A Foreclosure Judgment and Sale is a Forced Assignment Against the Interests of Investors and For the Interests of the Bank Intermediaries

For more information on foreclosure offense, expert witness consultations and foreclosure defense please call 954-495-9867 or 520-405-1688. We offer litigation support in all 50 states to attorneys. We refer new clients without a referral fee or co-counsel fee unless we are retained for litigation support. Bankruptcy lawyers take note: Don’t be too quick admit the loan exists nor that a default occurred and especially don’t admit the loan is secured. FREE INFORMATION, ARTICLES AND FORMS CAN BE FOUND ON LEFT SIDE OF THE BLOG. Consultations available by appointment in person, by Skype and by phone.

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Successfully hoodwinking a Judge into entering a Judgment of Foreclosure and forcing the sale of a homeowner’s property has the effect of transferring the loss on that loan from the securities broker and its co-venturers to the Pension Fund that gave the money to the securities broker. Up until the moment of the foreclosure, the loss will fall on the securities brokers for damages, refunds etc. Once foreclosure is entered it sets in motion a legal cascade that protects the securities broker from further claims for fraud against the investors, insurers, and guarantors.

The securities broker was thought to be turning over the proceeds to the Trust which issued bonds in an IPO. Instead the securities broker used the money for purposes and in ways that were — according to the pleadings of the investors, the government, guarantors, and insurers — FRAUDULENT. Besides raising the issue of unclean hands, these facts eviscerate the legal enforcement of loan documents that were, according to those same parties, fraudulent, unenforceable and subject to claims for damages and punitive damages from borrowers.

There is a difference between documents that talk about a transaction and the transaction documents themselves. That is the essence of the fraud perpetrated by the banks in most of the foreclosure actions that I have reviewed. The documents that talk about a transaction are referring to a transaction that never existed. Documents that “talk about” a transaction include a note, mortgage, assignment, power of attorney etc. Documents that ARE the transaction documents include the actual evidence of actual payments like a wire transfer or canceled check and the actual evidence of delivery of the loan documents — like Fedex receipts or other form of correspondence showing that the recipient was (a) the right recipient and (b) actually received the documents.

The actual movement of the actual money and actual Transaction Documents has been shrouded in secrecy since this mortgage mess began. It is time to come clean.

THE REAL DEBT: The real debt does NOT arise unless someone gets something from someone else that is legally recognized as “value” or consideration. Upon receipt of that, the recipient now owes a duty to the party who gave that “something” to him or her. In this case, it is simple. If you give money to someone, it is presumed that a debt arises to pay it back — to the person who loaned it to you. What has happened here is that the real debt arose by operation of common law (and in some cases statutory law) when the borrower received the money or the money was used, with his consent, for his benefit. Now he owes the money back. And he owes it to the party whose money was used to fund the loan transaction — not the party on paperwork that “talks about” the transaction.

The implied ratification that is being used in the courts is wrong. The investors not only deny the validity of the loan transactions with homeowners, but they have sued the securities brokers for fraud (not just breach of contract) and they have received considerable sums of money in settlement of their claims. How those settlement effect the balance owed by the debtor is unclear — but it certainly introduces the concept that damages have been mitigated, and the predatory loan practices and appraisal fraud at closing might entitle the borrowers to a piece of those settlements — probably in the form of a credit against the amount owed.

Thus when demand is made to see the actual transaction documents, like a canceled check or wire transfer receipt, the banks fight it tooth and nail. When I represented banks and foreclosures, if the defendant challenged whether or not there was a transaction and if it was properly done, I would immediately submit the affidavits real witnesses with real knowledge of the transaction and absolute proof with a copy of a canceled check, wire transfer receipt or deposit into the borrowers account. The dispute would be over. There would be nothing to litigate.

There is no question in my mind that the banks are afraid of the question of payment and delivery. With increasing frequency, I am advised of confidential settlements where the homeowner’s attorney was relentless in pursuing the truth about the loan, the ownership (of the DEBT, not the “note” which is supposed to be ONLY evidence of the debt) and the balance. The problem is that none of the parties in the “chain” ever paid a dime (except in fees) and none of them ever received delivery of closing documents. This is corroborated by the absence of the Depositor and Custodian in the “chain”.

The plain truth is that the securities broker took money from the investor/lender and instead of of delivering the proceeds to the Trust (I.e, lending the money to the Trust), the securities broker set up an elaborate scheme of loaning the money directly to borrowers. So they diverted money from the Trust to the borrower’s closing table. Then they diverted title to the loan from the investor/lenders to a controlled entity of the securities broker.

The actual lender is left with virtually no proof of the loan. The note and mortgage is been made out in favor of an entity that was never disclosed to the investor and would never have been approved by the investor is the fund manager of the pension fund had been advised of the actual way in which the money of the pension fund had been channeled into mortgage originations and mortgage acquisitions.

Since the prospectus and the pooling and servicing agreement both rule out the right of the investors and the Trustee from inquiring into the status of the loans or the the “portfolio” (which is nonexistent),  it is a perfect storm for moral hazard.  The securities broker is left with unbridled ability to do anything it wants with the money received from the investor without the investor ever knowing what happened.

Hence the focal point for our purposes is the negligence or intentional act of the closing agent in receiving money from one actual lender who was undisclosed and then applying it to closing documents with a pretender lender who was a controlled entity of the securities broker.  So what you have here is an undisclosed lender who is involuntarily lending money directly a homeowner purchase or refinance a home. The trust is ignored  an obviously the terms of the trust are avoided and ignored. The REMIC Trust is unfunded and essentially without a trustee —  and none of the transactions contemplated in the prospectus and pooling and servicing agreement ever occurred.

The final judgment of foreclosure forces the “assignment” into a “trust” that was unfunded, didn’t have a Trustee with any real powers, and didn’t ever get delivery of the closing documents to the Depositor or Custodian. This results in forcing a bad loan into the trust, which presumably enables the broker to force the loss from the bad loans onto the investors. They also lose their REMIC status which means that the Trust is operating outside the 90 day cutoff period. So the Trust now has a taxable event instead of being treated as a conduit like a Subchapter S corporation. This creates double taxation for the investor/lenders.

The forced “purchase” of the REMIC Trust takes place without notice to the investors or the Trust as to the conflict of interest between the Servicers, securities brokers and other co-venturers. The foreclosure is pushed through even when there is a credible offer of modification from the borrower that would allow the investor to recover perhaps as much as 1000% of the amount reported as final proceeds on liquidation of the REO property.

So one of the big questions that goes unanswered as yet, is why are the investor/lenders not given notice and an opportunity to be heard when the real impact of the foreclosure only effects them and does not effect the intermediaries, whose interests are separate and apart from the debt that arose when the borrower received the money from the investor/lender?

The only parties that benefit from a foreclosure sale are the ones actively pursuing the foreclosure who of course receive fees that are disproportional to the effort, but more importantly the securities broker closes the door on potential liability for refunds, repurchases, damages to be paid from fraud claims from investors, guarantors and other parties and even punitive damages arising out of the multiple sales of the same asset to different parties.

If the current servicers were removed, since they have no actual authority anyway (The trust was ignored so the authority arising from the trust must be ignored), foreclosures would virtually end. Nearly all cases would be settled on one set of terms or another, enabling the investors to recover far more money (even though they are legally unsecured) than what the current “intermediaries” are giving them.

If this narrative gets out into the mainstream, the foreclosing parties would be screwed. It would show that they have no right to foreclosure based upon a voidable mortgage securing a void promissory note. I received many calls last week applauding the articles I wrote last week explaining the securitization process — in concept, as it was written and how it operated in the real world ignoring the REMIC Trust entity. This is an attack on any claim the forecloser makes to having the rights to enforce — which can only come from a party who does have the right to enforce.

see http://livinglies.wordpress.com/2014/09/10/securitization-for-lawyers-conflicts-between-reality-the-documents-and-the-concept/

Securitization for Lawyers: Conflicts between reality, the documents and the concept.

For more information on foreclosure offense, expert witness consultations and foreclosure defense please call 954-495-9867 or 520-405-1688. We offer litigation support in all 50 states to attorneys. We refer new clients without a referral fee or co-counsel fee unless we are retained for litigation support. Bankruptcy lawyers take note: Don’t be too quick admit the loan exists nor that a default occurred and especially don’t admit the loan is secured. FREE INFORMATION, ARTICLES AND FORMS CAN BE FOUND ON LEFT SIDE OF THE BLOG. Consultations available by appointment in person, by Skype and by phone.

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Editor’s Note: The solution is obvious. Remove the servicers, Trustees and other “collection” entities from the situation. Those entities have been working against investors, lenders, the Trusts, and borrowers from the start. They continue to obstruct settlements and modifications because they have substantial liability for performing loans.

Their best strategy is to create the illusion of defaults even when the creditor has been paid in full.

Our best strategy is to remove them from the mix. And then let the chips fall. Since they ignored the PSA they are not authorized to act anyway.

