Mortgage Lenders Network and Wells Fargo Battled over Servicer Advances

Posted on January 22, 2014 by Neil Garfield

It is this undisclosed yield spread premium that produces the pool from which I believe the servicer advances are actually being paid. Intense investigation and discovery will probably reveal the actual agreements that show exactly that. In the meanwhile I encourage attorneys to look carefully at the issue of “servicer advances” as a means to defeat the foreclosure in its entirety.

As usual, the best decisions come from cases where the parties involved in “securitization” are fighting with each other. When a borrower brings up the same issues, the court is inclined to disregard the borrower’s defense as merely an attempt to get out of  a legitimate debt. In the Case of Mortgage Lenders  versus Wells Fargo (395 B.K. 871 (2008)), it is apparent that servicer advances are a central issue. For one thing, it demonstrates the incentive of servicers to foreclose even though the foreclosure will result in a greater loss to the investor then if a workout or modification had been used to save the loan.

See MLN V Wells Fargo

It also shows that the servicers were very much aware of the issue and therefore very much aware that between the borrower and the lender (investor or creditor) there was no default, and on a continuing basis any theoretical default was being cured on a monthly basis. And as usual, the parties and the court failed to grasp the real economics. Based on information that I have received from people were active in the bundling and sale of mortgage bonds and an analysis of the prospectus and pooling and servicing agreements, I think it is obvious that the actual money came from the broker dealer even though it is called a “servicer advance.” Assuming my analysis is correct, this would further complicate the legal issues surrounding servicer advances.

This case also demonstrates that it is in bankruptcy court that a judge is most likely to understand the real issues. State court judges generally do not possess the background, experience, training or time to grasp the incredible complexity created by Wall Street. In this case Wells Fargo moves for relief from the automatic stay (in a Chapter 11 bankruptcy petition filed by MLN) so that it could terminate the rights of MLN as a servicer, replacing MLN with Wells Fargo. The dispute arose over several issues, servicer advances being one of them. MLN filed suit against Wells Fargo alleging breach of contract and then sought to amend based on the doctrine of “unjust enrichment.” This was based upon the servicer advances allegedly paid by MLN that would be prospectively recovered by Wells Fargo.

The take away from this case is that there is no specific remedy for the servicer to recover advances made under the category of “servicer advances” but that one thing is clear —  the money paid to trust beneficiaries as “servicer advances” is not recoverable from the trust beneficiaries. The other thing that is obvious to Judge Walsh in his discussion of the facts is that it is in the servicing agreements between the parties that there may be a remedy to recover the advances; OR, if there is no contractual basis for recovering advances under the category of  “servicer advances” then there might be a basis to recover under the theory of unjust enrichment. As always, there is a complete absence in the documentation and in the discussion of this case as to the logistics of exactly how a servicer could recover those payments.

One thing that is perfectly clear however is that nobody seems to expect the trust beneficiaries to repay the money out of the funds that they had received. Hence the “servicer advance” is not a loan that needs to be repaid by the trust or trust beneficiaries. Logically it follows that if it is not a loan to the trust beneficiaries who received the payment, then it must be a payment that is due to the creditor; and if the creditor has received the payment and accepted it, the corresponding liability for the payment must be reduced.

Dan Edstrom, senior securitization analyst for the livinglies website, pointed this out years ago. Bill Paatalo, another forensic analyst of high repute, has been submitting the same reports showing the distribution reports indicating that the creditor is being paid on an ongoing basis. Both of them are asking the same question, to wit:  “if the creditor is being paid, where is the default?”

One attorney for US bank lamely argues that the trustee is entitled to both the servicer advances and turnover of rents if the property is an investment property. The argument is that there is no reason why the parties should not earn extra profit. That may be true and it may be possible. But what is impossible is that the creditor who receives a payment can nonetheless claim it as a payment still due and unpaid. If the servicer has some legal or equitable claim for recovery of the “servicer advances” then it can only be against the borrower, on whose behalf the payment was made. This means that a new transaction occurs each time such a payment is made to the trust beneficiaries. In that new transaction the servicer can claim “contribution” or “unjust enrichment” against the borrower. Theoretically that might bootstrap into a claim against the proceeds of the ultimate liquidation of the property, which appears to be the basis upon which the servicer “believes” that the money paid to the trust beneficiaries will be recoverable. Obviously the loose language in the pooling and servicing agreement about the servicer’s “belief” can lead to numerous interpretations.

