confusion by processes of circular phone transfers, lost documents, false claims, conflicting messages and blatant lies.

2. Time Destruction- Time spent in modification compromises other available options like refinancing, a short sale or hiring an attorney.  A consumer’s options diminish as time goes by. It is to the bank’s benefit to not modify the loan but to paint the homeowner into a corner.

3. Equity Erosion- Every month while in a modification the equity in the home is eroded by late fees and other charges the consumer is not advised about in advance.

4. Payment Hostage- The servicer retains the monthly modification payment in a suspense account.  These funds then cannot be used for a more beneficial purpose like retaining an attorney or refinancing. The consumer is not told that the payment will not be applied to their mortgage or if the modification fails that the payments will not be returned.

5. Dual-Tracking- A homeowner in the process of modifying their mortgage or who has an approved modification may be subsequently foreclosed upon in violation of law.

6. Government Kickbacks- Servicers who engage in the modification process receive compensation for each modification attempt and successful modification.  Servicers are accepting government payments (from tax payers) only to sabotage modifications.

The time has come for a full investigation into the behavior of loan servicers.  Not only do servicers make offers to modify loans they have no legal right to modify, but they engage in fraudulent practices that are not in the best interest of the homeowner, investor or community.  This article won’t get into the fact that servicers lie about their relationship to the loan, the balance owed and need to be heavily fined and sanctioned for forging documents, filing false affidavits and other criminal acts.  The bottom line is that a servicer is incentivized to lie, to cheat and to steal by a lack of governmental oversight and by the  potential windfall of profits that occur upon a successful foreclosure (including insurance, “servicer advances” and other compensation).  The bank has bet your mortgage will fail, and you can bet they will resort to every trick in the book to take your home including the use of faux modifications.

It is ironic that two months ago I received a letter from CitiMortgage offering to modify again.  This is despite the fact that the note and mortgage were rescinded under TILA.  I’m not sure what CitiMortgage thinks they are going to modify now that the note and mortgage are void by operation of law- but why would I expect rogue servicer CitiMortgage to comply with any state or federal law?

Advice: Your servicer is not your friend and will act only in their best interest.

I have attached copies of my “approved repayment plan” as evidence of the modification agreement.

If you would like to share your modification story with us please email us at: lendingliesconsulting@gmail.com.  We would like to hear about your experiences.

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Repayment Plan One cleanRepayment Plan Two clean

Bank Business Model is Foreclosure NOT “Repayment”

For further information or assistance please call 954-495-9867 or 520-405-1688.

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see http://newswire.net/newsroom/pr/00088375-6-tricks-banks-use-to-drive-homeowners-into-foreclosure.html

For many years it has been apparent most observers of the mortgage crisis that the Banks have switched their traditional role of creditor seeking to get paid to something else — a “servicer” or “Trustee” seeking foreclosure. in fact, in multiple cases where the homeowner has had sufficient funds to pay off the “debt” upon proof of ownership and balance, the banks have actually argued in court that they should not be required to accept the money. They argue that is their election to seek foreclosure. Judges did not agree, but they still are pursuing a business model of exactly that — seeking foreclosure rather than payment.

An important quote from the above article strips the tip off of the iceberg —

When a bank assigns the risk of a loan to the investors of a securitized trust, the “bank” is no longer a traditional bank that gets the benefit when mortgage payments are made.  Instead, the bank has become a servicer that actually benefits disproportionately from foreclosure on a homeowner’s property.

Note the language that says at some point the Banks decide where to assign the risk of loss to investors. It is only after they have sold the loans, obtained insurance payments, Government funds, credit default swap bets, and other things that make every loan a virtual fountain of money. This also suggests that the risk of loss had not been assigned to investors before which means by definition in most cases that the alleged transfer to the trust was an illusion.

[PRACTICE HINT FOR LAWYERS: Given that it may be possible to show that the servicer has an economic interest in the outcome, and that its interest is enhanced by foreclosure rather than modification or settlement, the foreclosure defense lawyer might argue that the servicer is not entitled to the same presumptions that would apply to a “disinterested party.” And that can lead you into forcing them to prove the real facts instead of having the court accept presumed “facts” that are actually false.]

The article states

Most homeowners are unaware that their mortgage banks make more money from foreclosure than actual payment.  Mortgage banks give as few modifications as possible and comply minimally with statutes put in place to protect borrowers, all while employing tricks to “cash in” on homeowners’ defaults, pushing them to foreclosure.  The banks take the risk of litigation because few people sue, but getting legal assistance as soon as possible can make the difference between homeowners asserting their rights or losing their homes while being bulldozed by the bank.

In other words the banks know that they have no right foreclosing and that they are gaming the system pretending to be lenders, servicers or trustees for essentially nonexistent trusts. And they know they will lose some cases. And in some cases the sanctions or punitive damage awards is in the millions of dollars. But it doesn’t matter. The fact remains that they are still successfully pushing through wrongful foreclosures by the thousands for each one they lose. And since it is not their money at risk, this is a perfectly acceptable business model.

So the article points to 6 common tricks that banks sue to push homeowners into foreclosure. These tricks work because on some level most borrowers still trust the bank’s representations of ownership and balance and don’t think to challenge the basic foundation of the party claiming to be servicer or trustee or owner of the debt. There is no default if the alleged debt never existed. That doesn’t mean you didn’t get a loan. But ti does mean that you didn’t get the loan that is referenced in the closing documents including the note and mortgage.

The six tricks:

Bank Trick #1:  Refusing Payments

Bank Trick #2:  Switching Service[r]s During Modification

Bank Trick #3:  Breaching a Modification Contract

Bank Trick #4:  Extra Fees & Escrow Accounts

Bank Trick #5:  False Notices [like including an amount required to reinstate that is completely without any basis]

Bank Trick #6:  Multiple Modifications

Foreclosure is clearly the fattest pot of gold possible and it’s for this reason foreclosure is the bank’s primary goal.

If a homeowner spots any of the above tricks, the best thing to do is immediately seek legal assistance in order to avoid the situation from getting any worse.

Barofsky: We Are Headed for a Cliff Because of Housing

Editor’s Note: Hera research conducted an interview with Neil Barofsky that I think should be  read in its entirety but here the the parts that I thought were important. The After Words are from Hera.

After Words

According to Neil Barofsky, another financial crisis is all but inevitable and the cost will be even higher than the 2008 financial crisis. Based on the way that the TARP and HAMP programs were implemented, and on the watering down of the Dodd-Frank bill, it appears that big banks are calling the shots in Washington D.C. The Dodd-Frank bill left risk concentrated in a few large institutions while doing nothing to remove perverse incentives that encourage risk taking while shielding bank executives from accountability. Neither of the two main U.S. political parties or presidential candidates are willing to break up “too big to fail” banks, despite the gravity of the problem. The assumption that another financial crisis can be prevented when the causes of the 2008 crisis remain in place, or have become worse, is unrealistic. In the mean time, what Mr. Barofsky describes as a “parade of scandals” involving highly unethical and likely criminal behavior is set to continue unabated. Although the timing and specific areas of risk are not yet known, there is no doubt that U.S. taxpayers will be stuck with another multi-trillion dollar bill when the next crisis hits.

*Post courtesy of Hera Research. Hera Research focuses on value investing in natural resources based on original geopolitical, macroeconomic and financial market analysis related to global supply and demand and competition for natural resources

Excerpts from Interview:

HR: Did the TARP help to restore confidence in U.S. institutions and financial markets?

Neil Barofsky: Yes, but it was intended and required by Congress to do much more than that and Treasury said that it was going to deploy the money into banks to increase lending, which it never did.

HR: Were the initial goals of the TARP realistic?

Neil Barofsky: First, if the goals were unachievable, Treasury officials should never have promised to undertake them as part of the bargain. Second, even if the goals were not entirely achievable, it would have been worth trying. Treasury officials didn’t even try to meet the goals.

HR: Can you give a specific example?

Neil Barofsky: The justification for putting money into banks was that it was going to increase lending. Having used that justification, there was an obligation, in my view, to take policy steps to achieve that goal, but Treasury officials didn’t even try to do it. The way it was implemented, there were no conditions or incentives to increase lending.

HR: What policy steps could the U.S. Department of the Treasury have taken to help the economy?

Neil Barofsky: There are all sorts of things that Treasury could have done. For example, they could have reduced the dividend rate—the amount of money that the banks had to pay in exchange for being bailed out—for lending over a baseline, which would have decreased the bank’s obligations. Or, they could have insisted on greater transparency so that banks had to disclose what they were doing with the funds. Treasury chose not to do any of these things.

HR: Weren’t there other housing programs like the Home Affordable Modification Program (HAMP)?

Neil Barofsky: Yes, but there were choices made to help the balance sheets of struggling banks rather than homeowners. The HAMP program was a massive failure but it wasn’t preordained. It was the result of choices made by Treasury officials.

HR: What could have been done differently in the HAMP?

Neil Barofsky: HAMP was deeply flawed with conflicts of interest baked into the program. The management of the program was outsourced to the mortgage servicers, which were thoroughly unprepared and ill equipped. The program encouraged servicers to extend out trial modifications. It was supposed to be a three month period but it often turned into more than a year. The servicers, because they could accumulate late fees for each month during the trial period, were incentivized to string the trial periods out then pull the rug out from under the homeowner, putting them into foreclosure, without granting a permanent mortgage modification. The servicers could make more money doing that then by doing mortgage modifications. If they had done permanent mortgage modifications, the banks couldn’t have kept the late fees.

HR: Are you saying that the program encouraged banks to extract as much cash as possible from homeowners before foreclosing on them anyway?

Neil Barofsky: Yes. The mortgage servicers exploited the conflicts of interest that were in the program, and blatantly broke the rules, and Treasury did nothing.

HR: When you were serving as Inspector General for TARP, you issued a report indicating that government commitments totaled $23.7 trillion. What was that about?

Neil Barofsky: $23.7 trillion was simply the sum of the maximum commitments for all the financial programs related to the financial crisis. The number was misconstrued as a liability but the government never stood to lose that much. For example, the government guarantee of money market funds was a multi-trillion dollar commitment. Of course, not all of that money could have been lost because it would have required every fund to go to zero. The government guaranteed commercial paper but, again, for that commitment to have been wiped out, every company would have had to have defaulted. But the numbers were very important in terms of transparency. All of the data were provided by the agencies responsible for the various programs, so the $23.7 trillion number was simple arithmetic. It was important to understand the scope of the extraordinary actions that were being taken.

HR: What are the potential future losses that the U.S. government—that taxpayers—might have to absorb?

Neil Barofsky: The real issue is the potential for another financial crisis because we haven’t fixed the core problems of our financial system. We still have banks that are “too big to fail.” Standard & Poor’s estimated last year that the up-front cost of another crisis, including bailing out the biggest banks yet again, would be roughly 1/3 of the U.S. gross domestic product (GDP) or about $5 trillion. The resulting problems will be even bigger.

HR: What were the problems resulting from the 2008 financial crisis?

Neil Barofsky: When you look at the fiscal impact of the 2008 crisis, you have to look at it not only in terms of lost tax revenues and increased government debt, but also in terms of the loss of household wealth. People who became unemployed suffered tremendous losses and the government’s social benefit costs expanded accordingly. One of the reasons we had the debt ceiling debate last year, when the U.S. credit rating was downgraded, and why we are facing a fiscal cliff ahead is the legacy of the 2008 crisis.

We have a lot less dry powder to deal with a new crisis and we almost certainly will have one.

HR: Why do you expect another financial crisis?

Neil Barofsky: It just comes down to incentives. A normally functioning free market disciplines businesses. The presumption of bailout for “too big to fail” institutions changes the incentives of a normally functioning free market. In a free market, if an institution loads up on risky assets with too little capital standing behind them, it will be punished by the market. Institutions will refuse to lend them money without extracting a significant penalty. Counterparties will be wary of doing business with companies that have too much risk and too little capital. Allowing “too big to fail” institutions to exist removes that discipline. The presumption is that the government will stand in and make the obligations whole even if the bank blows up. That basic perversion of the free market incentivizes additional risk.

HR: Are “too big to fail” banks taking more risks today than they did before?

Neil Barofsky: Bailouts give bank executives an incentive to max out short term profits and get huge bonuses, because if the bank blows up, taxpayers will pick up the tab. The presumption of bailout increases systemic risk by taking away the incentives of creditors and counterparties to do their jobs by imposing market discipline and by incentivizing banks to act in ways that make a bailout more likely to occur.

HR: Is it just a matter of the size of banking institutions?

Neil Barofsky: The big banks are 20-25% bigger now than they were before the crisis. The “too big to fail” banks are also too big to manage effectively. They’ve become Frankenstein monsters. Even the most gifted executives can’t manage all of the risks, which increases the likelihood of a future bailout.

HR: Since bank executives are accountable to their shareholders, won’t they regulate themselves?

Neil Barofsky: The big banks are not just “too big to fail,” they’re ‘too big to jail.’ We’ve seen zero criminal cases arising out of the financial crisis. The reality is that these large institutions can’t be threatened with indictment because if they were taken down by criminal charges, they would bring the entire financial system down with them. There is a similar danger with respect to their top executives, so they won’t be indited in a federal criminal case almost no matter what they do. The presumption of bailout thus removes for the executives the disincentive in pushing the ethical envelope. If people know they won’t be held accountable, that too will encourage more risk taking in the drive towards profits.

HR: So, it’s just a matter of time before there’s another crisis?

Neil Barofsky: Yes. The same incentives that led to the 2008 crisis are still in place today and in many ways the situation is worse. We have a financial system that concentrates risk in just a handful of large institutions, incentivizes them to take risks, guarantees that they will never be allowed to fail and ensures that the executives will never be held accountable for their actions. We shouldn’t be surprised when there’s another massive financial crisis and another massive bailout. It would be naïve to expect a different result.

HR: Didn’t the Dodd-Frank bill fix the financial system?

Neil Barofsky: Nothing has been done to remove the presumption of bailout, which is as damaging as the actual bailout. Perception becomes reality. It’s perception that ensures that counterparties and creditors will not perform proper due diligence and it’s perception that encourages them to continue doing business with firms that have too much risk and inadequate capital. It’s perception of bailout that drives executives to take more and more risk. Nothing has been done to address this. The initial policy response by Treasury Secretaries Paulson and Geithner, and by Federal Reserve Chairman Bernanke, was to consolidate the industry further, which has only made the problems worse.

HR: The Dodd-Frank bill contains 2,300 pages of new regulations. Isn’t that enough?

Neil Barofsky: There are tools within Dodd-Frank that could help regulators, but we need to go beyond it. The parade of recent scandals and the fact that big banks are pushing the ethical and judicial envelopes further than ever before makes it clear that Dodd-Frank has done nothing, from a regulatory standpoint, to prevent highly unethical and likely criminal behavior.

