Deny and Discover — Where the Rubber Meets the Road

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What’s the Next Step? Consult with Neil Garfield

For assistance with presenting a case for wrongful foreclosure, please call 520-405-1688, customer service, who will put you in touch with an attorney in the states of Florida, California, Ohio, and Nevada. (NOTE: Chapter 11 may be easier than you think).

Editor’s Analysis: The banks are broke and this rule properly applied will reveal exactly how badly they fall short of capital requirements. It can be found at Volume 77, No. 169 of the Federal Register dated, Thursday, August 30, 2012 2012-16759 Capital Risk Disclosure Requirements Under Dodd Frank.

Admittedly this is not for the feint of heart or those with limited literacy in economics, accounting and finance; but if you find yourself in the position of not understanding, then go to any economist or banker or finance specialist or accountant  and they will explain it to you.

Lewtan which produces ABSnet is offering a service to banks that will give the banks and plausible deniability when the figures come up all rosy for the banks. Lewtan should be careful in view of the action being taken against the ratings companies, which is the start of an assault on the citadel of evil intent on Wall Street.

The fundamental aspect of these new rules are that the bank must report on the degree of risk it has taken on in any activity or holding. They must also  show how they arrived at that assessment and under the Freedom of Information Act (FOIA) you might be able to get copies of their filing whether they do it themselves (doubtful) or hire someone like Lewtan which is obviously going to do the bidding of its paying clients.

The main problem for the banks is that they are holding overvalued assets and some non-existent assets on their balance sheet. A review to assess risk if properly conducted, will definitely turn up both kinds of assets reported on the balance sheet of the banks, which in turn will reduce their reported capital reserves, which in turn will result in changing the ratio between capital and risk.

This might sound like gumbo to you. But here is the bottom line: the banks were using investor money. We all know that. In baby language, the question is if they were using someone else’s money how did the banks lose any money?

They did receive the money from investors like pension funds, and other managed funds for retirement or contingencies. But they diverted the money and the documents to make it appear that the bank owned the assets that were intended to be purchased for the REMIC trusts. The Banks then purchased and claimed to be an insured or a party who had sustained a loss when in fact the loss was incurred by the investors and the mortgage bonds and loans were owned collectively by the investors.

By doing that the insurance proceeds were paid to the banks creating an instant liability to the investors to whom they owed a common law and contractual duty to provide an accounting and distribution based upon the insurance recovery. At no time did the banks ever have a risk of loss nor an insurable interest in their own name. And at not time were they bound by the REMIC documents because they ignored the REMICs and conducted transactions through an entirely different superstructure.

As agents of the investors they should have followed the REMIC documents and purchased the insurance and CDS protection for the benefit of the investors. But they didn’t do that. They kept the money for the bank who never had any proof of loss, proof of payment and was a mere intermediary claiming the rights of the principal. The same thing happened with Credit Default Swaps and Federal bailouts.

That is why the definition of toxic assets changed over a weekend when TARP was started. It was thought that the mortgages had gone bad for the banks.

Then they realized that the mortgages weren’t going bad to the extent reported and that the bank was suffering no loss because they were using investor money to create the funding of loans and the funding of proprietary trading in which they masked the theft of trillions from investors.

So the government quietly changed the definition of toxic assets to mortgage bonds — but that ran into the same problem, to wit: the mortgage bonds were underwritten by the banks but purchased by the investors (pension funds etc.).

Now the rubber meets the road. The claim that somehow the banks got stuck with mortgage bonds is patently absurd. If they have mortgage bonds it is not because they bought them, it is because they created them but were unable to sell them because the market collapsed and the PONZI scheme fails whenever the suckers stop buying.

The actual proceeds from theft from the investors and the borrowers is parked off shore around the world. The Banks having been feeding the money back in very slowly because they want to create the appearance of an increasingly profitable bank, when in fact, their revenues sand earnings are slipping away quickly — except for the bolstering they get from repatriating stolen money from investors and borrowers and calling them “proprietary trades.”

Nobody on Wall Street is making that kind of money on trades, proprietary or otherwise, but the banks are claiming ever increasing profits, raising their stock price, defrauding their stockholders. So against each overvalued and non-existent asset claimed by the mega banks on their balance sheet is a liability of far exceeding the assets or even the combined assets of the banks. Treasury knows, this, the Fed knows this and central bankers around the world know it. But they have been drinking the Kool-Aid believing that if they call out the mega banks on this fake accounting, the entire financial system will collapse.