What is not subject to interpretation is the language of the prospectus which clearly states that the investor who is purchasing one of these bogus mortgage bonds agrees that the money advanced for the purchase of the bond can be pooled by the broker-dealer; it is expressly stated that the investor can be paid out of this pool, which is to say that the investor can be paid with his own money for payments of interest and principal. This corroborates my many prior articles on the tier 2 yield spread premium. There is no discussion in the securitization documents as to what happens to that pool of money in the care custody and control of the broker-dealer (investment bank). And this corroborates my prior articles on the excess profits that have yet to be reported. And it explains why they are doing it again.

It doesn’t take a financial analyst to question why anyone would think it was a great business model to spend hundreds of millions of dollars advertising for loan customers where the return is less than 5%. The truth in lending act passed by the federal government requires the participants who were involved in the processing of the loan to be identified and to disclose their actual compensation arising from the origination of the loan — even if the compensation results from defrauding someone. Despite the fact that most loans were subject to claims of securitization from 2001 to the present, none of them appear to have such disclosure. That means that under Reg Z the loans are “predatory per se.”

To say that these were table funded loans is an understatement. What was really occurring was fraudulent underwriting of the mortgage bonds and fraudulent underwriting of the underlying loans. The higher the nominal interest rate on the loans (which means that the risk of default is correspondingly higher) the less the broker-dealer needed to advance for origination or acquisition of the loan; and this is because the investor was led to believe that the loans would be low risk and therefore lower interest rates. The difference between the interest payment due to the investor and the interest payment allegedly due from the borrower allowed the broker-dealers to advance much less money for the origination or acquisition of loans than the amount of money they had received from the investors. That is a yield spread premium which is not been reported and probably has not been taxed.

It is this undisclosed yield spread premium that produces the pool from which I believe the servicer advances are actually being paid. Intense investigation and discovery will probably reveal the actual agreements that show exactly that. In the meanwhile I encourage attorneys to look carefully at the issue of “servicer advances” as a means to defeat the foreclosure in its entirety.

I caution that when enough cases have been lost as a result of servicer advances, the opposition will probably change tactics. While you can win the foreclosure case, it is not clear what the consequences of that might be. If it results in a final judgment for the homeowner then it might be curtains for anyone to claim any amount of money from the loan. But that is by no means assured. If it results in a dismissal, even with prejudice, it might enable the servicer to stop making advances and then declare a default if the borrower fails to make payments after the servicer has stopped making the payments. Assuming that a notice of acceleration of the debt has been declared, the borrower can argue that the foreclosing party has elected its own defective remedy and should pay the price. If past experience is any indication of future rulings, it seems unlikely that the courts will be very friendly towards that last argument.

Attorneys who wish to consult with me on this issue can book 1 hour consults by calling 520-405-1688.

Filed under: CASES, CDO, CORRUPTION, evidence, expert witness, Fannie MAe, foreclosure, foreclosure defenses, foreclosure mill, GARFIELD KELLEY AND WHITE, GTC | Honor, investment banking, Investor, MBS TRUSTEE, MODIFICATION, Mortgage, Motions, Pleading, securities fraud, Servicer, STATUTES, TRUST BENEFICIARIES, trustee | Tagged: , , , , , , , , , , , | 124 Comments »

GUILTY! DOCX Defendants Plead in Fraud Cases

Posted on November 21, 2012 by Neil Garfield

“Ms. Brown admitted to participating in the falsification of more than a million documents.”

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Editor’s Comment: A 2 year sentence can only be justified if she is cooperating with authorities, but he narrative coming out of this is that her “clients” didn’t know what she was doing. THAT is impossible.

“If citizens had filed these types of documents with a bank in an attempt to get a loan, the banks would have filed criminal cases against them,” Mr. Koster said. “The mortgage servicing industry has to be held to the same standard that the banks hold the rest of us to.”

The fact is that no bank would have accepted these documents if they came from a borrower and the deals would never have been done. Banks know when they are looking at fabricated documents and they know what questions to ask including requiring supporting documentation from the people who are “represented” on those one million falsified documents.