HR: Is the Dodd-Frank bill a failure?

Neil Barofsky: The whole point of Dodd-Frank was to end the era of “too big to fail” banks. It’s fairly obvious that it hasn’t done that. In that sense, it has been a failure. Dodd-Frank probably has been helpful in the short term because it increased capital ratios, although not nearly enough. If we ever get over the counter (OTC) derivatives under control, that would be a good thing and Dodd-Frank takes some initial steps in that direction. I think that the Consumer Financial Protection Bureau is a good thing.

Nonetheless, the financial system is largely in the hands of the same executives, who have become more powerful, while the banks themselves are bigger and more dangerous to the economy than before.

HR: How are OTC derivatives related to the risk of a new financial crisis?

Neil Barofsky: Credit default swaps (CDS) were specifically what brought down AIG, and synthetic CDOs, which are entirely dependent on derivatives contracts, contributed significantly to the financial crisis. When you look at the mind numbing notional values of OTC derivatives, which are in the hundreds of trillions, the taxpayer is basically standing behind the institutions participating in these very opaque and, potentially, very dangerous markets. OTC derivatives could be where the risks come from in the next financial crisis.

HR: Can anything be done to prevent another financial crisis?

Neil Barofsky: We have to get beyond having institutions, any one of which can bring down the financial system. For example, Wells Fargo alone does 1/3rd of all mortgage originations. Nothing can ever happen to Wells Fargo because it could bring down the entire economy. We need to break up the “too big to fail” banks. We have to make them small enough to fail so that the free market can take over again.

HR: Does the political will exist to break up the largest banks?

Neil Barofsky: The center of neither party is committed to breaking up “too big to fail” banks. Of course, pretending that Dodd-Frank solved all our problems, as some Democrats do, or simply saying that big banks won’t be bailed out again, as some Republicans have suggested, is unrealistic. Congress needs to proactively break up the “too big to fail” banks through legislation. Whether that’s through a modified form of Glass-Steagall, size or liability caps, leverage caps or remarkably higher capital ratios, all of which are good ideas, we need to take on the largest banks.

HR: Do you think the U.S. presidential election will change anything?

Neil Barofsky: No. There’s very little daylight between Romney and Obama on the crucial issue of “too big to fail” banks. Romney recently said, basically, that he thinks big banks are great and the Obama Administration fought against efforts to break up “too big to fail” banks in the Dodd-Frank bill. Geithner, serving the Obama White House, lobbied against the Brown-Kaufman Act, which would have broken up the “too big to fail” banks.

HR: What will it take for U.S. lawmakers to finally take on the largest banks?

Neil Barofsky: Some candidates have made reforms like reinstating Glass-Steagall part of their campaigns but the size and power of the largest banks in terms of lobbying campaign contributions is incredible. It may well take another financial crisis before we deal with this.

HR: Thank you for your time today.

Neil Barofsky: It was my pleasure.

Deutsch: Trustee in name only

TOO BIG TO GO TO JAIL?!?
For information on seminars and legal representation in Northern California please call our customer service line at 520-405-1688. Neil is now directly involved in assisting the attorneys plead an script these cases. A new seminar in Auburn, CA which focuses on the bankruptcy venue, is soon to be announced.
Editor’s Comment: Echoing the analyses presented here over the last few weeks, our senior securitization analyst wrote me this note which corroborates the basic assumption that everything is upside down. In the recorded words of Reynaldo Reyes at Deutsch — “it is all very counter-intuitive.” It is also wrong, illegal and probably criminal.
That is a euphemistic way of referring to a shell game that is covering up the largest Ponzi scheme in human history — and one which is still on-going because regulators and law enforcement either refuse to see it or simply don’t have the resources to study it.
We are left with the appearance of a REMIC — the equivalent of what I once called a holographic image of an empty paper bag. We have a paper trust that is both unfunded and in which there are no assets, that was routinely ignored by the investment bankers who directed them to be written but not used. We have beneficiaries who think they are holding asset-backed mortgage bonds when there are no assets to back up the bonds because the bonds were issued by the empty trust. Investors are paid out of their own money and the sale of new “mortgage bonds.” Classic PONZI.
Then as Dan so simply explains it, you have a paper “trustee” over the paper trust, where the paper trustee has been stripped of all powers — powers that are 100% delegated (back to the banks acting as servicers) in the documents written for the trust, unless the investors say otherwise, but there is no way for investors to identify other investors in the paper trust in order to compare notes and give instructions to the trustee.
Same as the homeowner who has kept asking “which trust owns my loan.” The answer is that none of them do. The banks don’t own the loan either. It is the investors who own the loan receivable, but the loan receivable is neither documented nor secured.
Everything else is just paper and ink that didn’t matter to the investment banks who were creating servicing entities and other exotic vehicles through which they could “trade” loans that didn’t belong to them, receive insurance on losses they didn’t have, get federal bailouts on lies about mortgage defaults when it was only the threat of NOT receiving an undeserved windfall that the banks were worried about — 100 cents on the dollar for loans and fictitious pools for each insurance or CDS contract they purchased — using the investors money.
As Dan points out, the entire scam comes back to one thing, as it always does in an illegal fraudulent scheme — control was by the banks who should have only served as intermediaries both on paper and in action. They did neither. They posed as the investor when it suited them and even changed MERS records to show that, as if it were true. They posed as owners of an obligation from homeowners when they neither funded nor purchased the loans.
AND they convinced Judges that millions of foreclosures should be allowed where the bank acting for itself and on behalf of the paper trust, submitted a credit bid from entities that never had any money or assets, much less ownership of the loan receivable.
The plain simple truth is that if you compare what should have been done if this was honest dealing, is that the money invested would have gone into the pool (REMIC, SPV, Trust) and the used to fund mortgages. Instead the money went elsewhere and no loans were assigned into the pool, the mortgage bonds were worthless, and the complexity of the fraud has so far been too daunting for law enforcement and regulators to step in.
If this was a legal transaction in which the  intent of the investment banks was honest, the instructions to the closing agent and the documents and disclosures would have the name of the pool all over them. Instead they put in the names of entities who were neither acting as brokers nor lenders. And the purpose of the banks was to “borrow” the funds from one end and “borrow” the fraudulent documents on the other end and trade for their own benefit. Obama’s advisers are just plain wrong when they tell him that the transactions were bad or wrong, but legal under existing laws and regulations.
I still believe that law enforcement and regulators are both stepping in and getting their ducks in a row. Unraveling something this complex on paper, requires a solid foundation of knowledge in which they can ignore the paperwork just like the banks did. After that it becomes clear that this is just another Ponzi scheme based upon tens of millions of fraudulent documents were produced supporting tens of millions of transactions that were never completed in which tens of millions of recorded documents lie ticking like a time bomb in the county recorders’ offices, only to surface later as a blight on a corrupted title system.
From Dan:
Here is how out of control the situation is. The Trustee (Deutsche in this case) has serious concerns over the servicing and foreclosure activity of the servicers.  Deutsche has (by contract) given control to the servicers.  Deutsche has no ability to interfere with what the servicers are doing (unless instructed by the investors). [Editor’s Note: But they knew this going in meaning they were accepting “trustee” fees without acting as trustees, which is why these paper trusts were never administered from the trust department of ANY of the banks alleging they are trustees for the on-existent trusts. An unfunded trust is no trust at all. It is fictitious.]
On the other side, Deutsche is constrained and cannot exercise control over the servicers unless and until a certain percentage of the investors give written authorization and agree to indemnify Deutsche. [Editor’s Note: That percentage can only be reached when the investors know who the other investors are. So far the banks have succeeded in keeping most of the information secret — as both investors and homeowners unravel the mystery of vanishing documents and money in flight]
The scenario created by Wall Street is a sinking ship that does not allow the officers of the ship (Deutsche), to interfere with workers repairing a hole in the bottom of the ship, unless the ship owners (the investors) get together and give them (the officers) written authorization to remediate the actions of the workers.
This ship is going down and there is no stopping it. [Editor’s Note: When those “assets” on the balance sheets of the mega banks turn out to be at best worthless and at worst fraudulent, the bank’s financial condition will be changed from viable to impossible and they will be broken up. But as Iceland showed us clearly, the other banks pick up the pieces, the household debt is reduced forcing the banks to cooperate, and as much money as possible is returned to the investors who were the first victims in this fraudulent PONZI scheme]
This type of contractual relationship is against public policy and should be unenforceable.
Once again, the principal is not exercising any control over the agent (investors and trustee).
Once again, the principal is not exercising any control over the agent (trustee and servicers).
Once again, the principal is not exercising any control over the agent (foreclosure trustee and beneficiary).  In fact the foreclosure trustee does not even know who the beneficiary is.
Thx,
Office: 530.392.4681

Yves Smith Nails Obama on Failed Housing Policies

Editor’s Note: Yves wrote the piece I was going to write this morning. See link below. The salient points to me are mentioned below with comments. The principal point I would make is that Obama has been listening to people who are listening to Wall Street. The Wall Street spin is that this is just another housing bust. It isn’t. It is massive Ponzi scheme that was well-planned and executed with precision, sucking the life out of our economy. Normally Ponzi schemes (see Drier or Madoff) don’t get big enough to have that effect.

The bottom line is that the banks took money from investors under false pretenses and diverted the proceeds into their own pockets.

In order to cover that up they created false documents with false lenders and false secured parties, false creditors and false beneficiaries. They borrowed money from the lenders, then borrowed the identity of the lenders to declare it was the banks who were losing money from mortgage “defaults”, to receive proceeds of payouts from subservicers, payouts from insurance, payouts from credit default swaps and payouts from federal bailouts.

The plain fact is that under normal black letter law, the notes and mortgages were faked at origination based upon the false premise that the actual lender was named or protected. That was a lie. The loans are not secured and the investors have a mess on their hands figuring out who has what claim to what loan so they are suing the investment banks instead of going after the homeowners and striking deals that would undermine the hundreds of trillions of dollars in bets out there that is masquerading as shadow banking.

Instead the investors and the homeowners — the only true parties in interest — got screwed and the administration has yet to correct that basic injustice.

  1.  The proposals for the housing fix were predicated upon the fraud and other illegals activities of the parties in a mythological “securitization” scheme. They were not “unpopular” as Klein observes in the news. They were rejected because wall Street obviously rejected any plan that would take away their ill-gotten gains.
  2. Combat servicing operations using five times the staff of ordinary servicers are doing the work just fine. It was the lack of oversight and regulation that allowed the obfuscation of the truth by the servicers created for the sole purpose of covering up the fraud. These servicers never report the status of the loan receivable to anyone and they probably don’t have access to the loan receivable accounts. In fact, it is quite probable that no loan receivable account actually exists on the books of any creditor who loaned money through the vehicle of bogus mortgage bonds.
  3. Servicers were set up to foreclose, not service and not to assist in modification or settlement. Wall Street needed the foreclosure to be able to say to the investor, OK now the loan and the loss is yours, since we have drained all value out of it. Sorry.
  4. The administration had a ready tool available: enforcing the REMIC statute. They chose not to do this despite the obvious facts in the public domain that the banks were routinely ignoring both the law and the documents inducing investors to invest in non-existent bonds based upon non-existent loans.
  5. The CFPC had not trouble issuing a regulation that defined all parties as subject to regulation. Why did it take the formation of a new agency to do that? Treasury officials from the administration who argued that they had no authority over servicers were wrong and if they had done any due diligence, it would have been obvious that the banks were blowing smoke up their behinds.
  6. There are hundreds of billions of dollars, perhaps trillions of dollars in lost tax revenue that the ITS is not pursuing because the the policy of coddling the scam artists who manufactured this crisis. The deficit exists in large part because the administration has not pursued all available revenue, the bulk of which would have made a huge difference in the dynamics of the American economy and the election.
  7. Refusing the help the  victims by characterizing some of them as undeserving borrowers is like saying that a bank robber should be granted leniency because the bank he robbed was run poorly.
  8. The real issue is the solvency of the large banks which most economists and even bankers agree are in fact too big to manage, far too big to regulate. The administration is taking the view that even if the assets on the balance sheets of the big banks are fake, we can’t let them fail because they would bring the entire system down. That is Wall Street spin. Iceland and other places around the world have proven that is simply not true. The other 7,000 banks in this country would easily be able to pick up the pieces.

Yves Smith on Obama Failed Housing Policies

MERS: No Agency with Undisclosed Rotating “Principals”

THE WASHINGTON SUPREME COURT DECISION WILL BE USED EXTENSIVELY AT THE EMERYVILLE AND ANAHEIM CLE WORKSHOPS.

The Stunning clarity of the decision rendered by the Washington Supreme Court, sitting En Banc, corroborates the statements I have made on this blog and under oath that they might just as well have put the name “Donald Duck” in as the mortgagee or beneficiary.

The argument, previously successful, has been that even if the entity MERS had nothing to do with financial transaction and even if they didn’t know about the transaction because the “knowledge” was all contained on a database that nobody at MERS checked for authenticity or veracity, the instrument was still valid. This coupled with a “public policy”argument that if the courts were to rule otherwise none of the MERS “mortgages” would be valid thus making the creditor unsecured.

The Washington Supreme court rejected that argument and further added that if such was the result, then it was through no fault of the borrower. SO now we have a situation where the law in the State of Washington is that MERS beneficiary instruments do not establish a perfected lien and therefore there is no opportunity to foreclose using either non-judicial or judicial means. A word of caution here is that this applies right now as law only in that state but that it closely follows the Landmark decision in Kansas Supreme Court. But the decision is extremely persuasive and reinvigorates the fight over whether the loans were secured loans or unsecured — especially powerful in bankruptcy courts.

It should be noted that the Washington Supreme Court has wider application than might appear at first blush. This is because the question was certified not from a state judge but from a federal court. Thus in Federal Courts, the decision might be all the more persuasive that MERS, which never had anything to do with the financial transaction, never handled a dime of the money going in or out of the loan receivable account, and never had any person with personal knowledge who could identify and verify that there was a disclosed principal for whom they were acting should be identified as a non-stakeholder with bare (naked) title recited in a fatally defective instrument.

This does not mean the obligation vanishes. It just means that they can’t foreclose through non-judicial foreclosure and probably can’t foreclose even through judicial means unless they accompany it with a request that the court reconstruct the mortgage — in which case they would need to allege and prove that the disclosed parties were the sources of funds for the origination of the loans, which in most cases, they were not.

The actual parties who were the source of funds either still exist or have been settled or traded out into new investment vehicles. This is why putting intense pressure to move the discovery along is so powerful. You are demanding what they should have had when they started the foreclosure timeline with a defective notice of default signed by a person who had no idea what the loan receivable account looked like or even the identity of the party or entity that had the loan booked as a loan receivable.

