Who Has the Power to Execute a Satisfaction and Release of Mortgage?

 The answer to that question is that probably nobody has the right to execute a satisfaction of mortgage. That is why the mortgage deed needs to be nullified. In the typical situation the money was taken from investors and instead of using it to fund the REMIC trust, the broker-dealer used it as their own money and funded the origination or acquisition of loans that did not qualify under the terms proposed in the prospectus given to investors. Since the money came from investors either way (regardless of whether their money was put into the trust) the creditor is that group of investors. Instead, neither the investors or even the originator received the original note at the “closing” because neither one had any legal interest in the note. Thus neither one had any interest in the mortgage despite the fact that the nominee at closing was named as “lender.”

This is why so many cases get settled after the borrower aggressively seeks discovery.

The name of the lender on the note and the mortgage was often some other entity used as a bankruptcy remote vehicle for the broker-dealer, who for purposes of trading and insurance represented themselves to be the owner of the loans and mortgage bonds that purportedly derive their value from the loans. Neither representation was true. And the execution of fabricated, forged and unauthorized assignments or endorsements does not mean that there is any underlying business transaction with offer, acceptance and consideration. Hence, when a Court order is entered requiring that the parties claiming rights under the note and mortgage prove their claim by showing the money trail, the case is dropped or settled under seal of confidentiality.

The essential problem for enforcement of a note and mortgage in this scenario is that there are two deals, not one. In the first deal the investors agreed to lend money based upon a promise to pay from a trust that was never funded, has no assets and has no income. In the second deal the borrower promises to pay an entity that never loaned any money, which means that they were not the lender and should not have been put on the mortgage or note.

Since the originator is an agent of the broker-dealer who was not acting within the course and scope of their relationship with the investors, it cannot be said that the originator was a nominee for the investors. It isn’t legal either. TILA requires disclosure of all parties to the deal and all compensation. The two deals were never combined at either level. The investor/lenders were never made privy to the real terms of the mortgages that violated the terms of the prospectus and the borrower was not privy to the terms of repayment from the Trust to the investors and all the fees that went with the creation of multiple co-obligors where there had only been one in the borrower’s “closing.”.

The identity of the lender was intentionally obfuscated. The identity of the borrower was also intentionally obfuscated. Neither party would have completed the deal in most cases if they had actually known what was going on. The lender would have objected not only to the underwriting standards but also because their interest was not protected by a note and mortgage. The borrower  would have been alerted to the fact that huge fees were being taken along the false securitization trail. The purpose of TILA is to avoid that scenario, to wit: borrower should have a choice as to the parties with whom he does business. Those high feelings would have alerted the borrower to seek an alternative loan elsewhere with less interest and greater security of title —  or not do the deal at all because the loan should never have been underwritten or approved.

JP Morgan Corners Gold Market — where did they get the money?

Zerohedge.com notes that JP Morgan has cornered the market in gold derivatives. They ask how the CFTC, who supposedly regulates the commodities markets could have let this happen. I ask some deeper questions. If JPM has cornered the market on those derivatives, is this a reflection that they, perhaps in combination with others, have cornered the market on actual gold reserves? Zerohedge.com leaves this question open.

I suggest that this position in derivatives (private contracts that circumvent the actual futures market) is merely a reflection of a much larger position — the actual ownership or right to own gold reserves that could total more than a trillion dollars in gold. And the further question is that if JPM has actually purchased gold or rights to own gold, where did the money come from? And the same question could be asked about other commodities like tin, aluminum and copper where Chase and Goldman Sachs have already been fined for manipulating market prices.

This is the first news corroborating what I have previously reported — that trillions of dollars have been diverted from investors and stolen from homeowners by the major banks, parked off shore, and then laundered through investments in natural resources including precious metals. This diversion occurred as an integral part of the mortgage madness and meltdown. It was intentional and knowing behavior — not bad judgment. It was bad because of what happened to anyone who wasn’t an insider bank (see Thirteen Bankers by Simon Johnson). But to attribute stupidity to a group of bankers who now have more money, property and investments than anyone else in the world is pure folly. What Is stupid about pursuing a strategy that brings a geometric increase in wealth and power? This was no accident.

And the answer is yes, all of this is relevant to foreclosure litigation. The question is directed at the source of funds for JP Morgan, Chase, Goldman Sachs and the other main players on Wall Street. And the answer is that they stole it. In the complicated world of Wall Street finance, the people at the Department of Justice and the SEC and other regulatory agencies, there are scant resources to investigate this threat to the entire financial system, the economy in each of the world marketplaces, and thus to national security for the U.S. And other nations.

It would be naive in the context of current litigation over mortgages and Foreclosures to expect any judge to allow pleading, discovery or trial on evidence that traces these investments backward from gold derivatives to the origination or acquisition of mortgages. Perhaps one of the regulators who read this blog might make some inquiries but there is little hope that they will connect the dots. But it is helpful to know that there is plenty of corroboration for the position that the REMIC Trusts could not have originated or acquired mortgages because they were never funded with the money given to the broker dealers who sold “mortgage bonds” issued by those Trusts with no chance of repayment because the money was never used to fund the trusts.

The unfunded trusts could not originate or acquire the loans because they never had the money. In fact, they never had a trust account. Thus in a case where the Plaintiff is US Bank as trustee is not only wrong because the PSA and their own website says that trustees don’t initiate Foreclosures — that is reserved to the servicers who appear to have the actual powers of a trustee. The real argument is that the trust was never a party to the loan because the trust was never party to a transaction in which any loan was acquired or originated.

Investors and governmental agencies have sued the broker dealers accusing them of fraud (not bad judgment) and mismanagement of money — all of which lawsuits are being settled almost as quickly as they are filed. The issue is not just bad loans and underwriting of bad loans. That would be breach of contract and could not be subject to claims of fraud. The fraud is that the investment banks took the money from investors and then used it for their own purposes. The first step was skimming a large percentage of the investor funds from the top, in addition to fake underwriting fees on the fake issuance of mortgage bonds from an unfunded trust.

And here is where the first step in mortgage transactions and foreclosure litigation reveals itself — compensation that was never disclosed closed to the borrower in violation of he the Truth in lending Act. While most judges consider the 3 year statute of limitations to run absolutely, it will eventually be recognized by the courts that the statute doesn’t start to run until discovery of the undisclosed compensation by an undisclosed party who was a principal player in permeating the loan. This will be a fight but eventually success will visit someone like Barbara Forde in Scottsdale or in one of the cases my firm handles directly or where we provide litigation support.

The reason it is relevant is that by tracing the funds, it can be determined that the actual “lender” was a group of investors who thought they were buying mortgage bonds and who did not know their money had been diverted into the pockets of the broker dealers, and then used to create fictitious transactions that the banks falsely reported as trading profits. In order to do this the broker dealers had to create the illusion of mortgage loans that were industry standard loans and they had to divert the apparent ownership of those loans from the investors through fraudulent paper trails based on the appearance of transactions that in fact never happened. In truth, contrary to their duties under the prospectus and pooling and servicing agreement, the broker dealers created a false “proprietary” trade in which the investment bank was the actual trader on both sides of the transaction.

They booked some of these “trades” as profits from proprietary trading, but the truth is that this was a yield spread premium that falls squarely within the definition of a yield spread premium — for which the investment bank is liable to be named as a party to the closing of the loan with borrowers. As such, the pleading and proof would be directed at the fact that the investment bank was hiding their identity or even their existence along with the fact that their compensation consisted of a yield spread premium that sometimes was greater than the principal amount of the loan. Under federal law under these facts (if proven) and the pleading would establish that the investment bank should be a party to the claim, affirmative defenses or counterclaim of borrowers for “refund” of the undisclosed compensation, treble damages, interest and attorney fees. I might add that common law doctrines that are not vulnerable to defenses of the statute of limitations under TILA or RESPA, could be used to the same effect. See the Steinberger decision.

Lawyers take note. Instead of getting lost in the weeds of the sufficiency of documentation, you could be pursuing a claim that is likely to more than offset the entire loan. I make this suggestion to attorneys and not to pro se litigants who will probably never have the ability to litigate this issue. My firm offers litigation support to those law firms who have competent litigators who can appear in court and argue this position after our research, drafting and scripting of litigation strategies. Once taught and practiced, those firms should no longer require us to provide support except perhaps for our expert witnesses (including myself). For more information on litigation support services offered to attorneys call 850-765-1236 or write to neilfgarfield@hotmail.com.

I conclude with this: it is unlikely that any judge would seriously entertain discharging liability or stop enforcement of a mortgage merely because of a defect in the documentation. These defects should be used — but only as corroboration for a more serious argument. That the attempted enforcement of the documentation is a cover-up of a fraud against the investors and the borrower; this requires artful litigating to show the judge that your client has a legitimate claim that offsets the alleged debt to the investors who are seeking damage awards not from the borrowers but from the investment bankers. As long as the Judge believes that the right lender and the right borrower are in his court, the judge is not likely to make rulings that would create additional uncertainties in a market that is already unstable.

I have always maintained that a pincer action by investor lenders and homeowner borrowers would bring home the point. The real culprits have been left out of foreclosure litigation. Tying investment banks to the loan closing would enable the homeowner to show that the intermediaries are in fact inserting themselves as parties in interest — to the detriment of the real parties. The investors are bringing their claims against the broker dealers. Now it is time for the borrowers to do their part. This could lead to global settlements in which borrowers and investors are able to mitigate (or even eliminate) their losses.

Like I said, the loans never made into the “pools”

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Editor’s Comment:

When I first suggested that securitization itself was a lie, my comments were greeted with disbelief and derision. No matter. When I see something I call it the way it is. The loans never left the launch pad, much less flew into a waiting pool of investor money. The whole thing was a scam and AG Biden of Đelaware and Schniedermann of New York are on to it.

The tip of the iceberg is that the note was not delivered to the investors. The gravitas of the situation is that the investors were never intended to get the note, the mortgage or any documentation except a check and a distribution report. The game was on.

First they (the investment banks) took money from the investors on the false pretenses that the bonds were real when anyone with 6 months experience on Wall street could tell you this was not a bond for lots of reasons, the most basic of which was that there was no borrower. The prospectus had no loans because there were no loans made yet. The banks certainly wouldn’ t take the risks posed by this toxic heap of loans, so they were waiting for the investors to get conned. Once they had the money then they figured out how to keep as much of it as possible before even looking for residential home borrowers. 

None of the requirements of the Internal Revenue Code on REMICS were followed, nor were the requirements of the pooling and servicing agreement. The facts are simple: the document trail as written never followed the actual trail of actual transactions in which money exchanged hands. And this was simply because the loan money came from the investors apart from the document trail. The actual transaction between homeowner borrower and investor lender was UNDOCUMENTED. And the actual trail of documents used in foreclosures all contain declarations of fact concerning transactions that never happened. 

The note is “evidence” of the debt, not the debt itself. If the investor lender loaned money to the homeowner borrower and neither one of them signed a single document acknowledging that transaction, there is still an obligation. The money from the investor lender is still a loan and even without documentation it is a loan that must be repaid. That bit of legal conclusion comes from common law. 

So if the note itself refers to a transaction in which ABC Lending loaned the money to the homeowner borrower it is referring to a transaction that does not now nor did it ever exist. That note is evidence of an obligation that does not exist. That note refers to a transaction that never happened. ABC Lending never loaned the homeowner borrower any money. And the terms of repayment intended by the securitization documents were never revealed to the homeowner buyer. Therefore the note with ABC Lending is evidence of a non-existent transaction that mistates the terms of repayment by leaving out the terms by which the investor lender would be repaid.

Thus the note is evidence of nothing and the mortgage securing the terms of the note is equally invalid. So the investors are suing the banks for leaving the lenders in the position of having an unsecured debt wherein even if they had collateral it would be declining in value like a stone dropping to the earth.

And as for why banks who knew better did it this way — follow the money. First they took an undisclosed yield spread premium out of the investor lender money. They squirreled most of that money through Bermuda which ” asserted” jurisdiction of the transaction for tax purposes and then waived the taxes. Then the bankers created false entities and “pools” that had nothing in them. Then the bankers took what was left of the investor lender money and funded loans upon request without any underwriting.

Then the bankers claimed they were losing money on defaults when the loss was that of the investor lenders. To add insult to injury the bankers had used some of the investor lender money to buy insurance, credit default swaps and create other credit enhancements where they — not the investor lender —- were the beneficiary of a payoff based on the default of mortgages or an “event” in which the nonexistent pool had to be marked down in value. When did that markdown occur? Only when the wholly owned wholly controlled subsidiary of the investment banker said so, speaking as the ” master servicer.”

So the truth is that the insurers and counterparties on CDS paid the bankers instead of the investor lenders. The same thing happened with the taxpayer bailout. The claims of bank losses were fake. Everyone lost money except, of course, the bankers.

So who owns the loan? The investor lenders. Who owns the note? Who cares, it was worth less when they started; but if anyone owns it it is most probably the originating “lender” ABC Lending. Who owns the mortgage? There is no mortgage. The mortgage agreement was written and executed by the borrower securing terms of payment that were neither disclosed nor real.

Bank Loan Bundling Investigated by Biden-Schneiderman: Mortgages

By David McLaughlin

New York Attorney General Eric Schneiderman and Delaware’s Beau Biden are investigating banks for failing to package mortgages into bonds as advertised to investors, three months after a group of lenders struck a nationwide $25 billion settlement over foreclosure practices.

The states are pursuing allegations that some home loans weren’t correctly transferred into securitizations, undermining investors’ stakes in the mortgages, according to two people with knowledge of the probes. They’re also concerned about improper foreclosures on homeowners as result, said the people, who declined to be identified because they weren’t authorized to speak publicly. The probes prolong the fallout from the six-year housing bust that’s cost Bank of America Corp., JPMorgan Chase & Co. (JPM) and other lenders more than $72 billion because of poor underwriting and shoddy foreclosures. It may also give ammunition to bondholders suing banks, said Isaac Gradman, an attorney and managing member of IMG Enterprises LLC, a mortgage-backed securities consulting firm.

“The attorneys general could create a lot of problems for the banks and for the trustees and for bondholders,” Gradman said. “I can’t imagine a better securities law claim than to say that you represented that these were mortgage-backed securities when in fact they were backed by nothing.”

Countrywide Faulted

Schneiderman said Bank of America Corp. (BAC)’s Countrywide Financial unit last year made errors in the way it packaged home loans into bonds, while investors have sued trustee banks, saying documentation lapses during mortgage securitizations can impair their ability to recover losses when homeowners default. Schneiderman didn’t sue Bank of America in connection with that criticism.

The Justice Department in January said it formed a group of federal officials and state attorneys general to investigate misconduct in the bundling of mortgage loans into securities. Schneiderman is co-chairman with officials from the Justice Department and the Securities and Exchange Commission.

The next month, five mortgage servicers — Bank of America Corp., Wells Fargo & Co. (WFC), Citigroup Inc. (C), JPMorgan Chase & Co. and Ally Financial Inc. (ALLY) — reached a $25 billion settlement with federal officials and 49 states. The deal pays for mortgage relief for homeowners while settling claims against the servicers over foreclosure abuses. It didn’t resolve all claims, leaving the lenders exposed to further investigations into their mortgage operations by state and federal officials.

Top Issuers

The New York and Delaware probes involve banks that assembled the securities and firms that act as trustees on behalf of investors in the debt, said one of the people and a third person familiar with the matter.