So yes there is a consensus between those who pull the levers of power that they will allow the banks to pretend to have assets, that their liabilities are fairly low, and that the risks associated with their business activities, assets and liabilities are minimal even while knowing the converse is true. The system’s foundation is a loose amalgamation of lies that will eventually collapse anyway but everyone likes to kick the can down the road.

You are getting in this article a sneak peek into why the banks all rushed to foreclose rather than modify or settle on better terms. What is important from the practice point of view is that (1) the “Consideration” mandated by HAMP is not happening and you can prove it with the right allegations and discovery and (2) the reports tendered to OCC and the Fed under this rule will reveal that the issue of proof of loss, risk of loss, proof of payment and ownership is completely muddled — unless you follow the money trail (see yesterday’s article). You can subpoena the reports given by the banks from both the bank itself or the agency. My opinion is that you fill find a treasure trove of information very damaging to the banks and the Treasury Department.

There will be caveats in the notes that express the risk of inaccuracy and which reveal the possibility that the banks neither own nor control the mortgages except as agents for the investors, that the liability to the investors is equal to the money received from insurance, CDS, and bailouts, and that the borrower’s loan payable balance was corresponding reduced as to the investor and increased to entities that are not or cannot press any claims against the borrowers. Educate yourself and persist — the tide is turning.

Excerpt from attached section of Federal Register:

The bank’s primary federal supervisor may rescind its approval, in whole or in part, of the use of any internal model and determine an appropriate regulatory capital requirement for the covered positions to which the model would apply, if it determines that the model no longer

complies with the market risk capital rule or fails to reflect accurately the risks of the bank’s covered positions. For example, if adverse market events or other developments reveal that a material assumption in an approved model is flawed, the bank’s primary federal supervisor may require the bank to revise its model assumptions and resubmit the model specifications for review. In the final rule, the agencies made minor modifications to this provision in section 3(c)(3) to improve clarity and correct a cross-reference.

Financial markets evolve rapidly, and internal models that were state-of-the- art at the time they were approved for use in risk-based capital calculations can become less effective as the risks of covered positions evolve and as the industry develops more sophisticated modeling techniques that better capture material risks. Therefore, under the final rule, as under the January 2011 proposal, a bank must review its internal models periodically, but no less frequently than annually, in light of developments in financial markets and modeling technologies, and to enhance those models as appropriate to ensure that they continue to meet the agencies’ standards for model approval and employ risk measurement methodologies that are, in the bank’s judgment, most appropriate for the bank’s covered positions. It is essential that a bank continually review, and as appropriate, make adjustments to its models to help ensure that its market risk capital requirement reflects the risk of the bank’s covered positions. A bank’s primary federal supervisor will closely review the bank’s model review practices as a matter of safety and soundness. The agencies are adopting these requirements in the final rule.

Risks Reflected in Models. The final rule requires a bank to incorporate its internal models into its risk management process and integrate the internal models used for calculating its VaR-based measure into its daily risk management process. The level of sophistication of a bank’s models must be commensurate with the complexity and amount of its covered positions.

They Just Don’t Get It: Meltdown Primer

CHECK OUT OUR DECEMBER SPECIAL!

What’s the Next Step? Consult with Neil Garfield

For assistance with presenting a case for wrongful foreclosure, please call 520-405-1688, customer service, who will put you in touch with an attorney in the states of Florida, California, Ohio, and Nevada. (NOTE: Chapter 11 may be easier than you think).

Editor’s Analysis: Reynaldo Reyes, the asset manager for Deutsch that pretends to be a trustee of non existent unfunded trusts said it best: “it’s all very counter-intuitive.” In reality he was giving a clue. It isn’t that we haven’t yet unravelled the tangled web of deceit and exotic financial instruments and absurd risk taking. It all boils down to one thing: it doesn’t make sense, it was illegal from the start and it will never make sense. The reason it is counter intuitive is that there is no explanation except lying, cheating, stealing and cover-ups.

Whether you start from the top down, the bottom up or even start in the middle and spread out to the top and bottom, there is no connection between the money trail, the promises and representations made, and the document trail which proves beyond a shadow of a doubt that theft, breach of fiduciary duty, breach of contract, fraud, theft and cover-up were at the heart of what Wall Street called a securitization plan but which in practice was not securitization of credit but rather a PONZI s scheme completely dependent upon more investors buying bogus mortgage bonds. The crash didn’t happen because of mortgage de faults. It happened because investors stopped buying the bogus mortgage bonds. That is the red flag on all Ponzi Schemes. When people stop buying and start demanding their money back, the scheme collapses.