You’ll remember that MERS issued a proclamation to everyone that nobody should use its name in foreclosures in 2011. But that doesn’t address the underlying fatal defect of the MERS business model and the instruments that recite MERS as the mortgagee or beneficiary.

Th reasoning behind the rejection of the “Agency” argument is also very important. The court states that “While we have no reason to doubt that the lendersand their assigns control MERS, agency requires a specific principal that is accountable for the acts of its agent. If MERS is an agent, its principals in the two cases before us remain unidentified.12 MERS attempts to sidestep this portion of traditional agency law by pointing to the language in the deeds of trust that describe MERS as “acting solely as a nominee for Lender and Lender’s successors and assigns.” Doc. 131-2, at 2 (Bain deed of trust); Doc. 9-1, at 3 (Selkowitz deed of trust.); e.g., Resp. Br. of MERS at 30 (Bain). But MERS offers no authority for the implicit proposition that the lender’s nomination of MERS as a nominee rises to an agency relationship with successor noteholders.13 MERS fails to identify the entities that control and are accountable for its actions. It has not established that it is an agent for a lawful principal.” Hat tip again to Yves Smith on picking up on that before I did.

And the court even went further than that on the issue of modification that I have been pounding on for so long — how can you submit a request for modification with a proposal unless you know the identity of the secured party and the identity of any party or stakeholder who is unsecured? Hoe can anyone settle or modify a claim without knowing the identity of the claimant or the actual status of the claim as affected by payments of co-obligors? “While not before us, we note that this is the nub of this and similar litigation and has caused great concern about possible errors in foreclosures, misrepresentation, and fraud. Under the MERS system, questions of authority and accountability arise, and determining who has authority to negotiate loan modifications and who is accountable for misrepresentation and fraud becomes extraordinarily difficult.”

BUT WAIT! THERE IS MORE! The famed Deutsch bank acting as trustee ruse is also exposed by the court, leaving doubt ( a question of material fact that is in dispute) as to the identity and character of the creditor and the status of the loan. Without those nobody can state with personal knowledge that the principal due is now this figure or that and that the following fees apply. The Supreme Court in the footnotes takes this on too, although it wasn’t argued (but will be in the future I can assure you): “It appears Deutsche Bank is acting as trustee of a trust that contains Bain’s note, along with many others, though the record does not establish what trust this might be.”

The Court also is not shy. It also takes on the notion that the borrower is not entitled to know the identity of the creditor or principal and that the borrower only has a right to know the identity of the servicer. This of course is patently absurd argument. If it were true anyone could assert they were the servicer and you could not look behind that assertion to determine its veracity.

“MERS insists that borrowers need only know the identity of the servicers of their loans. However, there is considerable reason to believe that servicers will not or are not in a position to negotiate loan modifications or respond to similar requests. See generally Diane E. Thompson, Foreclosing Modifications: How Servicer Incentives Discourage Loan Modifications, 86 Wash. L. Rev. 755 (2011); Dale A. Whitman, How Negotiability Has Fouled Up the Secondary Mortgage Market, and What To Do About It, 37 Pepp. L. Rev. 737, 757-58 (2010). Lack of transparency causes other problems. See generally U.S. Bank Nat’l Ass’n v. Ibanez, 458 Mass. 637, 941 N.E.2d 40 (2011) (noting difficulties in tracing ownership of the note).”

And lastly, about making the rules up as you along, and moving the goal posts around, the Court challenges the argument and rejects the MERS position that the parties are free to contract as they choose despite any statutory language. Specifically the question what is what is the definition of a beneficiary. In Washington as in other states, the definitions of the Act apply to all transactions described and there is no room for anyone to change the law by contract. “Despite its ubiquity, we have found no case—and MERS draws our attention to none—where this common statutory phrase has been read to mean that the parties can alter statutory provisions by contract, as opposed to the act itself suggesting a different definition might be appropriate for a specific statutory provision.”

And again corroborating my work and manuals on the livinglies store. the Court finally addresses for the first time that I am aware, the essential reason why all this is so important. It is the auction itself and the acceptance of the credit bid from a non-creditor. Besides the challenges as to whether the substitution of trustee and instructions to trustee are valid, nobody can claim title suddenly born as a result of a “transfer” or assignment” or other document from MERS, an entity that had specifically claimed any interest in the obligation. The Court concludes that you either have the proof of being the actual creditor to whom the obligation is owed, in which case you can submit a credit bid if it is properly secured, or you must pay cash.

“Other portions of the deed of trust act bolster the conclusion that the legislature meant to define “beneficiary” to mean the actual holder of the promissory note or other debt instrument. In the same 1998 bill that defined “beneficiary” for the first time, the legislature amended RCW 61.24.070 (which had previously forbidden the trustee alone from bidding at a trustee sale) to provide:
(1) The trustee may not bid at the trustee’s sale. Any other person, including the beneficiary, may bid at the trustee’s sale.
(2) The trustee shall, at the request of the beneficiary, credit toward the beneficiary’s bid all or any part of the monetary obligations secured by the deed of trust. If the beneficiary is the purchaser, any amount bid by the beneficiary in excess of the amount so credited shall
18
Bain (Kristin), et al. v. Mortg. Elec. Registration Sys., et al., No. 86206-1
be paid to the trustee in the form of cash, certified check, cashier’s check, money order, or funds received by verified electronic transfer, or any combination thereof. If the purchaser is not the beneficiary, the entire bid shall be paid to the trustee in the form of cash, certified check, cashier’s check, money order, or funds received by verified electronic transfer, or any combination thereof. Laws of 1998, ch. 295, § 9, codified as RCW 61.24.070. As Bain notes, this provision makes little sense if the beneficiary does not hold the note.”

Thus this court has now left open the possibility of challenging wrongful foreclosures both in equity and at law for damages (slander of title etc.) It would be hard to believe that Washington State Attorneys won’t pounce on this opportunity to do some good for their clients and themselves.

It’s Down to Banks vs Society

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We are trying to rescue the creditors and restart the world that is dominated by the creditors. We have to rescue the debtors instead before we are going to see the end of this process. — Economist Steve Keen

Bankers Are Willing to Let Society Crash In Order to Make More Money

Editor’s Comment: 

I was reminded last night of a comment from a former bond trader and mortgage bundler that the conference calls are gleeful about the collapse of economies and societies around the world. Wall Street will profit greatly on both the down side and then later when asset prices go so low that housing falls under distressed housing programs and 125% loans become available in bulk. They think this is all just swell. I don’t.

The obvious intent on the part of the mega banks and servicers is to bring everything down with a crash using every means possible. When you look at the offers state and federal government programs have offered for the banks to modify, when you see the amount of money poured into these banks by our federal government in order to prop them up, you cannot conclude otherwise: they want our society to end up closed down not only by foreclosure but in any other way possible. They withhold credit from everyone except the insider’s club.

So now it is up to us. Either we take the banks apart or they will take us apart. I had a recent look at many modification proposals. In the batch I saw, the average offer from the homeowner was to accept a loan 20%-30% higher than fair market value and 50%-75% higher than foreclosure is producing. It seems we are addicted to the belief that this can’t be true because no reasonable person would act like that. But the answer is that the system is rigged so that the intermediaries (the megabanks) control what the investors and homeowners see and hear, they make far more money on foreclosures than they do on modifications, and they make far money on all the “bets” about the failure of the loan by foreclosing and not modifying.

The reason for the unreasonable behavior, as it appears, is that it is perfectly reasonable in a lending environment turned on its head — where the object was to either fund a loan that was sure to fail, or keep a string attached that would declare it as part of a failed “pool” that would trigger insurance and swaps payments.Steve Keen: Why 2012 Is Shaping Up To Be A Particularly Ugly Year

At the high level, our global economic plight is quite simple to understand says noted Australian deflationist Steve Keen.

Banks began lending money at a faster rate than the global economy grew, and we’re now at the turning point where we simply have run out of new borrowers for the ever-growing debt the system has become addicted to.

Once borrowers start eschewing rather than seeking debt, asset prices begin to fall — which in turn makes these same people want to liquidate their holdings, which puts further downward pressure on asset prices:

The reason that we have this trauma for the asset markets is because of this whole relationship that rising debt has to the level of asset market. If you think about the best example is the demand for housing, where does it come from? It comes from new mortgages. Therefore, if you want to sustain he current price level of houses, you have to have a constant flow of new mortgages. If you want the prices to rise, you need the flow of mortgages to also be rising.

Therefore, there is a correlation between accelerating and rising asset markets. That correlation applies very directly to housing. You look at the 20-year period of the market relationship from 1990 to now; the correlation of accelerating mortgage debt with changing house prices is 0.8. It is a very high correlation.

Now, that means that when there is a period where private debt is accelerating you are generally going to see rising asset markets, which of course is what we had up to 2000 for the stock market and of course 2006 for the housing market. Now that we have decelerating debt — so debt is slowing down more rapidly at this time rather than accelerating — that is going to mean falling asset markets.

Because we have such a huge overhang of debt, that process of debt decelerating downwards is more likely to rule most of the time. We will therefore find the asset markets traumatizing on the way down — which of course encourages people to get out of debt. Therefore, it is a positive feedback process on the way up and it is a positive feedback process on the way down.

He sees all of the major countries of the world grappling with deflation now, and in many cases, focusing their efforts in exactly the wrong direction to address the root cause:

Europe is imploding under its own volition and I think the Euro is probably going to collapse at some stage or contract to being a Northern Euro rather than the whole of Euro. We will probably see every government of Europe be overthrown and quite possibly have a return to fascist governments. It came very close to that in Greece with fascists getting five percent of the vote up from zero. So political turmoil in Europe and that seems to be Europe’s fate.

I can see England going into a credit crunch year, because if you think America’s debt is scary, you have not seen England’s level of debt. America has a maximum ratio of private debt to GDP adjusted over 300%; England’s is 450%. America’s financial sector debt was 120% of GDP, England’s is 250%. It is the hot money capital of the western world.

And now that we are finally seeing decelerating debt over there plus the government running on an austerity program at the same time, which means there are two factors pulling on demand out of that economy at once. I think there will be a credit crunch in England, so that is going to take place as well.

America is still caught in the deleveraging process. It tried to get out, it seemed to be working for a short while, and the government stimulus seemed to certainly help. Now, that they are going back to reducing that stimulus, they are pulling up the one thing that was keeping the demand up in the American economy and it is heading back down again. We are now seeing the assets market crashing once more. That should cause a return to decelerating debt — for a while you were accelerating very rapidly and that’s what gave you a boost in employment —  so you are falling back down again.

Australia is running out of steam because it got through the financial crisis by literally kicking the can down the road by restarting the housing bubble with a policy I call the first-time vendors boost. Where they gave first time buyers a larger amount of money from the government and they handed over times five or ten to the people they bought the house off from the leverage they got from the banking sector. Therefore, that finally ran out for them.

China got through the crisis with an enormous stimulus package. I think in that case it is increasing the money supply by 28% in one year. That is setting off a huge property bubble, which from what I have heard from colleagues of mine is also ending.

Therefore, it is a particularly ugly year for the global economy and as you say, we are still trying to get business back to usual. We are trying to rescue the creditors and restart the world that is dominated by the creditors. We have to rescue the debtors instead before we are going to see the end of this process.

In order to successfully emerge on the other side of this this painful period with a more sustainable system, he believes the moral hazard of bailing out the banks is going to have end:

[The banks] have to suffer and suffer badly. They will have to suffer in such a way that in a decade they will be scared in order to never behave in this way again. You have to reduce the financial sector to about one third of its current size and we have to also ultimately set up financial institutions and financial instruments in such a way that it is no longer desirable from a public point of view to borrow and gamble in rising assets processes.

The real mistake we made was to let this gambling happen as it has so many times in the past, however, we let it go on for far longer than we have ever let it go on for before. Therefore, we have a far greater financial parasite and a far greater crisis.

And he offers an unconventional proposal for how this can be achieved:

I think the mistake [central banks] are going to make is to continue honoring debts that should never have been created in the first place. We really know that that the subprime lending was totally irresponsible lending. When it comes to saying “who is responsible for bad debt?” you have to really blame the lender rather than the borrower, because lenders have far greater resources to work out whether or not the borrower can actually afford the debt they are putting out there.

They were creating debt just because it was a way of getting fees, short-term profit, and they then sold the debt onto unsuspecting members of the public as well and securitized their way out of trouble. They ended up giving the hot potato to the public. So, you should not be honoring that debt, you should be abolishing it. But of course they have actually packaged a lot of that debt and sold it to the public as well, you cannot just abolish it, because you then would penalize people who actually thought they were being responsible in saving and buying assets.

Therefore, I am talking in favor of what I call a modern debt jubilee or quantitative easing for the public, where the central banks would create ‘central bank money’ (we cannot destroy or abolish the debt, which would also destroy the incomes of the people who own the bonds the banks have sold). We have to create the state money and give it to the public, but on condition that if you have any debt you have to pay your debt down — no choice. Therefore, if you have debt, you can reduce the debt level, but if you do not have debt, you get a cash injection.

Of course, this would then feed into the financial sector would have to reduce the value of the debts that it currently owns, which means income from debt instruments would also fall. So, people who had bought bonds for their retirement and so on would find that their income would go down, but on the other hand, they would be compensated by a cash injection.

The one part of the system that would be reduced in size is the financial sector itself. That is the part we have to reduce and we have to make smaller.  That is the one that I am putting forward and I think there is a very little chance of implementing it in America for the next few years not all my home country [Australia] because we still think we are doing brilliantly and all that. But, I think at some stage in Europe, and possibly in a very short time frame, that idea might be considered.

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Fine Print: The Real Story on the “$25 Billion” Multistate Settlement

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One of the things I heard from a high ranking official in state government is that only a tiny fraction of the “settlement” is translating into actual dollars from the banks to anyone. In Arizona the $1.3 billion is subject to an “earn-down” as it was described to me and the net amount turned out to be $97 million and then on the website for the attorney general of the state, the $97 million became $47 million.

So I brought up my calculator and discovered that out of the “settlement” the banks were paying themselves around $1.2 billion out of the $1.3 billion (some say it is $1.6 billion, but the net left for the state remains unchanged at $97 million) and that some of the balance of the money is “unaccounted for.” By the way this has NOTHING to do with the Arizona Department of Housing, which is as close to non-political as you can get in any government.

So in plain language, the banks are taking money from their left pocket and putting int heir right pocket and saying it was a deal. This sounds a lot like the fake claims of securitization and assignment of debt on housing, student loans, credit cards, auto loans etc. In the end, no money will move except a tiny percentage because since the banks are simply paying themselves out of their own money how bad can the accounting be for them?