The top issuers of mortgage securities without government backing in 2005 included Bank of America’s Countrywide Financial unit, GMAC, Bear Stearns Cos. and Washington Mutual, according to trade publication Inside MBS & ABS. Total volume for the top 10 issuers was $672 billion. JPMorgan acquired Bear Stearns and Washington Mutual in 2008.

The sale of mortgages into the trusts that pool loans may be void if banks didn’t follow strict requirements for such transfers, Biden said in a lawsuit filed last year over a national mortgage database used by banks. The requirements for transferring documents were “frequently not complied with” and likely led to the failure to properly transfer loans “on a large scale,” Biden said in the complaint.

“Most of this was done under the cover of darkness and anything that shines a light on these practices is going to be good for investors,” Talcott Franklin, an attorney whose firm represents mortgage-bond investors, said about the state probes.

Critical to Investors

Proper document transfers are critical to investors because if there are defects, the trusts, which act on behalf of investors, can’t foreclose on borrowers when they default, leading to losses, said Beth Kaswan, an attorney whose firm, Scott + Scott LLP, represents pension funds that have sued Bank of New York Mellon Corp. (BK) and US Bancorp as bond trustees. The banks are accused of failing in their job to review loan files for missing and incomplete documents and ensure any problems were corrected, according to court filings.

“You have very significant losses in the trusts and very high delinquencies and foreclosures, and when you attempt to foreclose you can’t collect,” Kaswan said.

Laurence Platt, an attorney at K&L Gates LLP in Washington, disagreed that widespread problems exist with document transfers in securitization transactions that have impaired investors’ interests in mortgages.

“There may be loan-level issues but there aren’t massive pattern and practice problems,” he said. “And even when there are potential loan-level issues, you have to look at state law because not all states require the same documents.”

Fixing Defects

Missing documents don’t have to prevent trusts from foreclosing on homes because the paperwork may not be necessary, according to Platt. Defects in the required documents can be fixed in some circumstances, he said. For example, a missing promissory note, in which a borrower commits to repay a loan, may not derail the process because there are laws governing lost notes that allow a lender to proceed with a foreclosure, he said.

A review by federal bank regulators last year found that mortgage servicers “generally had sufficient documentation” to demonstrate authority to foreclose on homes.

Schneiderman said in court papers last year that Countrywide failed to transfer complete loan documentation to trusts. BNY Mellon, the trustee for bondholders, misled investors to believe Countrywide had delivered complete files, the attorney general said.

Hindered Foreclosures

Errors in the transfer of documents “hampered” the ability of the trusts to foreclose and impaired the value of the securities backed by the loans, Schneiderman said.

“The failure to properly transfer possession of complete mortgage files has hindered numerous foreclosure proceedings and resulted in fraudulent activities,” the attorney general said in court documents.

Bank of America faced similar claims from Nevada Attorney General Catherine Cortez Masto, who accused the Charlotte, North Carolina-based lender of conducting foreclosures without authority in its role as mortgage servicer due improper document transfers. In an amended complaint last year, Masto said Countrywide failed to deliver original mortgage notes to the trusts or provided notes with defects.

The lawsuit was settled as part of the national foreclosure settlement, Masto spokeswoman Jennifer Lopez said.

Bank of America spokesman Rick Simon declined to comment about the claims made by states and investors. BNY Mellon performed its duties as defined in the agreements governing the securitizations, spokesman Kevin Heine said.

“We believe that claims against the trustee are based on a misunderstanding of the limited role of the trustee in mortgage securitizations,” he said.

Biden, in his complaint over mortgage database MERS, cites a foreclosure by Deutsche Bank AG (DBK) as trustee in which the promissory note wasn’t delivered to the bank as required under an agreement governing the securitization. The office is concerned that such errors led to foreclosures by banks that lacked authority to seize homes, one of the people said.

Renee Calabro, spokeswoman for Frankfurt-based Deutsche Bank, declined to comment.

Investors have raised similar claims against banks. The Oklahoma Police Pension and Retirement System last year sued U.S. Bancorp as trustee for mortgage bonds sold by Bear Stearns. The bank “regularly disregarded” its duty as trustee to review loan files to ensure there were no missing or defective documents transferred to the trusts. The bank’s actions caused millions of dollars in losses on securities “that were not, in fact, legally collateralized by mortgage loans,” according to an amended complaint.

“Bondholders could have serious claims on their hands,” said Gradman. “You’re going to suffer a loss as bondholder if you can’t foreclose, if you can’t liquidate that property and recoup.”

Teri Charest, a spokeswoman for Minneapolis-based U.S. Bancorp (USB), said the bank isn’t liable and doesn’t know if any party is at fault in the structuring or administration of the transactions.

“If there was fault, this unhappy investor is seeking recompense from the wrong party,” she said. “We were not the sponsor, underwriter, custodian, servicer or administrator of this transaction.”

Here is How JPMorgan Posts $19B Annual Profit Despite Housing Hangover

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EDITOR’S ANALYSIS: You might ask how any bank could post such huge profits while the economy is in the toilet, Europe is falling apart and Asia is having problems. The answer lies — yes here it is again — in the level 2 yield spread premium they stole from investors. The way I add it up, the Banks collectively stole nearly 3 Trillion dollars from the investors before they even started funding loans out of investor money. According to some documentation that I received anonymously and a some documentation I received accidentally, that money was whisked off-shore through Bermuda, who asserted tax jurisdiction over the money and then waived the tax.
  1. The yield spread premium was achieved through the use of smoke and mirrors, which is to say business as usual on Wall Street. By making loans at higher interest interest rates or higher stated interest rates on stated asset and subprime loans, Wall Street reduced the amount that was needed to fund loans — and pocketed the difference without telling investors or disclosing to borrowers as required by the Federal Truth in Lending Act. On the one hand they say they are lenders so they can foreclose, and on the other they say they are not subject to the TILA disclosure requirements.
  2. The spread was enormous — each one as much as 100 times the yield spread premium that brokers were paid for steering hapless borrowers into more expensive loans.
  3. In a frequent example, the investor was expecting a return of 5% based upon loans of only the highest quality which of course would carry an interest rate that was the lowest the market had to offer — at around 5% average. If that had actually been done, Wall Street wouldn’t have been interested because the fees were too low. Instead, the Wall Street Banks sought out loans that carried a stated interest rate of 10% — obviously to borrowers who were either less credit worthy than the borrowers that the investors were expecting or borrowers who were convinced they were less credit  worthy, or they were convinced that the loan in front of them was a better deal even though they qualified for a lower interest rate.
  4. By doubling the interest rate the banks halved the principal funded by investors, pocketing the rest which they booked, for the most part as trading profits. They simply sold the 10% loan for the value of the 5% loan and doubled their money without using any of their own money to begin with.They kept the profit and didn’t report it while putting the investors at far greater risk than they were led to expect.
  5. So now, when the recession is gripping the world, Banks are reporting higher profits because they are able to feed the off-shore off-balance sheet transactions back in as needed to maintain the appearance of profitability. It is a living lie.
  6. Besides the obvious fact that these were ill-gotten gains from the past and not profits from current operations and the banks’ auditors will pay for this one day when shareholders wake up, there is a much more insidious and dangerous aspect to this shell game. If the law is applied as many scholars and writers, including myself, believe it should be, there is no doubt that the result would be a reversal of most foreclosures and an obligation that is unsecured or secured with some modified deal or settlement.
  7. It is highly likely that the the most dreaded result would occur — homeowners would actually pay the full balance of their debts after deductions for payments by third parties and set-off for TILA and other lending violations.
  8. This would result in a requirement of full accounting to the investors who would quickly find out that although the loans were paid in full, the amount they advanced was still not covered — because of the theft by the banks and reported as trading profits. It would also lead those who advanced money on the premise that the pools were insolvent to demand their money back because the loss they were covering in the insurance contract or contract for credit default swap never materialized — except for the intentional act of theft by the Banks.
  9. The resulting effect would be unraveling and reversing a lot of the profit made by selling the loans multiple times through exotic instruments that obscured the fact that they were in essence just selling the same loan over and over again — as much as 40 times the original loan. The consequences are by no means assured, but it seems logical that the Tier 2 YSP would be required to be disgorged. And then, it is possible they would be required to disgorge the money they received from Federal Bailout, insurance, credit default swaps and other derivatives and credit enhancement tools.
  10. Which means that loan you had that was $200,000 in principal is a liability to the Wall Street banks IF YOU PAY IT OFF — and that liability could be in excess of $8 million. When you reverse engineer the Wall Street process that led us into the mortgage meltdown and recession you see several things — false securitization, a fake default rate, fake losses, fraudulent foreclosures and a recession that only happened because the banks sucked the money out of the system. Just follow the money — everyone including government is a loser except the banks. The conclusion is inescapable.
By: Carrie Bay 01/13/2012
JPMorgan Chase kicked off the earnings reporting season for major U.S. lenders on Friday with its announcement that the company earned a record profit of $19 billion for the 2011 fiscal year. That compares with $17.4 billion in net income for the prior year. Earnings per share were $4.48 for 2011.
The company reported net income of $3.7 billion for the fourth quarter of 2011, compared with $4.8 billion for the fourth quarter of 2010.
Although the numbers paint a picture of a company in full recovery mode from the financial crisis and recession, JPMorgan’s latest results missed analysts’ expectations as
the company continues to struggle with legacy issues stemming from the housing downturn.
Mortgage net charge-offs and delinquencies modestly improved over the final quarter of 2011, but both remained at elevated levels, the New York-based lender noted in its earnings report.
JPMorgan’s total nonperforming assets declined by 33 percent compared to a year earlier, but legal wranglings involving mortgages and investors’ repurchase demands cut heavily into the company’s profits.
The company doled out more than $3 billion in 2011 to cover legal proceedings related to its mortgage business. That tally marks a decline from the $5.7 billion that was laid down in 2010 but still represents a hefty sum of what could have gone to boosting the bottom line.
CEO Jamie Dimon says the company set aside $528 million in the final quarter of last year alone to address mortgage-related legal issues.
The handling of foreclosures and defaulted mortgages also carried a steep price tag. In the fourth quarter, JPMorgan’s cost related to this part of the business added up to $925 million.
“There’s still a huge drag [from housing issues],” CEO Jamie Dimon told investors. “You’re talking about several billion dollars a year in mortgage [operations] alone.”
©2012 DS News. All Rights Reserved.

Charles
Charles Wayne Cox – Oregon State Director for the National Homeowners Cooperative
Email: mailto:Charles@BayLiving.com
Websites: http://www.NHCwest.comwww.BayLiving.com; and www.ForensicLoanAnalyst.com
1969 Camellia Ave.
Medford, OR 97504-5403
(541) 727-2240 direct
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Tier 2 Yield Spread Premium Confirmed: Wells Fargo to Pay $11 Million to Investors

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Prices “Marked Up” 70% Over Values Shown on Books

If Investor-lenders got their money back from the investment banker, then where is the debt from the home borrower (if the creditor is satisfied)? It might be nowhere. The SEC is calling it a price-gouging “mark-up” which is the same thing as the extra compensation paid to mortgage brokers. If the extra money paid to the investment banker was justified by the difference between the actual interest rate and viability, life and status of the loan to the homeowner and the rate “disclosed” to the investor — there are two causes of action using the same pot of money.

The investors won here because they were defrauded by price gouging, pretending the mortgage backed securities were not only mortgage-backed (when they weren’t), pretending that there was an existing receivable in the “asset-backed” pool (which there was not), pretending that the promissory note and security instrument (mortgage or deed of trust) were valid and enforceable, and pretending that the true expected rate of return on investment (interest payments and principal) were properly disclosed to the investor-lenders.

In point of fact the investment banker quickly launched a program in which huge fees of 40% or more could be retained by the investment bank while at the same time stating that the investor was getting a safe return on  its investment– all of which raises the question about who gets title to the house. 

The reality is that the nominal rate of return on most mortgages was significantly higher than the real return expected by investors and in fact the actual payments to creditors was largely accomplished by payments from the pool itself (PONZI scheme) and by servicers continuing payments to preserve their “right” and intention to mark down the house for foreclosure sale and apply both contractual and non-contractual fees to the sale, making the house THEIR house instead of using it protect the investors’ position. This difference was achieved by sleight of hand.

By translating the real DOLLAR return to the investor from the percentage used in the prospectus, Wall Street was able to, by example, take $100,000 million and keep $50 million of it for themselves, contrary to any reasonable interpretation of the Prospectus or PSA. The Math is simple.

Take a pension fund who wants to earn 6% in a market where only 5% is available. Thus on the $100,000,000 investment they are expecting a return of $6,000,000 per year (at 6%). Wall Street packaged up loans with an average nominal interest rate of 12% which means that the risk of non-payment was raised far beyond the tolerance of the investor. But the investor-lender didn’t know how their money was being used in the real world. Wall Street bundled $50,000,000 worth of “loans” with an average rate on the note of 12% which equals the $6,000,000 — the amount the investor wanted. Wall Street knew those loans were at maximum risk or certainty of default which is the opposite of the AAA rating from S&P or Fitch. But they didn’t care because the worse the loan, the higher the NOMINAL (in name only) rate of interest stated on the note, the more spread there was against which they could charge their exorbitant fees.

At the end of the day, the pension fund parted with $100 million and never received anything real in return. Under the best circumstances in a court of equity the investor-lenders would have a shot at enforcing some liability and lien on the homeowners in the $50 million package. But because of appraisal fraud where the value of the homes were pumped up intentionally to make THAT also look like something it wasn’t, the reality for investors is that by making collection attempts directly against the homeonwers they would be pursuing properties whose combined value is more likely than not under $25,000,000, which after real expenses and distressed sales could fall far below that amount even if the loan was still performing.

Making a secret profit from the difference between what the interest SHOULD have been and what it was, as nominally stated on the note, is called a yield spread premium (YSP) Most people think of yield spread premiums as the amount paid to mortgage brokers as their reward for getting the borrower to a take a loan whose interest is higher than the interest rate the borrowers could get elsewhere, or even from the same “lender” because their credit score and history qualified them for a lower interest rate. The mortgage broker is paid an actual fee if he is successful in getting the borrower to accept a higher cost loan product.

But here we see a story (below) where the investment banker paid itself a yield spread premium in some cases equal to or greater than the amount funded for the loan. That fee must be disclosed under federal and most state lending laws. The failure to disclose provides the borrower with a right of rescission and a right to damages and treble damages plus attorney fees and costs. That is the tier 2 YSP. It is the same pot of money as the “excessive mark-up” of the securities to the investor-lenders. The investors are collecting, thus raising the issue of whether the deal is now closed out, paid in full, despite little or no participation from the borrower or whether BOTH the investor-lender and the borrower have equally valid and meritorious claims against the same pot of money.

SEC charges Wachovia over CDOs

Wells Fargo agrees to settle charges and pay more than $11 million

By Ronald D. Orol, MarketWatch

WASHINGTON (MarketWatch) — The Securities and Exchange Commission on Tuesday charged Wachovia Corp. with overpricing mortgage-bond deals, in the first of what could be several suits the regulator brings to clamp down on Wall Street practices.

Wells Fargo & Co. (NYSE:WFC) , which now owns Wachovia, agreed to settle the SEC’s charges by paying more than $11 million in disgorgement and penalties, much of which the agency said will be returned to harmed investors.

