Warren, Cummings and Waters to Banks and Regulators: Not So Fast!!!

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Editor’s Analysis: As we move into the fifth inning of a nine inning game, it looks like we are going into overtime. Just as the GOP failed to read the census and lost the national elections, the Banks have failed to read the Congressional Census and are finding that the “deals” they made with regulators and law enforcement are not the end of the story. There are people in office now who do actually give a damn and who want to do something about Wall Street grifting.

Elizabeth Warren is leading the charge: They want full disclosure of the failed review process, and full disclosure of the deal that was reached. This could be a problem for banks who are holding worthless mortgage bonds and for entities claiming that they own loans that either never existed at all or were misstated in every meaningful way.

Warren and others want oversight of the deal this time and they are likely to get it, one way or another. It would be nice is the President took some time out of his schedule, albeit precious little free time exists, and decide for himself the direction that should be taken now that Geithner is leaving. Maybe he already has.

The questions that remain in the context of doing what is best for the country remain unresolved:

  1. Knowing that the title chain is corrupted in all 50 states and that the amount of chaos ranges all the way up to 80%, what are the remedial steps required to boost confidence in the title registries around the country? At present it is a leap of faith to even buy a plot of empty land.
  2. Knowing now that the investors put up the money and borrowers put down payments on homes and refinancing, how will the victims of Wall Street chicanery be compensated by a appointment of a receiver? Restitution is a fundamental bedrock for fraudulent deals. What economic, legal or financial reason would there be to allow the Wall Street banks that took and kept the loss mitigating payments from insurance, credit default swaps, and bailouts for the U.S. Treasury and Federal Reserve.
  3. Knowing that the quantitative easing and Federal bailouts, insurance and credit default swaps were supposed to mitigate damages and most importantly re-start lending and commerce, how do we move those trillions (estimates run as high as $17+ trillion) back to the economy which remains gasping for air.
  4. Knowing that the Wall Street frequently diverted documents and money from investors, this leaving borrowers with no authorized party with whom they could negotiate a modification based upon the true balance owed on the loans, how will the government announce its conclusions without starting a run on the big banks that may bleed over to the small banks.
  5. Knowing that some 14 banks have grown to a size with cross border relationships that there is no one regulatory agency to watch and correct them, how will the banks be brought down to a size that can be regulated? And in a related matter, how do we level the playing field such that the mega banks no longer control the size, growth, and business plans of smaller banks.
  6. AND knowing the criminal acts performed by or on behalf of the mega banks by specially created corporations, law offices and other vendors, how will the government bring these people to justice in a way that is meaningful — i.e., that will deter Wall Street titans from doing it again?
  7. How will the government take the reigns of regulation such that settlements for pennies on the dollar avoids civil and criminal prosecution by the government that is supposed to protect those who cannot adequately protect themselves, and avoids administrative complaints against the bank charter.
  8. How will the administration demonstrate to every American that the Government is running the show, not the Banks.
  9. Knowing that the vast majority of foreclosures were completed” by strangers to the transactions, what do we do the displaced homeowners and the homes that were put in distress as a result of a ball of lies?
  10. If the review process was revealing damages to homeowners (and indirectly to investors) that were vastly understated, as alleged by numerous whistle-blowers, then what will be installed as a watchdog over that process and what resources will be applied to get to the truth rather than a PR result?

Warren Demands Transparency On Failed Foreclosures
http://www.huffingtonpost.com/2013/01/31/elizabeth-warren-foreclosure-reviews_n_2592551.html

Elizabeth Warren Demands Mortgage Settlement Documents From Regulators
http://news.firedoglake.com/2013/01/31/elizabeth-warren-demands-mortgage-settlement-documents-from-regulators/

TAPE Recording Shows “Trustee” is NOT the party with Fiduciary Powers or Obligations

One of the interesting things about Arizona Law is that it is perfectly legal to tape record a telephone conversation without the knowledge or consent of the parties to that call.

