Sep

By Lane Houk

THE REST REPORT IS a report generated by the REST software platform, which is a loan disposition analysis system that, in limited different formats, is used by major banks and mortgage servicers with borrowers and properties that are in default, to run an NPV test and to determine qualification for a HAMP Loan Modification. Financial institutions use systems like REST to analyze the various options available when a loan is not being repaid as agreed by the borrower. The purpose of such analysis is to make sure that the bank can choose the path that offers the best financial outcome possible for the investor or owner of the loan; the servicer is simply the agent for the investor with whom most borrowers interface with on a regular basis. Usually, the investor/owner of the loan is unknown to the borrower and, in most cases, is a Special Purpose Vehicle (SPV) more commonly known as a “Trust.”

Although almost all financial institutions and servicers use loan disposition analysis software platforms, these systems are not made available to consumers. They are sophisticated systems only purchased and utilized by banks that have many thousands of loans that need to be analyzed so that outcomes may be determined and optimized.

When homeowners arrange to run a REST Report, the system produces an 11-page document based on the specifics of their property and their financial situation that shows, from the investor and servicer’s perspective, the various financial outcomes that would result from modifying their mortgage compared with the costs and bottom line result of foreclosure and distressed sale. A homeowner can then use the report by submitting it to his or her lender or servicer, along with the required supporting documents, when seeking to obtain a loan modification, or approval for a short sale.

Compare the approach of using an expert financial professional who knows how to use the REST Report to that of today’s homeowners applying for a loan modification without any assistance and without any negotiating leverage whatsoever. Some homeowners attempt to negotiate with their lender or servicer on their own and from a position of weakness, while others hire lawyers or other third parties to represent them, but in either case, all the homeowner ends up submitting to the lender or servicer is information about themselves, and nothing substantive about the possible dispositions of that loan from the bank’s perspective, or in the best interests of investors.

Law firms and other third parties, depending on the state you live in, all concentrate on helping homeowners submit the best possible application… or “proposal” to the bank. In general, that proposal includes the borrower’s information, various documents intended to verify income, a letter describing the hardship that has caused the homeowner to apply for a modification or short sale… all the information that the homeowner or attorney/representative hopes will paint a picture that the servicer will view as qualifying for a loan modification.

But, “hope,” should only be considered a negotiating strategy, when hope is all you’ve got.

When applying for a loan modification with the REST Report, borrowers still submit their application and supporting documentation, but in addition the borrower submits a report, generated by a loan disposition analysis platform that incorporates the same decision analytics used by lenders and servicers. The report clearly shows the servicer the investor’s financial outcome, in terms of net present value, in a range of scenarios, assuming such outcomes are possible, of course. In addition, the REST Report clearly quantifies a borrower’s eligibility for a HAMP Loan Modification and a HAFA short sale or deed in lieu of foreclosure alternatives.

In March 2009, the Obama Administration published detailed program guidelines for the Making Home Affordable (MHA) Program. Mortgage servicers were authorized to begin modifications under the HAMP plan immediately. With the assistance of several government agencies, GSEs, and servicers – this effort involved the development and refinement of servicer guidelines, modification documents, and data collection and modeling tools.

The Home Affordable Modification Program (HAMP) was designed to help as many as 3 to 4 million financially struggling homeowners avoid foreclosure by modifying loans to a level that is affordable for borrowers now and sustainable over the long term. The program provides clear and consistent loan modification guidelines that the entire mortgage industry can use.

Borrower eligibility is based on meeting specific criteria including:

1) borrower is delinquent on their mortgage or faces imminent risk of default

2) property is occupied as borrower’s primary residence

3) mortgage was originated on or before Jan. 1, 2009 and unpaid principal balance must be no greater than $729,750 for one-unit properties.

After determining a borrower’s eligibility, a servicer will take a series of steps to adjust the monthly mortgage payment to 31% of a borrower’s total pretax monthly income:

First, reduce the interest rate to as low as 2%,

Next, if necessary, extend the loan term to 40 years,

Finally, if necessary, forbear (defer) a portion of the principal until the loan is paid off and waive interest on the deferred amount.

Note: Servicers may elect to forgive principal under HAMP on a stand-alone basis or before any modification step in order to achieve the target monthly mortgage payment.

The Home Affordable Modification Program was designed with good intentions, however, in reality, the servicers are denying thousands of homeowners who actually qualify for a HAMP Modification. There is an answer “why” but that’s another article for another time. In short, if you’re reading this, you are likely one of the tens of thousands of homeowners who have been denied a HAMP Modification even though you really qualify. The problem is that the servicers don’t usually tell the homeowner the specific reason(s) they were denied because, in reality, they should never have been denied. Let’s just say that the real reason for denial is that it’s just not in the servicer’s best interest to modify. They’d rather foreclose because they’ll make more money going that route. It may not make sense to you right now at face value but trust me; they make more money foreclosing than they do modifying a homeowner’s loan.

The simple fact is that when a servicer receives an application for a loan modification from a borrower, that servicer should conduct its own loan disposition analysis in order to determine which outcome, foreclosure or some form of modification or disposition, is in the best interests of the investor who owns the loan. So, when you apply with the REST Report, you provide that loan disposition analysis, causing the servicer to have to verify those numbers. When they find that the report’s analysis is correct, we are seeing modifications granted in situations, and in timeframes, that were unexpected.

Loans and loan modifications are like snowflakes… no two are alike. And while there are law firms or other mortgage professionals that may feel confident about their analysis, the REST Report unquestionably adds a degree of certainty that hasn’t been possible until now.

According to the latest HAMP report from the U.S. Treasury, dated April 30, 2010: Out of 1.2 million HAMP trial modifications there have been 277,640 trials cancelled… and 295,348 permanent modifications granted.

The latest Treasury HAMP Report shows the situation clearly. The number of trial modifications that have been cancelled, is about the same as the number of permanent modifications granted, which is not good enough if you find yourself among those that have been declined by HAMP. There are still 637,353 trial modifications awaiting an answer… thumbs up, or thumbs down. I have seen homeowners who have paid 6, 9 and even 12 trial monthly payments (which is outside the allowable guidelines) and they are still awaiting approval for their permanent modification. Still other clients have come to me having faithfully paid their 3 monthly trial period payments only to be denied a permanent modification and for no apparent or good reason.

The latest Treasury data did show some very encouraging trends as well. For example, as of June 1, 2010, borrowers will have to document their income before beginning a trial modification, and many servicers started implementing this policy in April, so there is data, and it is very encouraging in that it shows roughly twice as many homeowners being approved for a permanent modification after successfully completing the trial period.

Well, when it comes to loan modifications under HAMP, the REST Report runs NPV analytics that should fall within HAMP guidelines. So, when the report says you qualify for HAMP, there’s no one else, besides your servicer of course, that can be as sure you do, as the REST Report.

But, what if you don’t qualify for HAMP?

However, for homeowners that don’t qualify for HAMP, the REST Report can be every bit as helpful to the loan modification or short sale process as it is for those applying under HAMP. Perhaps the principal balance on your loan exceeds HAMP’s $729,000 limit. Or, perhaps you’ve been turned down for HAMP and don’t know why. Or, maybe it’s a mortgage on a second home that you’re trying to modify.

Whatever the reason for falling outside of HAMP guidelines, the loan disposition analysis report produced by the REST platform is proving itself invaluable in the negotiations between a homeowner and their lender or servicer.

Mortgage servicers are companies that are hired by investors to “service” mortgages they own. The servicers all work under a contract called a “Pooling and Servicing Agreement,” or PSA. And all PSAs require servicers to make decisions related to the loans they are servicing in the best interests of the investors for whom they work.

So, when you submit a REST Report to your lender or servicer, they don’t just receive information about you, they also receive an analysis of the financial impact to investors of the alternatives to foreclosure compared with the cost of foreclosing on your property.

If the net present value analysis shows that investors would be better off modifying than foreclosing, we’re seeing servicers responding to the report, and offering to modify loans in more cases than we expected.

It’s not that we believe that a servicer would accept the analysis shown in the REST Report at face value, they most certainly would not. But we do know that when they verify the report’s conclusions using their own internal systems, they will find the REST Report’s financial analysis to be accurate.

Does that mean that submitting an application for a loan modification or short sale along with the REST Report guarantees anything? No, no one can guarantee anyone that a lender or servicer will modify a loan, at the end of the day, both participation in HAMP, and their willingness to modify a mortgage internally, is strictly voluntary. And as anyone in the banking industry will readily tell you… banks only modify loans when it’s in their own best financial interest to do so.

And that, folks is precisely the point. When you can quantify and document that the modification (or short sale) is in the best interest of the investor, the servicer will be put in a very precarious position if they then still choose to ignore those findings.

Most importantly, when it comes to a HAMP Modification, the core component of a HAMP approval boils down to the NPV Analysis or NPV Test. NPV stands for “Net Present Value.”

The base NPV model provides consistency in NPV calculations for the Home Affordable Modification Program and was designed to help the mortgage industry move toward a more standard process for evaluating the NPV of mortgages for purposes of making modifications.

A participating servicer in the Home Affordable Modification Program must modify any loan that meets the program’s eligibility criteria if the modification tests “positive” for NPV. I hope you noted that point above. That word is “must.”

When mortgage modifications have a positive NPV, it is in the best interests of lenders, servicers, investors, and borrowers to modify mortgages to reduce the risk of foreclosure. The Home Affordable Modification Program increases the potential number of mortgage modifications that will have a positive NPV, resulting in more servicers modifying mortgages, and keeping more Americans in their homes. The Home Affordable Modification Program specifies a precise method for determining NPV and provides a base NPV model that any servicer can use or customize into a proprietary NPV model that satisfies all of the program’s methodological requirements.

Almost all servicers in the US have by now elected to participate in the Making Home Affordable program and have signed what is called a “Servicer Participation Agreement” (SPA) with the US Department of Treasury, Fannie Mae and Freddie Mac as compliance agent.

The SPA obligates the servicer to follow the HAMP guidelines. If the NPV Test comes back positive and the servicer still refuses to modify, it is likely that a claim for breach of contract could be brought against the servicer; and, there are already about a dozen lawsuits currently pending claiming just that… that the servicer breached their contract with Treasury by wrongfully denying homeowners for a HAMP Modification.