In Arizona, the legislature decided, as per the terms of the “settlement” to take the money and use it as part of general operating funds leaving distressed homeowners with nothing. So now there is something of an uproar in Arizona. Here is a $1.3 billion settlement that could have reversed a downward economic spiral for the state that will be felt for decades, and we end up with only 7% of that figure and then at least half, if not all of that is being taken for uses other than homeowner relief that is essential for economic recovery.

My guess is that they will say they are stopping the move to use the homeowner relief funds for perks to corporate donors and then quietly go out and do it anyway. What is your guess?

——————————————–

By Howard Fischer, Capitol Media Services

State officials agreed Tuesday to delay the transfer of $50 million of disputed mortgage settlement funds, at least for the time being.

Assistant Attorney General David Weinzweig made the offer during a hearing where challengers were hoping to get a court order blocking the move while its legality is being decided by Maricopa County Superior Court Judge Mark Brain. Attorney Tim Hogan of the Arizona Center for Law in the Public Interest, who represents those opposed to the transfer, readily agreed.

“You don’t want to rush the judge,” said Hogan, whose clients are people he believes would be helped by the funds.

“You want him to take his time on important questions like this,” Hogan said. “And so it’s reasonable to agree not to transfer the funds for a certain period of time to give the judge the opportunity to do that.”

The move sets the stage for a hearing in August on the merits of the issue.

Weinzweig told Brain he believes the transfer, ordered by state lawmakers earlier this year, is legal. Anyway, he said, Hogan’s clients have no legal standing to challenge what the Legislature did.

The fight surrounds a $26 billion nationwide settlement with five major lenders who were accused of mortgage fraud.

Arizona’s share is about $1.6 billion, with virtually all of that earmarked for direct aid to those who are “under water” on their mortgages — owing more than their property is worth — or have already been forced out of their homes.

But the deal also provided $97 million directly to the state Attorney General’s Office. The terms of that pact said the cash was supposed to help others with mortgage problems as well as investigate and prosecute fraud.

Lawmakers, however, seized on language which also said the money can be used to compensate the state for the effects of the lenders’ actions. They said the result of the mortgage crisis was lower state revenues, giving them permission to take $50 million from the settlement to balance the budget for the fiscal year that begins July 1.

Hogan’s suit is based on his contention that the settlement terms put the entire $97 million in trust and makes Attorney General Tom Horne, who was authorized by state law to sign the deal, responsible for ensuring the cash is properly spent.

Horne urged lawmakers not to take the funds. But once the budget deal was done, he went along and took the position that, regardless of whether the cash could have been better spent elsewhere, the transfer demand is legal.

Whatever Brain rules is likely to be appealed.

The challenge was brought on behalf of two people who would benefit by the state having more money to help homeowners avoid foreclosure. The lawsuit said both are currently “at risk” of losing their homes.

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State Programs with Real Money Going Unused

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Millions for Principal Reduction and Moving Expenses and No Applicants

Editor’s Comment: 

I had the pleasure of listening last night to Michael Trailor, the Director of the Arizona Department of Housing. It was like a breath of fresh air. He was a home builder for decades and when the market crashed he went into this obscure post of this obscure state agency that turns out to have its counterparts in many if not all states. Each of these agencies has received money and authority to help homeowners and they are willing to pay down principal reductions, buy the loans and then modify and pay for moving expenses in short sales and other events.

Trailor is a plain-speaking non-politician who tells it like it is. His agency has programs based upon the premise that principal reduction is the only thing that works and he has working relationships with some small banks where his agency literally pays the principal down while the Bank shares in that loss. The small banks see the sense in it. He can’t get cooperation from the big banks and servicers.

In the meeting at Darrell Blomberg’s Tuesday Strategist presentation (every week at Macayo’s restaurant in downtown Phoenix), we heard straight talk and we heard about a number of programs that I had advocated before Trailor became director. My suggestions fell on deaf ears. Trailor’s programs are of the same variety and creativity with the objective of saving the Arizona economy from destruction.

He reported that three states got together under the same program to make the offer of sharing the reduction of principal because the banks said that Arizona was not big enough on its own to motivate the banks to participate in the program. So he got three states — Arizona, California and Nevada. The banks did the old familiar two-step with him and his counterparts in the other states and essentially refused to pparticipate. Every borrower knows that two-step by heart.

I made some suggestions for programs that could be introduced in bankruptcy court, where the power of the Banks is much less. Right now if they don’t want to modify the loan, they can’t be forced. If they don’t want to SELL the loan and then modify it as the beneficiary or mortgagee, the mega bank can and does say no (while the small bank can and does say yes).

That’s right. His agency said they would buy the loan from the bank for 100 cents on the dollar, and then modify the loan the principal and payments to something the borrower could afford and that would not lead to future foreclosures (the fate of practically all modifications). The mega banks killed the idea. Don’t you wonder why banks would contrary to the interest of a ‘lender” who can minimize their losses with government money that has already been allocated but is not yet spent?

This is exactly what I predicted back in 2008. The small banks agree because it is the smart thing to do and THEY are actually owed the money. The mega banks refuse to go along with the deal because hanging on the now invisible and non-existent trunk of an existing debt-tree are hundreds of branches of swaps, insurance and credit enhancements upon which Wall Street has made and is continuing to make billions of dollars in “trading profits” at the expense of the investors and to the detriment of the homeowners.

In other words, they sold the loan multiple times — up to 40 times as I read the data. So hanging on your $200,000 loan could be as much as $8 MILLION in derivatives, swaps etc. That could mean $8 million in claims on the proceeds of sale of the obligation or note or satisfaction of the note or obligation.

Here is my suggestion for those homeowners’ attorneys that have started a bankruptcy proceeding. Where the so-called creditor has sent out a notice of sale and has filed a motion to lift the automatic stay, apply for assistance from the Arizona Department of Housing or whatever the equivalent is in your state. If the agency agrees to assist in refinancing or buying the loan so the homeowner can stay and pay, then the bank would need to explain the basis on which they are responding negatively. After all they are being offered 100 cents on the dollar — why isn’t that enough?

Make sure you notify the Trustee and Court of the pending application made to the agency and don’t use it in a silly fashion promising things that the agency will not corroborate.

I believe that Trailor’s agency and his counterparts would respond with some program that would essentially be an offer to the supposed creditor — provided that the true creditor steps forward and can prove that they are the actual party to whom the money from the homeowner’s obligation is owed. Darrell and I are starting talks with Trailor’s agency to get specific programs that will work in bankruptcy court and maybe other situations.

Once the Notice of Sale is sent,  the “creditor” has committed itself to selling. How can they turn around and say no when they are being offered the full amount? In that court, once the “lender” has committed to selling the property they can hardly say they don’t want to sell the loan — especially if they are receiving 100 cents on the dollar. The offer would be accepted by the Trustee, I am fairly certain, and the Judge since there really is no choice.

Now here is where the fun begins. The Judge would agree as would the U.S. Trustee that only the party to whom the money is owed can get the money. Some of you might recall my frequent diatribes about who can submit a credit bid — only the actual creditor to whom the original loan is now owed or an authorized representative who submits the bid on behalf of THAT creditor.

So assuming the Trustee and Judge agree that the “creditor” who filed the Motion to Lift Stay MUST sell the loan or release it upon receiving full payment, then they are stuck with coming up with the real creditor, which is going to be impossible in many cases, difficult in virtually all other cases. Trailor is sitting on hundreds of millions of dollars to help homeowners and he can’t use it because nobody will play ball under circumstances that he “naively” thought would be a no-brainer.

For those versed in bankruptcy you know the rest. The “lender” must admit that it is not the lender, that is has no authority to represent the creditor, that it doesn’t know who the creditor is or even if one still exists. The mortgage can be attacked as not being a perfected lien on the property and the obligation is wiped out or reduced by the  final order entered in the bankruptcy court.

Now the banks and servicers are going to fight this one tooth and nail because while the loan might be $200,000, there is an average of around $4 million in derivatives and exotic credit enhancements hanging on this loan. If it is paid off, then all accounts must settle. There are going to be gains and losses, but the net effect might well be that the bank “Sold” the loan 20 times. And the best part of it is that you don’t need t prove the theft. If will simply emerge from the failure of the “lender” to conform with the order of the court approving the deal. 

This is a classic case of the scam used in the “The Producers” which has been done on Broadway and movies. You sell 10,000% of a show you know MUST fail. They select “Springtime for Hitler” right after World War II and expect it to crash. After all it is musical comedy. But the show is a spectacular success. So whereas the news of the show’s closing would have sent investors to their accountants to write it off for tax purposes, now they were all clamoring for an accounting for their share of the profits. Since the producers had sold the show 100 times over it was impossible to pay the investors and they went to jail.

THAT is the problem here. It is only if the show closes with a foreclosure that the investors will not ask for the accounting. If the show succeeds (the loan is paid off) then all the investors will want their share of the payments that are due — unless they had the misfortune of taking the wrong side of a “bet” that the loan would fail. Not many investors did that. But the investment banks that sold the show (the loan) many times over used those bets as a way of selling the show over and over again.

If I’m lying I’m dying. That is what is happening and when people realize that as homeowners they are sitting on leverage worth 20 times their loan and they use it against the banks and servicers, they will get some very nice results. Agencies like Arizona’s Department of Housing can save the day like the cavalry just by making the offer and getting a judge to enforce it and watch in merriment how the “lenders” insist that they don’t want the payment and they can’t be forced to take it. That is what happens  when you turn the conventional and reasonable lending model on its head.

So now the banks and servicers must come up with a whole new set of fabricated, forged and fraudulent documents in which the investors assigned their interest in the obligation or note or mortgage to some other entity that is now the “creditor” — but the question that will be asked by every Trustee and Judge in bankruptcy court “who paid for this, how much did they pay, and how do we know a transaction actually happened.” That is the problem with a VIRTUAL TRANSACTION. At some point, like every PONZI scheme, the house of cards falls down.

Check with Arizona Department of Housing

Of course if you are not in Arizona check with the equivalent agency in your state. Chances are they have hundreds of millions of dollars and no place to spend it for homeowners because the banks won’t agree to no-brainer solutions that any bank can and does accept if they were playing the “Securitization game.” Don’t expect the agency to march into court and save the day. The agency is not going to litigate your case for you. But they probably will give you plenty of support and encouragement and offers of real money to end this nightmare of foreclosures. You must do the work, fill out applications and get the process underway before you can go to the court with a motion that says we have a settlement vehicle pending with a state agency and you can prove it is true.

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How the Servicers and Investment Banks Cheat Investors and Homeowners

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Master Servicers and Subservicers Maintain Fictitious Obligations

Editor’s Comment: 

This article really is about why discovery and access to the information held by the Master Servicer and subservicer, investment bank and Trustee for the REMIC (“Trust”) is so important. Without an actual accounting, you could be paying on a debt that does not exist or has been extinguished in bankruptcy because it was unsecured. In fact, if it was extinguished in bankruptcy, giving them the house or payment might even be improper. Pressing on the points made in this article in order to get full rights in discovery (interrogatories, admissions and production) will yield the most beneficial results.

Michael Olenick (creator of FindtheFraud) on Naked Capitalism gets a lot of things right in the article below. The most right is that servicers are lying and cheating investors in addition to cheating homeowners.

The subservicer is the one the public knows. They are the ones that collect payments from the “borrower” who is the homeowner. In reality, they have no right to collect anything from the homeowner because they were appointed as servicer by a party who is not a creditor and has no authority to act as agent for the creditor. They COULD have had that authority if the securitization chain was real, but it isn’t.

Then you have the Master Servicers who are and should be called the Master of Ceremonies. But the Master Servicer is basically a controlled entity of the investment bank, which is why everyone is so pissed — these banks are making money and getting credit while the rest of us can’t operate businesses, can’t get a job, and can’t get credit for small and medium sized businesses.

Cheating at the subservicer level, even if they were authorized to take payments, starts with the fees they charge against the account, especially if it becomes (delinquent” or in “default” or “Nonperforming.” At the same time they are telling the investors that the loan is a performing loan and they are making payments somewhere in the direction of the investors (we don’t actually know how much of that payment actually gets received by investors), they are also declaring defaults and initiating a foreclosure.

What they are not reporting is that they don’t have the paperwork on the loan, and that the value of the portfolio is either simply over-stated, which is bad enough, or that the portfolio is worthless, which of course is worse. Meanwhile the pension fund managers do not realize that they are sitting on assets that may well have a negative value and if they don’t handle the situation properly, they might be assessed for the negative value.

It gets even worse. Since the money and the loans were not handled, paid or otherwise organized in the manner provided in the pooling and servicing agreement and prospectus, the SPV (“Trust”) does not exist and has no assets in it — but it might have some teeth that could bite the hand that fed the banks. If the REMIC was not created and the trust was not created or funded, then the investors who in fact DID put up money are in a common law general partnership. And since the Credit Default Swaps were traded using the name of  entities that identified groups of investors, the investors might be hit with an assessment to cover a loss that the “pool” can’t cover because they only have a general partnership created under common law. Their intention to enter into a deal where there was (a) preferential tax status (REMIC) and (b) limited liability would both fall apart. And that is exactly what happened.

The flip side is that the credit default swaps, insurance, credit enhancements, and so forth could have and in most cases did produce a surplus, which the banks claimed as solely their own, but which in fact should have at least been allocated to the investors up to the point of the liability to them (i.e., the money taken from them by the investment bank).

AND THAT is why borrowers should be very interested in having the investors get their money back from the trading, wheeling and dealing made with the use of the investors’ money. Think about it. The investors gave up their money for funding mortgages and yours was one of the mortgages funded. But the vehicle that was used was not a simple  one. The money taken from the investors was owed by the REMIC in whose name the trading in the secret derivative market occurred.

Now think a little bit more. If the investors get their rightful share of the money made from the swaps and insurance and credit enhancements, then the liability is satisfied — i.e., the investor got their money back with interest just like they were expecting.

But, and here is the big one, if the investor did get paid (as many have been under the table or as part of more complex deals) then the obligation to them has been satisfied in full. That would mean by definition that the obligation from anyone else on repayment to the investor was extinguished or transferred to another party. Since the money was funded from investor to homeowner, the homeowner therefore does not owe the investor any money (not any more, anyway, because the investor has been paid in full). The only valid transfer would be FROM the REMIC partnership not TO it. But the fabricated, forged and fraudulent documents are all about transferring the loan TO the REMIC that was never formed and never funded.