Under normal circumstances, the perpetrators — Madoff, Dreier, Stanford et al — go to jail, a receiver is appointed and the receiver does the best job possible of clawing back all the illicit gains, profits and accounts of the perpetrators. That is what should happen with he mortgage mess but that would mean admitting that the judicial system let millions of foreclosures go through the system because of bad lawyering, bad representation by pro se litigants and bad practices by the bench which failed to see the correct chain of title and then failed to inquire why not. —-

YES that IS the way it was. When I represented banks and HOA foreclosing on their liens, if I didn’t have my paperwork in order, the Judge sent me back to do it right — even if the other side didn’t show up. Why? Because the Judge understood that bad paperwork means bad title and that dozens of others could be effectively defrauded by allowing a bad foreclosure to proceed to sale, allowing an unproven creditor to submit a credit bid, and allowing a homeowner who legally still owned the home after the foreclosure to be evicted.

Back in those days certain presumptions applied — legal or informal — that the debt was real, the note was valid, and the mortgage was perfected. it was further correctly assumed that the borrower was in default.

The problem is that the old presumptions and assumptions remain while the facts are wildly different than the old-style foreclosures. Instead of the Judge being able to peruse the documents behind the mortgage, he must either accept the proffer of the facts from the lawyers for the foreclosing entity or have an evidentiary hearing, which he certainly doesn’t want on his calendar because all his other cases would pile up in a bottle neck. Thus lying in court became an acceptable substitute for having the right verifiable paperwork.

People ask me — how do I prove this? Lawyers ask me the same question. My answer is spend the daily rate for Lexus-nexus and get cases on point in your jurisdiction. They will say that where the facts and documents are uniquely within the knowledge and custody of the the defendant, the appropriate remedy is discovery and that the respondent to discovery has a higher duty to provide clear, concise and  extensive answers. In short, the burden of persuasion changes to the the foreclosing party — whether you are in a judicial or non-judicial venue.

Any other approach would have the Judge making findings in the absence of real evidence and actual facts, which is exactly the problem in the current judicial climate, although the tide is definitely turning in many states.

A quick look at the reality of the Ponzi scheme reveals the true nature of the illegality that the regulators and law enforcement faced, understaffed and underfunded against a well staffed and over-funded banking sector.

Let’s start in this article from the top. There the investment banking firm forms what appears to be a REMIC trust and they create a selling entity to put some distance between the investment banking firm and the actual sale. The sale takes place, to wit: the investors gives the investment banking money and the investor gets either a certificate (rarely) or some acknowledgment ina statement that the investor is now the proud owner of an interest in a REMIC trust governed by the REMIC provisions of the internal Revenue Code, which allows the REMIC trust to be a tax-exempt entity meaning the flow of funds from investments by the REMIC will only be taxed once even though it is coming through another entity. If that were true, there would be no problem. The problem is that it is not true and for the most never was true and never was the intent of the banks.

So to recap thus far, the money went from the bank account of the investors to the bank account of the investment bank or to an entity wholly controlled by the investment bank. Where it did NOT go was into a trust account wherein the Trustee for the REMIC pool would collect and disburse all funds, receipts and disbursements as set forth in the investor prospectus and pooling and service agreement.

If you look at the Taylor Bean and Whitaker setup, you’ll see, as Dan Edstrom has pointed out, that the money was instead put into a vast commingled account which they called a custodial account, but they never state for whom they are the custodian. And that is because they were skimming the money in a tier 2 yield spread premium and other “proprietary trading” also known as three pocket Monty — you take the money out of one pocket to transfer it to another pocket but on the way a few dollars drops into a secret third pocket. This vast Superfund was used as a TBW piggy bank as well as the source of funding for mortgages.

Without getting into the farce of “proprietary trading” being the cover for outright theft of investors money, let’s look at what happened next with the money.

People with the right connections were told to create mortgage origination companies. These companies would act as the payee on the note and the secured party on the mortgage or deed of trust, but they would never ever be allowed to touch the actual funding of the mortgage nor would they have the right to make a loan that would fall under the provisions of the assignment and assumption agreement signed with the aggregator (Countrywide, for example). SO XYZ company is created and they have a bank account and all that but the funding of the mortgage never touches the bank account of XYZ or any person associated with XYZ. The simple reason is that Wall Street being composed largely of thieves, understood that when the balances became high enough in the originators accounts, many if them would abscond with the money. So the wire transfer was made directly from the Superfund account (euphemistically referred to as a warehouse credit facility set up solely at the discretion of the aggregation (e.g. Countrywide.).