Now, if you are a homeowner who is frustrated beyond belief and looking for relief, I encourage you to pick up the phone and call us. We are one of the few firms around the country authorized to run REST Reports and help homeowners with the process of getting their ducks in a row and putting their best foot forward.

Call the National Institute of Consumer Advocacy at 800-985-4685 or by email at info[at]nioca.org

May

SECURITIZATION If They Did It Right

By LH | Foreclosure Blog News, Homeowner Resources

7599Leave a CommentSECURITIZATION+If+They+Did+It+Right2010-05-17+09%3A58%3A19LH

SECURITIZATION If They Did It Right

Sometimes it IS easier to prove a negative than a positive. Your opposition has far more facts than you do and in due process, should be required to prove them up into a prima facie case using real evidence from competent witnesses, with real documents that nobody played with before initiating foreclosure.

So let’s take a look at how all this WOULD HAVE BEEN DONE, because most judges, even today are seeing the transaction through this lens.

A homeowner or prospective homeowner would apply for refinancing or a purchase money first, second or Home Equity Line of Credit (HELOC).
Loan Closing and Disclosures
Details of the loan and loan closing, good faith estimate and closing statement are provided in some form to both the borrower and the investors who acknowledge receipt and acceptance in binding form. Presumably this would be done through the offices of the manager, agent or “Trustee” of the Special Purpose Vehicle, the name of which and contact information was disclosed to the borrower prior to closing and is confirmed at closing.
Assignment of Loan into Pool, acknowledged by Borrower. Intermediaries and Investors disclosed to borrower/debtor. The lender is identified as the group of investors who have provided funding for the loan.
Investors’ representative(s) identified and disclosed, with contact information.
During the life of the loan, Borrower receives same statement as investor — receipts and disbursements allocable to the loan are allocated and applied to payments and loan balance. If third party payments are received for any reason by any of the intermediaries, who are all disclosed, the amount of the receipt and the method of allocation to the borrower’s loan is disclosed.
If the Borrower falls delinquent, the Investors either decide as a group or through their representative, manager, agent or named Trustee whether to offer a workout or to foreclose. A modification or settlement would be negotiated with parties known to Borrower at closing or successors in interest which would have been disclosed immediately upon execution of closing documents between the investors, or part of them, and the successor(s).
Any change in ownership of the loan would be a change in beneficiary and a change of Payee under the note, which would be the same party. Such change would be recorded in accordance with State Law. The change would not, under these circumstances leave the Borrower in doubt as to the amount of the obligation and whether the obligation was or should be affected by the third party transactions. If the third party transaction is intended contemporaneously with the closing with the Borrower, even if the third party is not identified, this fact would also be disclosed to the Borrower and the Investors.
Insurance, credit default swaps, and other credit enhancements are identified and disclosed to the Borrower — pursuant to contractual provisions executed between the Investors as a Group or individually; provided however, the insurer or third party payor would have rights of subrogation in which upon payment under the referenced contract, they have acquired the interests of the insured parties, in order to mitigate their losses, a fact which was identified and disclosed to the borrower at the closing with the borrower.
In this transparent series of transactions that are part and parcel of a single transaction consisting of many steps, the Borrower having accepted all the terms and conditions of the approval of the loan and the securitization of the loan, achieves no greater standing or defense in the event of default. The only exception would be malfeasance or misfeasance by the participants in the securitization chain wherein, disclosed or not, the loan, or part of it, was satisfied by direct or indirect payment to a representative with apparent authority over the loan and to act in the interests of the investor as an agent. If the loan was sold multiple times, neither the Borrowers liability nor the Initial investors’ asset would be effected. Any dispute would NOT include the Borrower whose obligation would be unaffected UNLESS the intermediaries receiving multiple payments for sale of the same loan or percentage interests in the same loan pool were allowed to retain the proceeds of said sale, inasmuch as this would mean that the liability of the borrower would either (a) be diminished by the excess payments or (b) spread out to investors that were not disclosed at the Borrower’s Loan Closing.
In the event that the matter is referred to a foreclosure proceeding, the action (whether private non-judicial sale or public lawsuit in foreclosure) would be brought on behalf of the named investors, through their authorized representative, with a complete statement of accounting and exhibits showing the entire securitization structure and the balance due on the Borrower’s obligation, including any third party payments, whether those were allocated to payments, interest or principal, and what balance of the obligation exists. Also named as foreclosers would be those party who acceded to a subrogated interest in the Borrower’s loan in whole or in part.
Since a judicial allocation would be required to determine the relative interests and priority of interests of the investors, successors and subrogated parties, it is probably not possible to initiate a non-judicial sale unless there existed an agreement between all of the parties as to those matters. Such an agreement would specifically describe the distribution of proceeds of sale, which party was entitled to enter a credit bid, and what would be done with the property if the bid resulted in a Trustee Certificate being issued giving title to the party that initiated the foreclosure.
If the creditor parties were able to satisfy all the prerequisites of a non-judicial foreclosure sale and the sale took place under non-judicial circumstances, the Borrower would lose the right of redemption and the Creditor would lose the right to pursue any delinquency or deficiency resulting from the sale of the home.
If the Borrower was the defendant or re-oriented as the defendant in a foreclosure lawsuit, then the borrower’s right to redemption would be retained, if State Law permits same, and the Creditor would, if State Law permits it, be allowed to pursue a deficiency judgment against the Borrower. The allegation for suing for damages to cover a deficiency would include the fact that the sale price was fair and reasonable under the circumstances. The prima facie case of the Plaintiff Creditor in those circumstances would require evidence from an appraiser or other credible resource that is admitted by the Court as competent testimony and evidence of the fair market value and the sales price. Submission of a written affidavit or document is sufficient to support the allegation, not insufficient to satisfy the requirements of establishment of a prima facie case. A competent witness with personal knowledge and recollection is required to establish the foundation of any document. Business records do not include records regularly prepared after the loan goes into default, if those records are offered to prove facts that relate to events prior to the default. SUCH RECORDS ARE ONLY ADMISSIBLE TO PROVE (WITH FOUNDATION FROM A COMPETENT WITNESS) FACTS, CIRCUMSTANCES OR EVENTS THAT OCCURRED AFTER DEFAULT.

Filed under: foreclosure, foreclosure mill, Forensic Analysis Workshop, GTC | Honor, HERS, investment banking, Investor, MODIFICATION, Mortgage, Motion Practice and Discovery, securities fraud, Securitization Survey, STATUTES, trustee, workshop Tagged: business records, CLOSING WITH BORROWER, CLOSING WITH INVESTORS, CLOSING WITH SECURITIZATION PARTICIPANTS, evidence, prima facie case, securitization, SUBROGATION, SUCCESSORS IN INTEREST, third party payments

May

Ratings Arbitrage a/k/a Fraud

By LH | Foreclosure Blog News, Homeowner Resources

7388Leave a CommentRatings+Arbitrage+a%2Fk%2Fa+Fraud2010-05-13+16%3A01%3A44LH

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

Filed under: bubble, CDO, CORRUPTION, Eviction, expert witness, Fannie MAe, foreclosure, foreclosure mill, Forensic Analysis Workshop, GTC | Honor, HERS, investment banking, Investor, MODIFICATION, Mortgage, Motion Practice and Discovery, politics, securities fraud, Securitization Survey, Servicer, STATUTES, trustee, workshop Tagged: accounting, Bank of America, BofA, bundled, BURDEN OF PROOF, Charles Koppa, Citigroup Inc, Countrywide Home Loans, damages, Deutsche Bank AG, Fitch ratings, Goldman Sachs, GRETCHEN MORGENSON, guaranteed to fail, injunction, JP Morgan Chase, Louise Story, Merrill Lynch, modifications, Moody's Investor Service, prima facie case, rebundled, securitization, short sales, Standard & Poor's, Substitute Trustee, The New York Times, yield spread premium

May

NY Judges Slamming Debt Collectors

By LH | Foreclosure Blog News, Homeowner Resources

7163Leave a CommentNY+Judges+Slamming+Debt+Collectors2010-05-08+14%3A47%3A10LH

Eltman, Eltman & Cooper was one of 35 law firms sued last July by the state, which claimed that they had improperly obtained more than 100,000 judgments in consumer-debt cases. Editor’s notes: The dubious “enforcement” of mortgages, notes and “obligations (that have been paid many times over through credit enhancement) is both mirrored and amplified in the debt collection industry. Servicers are merely debt collectors since they are collecting for a third party. In an investigative report coming soon to these pages you will see that servicers are actually the “real trustee” for the investors, separate and apart from the Special Purpose Vehicle. But that is for later.

For now, before you slide into grief and shame over your financial condition, know this: the people hounding you for money are doing so in most cases illegally and Judges are reversing themselves across the country as they take a closer look at the the procedural tricks routinely employed by those who prey upon consumers with “debt” claims have that long since been extinguished, written off, repackaged into resecuritized asset backed securities, with even more credit swaps on top of the old ones.

In this article from the New York Times, the clarity of the scam is being revealed and unraveled. The ultimate conclusion of this mess will take years if not decades, to move us back to a state of equilibrium. In the meantime, the major piece of advice you will probably get from any consumer law advocate or attorney is this: don’t pay anyone unless you are sure you owe THEM the money. The question is not whether you owe money (i.e., the existence of the obligation), the question is the identity of the creditor and whether the obligation, without your knowledge was already paid in whole or in part by credit default swaps, other credit enhancement techniques, etc.

————————

May 7, 2010

In New York, Some Judges Are Now Skeptical About Debt Collectors’ Claims

By WILLIAM GLABERSON

As New Yorkers have tumbled into credit card debt in large numbers during the great recession, bill collectors have inundated the courts to get what they say is due. In turn, the courts have issued hundreds of thousands of orders against residents. Some consumer groups argue that by doing so, the courts have become little more than an arm of the debt collection industry.

Now, a few judges in New York State are suggesting that they agree, at least in part, with the consumer groups. They have fumed at debt collectors and their lawyers, scolding them for interest as high as 30 percent a year and berating them for false statements and abusive practices.