It is possible that another party may be a successor to the homeowner’s obligation to the investor. But there are prerequisites to that happening. First of all we know that the obligation of the homeowner to the investor was not secured because there was no agreement or written instrument of any kind in which the investor and the borrower both signed and which set forth terms that were disclosed to both parties and were the subject of an agreement, much less a mortgage naming the investor. That is why the MERS trick was played with stating the servicer as the investor. That implies agency (which doesn’t really exist).

Second we know that the SWAPS and the insurance were specifically written with expressly worded such that AIG, MBIA etc. each waived their right to get payment from the borrower homeowner even though they were paying the bill.

Third we know that most payments were made by SWAPS, insurance and the Federal Reserve deals, in which the Fed also did not want to get involved in enforcing debts against homeowners and that is why the Federal Reserve has never been named as the creditor even though they in fact, would be the creditor because they have paid 100 cents on the dollar to the investment bank who did NOT allocate that money to the investors.

Since they did not allocate that money to the investors, as servicers (subservicer and Master Servicer), they also did not allocate the payment against the homeowner borrower’s debt. If they did that, they would be admitting what we already know — that the debt from homeowner to investor has been extinguished, which means that all those other credit swaps, insurance and enhancements that are STILL IN PLAY, would collapse. That is what is happening in our own cities, towns, counties and states and what is happening in Europe. It is only by keeping what is now only a virtual debt alive in appearance that the banks continue to make money on the Swaps and other exotic instruments. But it is like a tree without the main trunk. We have only branches left. Eventually in must fall, like any other Ponzi scheme or House of Cards.

So by cheating the investors, and thus cheating the borrowers, they also cheated the Federal Reserve, the taxpayers and European banks based upon a debt that once existed but has long since been extinguished. If you waded through the above (you might need to read it more than once), then you can see that your  feeling, deep down inside that you owe this money, is wrong. You can see that the perception that the obligation was tied to a perfected mortgage lien on the property was equally wrong. And that we now have $700 trillion in nominal value of derivatives that has at least one-third in need of mark-down to zero. The admission of this inescapable point would immediately produce the result that Simon Johnson and others so desperately want for economic reasons and that the rest of us want for political reasons — the break-up of banks that are broken. Only then will the market begin to function as a more or less free trading market.

How Servicers Lie to Mortgage Investors About Losses

By Michael Olenick

A post last week reviewed a botched foreclosure for a mortgage loan in Ace Securities Home Equity Loan Trust 2007-HE4 dismissed with prejudice, meaning that the foreclosure cannot be refilled; a total loss for investors. Next, we reviewed why the trust has not yet recorded the loss despite the six month old verdict.

As an experiment, I gave my six year-old daughter four quarters. She just learned how to add coins so this pleased her. Then I told her I would take some number of quarters back, and asked her how many I should take. Her first response was one – smart kid – then she changed her mind to two, because we’d each have two and that’s the most “fair.” Having mastered the notion of loss mitigation and fairness, and because it’s not nice to torture six year-old children with experiments in economics, I allowed her to keep all four.

When presented with a similar question – whether to take a partial loss via a short-sale or principal reduction, or whether to take a larger loss through foreclosure – the servicers of ACE2007-HE4 repeatedly opt for the larger losses. While the dismissal with prejudice for the Guerrero house is an unusual, the enormous write-off it comes with through failure to mitigate a breach – to keep overall damages as low as possible – is common. When we look more closely at the trust, we see the servicer again and again, either through self-dealing or laziness, taking actions that increase losses to investors. And this occurs even though the contract that created the securitization, a pooling and servicing agreement, requires the servicer to service the loans in the best interest of the investors.

Let’s examine some recent loss statistics from ACE2007-HE4. In May, 2012 there were 15 houses written-off, with an average loss severity of 77%. Exactly one was below 50% and one, in Gary, IN, was 145%; the ACE investors lent $65,100 to a borrower with a FICO score of 568 then predictably managed to lose $94,096. In April, there were 23 homes lost, with an average loss severity of 82%, three below 50%, though one at 132%, money lent to a borrower with an original FICO score of 588.

Of course, those are the loans with finished foreclosures. There are 65 loans where borrowers missed at least four consecutive payments in the last year with yet there is no active foreclosure. Among those are a loan for $593,600 in Allendale, NJ, where the borrower has not made a payment in about four years, though they have been in and out of foreclosure a few times during that period. It’s not just the judicial foreclosure states; a $350,001 loan in Compton, CA also hasn’t made a payment in over a year and there is no pending foreclosure.

There is every reason to think the losses will be higher for these zombie borrowers than on the recent foreclosures. First, every month a borrower does not pay the servicer pays the trust anyway, though the servicer is then reimbursed the next month, mainly from payments of other borrowers still paying. This depletes the good loans in the trust, so that the trust will eventually run out of money leaving investors holding an empty bag. And on top of that, when the foreclosure eventually occurs, the servicer also reimburses himself for all sorts of fees, late fees, the regular servicing fee, broker price opinions, etc. Longer times in foreclosure mean more fees to servicers. Second, the odds are decent that the servicers are holding off on foreclosing on these homes because the losses are expected to be particularly high. Why would servicers delay in these cases? Perhaps because they own a portfolio of second mortgages. More sales of real estate that wipe out second liens would make it harder for them to justify the marks on those loans that they are reporting to investors and regulators. Revealing how depressed certain real estate markets were if shadow inventory were released would have the same effect.

These loans will eventually end up either modified or foreclosed upon, but either way there will be substantial losses to the trust that have not been accounted for. Of course, this assumes that the codes and status fields are accurate; in the case of the Guerreros’ loan the write-off – with legal fees for the fancy lawyers who can’t figure out why assignments are needed to the trust – is likely to be enormous. How much? Nobody except Ocwen knows, and they’re not saying.

Knowing that an estimated loss of 77%, is if anything an optimistic figure, even before we get to the unreported losses on the Guerrero loan, it seems difficult to understand why Ocwen wouldn’t first try loss mitigation that results in a lower loss severity. If they wrote-off half the principal of the loan, and decreased interest payments to nothing, they’d come out ahead.

Servicers give lip service to the notion that foreclosure is an option of last resort but, only when recognizing losses, do their words seem to sync with their behavior. But it’s all about the incentives: servicers get paid to foreclose and they heap fees on zombie borrowers, but even with all sorts of HAMP incentives, they don’t feel they get paid enough to do the work to do modifications. Servicers are reimbursed for the principal and interest they advance, the over-priced “forced placed insurance” that costs much more and pays out much less than regular insurance, “inspections” that sometimes involve goons kicking in doors before a person can answer, high-priced lawyers who can’t figure out why an assignment is needed to bind a property to a trust, and a plethora of other garbage fees. They’re like a frat-boy with dad’s credit-card, and a determination to make the best of it while dad is still solvent.

Despite the Obama campaign promise to bring transparency to government and financial markets, the investors in trusts remain largely unknown, so we’re not sure who bears the brunt of the cost of Ocwen’s incompetence in loss mitigation (to be fair Ocwen is not atypical; most servicers are atrocious). But, ACE2007-HE4 has a few unique attributes allowing us to guess who is affected.

ACE2007-HE4 is named in a lawsuit filed by the Federal Housing Finance Agency (FHFA), which has sued ACE, trustee Deutsche Bank, and a few others citing material misrepresentations in the prospectus of this trust. As pointed out in the prior article, both the Guerreros’ first and second loans were bundled into the same trust – so there were definitely problems – though the FHFA does not seem to address that in their lawsuit.

With respect to ACE2007-HE4, the FHFA highlights an investigation by the Financial Industry Regulatory Authority (FINRA), which found that Deutsche Bank “‘continued to refer customers to its prospectus materials to the erroneous [delinquency] data’”even after it ‘became aware that the static pool information underreported historical delinquency rates.”

The verbiage within the July 16, 2010 FINRA action is more succinct: “… investors in these 16 subsequent RMBS securitizations were, and continue to be, unaware that some of the static pool information .. contains inaccurate historical data which underreported delinquencies.” FINRA allowed Deutsche Bank to pay a $7.5 million fine without either admitting or denying the findings, and agreed never to bring another action “based on the same factual findings described herein.”

Despite the finding and the fine, FINRA apparently forgot to order Deutsche Bank to knock off the conduct, and since FINRA did not reserve the right to circle back for a compliance check maybe Deutsche Bank has the right to produce loss reports showing whatever they wish to.

It is unlikely that Deutsche Bank had trouble paying their $7.5 million fine since the trust included an interest swap agreement that worked out pretty well for them. Note that these swap agreements were a common feature of post 2004 RMBS. Originators used to retain the equity tranche, which was unrated. When a deal worked out, that was nicely profitable because the equity tranche would get the benefit of loss cushions (overcollateralization and excess spread). Deal packagers got clever and devised so-called “net interest margin” bonds which allowed investors to get the benefit of the entire excess spread for a loan pool. The swaps were structured to provide a minimum amount of excess spread under the most likely scenarios. But no one anticipated 0% interest rates.

From May, 2007, when the trust was issued, to Oct., 2007, neither party paid one another. In Nov., 2007, Deutsche Bank paid the trust $175,759.04. Over the next 53 months that the swap agreement remained in effect the trust paid Deutsche Bank $65,122,194.92, a net profit of $64,946,435.88. Given that Deutsche traders were handing out t-shirts reading “I’m Short Your House” when this trust was created, I can see why they’d bet against steep interest rates over the next five years, as the Federal Reserve moved to mitigate the economic fallout of their mischievousness with low interest rates.

In any event, getting back to Fannie Mae and Freddie Mac (the FHFA does not disclose which), one of the GSEs purchased $224,129,000 of tranche A1 at par; they paid full freight for this fiasco. Since this trust is structured so that losses are born equally by all A-level tranches once the mezzanine level tranches are destroyed by losses, which they have been, to find the party taking the inflated losses you just need to look in the nearest mirror. Fannie and Freddie are, of course, wards of the state so it is the American taxpayer that gets to pay out the windfall to the Germans. In this we’re like Greece, albeit with lousier beaches and the ability to print more money.

If the mess with the FHFA and FINRA were not enough, ACE2007-HE4 is also an element in the second 2007 Markit index, ABX.HE.AAA.07-2, a basket of tranches of subprime trusts that – taken as a whole – show the overall health of all similar securities. This is akin to being one of the Dow-Jones companies, where a company has its own stock price but that price also affects an overall index that people place bets on. Tranche A-2D, the lowest A-tranche, is one of the twenty trusts in the index. Since ACE2007-HE4 is structured so that all A-tranches wither and die together once the mezzanine level tranches are destroyed it has the potential to weigh in on the rest of the index. Therefore, the reporting mess – already known to both the FHFA and FINRA – stands to be greatly magnified.

The problems with this trust are numerous, and at every turn, the parties that could have intervened to ameliorate the situation failed to take adequate measures.

First there is the botched securitization, where a first and second lien ended up in the same trust. Then, there is failure to engage in loss mitigation, with the result that refusing to accept the Guerrero’s short-sale offers or pleas for a modification, resulting in a more than 100% loss. Next, there is defective record-keeping related to that deficiency and others like it. And the bad practices ensnarled Fannie /Freddie when they purchased almost a quarter billion dollars of exposure to these loans. Then there’s the mismanaged prosecution by FINRA, where they did not require ongoing compliance, monitoring, or increasing fines for non-compliance. There’s the muffed FHFA lawsuit, where the FHFA did not notice either the depth of the fraud, namely two loans for the same property in the same trust, and that the reporting fraud they cited continues. I’m not sure if the swap agreement was botched, but you’d think FINRA and the FHFA would and should do almost anything to dissolve it while it was paying out massive checks every month. Finally, returning full circle, there’s the fouled up foreclosure that the borrowers fought only because negotiations failed that resulted in a the trust taking a total loss on the mortgage plus paying serious legal fees.

It is an understatement to say this does not inspire confidence in any public official, except Judge Williams, the only government official with the common sense to lose patience with scoundrels. We’d almost be better off without regulators than with the batch we’ve seen at work.

US taxpayers would have received more benefit by burning dollar bills in the Capitol’s furnace to heat the building than we received from bailing out Fannie, Freddie, Deutsche Bank, Ocwen, and the various other smaller leaches attached to the udder of public funds. We could and should have allowed the “free market” they worship to work its magic, sending them to their doom years ago. That would have left investors in a world-o-hurt but, in hindsight, that’s where they’re ending up anyway with no money left to fix the fallout. It is long past time public policy makers did something substantive to rein in these charlatans.

My six year-old daughter understands the concept of limiting losses to the minimum, and apportionment of those losses in the name of fairness. Maybe Tim Geithner should take a lesson from her about this “unfortunate” series of events, quoting Judge Williams, before wasting any more money that my daughter will eventually have to repay.

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Wrong Bailout

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Editor’s Comment:

It isn’t in our own mainstream media but the fact is that Europe is verging on  collapse. They are bailing out banks and taking them apart (something which our regulators refuse to do). The very same banks that caused the crisis are the ones that are going to claim they too need another bailout because of international defaults. The article below seems extreme but it might be right on target.

From the start the treatment of the banks had been wrong-headed and controlled by of course the banks themselves. With Jamie Dimon sitting on the Board of Directors of the NY FED, which is the dominatrix in the Federal Reserve system, what else would you expect?

The fact is that, as Iceland and other countries have proven beyond any reasonable doubt, the bailout of the banks is dead wrong and it is equally wrong-headed to give them the continued blank check to pursue business strategies that drain rather than infuse liquidity in economies that are ailing because of intentional acts of the banks to enrich themselves rather than the countries that give them license to exist.

The bailout we proposed every year and every month and practically every day on this blog is the only one that will work: reduce household debt, return things to normalcy (before the fake securitization of mortgages and other consumer and government debt) and without spending a dime of taxpayer money.  The right people will pay for this and the victims will get some measure of relief — enough to jump start economies that are in a death spiral.

Just look at home mortgages. They were based upon layers of lies that are almost endless and that continue through the present. But the principal lie, the one that made all the difference, was that the mortgage bonds were worth something and the real property was worth more than the supposed loans. With only a few exceptions those were blatant lies that are not legal or permissible under any exemption claimed by Wall Street. Our system of laws says that if you steal from someone you pay for it with your liberty and whatever it is you stole is returned to the victim if it still exists. And what exists, is millions of falsely created invalid illegal instruments recorded in title registries all over the country affecting the title of more than 20 million households.

All we need to do is admit it. The loans are unsecured and the only fair way of handling things is to bring all the parties to the table, work out a deal and stop the foreclosures. This isn’t going to happen unless the chief law enforcement officers of each state and the clerks of the title registry offices wake up to the fact that they are part of the problem. It takes guts to audit the title registry like they did in San Francisco and other states, cities and counties. But the reward is that the truth is known and only by knowing the truth will we correct the problem.