For those who are religious about free market forces, this should be appealing inasmuch as it lets the marketplace function without being hijacked by players who illegally cornered the marketplace in finance, currency and economic activity. — Neil Garfield, livinglies.me

Continuing with my article THE CONCEPT OF SECURITIZATION, and my subsequent article How Securitization Was Written by Wall Street, we continue now with the reality. What we find is predictable conflict arising out of the intentional ambiguity and vagueness of the securitization documents (Prospectus, Pooling and Servicing Agreement, Assignment and Assumption Agreement etc.). The conclusion I reach is that the Banks gambled on their ability to confuse lender/investors, borrowers, regulators, the rating agencies, the insurers, guarantors, counterparties to credit default swaps, the courts and the gamble has paid off, thus far.

THE ECONOMICS OF TOXIC WASTE MORTGAGE LOANS

It is easy to get lost in the maze of documents and transactional analysis. The simple fact is that the banks wanted to make more risky loans than the less risky loans that always worked but gave them only a sliver of the potential profit they would make if they threw their status and reputations to the wind. If they could cash in on the element of “trust” and that people would rather keep their money in a bank than under their mattress there was literally no end to the amount of money they could make. They could even use their hundred year old brand names to create the illusion that THEY would never do something as stupid as what I am about to show you:

  1. To make things simple assume that a pension fund has $1,000 that the fund manager wishes to invest in a low risk “investment.”
  2. Assume that the fund manager wants a 5% return on investment (ROI)
  3. That means of course that the fund manager expects to get his money back ($1,000) PLUS $50 per year (5% of $1,000 invested).
  4. So the fund manager calls one of his “trusted” brokers and tells the broker what the pension is looking for as a return.
  5. The broker tells the fund manager that there is an investment that qualifies.
  6. The fund manager sends the $1,000 from the pension fund to the broker.
  7. The broker lends 25% or $250 out of the $1,000, or so it seems, for interest at 5%, as demanded by the fund manager. It looks good enough that the fund manager wants to give the broker more money.
  8. The fund manager gets deposits of $50 per year and is quite happy.
  9. Skipping a few steps assume that the pension fund has been happily buying into this “investment” for a while.
  10. But the broker takes the next $1,000 and lends out only $500 at 10%, yielding a rate of return of 10% or $50. Oddly, the dollar return is exactly what the fund manager is expecting — $50 per year for each thousand invested.
  11. But the “investment” is only $500.
  12. So the broker forms a series of companies and has his “proprietary trading desk” execute a transaction in which the $500 loan is sold to the pension fund for $1,000. No money exchanges hands because the broker has already “invested” the money for his own purposes. Neither the pension fund nor the Trust gets anything from the broker-controlled entity that “sold” the loan that in many cases had not even been yet originated!
  13. The pension fund’s money is traveling a road very different than the one portrayed in the Prospectus and the Pooling and Servicing agreement. That pension money was used to originate most of the loans without even the originator knowing it. Unknown to the pension fund the pension money was sued to fund origination and acquisition of loans; this is opposite to the apparent IPO scenario where the Trust issued “mortgage-backed bonds” that the lender/investors thought they were buying. The transaction between the REMIC Trust and the pension fund was never completed. The REMIC Trust is left unfunded and the contract documents for the formation and operation of the REMIC Trust were completely ignored in reality, while the illusion was created that the REMIC Trusts (completely controlled by the broker who “sold” the “bonds”) were operating with the money from the pension fund.
  14. It is the money of the pension fund that appears at closing, having been sent there by the broker. The only lender is the pension fund and the only debt is between the homeowner and the pension fund. But that loan is never documented and that is how the brokers get to claim almost anything. They are quintessential pretender lenders operating through a veil of cloaks and curtains and peculiarly NOT branding the product because they knew it was beyond wrong. It was probably criminal.
  15. This evens things out — the fund manager sees his $1,000 “invested” and the return of $50 per year. So the fund manager is clueless as to what is happening. The fund manager does not realize that the pension fund is the direct creditor of the debtor/homeowner.
  16. Now assume that the “investment” is a bond issued by a trust that will loan money or acquire loans.
  17. That means the “sale” transaction is between the Trust created and controlled by the broker and the company that is created and controlled by the broker to loan the money. This trade occurs at the proprietary trading desk of the broker. It shows up as a sale between the Trust and, for example, Countrywide. Countrywide gets no money and delivers no documents. The Trust pays no money nor receives any documents (note or mortgage). The “depositor” for the Trust is left out of all transactions.
  18. And THAT means the broker can declare a “profit” from his proprietary trading desk of $500 — because he only loaned $500 and the pension fund gave him $1,000. That leaves $500 of uninvested capital that the broker converts to “profit” at the broker’s trading desk.
  19. The broker knows that the $500 loan is priced at 10% interest because there is a substantial likelihood that the borrower will default. The higher the risk, the higher the interest rate. Nobody would question that. This gives the broker a chance to “bet” on the failure of the loans and the consequent failure of “bonds” that derived their value from the nonexistent assets of the Trust. Frequently at “closing” the title and liability insurance names a payee other than the originator — maintaining the distance between the originator and the closing.
  20. Getting insurance and credit default swaps is difficult because of the higher risk. So the broker buys a credit default swap from another Trust he has created where the loans are conventional 5% loans. This is the conventional loan Trust, which is also probably mostly unfunded. The sale of the swap actually means that the conventional loan trust has agreed to buy the toxic loan Trust “assets” (which do not exist) if there are a sufficient number of defaults on loans on the list for that toxic waste Trust.
  21. This means that the Trust “selling” the credit default swap will make up for losses in the toxic waste trust containing loans at interest rates of 10% or higher.
  22. When the Trust with the 10% loans goes up in smoke because the loans fail at predictable rates, the conventional Trust is on the hook to bail out the toxic waste trust.
  23. The bailout virtually bankrupts the conventional trust. Both the toxic waste trust and the conventional trust have been essentially wiped out. But the pension fund continues to receive payments as long as the broker can maintain the illusion — a device created as “servicer advances” so that the pension fund will continue to buy more of these bonds which were sold as loans to the Trust.
  24. This causes a “credit event” which the broker declares and sends to the insurance company that insured the risk on the conventional loan trust. The insurer (AIG, AMBAC etc) pays the loss declared by the broker as “Master Servicer”. This further enhances the illusion that the Trust was funded and that the bonds were in fact sold and issued by the Trust in exchange for the investment by the pension fund.
  25. The losses in the toxic waste trust are covered by the credit default swap with the conventional loan trust, and the losses in the conventional loan trust are covered by insurance.
  26. When the borrower in the toxic waste trust finally stops paying, the broker orders the servicer to declare a default and foreclose. The “default” is declared based upon the provisions of the note executed at the borrower’s loan closing. But the note is evidence of a loan that does not exist — i.e., a loan by the originator to the borrower. And the mortgage therefore exists to provide security for a nonexistent debt based upon legal presumptions regarding the note, which in actuality is worthless and should be re turned to the borrower for destruction.
  27. Meanwhile the pension fund continues to get the $50 per year from the broker. So the fund manager is blissfully ignorant of the fact that the “investment” was a scam that has already blown up.
  28. Eventually the loan in “default” is sold at a foreclosure sale in the name of the broker-controlled Trust.
  29. The proceeds are not sent to the pension fund because that would alert the fund manager of the default. So the property is kept as “REO” property as long as possible. As long as the pension fund is buying bonds, the bank retains the property in REO status and keeps paying the pension fund $50 per year.
  30. CONCLUSION: The broker has created a $500 “profit” from the proprietary trading desk, the pension fund is going to get a loss from a loan that was not what they ordered, and the broker collects the proceeds of the credit default swap and the insurance without accounting to anyone. Altogether, the broker makes around $1500 on a $500 loan in which the broker received $1,000 from the pension fund. This is a general and oversimplified example of what happened in virtually all the REMIC trust financing.
  31. If the broker had put the money into the Trust and made the loans from the trust then the profit of $1500 disappears. Any profit becomes the profit of the Trust and the Trust beneficiaries. And the broker is left accepting only his typical sliver of the pie as a commission. Why accept the miniscule commission when you can claim it all and then some?
  32. When most loans are originated, they are funded by the pension fund without the pension knowing about it. In standard transactional analysis that makes the pension fund the creditor and the borrower the debtor.
  33. But the only way the broker could make his “proprietary trading profits” is by placing the name of a third party on the note and mortgage. This raises the prospect of “moral hazard” where originators claim loans as their own even though the money for the loan came from third parties. The originator thinks the money came from an aggregator. In  that scenario, the aggregator would be getting the money from the Trust but in fact, the aggregator gets no money which stays with the broker. The entire “chain” is an illusion culminating with the illusion that the Trust was an actual real party in interest. But in that case the Trust would be a holder in due course. That is the way it is supposed to be as per the Concept and the Securitization documents. Experience shows that no claims of any holder in due course are ever made.
  34. The broker’s position was protected by (a) the Assignment and Assumption Agreement with the originator and (b) control over the money going into each loan closing and coming out of it.
  35. The Assignment and Assumption Agreement is executed before the loan is originated and governs the transaction without disclosure to the borrower. It is the ONLY real assignment (sort of) in that it is the contract in which actual funds are sent to the closing table — albeit not from the originator.
  36. The originator does not get to touch the money and has no rights to the note and mortgage even if the originator’s name is on it. But to make sure, many loans were made using MERS as nominee which was also bank controlled, thus preventing the originator from “moral hazard” in claiming the loan as its own. The real purpose of MERS was not to sidestep recording fees (a perk of the plan) but rather to make sure originators had no legal or equitable claim to the fake mortgage paper that was executed by the borrower. This might constitute an admission in conduct that neither the note nor the mortgage should have been executed, much less delivered and recorded. This leads to the conclusion that none of the mortgages or notes are in actuality enforceable unless they end up in the hands of a holder in due course.
  37. To further protect the broker from the originator taking delivery of the note and doing something with it, the instructions were to destroy the note signed by the borrower which would be resurrected later through mechanical means as needed. (See Katherine Ann Porter study —2007 — when she was at University of Iowa).
  38. Control over the fictitious note and mortgage was thus secured to the broker.
  39. When and if the loan goes into foreclosure and it is contested, then the false paper is mechanically created and signed and then sent up a chain of companies none of which pays any money for the loan because none of their predecessors had anything to sell. Eventually when a loan goes into foreclosure, the paperwork appears and the assignment to the Trust is then created and executed by robo-signors etc.
  40. The only time an assignment appears is when the loan is sent into foreclosure. I have made hundreds of attempts to get the closing documents and assignments to the Trust where the loans were NOT in “default”. None of the banks had the documents. Creative discovery directed at the records custodian will confirm this basic fact.
  41. Loan are sent into foreclosure because the borrower stopped paying — even though the creditor has continued to receive all expected payments. Hence the real creditor, the pension fund, has not experienced a “Credit event” (i.e., a default). Legally no default exists unless the creditor fails to receive a required payment. In nearly all cases the creditor continued to get paid regardless of whether the payments were made by borrowers on the “faulty” notes and mortgages (see below). So the notice of default is merely the intermediaries covering their tracks as often as possible luring people into the illusion of a default or just declaring it even if the payments are current. And that is why modifications and settlements are kept to a minimum so that the government sees efforts being made to help borrowers when in fact the only real instruction is to foreclose because the $500 loan represents at least $1500 in liability to the broker and its co-venturers.
  42. In court, the broker-controlled foreclosing party asserts ownership over the debt, the note and the mortgage. The loans are “scrubbed” by LPS in Jacksonville or some other company or division (like Chase) so that only one party is selected to claim rights to enforce the false closing documents. Occasionally they still get it wrong and two parties sue for foreclosure each filing the “original” note.  In truth the debt is the property of the pension fund who will receive very little money even after the property is completely liquidated, because each of the participants in this scheme gets fees for the “work” they are doing.
  43. The REMIC Trust is left as an unfunded entity except for loans that are the subject of a final judgment of foreclosure in the name of the Trust, which is why they didn’t name the Trust as Plaintiff until recently when they couldn’t avoid it.
  44. The final judgment ends the potential liability to refund the $1500 in “profits” that the broker “made” because it is proof that the loan failed. Then the broker eventually collects the proceeds of liquidation of the property acquired in foreclosure. If such liquidation is not possible, then the broker abandons the property and it is demolished. (see Detroit, Cleveland and other cities where entire neighborhoods were demolished and parks put in their place).
  45. By adding a healthy scoop of toxic waste loans and nearly toxic waste loans to the mix, the broker makes far more money in fees, profits and commissions than the original principal of the loan. By adding multiple sales to the mix of the same loan or the same bond, they made even more. And each time a foreclosure judgment is entered, and each time a foreclosure sale is said to be completed, the brokers are laughing their heads off because they got away with it.