Some of the rulings have even been sarcastic or incredulous. In December, a Staten Island judge said debt collectors seemed to think their lawsuits were taking place in a legal Land of Oz, where everyone was supposed to follow anticonsumer rules invented by some unseen debt-collection wizard.

Last month, a Manhattan appeals court threw out a credit card case, saying a debt collection company had sued the wrong person but pursued the case anyway.

“I think these judges are outraged at the status quo, and they’re trying to change it,” said Janet Ray Kalson, a Manhattan lawyer who is the chairwoman of a City Bar Association committee that has studied the deluge of credit card cases.

Debt-buyer businesses purchase debts — along with lists of names and amounts supposedly due — for pennies on the dollar from credit card companies and sometimes have no real evidence about whom they are suing or why. They then file tens of thousands of suits, often with little to back up their claims.

A Nassau County District Court judge said recently, for example, that one of New York City’s high-volume debt collection law firms, which has close ties to a debt-buying company, did not provide “a scintilla of evidence” that there was even a debt in a case against a Long Island woman.

The suit received an unusual amount of attention. The judge, Michael A. Ciaffa, said that it “regrettably, involves a veritable ‘perfect storm’ of mistakes, errors, misdeeds and improper litigation practices.” Judge Ciaffa said the law firm, Eltman, Eltman & Cooper, ignored court orders, made a “demonstrably false” assertion and harassed the woman for payment even after its suit was dismissed.

The case before Judge Ciaffa ended with an order that is far from typical in a credit card suit. The woman who had been sued, Patricia Bohnet, a bookkeeper and single mother, did not have to pay anything. But Eltman, Eltman & Cooper had to pay $14,800 in sanctions for violating ethical rules at least 18 times. Under the judge’s order, $4,800 is to go to Ms. Bohnet and the remainder to a state fund that works to reimburse clients for dishonest conduct by lawyers.

“They don’t care if you’re sick; they don’t care if you’re poor,” Ms. Bohnet said in an interview at her job in Woodmere. “Their only job is to collect money, and they’ll do it in any way possible.”

In response to questions, the law firm said in a written statement that Judge Ciaffa had not had all the facts but that the firm would not appeal. “As with any firm or business that handles this type of volume,” it added, “there exists a potential for errors or omissions in the normal course of business.”

Eltman, Eltman & Cooper was one of 35 law firms sued last July by the state, which claimed that they had improperly obtained more than 100,000 judgments in consumer-debt cases. Separate files in Federal District Court in Brooklyn show that without admitting fault, the Eltman law firm settled a class-action suit in 2006 that claimed it used “false, misleading and deceptive means” to collect debts.

Privately, some judges say they are embarrassed that in many New York courts, debt-collection lawyers have grown so comfortable that they give the impression they are in charge of the proceedings and do not need prove their claims with strong evidence.

In the recent pro-consumer rulings, skepticism of the debt collectors’ claims has been obvious. A Civil Court judge in Brooklyn, Noach Dear, has written decisions that come close to saying that the collection cases are sometimes based on falsehoods.

In a case in August, Judge Dear observed that there was nothing to substantiate a lawyer’s claim that she somehow remembered mailing a document to the credit card holder that was the foundation of the collection suit. The document, Judge Dear noted archly, had been mailed three and a half years earlier.

Behind the legalese of the credit card suits, some judges have suggested, there is often a disorganized jumble of documentation. A Mount Vernon City Court judge noted that one case was based on little more than “a self-serving computer printout.” A Manhattan judge said one company that bought debt claims from credit card companies had filed suit against a cardholder although it did not own that particular debt.

In the Staten Island case, the judge, Philip S. Straniere, said a credit card company was claiming interest of 28 percent on the balance due, which would be illegal as usury under New York law. The company argued that the credit card issued to a New Yorker that seemed to be from a national company had actually been issued by a one-branch bank in Utah, which had no usury law.

“Like the Land of Oz, run by a Wizard who no one has ever seen,” Judge Straniere wrote, “the Land of Credit Cards permits consumers to be bound by agreements they never sign, agreements they may never have received, subject to change without notice and the laws of a state other than those existing where they reside.”

The judge ruled that the supposed agreement allowing unlimited interest charges was not enforceable in New York.

Industry officials said that tales of abusive collection cases were misleading. “There are certainly colorful stories,” said Joann Needleman, an officer of the National Association of Retail Collection Attorneys. “People think that handful is the rule, not the exception, but it’s not.”

But Ms. Bohnet, the Long Island woman who was sued by a New York law firm, said just one case could be harrowing. When she received a call last year at the charity where she keeps the books for $39,000 a year, the voice on the other end told her the debt collectors had a five-year-old court judgment against her for a $4,861 debt. She had to pay, or they would start taking money out of her salary, she said she was told.

The address of the debt-collection firm and its lawyers at Eltman, Eltman & Cooper seemed to be the same, she noticed.

Ms. Bohnet did not know she had ever been sued. She started to cry, she said, worried that with a chunk of money taken every month, she might lose the modest apartment she needed to share custody of her teenage daughter.

“I was in all-out fear,” she said, adding, “After I got off the phone, I realized I didn’t even know what the debt was for.” She might have had an old credit card debt, but she had had some years of problems with alcohol and drugs and tangled financial problems. In recovery, she said, she had worked to clean up her financial affairs.

The next time the collectors called, she said, she told them that she was willing to pay if she owed any money but that she needed to see some proof that they had the right person. Then, without a lawyer, she went to the court, in Hempstead, to check into the order the debt collectors said they had against her.

After some digging, she found the case. The debt-buyer’s lawyers had filed a sworn statement that they said was proof she had been given notice of the suit. A process server for Eltman, Eltman & Cooper claimed she had been given a copy of the suit personally on July 30, 2004.

Judge Ciaffa doubted that. Ms. Bohnet, he wrote, “hadn’t lived at that address since 1998.”

Filed under: CASES, CORRUPTION, foreclosure, foreclosure mill, GTC | Honor, HERS, Motion Practice and Discovery, Servicer, STATUTES, trustee Tagged: debt, Debt Collectors, Eltman, Eltman & Cooper, judges, New York, Obligation, Philip S. Straniere, usury, WILLIAM GLABERSON

Apr

Goldman Sachs Messages Show It Thrived as Economy Fell

By LH | Foreclosure Blog News, Homeowner Resources

6773Leave a Comment2010-04-26+15%3A55%3A49LH

Editor’s Note: Now the truth as reported here two years ago.

There were no losses.

They were making money hand over fist.

And this article focuses only on a single topic — some of the credit default swaps — those that Goldman had bought in its own name, leaving out all the other swaps bought by Goldman using other banks and entities as cover for their horrendous behavior.

It also leaves out all the other swaps bought by all the other investment banking houses.

But most of all it leaves out the fact that at no time did the investment banking firms actually own the mortgages that the world thinks caused enormous losses requiring the infamous bailout. It’s a fiction.

In nearly all cases they sold the securities “forward” which means they sold the securities first, collected the money second and then went looking for hapless consumers to sign documents that were called “loans.”

The securities created the intended chain of securitization wherein first the investors “owned” the loans (before they existed and before the first application was signed) and then the “loans” were “assigned” into the pool.

The pool was assigned into a Special Purpose Vehicle that issued “shares” (certificates, bonds, whatever you want to call them) to investors.

Those shares conveyed OWNERSHIP of the loan pool. Each share OWNED a percentage of the loans.

The so-called “trust” was merely an operating agreement between the investors that was controlled by the investment banking house through an entity called a “trustee.” All of it was a sham.

There was no trust, no trustee, no lending except from the investors, and no losses from mortgage defaults, because even with a steep default rate of 16% reported by some organizations, the insurance, swaps, and other guarantees and third party payments more than covered mortgage defaults.

The default that was not covered was the default in payment of principal to investors, which they will never see, because they never were actually given the dollar amount of mortgages they thought they were buying.

The entire crisis was and remains a computer enhanced hallucination that was used as a vehicle to keep stealing from investors, borrowers, taxpayers and anyone else they thought had money.

The “profits” made by NOT using the investor money to fund mortgages are sitting off shore in structured investment vehicles.

The actual funds, first sent to Bermuda and the caymans was then cycled around the world. The Ponzi scheme became a giant check- kiting scheme that hid the true nature of what they were doing.

April 24, 2010

Goldman Sachs Messages Show It Thrived as Economy Fell

By LOUISE STORY, SEWELL CHAN and GRETCHEN MORGENSON

In late 2007 as the mortgage crisis gained momentum and many banks were suffering losses, Goldman Sachs executives traded e-mail messages saying that they were making “some serious money” betting against the housing markets.

The e-mails, released Saturday morning by the Senate Permanent Subcommittee on Investigations, appear to contradict some of Goldman’s previous statements that left the impression that the firm lost money on mortgage-related investments.

In the e-mails, Lloyd C. Blankfein, the bank’s chief executive, acknowledged in November of 2007 that the firm indeed had lost money initially. But it later recovered from those losses by making negative bets, known as short positions, enabling it to profit as housing prices fell and homeowners defaulted on their mortgages. “Of course we didn’t dodge the mortgage mess,” he wrote. “We lost money, then made more than we lost because of shorts.”

In another message, dated July 25, 2007, David A. Viniar, Goldman’s chief financial officer, remarked on figures that showed the company had made a $51 million profit in a single day from bets that the value of mortgage-related securities would drop. “Tells you what might be happening to people who don’t have the big short,” he wrote to Gary D. Cohn, now Goldman’s president.

The messages were released Saturday ahead of a Congressional hearing on Tuesday in which seven current and former Goldman employees, including Mr. Blankfein, are expected to testify. The hearing follows a recent securities fraud complaint that the Securities and Exchange Commission filed against Goldman and one of its employees, Fabrice Tourre, who will also testify on Tuesday.

Actions taken by Wall Street firms during the housing meltdown have become a major factor in the contentious debate over financial reform. The first test of the administration’s overhaul effort will come Monday when the Senate majority leader, Harry Reid, is to call a procedural vote to try to stop a Republican filibuster.