It was the coincidence of timing that convinced the closing agent and the borrower that the money had come from the “lender” identified on the disclosure paperwork and in the note and mortgage, when in fact, the originator was a mere nominee working for a fee. The originator could not under generally accepted accounting rules, book the transaction as a loan receivable because there was no offsetting entry debiting a cash account or other account over which the originator had control. The originator had control over nothing — the underwriting, funding, approval of the loan was left to the undisclosed aggregator using a computer system designed explicitly for this purpose. Without approval from Countrywide, the originator was not permitted to communicate approval of the loan.

The real lender were the investors whose money had been diverted from the REMIC trust into the Superfund. This created a common law partnership instead of a REMIC trust. This partnership with no name was the lender but the banks made sure that the true lender in an obviously illegal table-funded transaction was never disclosed. As far as the closing agent and borrower were concerned the coincidence of having the money there at the same time as the closing with the originator was proof of enough about what was going on. After all, who would send money for a mortgage transaction unless they thought they were getting a valid enforceable note and a mortgage or deed of trust securing the provisions of that note, which was valid evidence of the debt.

Unfortunately for the investors, the banks had other ideas than using the money the way they promised in the prospectus and pooling and servicing agreement, and they had other plans than protecting the investors enforceable rights under a valid promissory note, and they had a different idea about securing a note payable to the investors with the investors having a perfected mortgage lien against the property.

Bottom Line: The wire transfer receipt shows a loan emanating from the Superfund and that the money from the Superfund was advanced by the investors, but other than the wire transfer receipts there was not a shred of documentary evidence showing that the investors were going to be repaid under the terms of the mortgage-backed bonds in the REMIC because the mortgage bonds never made into the REMIC and their money never  made it into the largely or completely unfunded REMIC trust.

On the contrary, the documents produced by the originator under direction of the aggregator who was functioning under the thumb of the investment banks, all tell a wildly different story. According to the documents, the originator made the loan and assigned or sold it to the aggregator who sold it to the REMIC, which presumably protected the investors in a round about way even if it was a lie. The main problem with the bank’s version of the story is that XYZ never got paid for the loan or mortgage in a transfer or assignment transaction. And the aggregator never got paid by the REMIC trust for the loans either. The lack of consideration is not merely a technicality but rather part of a larger plot to steal from investors and homeowners.

The trust reposed in the banks by investors and homeowners alike basically was like putting red meat in front of a lion. The reason for the subterfuge was that the banks wanted to and did in fact get away with borrowing the loss of the investors by pretending to be the owner of the loans for a temporary period of time. By doing that they had what appeared to be ownership, proof of loss, albeit without any proof of payment. Now the insurers and credit default swap parties are hip to this trick and suing the investment banks.

The net result is that the actual financial transaction is largely undocumented, unsecured, and unenforceable in terms of method of repayment. The debt to investors (not the REMIC trusts) exists — less the insurance, CDS and bailouts received by the agents of the investors — but it is not documented. Conversely, the documented transaction lacks consideration of any kind, thus describing a financial transaction that never actually occurred. Any assignment therefore was pure lies and hype, since the reference was to originating documents that were procured by misrepresentation or fraud, without consideration, and obviously no perfected lien, which is not subject to nullification of instrument.

The banks and regulators and law enforcement don’t like my explanation because it would require them to do their work, and the people in charge of the banks to go to jail, costing a could of hundred millioin dollars to prove the case against the right people. Whether they like it or not, the regulators and law enforcement needs to do their job or face recriminations from the public once the true nature of this scheme is fully revealed. And make no mistake about it. I am not the only one who knows. The truth is coming out and that is why Judges are turning.

Major Economists Tell Obama to Reduce Mortgage Debt

What’s the Next Step? Consult with Neil Garfield

CHECK OUT OUR NOVEMBER SPECIAL

For assistance with presenting a case for wrongful foreclosure, please call 520-405-1688, customer service, who will put you in touch with an attorney in the states of Florida, California, Ohio, and Nevada. (NOTE: Chapter 11 may be easier than you think).

Editor’s Comment: I think Obama is stuck on the idea that correction of loans to reflect their true value is a gift to undeserving people — because that is the message he is getting from Wall Street. I have demonstrated on these pages that correction of loan principal is not a gift, it is paid in full, and even if you disagree with indisputable facts, it is the only practical thing to do as Iceland has clearly shown, with the only growing economy in Western nations.