The gamble has worked very well for the brokers (investment banks) because even now, all these parties are assuming there is at least some truth in what the Banks are saying in Court. They are wrong. Most of the positions taken in court are directly in conflict with the actual facts, the actual transactions and the actual movement of money. These banks continue to profit from the confusion and the inability or unwillingness of all those parties to actually read the documents and then demand proof that the transactions were real.

The press has not done much good either. Take a look at virtually any article written by financial and other types reporters. They get close to the third rail of journalism but they fail or refuse to take it to the next step — a report or declaration that most of the mortgages are fatally defective, incapable of being legally enforced, and leaving the borrowers and lenders with nothing but their own wits to figure out what to do with the debt that was created. Such a paradigm shift would mirror the policy adopted in Iceland where household debt was reduced by more than 25% providing the earliest evidence of a stimulus to a failing economy — producing positive GDP growth and low unemployment far ahead of the gains reported in other economies, including the U.S. The fact remains that the debt is no longer as much as what was loaned, it is not owned by any of the strangers who are enforcing them, and the note and mortgage are fatally defective.

If I am a borrower and I receive a loan of money from one person and then I am tricked into signing a note and mortgage in favor of someone else, there are TWO potential liabilities created — in exchange for ONE loan of money. If the signed paperwork gets into the hands of someone who is a Holder in Due Course, the fact that the borrower was cheated is irrelevant. I will owe the entire loan to both the person who loaned me the money AND the person who paid for the fake paperwork in good faith without knowledge of my defenses. But if the end party with the paperwork does NOT claim Holder in Due Course status, then the borrower has a right to show the loan on THAT PAPERWORK never happened. So then I will owe only the person from whom I received the money — a loan that is undocumented (except for proof of payment) and thus unsecured. Thus borrowers should not be seen as seeking relief; they should be seen as seeking justice — one debt for one loan.

The fact is that the borrower is treated as the party with the burden of proving that no loan actually underlies the paperwork upon which the forecloser is placing reliance. It is unfair to place the burden on the borrower, and within the Judge’s discretion, based upon common law, the Judge has the power to require the foreclosing party to prove the underlying loan if it is merely denied (as opposed to appearing in the affirmative defenses).

Both the closing documents with the lender (pension fund) and the closing documents with the borrower (homeowner) should be considered void, in the nature of a wild deed. Hence there could be no foreclosure and any foreclosure that already happened would be wrongful. In a quiet title action the mortgage on record should be nullified first, and then the homeowner could move on to seeking a declaration of rights from the court in which his title is not impaired by the bogus mortgage based upon a bogus note which is evidence of a loan of money that does not exist.

If I am lender and I give a broker money to deliver to a trust that is the borrower in my transaction and then the broker gives my money to someone else as a loan, the same reasoning applies. The mistake made is calling these lenders “investors”. They are not. They think they are investors and everyone calls them that but they have not invested in any Trust because their money was never delivered to the intended borrower and was instead loaned to borrowers that the lender would never have approved in a manner that was specifically prohibited by the securitization documents (which were routinely ignored).

Like the borrower, the lenders are stuck with documentation for a loan that never happened. The loan was intended (concept and written documents) to be between themselves and a trust. But the REMIC Trust never got the money. The lender (pension fund) is left with an undocumented loan to an actual borrower without a note or mortgage made in favor of the lender or any agent of the lender. Neither the common law nor the securitization documents were followed — delivery of the loan documents simply never happened; nor did payment for those documents (except for exorbitant fees and “profits” declared by the participants in the scheme).

If you look at an article like Trustees Seek $4.5 Billion Settlement with JP Morgan, you see the usual code language. But like the court room, follow-up questions would be appropriate. “Mortgage-bond trustees including U.S. Bank N.A. and Bank of New York Mellon Corp. asked a New York state court judge to approve a $4.5 billion settlement with JPMorgan Chase & Co. (JPM) over investor claims of faulty home loans.”

US Bank is consolidating its position as the Trustee of multiple REMIC Trusts whose documents name other parties and conditions for replacement of Trustee that prohibit US Bank from becoming the “new Trustee.” This is like a stranger to the transaction in non-judicial states who declares that it the beneficiary without proving it and then names a “substitute trustee” on the deed of trust. This substitution is frequently bogus. But if it goes unchallenged, it becomes the law of that case. The “beneficiary” under the deed of trust is nothing of the kind and the substitution of trustee is just plain wrong.

Bank of New York Mellon is essentially clueless as to what actions are pending in its name and they never produce a witness even when they are the plaintiff in the judicial foreclosure states. The current common practice is to rotate “servicers” such that the witness at a foreclosure trial is a person employed by a servicer who is new to the transaction — long after the loan was claimed to be in default and long after the “assignment” appeared and long after even the foreclosure litigation commenced. There also exists a confused claim because of rotation of Plaintiffs without amendment to the pleadings.  Plaintiffs are rotated as though it were only a name change. At trial there exists an amorphous claim of being the owner of the debt which is more like an implication or presumption.

The broker (investment banks) never claim to be a holder in due course because THAT would require proof of payment, delivery of the documents, good faith and lack of knowledge of the borrower’s defenses. But worse, it would reveal that BONY/Mellon has no records, knowledge, possession or accounts relating to the trust, the pool or any individual loan — except those that have been foreclosed on false pretenses.