Republicans have contended that the renewed focus on Goldman stems from Democrats’ desire to use anger at Wall Street to push through a financial reform bill.

Carl Levin, Democrat of Michigan and head of the Permanent Subcommittee on Investigations, said that the e-mail messages contrast with Goldman’s public statements about its trading results. “The 2009 Goldman Sachs annual report stated that the firm ‘did not generate enormous net revenues by betting against residential related products,’ ” Mr. Levin said in a statement Saturday when his office released the documents. “These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market.”

A Goldman spokesman did not immediately respond to a request for comment.

The Goldman messages connect some of the dots at a crucial moment of Goldman history. They show that in 2007, as most other banks hemorrhaged losses from plummeting mortgage holdings, Goldman prospered.

At first, Goldman openly discussed its prescience in calling the housing downfall. In the third quarter of 2007, the investment bank reported publicly that it had made big profits on its negative bet on mortgages.

But by the end of that year, the firm curtailed disclosures about its mortgage trading results. Its chief financial officer told analysts at the end of 2007 that they should not expect Goldman to reveal whether it was long or short on the housing market. By late 2008, Goldman was emphasizing its losses, rather than its profits, pointing regularly to write-downs of $1.7 billion on mortgage assets and leaving out the amount it made on its negative bets.

Goldman and other firms often take positions on both sides of an investment. Some are long, which are bets that the investment will do well, and some are shorts, which are bets the investment will do poorly. If an investor’s positions are balanced — or hedged, in industry parlance — then the combination of the longs and shorts comes out to zero.

Goldman has said that it added shorts to balance its mortgage book, not to make a directional bet that the market would collapse. But the messages released Saturday appear to show that in 2007, at least, Goldman’s short bets were eclipsing the losses on its long positions. In May 2007, for instance, Goldman workers e-mailed one another about losses on a bundle of mortgages issued by Long Beach Mortgage Securities. Though the firm lost money on those, a worker wrote, there was “good news”: “we own 10 mm in protection.” That meant Goldman had enough of a bet against the bond that, over all, it profited by $5 million.

Documents released by the Senate committee appear to indicate that in July 2007, Goldman’s daily accounting showed losses of $322 million on positive mortgage positions, but its negative bet — what Mr. Viniar called “the big short” — came in $51 million higher.

As recently as a week ago, a Goldman spokesman emphasized that the firm had tried only to hedge its mortgage holdings in 2007 and said the firm had not been net short in that market.

The firm said in its annual report this month that it did not know back then where housing was headed, a sentiment expressed by Mr. Blankfein the last time he appeared before Congress.

“We did not know at any minute what would happen next, even though there was a lot of writing,” he told the Financial Crisis Inquiry Commission in January.

It is not known how much money in total Goldman made on its negative housing bets. Only a handful of e-mail messages were released Saturday, and they do not reflect the complete record.

The Senate subcommittee began its investigation in November 2008, but its work attracted little attention until a series of hearings in the last month. The first focused on lending practices at Washington Mutual, which collapsed in 2008, the largest bank failure in American history; another scrutinized deficiencies at several regulatory agencies, including the Office of Thrift Supervision and the Federal Deposit Insurance Corporation.

A third hearing, on Friday, centered on the role that the credit rating agencies — Moody’s, Standard & Poor’s and Fitch — played in the financial crisis. At the end of the hearing, Mr. Levin offered a preview of the Goldman hearing scheduled for Tuesday.

“Our investigation has found that investment banks such as Goldman Sachs were not market makers helping clients,” Mr. Levin said, referring to testimony given by Mr. Blankfein in January. “They were self-interested promoters of risky and complicated financial schemes that were a major part of the 2008 crisis. They bundled toxic and dubious mortgages into complex financial instruments, got the credit-rating agencies to label them as AAA safe securities, sold them to investors, magnifying and spreading risk throughout the financial system, and all too often betting against the financial instruments that they sold, and profiting at the expense of their clients.”

The transaction at the center of the S.E.C.’s case against Goldman also came up at the hearings on Friday, when Mr. Levin discussed it with Eric Kolchinsky, a former managing director at Moody’s. The mortgage-related security was known as Abacus 2007-AC1, and while it was created by Goldman, the S.E.C. contends that the firm misled investors by not disclosing that it had allowed a hedge fund manager, John A. Paulson, to select mortgage bonds for the portfolio that would be most likely to fail. That charge is at the core of the civil suit it filed against Goldman.

Moody’s was hired by Goldman to rate the Abacus security. Mr. Levin asked Mr. Kolchinsky, who for most of 2007 oversaw the ratings of collateralized debt obligations backed by subprime mortgages, if he had known of Mr. Paulson’s involvement in the Abacus deal.

“I did not know, and I suspect — I’m fairly sure that my staff did not know either,” Mr. Kolchinsky said.

Mr. Levin asked whether details of Mr. Paulson’s involvement were “facts that you or your staff would have wanted to know before rating Abacus.” Mr. Kolchinsky replied: “Yes, that’s something that I would have personally wanted to know.”

Mr. Kolchinsky added: “It just changes the whole dynamic of the structure, where the person who’s putting it together, choosing it, wants it to blow up.”

The Senate announced that it would convene a hearing on Goldman Sachs within a week of the S.E.C.’s fraud suit. Some members of Congress questioned whether the two investigations had been coordinated or linked.

Mr. Levin’s staff said there was no connection between the two investigations. They pointed out that the subcommittee requested the appearance of the Goldman executives and employees well before the S.E.C. filed its case.

Filed under: CORRUPTION, credit unions, currency, Eviction, expert witness, Fannie MAe, foreclosure, Forensic Analysis Workshop, GTC | Honor, HERS, investment banking, MODIFICATION, Mortgage, Motion Practice and Discovery, securities fraud, Securitization Survey, Servicer, STATUTES, trustee, workshop Tagged: ABACUS 2007-AC1, bonds, borowers, check-kiting, David A. Viniar, default, Eric Kolchinsky, Federal Deposit Insurance Corporation., financial crisis, Financial Crisis Inquiry Commission, Fitch, fraud, Gary D. Cohn, Goldman Sachs, GRETCHEN MORGENSON, HERS, John A. Paulson, Kolchinsky, lenders, lending, Lloyd C. Blankfein, losses, Louise Story, Moody’s, mortgage backed securities, Office of Thrift Supervision, operating agreement, OWNERSHIP of the loan pool, Ponzi, Securities and Exchange Commission, selling forward, Senate Permanent Subcommittee on Investigations, SEWELL CHAN, sham, shares, special purpose vehicle, Standard & Poor’s, swaps, trust, trustee, Washington Mutual

Apr

Reg Z TILA Amendment requires new owners and assignees of mortgage loans to notify consumers of the sale or transfer

By LH | Foreclosure Blog News, Homeowner Resources

60721 Comment2010-04-01+13%3A31%3A54LH

The Federal Reserve Board has issued an interim final rule under Regulation Z to implement the recent Truth in Lending Act (TILA) amendment that requires new owners and assignees of mortgage loans to notify consumers of the sale or transfer.

While mostly helpful in foreclosure defense, the rule leaves open the question of ownership of the loans. Because of the practice of “assignment” of the loans to a special purpose vehicle, the Fed stopped there in its inquiry. If it had taken one step further it would have seen that the indenture to the mortgage backed bond conveyed an ownership interest in the loans supposedly assigned. it also leaves open the problem of whether the loans were accepted into the pool or were time-barred or were defective for failure to meet the requirements of recordation or recordable form set forth in the enabling documents.

The TILA requirement has been in effect since the May 20, 2009, enactment of the Helping Families Save Their Homes Act of 2009. Compliance with the specifics of the new rule is optional until January 19, 2010. As a result, new owners may (but need not) rely on the new rule immediately to ensure they are in compliance with TILA. Violations give rise to liability for statutory damages, including up to $4,000 per violation in individual actions or up to $500,000 in a class action.

The transfer notice requirement applies to all closed-end and open-end consumer-purpose mortgage loans secured by a consumer’s principal residence. It requires any person that acquires more than one mortgage loan in any 12-month period to provide a transfer notice without regard to whether the new owner would otherwise be a “creditor” subject to TILA. Mere servicers of mortgage loans and investors in mortgage-backed securities or other interests in pooled loans do not acquire legal title to loans and are not subject to the new rule. However, trusts or other entities acquiring legal title to the securitized loans are subject to the rule. The notice requirement is triggered by a transfer of the underlying loan, regardless of whether the assignment is recorded. Thus, assignees are not exempt from the duty to provide notice merely because the mortgage (as opposed to the note) is in the name of Mortgage Electronic Registration Systems (MERS), for example.

The new rule does not affect the separate notification requirement under the Real Estate Settlement Procedures Act (RESPA) for servicing transfers on mortgage loans. Accordingly, new owners who acquire both legal title to a mortgage loan and the servicing rights will need to satisfy both the TILA and RESPA notification requirements.

The notice must be given on or before the 30th calendar date after the date the new owner acquires the loan, with the acquisition date deemed to be the date that the acquisition is recognized in the new owner’s books and records. In the case of short-term repurchase agreements, the acquirer is not required to give the notice if the transferor has not treated the transfer as a loan sale on its own books and records. However, if a repurchase does not occur, the acquirer must give the notice within 30 days after it recognizes the transfer as an acquisition on its books and records.
The notice must be given even where the new and former owners are affiliates, but a combined notice may be sent where one company acquires a loan and subsequently transfers it to another company so long as the content and timing requirements are satisfied as to both entities.
The notice must contain the information specified by the new rule, including contact information for any agents used by an owner to receive legal notices and resolve payment issues.
The required information also includes a disclosure of the location where ownership of the debt is recorded. If a transfer has not been recorded in the public records at the time the notice is provided, a new owner may satisfy this requirement by stating that fact.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, expert witness, Fannie MAe, foreclosure, HERS, Investor, MODIFICATION, Mortgage, securities fraud, Servicer Tagged: agents, AGGREGATOR, consumer protection, contact information, creditor, foreclosure defense, legal notices, MERS, mortgage backed securities, mortgage loans, principal residence, Real Estate Settlement Procedures Act, Reg Z, resolve payment issues, RESPA, secured, statutory damages, TILA, violation

Mar

RESECURITIZATION: ADDING MORE LAYERS FOR THE FORENSIC ANALYST, EXPERT, LAWYER AND LITIGANT

By LH | Foreclosure Blog News, Homeowner Resources

6043Leave a Comment2010-03-31+21%3A20%3A22LH

NEWS REPORTS HAVE BEEN SPORADICALLY REFERRING TO THE OLD DERIVATIVES BEING RE-PACKAGED AND SOLD AGAIN. This is called resecuritization. It takes the old pools, or what’s left of them, puts them together with other old pools, and creates a brand new Special Purpose vehicle that issues brand spanking new mortgage backed bonds.