“Wachovia caused significant losses to the Zuni Indians and other investors by violating basic investor-protection rules — don’t charge secret excessive markups, and don’t use stale prices when telling buyers that assets are priced at fair-market value,” said SEC Division of Enforcement Director Robert Khuzami.

Subpoena for IPO-poised Pandora

Online-music streaming service Pandora, which plans an initial public offering, says it has been subpoenaed in an investigation probing information-sharing by mobile applications. John Letzing and Stacey Delo discuss.

The agency is focusing on the amounts Wachovia charged for collateralized debt obligations, and the inquiry is part of a broader probe into Wall Street sales of $1 trillion worth of CDOs.

CDOs are a type of security often made up of the riskier portions of mortgage-backed securities. Read about CDOs role in the financial crisis.

The SEC’s order found that Wachovia violated securities laws by charging “undisclosed excessive markups” in shares of CDOs to the Zuni Indian Tribe and to an individual investor.

According to the SEC, Wachovia allegedly marked down $5.5 million of equity to 52.7 cents on the dollar after the deal closed and it was unable to find a buyer. Months later, the SEC said, the Zuni Indian Tribe and individual investor paid 90 cents and 95 cents on the dollar for the securities, the agency added. Read about Merrill Lynch and CDO disclosures

“Unbeknownst to them, these prices were over 70 percent higher than the price at which the equity had been marked for accounting purposes,” the SEC said.

The settlement follows a Manhattan federal judge ruling on Friday, dismissing three shareholder lawsuits accusing Wachovia and former executives there of misrepresenting the bank’s exposure to risky mortgage loans, according to a Reuters report. Shareholders claimed Wachovia loosened underwriting guidelines and marketed the loans aggressively, the report said.

Last year, the SEC and Goldman Sachs Group Inc. (NYSE:GS)  agreed to a $550 million settlement over CDOs. As part of the settlement, Goldman acknowledged that marketing materials for a CDO it sold were “incomplete” and that it should have revealed the role hedge-fund firm Paulson & Co. played in constructing the vehicle. Read about Goldman settlement with SEC over CDOs

FED BANS YIELD SPREAD PREMIUMS

A YIELD SPREAD PREMIUM IS A FEE PAID TO A BROKER FOR CREATING A FRAUDULENT PROFIT BY LYING TO THE CUSTOMER WHO BUYS A FINANCIAL PRODUCT. This particular lie would be about the rate on the loan.

One would think this was already illegal and one would be right. Not only is it specified in the Truth in Lending Act and other state and federal laws governing deceptive lending practices, it is also covered by RICO and common law actions for fraud. YSP fees and other forms of undisclosed compensation, of which there were many, are all illegal. These fees are illegal and are all due back to the borrower, along with attorney fees, interest, and potential treble damages. And states and federal government agencies that collect revenue should be interested in all this undeclared income “earned” tax-free.

Up until the era of securitization, YSP fees were limited to those situations addressed by this “new” FED ban — where a mortgage broker convinced a borrower to take a higher interest rate in exchange for some perceived advantage that was in fact disadvantageous to the customer — like coming to the table with less money in exchange for a virtual guarantee of foreclosure down the road. But what this ban does not address directly is the the “tier 2” YSP, in which the second broker was the investment bank. Nor does it take a shot at the trillions in YSP fees ripped out of our economy up until now, which the taxpayers have guaranteed thanks to the TARP, US Treasury and Federal Reserve programs in the fall of 2008. In a hot election year, government and Wall Street guessed correctly that nobody would realize what hit them until long after the deed was done.

While the first YSP was abhorrent, paying brokers thousands of dollars for each bad loan, the second one, also undisclosed, paid investment bankers a profit that sometimes exceeded the loan itself. In the first instance the lie was that this loan is better for you because your initial payment is less, your down payment is less or whatever. In the first instance the lie was first to the prospective borrower, and second to the investor who was advancing money under the supposition that the money would be used to fund loans that had the usual risk of non-payment — which is to say that the odds were in their favor that on balance they would get the return they were looking for, get their principal back and minimize the small balance of defaults with proceeds of foreclosures.

The first lie was predicated on an even bigger lie to both the borrower and the lender (investor): that the property was worth more than the loan, so it was covered by a security interest that would minimize or eliminate the risk of an actual loss. This lie was compounded by the lie that housing prices never go down and they had the appraisals and ratings form official rating agencies to prove that these were transactions whose value was the highest grade available in the marketplace.

The compounded lie was used to convince borrowers that the fact that they knew they could not afford the loan payments when the loan reset to its real terms was “offset” by the “fact” that the broker “guaranteed” the house would later be refinanced at a higher value in which the payment would again be reduced and the borrower would actually receive extra cash. This passive return on an investment meets the definition of the sale of a security, qualifies as a fraudulent unregistered securities transaction, and should land some people in jail. So far, though, the bulk of public opinion continues to blame the victim. The fact that in a transparent transaction where the real facts were disclosed most borrowers would never have signed and no investor would have advanced money is still mysteriously being ignored by policy makers and the courts. Yet it is as plain as day.

This brings us to the second BIG LIE which was that the loan met underwriting standards for the industry, was verified in all the appropriate ways, and the money advanced by the investors was being used to fund loans, not illicit profits. All the lies overlap. The worse the loan the higher the “yield spread premium” to the broker and the higher the yield premium to the investment banker. If the lender (investor) and the borrower knew that the actual amount funded by the lender was $450,000 but the loan was only $300,000, how many people do you think would have allowed or completed that transaction. If they knew that a $150,000 yield spread premium was kept by the investment banker  on a $300,000 loan, how many readers think that NOBODY would have asked “hey! Where is the other $150,000?” How many readers think that ANYONE would say that 50% of the loan amount is a reasonable fee for the investment banker to keep?

Although they make it sound complicated the method was conventional and simple: keep the borrower and lender far away from each other so that neither one actual knew the true facts of the transaction. In other words, your standard con game.

This is why the securitization searches are SO important in confronting your adversary in a mortgage dispute. The title search is important, but the securitization search is what really traces the money. And NOBODY in the financial industry wants you to be able to trace the money because if you do, then investors and borrowers who are suing in greater and greater numbers are going to know where the money went, who got it, and they are going to want it back because it was procured by outright lies.

NOTE: The tier 2 YSP runs counter-intuitive to most people so they keep putting it aside. But it lies at the heart of the mortgage crisis. So I’ll explain it AGAIN here. I’ll use a brand new example taken from the above. It is oversimplified to make the point, but it makes the double point that every financial transaction should be allocated to every loan where it is appropriate to do so, which is why your action for ACCOUNTING and DISCOVERY is so important.

  1. Teachers Pension Fund of Arizona is limited to AAA rated investments, which means the equivalent of U.S. Treasury obligations. They seek the highest possible return without going outside the lines of the primary restriction: NO RISK. They understand that in a market where AAA returns are running at 4% they are not going to get 8% without substantially increasing their risk, which is not allowed. The fund managers basically have the job of making sure that investments stay within guidelines, and that liquidity is maintained to pay the benefits to retired Arizona teachers. The fund managers generally rely upon the rating agencies (Moody’s, Standard and Poor’s, Fitch etc.) but they also “peek under the hood” now and then to make sure everything is OK. Generally they rely upon 2 or 3 investment brokerage houses that have world wide reputations to “protect” and whose objective is to keep the pension fund as a long-term client. It’s been like this for decades, so the hum drum of daily activity lulls everyone into a semi-comatose state.
  2. So when Merrill Lynch tells them they have this “innovative financial product” that “everyone” is buying and that has the AAA rating but provides a higher return of say 5% AND is further insured by AIG and/or AMBAC, the fund managers, wanting to look pretty to management of the fund, buy some of these exotic creatures. In our case we will say for example that the fund invested $450,000 in exchange for a promised return on investment of 5%.
  3. Thus our pension fund managers have partied with $450,000 and they are expecting 5% interest (RISK-FREE) which is, in dollars, $22,500 per year. And they expect the investment bank to pick up a few basis points as their fee on this no-brainer risk free investment transaction.
  4. The investment bank goes to its mortgage aggregator, let’s say Countrywide (now Bank of America/BAC), and says give me a $300,000 loan on which the borrower has agreed to pay $22,500 in interest. CW does a quick calculation and arrives at the obvious result: Merrill Lynch is asking them for a $300,000 mortgage loan whose stated rate of interest is 7.5%. Just to check their math they multiply $300,000 times the 7.5% rate and sure enough, it is $22,500 annual interest.
  5. CW goes to its loan originator, and asks for a $300,000 loan with a nominal rate of 9%, with a teaser payment of only 1%, because they want to make sure there is plenty of money to pay the yield spread premium to the mortgage broker, and to collect service fees, transaction fees etc.
  6. The loan originator goes to the prospective borrower who qualifies for a 5 1/2% loan fixed rate for 30 years and can easily pay that. But that is not what Merrill Lynch, CW, or the loan originator want in order to earn their ridiculous fees.
  7. The loan originator assigns a “loan specialist” who has received been certified as a mortgage analyst after a total of 7 seconds of training on his way up the elevator to the 13th floor where his cubicle is filled with prospective deals. His conviction for mail fraud, wire fraud, and prison sentence is behind him now because this new company doesn’t care about his past.
  8. The loan specialist is given a script to convince the borrower against paying 20% down payment, and to take a loan that allows them to pay only 1% interest only for two years. At $250 per month payment, the savings per month is enormous and the loan specialist further entices them with the fact that this is a bona fide transaction backed up by Quicken Loans or some other originator who has done the math and they have figured out that this works best for the customer.  Not only that, home prices are forecasted to continue rising by 20% per month, so in a year they will able to refinance and take out an extra $100,000 with even Lower payments.
  9. If the borrower takes the bait, everyone gets what they want except the borrower who is in for some nasty surprises down the road when the payments rise substantially above anything the borrower can pay. This loan is identified as being in the junior tranches of a securitized pool, but subject to a credit default swap which was sold by the senior tranche thus contains toxic waste loans without anyone being the wiser. [This “sale” initially shows MORE INCOME in the senior tranche but creates an enormous liability — the equivalent of having purchased the worst of the toxic waste loans. Thus the senior tranche “safe” asset was converted into a horrendous liability that was as guaranteed to fail as the lowest tranches. The trick on the secondary transaction was that the investment banking firm had the proceeds of the credit default swaps payable to themselves instead of the investors, by labeling the transaction as a proprietary trade instead of a fiduciary transaction].
  10. If the borrower doesn’t take the bait, then the loan is done at 5 1/2% and is identified as being in the senior tranches of a securitized pool by virtue of a spreadsheet without any assignment, indorsement or delivery of or recording of actual documents.
  11. So to summarize, on a $300,000 loan, the investment bank made $150,000 which was used to fund the outsized and illegal yield spread premiums to the mortgage brokers, who were incentivized to make the worst loans possible because the investment bank’s spread increases exponentially every time they get a bad loan. The Arizona Pension Fund is not wise to the fact that only $300,000 of their money was actually invested in a mortgage. Nor do they know the quality of the mortgage is virtually ‘guaranteed to fail” much less AAA.
  12. Once the loan fails, the Pension Fund does not in theory ask any questions about what happened to all the money — except now, many investors ARE asking that that question and I encourage readers to keep track of those cases, since the discovery responses and pleadings will be very revealing regarding your own actions as borrowers to recover damages, interest, attorney fees etc for TILA, RICO and other violations.

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August 16, 2010

Fed Adopts Rules Meant to Protect Home Buyer

By DAVID STREITFELD

The Federal Reserve on Monday moved to end a controversial lending practice that had helped propel the housing boom to unsustainable heights and then accelerated its collapse.

The Fed announced that it was adopting new rules banning yield spread premiums, which allowed mortgage brokers and lenders to gain additional profit from loans by charging borrowers higher-than-market interest rates.

Reaction to the change was muted. For one thing, the recent package of financial reforms passed by Congress this summer already addressed the issue. And some thought a ban should have been imposed long ago, at a time when it could have directly affected loan quality.

Michael D. Calhoun, president of the Center for Responsible Lending, described the action as “a real milestone,” but he said that he had been trying to convince regulators for at least 15 years that yield spread premiums were no more than illegal kickbacks.

Many borrowers had little idea of what a yield spread premium was, even when it was costing them money.

Traditionally, mortgage brokers were paid directly by the home buyer. The rise of the premium allowed the brokers to be compensated by the lender as well. Lenders in effect started paying bonuses to brokers who brought them high-interest loans that were naturally coveted by mortgage investors.

From there, critics said, it was a short step for some brokers to put unsuspecting buyers into these loans and tell them it was the best deal they could get. Subprime lenders in particular often used yield spread premiums.

“People didn’t just happen to end up in risky loans,” Mr. Calhoun said. “Mortgage brokers and other people on the frontlines were getting two to three times as much money to push buyers into those loans than they were into 30-year fixed-rate loans. So what do you think happened?”

Brokers argued that it was frequently in the interest of the borrower, especially a low-income buyer, to pay a higher rate in exchange for bringing less cash to closing.

Attempts at reform achieved little, and during the housing boom the yield spread premiums became ever more prevalent. In many cases, groups like the Center for Responsible Lending found, borrowers never realized they were paying both higher fees and a higher rate.

While the new rules prohibit payments to a lender or broker based on the loan’s interest rate, they do allow for compensation based on a fixed percentage of the loan amount.

To avoid steering the buyer into a loan that is offering less favorable terms, the rules now say that the borrower must be provided with competing options, including the lowest qualifying interest rate, the lowest points and origination fees, and the lowest qualifying rate without risky features like prepayment penalties.

The National Association of Mortgage Brokers, which had long argued that efforts to reform the premium unfairly singled out its members, pronounced itself satisfied with the new rules.

The Fed rules “put everybody on the same footing,” including brokers and banks, said Roy DeLoach, executive vice president for the brokers’ association.

The rules take effect in April. Similar, and in some ways broader, rules in the financial reform bill will take effect later.

REMIC EVASION of TAXES AND FRAUD

I like this post from a reader in Colorado. Besides knowing what he is talking about, he raises some good issues. For example the original issue discount. Normally it is the fee for the underwriter. But this is a cover for a fee on steroids. They took money from the investor and then “bought” (without any paperwork conveying legal title) a bunch of loans that would produce the receivable income that the investor was looking for.

So let’s look at receivable income for a second and you’ll understand where the real money was made and why I call it an undisclosed tier 2 Yield Spread Premium due back to the borrower, or apportionable between the borrower and the investor. Receivable income consists or a complex maze designed to keep prying eyes from understanding what theya re looking at. But it isn’t really that hard if you take a few hours (or months) to really analyze it.

Under some twisted theory, most foreclosures are proceeding under the assumption that the receivable issue doesn’t matter. The fact that the principal balance of most loans were, if properly accounted for, paid off 10 times over, seems not to matter to Judges or even lawyers. “You borrowed the money didn’t you. How can you expect to get away with this?” A loaded question if I ever heard one. The borrower was a vehicle for the commission of a simple common law and statutory fraud. They lied to him and now they are trying to steal his house — the same way they lied to the investor and stole all the money.

  1. Receivable income is the income the investor expects. So for example if the deal is 7% and the investor puts up $1 million the investor is expecting $70,000 per year in receivable income PLUS of course the principal investment (which we all know never happened).