The housing market is continuing to suffer because we are living a series of lies. The government, realtors and the banks and servicers all need us to believe these lies because they say that if we admit them, the entire financial system will dissolve. Ask any Joe or Josephine on the street — the financial system has already failed for them. Income inequality has never been worse and history shows that (1) the more the inequality the more power those with wealth possess to keep things going their way and (2) this eventually leads to chaos and violence. As Jefferson said in the Declaration of Independence, people will endure almost anything until they just cannot endure it any longer. That time is coming closer than anyone realizes.

Only weeks before France erupted into a bloody revolution with gruesome dispatch of aristocrats, the upper class thought that the masses could be kept in line as long as they were thrown a few crumbs now and then. That behavior of the masses grew from small measures exacted from a resisting government infrastructure to simply taking what they wanted. Out of sheer numbers the aristocracy was unable to fight back against an entire country that was literally up in arms about the unfairness of the system. But even the leaders of the French Revolution and the Merican revolution understood that someone must be in charge and that an infrastructure of laws and enfrocement, confidence in the marketplace and fair dealing must be the status quo. Disturb that and you end up with overthrow of existing authority replaced by nothing of any power or consequence.

Both human nature and history are clear. We can all agree that the those who possess the right stuff should be rich and the rest of us should have a fair shot at getting rich. There is no punishment of the rich or even wealth redistribution. The problem is not wealth inequality. And “class warfare” is not the right word for what is going on — but it might well be the right words if the upper class continue to step on the rest of the people. The problem is that there is no solution to wealth inequality unless the upper class cooperates in bringing order and a fair playing field to the marketplace —- or face the consequences of what people do when they can’t feed, house, educate or protect their children.

LaRouche: The Glass-Steagall Moment Is Upon Us

Spanish collapse can bring down the Trans-Atlantic system this weekend

Abruptly, but lawfully, the Spanish debt crisis has erupted over the past 48 hours into a systemic rupture in the entire trans-Atlantic financial and monetary facade, posing the immediate question: Will the European Monetary Union and the entire trans-Atlantic financial system survive to the end of this holiday weekend?



Late on Friday afternoon, the Spanish government revealed that the cost of bailing out the Bankia bank, which was nationalized on May 9, will now cost Spanish taxpayers nearly 24 billion euro—and rising. Many other Spanish banks are facing imminent collapse or bailout; the autonomous Spanish regions, with gigantic debts of their own, are all now bankrupt and desperate for their own bailout. Over the last week, Spanish and foreign depositors have been pulling their money out of the weakest Spanish banks in a panic, in a repeat of the capital flight out of the Greek banks months ago. 



The situations in Greece, Italy, Portugal, and Ireland are equally on the edge of total disintegration—and the exposure of the big Wall Street banks to this European disintegration is so enormous that there is no portion of the trans-Atlantic system that is exempt from the sudden, crushing reality of this collapse.



Whether or not the system holds together for a few days or weeks more, or whether it literally goes into total meltdown in the coming hours, the moment of truth has arrived, when all options to hold the current system together have run out.

Today, in response to this immediate crisis, American political economist Lyndon LaRouche issued a clarion call to action. Referring to the overall trans-Atlantic financial bubble, in light of the Spanish debt explosion of the past 48 hours, LaRouche pinpointed its significance as follows:

“The rate of collapse now exceeds the rate of the attempts to overtake the collapse. That means that, essentially, the entire European system, in its present form, is in the process of a hopeless degeneration. Now, this is something comparable to what happened in Germany in 1923, and they’ve caught themselves in a trap, where a rate of collapse exceeds the rate of their attempt to overtake yesterday.

“So therefore, we’re in a new situation, and the only solution in Europe, in particular, is Glass-Steagall, or the Glass-Steagall equivalent, with no fooling around. Straight Glass-Steagall — no bailouts! None! In other words, you have to collapse the entire euro system. The entirety of the euro system has to collapse. But it has to collapse in the right way; it has to be a voluntary collapse, which is like a Glass-Steagall process. This means the end of the euro, really. The euro system is about to end, because you can’t sustain it.

“Everything is disintegrating now in Europe. It can be rescued very simply, by a Glass-Steagall type of operation, and then going back to the currencies which existed before. In other words, you need a stable system of currencies, or you can’t have a recovery at all! In other words, if the rate of inflation is higher than the rate of your bailout, then what happens when you try to increase the bailout, you increase the hysteria. You increase the rate of collapse. In other words, the rate of collapse exceeds the rate of bailout.

“And now, you have Spain, and Portugal implicitly, and the situation in Greece. Italy’s going to go in the same direction. So the present system, which Obama’s trying to sustain, in his own peculiar way, is not going to work. There’s no hope for the system. Nor is there any hope for the U.S. system in its present form. The remedies, the problems, are somewhat different between Europe and the United States, but the nature of the disease is the same. They both have the same disease: It’s called the British disease. It’s hyperinflation.

“So, now you’re in a situation where the only way you can avoid a rate of hyperinflation beyond the rate of hyper-collapse is Glass-Steagall, or the equivalent. You have to save something, you have to save the essentials. Well, the essentials are: You take all the things that go into the bailout category, and you cancel them. How do you cancel them? Very simple: Glass-Steagall. Anything that is not fungible in terms of Glass-Steagall categories doesn’t get paid! It doesn’t get unpaid either; it just doesn’t get paid. Because you remove these things from the categories of things that you’re responsible to pay. You’re not responsible to bail out gambling, you’re not responsible to pay out gambling debts.

“Now, the gambling debts are the hyperinflation. So now, we might as well say it: The United States, among other nations, is hopelessly bankrupt.

“But this is the situation! This is what reality is! And what happens, is the entire U.S. government operation is beyond reckoning. It is collapsing! And there’s only one thing you can do: The equivalent of Glass-Steagall: You take those accounts, which are accounts which are worthy, which are essential to society, you freeze the currencies, their prices, and no bailout. And you don’t pay anything that does not correspond to a real credit. It’s the only solution. The point has been reached—it’s here! You’re in a bottomless pit, very much like Germany 1923, Weimar.

“And in any kind of hyperinflation, this is something you come to. And there’s only one way to do it: Get rid of the bad debt! It’s going to have to happen.

“The entire world system is in a crisis. It’s a general breakdown crisis which is centered in the trans-Atlantic community. That’s where the center of the crisis is. So, in the United States, we’re on the verge of a breakdown, a blowout; it can happen at any time. When will it happen, we don’t know, because we’ve seen this kind of thing before, as in 1923 Germany, November-December 1923, this was the situation. And it went on after that, but it’s a breakdown crisis. And that’s it.

“Those who thought there could be a bailout, or they had some recipe that things were going to be fine, that things would be manageable, that’s all gone! You’re now relieved of that great burden. You need have no anxiety about the U.S. dollar. Why worry about it? Either it’s dead or it’s not! And the only way it’s not going to be dead, is by an end of bailout. That’s the situation.

“We don’t know exactly where the breakdown point comes. But it’s coming, because we’re already in a system in which the rate of breakdown is greater than the rate of any bailout possible! And there’s only one way you can do that: Cancel a whole category of obligations! Those that don’t fit the Glass-Steagall standard, or the equivalent of Glass-Steagall standard: Cancel it, immediately! We don’t pay anything on gambling debts. Present us something that’s not a gambling debt, and we may be able to deal with that.”

LaRouche concluded with a stark warning:

“If you think that this system is going to continue, and you can find some way to get out of this problem, you can not get out of this problem, because you are the problem! Your failure to do Glass-Steagall, is the problem. And it’s your failure! Don’t blame somebody else: If you didn’t force through Glass-Steagall, it’s your fault, and it continues to be your fault! It’s your mistake, which is continuing!

“And that’s the situation we have in Europe, and that, really, is also the situation in the United States.

“But that’s where we are! It’s exactly the situation we face now, and there’s no other discussion that really means much, until we can decide to end the bailout, and to absolutely cancel all illegitimate debt—that is, bailout debt!

“There’s only one solution: The solution is, get rid of the illegitimate disease, the hyperinflation! Get rid of the hyperinflationary factor. Cancel the hyperinflation! Don’t pay those debts! Don’t cancel them, just don’t pay them! You declare them outside the economy, outside the responsibility of government: We can no longer afford to sustain you, therefore, you’ll have to find other remedies of your own. That’s where you are. It had to come, it has been coming.”


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Still Pretending the Servicers Are Legitimate

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Editor’s Comment:

I keep waiting for someone to notice. We all know that the foreclosures were defective. We all know that in many cases independent auditors found that strangers to the transaction submitted credit bids that were accepted by the auctioneer, and that in the non-judicial states where substitutions of trustees are always used to replace an independent trustee with one owned or controlled by the “new creditor” the “credit bid” is accepted by the creditor’s agent even if the trustee has notice from the borrower that neither the substitution of trustee nor the foreclosure are valid, that the borrower denies the debt, denies the default and denies the right of the “new creditor” to do anything.

In the old days when we followed the law, the trustee would have only one option: file an interpleader lawsuit in court claiming two stakeholders and that the trustee is not a stakeholder and should be reimbursed for fees and costs. Today instead of an interpleader, it is a foreclosure because the “creditor” is holding all the cards.

So why is anyone surprised that modifications are rejected when in the past the debtor and borrower always worked things out because foreclosure was not as good as a work-out?

Why do the deeds found to be lacking in consideration with false credit bids still remain on the books? Why hasn’t the homeowner been notified that he still owns the property and has the right to possession?

And why are we so sure that the original mortgage has any more validity than the false documents to support fraudulent foreclosures? Is it because the borrower’s signature is on it? OK. If we are going to look at the borrower’s signature then why do we not look at the rest of the document and the facts alleged to have occurred in those documents. The note says that the payee is the lender. We all know that isn’t true. The mortgage says the property is collateral for payment to the payee on the note. What first year law student would fail to spot that if the note recited a loan transaction that never occurred, then the mortgage securing the payments on the false transaction is no better than the note?

So if the original transaction was defective and the servicer derives its status or power from the origination documents, then who is the servicer and why is he standing in your living room demanding payment and declaring you in default?

If any reader of this blog somehow convinced another reader of the blog to sign a note and mortgage, would the note and mortgage be valid without any actual financial transaction. No. In fact, the attempt to collect on the note where I didn’t make the loan might be considered fraud or even grand theft. And rightfully so. I am told that in some states the Judges say it is the absence of anyone else making an effort to collect on the note that proves the standing of the party seeking to enforce it. Really?

This sounds like a business plan. A lends B money. B signs papers indicating the loan came from C and C gets the mortgage. B is delinquent by a month and having lost his job he abandons the property. D comes in and seeks to enforce the mortgage and note and nobody else is around. The title record is still clear of any foreclosure activity. D says he has an assignment and produces a false forged assignment. Nobody else shows up. THAT is because the parties in the securitization chain are using MERS instead of the public record title registry so they didn’t get any notice. D gets the foreclosure after substituting trustees in a non-judicial state or doing absolutely nothing in a judicial state. The property is auctioned and D submits a credit bid which is accepted by the auctioneer. The clerk or trustee issues D a deed upon foreclosure and D immediately transfers the property to XYZ corporation that he formed the day before. XYZ sells the property to E for $300,000. E pays D $60,000 down payment and gets a mortgage from ABC Lending Corp. for the other $240,000. ABC Lending Corp. sells the note and mortgage into the secondary market where it is sliced and diced into parcels that are allocated into one or more REMIC special purpose vehicles.

Now B comes back and finds out that he was never foreclosed on by his lender. C wakes up and says they never released the mortgage. D took the money and ran, never to be heard from again. The investors in the REMIC trusts are told they bought an invalid mortgage or one in which the mortgage has second priority instead of first priority. E, who bought the property with $60,000 of his own money is now at risk, and when he looks at his title policy and makes a claim he is directed to the schedules of exclusions and exceptions that specifically cover this event. So no title carrier is going to pay. In fact, the title company might concede that B still owns the property and that C has the first mortgage on it, but that leaves E with two mortgages instead of one. The two mortgages together total around $500,000, a price that E’s property will never reach in 20 years. Sound familiar?

Welcome to USA property law as it was summarily ignored, changed and enforced for the past 10 years? Why? Especially when it turns out that the investment broker that sold the mortgage bonds of the REMIC knew about the whole story all along. Why are we letting this happen?


NO Reason to Modify: Banks Foreclosed to Collect 100 cents on the Dollar from the Government

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Editor’s Comment:

The math is simple which is why we are now offering as part of a forensic loan specific analysis, a HAMP analysis and proposal along with the worksheets that back it up. If they foreclose, then they get all the money due on the mortgage even if they would only get 30% of that (see previous article) in foreclosure. This is really simple folks. If you had two “buyers” who would you sell to — the one offering $300,000 or the one offering $100,000?

The servicers and master servicers have only one major incentive in play because our elected officials have let it stay in play — the paper representing mortgage bonds and loans which undoubtedly are riddled with misrepresentations and bad data, is worth 100% if the government gets it but only 30% if anyone else gets it. This is welfare for the largest banks that stole from the citizens and are being allowed to keep the money and gamble more with our future. This isn’t about deficits or budgets. This is about fraud and restitution.

The victims of fraud — all of them including financial institutions (if they are innocent, which is another story) should receive full restitution and if the net balance due on any one loan is proportionately reduced by receipts of payments from the servicer, the proceeds of insurance, credit default swaps and credit enhancements (and of course restructuring into even more exotic pools that are never reported, thus rendering even the “trust” to be non-existent), a fair deal can be reached because the principal will have been reduced.

Foreclosure Fraud 101 – How (not) to Fraudclose on a Default When There is No Default in Order to Steal $$$ from the Govt (FDIC)

By ZeroHedge.com

This little gem comes over from Mark Stopa…

Take a look at this Final Judgment, where a borrower prevailed over BB&T at trial. Yes, the bank was sleazier than the skuz on the bottom of my shoes, declaring this borrower in default when there was no default. But take a close look at WHY the bank did so. As the Final Judgment reflects, the bank was financially motivated to declare a default because it knew the government was going to pay the mortgage in the event of default.

As if that’s not disgusting enough, what makes it even worse was that BB&T did not even loan the money – a prior bank did. Yet as a result of a deal with the FDIC, BB&T was in the position of pocketing millions of dollars from our government merely by declaring this borrower in default. This should piss off everybody in America – a bank that didn’t loan money wrongly declares a default so it can collect millions from our government. Where is the outrage?

Don’t believe me? Don’t take my word for it – read the findings of Judge Levens in this Final Judgment.