Now we find out that Obama was given exactly that advice 18 months before he won reelection. Let’s see if he does it. He sought got the advice of seven of the world’s leading economists who all agreed that reduction of household debt — and in particular the dubious mortgage debt that Wall Street is using to make more and more profit, is something that the administration should do right away.

We can only guess why the administration has not done it, but I know from background sources that this ideological battle has been going on in the White House since Obama was first elected. What is needed is for Obama to take the time to get to know the real facts. And those facts show clearly that (1) the foreclosures that already were allowed to proceed did so on imperfected liens which is to say the right to foreclose was absent regardless of the amount and (b) the principal claimed as due on those loans was (1) not due to the people who claimed it and (2) far above the real amount that was due because the banks stole the money from insurance, credit default swaps and federal bailouts from investing pension funds and other managed funds.

The banks claimed ownership of loans they neither funded nor purchased and also had the audacity to claim the losses and then overstated the losses by a factor of 10. The insurance companies and counterparties on the credit default swaps, along with the federal government, paid the banks who didn’t have a dime in the deal and therefore lost nothing. The investors received small pittances in settlements when they should have received from their investment bankers (agents of the investors) the money that was received.

An accounting from the Master Servicer and the trustee or manager of the “pools” would clearly show that the money was received and not allocated in accordance with the contrnacts nor common law. As a result we are left with a fake loss that was tossed over the fence at the investors. Had they allocated the gargantuan payments received from multiple insurance policies on the same bonds and loans, the principal would be reduced anyway.

This is why I keep saying that you should use Deny and Discover as  your principal strategy and direct it not just to the subservicer who deals directly with the homeowner borrowers but also the Master Servicer who deals with the subservicer, the insurance companies, the counterparties on credit default swaps, and the federal government.

Following the money trial will in most cases show that the lien recorded was imperfect and not enforceable because the party who was designated as the lender was not the lender, hence “pretender lender.” Following this trail from one end to the other and forcing the books open will show that most loans were table funded (predatory per se as per TILA reg Z) — and not for the benefit of the investors, but rather for the benefit of the bankers (a typical PONZI scheme).

In an economy driven by consumer spending, the reduction in household debt will drive the economy forward and upward. The real total in many cases is zero after credits for insurance, CDS, and federal bailouts. If you leave the tax code alone, and let the “benefit” be taxed, the federal government will receive a huge amount of taxes that the banks evaded, but they would get it from homeowners, whose tax debt would be a small fraction of the mortgage debt claimed by the banks.

The problem can be solved. It is a question of whether the leader of our nation studies the issues and comes to his own conclusions instead of being led on a string by Wall Street spinning.

Failure to act will produce a wave of strategic defaults because like any business failure, the “businessman” — i.e., the homeowner — has concluded that the investment went bad and they will just walk away — resulting in another windfall to the banks who after cornering the world’s supply of money will have cornered the world’s supply of real estate.

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With All the Settlements, What is Owed on Principal?

CREDITOR HAS BEEN PAID

The complexity and shroud of mystery surrounding claims of securitizations, assignments etc can be simplified if you just look at the money. This is why I have forensic auditors who chase this information down. Call living lies customer service 520-405-1688 if you can’t find an adequate analyst of your own who REALLY dig in.

  1. What money was paid to whom? When? How? Who is a witness that can authenticate and verify the documents used (ACH, Wire transfer, check) the documents used for money transfer?
  2. If the creditor already settled with the investment bank, then is the claim for collection or foreclosure on the mortgage still viable?
  3. How was the settlement allocated as to the investor-lenders?
  4. If the investor-lenders received all or part of the money from the investment bank, how much is owed by the homeowner and to whom?
  5. To whom was money paid? Who received the actual payments from borrowers, co-obligors, insurance, credit default swaps, federal bailouts and civil settlements? How much of this money was received as agent for the investor-lenders (creditors)?

There are lots of questions but they can all be answered with arithmetic. If investor bought a bogus mortgage bond for $100 million and received $50 million in settlement, then they are either owed still $50 million or they settled the claim and if you contact them, they will say they have no interest in pursuing the matter any further. So why the foreclosure? And if there is a foreclosure, who gets the money? Who is the “creditor that submits a “credit bid.?”

People don’t like talking about the free house syndrome, but SOMEONE IS GETTING A FREE HOUSE one way or the other — either the banks or the homeowner.