I have a tape recording of a conversation between a borrower up in Scottsdale and an officer of Deutsch bank who is in charge of “Asset Acquisition.” His name might well be on the documents in your case. In that conversation he says that Deutsch is the “beneficiary”.. “for the “benefit of the investors”. He says that the whole arrangement is “counter-intuitive” (used that word more than once). Although the beneficiaries are the investors and Deutsch is named as Trustee, the Trustee has nothing to do. That is because the servicer (One West in the conversation) actually has complete discretion on all issues including modification. As to whether the loan was modifiable he explicitly deferred to the servicer.

Thus he is saying that notwithstanding appearances and what would be logical the ACTUAL arrangement is that the servicer has all power over the assets that have been conveyed to investors. He never mentioned the “Trust” (remember my contention is that there is no trust, that the SPV is merely a conduit vehicle for aggregating the assets and revenue streams from borrowers, insurers, counterparties on CDS etc.) He even refers to the servicer as having “fiduciary” obligations but shies away from any reference to Deutsch having fiduciary duties.

In my opinion, this tape both confirms my opinion and supplements it with a surprising detail, to wit: the servicer is the one with the power of a “Trustee” and not the named “Trustee” (in this case Deutsch). But the power of the real trustee (servicer) is limited to the provisions of the note, excludes third party payments from insurers, counterparties and federal bailouts, and is without reference to the encumbrance allegedly created by the Deed of Trust (Mortgage).

Boiling this down to its essential elements, the owner of the “asset” (the loan) is a group of investors who accepted certificated or non-certificated interests conveying to them a percentage interest in the flow of funds (principal and interest) and ownership of the note. The reference to a “Trust” is nominal (in name only) and the reference to a “Trustee” is both nominal and misleading. The beneficiary under the Deed of Trust, as seen by this representative of Deutsch is also the investor in that Deutsch is only named as a straw man for the investors as a convenience and with the result that the true beneficiaries are not disclosed.

Therefore, on its face, the beneficiary on the original Deed of Trust, the beneficiary named in the instruments used to securitize the loan, and the beneficiary in fact are all different. The original note also names a payee that is different from the payee under the assignments, which is different from the payee under the instruments of securitization and different from the actual party (the servicer) who receives those payments. In practice, according to this officer, the actual payee under the securitization documents (the investors) is different than the parties receiving payment and enforcing payment.

The effect of this “counterintuitive” arrangement is that the beneficiary and the party who represents themselves as the proper holder in due course or owner of the loan are different. All of this presumes that the loan was in fact properly, legally and successfully assigned and securitized — a question of fact since there are multiple conditions to acceptance of the assignment and multiple conditions subsequent (replacement of loan with another, buy back of the loan etc.), which are also questions of fact as to whether those conditions subsequent did or did not occur. In addition there are subsequent events (third party payments in accordance with insurance contracts, credit default swaps and other credit enhancements written into the securitization documents) that are also questions of fact.  And in either related or non-related context, there is the fact that many of these special purpose vehicles (“Trusts”) have been dissolved with the “assets” resecuritized into brand new securities sold to new investors.

Regulation and Prosecution on Wall Street

In my opinion, the growing anger at Wall Street is giving Lloyd Blankfein and Jamie Dimon another chance at misdirection. They are using the current popular angst to steer the debate into whether derivatives and synthetic CDOs should be banned. In the end they will win that debate, and they should win it. What they should lose is their freedom in a judicial forum where they are prosecuted like Ken Lay and Bernie Ebbers, and where it is proven beyond a reasonable doubt that they committed criminal fraud and securities fraud.

The fact that we had a bad experience with derivatives is not a reason to ban them. The fact that they were abused and that people were cheated and that the entire financial system was undermined is another story.

There is nothing wrong with any transaction if the playing field is relatively level and if the imbalances are addressed by law and regulation. That is what the Truth in lending Act is all about and the Real Estate Settlement Procedures Act is meant to address.

When the big guys use their superior knowledge to trick consumers into deadly transactions, the big guys should pay the price. We have the SEC to take care of that on the other end protecting investors. Licensing laws and administrative sanctions against those licensed by state or federal agencies are well-equipped to step in and deal with these abuses. But they didn’t.