JP Morgan has been caught in flat out lies repeatedly as to “ownership” of loans allegedly obtained from Washington Mutual for a price of “ZERO” without any agreement or assignment even claiming that the loans were purchased by Chase. Many of their claims are based upon “loans” originated by non-existent entities like American Broker’s Conduit. We see the same entities or non entities used by Wells Fargo, Bank of America and CitiMortgage with great regularity.

“Faulty home loans” is a phrase frequently used in press releases and press reports. What does that mean? If they were faulty, in what way? If they were faulty how could they be enforceable? This goes back to what I said above. The real loan was never documented.  And what was documented was not a real loan. This enabled the banks to create the illusion of normal paperwork for “standard home loans” as they frequently claim through their attorneys in court. By trick and intentional confusion they often convince a Judge to treat them as though they were holders in due course even without the claim of HDC status thus defeating the borrower before the case ever gets to trial.

So why are they settling for $4.5 Billion on more than $75 Billion in “securitized” “mortgage backed” bonds? Notice that 5 of them won’t settle which is to say they won’t join the party. The rest are willing to continue playing games with these worthless bonds and worthless loan documents. By “settling” for $4.5 Billion, the Trustees are taking about 6 cents on the dollar. They are also pretending that they are the ultimate owners of the bonds and mortgages. And they are pretending that the bonds and mortgages are real, hoping that the courts will continue to treat them as such. Hence they maintain the illusion that securitization of home loans was real.

The real problem can be seen by reference to the shadow banking marketplace, where the nominal value of cash equivalent instruments are now estimated to be around 1 quadrillion dollars — which is around 12-14 times the actual amount of all the government fiat money issued in the current world. Nobody knows if there is any real value in those instruments but current estimates are that they might be worth as much as $27 Trillion which is still more than 1/3 of all government fiat money issued in the current world. Why so much?

The loans and the bonds were all sold multiple times under various disguises. The simple truth is that a final deed issued as a result of an “auction” from a foreclosure seals off much of the liability for returning the money that the banks received when they posed as lenders and sold, insured or hedged their interest in the bonds and mortgages, neither of which could they possibly own and neither of which had any value in the first place. The original debt between the lenders (pension funds etc) and the borrowers (homeowners) remains in place and is continued to be carried on the books of multiple institutions who think they own it.

The practical solution might be a court recognition of the banks as agents of the lenders, and allocating the multiple payments received by the lenders, the banks and all the other intermediaries. This will vastly reduce or even eliminate the debt from the homeowner leaving the defrauded lender/investors to sue the banks not for 6 cents on the dollar but for 100 cents on the dollar. Any other resolution leaves homeowners holding the bag on transactions they could not possibly have understood because the information — that would have alerted them to these issues — was intentionally withheld.

The behavior of the brokers (investment banks) lends considerable support to the defense of unclean hands. Even if they somehow validated or ratified the closing foreclosure procedures they should be left with an unenforceable mortgage and then a note on which they could sue — if they could prove that the loan of money came from someone in their alleged chain of title.

The solution is to recognize the obvious. This will restore household wealth and prevent further gains by the banks who created this mess.

 

 

Giunta Prevails on Wells Fargo Motion to Dismiss — Federal Court

For more information on foreclosure offense, expert witness consultations and foreclosure defense please call 954-495-9867 or 520-405-1688. We offer litigation support in all 50 states to attorneys. We refer new clients without a referral fee or co-counsel fee unless we are retained for litigation support. Bankruptcy lawyers take note: Don’t be too quick admit the loan exists nor that a default occurred and especially don’t admit the loan is secured. FREE INFORMATION, ARTICLES AND FORMS CAN BE FOUND ON LEFT SIDE OF THE BLOG. Consultations available by appointment in person, by Skype and by phone.

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Patrick Giunta, Esq. the lead litigator for the livinglies team has done it again. He filed a lawsuit against Wells Fargo while the trial on a foreclosure was underway. Wells Fargo now faces a loss in the foreclosure where their witness admitted to being unable to explain the chain of ownership, the balance and the reason why Wells Fargo refused to cooperate in the sale of the property that would have paid them in full.

This corroborates my strategy that presumes that the foreclosers don’t want the house or the money. What the banks want is a foreclosure judgment that forces the loan onto an investor who does not even know of the existence of the proceedings. besides it being illegal and unfair, it raises questions of jurisdiction and standing, because the actual source of funds — the investors who in reality own the debt directly — receive no notice of the proceeding — and they think they barred by the terms of the Prospectus and Pooling and Servicing Agreement from even inquiring about the status of the “pool” (which is most likely non-existent except where foreclosure judgments have been entered).

Here Judge Dimitroleas, Federal Judge in the Southern District of Florida, ruled that the Homeowner has rights of action for money damages against dubious claims from “holders”, “servicers” and even “trustees.” Along with other claims, Giunta survived a motion to dismiss the homeowner’s claim for fraudulent misrepresentation — as to the status of the loan, the ownership and the balance.

The fact pattern of this case clearly corroborates the fact that “servicers” are claiming ownership or rights to enforce debts that they don’t own and don’t have any authority to represent the creditor because they are making false claims of securitization. Thus the banks cannot say they actually represent the investors who THOUGHT they were buying mortgage backed securities from a funded trust that was originating and acquiring loans. If they admit the facts in reality they are admitting to committing fraud on the investors, the insurers, the guarantors, and of course the borrowers. The presumption regarding ownership or rights to enforce is directly contrary to the actual facts. And the threshold for rebutting those presumptions is fast falling in Federal and State courts.

Patrick Giunta is located in Broward County Florida.

see Grave – (DE28) – Order on Motion to Dismiss

Maine Moving toward the Truth About the Mortgages, MERS and Foreclosures

submitted by anonymous reader:

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The Maine Supreme Court has been active in the last few months – issuing several decisions that will likely impact foreclosure actions in that state. The decisions covered a full range of foreclosure issues, from whether a lender can establish standing when it holds an assignment of the mortgage from Mortgage Electronic Registration Systems, Inc. (“MERS”) to the amount a borrower must pay to cure a default. If you originate and/or service RESIDENTIAL MORTGAGE LOANS in this state, you may want to review these recent cases. This alert focuses on the court’s holdings in one of these cases, Bank of America, N.A. v. Greenleaf, — A.3d —-, 2014 WL 2988236 (Me., July 3, 2014) (Review the Maine Supreme Court Opinion.)

Assignment from MERS May Only Transfer Right to Record Mortgage

The Maine Supreme Court’s decision in Greenleaf may require lenders to make some changes before they initiate FORECLOSURE actions in this state in which the mortgage identifies MERS as the nominee for the lender. This case presented some simple basic facts, but the court’s holdings may raise concerns. In 2006, Scott Greenleaf executed a promissory note for $385,000 to RESIDENTIAL MORTGAGE Services, Inc. (“RMS”) and signed a mortgage securing the debt. The note was endorsed in blank. The mortgage listed RMS as the lender and MERS as the nominee for the lender.
In 2011, Bank of America, N.A. (“BofA”) initiated FORECLOSURE proceedings against Greenleaf. It was undisputed that Greenleaf had failed to make payments on the loan since 2008. Although some interim drama played out in the FORECLOSURE proceeding, a trial was held in 2013. BofA presented the following documents to the court: the original note, the mortgage, and a document recorded in 2011 reflecting the assignment of the mortgage from MERS to BAC Home Loans Servicing, LP (“BAC”), an entity that subsequently merged with BofA. The court entered a judgment of FORECLOSURE IN favor of BofA and Greenleaf appealed.
Greenleaf alleged, among other things, that BofA lacked standing to seek foreclosure of the property since BofA did not have an interest in both the promissory note and the mortgage securing that note. Since the note was endorsed in blank and BofA had possession of the note, the Maine Supreme Court held that BofA met the first prong of the standing test. However, the court found that BofA failed to establish the second prong of the test, ownership of the mortgage.
The court struggled with the 2011 assignment of the mortgage by MERS to BAC. The court focused on one sentence in the 2006 mortgage that specifically provided that MERS was the mortgagee of record for purposes of recording the mortgage. The court held that this provision of the mortgage only granted MERS the right to record the mortgage as the lender’s nominee. When MERS then assigned its interest to BAC, the court held that it granted BAC only the right that it possessed, the right to record the mortgage as nominee for the lender. When BAC then merged with BofA, BofA only obtained the right that BAC had possessed, the right to record the mortgage as nominee. The court also noted that there was no separate and independent assignment of the mortgage from RMS to MERS, BAC, or BofA. As such, the court held that the record only demonstrated a series of assignments of the right to record the mortgage as nominee. In the absence of evidence that BofA owned the Greenleaf mortgage, the Maine Supreme Court held that BofA lacked standing to seek foreclosure and vacated the lower court’s judgment of foreclosure.
Since similar “right to record” language is included in many mortgage forms, lenders and servicers should pay particular attention to whether they are relying on assignments from MERS before initiating a foreclosure action in this state. Unless a lender holds or can obtain an assignment of the mortgage from the originating lender (and many of this lenders may no longer be in business), a lender may need to explore other options for establishing the second prong of the standing test in Maine. A mortgage assignment by MERS, standing alone, may not be sufficient to prove an assignment of a mortgage.
In response to the Greenleaf decision, many of the title insurers in the state have issued guidance regarding title issues under various scenarios in which MERS had assigned the mortgages. At least one title insurer has indicated that if MERS assigned the mortgage in a pending foreclosure action, an assignment from the original lender to the FORECLOSING mortgagee will be required in order for title to be insured without exception.