  2. Receivable income from loans is nominal — i.e., in name only. So if you have a $500,000 loan to a borrower who has an income of $12,000 per year, and the interest rate is stated as 16%, then the nominal receivable income is $80,000 per year, which everyone knows is a lie.

  3. The Yield Spread premium is achieved exactly that way. The investment banker takes $1,000,000 from an investor and then buys a mortgage with a nominal income of $80,000 which would be enough to pay the investor the annual receivable income the investor expects, plus fees for servicing the loan. So in our little example here, the investment banker only had to commit $500,000 to the borrower even though he took $1 million from the investor. His yield spread premium fee is therefore the same amount as the loan itself.  Would the investor have parted with the money if the investor was told the truth? Certainly not. Would the borrower sign up for a deal where he was sure to be thrown out on the street? Certainly not. In legal lingo, we call that fraud. And it never could have happened without defrauding BOTH the investor and the borrower.

  4. Then you have the actual receivable income which is the sum of all payments made on the pool, reduced by fees for servicing and other forms of chicanery. As more and more people default, the ACTUAL receivables go down, but the servicing fees stay the same or even increase, since the servicer is entitled to a higher fee for servicing a non-performing loan. You might ask where the servicer gets its money if the borrower isn’t paying. The answer is that the servicer is getting paid out of the proceeds of payments made by OTHER borrowers. In the end most of the ACTUAL income was eaten up by these service fees from the various securitization participants.

  5. Then you have a “credit event.” In these nutty deals a credit event is declared by investment banker who then makes a claim against insurance or counter-parties in credit default swaps, or buys (through the Master Servicer) the good loans (for repackaging and sale). The beauty of this is that upon declaration of a decrease in value of the pool, the underwriter gets to collect money on a bet that the underwriter would, acting in its own self interest, declare a write down of the pool and collect the money. Where did the money come from to pay for all these credit enhancements, insurance, credit default swaps, etc? ANSWER: From the original transaction wherein the investor put up $1 million and the investment banker only funded $500,000 (i.e., the undisclosed tier 2 yield spread premium).

  6. Under the terms of the securitization documents it might appear that the investor is entitled to be paid from third party payments. Both equitably, since the investors put up the money and legally, since that was the deal, they should have been paid. But they were not. So the third party payments are another expected receivable that materialized but was not paid to the creditor of the mortgage loan by the agents for the creditor. In other words, his bookkeepers stole the money.

Very good info on the securitization structure and thought provoking for sure. Could you explain the significance of the Original Issue Discount reporting for REMICs and how it applies to securitization?

It seems to me that the REMIC exemptions were to evade billions in taxes for the gain on sale of the loans to the static pool which never actually happened per the requirements for true sales. Such reporting was handled in the yearly publication 938 from the IRS. A review of this reporting history reveals some very interesting aspects that raise some questions.

Here are the years 2007, 2008 and 2009:

2009 reported in 2010
http://www.irs.gov/pub/irs-pdf/p938.pdf

2008? is missing and reverts to the 2009 file?? Don’t believe me. try it.
http://www.irs.gov/pub/irs-prior/p938–2009.pdf

2007 reported in 2008
http://www.irs.gov/pub/irs-prior/p938–2007.pdf

A review of 2007 shows reporting of numerous securitization trusts owned by varying entities, 08 is obviously missing and concealed, and 2009 shows that most reporting is now by Fannie/Freddie/Ginnie, JP Morgan, CIti, BofA and a few new entities like the Jeffries trusts etc.

Would this be simply reporting that no discount is now being applied and all the losses or discount is credited to the GSEs and big banks, or does it mean the trusts no longer exist and the ones not paid with swaps are being resecuritized?

Some of the tell tale signs of some issues with the REMIC status especially in the WAMU loans is a 10.3 Billion dollar tax claim by the IRS in the BK. It is further that the balance of the entire loan portfolio of WAMU transferred to JPM for zero consideration. A total of 191 Billion of loans transferred proven by an FDIC accounting should be enough to challenge legal standing in any event.

I believe that all of the securitized loans were charged back to WAMU’s balance sheet prior to the sale of the assets and transferred to JPM along with the derivative contracts for each and every one of them. [EDITOR’S NOTE: PRECISELY CORRECT]

The derivatives seem to be accounted for in a separate mention in the balance sheet implying that the zeroing of the loans is a separate act from the derivatives. Add to that the IRS claim which can be attributed to the gain on sale clawback from the voiding of the REMIC status and things seem to fit.

I would agree the free house claim is a tough river to row but the unjust enrichment by allowing 191 billion in loans to be collected with no Article III standing not only should trump that but additionally forever strip them of standing to ever enforce the contract.

The collection is Federal Racketeering at the highest level, money laundering and antitrust. Where are the tobacco litigators that want to handle this issue for the homeowners? How about an attorney with political aspirations that would surely gain support for saving millions of homes for this one simple case?

Documents and more info on the FDIC litigation fund extended to JPM to fight consumers can be found here:

http://www.wamuloanfraud.com

You can also find my open letter to Sheila Bair asking her to personally respond to my request here:

http://4closurefraud.org/2010/06/09/an-open-letter-to-sheila-bair-of-the-federal-deposit-insurance-corporation-fdic-re-foreclosures/

Any insight into the REMIC and Pub. 938 info is certainly appreciated

Re-Orienting the Parties to Clarify Who is the Real Plaintiff

The procedural motion missed by most lawyers is re-orienting the parties. Just because you are initially the plaintiff doesn’t mean you should stay that way. Once it is determined that the party seeking affirmative relief is seeking to sell your personal residence and that all you are doing is defending, they must become the plaintiff and file a lawsuit against you which you have an opportunity to defend. A Judge who refuses to see that procedural point is in my opinion committing clear reversible error.

If the would-be forecloser could not establish standing and/or could not prove their case in a judicial foreclosure action, there is no doubt in my mind that the ELECTION to use the power of sale is UNAVAILABLE to them. They must show the court that they have a prima face case and the homeowners must present a defense. But that can only be done if the parties are allowed to conduct discovery. Otherwise the proceedings are a sham, and the Judge is committing error by giving the would-be forecloser the benefit of the doubt (which means that the Judge is creating an improper presumption at law).

If the Judge says otherwise, then he/she is putting the burden on the homeowner. But the result is the same. Any contest by the would-be forecloser should be considered under the same rules as a motion to dismiss, which means that all allegations made by the homeowner are taken as true for purposes of the preliminary motions.

Some people have experienced the victory of a default final judgment for quiet title only to have it reversed on some technical grounds. While this certainly isn’t the best case scenario, don’t let the fight go out of you and don’t let your lawyer talk you into accepting defeat. Reversal of the default doesn’t mean anyone won or lost. It just means that instead of getting the ultimate victory by default, you are going to fight for it. The cards are even more stacked in your favor with the court decisions reported over the last 6 months and especially over the last two weeks. See recent blog entries and articles.

All that has happened is that instead of a default you will fight the fight. People don’t think you can get the house for free. Their thinking is based upon the fact that there IS an obligation that WAS created.

The question now is whether the Judge will act properly and require THEM to have the burden of proof to plead and prove a case in foreclosure. THEY are the party seeking affirmative relief so they should have the burden of pleading and proving a case. Your case is a simple denial of default, denial of their right to foreclose and a counterclaim with several counts for damages and of course a count for Quiet Title. As a guideline I offer the following which your lawyer can use as he/she sees fit.

The fact that you brought the claim doesn’t mean you have to plead and prove their case. Your case is simple: they did a fraudulent and wrongful foreclosure because you told them you denied the claim and their right to pursue it. That means they should have proceeded judicially which of course they don’t want to do because they can’t make allegations they know are not true (the note is NOT payable to them, the recorded documentation prior to sale doesn’t show them as the creditor etc.).

I don’t remember if MERS was involved in your deal but if it was the law is getting pretty well settled that MERS possesses nothing, is just a straw man for an undisclosed creditor (table funded predatory loan under TILA) and therefore can neither assign nor make any claim against the obligation, note or mortgage.

Things are getting much better. Follow the blog — in the last two weeks alone there have been decisions, some from appellate courts, that run in your favor. There is even one from California. So if they want to plead a case now in foreclosure they must first show that they actually contacted you and tried to work it out. Your answer is the same as before. I assume you sent a qualified written request. Under the NC appellate decision it is pretty obvious that you do have a right of action for enforcement of RESPA. They can’t just say ANYONE contacted you they must show the creditor contacted you directly or through an authorized representative which means they must produce ALL the documentation showing the transfers of the note, the PSA the assignment and assumption agreement etc.

They can’t produce an assignment dated after the cutoff date in the PSA. They can’t produce an assignment for a non-performing loan. Both are barred by the PSA. So there may have been an OFFER of assignment  but there was no authority to accept it and no reasonable person would do so knowing the loan was already in default. And they must show that the loan either was or was not replaced by cash or a substitute loan in the pool, with your loan reverting back to the original assignor. Your loan probably is vested in the original assignor who was the loan aggregator. If it’s in the pool it is owned by the investors, collectively. There is no trust nor any assets in the trust since the ownership of the loans were actually conveyed when the investors bought the mortgage backed securities. They don’t want you going near the investors because when you compare notes, the investors are going to realize that the investment banker did not invest all the money that the investor gave the investment banker — they kept about a third of it for themselves which is ANOTHER undisclosed yield spread premium entitling you to damages, interest and probably treble damages.

The point of all this is that it is an undeniable duty for you to receive disclosure of the identity of the creditor, proof thereof, and a full accounting for all receipts and disbursements by the creditor and not just by the servicer who does not track third party payments through insurance, credit default swaps and other credit enhancements. It’s in federal and state statutes, federal regulations, state regulations and common law.

The question is not just what YOU paid but what ANYONE paid on your account. And even if those payments were fraudulently received and kept by the investment banker and even if the loan never made it through proper assignment, indorsement, and delivery, those payments still should have been allocated to your account, according to your note first to any past due payments (i.e., no default automatically, then to fees and then to the borrower). That is a simple breach of contract action under the terms of the note.

Again they don’t want to let you near those issues in discovery or otherwise because the fraud of the intermediaries would be instantly exposed. So while you have no automatic right to getting your house free and clear, that is often the result because they would rather lose the case than let you have the information required to prove or disprove their case in foreclosure. The bottom line is that you don’t want to let them or have the judge let them (Take an immediate interlocutory appeal if necessary) use the power of sale which is already frowned upon by the courts and use it as an end run around the requirements of due process, to wit: if you think you have a claim you must plead and prove it and give the opposition an opportunity to defend.

The procedural motion missed by most lawyers is re-orienting the parties. Just because you are initially the plaintiff doesn’t mean you should stay that way. Once it is determined that the party seeking affirmative relief is seeking to sell your personal residence and that all you are doing is defending, they must become the plaintiff and file a lawsuit against you which you have an opportunity to defend. A Judge who refuses to see that procedural point is in my opinion committing clear reversible error.

The worst case scenario if everything is done PROPERLY is that you get the full accounting, you are not in default (unless there really were no third party payments which is extremely unlikely) and they must negotiate new terms based upon all the money that is owed back to you, which might just exceed the current principal due on the loan — especially once you get rid of the fabricated fees and costs they attach to the account (see Countrywide settlement with FTC on the blog).

Ratings Arbitrage a/k/a Fraud

Investment banks bundled mortgage loans into securities and then often rebundled those securities one or two more times. Those securities were given high ratings and sold to investors, who have since lost billions of dollars on them.

Editor’s Note: The significance of this report cannot be overstated. Not only did the investment bankers LOOK for and CREATE loans guaranteed to fail, which they did, they sold them in increasingly complex packages more than once. So for example if the yield spread profit or premium was $100,000 on a given loan, that wasn’t enough for the investment bankers. Without loaning or investing any additional money they sold the same loans, or at least parts of those loans, to additional investors one, two three times or more. In the additional sales, there was no cost so whatever they received was entirely profit. I would call that a yield spread profit or premium, and certainly undisclosed. If the principal of the loan was $300,000 and they resold it three times, then the investment bank received $900,000 from those additional sales, in addition to the initial $100,000 yield spread profit on sale of the loan to the “trust” or special purpose vehicle.

So the investment bank kept $1 million dollars in fees, profits or compensation on a $300,000 loan. Anyone who has seen “The Producers” knows that if this “show” succeeds, i.e., if most of the loans perform as scheduled and borrowers are making their payments, then the investment bank has a problem — receiving a total of $1.3 million on a $300,000 loan. But if the loans fails, then nobody asks for an accounting. As long as it is in foreclosure, no accounting is required except for when the property is sold (see other blog posts on bid rigging at the courthouse steps documented by Charles Koppa).

If they modify the loan or approve the short sale then an accounting is required. That is a bad thing for the investment bank. But if they don’t modify any loans and don’t approve any short-sales, then questions are going to be asked which will be difficult to answer.

You make plans and then life happens, my wife says. All these brilliant schemes were fraudulent and probably criminal. All such schemes eventually get the spotlight on them. Now, with criminal investigations ongoing in a dozen states and the federal government, the accounting and the questions are coming anyway—despite the efforts of the titans of the universe to avoid that result.

All those Judges that sarcastically threw homeowners out of court questioning the veracity of accusations against pretender lenders, can get out the salt and pepper as they eat their words.

“Why are they not in jail if they did these things” asked practically everyone on both sides of the issue. The answer is simply that criminal investigations do not take place overnight, they move slowly and if the prosecutor has any intention of winning a conviction he must have sufficient evidence to prove criminal acts beyond a reasonable doubt.

But remember the threshold for most civil litigation is merely a preponderance of the evidence, which means if you think there is more than a 50-50  probability the party did something, the prima facie case is satisfied and damages or injunction are stated in a final judgment. Some causes of action, like fraud, frequently require clear and convincing evidence, which is more than 50-50 and less than beyond a reaonsable doubt.

From the NY Times: ————————

The New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities, according to two people with knowledge of the investigation.

by LOUISE STORY

Andrew Cuomo, the attorney general of New York, sent subpoenas to eight Wall Street banks late Wednesday.

The investigation parallels federal inquiries into the business practices of a broad range of financial companies in the years before the collapse of the housing market.

Where those investigations have focused on interactions between the banks and their clients who bought mortgage securities, this one expands the scope of scrutiny to the interplay between banks and the agencies that rate their securities.

The agencies themselves have been widely criticized for overstating the quality of many mortgage securities that ended up losing money once the housing market collapsed. The inquiry by the attorney general of New York, Andrew M. Cuomo, suggests that he thinks the agencies may have been duped by one or more of the targets of his investigation.

Those targets are Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch, which is now owned by Bank of America.

The companies that rated the mortgage deals are Standard & Poor’s, Fitch Ratings and Moody’s Investors Service. Investors used their ratings to decide whether to buy mortgage securities.

Mr. Cuomo’s investigation follows an article in The New York Times that described some of the techniques bankers used to get more positive evaluations from the rating agencies.

Mr. Cuomo is also interested in the revolving door of employees of the rating agencies who were hired by bank mortgage desks to help create mortgage deals that got better ratings than they deserved, said the people with knowledge of the investigation, who were not authorized to discuss it publicly.

Contacted after subpoenas were issued by Mr. Cuomo’s office late Wednesday night notifying the banks of his investigation, spokespeople for Morgan Stanley, Credit Suisse and Deutsche Bank declined to comment. Other banks did not immediately respond to requests for comment.