The real question is whether anyone in government is going to undo the damage caused by these practices. And perhaps even more important, why was it necessary to falsify documents if the deals were legitimate?

Think about it. If the origination of these loans had been proper, all the documents that were routinely required, verified and investigated would be present and accounted for. Instead the documents vanished, destroyed or lost 40%-80%  of them. That is no accident.

If the origination documents had been done properly, securitization could have been possible. But the banks were not interested in securitization, except as a buzz word to get investors to buy bonds. The origination documents would have named the REMICs as the payee and secured party. This is property law 101. If securitization was actually in action then the money from the investors would have been put in a trust account bearing the name of that REMIC. Neither one happened.

The Wall Street banks snookered the investors by diverting the money from the sale of bogus mortgage bonds from unfunded, incomplete common law trusts, which is to say, the trusts either held nothing or didn’t even exist for all practical purposes. They diverted the paperwork away from the REMIC so they could claim ownership of the loans for purposes of “trading” (tier 2 yield spread premium) and collecting the insurance, hedge proceeds and federal bailouts.

Here is what the “trading” looked like: The Wall Street Banks took let’s say $1 million from a pension fund (simplifying the situation) into numbers we can all grasp).

The pension fund was expecting a return of 5% or $50,000 per year in interest plus amortized principal. The banks put in the prospectus that the payments could come out of the money from the investing pension funds — the first red flag that a PONZI scheme was at work.

Then the Bank pulling the strings on thousands of puppets, the banks steered blacks, Latins and other unsophisticated, purposely uneducated borrowers into higher priced loans than they were qualified to receive. (I.e., predatory lending according to Federal and state deceptive lending laws).

For simplicity let’s say the loan was for $500,000 at 10%. The originator was representing several things that were not true to the borrower. First that they were the lender (violation of TILA), second that standard underwriting procedures were being followed including verification of income and verification of the value of the property (no such underwriting occurred because neither the originator nor the bank pulling the strings had any risk of loss — they were playing with investor — i.e., pension fund — money).

So they take the $500,000 loan at 10% which means that it would pay $50,000 per year in interest (just like the investor pension fund thought) but they did it knowing that the high price of the loan and the falsely appraised value of the property and false statement of income of the borrower would not repay the loan.

Now here comes the “trade”: They “sell” the loan to the investors for $1 million, the amount invested, because it produces $50,000 per year in interest income but that was contrary to the expectations and representations made to the investor who expected high quality mortgages in viable loans that would be repaid.

So the bank takes in $1 million, funds $500,000 and take the other $500,000 as a “trading profit,” without putting up a dime. And THAT is why the REMIC’s name was not put on the note and mortgage (or deed of trust). If the REMIC’s name had been put on the origination documents, the “trade could not exist because it would be selling the loan to itself.

The end result is that the Wall Street bank makes a $500,000 tier 2 yield spread premium trading profit by stealing the money of the pension funds. By not putting the name of the real source of funds on the origination documents, they raise another red flag showing that a PONZI scheme and a separate fraud were in play here.

And this is why I say you should FIRST FOLLOW the money using the DENY and Discover strategy. Once that order is entered requiring them to show the money trail they are dead in the water and you’ll either get the house or get a settlement in all likelihood — but you must present a credible, understandable threat to them.

And you must be as relentless in pursuing them as they are in pursuing the homeowner. The lawyers that have followed this advice or realized it on their own are picking up victory and after victory. The timid lawyers who for reasons unknown to this writer are afraid to deny the obligation, note and mortgage, lose almost every time.

Back in 2007 I told everyone that the defense was going to be plausible deniability on the part of the Wall Street banks — that they didn’t know of all the violations in the origination and assignments of the loans. That they deny knowledge is already established. That is plausible for them to deny it is impossible. It was the violations themselves that enabled the Wall Street banks to profit while the rest of the country was plunged into recession.

Guilty Pleas in Foreclosure Fraud Cases

By

The founder and former president of DocX, once one of the nation’s largest foreclosure-processing companies, pleaded guilty on Tuesday to fraud in one of the few criminal cases to have arisen out of the housing crisis.

The executive, Lorraine O. Brown, 56, entered a guilty plea in federal court in Florida and a plea agreement in state court in Missouri related to DocX’s preparation of improper documents used to evict troubled borrowers from their homes. Ms. Brown’s guilty pleas will lead to a prison term of at least two years, the Missouri attorney general said.