The backing in this case is the old mortgage backed bond which in turn is evidence of the ownership or “beneficial ownership” of the underlying loans.

This produces the desired effect of making more money while at the same time leading litigators down blind alleys and the equally desirable effect of showing the Judge that you were full of crap. Of course if you do the proper discovery and explain with expert witness declarations or even testimony what is going on, then the Judge will either give you the go-ahead to pursue your line of inquiry or not, leading to an interesting appeal. Witness the following:

Fitch Rates J.P. Morgan Resecuritization Trust 2009-12

Business Wire, Nov 30, 2009

NEW YORK — Fitch Ratings has rated the J.P. Morgan Resecuritization Trust 2009-12. This transaction consists of nine non-crossed groups. Each group is a resecuritization of a residential mortgage backed securities certificate. Fitch is not rating Group 3, 6, and 9 certificates.

–Group 1 is a resecuritization of 55.26% interest in CHL 2007-9, Class A-6;

–Group 2 is a resecuritization of 6.97% interest in WFMBS 2006-AR12, Class II-A-1;

–Group 4 is a resecuritization of 11.08% interest in CHL 2005-29, Class A-1;

–Group 5 is a resecuritization of 12.55% interest in FHASI 2007-2, Class I-A-4;

–Group 7 is a resecuritization of 30.33% interest in WFMBS 2007-11, Class A-85;

–Group 8 is a resecuritization of 4.92% interest in WFMBS 2007-11, Class A-96.

As resecuritizations, the certificates will receive their cash flows from the underlying classes of certificates. The underlying certificates represent beneficial ownership interest in fixed-rate and adjustable-rate, conventional, first lien residential mortgage loans, substantially all of which have original terms to stated maturity of 30 years.

This transaction contains certain classes designated as Base Certificates and others as Exchangeable Certificates. Group 1 A-1 certificate is a Base Certificate and can be exchanged for certain combinations of A-3 through A-16. The A-1, A-2, A-3, A-4 and A-6 certificates in group 2, 7 and 8 are Base Certificates and can be exchanged for certain combinations of A-3 through A-19. The class A-3, A-4 and A-6 certificates in group 4 are Base Certificates and can be exchanged for class A-1. The class A-1 certificate in group 5 is a Base Certificate and can be exchanged for certain combinations of A-3 through A-8. Classes C-A-1 through C-A-8 can be exchanged for certain combinations of certificates from group 7 and group 8.

ResiLogic, the regression-based model used by Fitch, takes into account multiple risk factors which can broadly be placed into three categories in the following order of influence: seasoned loan risks, economic risks, and collateral risks. For seasoned loan risks, the delinquency status and volatility are the most important with regards to Frequency of Foreclosure (FOF), while change in home price index and loan age are the most important with regards to Loss Severity (LS). Economic risk is solely comprised of state and MSA level risk multipliers as well as a national multiplier. In the category of collateral risk, the credit score, credit sector, and combined loan-to-value (CLTV) ratio are the most heavily-weighted risk factors in calculating the FOF. Closing balance, loan-to-value (LTV) ratio and loan coupon are the most heavily-weighted risk factors in calculating Loss Severity. Due to concerns over recent pool performance and volatility, loss levels were adjusted higher than the ResiLogic model results for Group 5.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, HERS, Investor, Mortgage, securities fraud, Servicer Tagged: 2009-12, Business Wire, CHL 2007-9, Class A-6, CLTV, collateral risks, combined loan-to-value, delinquency status, discovery, Fitch ratings, FOF, Frequency of Foreclosure, HERS, J.P. Morgan Resecuritization Trust, Loss Severity, ResiLogic model, risk factor, Wells Fargo, WFMBS 2007-11

Mar

WHY SECURITISATION IS ILLEGAL UNDER U.S. AND COMMON LAW

By LH | Foreclosure Blog News, Homeowner Resources

5473Leave a Comment2010-03-15+15%3A42%3A37LH

Submitted by Charles Cox, apparently from public domain

Article by Christopher Story to be published by Economic Intelligence Review

conflict of interest inherent in the sponsor also serving as the servicer constitutes fraud and conversion. In the fourth place, in all ‘true-sale’, ‘disguised loan’ and ‘assignment’ securitisations where the Special Purpose Vehicle [SPV] is a trust, the declaration of trust is void, as it exists for an illegal purpose.

The specific R.I.C.O. sections are: Section 1341 (mail fraud); Section 1343 (wire fraud); Section 1344 (financial institution fraud); Section 1957 (engaging in monetary transactions improperly derived from specified unlawful activity) [‘the money you make from the illegal exploitation of my money, is my money’]; and Section 1952 (racketeering).

Illusory promises are not valid consideration for a contract. Such promises may be found in the Subscription/Purchase Agreement, whereby an existing asset is being exchanged for a future asset that does not exist as of the date of the subscription/purchase agreement. To make matters worse, none of the agreements typically signed by the investor as part of his/her purchase of the Special Purpose Vehicle’s Asset-Backed Securities expressly incorporates the (typically illusory) promises embodied in the offering prospectus.

WHY SECURITISATION IS ILLEGAL UNDER U.S. AND COMMON LAW

Securitisation is illegal under US legislation – primarily because it is fraudulent and causes specific violations of R.I.C.O., usury, Antitrust and bankruptcy laws. And it flies in the face of public policy in numerous ways, as is expounded in extensive detail in an analysis to be published in our journal Economic Intelligence Review 2009Q1 (7) with several pages of book, article and case references.

To begin with, securitisation violates US State usury legislation. Secondly, all ‘true-sale’, ‘disguised loan’ as well as ‘assignment’ securitisations are essentially tax evasion schemes, and the penalties for tax evasion in the United States are excessively severe.

Thirdly, in all ‘true-sale’, ‘disguised loan’ and ‘assignment’ securitisations, the conflict of interest inherent in the sponsor also serving as the servicer constitutes fraud and conversion. In the fourth place, in all ‘true-sale’, ‘disguised loan’ and ‘assignment’ securitisations where the Special Purpose Vehicle [SPV] is a trust, the declaration of trust is void, as it exists for an illegal purpose.

In the fifth place, off-balance sheet treatment of asset-backed securities (both for ‘true-sale’ and for assignment transactions) constitutes fraud.

Sixth, all ‘true-sale’, ‘disguised loan’ and ‘assignment’ securitisations involve blatant fraudulent conveyances. In the seventh place, securitisation usurps United States bankruptcy laws and is accordingly illegal, as well as being also demonstrably contrary to public policy.

SECURITISATION ENTAILS GROSS VIOLATIONS OF R.I.C.O. STATUTES
In ‘true-sale’, ‘disguised loan’ and ‘assignment’ securitisations, there are fraudulent transactions which serve as ‘predicate acts’ under US Federal R.I.C.O. statutes.

The specific R.I.C.O. sections are: Section 1341 (mail fraud); Section 1343 (wire fraud); Section 1344 (financial institution fraud); Section 1957 (engaging in monetary transactions improperly derived from specified unlawful activity) [‘the money you make from the illegal exploitation of my money, is my money’]; and Section 1952 (racketeering).

Furthermore, securitisation constitutes violations of American antitrust statutes through market integration, syndicate collusion, price formation, vertical foreclosure, tying, price-fixing, predatory pricing, and the rigging of allocations.

Securitisation also involves void contracts, given the lack of consideration, illusory promises, the absence of any actual bargain, the absence of mutuality – and finally illegal subject matter and the contravention of public policy.

Securitisation is riddled with Fraudulent Transfer, Fraud in the Inducement, Fraud in Fact by Deceit, Theft by Deception (Fraudulent Concealment) and Fraudulent Conveyance: see the US securities regulations routinely breached in such activity, listed at the foot of this report and of most of these reports for THE PAST THREE YEARS, and other laws also routinely flouted in this context.

NOTWITHSTANDING THAT IT’S ILLEGAL, U.S. AUTHORITIES
CONTINUE TO PROMOTE AND ENCOURAGE SECURITISATION
Yet notwithstanding such crystal-clear indications that securitisation is 100% ILLEGAL under US Law, as well as under Common Law generally (so that these findings are largely applicable in all Common Law countries), US authorities from the highest level downwards, financial institutions, intermediaries, Intelligence Power operatives and others are gearing up for what they doubtless hope will be intensified racketeering and trading activity with (corrupt) foreign counterparties.

This behaviour is being fine-tuned ‘as we speak’, despite the reality that the securitisation activity being planned and implemented violates innumerable US statutes in the manner we summarise above, and notwithstanding that such activity is contrary to public policy.

Indeed, it’s as though the Rule of Law did not exist. From the highest level of the US Treasury, the White House, the US State Department and the Central Intelligence Agency and its subsidiaries such as the lethal Office of Naval Intelligence (ONI), the mindset, intention and perverse primary objective has all along been to resume Fraudulent Finance based on securitisation, as quickly and as seamlessly as possible. No wonder the five criminal Presidents DEMANDED immunity from prosecution from the World Bank: did they arrange for key Justices (starting with the American Justice) at the World Court to receive pecuniary reward for granting them their demand?

SUMMARY FORENSIC ANALYSIS PROVING THE ILLEGALITY OF SECURITISATION
From whichever angle securitisation is considered, it is ILLEGAL. For example, the contracts are themselves VOID. This is because the process of securitisation involves several contracts that are either signed simultaneously, or within a short timeframe – many of which are rendered void inter alia because there is no consideration in contracts used in effecting the securitisations.