In response to questions for the Times article in April, a Goldman Sachs spokesman, Samuel Robinson, said: “Any suggestion that Goldman Sachs improperly influenced rating agencies is without foundation. We relied on the independence of the ratings agencies’ processes and the ratings they assigned.”

Goldman, which is already under investigation by federal prosecutors, has been defending itself against civil fraud accusations made in a complaint last month by the Securities and Exchange Commission. The deal at the heart of that complaint — called Abacus 2007-AC1 — was devised in part by a former Fitch Ratings employee named Shin Yukawa, whom Goldman recruited in 2005.

At the height of the mortgage boom, companies like Goldman offered million-dollar pay packages to workers like Mr. Yukawa who had been working at much lower pay at the rating agencies, according to several former workers at the agencies.

Around the same time that Mr. Yukawa left Fitch, three other analysts in his unit also joined financial companies like Deutsche Bank.

In some cases, once these workers were at the banks, they had dealings with their former colleagues at the agencies. In the fall of 2007, when banks were hard-pressed to get mortgage deals done, the Fitch analyst on a Goldman deal was a friend of Mr. Yukawa, according to two people with knowledge of the situation.

Mr. Yukawa did not respond to requests for comment.

Wall Street played a crucial role in the mortgage market’s path to collapse. Investment banks bundled mortgage loans into securities and then often rebundled those securities one or two more times. Those securities were given high ratings and sold to investors, who have since lost billions of dollars on them.

Banks were put on notice last summer that investigators of all sorts were looking into their mortgage operations, when requests for information were sent out to all of the big Wall Street firms. The topics of interest included the way mortgage securities were created, marketed and rated and some banks’ own trading against the mortgage market.

The S.E.C.’s civil case against Goldman is the most prominent action so far. But other actions could be taken by the Justice Department, the F.B.I. or the Financial Crisis Inquiry Commission — all of which are looking into the financial crisis. Criminal cases carry a higher burden of proof than civil cases. Under a New York state law, Mr. Cuomo can bring a criminal or civil case.

His office scrutinized the rating agencies back in 2008, just as the financial crisis was beginning. In a settlement, the agencies agreed to demand more information on mortgage bonds from banks.

Mr. Cuomo was also concerned about the agencies’ fee arrangements, which allowed banks to shop their deals among the agencies for the best rating. To end that inquiry, the agencies agreed to change their models so they would be paid for any work they did for banks, even if those banks did not select them to rate a given deal.

Mr. Cuomo’s current focus is on information the investment banks provided to the rating agencies and whether the bankers knew the ratings were overly positive, the people who know of the investigation said.

A Senate subcommittee found last month that Wall Street workers had been intimately involved in the rating process. In one series of e-mail messages the committee released, for instance, a Goldman worker tried to persuade Standard & Poor’s to allow Goldman to handle a deal in a way that the analyst found questionable.

The S.& P. employee, Chris Meyer, expressed his frustration in an e-mail message to a colleague in which he wrote, “I can’t tell you how upset I have been in reviewing these trades.”

“They’ve done something like 15 of these trades, all without a hitch. You can understand why they’d be upset,” Mr. Meyer added, “to have me come along and say they will need to make fundamental adjustments to the program.”

At Goldman, there was even a phrase for the way bankers put together mortgage securities. The practice was known as “ratings arbitrage,” according to former workers. The idea was to find ways to put the very worst bonds into a deal for a given rating. The cheaper the bonds, the greater the profit to the bank.

The rating agencies may have facilitated the banks’ actions by publishing their rating models on their corporate Web sites. The agencies argued that being open about their models offered transparency to investors.

But several former agency workers said the practice put too much power in the bankers’ hands. “The models were posted for bankers who develop C.D.O.’s to be able to reverse engineer C.D.O.’s to a certain rating,” one former rating agency employee said in an interview, referring to collateralized debt obligations.

A central concern of investors in these securities was the diversification of the deals’ loans. If a C.D.O. was based on mostly similar bonds — like those holding mortgages from one region — investors would view it as riskier than an instrument made up of more diversified assets. Mr. Cuomo’s office plans to investigate whether the bankers accurately portrayed the diversification of the mortgage loans to the rating agencies.

Gretchen Morgenson contributed reporting

APPRAISAL FRAUD IN DETAIL

APPRAISAL FRAUD IS THE ACT OF GIVING A RATING OR VALUE TO A HOME THAT IS WRONG — AND THE APPRAISER KNOWS IT IS WRONG. This can’t be performed in a vacuum because there are so many players who are involved. They ALL must be complicit in the deceit leading to the homeowner signing on the the bottom line and advancing his home as collateral on a loan which at the very beginning is theft of most of the value of the home. It’s like those credit cards they send to people who are financially challenged. $300 credit, no questions asked. And then you get a bill for $297 including fees and insurance. So you end up not with a credit line of $300, but a liability of $300 just for signing your name. It’s a game to the “lenders” because they are not using their own money.

And remember, the legal responsibility for the appraisal is directly with the appraiser, the appraisal company (which usually has errors and omissions insurance) and the named lender in your closing documents. The named “lender” is, according to Federal Law, required to verify the value of the property.

How many of them , if they were using their own money, would blithely accept a $300,000 appraisal on a home that was worth $200,000 last month and will be worth $200,000 next month? You are entitled to rely on the appraisal and the “verification” by the “lender” (see Truth in Lending Act and Reg Z). The whole reason the law is structured that way is because THEY know and YOU don’t. THEY have access to the information and YOU don’t. This is a complex transaction that THEY understand and YOU don’t.

A false appraisal steals money from you because you rely on it to make the deal for refinancing or for the purchase. You think the home is worth $300,000 and so you agree to buy a loan product that puts you in debt for $290,000. But the house is worth $200,000. You just lost $90,000 plus closing costs and a variety of other expenses, especially if you are moving into anew home that requires all kinds of additions like window treatments etc. But the “lender” who is really just a front for the Wall Street and the investor pool that funded the loan, made out like bandits. Yield spread premiums, extra fees, profits, rebates, kickbacks to the developer, the appraiser, the mortgage broker, the title agency, the closing agent, the real estate broker, trustee(s) the investment banking entities that were used in the securitization of your loan, amount in some cases to MORE THAN YOUR LOAN. No wonder they are so anxious to get your signature.

“Comparable” means reference to time, nearby geography, and physical attributes of the home and lot. Here are SOME of the more obvious indicators of appraisal fraud:

  1. Your home is worth 40% of the appraisal amount.
  2. The appraisal used add-ons from the developer that were marked up for the home buyer but which nobody in the secondary market will pay. That kitchen you paid an extra $10,000 for “extras” is included in your appraisal but has no value to anyone else. That’s not an appraisal and it isn’t collateral or fair market value.
  3. The homes in the immediate vicinity of your home were selling for less than your home appraisal when they had the same attributes.
  4. The homes in the immediate vicinity of your home were selling for less than your home appraisal just a few weeks or months before.
  5. The value of your home was significantly less just a  few weeks or months after the closing.
  6. You are underwater: this means you owe more on your obligation than your house is worth. Current estimates are that it might take 20 years or more for home prices to reach the level of mortgages, and that is WITH inflation.
  7. Negative amortization loans usually allow the principal to rise even above the falsely inflated appraisal amount. If that happened, then they knew at the time of the loan that even if the appraisal was not inflated, it still would not be worth the amount of the principal due on the obligation. For example, if your loan is $290,000 and the interest is $25,000 per year, but you were only required to pay $1,000 per month for the first three years, then your Principal was going up by $13,000 per year compounded. So that $300,000 appraisal doesn’t cover the $39,000+ that would be added to your principal balance. The balance at the end of 3 years will be over $330,000 on property APPRAISED at $300,000. No honest appraiser, mortgage broker, or lender, would be complicit in such an arrangement unless they were paid handsomely to do it and they had no risk because they were not using their own money for the loan.

Subprimes Not Dead for Deutsch, American General New offerings Planned

Editor’s Notes: They are STILL doing it. This report clearly shows that the main players are still packaging sub-prime loans (which most people would define as loans likely to fail). The reason is money. The higher the spread the higher the yield spread premium. These YSP’s are still not reported to borrowers. They are hidden from both investors and borrowers. My opinion is that there is no statute of limitations on a cause of action you don’t know exists — especially if the intent and conduct of the defrauding parties was a pattern to withhold information.

What is interesting is to see how they are addressing investor concerns about toxic assets and what they disclose now versus what they disclosed when the real mess was created. What is scary is that without regulation, the game continues. This is like a sports event where the referees have left the field.

“the underlying borrowers have full documentation, were fully examined by the company and most have made 50 payments or more – factors that have often been missing from poorly performing loan pools.

“Subprime mortgages were once the lifeblood of the securitization business, accounting for more than $1 trillion of deals in the decade leading up to the 2007 credit-market crash

Subprimes Not Dead for American General
Asset Backed Alert, Harrison Scott Publications Inc. (March 26, 2010)

American General is about to start shopping the second in what could be a series of securitizations this year, this time in the form of a deal backed by subprime mortgages. The offering, totaling $800 million, is set to hit the market within the next two weeks via lead underwriter Deutsche Bank. It would be backed by 30-year fixed-rate loans that were mostly written 3-7 years ago through American General’s own branches, with no credits newer than 18 months old.

The transaction is separate from a securitization the Evansville, Ind., unit of AIG is poised to price in the coming days. RBS is leading that $1 billion issue, backed by alternative-A credits written through brokers. The alt-A deal was seen as a rarity when it hit the market just over a month ago, as it was among just a few private-label mortgage securitizations to go into development since the global credit crisis intensified in late 2008. Even then, however, subprime-loan issues were presumed extinct.

Indeed, investors have been treating subprime-mortgage securitizations as toxic for nearly three years. But American General is touting some characteristics that might ease buyers’ concerns. For instance, the underlying borrowers have full documentation, were fully examined by the company and most have made 50 payments or more – factors that have often been missing from poorly performing loan pools.

There will also be substantial credit enhancement for the deal’s triple-A-rated senior class, in the form of three or four subordinate pieces equal to about half the top-rated tranche. Deutsche plans to pitch the top class to large “real-money” investors like insurers or pension plans, while shopping the junior notes more quietly among hedge funds.

After that, American General could try to complete six or seven more deals over the course of the year. Most if not all would be backed by subprime loans, mainly from a $10 billion mortgage portfolio the company holds in what it calls its centralized retail pool. It could also draw on a smaller book of brokered loans.

Deutsche would likely run the books on deals involving the retail portfolio with RBS as a co-lead, as is the case with the upcoming subprime-mortgage issue. The arrangement reverses for brokered-loan deals, with RBS in front and Deutsche as a co-lead. American General is also in talks with whole-loan buyers.

Like other mortgage-bond issues that have gone into development in recent months, American General’s securitizations are being talked about as indicators of how the new-deal market will unfold in the months ahead. Other issuers might see successful offerings as justification to pitch bonds of their own, including Wall Street dealers and hedge funds that bought loans on the cheap.

American General has never been a frequent issuer of mortgage-backed bonds, but sees now as an opportune time to use its loan-origination business to carve out a presence in the market. Subprime mortgages were once the lifeblood of the securitization business, accounting for more than $1 trillion of deals in the decade leading up to the 2007 credit-market crash. Amid rampant defaults, the flow of those deals slowed late that year and then shut off entirely in 2008.

Yield Spread Premiums Revealed as Interest Rates Rise

Editor’s Note: This article might help you understand the workings of a yield spread premium. For every 1% difference in interest rate the “cost” of the loan to you goes up 19%. Now if you look at it from the point of view of the “lender” that means the “value” goes up by 19%. That means, on a $100,000 loan an increase of $19,000.

So if you have a $100,000 loan and you qualified for a 5% loan, then a smooth-talking mortgage broker or mortgage originator might get you confused enough to get into a loan that looks better but ends being worse.

The result might be that you pay a 10% rate when the loan re-sets. This increases the “cost” of the loan (oversimplifying here for the purpose of education) to the borrower and the “value” of the loan to the “lender.” How much? 19% for every 1% increase, so in our example here, to keep it simple, the cost to you on a $100,000 loan is increased by 19%x5=95%. So you will pay $95,000 more for that increase. And the lender will get $95,000 more for their “investment.”

The mortgage broker gets a “share” of that increase as a reward for having talked you into a worse loan product even if it means that the viability of the loan (the likelihood that you will pay it off) has been diminished. This “share” is called a premium and it is caused by the spread between the original 5% that you could have had and the 10% loan they you bought. Hence yield spread premium, and I call that “tier 1.”

Tier 2 occurs because the source of funds is not the bank, it is an investor who is kept in the dark much as you are. They think they are getting 5% on a $200,000 loan. But what Wall Street did was they actually funded your $100,000 loan, valued it at 10%, and then kept the balance of the $200,000 investment for themselves. To the investor the numbers look the same — they expected 5% on their $200,000 purchase of mortgage backed securities which is $10,000 per year. Wall Street gave them what looked like an investment that yielded $10,000 per year simply by creating toxic loans and used it against the borrowers who would have otherwise paid on the loans because they could.

It is the same yield spread between 5% and 10%, but used in reverse against the investor.
In my opinion this gives rise to recovery of the undisclosed tier 2 yield spread premium payable to the borrower. It might also give rise to a cause of action for securities fraud that the investor could claim. At the moment, few people are pursuing this. Eventually as the mystery unravels, there will be competing claims for this money, and the first one to the finish line is probably going to be the winner.
April 10, 2010

Interest Rates Have Nowhere to Go but Up

By NELSON D. SCHWARTZ

Even as prospects for the American economy brighten, consumers are about to face a new financial burden: a sustained period of rising interest rates.

That, economists say, is the inevitable outcome of the nation’s ballooning debt and the renewed prospect of inflation as the economy recovers from the depths of the recent recession.

The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.

“Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. “It’s been a great thrill as rates descended, but now we face an extended climb.”

The impact of higher rates is likely to be felt first in the housing market, which has only recently begun to rebound from a deep slump. The rate for a 30-year fixed rate mortgage has risen half a point since December, hitting 5.31 last week, the highest level since last summer.

Along with the sell-off in bonds, the Federal Reserve has halted its emergency $1.25 trillion program to buy mortgage debt, placing even more upward pressure on rates.

“Mortgage rates are unlikely to go lower than they are now, and if they go higher, we’re likely to see a reversal of the gains in the housing market,” said Christopher J. Mayer, a professor of finance and economics at Columbia Business School. “It’s a really big risk.”

Each increase of 1 percentage point in rates adds as much as 19 percent to the total cost of a home, according to Mr. Mayer.

The Mortgage Bankers Association expects the rise to continue, with the 30-year mortgage rate going to 5.5 percent by late summer and as high as 6 percent by the end of the year.

Another area in which higher rates are likely to affect consumers is credit card use. And last week, the Federal Reserve reported that the average interest rate on credit cards reached 14.26 percent in February, the highest since 2001. That is up from 12.03 percent when rates bottomed in the fourth quarter of 2008 — a jump that amounts to about $200 a year in additional interest payments for the typical American household.

With losses from credit card defaults rising and with capital to back credit cards harder to come by, issuers are likely to increase rates to 16 or 17 percent by the fall, according to Dennis Moroney, a research director at the TowerGroup, a financial research company.

“The banks don’t have a lot of pricing options,” Mr. Moroney said. “They’re targeting people who carry a balance from month to month.”