No Adjustments to Disclosed Payoff Amount Permitted During Cure Period

The Greenleaf court also defined the amount a borrower can be required to pay to cure a default. The notice of default and right to cure sent to Greenleaf included an itemization of all past due amounts and identified the total amount required to be paid by Greenleaf to cure the default. This total amount included a footnote reference that Greenleaf should “[c]ontact the servicer to obtain an up to date figure for outstanding attorney fees, unpaid taxes and costs before sending payment” and the notice also separately provided that Greenleaf should contact BAC at a prescribed telephone number “to obtain an up to date figure before sending payment.” Similar disclosures are generally included in the right to cure notices provided by many lenders and servicers.
Me. Rev. Stat. Ann. tit. 14, § 6111 provides that the contents of the notice of default and right to cure must include, among other things, an itemization of all past due amounts causing the loan to be in default and an itemization of any other charges that must be paid in order to cure the default. Greenleaf argued that the addition of the “call for updated information” references did not meet the statutory requirement that the notice itself must provide an itemization of other charges that must be paid in order to cure the default. The Maine Supreme Court agreed with Greenleaf and held that state law effectively freezes additions to the payoff amount during the cure period.
As such, the amount stated in the notice of default and right to cure is the only amount the borrower can be required to pay to cure the default during the 35 day cure period. Any attorneys’ fees incurred in continuing efforts to recover on the loan and advances made for property taxes or insurance during the cure period – none of these amounts can be added to the amount a borrower may be required to pay to cure the default. The court noted that the incorrect “call for updated information” references in the cure notice were an independent basis on which they could have vacated the lower court’s foreclosure judgment.

Changing Landscape?

Lenders and servicers should work closely with their foreclosure counsel to ensure they can establish standing before initiating a foreclose action in Maine. Lenders and servicers may also want to work with the title insurers to address any title issues that may arise in connection with MERS assignments. With certain changes in their foreclosure practices, lenders and servicers should still be able to prove up ownership of each mortgage sufficient to pass the Greenleaf court’s standing scrutiny. In addition, lenders and servicers should review their cure notice form templates used in this state and any corresponding policies and procedures to ensure that a borrower is never advised or required to pay more than the total amount due as disclosed in the cure notice. The Greenleaf court may have stirred the lobster pot – but lenders and services have options to adapt to the court’s recipes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Banks Take Voluntary Dismissals to Avoid Judgments Against Them — Neil Garfield Show 6 P.M. EDT Thursdays

Banks Take Voluntary Dismissals to Avoid Judgments Against Them

Click in or phone in at The Neil Garfield Show

Or call in at (347) 850-1260, 6pm EDT Thursdays

I will continue the theme from last week tonight talking about voir dire and cross examination, but first I wanted to talk about the practice of the lawyers for the foreclosing party submitting a Notice of Voluntary Dismissal at the 11th hour. After all the Banks were hit with huge sanctions for misrepresenting themselves in litigation, the practice has shifted to taking a voluntary dismissal after all attempts at intimidation have failed. The banks faced with a high probability of losing the case files instead a notice of voluntary dismissal. This allows for a substantial recovery of attorney fees and costs and might give rise to a case for wrongful foreclosure or even intentional interference.

But what they DO accomplish despite the costs of those options, is that there are very few actual judgments against the banks. This perpetuates the illusion of “you can’t fight city hall.” People think it is futile to challenge the banks. But the judiciary, while it moves slowly, is arriving at the point where many judges are highly suspicious of claims from plaintiffs that they are “holders” with rights to enforce. Judges have mused out loud that it is highly peculiar to see change of plaintiffs and changes in servicers during litigation — much less multiple times.

Several Judges are saying out loud in court words to this effect: “there is something wrong here, but I am here to call balls and strikes and not investigate on my own.”

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FROM LAST WEEK’S SHOW

HOW DO YOU KNOW THAT? — Introducing two upcoming CLE Seminars from the Garfield Continuum on Voir Dire of corporate representatives in foreclosure litigation. The first is a two hour telephone conference devoted exclusively to voir dire examination and the second is a full day on only voir dire plus cross examination. The show is free. To preregister for the mini seminar on voir dire or the full seminar on voir dire and cross examination (at a discount) call 954-495-9867.

  • Overview of Foreclosure Litigation in Florida and Other States
  • The need for copies of actual case law and even memoranda supporting your line of questioning
  • The Three Rules for Questioning
  • —– (1) Know why you want to inquire
  • —– (2) Listen to the Answer
  • —– (3) Follow up and comment
  • What to ask, and when to ask it
  • The difference between voir dire and cross examination
  • Getting traction with the presiding Judge
  • Developing your goals and strategies
  • Developing a narrative
  • Impeaching the witness before he or she gets started
  • Preparing your own witnesses for voir dire questions

 

IF YOU MISSED IT: Go to blog radio link and click on the Neil Garfield Show — past shows include—-

News abounds as we hear of purchases of loans and bonds. Some of these are repurchases. Some are in litigation, like $1.1 Billion worth in suit brought by Trustees against the broker dealer Merrill Lynch, which was purchased by Bank of America. What do these purchases mean for people in litigation. If the loan was repurchased or all the loan claims were settled, does the trust still exist? Did it ever exist? Was it ever funded? Did it ever own the loans? Why are lawyers unwilling to make representations that the Trust is a holder in due course? Wouldn’t that settle everything? And what is the significance of the $3 trillion in bonds purchased by the Federal Reserve, mostly mortgage backed bonds? This and more tonight with questions and answers:

Adding the list of questions I posted last week (see below), I put these questions ahead of all others:

  1. If the party on the note and mortgage is NOT REALLY the lender, why should they be allowed to have their name on the note or mortgage, why are those documents distributed instead of returned to the borrower because he signed in anticipation of receiving a loan from the party disclosed, as per Federal and state law. Hint: think of your loan as a used car. Where is the contract (offer, acceptance and consideration).
  2. If the party receiving an assignment from the false payee on the note does NOT pay for it, why are we treating the assignment as a cure for documents that were worthless in the first place. Hint: Paper Chase — the more paper you throw at a worthless transaction the more real it appears in the eyes of others.
  3. If the party receiving the assignment from the false payee has no relationship with the real lender, and neither does the false payee on the note, why are we allowing their successors to force people out of their homes on a debt the “bank” never owned? Hint: POLITICS: What is the position of the Federal reserve that has now purchased trillions of dollars of the “mortgage bonds” from banks who never owned the bonds that were issued by REMIC trusts that never received the proceeds of sale of the bonds.
  4. If the lenders (investors) are receiving payments from settlements with the institutions that created this mess, why is the balance owed by the borrower the same after the settlement, when the lender’s balance has been reduced? Hint: Arithmetic. John owes Sally 5 bananas. Hank gives Sally 3 bananas and says this is for John. How many bananas does John owe Sally now?
  5. And for extra credit: are the broker dealers who said they were brokering and underwriting the issuance of mortgage bonds from REMIC trusts guilty of anything when they don’t give the proceeds from the sale of the bonds to the Trusts that issued those bonds? What is the effect on the contractual relationship between the lenders and the borrowers? Hint: VANISHING MONEY replaced by volumes of paper — the same at both ends of the transaction, to wit: the borrower and the investor/lender.

1. What is a holder in due course? When can an HDC enforce a note even when there are problems with the original loan? What does it mean to be a purchaser for value, in good faith, without notice of borrower’s defenses?

2. What is a holder and how is that different from a holder with rights to enforce? What does it mean to be a holder subject to all the maker’s defenses including lack of consideration (i.e. no loan from the Payee).

3. What is a possessor of a note?

4. What is a bailee of a note?

5. If the note cannot be enforced, can the mortgage still be foreclosed? It seems that many people don’t know the answer to this question.

6. The question confronting us is FORECLOSURE (ENFORCEMENT) OF A MORTGAGE. If the status of a holder of a note is in Article III of the UCC, why are we even discussing “holder” when enforcement of mortgages is governed by Article IV of the UCC?

7. Does the question of “holder” or holder in due course or any of that even apply in the original loan transaction? Hint: NO.

8. Homework assignment: Google “Infinite rehypothecation”

For more information call 954-495-9867 or 520-405-1688.

 

Securitization for Lawyers: How it was Written by Wall Street Banks

For more information on foreclosure offense, expert witness consultations and foreclosure defense please call 954-495-9867 or 520-405-1688. We offer litigation support in all 50 states to attorneys. We refer new clients without a referral fee or co-counsel fee unless we are retained for litigation support. Bankruptcy lawyers take note: Don’t be too quick admit the loan exists nor that a default occurred and especially don’t admit the loan is secured. FREE INFORMATION, ARTICLES AND FORMS CAN BE FOUND ON LEFT SIDE OF THE BLOG. Consultations available by appointment in person, by Skype and by phone.