Foreclosure abuses, like the routine filing of apparent forgeries with the nation’s courts, gained widespread notoriety in 2010. Ms. Brown admitted to directing DocX employees, beginning in 2005, to sign other peoples’ names on crucial mortgage documents. Many of the documents, like assignments of mortgages and affidavits claiming that a borrower’s i.o.u. had been lost, were used by banks and their representatives to foreclose on homeowners. DocX also filed falsely notarized documents with county clerks across the country. These practices are now known as robo-signing. In her plea, Ms. Brown admitted to participating in the falsification of more than a million documents.

“We are sending a signal to the financial industry that these mortgage documents have meaning, they are legal documents and if you are going to file them in the courthouses of this country then they had better be honestly drafted,” said Chris Koster, the Missouri attorney general.

In a statement, Mark Rosenblum, a lawyer for Ms. Brown in Jacksonville, Fla., said: “By negotiating a settlement to her situation and entering her guilty plea, Lori has started the process of getting on with the rest of her life.”

Ms. Brown entered her pleas Tuesday afternoon. She pleaded to one count of mail fraud in federal court in Jacksonville and agreed to one count each of forgery and perjury in Missouri. The Missouri pleas follow a settlement last summer in which DocX agreed to pay the state $2 million and to cooperate with its investigation.

DocX, founded by Ms. Brown and later purchased by Lender Processing Services of Jacksonville, has executed and notarized millions of mortgage documents for big banks and loan servicers. Lender Processing closed the company in April 2010 after evidence of problems emerged.

According to her plea in Missouri, Ms. Brown said that in 2009 she directed a DocX employee to develop a surrogate signers program at the company because there were “too many documents to sign and not enough people with signature authority.”

Mr. Koster said he was unsure when Ms. Brown would be sentenced. In the federal case, she could face a minimum of probation and a maximum of five years in prison. In the Missouri matter, she could receive a sentence of two to three years. But if she receives a federal sentence of probation or fewer than two years in prison, Mr. Koster said, she would be obligated to serve at least two years in Missouri.

“If citizens had filed these types of documents with a bank in an attempt to get a loan, the banks would have filed criminal cases against them,” Mr. Koster said. “The mortgage servicing industry has to be held to the same standard that the banks hold the rest of us to.”

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , , , , , | 77 Comments »

Tax “break” about to expire on debt “forgiveness”

Posted on November 9, 2012 by Neil Garfield

Editor’s Comments on policy:

Depending upon what Congress does between now and the end of the year the waiver of a tax on debt forgiveness as ordinary income will expire. My take is that it should expire and that at the same time the debt should be reduced by virtue of payments received or due from  subservicers, Master Servicers,  insurers, and counterparties to credit default swap contract, where appropriate. This is because (a) it was never secured and (b) it was never funded or acquired for “value received” by the parties whose name appears as payee and mortgagee on closing papers and (c) the debts have been paid off multiple times by multiples sales of the same loan under the structure of an outright sale (of something they didn’t own), insurance, credit default swaps and even federal bailout.

The added reason is that the homeowners were defrauded: the appraisals were cooked and the borrower justifiably relied upon them as did the investors. So we are talking restitution here not forgiveness.

That would leave each borrower with a tax instead of a mortgage. It would also give back the money to the Federal government and investors. In many cases the investors are also the borrowers if they pay taxes or are depending upon a managed institutional fund that bought the bogus mortgage bonds. By converting the defective mortgage, note and assignments to a tax, the borrower’s liability would be reduced and payable in installments.

Obama wants as little Federal involvement as possible, but he is missing the point that a large scale fraud took place here that ended up corrupting the title records in all fifty states and in which investors suffered losses only because their agents, the investment banks, never shared the enormous profits they received from “trading” (Tier 2 yield spread premium), buying insurance in which the investment bank was the payee instead of the investors, and buying additional coverage from credit default swaps again making themselves the payee instead of the investors.

This is a mirror of the closings at which the loans were supposedly originated. Instead of making the investors or their REMIC the payee on the note or recording an assignment with actual payment in cash, the banks “borrowed” ownership from the investors and made a ton of money trading on it.

The Federal government MUST get involved here and straighten this out or there will continue to be uneven inconsistent opinions emanating from state and federal courts across the country making the title situation (and uncertainty in the marketplace) even worse than it is now.