Similarly, many car loans have already become significantly more expensive, with rates at auto finance companies rising to 4.72 percent in February from 3.26 percent in December, according to the Federal Reserve.

Washington, too, is expecting to have to pay more to borrow the money it needs for programs. The Office of Management and Budget expects the rate on the benchmark 10-year United States Treasury note to remain close to 3.9 percent for the rest of the year, but then rise to 4.5 percent in 2011 and 5 percent in 2012.

The run-up in rates is quickening as investors steer more of their money away from bonds and as Washington unplugs the economic life support programs that kept rates low through the financial crisis. Mortgage rates and car loans are linked to the yield on long-term bonds.

Besides the inflation fears set off by the strengthening economy, Mr. Gross said he was also wary of Treasury bonds because he feared the burgeoning supply of new debt issued to finance the government’s huge budget deficits would overwhelm demand, driving interest rates higher.

Nine months ago, United States government debt accounted for half of the assets in Mr. Gross’s flagship fund, Pimco Total Return. That has shrunk to 30 percent now — the lowest ever in the fund’s 23-year history — as Mr. Gross has sold American bonds in favor of debt from Europe, particularly Germany, as well as from developing countries like Brazil.

Last week, the yield on the benchmark 10-year Treasury note briefly crossed the psychologically important threshold of 4 percent, as the Treasury auctioned off $82 billion in new debt. That is nearly twice as much as the government paid in the fall of 2008, when investors sought out ultrasafe assets like Treasury securities after the collapse of Lehman Brothers and the beginning of the credit crisis.

Though still very low by historical standards, the rise of bond yields since then is reversing a decline that began in 1981, when 10-year note yields reached nearly 16 percent.

From that peak, steadily dropping interest rates have fed a three-decade lending boom, during which American consumers borrowed more and more but managed to hold down the portion of their income devoted to paying off loans.

Indeed, total household debt is now nine times what it was in 1981 — rising twice as fast as disposable income over the same period — yet the portion of disposable income that goes toward covering that debt has budged only slightly, increasing to 12.6 percent from 10.7 percent.

Household debt has been dropping for the last two years as recession-battered consumers cut back on borrowing, but at $13.5 trillion, it still exceeds disposable income by $2.5 trillion.

The long decline in rates also helped prop up the stock market; lower rates for investments like bonds make stocks more attractive.

That tailwind, which prevented even worse economic pain during the recession, has ceased, according to interviews with economists, analysts and money managers.

“We’ve had almost a 30-year rally,” said David Wyss, chief economist for Standard & Poor’s. “That’s come to an end.”

Just as significant as the bottom-line impact will be the psychological fallout from not being able to buy more while paying less — an unusual state of affairs that made consumer spending the most important measure of economic health.

“We’ve gotten spoiled by the idea that interest rates will stay in the low single-digits forever,” said Jim Caron, an interest rate strategist with Morgan Stanley. “We’ve also had a generation of consumers and investors get used to low rates.”

For young home buyers today considering 30-year mortgages with a rate of just over 5 percent, it might be hard to conceive of a time like October 1981, when mortgage rates peaked at 18.2 percent. That meant monthly payments of $1,523 then compared with $556 now for a $100,000 loan.

No one expects rates to return to anything resembling 1981 levels. Still, for much of Wall Street, the question is not whether rates will go up, but rather by how much.

Some firms, like Morgan Stanley, are predicting that rates could rise by a percentage point and a half by the end of the year. Others, like JPMorgan Chase are forecasting a more modest half-point jump.

But the consensus is clear, according to Terrence M. Belton, global head of fixed-income strategy for J. P. Morgan Securities. “Everyone knows that rates will eventually go higher,” he said.

Garfield Continuum White Paper Explains Economics of Securitization of Residential Mortgages

SEE The Economics and Incentives of Yield Spread Premiums and Credit Default Swaps

March 23, 2010: Editor’s Note: The YSP/CDS paper is intentionally oversimplified in order to demonstrate the underlying economics of securitization as it was employed in the last decade.

To be clear, there are several things I was required to do in order to simplify the financial structure for presentation that would be understandable. Even so, it takes careful study and putting pencil to paper in order to “get it.”

In any reasonable analysis the securitization scheme was designed to cheat investors and borrowers in their respective positions as creditors and debtors. The method used was deceit, producing (a) an asymmetry of information and (b) a trust relationship wherein the trust was abused by the sellers of the financial instruments being promoted.

So before I get any more comments about it, here are some clarifying comments about my method.

1. The effects of amortization. The future values of the interest paid are overstated in the example and the premiums or commissions are over-stated in real dollars, but correct as they are expressed in percentages.

2. The effects of present values: As stated in the report, the future value of interest paid and the future value of principal received are both over-statements as they would be expressed in dollars today. Accordingly, the premium, commission or profit is correspondingly higher in the example than it would be in real life.

3. The effects of isolating a single loan versus the reality of a pool of loans. The examples used are not meant to convey the impression that any single loan was securitized by itself. Thus the example of the investment and the loan are hypothetical wherein an average jumbo loan is isolated from the pool from one of the lower tranches and an average bond is isolated from a pool of investors, and the isolated the loan is allocated to in part to only one of the many investors who in real life, would actually own it.

The following is the conclusion extracted directly from the white paper:

Based upon the foregoing facts and circumstances, it is apparent that the securitization of mortgages over the last decade has been conducted on false premises, false representations, resulting in intentional and inevitable negative outcomes for the debtors and creditors in virtually every transaction. The clear provisions for damages and other remedies provided under the Truth in Lending Act and Real Estate Settlement Procedures Act are sufficient to make most homeowners whole if they are applied. Since the level 2 yield spread premium (resulting from the difference in money advanced by the creditor (investor) and the money funded for mortgages) also give rise to claim from investors, it will be up to the courts how to apportion the the actual money damages. Examination of most loans that were securitized indicates that they are more than offset by undisclosed profits, kickbacks, fees, premiums, and rebates. The balance of “damages” due under applicable federal lending and securities laws will require judicial intervention to determine apportionment between debtors and creditors.

Securitization and TILA Audits: You Can’t Do One without the Other

Article below submitted From the desk of Brad Keiser:

Editor’s note: This is a perfect example of why ignoring the complexities of securitization leaves all the red meat on the table. The commingling of funds that is cited in the article below is exactly what I have I have been talking about , exactly why the pretender lenders balk at a full accounting, and exactly why a full forensic analysis (like the one Brad will be presenting later this  month) is essential if you are going to battle.

see: Brad Keiser\’s Forensic Analysis Workshop

It is not enough to know about securitization. You must understand what effect it had on the transaction. It sounds counter-intuitive to say that when you know the homeowner has not made a  payment, the obligation might still be considered performing and NOT in default because the payments were made to the creditor.

This does not automatically  mean that you get a free house. But it does mean that the real creditor who has advanced the money, the creditor that the debtor owes money to, is the real party in interest and they might no longer be secured depending upon the nature of the payment and the handling of the accounts — which is why I think that accountants would be ideal candidates for Brad’s workshop.

Securitized loans are not a separate animal from the discrepancies that are revealed in TILA audits. They impact the TILA audit in a way that dwarfs all other factors. Like the fact that the $5,000 yield spread premium paid to the mortgage broker is just a small fraction of the yield spread pocketed by the investment banking crowd behind the curtain.

And what about the very significant impact of those spreads and premiums combined with the impact of a reset on the life of the loan, and the false appraisal? The APR is misstated in virtually every securitized loan not by small amounts or fractions but by multiples of more than 100% of the loan principal in some cases.

Moody’s warns on GMAC mortgage bond servicing
Thu Mar 4, 2010 3:07pm EST
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* Moody’s upgrades GMAC on US Tsy capital infusion
Fri, Feb 5 2010

NEW YORK, March 4 (Reuters) – Moody’s Investors Service on Thursday said it may downgrade portions of 125 residential mortgage bonds based on unusual “cash management arrangements” of GMAC Mortgage LLC, which services loans in the securities.

The rating company said GMAC commingled cash flows from multiple bonds in a single custodial account, Moody’s said in a statement. This allowed GMAC to use cash from loans in one bond for principal and interest payments on another, it said.

By allowing the commingling, it “increases the likelihood that some RMBS deals may not be able to recover the amounts ‘borrowed’ by the servicer to fund advances or another RMBS deal if a servicer bankruptcy were to occur,” Moody’s said.

This could give rise to competing claims in a bankruptcy proceeding, the rater said.

Downgrades based on mortgage servicing, rather than credit, may add to concerns of bond investors who have been long accustomed to harsh rating cuts as delinquencies and foreclosures increase losses.

GMAC Mortgage is a unit of Residential Capital LLC. Residential Capital is owned by GMAC Inc.

For some commentary see this link:
http://market-ticker.denninger.net/

Brad Keiser

(513)289-5353

Accounting for Damages: Madoff Ruling May Affect Homeowner Claims

Editor’s Note: Looking further down the road, when the Ponzi aspect of the Mortgage Meltdown is fully revealed, it will become obvious that both yield spread premiums and the proceeds of credit default swaps, insurance and federal bailout are subject to claims by homeowners. The Trustee’s conclusion as affirmed by the Judge’s ruling in the Madoff case will undoubtedly come up as a resource or support for persuasive argument about how those proceeds should be allocated.
The Judge’s conclusion was obvious even if it was controversial. The Trustee appointed to do the accounting decided that the Madoff assets should be apportioned on the basis of the actual dollar loss instead of what was shown on the Madoff statements to investors. Since the entire scheme was fraudulent, the statements sent out to investors were a lie and it would be inappropriate to allow any distribution to any investor for more than what they had invested.
Similarly, the proceeds from payments on credit default swaps, yield spread premiums (both at the borrower and investor levels), insurance and bailout money will need to be allocated to each individual loan to credit the homeowner debtor against the original obligation as evidenced by the note.
This allocation will not be as simple as the Madoff case for several reasons. But the Madoff allocation underscores that you can’t get a court to award you “damages” if you suffered no actual monetary damage.It is the same thing as the standing argument. Virtually all foreclosures for the past several years have been brought by non-creditors who produced either fabricated or irrelevant paperwork.
So the parties who purchased credit default swaps using money (profit) obtained from the yield spread premium gained from lying to the investor and the homeowner about the true intrinsic yield value of the transaction should not be allowed any allocation unless the money for the CDS came from a source other than these Ponzi transactions.
Additional factors in the allocation might include subjective issues if a court determines that risk of loss should be apportioned amongst all participants instead of just between the investors and the participants in the securitization chain. And there is that nagging problem of two Federal claims, one from TILA and the other from the SEC regulations, which appear to create a claim on the same pool of  proceeds by both the homeowner debtor and investor creditor.
March 2, 2010

Madoff Judge Endorses Trustee’s Rule on Losses

A federal bankruptcy judge in Manhattan has approved the fiercely disputed method used by the court-appointed trustee to calculate victim losses in Bernard L. Madoff’s enormous Ponzi scheme.

In a decision filed on Monday, Federal Bankruptcy Judge Burton R. Lifland ruled that losses should be defined as the difference between the cash paid into a Madoff account and the amount withdrawn before the fraud collapsed in mid-December 2008.

Judge Lifland rejected emotional arguments by hundreds of defrauded investors seeking to have their claims based on the balances shown on their final account statements, sent out just weeks before Mr. Madoff was arrested. He pleaded guilty last March and is serving a 150-year prison term.

The ruling is a setback for investors like Adele Fox of Tamarac, Fla., an 87-year-old retired school secretary who was widowed in 1986. Mrs. Fox withdrew more than her original capital for living expenses, but still had nearly $3 million on her account statement when the fraud was discovered.

Under Judge Lifland’s ruling, she is not eligible for cash from the Securities Investors Protection Corporation, the industry-financed organization that provides limited protection for customers of failed Wall Street firms.

“My health has been a mess,” Mrs. Fox said on Monday. “I can manage, more or less, but if I have to go into a facility, what would I do? All my life savings, it all went into Madoff and it is all gone.”

She added, “I don’t want to seem like a pig — I just want this insurance that I think I’m entitled to.”

If losses were based on the final account statements, Mrs. Fox and almost every Madoff investor would be eligible for up to $500,000 from SIPC — not as insurance, Judge Lifland noted, but as a cash advance against their fair share of any recovered assets.

The total of those account balances — the wealth investors believed they had saved — was nearly $65 billion, by far the largest financial fraud loss in history.

But those statements “were bogus and reflected Madoff’s fantasy world of trading activity,” Judge Lifland wrote in his opinion.

As such, they cannot reflect legitimate “securities positions” on which claims can be based, he said.

Instead, Judge Lifland endorsed the approach of the Madoff trustee, Irving H. Picard. The differences between how much investors put into their accounts and the amount they took out are “the only verifiable amounts” reflected in the Madoff firm’s records, Judge Lifland said of that method.

That ruling gives hope to investors like Simon P. Jacobs, a businessman in New York who wrote the judge to support Mr. Picard’s approach. Mr. Jacobs said that he “would be thrilled to get 25 percent of my cash back — while these opponents have gotten 100 percent back, at least.”

Those who withdrew all their initial investment before the collapse “still feel they have lost money,” he said. “But in truth, they did not lose any money. When the dust settled, they had gotten all their money back” while investors like him did not, he said.

He added: “Critics say that Mr. Picard is not representing them — well, he’s representing me to the hilt.”

Mr. Picard has said that the out-of-pocket cash losses for people like Mr. Jacobs total slightly more than $20 billion — still a record amount, but a bit closer to the multibillion-dollar amount Mr. Picard hopes to collect in the Madoff liquidation process.

Investors who did not retrieve all or, in many cases, any of their initial capital from Mr. Madoff, argue that they should have first claim on whatever assets Mr. Picard collects — since it was their money that Mr. Madoff used to cover the withdrawals and fictional profits he paid to others.

And Judge Lifland agreed.

While many Ponzi schemes have been resolved in the courts through the “cash in, cash out” method, it is rare for a Ponzi scheme to occur inside a SIPC-protected brokerage firm. Judge Lifland acknowledged that “the complex and unique facts of Madoff’s massive Ponzi scheme” defied any simple analysis.

Indeed, he added, “the parties have advanced compelling arguments in support of both positions,” sometimes using the same court cases and statutory language to support their opposing claims.

But after “a thorough and comprehensive analysis of the plain meaning and legislative history of the statute, controlling Second Circuit precedent, and considerations of equity and practicality,” he endorsed the trustee’s approach.

“It would be simply absurd to credit the fraud and legitimize the phantom world created by Madoff” when determining victim losses, he said.

The ruling was promptly criticized by Helen Davis Chaitman, a lawyer for several hundred Madoff victims and a victim herself.

“Unless and until this decision is reversed, no American who invests in the stock market with the hope of retiring on his savings, has any protection against a dishonest broker,” Ms. Chaitman said in a statement released by a coalition of Madoff victims.

She added: “If we learned anything in the last two years, it was that Wall Street will manipulate the law to enrich itself at the expense of every honest, hard-working American taxpayer. Now we know that no American can rely on SIPC insurance.”

But Stephen P. Harbeck, the president of SIPC, said the court recognized that Mr. Picard’s approach “does the greatest good for the greatest number of people, consistent with the law.”

David J. Sheehan, a lawyer for Mr. Picard, said he and the trustee expected an appeal and “hope it will be dealt with in an expedited way.”