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Continuing with my article THE CONCEPT OF SECURITIZATION from yesterday, we have been looking at the CONCEPT of Securitization and determined there is nothing theoretically wrong with it. That alone accounts for tens of thousands of defenses” raised in foreclosure actions across the country where borrowers raised the “defense” securitization. No such thing exists. Foreclosure defense is contract defense — i.e., you need to prove that in your case the elements of contract are absent and THAT is why the note or the mortgage cannot be enforced. Keep in mind that it is entirely possible to prove that the mortgage is unenforceable even if the note remains enforceable. But as we have said in a hundred different ways, it does not appear to me that in most cases, the loan contract ever existed, or that the acquisition contract in which the loan was being “purchased” ever occurred. But much of THAT argument is left for tomorrow’s article on Securitization as it was practiced by Wall Street banks.

So we know that the concept of securitization is almost as old as commerce itself. The idea of reducing risk and increasing the opportunity for profits is an essential element of commerce and capitalism. Selling off pieces of a venture to accomplish a reduction of risk on one ship or one oil well or one loan has existed legally and properly for a long time without much problem except when a criminal used the system against us — like Ponzi, Madoff or Drier or others. And broadening the venture to include many ships, oil wells or loans makes sense to further reduce risk and increase the likelihood of a healthy profit through volume.

Syndication of loans has been around as long as banking has existed. Thus agreements to share risk and profit or actually selling “shares” of loans have been around, enabling banks to offer loans to governments, big corporations or even little ones. In the case of residential loans, few syndications are known to have been used. In 1983, syndications called securitizations appeared in residential loans, credit cards, student loans, auto loans and all types of other consumer loans where the issuance of IPO securities representing shares of bundles of debt.

For logistical and legal reasons these securitizations had to be structured to enable the flow of loans into “special purpose vehicles” (SPV) which were simply corporations, partnerships or Trusts that were formed for the sole purpose of taking ownership of loans that were originated or acquired with the money the SPV acquired from an offering of “bonds” or other “shares” representing an undivided fractional share of the entire portfolio of that particular SPV.

The structural documents presented to investors included the Prospectus, Subscription Agreement, and Pooling and Servicing Agreement (PSA). The prospectus is supposed to disclose the use of proceeds and the terms of the payback. Since the offering is in the form of a bond, it is actually a loan from the investor to the Trust, coupled with a fractional ownership interest in the alleged “pool of assets” that is going into the Trust by virtue of the Trustee’s acceptance of the assets. That acceptance executed by the Trustee is in the Pooling and Servicing Agreement, which is an exhibit to the Prospectus. In theory that is proper. The problem is that the assets don’t exist, can’t be put in the trust and the proceeds of sale of the Trust mortgage-backed bonds doesn’t go into the Trust or any account that is under the authority of the Trustee.

The writing of the securitization documents was done by a handful of law firms under the direction of a few individual lawyers, most of whom I have not been able to identify. One of them is located in Chicago. There are some reports that 9 lawyers from a New Jersey law firm resigned rather than participate in the drafting of the documents. The reports include emails from the 9 lawyers saying that they refused to be involved in the writing of a “criminal enterprise.”

I believe the report is true, after reading so many documents that purport to create a securitization scheme. The documents themselves start off with what one would and should expect in the terms and provisions of a Prospectus, Pooling and Servicing Agreement etc. But as you read through them, you see the initial terms and provisions eroded to the point of extinction. What is left is an amalgam of options for the broker dealers selling the mortgage backed bonds.

The options all lead down roads that are absolutely opposite to what any real party in interest would allow or give their consent or agreement. The lenders (investors) would never have agreed to what was allowed in the documents. The rating agencies and insurers and guarantors would never have gone along with the scheme if they had truly understood what was intended. And of course the “borrowers” (homeowners) had no idea that claims of securitization existed as to the origination or intended acquisition their loans. Allan Greenspan, former Federal Reserve Chairman, said he read the documents and couldn’t understand them. He also said that he had more than 100 PhD’s and lawyers who read them and couldn’t understand them either.

Greenspan believed that “market forces” would correct the ambiguities. That means he believed that people who were actually dealing with these securities as buyers, sellers, rating agencies, insurers and guarantors would reject them if the appropriate safety measures were not adopted. After he left the Federal Reserve he admitted he was wrong. Market forces did not and could not correct the deficiencies and defects in the entire process.

The REAL document is the Assignment and Assumption Agreement that is NOT usually disclosed or attached as an exhibit to the Prospectus. THAT is the agreement that controls everything that happens with the borrower at the time of the alleged “closing.” See me on YouTube to explain the Assignment and Assumption Agreement. Suffice it to say that contrary to the representations made in the sale of the bonds by the broker to the investor, the money from the investor goes into the control of the broker dealer and NOT the REMIC Trust. The Broker Dealer filters some of the money down to closings in the name of “originators” ranging from large (Wells Fargo, Countrywide) to small (First Magnus et al). I’ll tell you why tomorrow or the next day. The originators are essentially renting their names the same as the Trustees of the REMIC Trusts. It looks right but isn’t what it appears. Done properly, the lender on the note and mortgage would be the REMIC Trust or a common aggregator. But if the Banks did it properly they wouldn’t have had such a joyful time in the moral hazard zone.

The PSA turned out to be the primary document creating the Trusts that were creating primarily under the laws of the State of New York because New York and a few other states had a statute that said that any variance from the express terms of the Trust was VOID, not voidable. This gave an added measure of protection to the investors that the SPV would not be used for any purpose other than what was described, and eliminated the need for them to sue the Trustee or the Trust for misuse of their funds. What the investors did not understand was that there were provisions in the enabling documents that allowed the brokers and other intermediaries to ignore the Trust altogether, assert ownership in the name of a broker or broker-controlled entity and trade on both the loans and the bonds.

The Prospectus SHOULD have contained the full list of all loans that were being aggregated into the SPV or Trust. And the Trust instrument (PSA) should have shown that the investors were receiving not only a promise to repay them but also a share ownership in the pool of loans. One of the first signals that Wall Street was running an illegal scheme was that most prospectuses stated that the pool assets were disclosed in an attached spreadsheet, which contained the description of loans that were already in existence and were then accepted by the Trustee of the SPV (REMIC Trust) in the Pooling and Servicing Agreement. The problem was that the vast majority of Prospectuses and Pooling and Servicing agreements either omitted the exhibit showing the list of loans or stated outright that the attached list was not the real list and that the loans on the spreadsheet were by example only and not the real loans.

Most of the investors were “stable managed funds.” This is a term of art that applied to retirement, pension and similar type of managed funds that were under strict restrictions about the risk they could take, which is to say, the risk had to be as close to zero as possible. So in order to present a pool that the fund manager of a stable managed fund could invest fund assets the investment had to qualify under the rules and regulations restricting the activities of stable managed funds. The presence of stable managed funds buying the bonds or shares of the Trust also encouraged other types of investors to buy the bonds or shares.

But the number of loans (which were in the thousands) in each bundle made it impractical for the fund managers of stable managed funds to examine the portfolio. For the most part, if they done so they would not found one loan that was actually in existence and obviously would not have done the deal. But they didn’t do it. They left it on trust for the broker dealers to prove the quality of the investment in bonds or shares of the SPV or Trust.

So the broker dealers who were creating the SPVs (Trusts) and selling the bonds or shares, went to the rating agencies which are quasi governmental units that give a score not unlike the credit score given to individuals. Under pressure from the broker dealers, the rating agencies went from quality culture to a profit culture. The broker dealers were offering fees and even premium on fees for evaluation and rating of the bonds or shares they were offering. They HAD to have a rating that the bonds or shares were “investment grade,” which would enable the stable managed funds to buy the bonds or shares. The rating agencies were used because they had been independent sources of evaluation of risk and viability of an investment, especially bonds — even if the bonds were not treated as securities under a 1998 law signed into law by President Clinton at the behest of both republicans and Democrats.

Dozens of people in the rating agencies set off warning bells and red flags stating that these were not investment grade securities and that the entire SPV or Trust would fail because it had to fail.  The broker dealers who were the underwriters on nearly all the business done by the rating agencies used threats, intimidation and the carrot of greater profits to get the ratings they wanted. and responded to threats that the broker would get the rating they wanted from another rating agency and that they would not ever do business with the reluctant rating agency ever again — threatening to effectively put the rating agency out of business. At the rating agencies, the “objectors” were either terminated or reassigned. Reports in the Wal Street Journal show that it was custom and practice for the rating officers to be taken on fishing trips or other perks in order to get the required the ratings that made Wall Street scheme of “securitization” possible.

This threat was also used against real estate appraisers prompting them in 2005 to send a petition to Congress signed by 8,000 appraisers, in which they said that the instructions for appraisal had been changed from a fair market value appraisal to an appraisal that would make each deal work. the appraisers were told that if they didn’t “play ball” they would never be hired again to do another appraisal. Many left the industry, but the remaining ones, succumbed to the pressure and, like the rating agencies, they gave the broker dealers what they wanted. And insurers of the bonds or shares freely issued policies based upon the same premise — the rating from the respected rating agencies. And ultimate this also effected both guarantors of the loans and “guarantors” of the bonds or shares in the Trusts.