The fact is that in most loans the amount received from Federal bailouts and the hedge contracts that were used, as well as the outright multiple sales of the same loans, have been paid in full several times over whether they are in foreclosure or not — and that includes the prior “foreclosures” that were put through the system based upon false, defective documentation and fraudulent representations to the borrowers and all others involved in the process.

The remedy I propose is indeed extreme if you look at it as a gift. But if you look at it from the point of view that the investors and borrowers were lured into the scheme by the same lies to support a PONZI scheme that collapsed as soon as investors stopped buying the bogus mortgage bonds, it is easy to see that the balance due from borrowers is zero. In fact, it is even possible that legally the overpayment left over after the investors are paid, might be due back to homeowners by virtue of the terms of the notes they signed. That might also be taxable but the homeowner would have the money with which to pay the tax.

This proposal would stimulate the economy by automatically reducing the amount of household debt based upon tax brackets, while also increasing revenue to pay back the Federal government for all the “favors” done for the banks. Whether the Feds decide to prosecute the banks for restitution would their choice.

As it stands now, as long as homeowners focus their strategy or DENY and DISCOVER and demand to see the actual transfers of money to prove ownership of the loan and the existence of an unpaid loan receivable, the decisions are already turning toward the borrowers, albeit slowly. One way or the other, this issue with taxation of the “forgiveness” of debt when in fact it was actually paid is going to surface.

Think about it. Comments welcome.

Tax break for struggling homeowners set to expire
http://money.cnn.com/2012/11/07/real_estate/mortgage-forgiveness-tax-break/

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , , , , , , , , | 142 Comments »

Mortgage Rates in U.S. Decline to Record Lows With 30-Year Loan at 3.84%

Posted on May 7, 2012 by Neil Garfield

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Editor’s Comment:

It appears as though Bloomberg has joined the media club tacit agreement to ignore housing and more particularly Investment Banking or relegate them to just another statistic. The possibilities of a deep, long recession created by the Banks using consumer debt are avoiđed and ignored regardless of the writer or projection based upon reliable indexes.

Why is it that Bloomberg News refuses to tell us the news? The facts are that median income has been flat for more than 30 years. The financial sector convinced the government to allow banks to replace income with consumer debt. The crescendo was reached in the housing market where the Case/Schiller index shows a flash spike in prices of homes while the values of homes remained constant. The culprit is always the same — the lure of lower payments with the result being the oppressive amount of debt burden that can no longer be avoided or ignored. The median consumer has neither the cash nor credit to buy.

Each year we hear predictions of a recovery in the housing market, or that green shoots are appearing. We congratulate ourselves on avoiding the abyss. But the predictions and the congratulations are either premature or they will forever be wrong.

The financial sector is allowed to play in our economy for only one reason— to provide capital to satisfy the needs of business for innovation, growth and operations. Instead, we find ourselves with bloated TBTF myths, the capital drained from our middle and lower classes that would be spent supporting an economy of production and service. That money has been acquired and maintained by the financal sector giants, notwithstanding the reports of layoffs.

From any perspective other than one driven by ideology one must admit that the economy has undergone a change in its foundation — and that these changes are ephemeral and cannot be sustained. With GDP now reliant on figures from the financial sector which for the longest time hovered around 16%, our “economy” would be 50% LESS without the financial sector reporting bloated revenues and profits just as they contributed to the false spike in prices of homes. Bloated incomes inflated the stampede of workers to Wall Street.

Investigative reporting shows that the tier 2 yield spread premium imposed by the investment bankers — taking huge amounts of investment capital and converting the capital into service “income” — forced a structure that could not work, was guaranteed not to work and which ultimately did fail with the TBTF banks reaping profits while the rest of the economy suffered.

The current economic structure is equally unsustainable with income and wealth inequality reaching disturbing levels. What happens when you wake up and realize that the real economy of production of goods and service is actually, according to your own figures, worth 1/3 less than what we are reporting as GDP. How will we explain increasing profits reported by the TBTF banks? where did that money come from? Is it real or is it just what we want to hear want to believe and are afraid to face?


Filed under: foreclosure | Tagged: , , , , , , , , , , , , , , , , , , , , , , , , , , | 3 Comments »

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