Its normal path would be through the United States District Court to the Second Circuit Court of Appeals, both in Manhattan. But if the appeal is allowed to bypass the district court, it could speed up the resolution of the dispute.

Taxing Wall Street Down to Size: Litigation Guidelines

The mistake I detect from those who are not faring well in court is the attempt to treat preliminary motions and hearings as opportunities to prove your entire case. Don’t talk about conspiracy and theft, talk about evidence and discovery.

every debtor is entitled to know the identity of the creditor, the full accounting for the entire obligation and all transactions arising from the transaction, and an opportunity to comply with Federal and State law requiring attempts at modification and/or mediation or settlement with the real parties in interest.
The banking system has become an agent of destruction for the gross domestic product and of impoverishment for the middle class. To be sure, it was lured into these unsavory missions by a truly insane monetary policy under which, most recently, the Federal Reserve purchased $1.5 trillion of longer-dated Treasury bonds and housing agency securities in less than a year. It was an unprecedented exercise in market-rigging with printing-press money, and it gave a sharp boost to the price of bonds and other securities held by banks, permitting them to book huge revenues from trading and bookkeeping gains.

Editor’s Note: Stockman notes the myth (lie) that “a prodigious upwelling of profitability will repair bank balance sheets and bury toxic waste from the last bubble’s collapse.” He questions whether the “profitability” will be there. I don’t question it, I know it — both for the reasons he cites and because the reality is that at least certain institution “in the loop” have tons of money and profitability “off-balance sheet” and I might add, off-shore.

According to published reports, Wall Street is “taxed” on this gorging of money at the rate of 1% while some poor bloke earning $80,000 is paying 16% just for social security, directly or indirectly. Fix the budget, cure the deficit? There it is!

The current profits reported, and the bonuses that come along with them, are being attributed widely in the press to the give-away of the federal reserve is letting them borrow at zero rates and then giving them a much higher rate for money held on deposit. While this is true all it really describes is the cover the laundering the plunder of $24 trillion back into the system where it will be moved around again producing more fees, more “profits”, and greater “liquidity” (proprietary currency).

The significance of this cannot be understated for the foreclosure litigator. We have the SEC in a 10 year confidentiality agreement with AIG so that the bailout and payment to counter-parties is being kept secret while the foreclosures proceed on obligations that have been paid in full, sometimes thirty times over. And we have the treasure trove “off-balance sheet” that was created by a secret undisclosed yield spread premium that should have investors, borrowers, and the regulators screaming. This second YSP as described recently in this blog, dwarfs any other fees, profits or other revenue or capital made during the creation stage of the mortgage mess.

The job of the litigator is to pique the interest of the judge enough to allow you to inquire about a FULL ACCOUNTING from the CREDITOR who is positively identified. Don’t ask the Judge to buy into the whole conspiracy theory aspect of the mortgage meltdown. He or she is not there to listen to “fiction.”

Just use your expert to prove there is an absence of facts and numbers such that the full accounting from debtor through creditor is not present and that under the most basic of premises, every debtor is entitled to know the identity of the creditor, the full accounting for the entire obligation and all transactions arising from the transaction, and an opportunity to comply with Federal and State law requiring attempts at modification and/or mediation or settlement with the real parties in interest.

The mistake I detect from those who are not faring well in court is the attempt to treat preliminary motions and hearings as opportunities to prove your entire case. Don’t talk about conspiracy and theft, talk about evidence and discovery.

Don’t ask the Judge to accept the idea that all these big name banks and other entities are thieves or interlopers, ask the Judge to accept the premise that you have alleged that the real creditor is not present, not represented, and that this action is in derogation of that creditor. Talk about your attempts to identify the creditor (investors) and the stonewalling you have received. Talk about your attempts to get a consistent complete accounting for the obligation and your inability to get it.

TALK ABOUT YOUR ATTEMPTS TO FIND AN ACTUAL DECISION MAKER (CREDITOR) WHOM YOU COULD SPEAK WITH AND ATTEMPT RECONCILIATION, MODIFICATION OR SETTLEMENT. 

January 20, 2010
Op-Ed Contributor

Taxing Wall Street Down to Size

By DAVID STOCKMAN

WHILE supply-side catechism insists that lower taxes are a growth tonic, the theory also argues that if you want less of something, tax it more. The economy desperately needs less of our bloated, unproductive and increasingly parasitic banking system. In this respect, the White House appears to have gone over to the supply side with its proposed tax on big banks, as it scores populist points against the banksters, too.

Not surprisingly, the bankers are already whining, even though the tax would amount to a financial pinprick — a levy of only 0.15 percent on the debts (other than deposits) of the big financial conglomerates. Their objections are evidence that the administration is on the right track.

Make no mistake. The banking system has become an agent of destruction for the gross domestic product and of impoverishment for the middle class. To be sure, it was lured into these unsavory missions by a truly insane monetary policy under which, most recently, the Federal Reserve purchased $1.5 trillion of longer-dated Treasury bonds and housing agency securities in less than a year. It was an unprecedented exercise in market-rigging with printing-press money, and it gave a sharp boost to the price of bonds and other securities held by banks, permitting them to book huge revenues from trading and bookkeeping gains.

Meanwhile, by fixing short-term interest rates at near zero, the Fed planted its heavy boot squarely in the face of depositors, as it shrank the banks’ cost of production — their interest expense on depositor funds — to the vanishing point.

The resulting ultrasteep yield curve for banks is heralded, by a certain breed of Wall Street tout, as a financial miracle cure. Soon, it is claimed, a prodigious upwelling of profitability will repair bank balance sheets and bury toxic waste from the last bubble’s collapse. But will it?

In supplying the banks with free deposit money (effectively, zero-interest loans), the savers of America are taking a $250 billion annual haircut in lost interest income. And the banks, after reaping this ill-deserved windfall, are pleased to pronounce themselves solvent, ignoring the bad loans still on their books. This kind of Robin Hood redistribution in reverse is not sustainable. It requires permanently flooding world markets with cheap dollars — a recipe for the next bubble and financial crisis.

Moreover, rescuing the banks yet again, this time with a steeply sloped yield curve (that is, cheap short-term money and more expensive long-term rates), is not even a proper monetary policy action. It is a vast and capricious reallocation of national income, which would be hooted down in the halls of Congress, were it properly brought to a vote.

National economic policy has come to this absurd pass because for decades the Fed has juiced the banking system with excessive reserves. With this monetary fuel, the banks manufactured, aggressively at first and then recklessly, a tide of new loans and deposits. When Wall Street’s “heart attack” struck in September 2008, bank liabilities had reached 100 percent of gross domestic product — double the ratio of a few decades earlier.

This was a measurement of the perilous extent to which bad investments, financed by debt, had come to distort the warp and woof of the economy. Behind the worthless loans stands a vast assemblage of redundant housing units, shopping malls, office buildings, warehouses, tanning salons and fast food restaurants. These superfluous fixed assets had, over the past decade, given rise to a hothouse economy of jobs that have now vanished. Obviously, the legions of brokers, developers, appraisers, contractors, tradesmen and decorators who created the bad investments are long gone. But now the waitresses, yoga instructors, gardeners, repairmen, sales clerks, inventory managers, office workers and lift-truck drivers once thought needed to work at these places are disappearing into the unemployment statistics, as well.

The baleful reality is that the big banks, the freakish offspring of the Fed’s easy money, are dangerous institutions, deeply embedded in a bull market culture of entitlement and greed. This is why the Obama tax is welcome: its underlying policy message is that big banking must get smaller because it does too little that is useful, productive or efficient.

To argue, as some conservatives surely will, that a policy-directed shrinking of big banking is an inappropriate interference in the marketplace is to miss a crucial point: the big Wall Street banks are wards of the state, not private enterprises. During recent quarters, for instance, the preponderant share of Goldman Sachs’ revenues came from trading in bonds, currencies and commodities.

But these profits were not evidence of Mr. Market doing God’s work, greasing the wheels of commerce and trade by facilitating productive financial transactions. In fact, they represented the fruits of hyperactive gambling in the Fed’s monetary casino — a place where the inside players obtain their chips at no cost from the Fed-controlled money markets, and are warned well in advance, by obscure wording changes in the Fed’s policy statements, about any pending shift in the gambling odds.

To be sure, the most direct way to cure the banking system’s ills would be to return to a rational monetary policy based on sensible interest rates, an end to frantic monetization of federal debt and a stable exchange value for the dollar. But Ben Bernanke, the Fed chairman, and his posse are not likely to go there, believing as they do that central banking is about micromanaging aggregate demand — asset bubbles and a flagging dollar be damned. Still, there can be no doubt that taxing big bank liabilities will cause there to be less of them. And that’s a start.

David Stockman, a director of the Office of Management and Budget under President Ronald Reagan, is working on a book about the financial crisis.

Yield Spread Premiums Prove Appraisal Fraud: The Key to Understanding The Mortgage Mess

OK I’m upping the ante here with some techno-speak. But I’ll try to make it as simple as possible.

YIELD is the percentage or dollar return on investment. For example,

  1. if you buy a bond for $1,000 and the interest rate is 5%, the yield is 5%.
  2. You are expecting to receive $50 per year in interest, which is your yield, assuming the bond is repaid in full when it is due.
  3. Another example is if you buy the same bond for $900.
  4. The interest rate is still 5% which means it still pays $50 per year in interest. But instead of investing $1,000, you have invested $900 and you are still getting $50 per year in interest.
  5. Your yield has increased because $50 is more than 5% of $900.
  6. In fact, it is a yield of 5.55% (yield base). You compute it by dividing the dollar amount of the interest paid ($50) by the dollar amount of the investment ($900). $50/$900=5.55%.
  7. But you are also getting repaid the full $1,000 when the bond comes due so adding to the money you get in interest is the gain you made on the bond (assuming you hold it to maturity). That difference in our example is $100, which is the difference between $900 and $1,000.
  8. If the bond is a ten year bond, for simplicity sake we will divide the extra $100 you are going to make by 10 years which means you will be getting an extra $10 per year.
  9. If you divide that extra $10 by your investment of $900 you are getting an average annual gain of 1.1%. Adding the base yield of 5.5% to the extra yield on gain of 1.1%, you get a total yield of 6.6%.
  10. The difference between the interest rate on the bond (5%) and the real yield to you as the investor (6.6%) is 1.6%, which could be expressed as a yield spread.

YIELD SPREAD can be expressed in either principal dollar terms or in interest rate. In the above example the dollar value of the yield spread is $100, being the difference between the par value of the bond (the amount that you hope will be repaid in full) and the amount you actually invested.

For decades there has been an illegal trick played between originating lenders using yield spread that resutled in an additional commission or kickback paid to the mortgage broker, commonly referred to as a yield spread premium. This occurs when the broker, with full consent of the “lender” steers the homeowner into a loan product that is more expensive than the one the homeowner would get from another more honest broker and lender.

  1. So for example, if you qualify for a 5% (interest) thirty year fixed loan, but the broker convinces you that a different loan is the only one you can qualify for or that the different loan is “better” than the other one, we shall say in our example that he steers you into a loan for 7%.
  2. The yield spread is 2% which may not sound like much, but it means everything to your loan broker and originating lender.
  3. The kickback to the broker is often several hundred or evens several thousand dollars — which is the very thing consumers were intended to be protected against in TILA (Truth in Lending Act).
  4. By not disclosing the yield spread premium he deprived you of the knowledge that you get get better terms elsewhere and he didn’t bother tell you that instead of working for you he was working for himself.
  5. Sometimes this is discovered right on the HUD statement disguised amongst the myriad of numbers that you didn’t understand when you signed the closing papers. They were required by federal law to disclose this to you and they are required to send you back the money that was paid as the kickback and for a variety of reasons it is grounds to rescind the transaction, making the Deed of Trust or mortgage unenforceable or void.
  6. The kickback is called a yield spread premium in the language of the industry. On this phase of the transaction we’ll call it Yield Spread Premium #1 or YSP1.

Now we get to the securitization part of the “loan.” If you will go back to the beginning of this article you will see that the investor was seeking and expecting $50 per year in interest. Buying the deal for $1,000 gives the investor the 5% YIELD he was seeking.

What Wall Street did was work backwards from the $50, and asked the following stupid and illegal question: What is the least amount of money we could fund in mortgages and still show the $50 in income? Answer: Anything we can get homeowners to sign.

  1. In our simple example, if they get a homeowner to sign a note calling for 10% interest, then all Wall Street needs to come up with is $500. Because 10% of $500 is $50 and $50 is what the investor was expecting.
  2. Wall Street sells the bond for $1,000 and funds $500 leaving themselves with a YIELD SPREAD PREMIUM of 5%+ or a value of $500, which is just as illegal as the kickbacks described above. We will call this YIELD SPREAD PREMIUM #2.
  3. They take $50 out of this $500 YIELD SPREAD PREMIUM and put into a reserve fund so they can pay the interest whether the homeowner pays or not. That is why they don’t want homeowners and investors to get together, because they will discover that the investor was paid the first year out of the reserve and payments from homeowners and then stopped receiving payment even though there was continued revenue.
  4. But Wall Street also had another problem. Since they had siphoned off $450 and probably sent most of it off-shore in an off balance sheet transaction (to a Structured Investment vehicle [SIV]). the time would eventually come when the investor would want his $1,000 repaid in full just like they said it would. That would leave them $450 short and possibly criminally liable for taking $1,000 to fund a $500 mortgage.
  5. So you can see that if the homeowner pays every cent owed, this is bad news to the people on Wall Street. They would be required to give the investor $1,000 when all they received from the homeowner was $500. Therefore they had to make certain that they (a) had a method of covering the difference that would give them “cover” when demand was made for the $1,000 and (b) a method of triggering that coverage.
  6. They also needed to make it as difficult as possible for investors to get together to fire the agent of the partnership (SPV) formed to issue the bonds they bought, which they did in the express terms of the bond indenture. So logistically they needed to keep investors away from investors and to keep investors away from borrowers so that none of them could compare notes.
  7. To cover the money they took from the investor they purchased insurance contracts (credit default swaps is one form). They wrote the terms themselves so that when a certain percentage of the pool failed they could declare it a failure and stop paying the ivnestors anything. The failure of the pool would trigger the insurance contracts.
  8. Under normal circumstances if you buy a car, you can insure it once and if it is wrecked you get the money for it. Imagine if you could buy insurance on it thirty times over at discounted rates. So you smash the car up and instead of receiving $30,000 for the car you receive $900,000. That is what Wall Street did with your mortgage. This was not risk taking much less excessive risk taking. It was fraud.
  9. So IF THE LOAN FAILED or was declared a failure as being part of a pool that went into failure, the insurance paid off.
  10. Hence the only way they could cover themselves for taking $1,000 on a $500 loan was by making absolutely certain the loan would fail.
  11. It wasn’t enough to use predatory loan tactics to trick people into loans that resulted in resets that were higher than their annual income. Wall Street still had the problem of people somehow making the payments anyway or getting bailed out by parents or even the government.
  12. They had to make sure the homeowner didn’t want the loan anymore and the only way to do that was to make certain that the homeowner would end up in a position wherein far more was owed on the loan than the house ever was worth and far more than it would ever be worth in the foreseeable future.
  13. They had to make sure that the federal government didn’t step in and help the homeowners, so they created a scheme wherein the federal government used all its resources to bail out Wall Street which had created the myth of losses on loan defaults for notes and mortgages they never owned. It would then become politically and economically impossible for the government to bail out the homeowners.
  14. This is why principal reduction is off the table. If these loans become performing again, insurance might not be triggered and the investors might demand the full $1,000. With insurance on the $500 loan they stand to collect $15,000. without it, they stand to lose $1000. There is no middle ground.
  15. So they needed a method to get the “market” to rise in values as much as possible to levels they were sure would be unsustainable. That was easy. They blacklisted the appraisers who wanted to practice honestly and paid appraisers, mortgage brokers and “originating lenders” (often owned by Wall Street firms) 3-10 times their normal fees to get these loans closed. They created “lenders” that were not banks or funding the loans that had no assets and then bankrupted them.
  16. With the demand for the AAA rated and insured MBS at an all-time high the demand went out to mortgage brokers not to bring them a certain number of mortgages but to bring in a certain dollar amount of obligations because Wall Street had already sold the bonds “forward” (meaning they didn’t have the underlying loans yet).
  17. With demand for loans exceeding the supply of houses, they successfully created the “market”conditions to inflate the market values on a broad scale thus giving them plausible deniability as to the appraisal fraud on any one particular house.