Many such contracts involve unilateral executory undertakings containing illusory promises. A unilateral executory promise is not a consideration. Such promises typically include a promise made by the Special Purpose Vehicle to pay out periodic interest, whether contingent or non-contingent on whether the collateral pays cash interest.

Collateral-substitution agreements contain a promise whereby the sponsor agrees to substitute impaired collateral. An assignment agreement of future (not yet existing) collateral may well be deemed a unilateral executory promise by the sponsor.

Illusory promises are not valid consideration for a contract. Such promises may be found in the Subscription/Purchase Agreement, whereby an existing asset is being exchanged for a future asset that does not exist as of the date of the subscription/purchase agreement. To make matters worse, none of the agreements typically signed by the investor as part of his/her purchase of the Special Purpose Vehicle’s Asset-Backed Securities expressly incorporates the (typically illusory) promises embodied in the offering prospectus.

OR: The Special Purpose Vehicle’s promise to pay interest and/or dividends on Asset-Backed Securities ‘Interest-Onlys’, Preferreds and ‘Pincipal-Onlys’ are essentially illusory promises because the underlying collateral may not produce any cash flows at all: so there won’t be any interest/dividend payments.

Moreover the lack of mutuality characterising such contracts renders them null and void, by definition. In any such contract, each party must have firm control of the subject matter of the contract and the underlying assets (consideration), and there MUST be a direct contractual relationship between the parties concerned.

But this is not the case, especially as the Special Purpose Vehicle’s corporate documents (trust indentures or bylaws or articles of incorporation) may typically limit the right of each Asset-Back Security investor; while there is typically no mutuality at all between the Special Purpose Vehicle and the sponsor/originator, because both entities are essentially the same, and are controlled by the sponsor before and after the securitisation takes place.

SECURITISATION: A COVER FOR TAX EVASION
In addition to their multiple violations of American State usury laws, all ‘true-sale’, ‘disguised loan’ and ‘assignment securitisations’ are essentially tax evasion arrangements. In the United States, the applicable tax evasion statute is the US Internal Revenue Code Section 7201 7 which reads: “Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution”.

Under this statute and related case law, prosecutors must prove three elements beyond any reasonable doubt:

(1): The actus reus (the guilty conduct) – which consists of an affirmative act (not merely an omission or failure to act) that constitutes evasion or an attempt to evade either: (a) the assessment of a tax or (b) the payment of a tax.

(2): The mens rea or “mental” element of willfulness – the specific intent to violate an actually known legal duty. In the case of ‘true sale’ transactions, the tax evasion occurs because:

(a): The sponsor determines the price at which the collateral is transferred to the SPV, and hence, can arbitrarily lower/increase the price to avoid capital gains taxes – it being assumed here that the sponsor is a profit-maximising entity and will always act to minimise its tax liability and to avoid any tax assessment;

(b): The sponsor typically retains a ‘residual’ interest in the SPV in the form of IOs, POs and “junior piece”, which are typically taxed differently and on a different tax-basis compared with the original collateral: hence, the sponsor can lower the price of the collateral upon transfer to the SPV, and convert what would have been capital gains, into a non-taxable basis in the SPV “residual”;

(c): There is typically the requisite “intent” by the sponsor – evidenced by the arrangement of the transaction and the transfer of assets to the Special Purpose Vehicle;

(d): Before securitisation, collateral is typically reported in the sponsors’ financial statements at book value (that is, lower-of-cost-or-market: under both the US and the international accounting standards, loans and accounts receivable are typically not re-valued to market-value unless there has been some major impairment in value) which does not reflect true Market Values, and results in effective tax evasion on transfer of the collateral to the SPV, as any unrealised gain is not taxed;

(e): The actus reus is manifested by the execution of the securitisation transaction and transfer of assets to the SPV;

(f): The mens rea or specific intent is manifested by the elaborate arrangements implicit in securitisation transactions, the method of determination of the price of the collateral to be transferred to the SPV, the aims of securitisation, and the sponsor’s transfer of assets to the SPV;

(g): The unpaid tax liability consists of foregone tax on the capital gains from the collateral (the transaction is structured to avoid recognition of capital gains), and tax on any income from the collateral which is ‘converted’ into basis or other non-taxable forms;

(h): Income (from the collateral) that would have been taxable in the sponsor’s own financial statements, is converted into non-taxable basis in the form of the SPV’s Interest-Only (IO) and Principal-Only (PO) securities: part of the Interest-Spread (the difference between the SPV’s income and what it pays as interest and operating costs) is paid out to PO-holders, and this transforms interest into return-of-capital or just capital repayment, with no tax consequences. [Leaving aside the Ponzi scam dimension here – Ed.].

In cases of ‘disguised loan’ or ‘assignment’ securitisation transactions, tax evasion occurs:
(a): Because the sponsor determines the price at which the collateral is transferred to the SPV, and hence can lower/increase the price of the collateral to avoid capital gains taxes;

(b): Because the sponsor typically retains a ‘residual’ interest in the SPV which is normally taxed differently and on a different tax-basis compared to the original collateral: hence, the sponsor can lower the price upon transfer to the SPV, and convert what would have been capital gains, into non-taxable basis for tax purposes;

(c): Because the transfer of collateral to the SPV and the creation of Interest-Only and Principal-Only securities converts what would have been taxable capital gains into non-taxable basis;

(d): Because gain in the value of the collateral is not recognised for tax purposes, because there has not been any ‘sale’;

(e): Where the ABS is partly amortising, any capital gains are converted into interest payments;

(f): Because actus reus is manifested by the execution of the securitisation transaction and transfer of assets to the SPV;

(g): Because the mens rea or specific intent is manifested by the elaborate arrangements implicit in securitisation transactions, the objectives of securitisation and the sponsor’s transfer of assets to the Special Purpose Vehicle;

(h): Because the unpaid tax liability consists of tax on the capital gains from the transfer of the collateral (the transaction is structured to avoid recognition of a sale, whereas the transfer to the Special Purpose Vehicle is effectively a sale), and tax on any income from the collateral which is ‘converted’ into basis or other non-taxable forms, by securitisation.

SECURITISATION VIOLATES THE U.S BANKRUPTCY CODE
AND THEREFORE ALSO CONTRAVENES PUBLIC POLICY
Any transfer or conveyance of the assets of a debtor that is deemed to be made for the purposes of hindering, delaying or defrauding actual or potential creditors, may be determined by Courts to be a Fraudulent Conveyance under Section 548 of the US Bankruptcy Code or under a relevant theory of Constructive Fraud.

Although each US State has its own laws regarding the appropriate elements of proof of Constructive Fraud, Section 548(a)(2) of the US Bankruptcy Code permits an inference of Constructive Fraud if the following factors exist:

(1): The debtor received less than reasonably equivalent value for the property transferred; and:

(2): The debtor was insolvent or became insolvent as a result of the transfer, or else retained unreasonably small capital after the transfer, or made the transfer with the intent or belief that it would incur debts beyond its ability to pay.

The following theories of Fraudulent Conveyance within the context of securitisation may apply:

• Where the sponsor/originator receives insufficient value for assets transferred.

• Where there is an ‘intent to hinder, delay or defraud’ creditors (representing an implicit pre-petition waiver of one’s right to file for bankruptcy), with regard to the originator’s transfer of assets to the SPV, or the originator’s transfer of assets to the SPV has clearly not been undertaken on an arms’-length basis.

• Where securitisation increases the originator’s bankruptcy risk; and:

• In all instances where securitisation usurps the United States’ bankruptcy laws and is therefore illegal on such a basis alone.

SECURITISATION VIOLATES FEDERAL R.I.C.O. STATUTES
Turning now to the reality that securitisation constitutes a violation of US Federal R.I.C.O. Statutes [see Legal Notes below], we can state without equivocation that the entire securitisation process constitutes violations of Federal R.I.C.O. statutes, because:

(1): There is the requisite criminal or civil ‘enterprise’ – consisting of the sponsor/issuer, the trustees and the intermediary bank. These three parties work closely together to effect the securitisation transaction.

(2): There are ‘predicate acts’ of:

(a): Mail fraud – using the mails for sending out materials among themselves and to investors.

(b): Wire fraud – using wires to engage in fraud by communicating with investors.

( c): Conversion – where there isn’t proper title to collateral.

(d): Deceit: misrepresentation of issues and facts pertaining to the securitisation transaction.

(e): Securities fraud: disclosure issues.

(f): It entails loss of profit opportunity.

(g): It involves the making of false statements and or misleading representations about the value of the collateral.

(h): It entails stripping the originator/issuer of the ability to pay debt claims or judgment claims in bankruptcy court – a state of affairs that may apply where the sponsor is financially distressed and the cash proceeds of the transaction are significantly less than the value of the collateral.

There is also typically the requisite ‘intent’ by members of the enterprise – evident in knowledge (actual and inferable), acts, omissions, purpose (actual and inferable) and results. Intent can be reasonably inferred from:

(a): The existence of a sponsor that seeks to raise capital – and cannot raise capital on better terms by other means;

(b): The participation of an investment bank that has very strong incentives to consummate the transaction on any agreeable (but not necessarily reasonable) terms.

SECURITISATION ALSO VIOLATES U.S. ANTITRUST LEGISLATION
Securitisation further constitutes violations of US Antitrust laws, because the American Asset-Backed Securities and Mortgage-Backed Securities markets are dominated by relatively few large entities such as FNMA (Fannie Mae), Freddie Mac, the top five investment banks (all of which have conduit programs), and the top five credit card issuers (MBNA, AMEX, Citigroup, etc.), etc.. As a consequence, the top five ABS/MBS issuers control more than 50% of the US ABS/MBS market. This constitutes illegal market concentration under US Antitrust legislation.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud Tagged: assignment, Charles Cox, Christopher Story, conversion, disguised loan, Economic Intelligence Review, fraud, RICO, Securitisation, securitization, tax evasion, true sale, usury

Jan

Loan Modification Efforts in Opposition to Securitization Trusts

By LH | Bankruptcy, Featured, Loan Modification

3313 Comments2009-01-26+19%3A42%3A54LH

The major issue affecting/preventing voluntary loan modification is “securitization”. Nearly all residential loans since the late 1990′s have been securitized. Understanding the securitization process is key to understanding why most efforts at mortgage modification will inevitably fail and why the proposed bankruptcy modification presents the only sure method of preventing foreclosures for those homeowners that can afford a reasonable monthly payment still.