So the investors were now presented with an insured investment grade rating from a respected and trusted source. The interest rate return was attractive — i.e., the expected return was higher than any of the current alternatives that were available. Some fund managers still refused to participate and they are the only ones that didn’t lose money in the crisis caused by Wall Street — except for a period of time through the negative impact on the stock market and bond market when all securities became suspect.

In order for there to be a “bundle” of loans that would go into a pool owned by the Trust there had to be an aggregator. The aggregator was typically the CDO Manager (CDO= Collateralized Debt Obligation) or some entity controlled by the broker dealer who was selling the bonds or shares of the SPV or Trust. So regardless of whether the loan was originated with funds from the SPV or was originated by an actual lender who sold the loan to the trust, the debts had to be processed by the aggregator to decide who would own them.

In order to protect the Trust and the investors who became Trust beneficiaries, there was a structure created that made it look like everything was under control for their benefit. The Trust was purchasing the pool within the time period prescribed by the Internal Revenue Code. The IRC allowed the creation of entities that were essentially conduits in real estate mortgages — called Real Estate Mortgage Investment Conduits (REMICs). It allows for the conduit to be set up and to “do business” for 90 days during which it must acquire whatever assets are being acquired. The REMIC Trust then distributes the profits to the investors. In reality, the investors were getting worthless bonds issued by unfunded trusts for the acquisition of assets that were never purchased (because the trusts didn’t have the money to buy them).

The TRUSTEE of the REMIC Trust would be called a Trustee and should have had the powers and duties of a Trustee. But instead the written provisions not only narrowed the duties and obligations of the Trustee but actual prevented both the Trustee and the beneficiaries from even inquiring about the actual portfolio or the status of any loan or group of loans. The way it was written, the Trustee of the REMIC Trust was in actuality renting its name to appear as Trustee in order to give credence to the offering to investors.

There was also a Depositor whose purpose was to receive, process and store documents from the loan closings — except for the provisions that said, no, the custodian, would store the records. In either case it doesn’t appear that either the Depositor nor the “custodian” ever received the documents. In fact, it appears as though the documents were mostly purposely lost and destroyed, as per the Iowa University study conducted by Katherine Ann Porter in 2007. Like the others, the Depositor was renting its name as though ti was doing something when it was doing nothing.

And there was a servicer described as a Master Servicer who could delegate certain functions to subservicers. And buried in the maze of documents containing hundreds of pages of mind-numbing descriptions and representations, there was a provision that stated the servicer would pay the monthly payment to the investor regardless of whether the borrower made any payment or not. The servicer could stop making those payments if it determined, in its sole discretion, that it was not “recoverable.”

This was the hidden part of the scheme that might be a simple PONZI scheme. The servicers obviously could have no interest in making payments they were not receiving from borrowers. But they did have an interest in continuing payments as long as investors were buying bonds. THAT is because the Master Servicers were the broker dealers, who were selling the bonds or shares. Those same broker dealers designated their own departments as the “underwriter.” So the underwriters wrote into the prospectus the presence of a “reserve” account, the source of funding for which was never made clear. That was intentionally vague because while some of the “servicer advance” money might have come from the investors themselves, most of it came from external “profits” claimed by the broker dealers.

The presence of  servicer advances is problematic for those who are pursuing foreclosures. Besides the fact that they could not possibly own the loan, and that they couldn’t possibly be a proper representative of an owner of the loan or Holder in Due Course, the actual creditor (the group of investors or theoretically the REMIC Trust) never shows a default of any kind even when the servicers or sub-servicers declare a default, send a notice of default, send a notice of acceleration etc. What they are doing is escalating their volunteer payments to the creditor — made for their own reasons — to the status of a holder or even a holder in due course — despite the fact that they never acquired the loan, the debt, the note or the mortgage.

The essential fact here is that the only paperwork that shows actual transfer of money is that which contains a check or wire transfer from investor to the broker dealer — and then from the broker dealer to various entities including the CLOSING AGENT (not the originator) who applied the funds to a closing in which the originator was named as the Lender when they had never advanced any funds, were being paid as a vendor, and would sign anything, just to get another fee. The money received by the borrower or paid on behalf of the borrower was money from the investors, not the Trust.

So the note should have named the investors, not the Trust nor the originator. And the mortgage should have made the investors the mortgagee, not the Trust nor the originator. The actual note and mortgage signed in favor of the originator were both void documents because they failed to identify the parties to the loan contract. Another way of looking at the same thing is to say there was no loan contract because neither the investors nor the borrowers knew or understood what was happening at the closing, neither had an opportunity to accept or reject the loan, and neither got title to the loan nor clear title after the loan. The investors were left with a debt that could be recovered probably as a demand loan, but which was unsecured by any mortgage or security agreement.

To counter that argument these intermediaries are claiming possession of the note and mortgage (a dubious proposal considering the Porter study) and therefore successfully claiming, incorrectly, that the facts don’t matter, and they have the absolute right to prevail in a foreclosure on a home secured by a mortgage that names a non-creditor as mortgagee without disclosure of the true source of funds. By claiming legal presumptions, the foreclosers are in actuality claiming that form should prevail over substance.

Thus the broker-dealers created written instruments that are the opposite of the Concept of Securitization, turning complete transparency into a brick wall. Investor should have been receiving verifiable reports and access into the portfolio of assets, none of which in actuality were ever purchased by the Trust, because the pooling and servicing agreement is devoid of any representation that the loans have been purchased by the Trust or that the Trust paid for the pool of loans. Most of the actual transfers occurred after the cutoff date for REMIC status under the IRC, violating the provisions of the PSA/Trust document that states the transfer must be complete within the 90 day cutoff period. And it appears as though the only documents even attempted to be transferred into the pool are those that are in default or in foreclosure. The vast majority of the other loans are floating in cyberspace where anyone can grab them if they know where to look.

Securitization for Lawyers

For more information on foreclosure offense, expert witness consultations and foreclosure defense please call 954-495-9867 or 520-405-1688. We offer litigation support in all 50 states to attorneys. We refer new clients without a referral fee or co-counsel fee unless we are retained for litigation support. Bankruptcy lawyers take note: Don’t be too quick admit the loan exists nor that a default occurred and especially don’t admit the loan is secured. FREE INFORMATION, ARTICLES AND FORMS CAN BE FOUND ON LEFT SIDE OF THE BLOG. Consultations available by appointment in person, by Skype and by phone.

The CONCEPT of securitization does not contemplate an increase in violations of lending laws passed by States or the Federal government. Far from it. The CONCEPT anticipated a decrease in risk, loss and liability for violations of TILA, RESPA or state deceptive lending laws. The assumption was that the strictly regulated stable managed funds (like pensions), insurers, and guarantors would ADD to the protections to investors as lenders and homeowners as borrowers. That it didn’t work that way is the elephant in the living room. It shows that the concept was not followed, the written instruments reveal a sneaky intent to undermine the concept. The practices of the industry violated everything — the lending laws, investment restrictions, and the securitization documents themselves. — Neil F Garfield, Livinglies.me

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“Securitization” is a word that provokes many emotional reactions ranging from hatred to frustration. Beliefs run the range from the idea that securitization is evil to the idea that it is irrelevant. Taking the “irrelevant” reaction first, I would say that comes from ignorance and frustration. To look at a stack of Documents, each executed with varying formalities, and each being facially valid and then call them all irrelevant is simply burying your head in the sand. On the other hand, calling securitization evil is equivalent to rejecting capitalism. So let’s look at securitization dispassionately.

First of all “securitization” merely refers to a concept that has been in operation for hundreds of years, perhaps thousands of years if you look into the details of commerce and investment. In our recent history it started with “joint stock companies” that financed sailing expeditions for goods and services. Instead of one person or one company taking all the risk that one ship might not come back, or come back with nothing, investors could spread their investment dollars by buying shares in a “joint stock company” that invested their money in multiple sailing ventures. So if some ship came in loaded with goods it would more than offset the ships that sunk, were pirated, or that lost their cargo. Diversifying risk produced more reliable profits and virtually eliminated the possibility of financial ruin because of the tragedies the befell a single cargo ship.

Every stock certificate or corporate or even government bond is the product of securitization. In our capitalist society, securitization is essential to attract investment capital and therefore growth. For investors it is a way of participating in the risk and rewards of companies run by officers and directors who present a believable vision of success. Investors can invest in one company alone, but most, thanks to capitalism and securitization, are able to invest in many companies and many government issued bonds. In all cases, each stock certificate or bond certificate is a “derivative” — i.e., it DERIVES ITS VALUE from the economic value of the company or government that issued that stock certificate or bond certificate.

In other words, securitization is a vehicle for diversification of investment. Instead of one “all or nothing” investment, the investors gets to spread the risk over multiple companies and governments. The investor can do this in one of two ways — either manage his own investments buying and selling stocks and bonds, or investing in one or more managed funds run by professional managers buying and selling stocks and bonds. Securitization of debt has all the elements of diversification and is essential to the free flow of commerce in a capitalistic economy.