From the judgment…

The evidence adduced at trial and considered by the court demonstrated that Plaintiff breached it duties of good faith and fair dealing in its contractual relationship with Defendants. The evidence also demonstrated that Plaintiff was motivated to behave in such as manner as a direct result of the PSA; that is, Plaintiff stood to profit by declaring a fraudulent default under the subject loan, collecting from the FDIC under the PSA for such default, and then enforcing the subject loan against Defendants, and retaining the property until such time as a real estate turnaround occurred in hopes to dispose of the property at the peak of the market. In fact, Mr. Bruni testified that Plaintiff may have already applied to the FDIC for a loss share payment on this loan. And Defendants’ expert, Jim Howard, explained that it was possible Plaintiff could have already applied for and received a payment from the FDIC on this loan, perhaps in an amount as high as $1,800,000.00. Notably, Plaintiff nowhere credited such potential payment from the FDIC against the amounts sought in the instant litigation; thereby giving the impression that Plaintiff might be “double dipping”, and possibly “triple dipping” if market conditions favorably change and the property likewise increases in value.

DISCUSSION

The evidence was clear that there was a long and unblemished record of good faith timely monthly payments by Defendants. The evidence is also clear that, both on legal and equitable grounds, a bona fide default never occurred, and the resulting loan acceleration and lawsuit were improvidently initiated by Plaintiff for purposes of trying to maximize collection simultaneously from the future sale of the property after favorable stabilization occurred. The evidence is clear that Plaintiff committed significant wrongdoing and breached the implied duty of good faith and fair dealing of a financial institution, such that the instant cause of action should be denied in its entirety.

Sounds like the plaintiff committed much more than “significant wrongdoing” but I guess when you’re the bank it isn’t a crime.

Now do you understand why there are so many “DEADBEATS” that do not pay their bills?


Nye Lavalle’s Early Warning in 2003 Profiled In New York Times

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“The Fraud of Our Lifetime”

Robert D. Drain, a federal bankruptcy judge in the Southern District of New York, said in court last month that the failure of the mortgage industry to deal with pervasive problems involving inaccurate documentation and improper court filings amounted to “the greatest failure of lawyering in the last 50 years.”

In an interview last week, Judge Drain said several practices have contributed to the foreclosure mess. One is that Fannie and the rest of the industry failed to ensure that MERS was operating legally in all states. Another is that the industry failed to perform due diligence on documentation.

SECRET STUDY IN 2006 CORROBORATED LAVALLE’S FINDINGS SEE O.C.J. Case no 5595

EDITOR’S NOTES: Nye has contributed to these pages and while he attended my workshop, he was as much a contributor there as a participant. For homeowners, lawyers, judges, legislators, and law enforcement officials, here are the take-away points that are documented by Lavalle and referred to in this article. Lavalle is a heavy hitter, and despite the obvious clarity of his projections and observations in 2003 and the years going forward, everyone ignored him — stating that he was “over the top.” I know how that feels. But here are some actual facts that can be found and used in your litigation with the banks and servicers, Fannie and Freddie. It was a dirty business from the start:

  1. Anyone who gains control of a note can try to force the borrower to pay it — even if it has already been paid. In our current context the burden mysteriously shifts to the borrower to prove information that is solely in the possession of the their opponent who has no intention of giving it up. By pretending to be a lender or successor, banks and servicers have foreclosed on millions of properties not just improperly from a procedural point of view, but wrongfully because there was no debt, there was no default and there was no security instrument that was enforceable.
  2. In at least 2 million foreclosures,, extrapolating from currently available figures, the debt was paid in full to the creditor but the note was not cancelled, so that the same note could be subject to collection multiple time. These uncancelled notes were routinely sent by Fannie and Freddie as parties complicit in a monumental fraud. Everyone knew better but the prospect of grabbing homes from unsuspecting homeowners who knew they had stopped making payments was irresistible. Why tell the homeowner that the debt was paid? Why tell the homeowner that there was no default? It certainly looked like there was a debt and it looked like a default. So the banks and servicers ran with it.
  3. Most of the remaining 5 million foreclosures were based upon false declarations of default because the note was partially paid by third parties as set forth in the contracts between the investors, servicers and banks. These also include debts that had been paid or settled in full by receipt of servicer payments, insurance, and credit default swaps as well as commingling of funds between tranches in each REMIC.
  4. Destruction of 40% of the notes ( at a minimum) was a planned strategy to create a grey area in which anyone who could create the “original note” (even though it was lost or shredded) was able to bring enforcement actions against hapless homeowners who had no way or knowing nor any access to information as to the reality of these exotic transactions.
  5. Lavalle warned Fannie and Freddie in 2005 — 2 years before this blog began — that David Stern’s office was being cited for using fabricated, fraudulent instruments. They didn’t care.
  6. The findings in confidential analyses and reports corroborated the observations and analysis of Lavalle. But the Conclusion is what will send occupiers and others through the roof — they concluded that most people would not have the resources of knowledge to attack the system of corruption and so it was decided to allow it to continue. In other words because you are ignorant of how the money was handled, because the banks and servicers were allowed to deceive you and you were deceived, because you didn’t understand the exotic instruments in which your your signature was used, and most of all because you didn’t have the money to challenge them, you would lose your home, all the money you put into it and never know that the parties who foreclosed were literally laughing all the way to the Bank. 
  7. The solution is to get help. The analytical tools offered on this web site are now being used with some success in courtrooms across the country. We are in the process of combining the tools into packages such that the inexperienced homeowner is not forced to choose between products that he or she does not understand. And we have paralegals support services for a legion of lawyers who will shortly announce their ability to process large volumes of case competently, methodically and successfully. We are ending the days where you order a report that contains helpful information but there is no instruction or manual that explains how to use the information on title, securitization Forensic Loan (TILA) Analysis and Loan Level Accounting. Now you only need to know that the consortium of analysts, paralegals and lawyers will bring the facts of your case together for the best possible presentation. Take hope from this but no sense of guarantee. Many Judges and lawyers and even the homeowners) have trouble with the notion that the debt was extinguished without borrower payment and was instead paid by others.

A Mortgage Tornado Warning, Unheeded

By

YEARS before the housing bust — before all those home loans turned sour and millions of Americans faced foreclosure — a wealthy businessman in Florida set out to blow the whistle on the mortgage game.

His name is Nye Lavalle, and he first came to attention not in finance but in sports and advertising. He turned heads in marketing circles by correctly predicting that Nascar and figure skating would draw huge followings in the 1990s.

But after losing a family home to foreclosure, under what he thought were fishy circumstances, Mr. Lavalle, founder of a consulting firm called the Sports Marketing Group, began a new life as a mortgage sleuth. In 2003, when home prices were flying high, he compiled a dossier of improprieties on one of the giants of the business, Fannie Mae.

In hindsight, what he found looks like a blueprint of today’s foreclosure crisis. Even then, Mr. Lavalle discovered, some loan-servicing companies that worked for Fannie Mae routinely filed false foreclosure documents, not unlike the fraudulent paperwork that has since made “robo-signing” a household term. Even then, he found, the nation’s electronic mortgage registry was playing fast and loose with the law — something that courts have belatedly recognized, too.

You might wonder why Mr. Lavalle didn’t speak up. But he did. For two years, he corresponded with Fannie executives and lawyers. Fannie later hired a Washington law firm to investigate his claims. In May 2006, that firm, using some of Mr. Lavalle’s research, issued a confidential, 147-page report corroborating many of his findings.

And there, apparently, is where it ended. There is little evidence that Fannie Mae’s management or board ever took serious action. Known internally as O.C.J. Case No. 5595, in reference to the company’s Office of Corporate Justice, this 2006 report suggests just how deep, and how far back, our mortgage and foreclosure problems really go.

“It is axiomatic that the practice of submitting false pleadings and affidavits is unlawful,” said the report, a copy of which was obtained by The New York Times. “With his complaint, Mr. Lavalle has identified an issue that Fannie Mae needs to address promptly.”

What Fannie Mae knew about abusive foreclosure practices, and when it knew it, are crucial questions as Congress and the Obama administration weigh the future of the company and its cousin, Freddie Mac. These giants eventually blew themselves apart and, so far, they have cost taxpayers $150 billion. But before that, their size and reach — not only through their own businesses, but also through the vast amount of work they farm out to law firms and loan servicers — meant that Fannie and Freddie shaped the standards for the entire mortgage industry.

Almost all of the abuses that Mr. Lavalle began identifying in 2003 have since come to widespread attention. The revelations have roiled the mortgage industry and left Fannie, Freddie and big banks with potentially enormous legal liabilities. More worrying is that the kinds of problems that Mr. Lavalle flagged so long ago, and that Fannie apparently ignored, have evicted people from their homes through improper or fraudulent foreclosures.

Until a few weeks ago, Mr. Lavalle, 54, had never seen O.C.J. 5595. He had hoped to get a copy after helping Fannie’s lawyers, at Baker & Hostetler in Washington, complete it. He didn’t.

But after learning about its findings from a reporter for The Times, Mr. Lavalle said, “Fannie Mae, its directors, servicers and lawyers appeared to have an institutional policy of turning a willful blind eye to evidence of mortgage origination and servicing fraud.”

He went on: “When confronted directly with this evidence, Fannie not only failed to correct and remedy the abuses, it assisted in continuing the frauds via institutional practices that concealed fraudulent foreclosures.”

A spokesman for Fannie Mae said in a statement last week that the company quickly addressed several issues that were raised in the 2006 report and that it took action on other issues associated with foreclosures in 2010. “We want to prevent foreclosure whenever possible, but when foreclosures cannot be avoided they must move forward in a timely, appropriate fashion,” he said.

Fannie Mae would not say whether it had shared O.J.C. 5595 with its board of directors or its regulator, then known as the Office of Federal Housing Enterprise Oversight. James B. Lockhart III, who headed that regulator in 2006, said he did not recall reading the report. “I probably did not see it as back then foreclosures were not a very big deal,” he said.

But another report published last fall by the inspector general of the Federal Housing Finance Agency, the current regulator, briefly mentioned some of the problems that Mr. Lavalle had raised. (It didn’t mention him by name.) It also faulted Fannie Mae, saying it failed to address foreclosure improprieties that had surfaced years before.

LIKE most people, Nye Lavalle had little interest in the mortgage industry until things got personal. Raised in comfortable surroundings in Grosse Pointe, Mich., just outside Detroit, he began his business career in the 1970s, managing professional tennis players. In the 1980s, he ran SMG, a thriving consulting and research firm.

Then he tried to pay off a loan on a home his family had bought in Dallas in 1988. The balance was roughly $100,000, and the property was valued at about $175,000, Mr. Lavalle said. But when he combed through figures provided by his lender, Savings of America, he found substantial discrepancies in the accounting that had inflated his bill by $18,000. The loan servicer had repeatedly charged him late fees for payments he had made on time, as well as for unnecessary appraisals and force-placed hazard insurance, he said.

Mr. Lavalle refused to pay. The bank refused to bend. The balance rose as the bank tacked on lawyers’ fees and the loan was deemed delinquent. The fight continued after his mortgage was allegedly sold to EMC, a Bear Stearns unit.

Unlike most people, Mr. Lavalle had the time and money to fight. He persuaded his family to help him pay for a lawsuit against EMC and Bear Stearns. Seven years and a small fortune later, they lost the house in Dallas. Back then, judges weren’t as interested in mortgage practices as some are now, he said.

The experience lit a fire. Mr. Lavalle set out to learn everything he could about the mortgage industry. In a five-hour interview in Naples, Fla., last month, he described his travels nationwide. He dove into mortgage arcana, land records and court filings. By 1996, he had identified what appeared to be forged signatures on foreclosure documents, foreshadowing troubles to come. He took his findings to big players in the industry: Banc One, Bear Stearns, Countrywide Financial, Freddie Mac, JPMorgan, Washington Mutual and others. A few responded but later said his claims were not valid, he said.

Now he splits his time between Orlando and Boca Raton, advising lawyers as an expert witness. “From my own personal experience and 20 years of research and investigation, nothing — and I mean nothing — that a bank, lender, loan servicer or their lawyer says or puts on paper can be trusted and accepted as true,” Mr. Lavalle said.

FANNIE MAE, now in government hands, has acknowledged how abusive foreclosure practices can hurt its own business. “The failure of our servicers or a law firm to apply prudent and effective process controls and to comply with legal and other requirements in the foreclosure process poses operational, reputational and legal risks for us,” it said in a 2010 filing with the Securities and Exchange Commission.

Five years earlier, Fannie seemed to have taken a different view. That was when Mr. Lavalle pointed out legal lapses by some of its representatives. Among them was the law offices of David J. Stern, in Plantation, Fla., which was handling an astonishing 75,000 foreclosure cases a year — more than 200 a day. In 2005, Mr. Lavalle warned Fannie Mae that some judges had ruled that the Stern firm was submitting “sham pleadings.” Nonetheless, Fannie continued to do business with the firm until it closed its doors last year, after evidence emerged of rampant forgeries and fraudulent filings.

O.C.J. Case No. 5595 found that Stern wasn’t the only firm working for Fannie that seemed to be cutting corners. It also found that lawyers operating in seven other states — Connecticut, Georgia, New York, Illinois, Louisiana, Kentucky and Ohio — had made false filings in connection with work for Fannie Mae or the Mortgage Electronic Registration System, or MERS, a private mortgage registry Fannie helped establish in 1995.

“While Fannie Mae officials do not have a single opinion, some officials believe foreclosure counsel are sacrificing accuracy for speed,” the report said.

The lawyers at Baker & Hostetler did not agree with everything Mr. Lavalle said. Mark A. Cymrot, a partner who led the investigation, discounted Mr. Lavalle’s fear that Fannie could lose billions if large numbers of foreclosures had to be unwound as a result of misconduct by its lawyers and servicers.

Even so, the report didn’t conclude that Mr. Lavalle was wrong on the legal issues. It simply said that few people would have the financial resources to challenge foreclosures. In other words, few people would be like Mr. Lavalle.

“Courts are unlikely to unwind foreclosures unless borrowers can demonstrate that the foreclosure would not have gone forward with the correct pleadings, which is a difficult burden for most borrowers to meet,” the report said. “Nevertheless, the issues Mr. Lavalle raises should be addressed promptly in order to mitigate the risk of exposure to lawsuits and some degree of liability.” Mr. Cymrot declined to comment for this article.

O.C.J. 5595 also questioned Mr. Lavalle’s contention that improprieties by loan servicers were pervasive. But based on interviews with 30 Fannie employees, the report conceded that the company had no mechanism to ensure that servicers were charging borrowers appropriate fees.

Other oversight at Fannie was similarly lacking, the Baker & Hostetler lawyers found. For instance, when Fannie identified fraud by a lender or servicer, it didn’t notify the homeowner. Nor did it police activities of lawyers or servicers it hired. As a result, the report said, Fannie might not be insulated from liability for their misconduct.