Securitization transactions are technical, complex deals, but the crux of the process is simple. A financial institution owns a pool of mortgage loans, which it either funded itself or purchased from other institutions or mortgage banking companies. Rather than hold these mortgages (ie. loans) (and the affiliated risk) on its own books, it sells them to a specially created entity, called a Special Purpose Vehicle (SPV), which is typically a trust . The trust pays for the mortgage loans by issuing bonds. The bonds are collateralized (backed) by the loans now owned by the trust. These bonds are so-called mortgage¬backed securities (MBS).

Because the trust is simply a “vehicle” to hold the loans and put them beyond the reach of the financial institution’s creditors, a third-party must be brought in to manage the loans. This third-party is called a Master Servicer or servicer. The servicer manages the loans for the benefit of the MBS holders. The servicer performs the day-to-day tasks related to the mortgages owned by the SPV, such as collecting mortgage and escrow payments, disbursing payments for taxes and insurance, handling paperwork, foreclosing, and selling foreclosed properties. These servicers are the entities that actually consider loan modification requests. They are the ones a customer calls when they have a question about their loan. They do not own the loans, they simply “service” the loan as an agent for the SPV.

One thing that confuses the consumer/homeowner is that the servicer is often, but not always, a corporate affiliate of originator; most of the major servicers are subsidiaries of bank holding companies: Countrywide Home Loans (Bank of America); CitiMortgage and CitiFinancial (Citigroup); Select Portfolio Servicing (Credit Suisse); Litton Loan Servicing LP (Goldman Sachs); Chase Home Finance and EMC Mortgage (JPMorgan Chase); Wilshire Credit (Merrill Lynch); Wells Fargo Home Mortgage and Homeq Servicing (Wells Fargo).

“Securitization creates numerous obstacles to voluntary loan modifications, but they may be reduced to three broad categories: contractual, practical, and economic.

Securitization Creates Contractual Limitations on Private Mortgage Modification

These limitations cannot be bypassed except through bankruptcy modification or a taking of MBS holders’ property rights.

Servicers carry out their duties according to what is specified in their contract with the SPV. This contract is known as a “pooling and servicing agreement” or PSA. Although the decision to modify mortgages held by an SPV sits with the servicer, and servicers are instructed to manage loans as if for their own account, PSAs often place restrictions on servicers’ ability to modify mortgages. Almost all PSAs restrict modifications to loans that are in default or where default is imminent or reasonably foreseeable in order to protect the SPV’s pass-thru REMIC tax and off-balance sheet accounting status.

PSAs often further restrict modifications: sometimes the modification is forbidden outright, sometimes only certain types of modifications are permitted, and sometimes the total number of loans that can be modified is capped (typically at 5% of the pool). Additionally, servicers are frequently required to purchase any loans they modify at the face value outstanding (or even with a premium). This functions as an anti¬modification provision.

No one has a firm sense of the frequency of contractual limitations to modification for residential MBS (RMBS). A small and unrepresentative sampling by Credit Suisse indicates that almost 40% of RMBS PSAs have limitations on loan modification beyond a near universal requirement that the loan be in default or imminently defaulting before it may be modified. The Credit Suisse study, however, did not track all types of modification restrictions, such as face-value repurchase provisions, so the true number of restrictive PSAs is likely higher. Nonetheless, there are still a large number of homeowners whose mortgages are held by securitization trusts with restrictive PSAs. This includes both private-label securitizations and GSE securitizations; some Fannie Mae securitizations, for example, prohibit any reductions in either principal or interest rates.

It is virtually impossible to change the terms of a restrictive PSA in order to allow the servicer greater freedom to engage in modifications. The PSA is part of the indenture under which the MBS are issued. Under the Trust Indenture Act of 1939, the consent of 100% of the MBS holders is needed in order to alter the PSA in a manner that would affects the MBS’ cashflow, as any change to the PSA’s modification rules would.

Practically speaking, it is impossible to gather up 100% of any MBS issue. There can be thousands of MBS certificates from a single pool and these certificate holders might be dispersed world-wide. The problem is exacerbated by collateralized mortgage obligations (CMOs), second mortgages, and mortgage insurance. MBS issued by an SPV are typically tranched-divided into different payment priority tiers, each of which will have a different dividend rate and a different credit rating. Because the riskier tranches are not investment grade, they cannot be sold to entities like pension plans and mutual funds. Therefore, they are often resecuritized into what are known as CMOs. A CMO is a securitization in which the assets backing the securities are themselves mortgage¬backed securities rather than the underlying mortgages. CMOs are themselves then tranched, and the senior tranches can receive investment grade ratings, making it possible to sell them to major institutional investors. The non-investment grade components of CMOs can themselves be resecuritized once again into what are known as CM02s. This process can be repeated, of course, an endless number of times.

The upshot of this financial alchemy is that to control 100% of an MBS issuance in order to alter a PSA, one would also have to own 100% of multiple CMOs to alter the
CMOs’ PSAs and of multiple CMOs to alter the CMO’s PSAs. .

The impossibility of modifying PSAs to permit modification on a wide scale is further complicated because many homeowners have more than one mortgage. Even if the mortgages are from the same lender, they are often securitized separately. If a homeowner is in default on two or three mortgages it is not enough to reassemble the MBS pieces to permit a modification of one of the mortgages. Modification of the senior mortgage alone only helps the junior mortgage holders, not the homeowner. In order for a loan modification to be effective for the first mortgage, it is necessary to also modify the junior mortgages, which means going through the same process. This process is complicated because senior lenders frequently do not know about the existence of the junior lien on the property.

A further complication comes from insurance. An SPV’s income can exceed the coupons it must pay certificate holders. The residual value of the SPV after the certificate holders are paid is called the Net Interest Margin (NIM). The NIM is typically resecuritized separately into an NIM security (NIMS), and the NIMS is insured by a financial institution. This NIMS insurer holds a position similar to an equity holder for the SPV. The NIMS insurer’s consent is thus typically required both for modifications to PSAs and modifications to the underlying mortgages beyond limited thresholds. NIMS insurers’ financial positions are very similar to out-of-the-money junior mortgagees¬they are unlikely to cooperate absent a payout because they have nothing to lose.

Thus, the contractual structure of securitization creates insurmountable obstacles to voluntary, private modifications of distressed and defaulted mortgages, even if that would be the most efficient outcome.”

Part of this post comes from the Testimony of Adam J. Levitin
Professor Georgetown University Law Center
“Helping Families Save Their Homes: The Role of Bankruptcy Law”
Senate Judiciary Committee, November 19, 2008

Jan

Banks, Bailout and Billions – The ins & outs of "Securitization"

By LH | Bank/Lender Failures, Corporate Greed & Corruption, Foreclosure Defense Research, Government, Homeowner Resources

731 Comment2009-01-11+03%3A19%3A59LH

Ok, so let’s break this down a bit because the pundits and the politicians are each spinning this in their own direction and one has to have some serious fog lights to eat through the “haze” that these guys spin in. Throw in the fact that no one is really exposing the REAL issues here to see if the actual bailout plan will truly deal with the real issues.

First, we need something to be done. Let’s get past this. It is true our entire financial sector is going through the dry heaves here as there’s not much more it can throw up. The entire financial system is starting to seize up and the constant coverage on these issues is pumping fear into the system and the heart of every American and even the foreign markets. So, if we can all agree that all of us losing our pensions, retirement funds, stocks, money market funds, and more home value is not a good thing then we can move on to what the solution should look like fundamentally because we do need a big solution to right the ship.

To start, one must have a basic understanding of the root of the problem. Yep, you guessed it, the mortgage meltdown which has led to the foreclosure crisis. Financial institutions, mainly the largest banks and investment banks on Wall Street are essentially holding large pools of residential and commercial loans (notes and corresponding mortgages) that are, for all intents and purposes, worthless – right now. Worthless because they cannot find a buyer for these notes (loans) with the current state of affairs. We all know that these “assets” are worth something and probably a lot more than just “something” BUT, if you can’t find a buyer then it’s really hard to place any real value on them currently. The assets are literally “backed” by mortgages and, ultimately, the real estate they’re tied to. We know the homes are worth something. That’s obvious.

Without getting into a lot of complicated explanations, this is the root of the problem. Now, you need to understand the process of the mortgage market because this is EXTREMELY important in the entire crisis. Almost 100% of all residential and commercial loans made since the late ’90′s were made by a “bank” or “lender.” Almost immediately after closing (and often before closing), these lenders sold these loans in “pools” to an “aggregator” of loans. Ok, a little glossary break down here. A pool of loans is two or more loans combined into a package. Smaller lenders might sell a package or pool of 50-100 loans to larger lender. The larger lender might buy 30 pools of 100 loans from 30 different smaller lenders. Now they have 3000 loans that they pool together into one big pool. You with me so far???