Complaints sent to the Federal Trade Commission, Office of Thrift Supervision and Office of the Controller of the Currency have gone unheeded even to this day. The only answer you get is similar to the answer we get from sending short or long Qualified Written requests or Debt Validation Letters — short shrift of legitimate complaints that by law are required to be investigated, verified (not just restated) and corrected.

The inconvenient truth is that our regulators were not employing the tools given to them. Everyone knew it. In part it was because of undue influence and in part it was because they were deferring to larger “smarter” institutions like the Federal Reserve. But the biggest reason the Federal and state agencies didn’t do their job is that we, as a society, bought into the non-regulation philosophy which has failed so spectacularly. We didn’t support appropriate funding, training and resources for these agencies. If we had done what we should have done — elect people who were committed to government protecting and serving the people — this mess would never have mushroomed to the point where Wall Street issued proprietary currency equal to 12 times times the amount of government currency — all in a span only 25 years.

The simple truth is that there was nothing inherently wrong about securitizing residential mortgages. In theory, spreading the risk out created much greater liquidity for small and large consumers of credit. What was wrong and remains wrong is that the use of these instruments was for an illegal purpose — to defraud investors and borrowers alike. And they did it in an illegal manner — by denying and withholding information essential to the decision-making on both sides of these transactions.

On one side you had a creditor who was willing to loan money for residential mortgages under terms and conditions that were “explained” in mind-numbing prospectuses and guaranteed by “insurance” that wasn’t really insurance and which was appraised by government licensed rating agencies who issued investment grade appraisals that were so wrong that it strains credibility to assume they didn’t know they were part of a larger criminal enterprise. This creditor lent money and received a bond, whose terms referenced other documents in the securitization chain that imposed conditions, co-obligors, and protections to the intermediaries that completely changed the loans that were signed by borrowers far, far away.

On the other side, you had borrowers, homeowners, who put their largest or only investment in the world at risk in a transaction that they could not understand because the information required to understand it was withheld. But even Alan Greenspan admitted he didn’t understand the transactions with the help of 100 PhD’s. These borrowers relied upon the sanctity of an underwriting process that no longer existed. Verification of property value, quality, affordability etc. were no longer in the mix.

These borrowers undertook an obligation to repay and signed a note that was evidence of the obligation but was payable to someone other than the party(ies) who loaned the money. That note was only a tiny part of the obligation to the creditor as evidenced by the mortgage backed bond they received.

The creditor was bilked out of a dollar and contrary to the expectations of the creditor, less than 2/3 of each dollar was actually used to fund mortgages. The creditor never actually received or even saw the note but ownership of the note was conveyed to the investor along with many other terms — terms that were entirely different from the note the borrower signed as to interest payments, principal, fees etc.

In between were the dozens of intermediaries who treated the documentation like a hot potato because nobody wanted to be stuck with it — knowing that misrepresentation and bad appraisals were the root of the instruments signed by creditors and debtors. These intermediaries kept possession of the note, kept the security instrument and kept the money and most of the insurance proceeds, received the federal bailout and now are proceeding to repackage the junk they already sold and through “resecuritization” are selling them again.

In my opinion there is nothing theoretically wrong with anything described above except for one thing — they lied. Fraud is fraud. If they had educated the creditors and debtors, if they had complied with local property and contract law, if they had been transparent disclosing everything much the same way as the prospectus in an IPO, then two things are true: (a) transactions that were completed would have been done because both sides knew the risks and were willing to take the loss and (b) transactions that were NOT completed (which would have been nearly all of them) would been rejected because the costs were too high, the risks were too high, and the consequences too dire.

But none of that happened because we allowed our regulators to be co-opted by the industries they were supposed to regulate. So tell your legislators and government agencies that you’ll allow them the resources to properly regulate and that you expect to hold them and the elected officials who put them there fully accountable.

Don’t throw the baby out with the bathwater. It isn’t derivatives that are wrong it is the people who used them and the way they were used that is wrong. Killing derivatives would lead to stagnation of what once was our greatest asset — the engine of liquidity for access to capital that has kept our economy growing.


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