Preview Questions:

  • What happens if the money from investors is NOT put in the company or given to the government?
  • What happens if the certificates are NOT delivered back to investors?
  • What happens if the company that issued the stock never existed or were not used as an investment vehicle as promised to investors?
  • What happens to “profits” that are reported by brokers who used investor money in ways never contemplated, expected or accepted by investors?
  • Who is accountable under laws governing the business of the IPO entity (i.e., the REMIC Trust in our context).
  • Who are the victims of misbehavior of intermediaries?
  • Who bears the risk of loss caused by misbehavior of intermediaries?
  • What are the legal questions and issues that arise when the joint stock company is essentially an instrument of fraud? (See Madoff, Drier etc. where the “business” was actually collecting money from lenders and investors which was used to pay prior investors the expected return).

In order to purchase a security deriving its value from mortgage loans, you could diversify by buying fractional shares of specific loans you like (a new and interesting business that is internet driven) or you could go the traditional route — buying fractional shares in multiple companies who are buying loans in bulk. The share certificates you get derive their value from the value of the IPO issuer of the shares (a REMIC Trust, usually). Like any company, the REMIC Trust derives its value from the value of its business. And the REMIC business derives its value from the quality of the loan originations and loan acquisitions. Fulfillment of the perceived value is derived from effective servicing and enforcement of the loans.

All investments in all companies and all government issued bonds or other securities are derivatives simply because they derive their value from something described on the certificate. With a stock certificate, the value is derived from a company whose name appears on the certificate. That tells you which company you invested your money. The number of shares tells you how many shares you get. The indenture to the stock certificate or bond certificate describes the voting rights, rights to  distributions of income, and rights to distribution of the company is sold or liquidated. But this assumes that the company or government entity actually exists and is actually doing business as described in the IPO prospectus and subscription agreement.

The basic element of value and legal rights in such instruments is that there must be a company doing business in the name of the company who is shown on the share certificates — i.e., there must be actual financial transactions by the named parties that produce value for shareholders in the IPO entity, and the holders of certificates must have a right to receive those benefits. The securitization of a company through an IPO that offers securities to investors offer one additional legal fiction that is universally enforced — limited liability. Limited liability refers to the fact that the investment is at risk (if the company or REMIC fails) but the investor can’t lose more than he or she invested.

Translated to securitization of debt, there must be a transaction that is an actual loan of money that is not merely presumed, but which is real. That loan, like a stock certificate, must describe the actual debtor and the actual creditor. An investor does not intentionally buy a share of loans that were purchased from people who did not make any loans or conduct any lending business in which they were the source of lending.

While there are provisions in the law that can make a promissory note payable to anyone who is holding it, there is no allowance for enforcing a non-existent loan except in the event that the purchaser is a “Holder in Due Course.” The HDC can enforce both the note and mortgage because he has satisfied both Article 3 and Article 9 of the Uniform Commercial Code. The Pooling and Servicing Agreements of REMIC Trusts require compliance with the UCC, and other state and federal laws regarding originating or acquiring residential mortgage loans.

In short, the PSA requires that the Trust become a Holder in Due Course in order for the Trustee of the Trust to accept the loan as part of the pool owned by the Trust on behalf of the Trust Beneficiaries who have received a “certificate” of fractional ownership in the Trust. Anything less than HDC status is unacceptable. And if you were the investor you would want nothing less. You would want loans that cannot be defended on the basis of violation of lending laws and practices.

The loan, as described in the origination documents, must actually exist. A stock certificate names the company that is doing business. The loan describes the debtor and creditor. Any failure to describe the the debtor or creditor with precision, results in a failure of the loan contract, and the documents emerging from such a “closing” are worthless. If you want to buy a share of IBM you don’t buy a share of Itty Bitty Machines, Inc., which was just recently incorporated with its assets consisting of a desk and a chair. The name on the certificate or other legal document is extremely important.

In loan documents, the only exception to the “value” proposition in the event of the absence of an actual loan is another legal fiction designed to promote the free flow of commerce. It is called “Holder in Due Course.” The loan IS enforceable in the absence of an actual loan between the parties on the loan documents, if a third party innocent purchases the loan documents for value in good faith and without knowledge of the borrower’s defense of failure of consideration (he didn’t get the loan from the creditor named on the note and mortgage).  This is a legislative decision made by virtually all states — if you sign papers, you are taking the risk that your promises will be enforced against you even if your counterpart breached the loan contract from the start. The risk falls on the maker of the note who can sue the loan originator for misusing his signature but cannot bring all potential defenses to enforcement by the Holder in Due Course.

Florida Example:

673.3021 Holder in due course.

(1) Subject to subsection (3) and s. 673.1061(4), the term “holder in due course” means the holder of an instrument if:

(a) The instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; and
(b) The holder took the instrument:

1. For value;
2. In good faith;
3. Without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series;
4. Without notice that the instrument contains an unauthorized signature or has been altered;
5. Without notice of any claim to the instrument described in s. 673.3061; and
6. Without notice that any party has a defense or claim in recoupment described in s. 673.3051(1).
673.3061 Claims to an instrument.A person taking an instrument, other than a person having rights of a holder in due course, is subject to a claim of a property or possessory right in the instrument or its proceeds, including a claim to rescind a negotiation and to recover the instrument or its proceeds. A person having rights of a holder in due course takes free of the claim to the instrument.
This means that Except for HDC status, the maker of the note has a right to reclaim possession of the note or to rescind the transaction against any party who has no rights to claim it is a creditor or has rights to represent a creditor. The absence of a claim of HDC status tells a long story of fraud and intrigue.
673.3051 Defenses and claims in recoupment.

(1) Except as stated in subsection (2), the right to enforce the obligation of a party to pay an instrument is subject to:

(a) A defense of the obligor based on:

1. Infancy of the obligor to the extent it is a defense to a simple contract;
2. Duress, lack of legal capacity, or illegality of the transaction which, under other law, nullifies the obligation of the obligor;
3. Fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms;
This means that if the “originator” did not loan the money and/or failed to perform underwriting tests for the viability of the loan, and gave the borrower false impressions about the viability of the loan, there is a Florida statutory right of rescission as well as a claim to reclaim the closing documents before they get into the hands of an innocent purchaser for value in good faith with no knowledge of the borrower’s defenses.

 

In the securitization of loans, the object has been to create entities with preferred tax status that are remote from the origination or purchase of the loan transactions. In other words, the REMIC Trusts are intended to be Holders in Due Course. The business of the REMIC Trust is to originate or acquire loans by payment of value, in good faith and without knowledge of the borrower’s defenses. Done correctly, appropriate market forces will apply, risks are reduced for both borrower and lenders, and benefits emerge for both sides of the single transaction between the investors who put up the money and the homeowners who received the benefit of the loan.

It is referred to as a single transaction using doctrines developed in tax law and other commercial cases. Every transaction, when you think about it, is composed of numerous actions, reactions and documents. If we treated each part as a separate transaction with no relationship to the other transactions there would be no connection between even the original lender and the borrower, much less where multiple assignments were involved. In simple terms, the single transaction doctrine basically asks one essential question — if it wasn’t for the investors putting up the money (directly or through an entity that issued an IPO) would the transaction have occurred? And the corollary is but for the borrower, would the investors have been putting up that money?  The answer is obvious in connection with mortgage loans. No business would have been conducted but for the investors advancing money and the homeowners taking it.

So neither “derivative” nor “securitization” is a dirty word. Nor is it some nefarious scheme from people from the dark side — in theory. Every REMIC Trust is the issuer in an initial public offering known as an “IPO” in investment circles. A company can do an IPO on its own where it takes the money and issues the shares or it can go through a broker who solicits investors, takes the money, delivers the money to the REMIC Trust and then delivers the Trust certificates to the investors.

Done properly, there are great benefits to everyone involved — lenders, borrowers, brokers, mortgage brokers, etc. And if “securitization” of mortgage debt had been done as described above, there would not have been a flood of money that increased prices of real property to more than twice the value of the land and buildings. Securitization of debt is meant to provide greater liquidity and lower risk to lenders based upon appropriate underwriting of each loan. Much of the investment came from stable managed funds which are strictly regulated on the risks they are allowed in managing the funds of pensioners, retirement accounts, etc.

By reducing the risk, the cost of the loans could be reduced to borrowers and the profits in creating loans would be higher. If that was what had been written in the securitization plan written by the major brokers on Wall Street, the mortgage crisis could not have happened. And if the actual practices on Wall Street had conformed at least to what they had written, the impact would have been vastly reduced. Instead, in most cases, securitization was used as the sizzle on a steak that did not exist. Investors advanced money, rating companies offered Triple AAA ratings, insurers offered insurance, guarantors guarantees loans and shares in REMIC trusts that had no possibility of achieving any value.

Today’s article was about the way the IPO securitization of residential loans was conceived and should have worked. Tomorrow we will look at the way the REMIC IPO was actually written and how the concept of securitization necessarily included layers of different companies.

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