Ok, next here’s what happens… a larger bank (Chase, Countrywide, Wachovia, GMAC, Homecomings Financial, Fremont, Option One, etc) then sells these 3000 loans to another entity. This “other” entity is often a subsidiary but sometimes not and this other entity is a “Sponsor” and usually a “Master Servicer” entity. This means that this company is going to be the servicer of these loans. A servicer is the company that is going to collect the monthly payments, manage the escrow accounts, etc. Now, most people think that this is who they owe the money to for the loan they have because they received that notice about 60 days after closing notifying them that the “Servicing” of their loans was being transferred to XYZ Company. Because they make the payments to this servicer they automatically assume that this is now their “lender.” Remember when I just said that these large pools are usually sold to subsidiaries of the large banks? Well, it’s no wonder that these Master Servicing companies have highly similar names. What’s the difference between “America’s Wholesale Lender” and “Countrywide Home Loans, Inc.?” Well, a lot and very little. Both do business as “Countrywide.” One is a lender and one is a Master Servicer. Confusing? Yes. Purposefully? Yes. If there is confusion in Wall Street, it’s on purpose because these guys aren’t “stupid.” Stay with me here…

So here’s what happens to this pool of 3000 loans. The Master Servicer then sells these same 3000 loans to a “Depositor.” What really and actually happens is a bona fide sale of all of these loans. Now, here’s an EXTREMELY important point, pay attention right here. When a “loan” is sold, what is really sold is the “Note.” The Note is sometimes called the “Promissory Note.” The Note is the only and real evidence of the debt. The ORIGINAL Note that is. That’s why you’ll sometimes here this called “selling the paper.” The paper debt, the NOTE, is the debt and has an actual value because you, the homeowner and borrower, have signed that note with your signature and pledged (promised) to pay that debt back. The MORTGAGE is what you give to the original lender (and any subsequent purchase of the Note) as “security” in case you don’t pay the debt back. The mortgage gives the owner of that Note the security (the home or property) and thus the right to foreclose if you don’t pay it back.

Now, this is important… the Mortgage doesn’t give just <i>anyone</i> the right to foreclose, It gives the actual OWNER of the Note the right to foreclose. The owner of the actual and original Note. Not a copy of the Note but the ORIGINAL note. This is a very important point that must be understood and grasped, by everyone, including the US Government. I think that it’s highly possible that this bailout package might be relieving financial institutions of defaulted debt even thought that same institution may not even have the actual Notes to evidence the defaulted debt. And, is it really defaulted? How do we know that these entities weren’t already paid for these Notes? It depends on exactly WHO they are bailing out but if it’s any entity other than the Trust, those entities have already been paid for the Notes!

Back to this pool of 3000 loans… so the Master Servicer has sold the 3000 loans to a Depositor for about 102.5% of the face value of these Notes. When a sale of these 3000 loans is made, the Depositor literally pays the seller of the loans a lump sum of money and the Master Servicer in turn hands over the Notes for that payment of money. And then this same Depositor sells the 3000 loans to a Trust and “deposits” (hence the name “Depositor”) these Notes into the Trust. The Trust pays the Depositor a lump sum of money and in return receives the Notes. The Master Servicer or “Servicer” gives the Notes, receives a lump sum payment and then promises to “pay” the trust a monthly payment on the money that the Trust paid it. This large monthly payment to the Trust is usually guaranteed by the Servicer and is an aggregate or sum of all of the individual 3000 borrowers who paid their monthly payment to that Servicer. The servicer collects all of those monthly payments, takes off their fees, disburses some of it to escrow accounts, etc. and then makes the payments to the Trust. The Servicers also have multiple layers of insurance that insure them against borrower defaults because the Servicers do in fact make representations and warranties on the monthly payments to the Trust that really owns these Notes.

This whole process is called “Securitization.” This is a simplified explanation of what happens. Through this Securitization process, these Notes are packaged into what’s called “Asset Backed Securities” or “Mortgage Backed Securities” in what’s called a CDO (Collaterlized Debt Obligation) and are sometimes called ABS or MBS Pools. The Depositor creates something called a “Special Purpose Vehicle” (SPV) to deposit these Notes into the SPV and then these Notes are sold and deposited into the Trust. The Trust is owned by all sorts of investors, individual and companies, pension funds, foreign investors. etc. They collectively own these Trusts. A “Trustee” acts as an Agent for the Trust and on behalf of the Trust in a fiduciary relationship.

So, now that you’re a securitization guru, let’s get the rubber to meet the road in all of this.

Here’s the real rub. I told you that, legally speaking, the only evidence of this debt (the loan) is the actual and original Note; and this makes sense! If not, anyone could create a Note, get a copy of your signature (which they can get in public records on the mortgage you signed and was subsequently recorded in public records), paste it on that created Note and allege that you owe them this money. Also, because this Note is changing hands some 3-6 times in the securitization process, everyone touching it can create a copy and allege you owe them the money even though they’ve already sold the original Note and have been paid for it by the new buyer! Just like a personal check, the Note has to be “Endorsed” to the new buyer of the Note by the Seller of that Note. They literally need to stamp on the last page of the Note, “Pay to the Order of Without Recourse” and then stamp or write in the name of the new buyer. On a bona fide Note, this is EXACTLY what you will see and find. Everytime this Note changes hands, it needs an actual endorsement.

So here’s what literally happening with ALL of these foreclosures… the Trusts are the actual owners of the majority of all of these Notes. Yes, the Trusts. A trust has a funky name such as Harborview Mortgage Loan Trust 2006-5 or Meritage Loan Trust 2007-2. There’s no such Trust named Countrywide Home Loans or Chevy Chase Bank or Citimortgage or GMAC Mortgage Co. or Residential Funding Corporation or Amtrust Bank or Fremont Investment and Loan or Option One Mortgage Co. – you get the point. All of these entities are either lenders or servicers. Period. They are NOT the Trusts that your loan and everyone’s loans were sold to. Don’t let anyone fool you. Over 98% of all loans made since 2000 were securitized in just the fashion I described above.

Now, I can only speak to the 100 or so foreclosure cases I have personally read the complaints on in Florida and a few in Ohio. In 100% of these foreclosure cases, the suit is being brought NOT by the Trust but by the servicer or the trustee. Both of these entities are agents for the Trust but they are NOT the owners of these Notes unless they show that they re-purchased that Note from the Trust. In about 70% of the foreclosure cases we have seen, the Plaintiff (usually the servicer) is also alleging that they have LOST THE NOTE or that is has been destroyed. No, that was NOT a typo or mistake. Well, if the Note is actually lost, they don’t have any actual evidence of the debt anymore.

So here’s the question to start asking your Congressman or Congresswoman, your State Senators, your Governor and every other politician that has any influence and may want to be re-elected… if the Federal Government is going to buy all of these non-performing or defaulted loans (ie. Notes), who are they actually going to buy them from? The Trusts or the Servicers?

And, if they can actually tell us this in plain language, are they actually going to buy the original Notes? Not a copy and not some affidavit from some $15/hour employee who is swearing that they saw the original note before it was actually lost or destroyed but the original Note?

I’m not kidding here. I’m seeing 70% of the cases allege a Lost Note! When they produce the Note, what this Servicer alleges is the original note is, in fact, only a COPY of the note and is NOT the original. Want to know how I know it’s NOT the original?

This is easy folks. The entire securitization process that any and all Notes are involved is and must be disclosed in filings with the SEC. Yes, every Note is involved a securitization. And this MUST be filed with the SEC. And in these filings with the SEC, these companies MUST disclose all of the parties involved in that process and what that “chain” of securitization actually follows. That chain MUST be evidenced on every single Note on the last page of that Note in the form of an endorsement. “Pay to the order of…” Every Note should have at a minimum of 2 endorsements and more likely, 4-5 endorsements. If a Servicer or an attorney for that Lender or Servicer produces a copy of a Note that they allege is the original Note, all one needs to do is look for those endorsements. If the endorsements don’t follow EXACTLY what they have already filed with the SEC, they got real problems folks. Either they are lying to the court (called fraud) or that Note is faulty in that the proper endorsements aren’t there and most likely, both are real legal issues.

Also, in these foreclosure cases, the Plaintiff (a Servicer or Trustee) is actually alleging that they have the RIGHT to foreclose and that they are the <u>owner and holder of the Note</u> (which gives rise to the right to foreclose). Now, us folks and attorneys who are wise to this charade know that they are NOT the owner of these Notes because they actually disclose these facts right in their SEC filings! But no judge in this country is going to or has the time to go and do fact checking on these issues and hold these Plaintiffs accountable to what they are alleging in their foreclosure lawsuits. 98% of all foreclosure filings go uncontested by the borrower. This means that 98% of the time, the foreclosure process is nothing more than a rubber stamp process with judges defaulting borrowers who don’t show up to defend themselves. The Servicing companies are getting away with highway robbery – rather, home robbery. Yes, this is happening. Entities like large banks and servicing companies are taking the homes of hard-working citizens and they do NOT own the mortgages or notes secured by that home. Yes, these homeowners owe the money to someone but that someone is NOT the actual owner of that Note. And, if I’m the homeowner, I’d like the opportunity to have a meaningful chance to work something out with the real owner. Because what happens in foreclosures is that the wrongful party gets the home in a foreclosure sale, puts it back on the market for sale and sells it for about 80-90% of its CURRENT VALUE! Now, why not keep that same homeowner in the house and let them pay 80-90% of it’s current value??? Heck, make it 100% of current value. Granted this won’t work 100% of the time but I’m betting at least 50% of the time and probably closer to 70% is realistic. We have large financial institutions wrongfully foreclosing, kicking people out of their flippin homes and flipping those homes to someone else for a bargain while the hard working homeowner goes down the block to rent another foreclosed home from an institution that wrongfully kicked that homeowner out most likely! What the heck is wrong with us folks? We gotta take stand on this. This is the definition of absurdity ten times over!

So, to bring this full circle in relation to the latest talk of Banks, Bailout and the 700 Billion to do it, I want to know exactly what our taxpayer dollars are actually going to buy? I think we have the right to know this. I want to make sure that the Federal Gov’t is going to buy actual Notes and yes, the originals, not some fraudulent copy. I don’t trust one of these banks… These guys have bilked billions out of us and after what I have seen in what they file, what they are alleging in these foreclosures, etc. I put nothing past them including purposefully “losing” notes so that they can sell them multiple times to multiple Trusts or investors. And now they’re whining for a bailout to the madness they’ve brought on us all. I can’t tell you how many people I’ve talked to that have tried desperately and in good faith to work something out with these thieves and they don’t even answer the phone! You wait on hold for 30 minutes to talk to someone half way around the world who tells you to fill out 10 pages of information, fax it in and someone will get back to you – which never happens!!!

Folks, knowledge of these facts and issues is what we all need to make sure we can and do hold our government and these politicians to some sort of order and accountability before we just bail out one more flippin company!

Hope this helps educate you on the real happenings in this big convoluted mess we’re all in. If nothing else, you can now impress your cohorts at the water cooler with some sophisiticated mortgage speak.

Lane Houk

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