Whether you call it appraisal fraud or simply an undisclosed yield spread premium, the result is the same. That money is due back to the homeowner and there is a liability to the investors that they don’t know about. Why are the fund managers so timid about pressing the claims? Perhaps because they were not fooled.

How to Negotiate a Modification

See how-to-negotiate-a-short-sale

See Michael Moore — Modifications

See Template-Lawsuit-STOP-foreclosure-TILA-Mortgage-Fraud-predatory-lending-Set-Aside-Illegal-Trustee-Sale-Civil-Rico-Etc Includes QUIET TITLE and MOST FEDERAL STATUTES — CALIFORNIA COMPLAINT

See how-to-buy-a-foreclosed-house-its-a-business-its-an-opportunity-its-a-risk

My statements here relate to general information and not legal advice. Generally we are of the opinion that the loan modification programs are a farce. First they end up in foreclosure in 6-7 months — more than 50-60% of the time. Then you have the problem that you signed new papers that will at least attempt to waive the rights and defenses you have now. A trial program is a trial program — it is not permanent. It is usually a smokescreen for the “lenders” (actually pretender lenders) to appear to comply with the federal mandate and thus collect the bonus from the Federal government for entering into a modification agreement. And let’s not forget that the entities with whom you would enter into this “new” agreement probably have no rights, ownership or authority over your mortgage — they are only pretending. Their game plan is that they have nothing to lose and everything to gain because they never advanced any money on the funding of your mortgage.

So the very first thing you want to do is ask for proof of real documents that can be reviewed by a forensic analyst which will demonstrate they have the power to change the terms, and assuming they can’t produce that, their agreement that any deal you enter into with them will be taken to court in a Quiet Title Action in which they will allow you to get a judgment that says you own the house free and clear except for whatever the new deal is with the new lender. The New Lender is necessary because the REAL Lender is quite gone and possibly unidentifiable.

Any failure to agree to such terms is a clear signal you are wasting your time and they are jockeying you into default, which is the only way they collect insurance on your mortgage through the credit default swaps purchased on the pool containing your mortgage. They actually make money if you default because they were allowed to buy insurance many times over on the same debt. So on your $300,000 mortgage they might actually receive (no joke) $9 million if you default. That means they have far more incentive to trick you into default than to REALLY modify your mortgage terms. and THAT means you need to be careful about what they are REALLY doing — a modification or deception. If it’s deception don’t fall into self deception and wish it weren’t so. Go after them with whatever you can. The law is on your side as to title, terms and predatory and fraudulent loan practices.

Your strategy is simple: (1) present a credible threat and (2) demonstrate that you have knowledgeable people (forensic analyst, expert witness, lawyer).

Your tactics are equally simple: (1) Present an expert declaration or affidavit that raises issues of fact regarding the representations of counsel or the pleadings of your opposition, (2) Pursue expedited discovery (ask for things that they should have had before they started the foreclosure process — a full accounting from the real creditor/lender, documentation showing chain of title/possession, documentation regarding the money that exchanged hands from the bond investor all the way down the securitization chain to the homeowner) and (3) ask for an evidentiary hearing on the factual issues.

It would probably be a good idea if you went through a local licensed attorney who really knows this stuff — like a graduate of Max Gardner’s seminars or a graduate of the Garfield Continuum. This attorney can create some credible threats like the fact that youa re claiming, under TILA, your right to undisclosed fees on your mortgage, including the SECOND yield spread premium paid in the securitization chain when the pool aggregator sold the “assets” to the SPV pool that sold bonds to investors — investors who were the the sole source of cash advanced to make this nightmare come true. Picking the right lawyer is critical. Anyone who has not studied securitization, anyone who has not been working hard in the area of foreclosure defense AND offense, should not be used because they simply don’t know enough to achieve a satisfactory result.

My rule of thumb is that I don’t like any modification unless it has the following attributes:

1. Forgiveness of all late fees, late payments etc. No tacking on fees, payments, interest or anything else to the end of the loan.
2. Removal of all negative comments from your credit rating.
3. Reduction of the principal due on your obligation in the form of a new note or an amendment executed by all relevant parties. The amount of the reduction should be no less than 30%, probably no more than 75% and should average across the board something like 40%-60%. So if your mortgage was $300,000 your reduction should be between $90,000 (leaving you with a $210,000 obligation) and $225,000 (leaving you with a $75,000 obligation).
a. How do you know what to ask for? First step is on the appraisal. Had you known that the appraisal used in your deal was unsustainable, you probably would have taken a different attitude toward the deal and would have insisted on other terms. Assuming you had a zero-down mortgage loan(s) [i.e., including 1st and 2nd mortgage] then you probably, on average have spent some $15,000-$20,000 in household improvements that cannot be recouped, but which were also spent based upon the apparent value of the house.
b. So you look at the current appraisal and let’s say in your community the actual sales prices of homes closest to you are down by 50% from what they were in 2007 or when you went to the “closing” on your loan.
(1) Write down the purchase price of your home or the original appraisal when you closed the “loan.”
(2) Deduct the Decline in Appraised Value, which in our example is a decline of 50%. If you had a zero down payment loan, this would translate as the original amount of the note minus the 50% $150,000-$160,000) reduction in value. This leaves $140,000-$150,000.
(3) Deduct the $15,000-$20,000 you spent on household improvements. This leaves $120,000 to $135,000.
(4) Deduct your attorney’s fees which will probably be around $15,000, hopefully on contingency at least in part. This leaves $105,000 to $120,000.
(5) Deduct any other related expenses such as the cost of a forensic audit (which INCLUDES TILA, RESPA, Securities, Title, Appraisal, Chain of Possession, and other factors like fabrication and forgery) that should cost around $2500, and any expense incurred retaining an expert to prepare and execute an expert declaration or expert affidavit that should cost around $1000-$1500. [Caution a declaration from someone who has no idea what is in the document, or who has very little exposure to discovery, depositions, court testimony etc. could be less than worthless. Your credibility will be diminished unless you pick the right forensic analyst and the right expert]. This leaves a balance of $101,000 to $116,000.
(6) If you did make a down payment or cash payments for “non-standard” options then you should deduct that too. So if you made a 20% down payment ($60,000, in our example) that would be a deduction too so you can recover that loss which resulted from the false appraisal and false presentation of the appraisal by the “lender” who was paid undisclosed fees to lie to you. In our example here I am going to assume you have a zero down payment. But if we used the example in this paragraph there would be an additional $60,000 deduction that could reduce your initial demand for modification to a principal reduction of $40,000.
(7) So your opening demand should be a note with a principal balance of $101,000 with a settlement probably no higher than $150,000. I would recommend a 15 year fixed rate mortgage because you will be done with it a lot sooner and convert you from debt to wealth. But a mortgage of up to 40 years is acceptable in order to keep your payments to a minimum if that is a critical issue.
4. Interest rate of 3%-4% FIXED.
5. Judge’s execution of final judgment ratifying the deal and quieting title against he world except for you as the owner of the property and the new lender who might have a new note and a new mortgage or who might just walk away completely when you present these terms. There are tens of thousands of homes in a grey area where they have not made a payment in years, the “lender” has not foreclosed, or the “lender” initiated foreclosure and then abandoned it. These people should be filing quiet title actions of their own and finish the job of getting the home free and clear from an encumbrance procured by fraud.

If you want to “up the stakes” then add the damages and rebates recoverable for TILA violations for predatory lending, undisclosed fees etc. That will ordinarily take you into negative territory where the “lender” owes you money and not vica versa. In that case your lawyer woudl write a demand letter for damages instead of an offer of modification. The other thing here is the typical demand for your current financial information. My position would be that this modification or settlement is not based upon NEED but rather, it is based upon LENDER LIABILITY. And if they are asking for proof of your financial condition on a SISA (stated income, stated asset) or NINJA (No Income, No Job, NO Assets) loan then the mere request for financial information is a request for modification. That triggers your unconditional right to ask “who are you and why are you the entity that is attempting to modify or settle this claim?”

By the way the “rule of thumb” came from the old common law doctrine that one could beat his wife and children with a stick no greater in diameter than the size of your thumb. In this case don’t let my use of the “rule of thumb” restrain you from using a bigger stick.

Neil F. Garfield, Esq.
ngarfield@msn.com

Mortgage Meltdown: Fueled by Fraud

Most stories about the mortgage crisis begin with the idea that people were induced to buy homes they could not afford. This is mostly incorrect. The reason for the meltdown is that people were induced to “buy” mortgages they could not afford — when in fact they qualified for mortgages they could afford and would still be paying but for the deceit of mortgage brokers and even real estate brokers who were skimming from the transaction.  The lenders and investment bankers who are claiming “plausible deniability” on this are not telling the truth. We know that because they paid the kickback either directly or by financing it.   This is not a story about buyers who went into a frenzy buying things they couldn’t afford.This is largely a story of conversion of equity of innocent people into fees for well-heeld, well connected scam artists — i.e., the transfer of wealth from those who have money and whose intent to buy something they could in fact afford, was switched into a scheme to take away their money, convert it to fees, take away their houses and all the improvements they made on those houses, and take away the savings of investors who were duped into buying shares in managed funds and institutions that were buying “high rated” CDO’s. On the buying end of the game, here is how it works.

  1.  Joe Jones and his wife Mary go house shopping. They are well-employed, with reliable jobs, and good credit ratings. They have a well-analyzed budget as to what they can afford and what they can’t but hey lack one thing — sophistication in financial instruments and legal knowledge of complex mortgages. This presented an opportunity to the scam artists out there who are claiming protection under the law, because they say what they did was legal. It wasn’t and it isn’t. They lied, took money for lying, and intentionally used their position of trust for their own benefit instead of delivering the services and Joe and Mary thought they were hiring when they went to a mortgage broker.
  2. The real estate broker steers them to a mortgage broker that (a) will assure that the deal closes because they will do anything to get the borrowers to sign papers that misrepresent their financial position and that misrepresent the value of the home and (b) more importantly, will give the real estate broker a kickback for the referral because the mortgage broker is about to pick up a huge fee called a “yield spread premium.”
  3. The Mortgage broker is presented in one of two alternatives in this market: (a) give the customer the best mortgage they qualify for and collect a reasonable fee or (b) convince the customer to take a mortgage that appears cheaper but is in fact much more expensive, for which the mortgage broker will get a kickback representing a fee which is a percentage of the the difference between the value of the mortgage the customer should have received and the higher value of the mortgage they were convinced into signing. If the mortgage broker goes for the the dishonest option, he/she might earn as much as $10,000 EXTRA. 
  4. Since the application process is both complex and expensive in time and money the customer is not free to shop around as one might think from the advertisements. And the nuances of one mortgage proposal versus another, are not clear except to experts who conceived them — people who knew they were going to transfer the risk to investors up stream. Thus none of the downstream participants — the “lender”, the “underwriter,” the “appraiser,” the real estate broker, the title company, the lawyers, the mortgage broker or the seller/developer have any interest in keeping the transaction honest because they are all going to make money whether the deal fails or not. The risk is going to Wall Street where it is being parceled out in “derivative securities” in nothing less that clear securities fraud on MANY levels. 
  5. Thus we have fraud going on at both ends of the line — starting at the home purchase and ending with the securities purchase. The amazing part of this is that while they were all committing fraud with full knowledge of the damage to the buyers and securities investors, the giddy greed factor became so great that even the scam operators themselves took positions in the CDO’s (which might as well be called junk bonds or junk securities) so that they could sell them at a premium to multiply the fees they were earning from this scheme into capital gains many times the fees they were “earning.”
  6. So Joe and Mary can afford a mortgage where the total payments are $2350 per month but are steered into a mortgage where the payments appear to be lower. The deal is “explained” to them until their minds are numb with too much information and too little understanding. They listen to their mortgage broker who after all is the person they hired to advise them and who clearly does understand the complexities of these obscure documents and instruments of conveyance. 
  7. Joe and Mary are also encouraged to put down less money than they can afford because that makes the mortgage debt higher and increases the bonus kickback to the mortgage broker for converting them from a conventional mortgage that they can afford to a sub-prime mortgage (in sheep’s clothing) that they cannot afford. 
  8. Now it is 2 years alter and Joe and Mary are in shock. Their income is stable, their credit rating is great, they have a great family and they have fixed up the new house nicely to their liking. But they have a growing problem. The 6% mortgage they could afford for a conventional mortgage was never presented. They could have paid that off easily. Instead they have a sub-prime, negative amortization mortgage, adjustable in its rates and they are now up to 11% with payments more than twice what their budget will allow them to pay. 
  9. So Joe and Mary are either not making payments, offering partial payments that are being rejected by a mortgage service provider who does not have the authority to adjust anything, or about to stop making payments. They are considering bankruptcy to save them but there while relief might be available, all of their payments under a Chapter 13 plan, are subject to an additional 10% fee for the bankruptcy trustee to process it. So in fact they are facing worse trouble if they go that route.
  10. In short, they are screwed and nobody cares.
  11. But here is what ought to happen:
    1. They should get legal help because all sorts of laws were violated — including truth in lending, breach of contract with the mortgage broker, and fraud — civil if not criminal. 
    2. Lawyers should step up tot he plate and take these cases on contingency, forcing the lenders and investors to settle the claims by giving the Jones family a mortgage they should have received in the first place and paying them damages for the fraud that was committed. Fees would be paid by the scam artists instead of the lenders.
    3. The Sheriff should convene his economic crimes unit to investigate and prosecute people for this fraud.
    4. The Sheriff should also call a moratorium on evictions.
    5. The State and Federal Attorney General should do the same and should join with the attorney generals of other states much the same as was done when Big Tobacco was taken on. 
    6. The state legislature should pass remedial legislation changing the procedures for foreclosure so that the victims have more time to get their defenses up.
    7. The Congress should do the same and initiate regulation of interstate lenders and the mortgage brokers that enter the transactions with felony penalties for violation of the duty to disclose.
    8. The Governor should issue an order stopping eviction on all foreclosures until there is a hearing before a judge where it is determined that there is not at least probably cause to believe that a fraud was committed. 
    9. Class action suits should be initiated against the mortgage banking, investment banking and retail securities firms that created this scheme, with full restitution, fines and loss of licenses — people should not be put out of their houses, Wall Street scammers should be put out of business.
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