Lewis D. Lowenfels, a securities law expert, said he was perplexed that Fannie’s board appeared to have done nothing to correct these practices. “If it had been brought to the board’s attention that specific acts of illegality were being committed, it should have directed that relationships with the transgressors be terminated forthwith and Fannie Mae’s regulator be advised accordingly,” he said.

Daniel H. Mudd, Fannie’s chief executive at the time, declined to comment through his lawyer. Mr. Mudd was recently sued by the S.E.C., accused of failing to disclose Fannie’s participation in the subprime mortgage market.

PERHAPS no development has done more to obscure the forces behind the foreclosure epidemic than the rise of the MERS, the private registry that has all but replaced public land ownership records. Created by Fannie, Freddie and big banks, MERS claims to hold title to roughly half the nation’s home mortgages. Judges and lawmakers have questioned MERS’s legal authority to initiate foreclosures, and some judges have thrown out foreclosures brought in its name. On Friday, New York’s attorney general sued MERS, contending that its system led to fraudulent foreclosure filings. MERS refuted the claims and said it would fight.

Mr. Lavalle warned Fannie years ago that MERS couldn’t legally foreclose because it didn’t actually own notes underlying properties.

The report agreed. MERS’s approach of letting loan servicers foreclose in its own name, not in that of institutions owning the notes, “is not accepted legal practice in all states,” the report said. Moreover, “MERS’s counsel conceded false allegations are routinely made, and the practice should be ‘modified.’ ”

It continued: “To our knowledge, MERS has not addressed the issue of its counsels’ repeated false statements to the courts.”

Janis L. Smith, a spokeswoman for MERS, said it had not seen the Baker & Hostetler report and declined comment on its references to the false statements made on its behalf to the courts. She said that MERS’s business model is legal in all states and that as a nominee, it has the right to foreclose. MERS stopped allowing its members to foreclose in its name in all states in 2011.

Robert D. Drain, a federal bankruptcy judge in the Southern District of New York, said in court last month that the failure of the mortgage industry to deal with pervasive problems involving inaccurate documentation and improper court filings amounted to “the greatest failure of lawyering in the last 50 years.”

In an interview last week, Judge Drain said several practices have contributed to the foreclosure mess. One is that Fannie and the rest of the industry failed to ensure that MERS was operating legally in all states. Another is that the industry failed to perform due diligence on documentation.

MERS no longer participates in foreclosures. But a lot of damage has already been done, Mr. Lavalle said.

“Hundreds of thousands of foreclosures in Florida and across America were knowingly conducted unlawfully, for which there are still severe liabilities and implications to come for many years,” he said.

THERE was a time when Americans had mortgage-burning parties: When they paid off a promisory note, they celebrated by burning the release of the lien.

But they kept the canceled promissory note — and there was a reason for that. Promissory notes, like dollar bills, are negotiable currency. Whoever holds them can essentially claim them.

According to O.C.J. Case No. 5595, Fannie held roughly two million mortgage notes in its offices in Herndon, Va., in 2005 — a fraction of the 15 million loans it actually owned or guaranteed. Who had the rest? Various third parties.

At that time, Fannie typically destroyed 40 percent of the notes once the mortgages were paid off. It returned the rest to the respective lenders, only without marking the notes as canceled.

Mr. Lavalle and the internal report raised concerns that Fannie wasn’t taking enough care in handling these documents. The company lacked a centralized system for reporting lost notes, for instance. Nor did custodians or loan servicers that held notes on its behalf report missing notes to homeowners.

The potential for mayhem, the report said, was serious. Anyone who gains control of a note can, in theory, try to force the borrower to pay it, even if it has already been paid. In such a case, “the borrower would have the expensive and unenviable task of trying to collect from the custodian that was negligent in losing the note, from the servicer that accepted payments, or from others responsible for the predicament,” the report stated. Mr. Lavalle suggested that Fannie return the paid notes to borrowers after stamping them “canceled.” Impractical, the 2006 report said.

This leaves open the possibility that someone might try to force homeowners to pay the same mortgage twice. Or that loans could be improperly pledged as collateral by some other institution, even though the loans have been paid, Mr. Lavalle said. Indeed, there have been instances in the foreclosure crisis when two different institutions laid claim to the same mortgage note.

In its statement last week, Fannie said it quickly addressed questions of lost note affidavits and issued guidance to servicers that no judicial foreclosures be conducted in MERS’s name. It also said it instructed Florida foreclosure lawyers “to use specific language to assure no confusion over the identity of the ‘owner’ and the ’holder’ of the note.”

The 2006 report said Mr. Lavalle at times came across as over the top, that he was, in its words, “partial to extreme analogies that undermine his credibility.” Knowing what we know now, he looks more like one of the financial Cassandras of our time — a man whose prescient warnings went unheeded.

Now, he hopes dubious mortgage practices will be eradicated.

“Any attorney general, lawyer, bank director, judge, regulator or member of Congress who does not open their eyes to the abuse, ask pertinent questions and allow proper investigation and discovery,” he said, “is only assisting in the concealment of what may be the fraud of our lifetime.”

8

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

“Keep your fingers crossed but I think we will price this just before the market falls off a cliff,” a Deutsche Bank manager wrote in February 2007

Internal emails indicate Deutsche Bank knew they were bankrolling toxic mortgages by Ameriquest and others

Internal emails indicate Deutsche Bank knew they were bankrolling toxic mortgages by Ameriquest and others

iWatch

In 2007, the report says, Deutsche Bank rushed to sell off mortgage-backed investments amid worries that the market for subprime loans was deteriorating.

“Keep your fingers crossed but I think we will price this just before the market falls off a cliff,” a Deutsche Bank manager wrote in February 2007 about a deal stocked with securities created from raw material produced by Ameriquest and other subprime lenders.

Deutsche Bank Analyst: Overpay For Our Assets, Or You’ll Regret It

By Zachary Roth – February 12, 2009, 3:49PM

For a while now, it’s seemed like Wall Street’s message to government has been: We screwed up. But if you don’t rescue us on our terms, you’re all gonna be in trouble.

But you don’t usually see that expressed quite as clearly as it was in a research memo sent out yesterday by a senior Deutsche Bank analyst, and obtained by TPMmuckraker.

In the memo — one of Deutsche’s daily “Economic Notes” sent out to the firm’s clients, and to some members of the press — Joseph LaVorgna, the bank’s chief US economist, essentially, appears to warn that if the government doesn’t pay high prices for the toxic assets on the books of Deutsche and other big firms, there will be massive consequences for the US economy.

Writes LaVorgna:

One main stumbling block to the purchasing of troubled assets has been pricing, specifically how does the government price a diverse set of assets in a way that does not put the taxpayer on the hook. However, this should not be the standard by which we judge the efficacy of the plan, because a more prolonged deterioration in the
economy will result in a higher terminal unemployment rate and a greater deterioration of the tax base. As such, the decline in tax revenues will crimp many of the essential services provided by the government. Ultimately, the taxpayer will pay one way or another, either through greatly diminished job prospects and/or significantly higher taxes down the line to pay for the massive debt issuance required to fund current and prospective fiscal spending initiatives.

We think the government should do the following: estimate the highest price it can pay for the various toxic assets residing on financial institution balance sheets which would still return the principal to taxpayers.

One leading economist described the memo to TPMmuckraker as a “ransom note” to the US government. And David Kotok of Cumberland Advisors, who writes such research memos for his own clients, acknowledged that the memo, like all such communications, could be interpreted as an attempt to influence policy-makers.

Still, seeing the memo as a threat to the government to drive the softest of bargains wouldn’t be entirely fair. Kotok that cautioned that the effects of a single analyst’s memo are limited: “Joe LaVorgna doesn’t have enough clout to hold the US government hostage.”

LaVorgna himself was blunt: “I don’t write editorials,” he told TPMmuckraker.

At the very least, the memo can be seen as a frank statement of position from the chief economist of a major bank: if the government doesn’t cave and buy up all the banks’ toxic assets at inflated prices, the country will suffer.

Nice fix we’ve got ourselves into.


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WERE ORIGINAL MORTGAGE DOCUMENTS FALSE OR FRAUDULENT?

YES — at least that’s my opinion and the the opinion of a growing body of legal experts. Any property lawyer will tell you that you can fix any chain of title using the proper methods — getting a signature to correct something that was wrong, getting a court order or affidavit from a competent witness, etc. The idea is to make it as easy as possible to correct improperly written or improperly executed documents to reflect the real deal that constituted the transaction.

So why would the mega banks start their own document fabrication and forgery operations when there is a perfectly legal way to correct “paperwork” problems? If there was a real transaction in which money changed hands, it is easy, especially in today;s digital world, to establish the trail of money, put the transaction in context and then either solicit the appropriate parties to sign corrective instruments or force them to do so by court order.

And sure enough there was a real transaction in which money changed hands. No borrower denies it. So why the fabricated and forged documents? ANSWER: BECAUSE NO THE INVESTOR-LENDER WHO ADVANCED THE FUNDS NOR THE BORROWER WILL SIGN ANY CORRECTIVE INSTRUMENTS. WHY YOU ASK? BECAUSE THE CORRECTIVE INSTRUMENTS DO NOT DESCRIBE THE TRANSACTION BETWEEN THE HOMEOWNER AND THE INVESTOR. In order to force the homeowner and the investor to take the deal and lose money on it, the securitizer pretenders would need to show that the transaction they are seeking to “correct” actually existed. But it didn’t.

The investors and borrowers are not suing because the deal didn’t turn out the way  they wanted. They are suing because the real deal was not disclosed to them and they never would have signed papers on either end of the deal.

Start with the “mortgage originator” who in the world of the illusory infrastructure of securitization is distinguished from lender, beneficiary or mortgagee. Here is an entity that has no money, lends no money, and in substance never even handled the money for the funding of the transaction except possibly through their wire transfer department if they were an actual bank. The so-called trusts, were not formed under New York law and the Trustees took great pains NOT to include these trusts within their “Trust Department” that they use ordinarily for the administration of trusts.

Move on to the inflation of the appraisal, the borrower’s income — often without knowledge or consent of the borrower, and you have a deal that nobody would do if they knew what was going on — which is why the securitizer pretenders CAN’T go to the investors and CAN’T go the homeowner and ask or demand that they sign corrective instruments.

AND THAT LEADS TO DEFECTIVE TITLE WHICH WILL HAUNT US FOR DECADES. Wall Street’s efforts to buy or start title companies is only another part of the cover-up. The inescapable conclusion when you look at the money trail and compare it to the documents, is that they don’t match. The unavoidable conclusion is that they were not intended to match — meaning there was fraud in the inducement and fraud in the execution of documents.

LOGIC and common sense bring us to this: the money trail is NOT reflected by any existing document. It never was and it can’t be now. The document trail, pretends to follow an illusory transaction trail in which no money changed hands — hence it is a bunch of documents in support of non-existent monetary transactions. The mega banks can’t correct it without admitting they lied to the investors and lied to the borrowers — because out of necessity, any corrective documents would change the deal completely. So ordinary forms of correcting legal instruments and recorded instruments are simply not available. They have no choice but to keep lying and fabricating and forging.

It won’t be long now before Judges and lawyers and homeowners realize the truth about their so-called mortgage loans. They are a fiction. The money trail leads to a single transaction between the investor-lender and the homeowner without any documents. The government’s attempt to use servicers to modify the mortgages failed because they were asking the fox to negotiate over who would get the eggs — and the chickens for that matter. WRONG WAY AND WRONG PARTIES.

It may therefore be fairly stated that ALL of the more than 80 million “mortgage” transactions that were documented at “closings” were fatally defective, unsecured and involved parties who were not involved in the actual transaction. $13 trillion in transactions went south because the investors were tricked by deception and because the homeowners were tricked by deception. Following the money trial will reveal that much of the money advanced never went to fund mortgages but was shunted off-shore as fees in “off-balance sheet” transactions amounting a yield spread premium that could only be described as fraudulent, inasmuch as the word “excessive” is inadequate to describe it.

FIRING SERVICERS AND TRUSTEES IS THE ONLY SMART STEP FOR INVESTORS

It may therefore fairly accurately be described as an economy that appears to be flipped but actually is not. Since none of the actual transactions were liens or encumbrances upon the real property, the original owners still own them. If the investors want to “settle” their claims with the investment bankers, that is fine. But if they want to recover more of the money that was stolen from them, they should probably work out a deal wherein homeowners are allowed to keep or re-take their homes under normal and reasonable terms. If investors want to maximize their recovery and minimize their damages, they need to exercise their right to fire the servicers, trustees, and others who are feeding off of their money.

MD GOV AND AG DEMAND FORECLOSURE HALT

SERVICERS HAVE BEEN NOTIFIED…. TEMPORARY FORECLOSURE MORATORIUM DEMANDED IN MARYLAND!!!

In response to a request this weekend by U.S. Rep. Elijah E. Cummings (D-Dist. 7) of Baltimore, Gov. Martin O’Malley (D) has a signed joint letter with Cummings and Attorney General Douglas F. Gansler calling on “Maryland mortgage servicers to halt current and future foreclosure proceedings until Maryland homeowners can be assured they’re being treated fairly.”

The joint letter, a copy of which was contained in a press release from the governor’s office, was dated Oct. 4 and addressed to several companies, including Wells Fargo/Wachovia, PNC Financial Services Group, JP Morgan Chase & Co., Bank of America and CitiMortgage. A spokesman for the governor said the letters will actually be mailed Tuesday morning.

O’Malley said in the press release, “In recent days, several servicers, including JP Morgan Chase, Bank of America and GMAC/Ally Finance, have acknowledged that they have failed to follow proper procedures by filing affidavits in foreclosure cases without adequate personal knowledge of the underlying cases, trampling laws that were designed specifically to protect homeowners in default. They have recently announced suspension of foreclosures in 23 states.”

Cummings, a senior member of the House Joint Economic Committee, sent a letter Saturday to O’Malley and Gansler, according to information on Cummings’ website, calling for a 60-day moratorium on foreclosures.

Cummings said in his letter, “Numerous new reports from multiple states suggest major lending institutions may have committed deceptive and fraudulent actions to initiate foreclosure proceedings against potentially hundreds of thousands of homeowners, including signing affidavits and other legal documents in bulk without confirming the accuracy of the information alleged in those documents …”

Cummings said on his website, “As a result of practices such as these, families may have been wrongly evicted from properties based on inaccurate or incomplete information. Foreclosed properties may have even been sold to new owners following such proceedings.”

Calls to mortgage servicers addressed in the joint letter calling signed by O’Malley, Cummings and Gansler were not immediately returned Monday evening.

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