One thing I am sure about is that there is a claim that can be firmly supported by the presence of a settlement or proceeds from co-obligors (insurers, CDS counterparties etc.). Either the amount due is wrong, eliminated or at least subject to a proper accounting. This would negate the issues of foreclosure, at least for a while, in the notice of default and initiation of foreclosure based upon the assertion that the creditor has been identified as beneficiary or mortgagee and the amount due is as stated. The amount due is probably NOT as stated and the creditor identified might not even have a dog in the race anymore.

Judges get angry at borrowers for bringing this up. I think lawyers should have the guts to stand up to such judges and say your anger is misplaced. Don’t shoot the messenger! The borrower didn’t create this mess, it was the financial industry and this loan was not even originated using standard rules of underwriting and document preparation.

REMIC Status Under Fire: HUGE LOSSES FROM TAX LIABILITIES

If, however, the transaction does not coincide with the parties’ bona fide intentions, courts will ignore the stated intentions.19  The analysis of ownership cannot merely look to the agreements the parties entered into because the label parties give to a transaction does determine its character.20  Consequently, the analysis must examine the underlying economics and the attendant facts and circumstances to determine who owns the mortgage notes for tax purposes.21

(Bradley T. Borden & David Reiss are professors at Brooklyn Law School.1)

“They take aggressive positions, and they figure that if enough of them take an aggressive position, and there’s billions of dollars at stake, then the IRS is kind of estopped from arguing with them because so much would blow up. And that is called the Wall Street Rule. That is literally the nickname for it.”2

Editor’s Note: We have been discussing the sham nature of securitization and assignment claims for years. The IRS and others have begun to take notice. The effect will be staggering unless “the Wall Street rule” is established. The article below from two professors at Brooklyn Law School is a mirror of the Fordham Law Review Article written 7 years ago entitled “Will the Real Party in Interest Please Stand Up.”

The author’s state “This calamity is compounded by the fact that those professional advisers should have known that the REMICs they created were flawed from the start.  If these losses are realized, those professionals will face suits for damages so large that they could put them out of business.” We are talking about bankers, insurers, lawyers, accounting firms and all the other players that were engaged in the make-believe game of securitization.

The scheme was not flawed in my opinion, it was intentional and based on the sole premise of every PONZI scheme artist: they thought they could get away with it and they still think so. Madoff, whose PONZI scheme is now being traced to the early 1970″s, Drier who used Solow’s name to create the appearance of legitimate transactions that were faked from start to finish, are all in the same pot. When you look closely, there isn’t any difference. They took money, they used it not the way the lender or investor intended, and they ended up lavishing on themselves huge bonuses, salaries and other gains (off-shore) that make Madoff and Dreir look like small potatoes.

A REMIC allows for the pooling of mortgage loans that can then be issued as a mortgage-backed security.  It is a pass-through entity for tax purposes, meaning that unlike corporations, they do not pay income tax and their owners thereby avoid the double taxation they would face from receiving corporate dividends.  A REMIC is intended to be a passive investment.

Because of its passive nature, a REMIC is limited as to how and when it can acquire mortgage.  In particular, a REMIC must in most cases acquire its mortgages within 90 days of its start-up.3  The Internal Revenue Code provides for draconian penalties for REMICs that fail to comply with applicable legal requirements.”

“By failing to transfer possession of the note to the pool backing the securities, Countrywide failed to comply with the requirements necessary to obtain REMIC status.  Numerous other filings and reports suggest that Countrywide’s practice was typical of many major lenders during the early 2000s.  Thus, although we rely on the facts in the Kemp case in this brief article, it has very broad application.”

The article maintains a focus on the paperwork which is a common occurrence in these analyses, assuming that the REMIC existed and was somehow funded with cash and/or “assets.” But this was not the case and so the scenario that these authors paint are actually understated. The money appears to have been diverted from the REMIC from the very start, with no bank account or other “account” held by a financial institution or trustee in control of it.

The authors give the banks the benefit of the doubt when they describe the actions as negligent. They stop at the doorway leading to the PONZI scheme that went into full swing at the beginning of the 2000′s. BY diverting the money and then diverting the documents away from the REMICs, the banks were able to assert “ownership” of the loan thus enabling them to collect insurance, credit default swap and Federal bailout proceeds for themselves instead of the REMICs or the REMIC investors.

The reason why so many notes were lost, destroyed, stolen or whatever is that if the insurers, investors, and counterparties on hedge products had actually seen the notes rather than data describing the notes, they would have known that the wrong parties were named on all the instruments, and that the REMICs were violating the rules to avoid double-taxation on a regular basis — all without the investors knowledge. Further, the profits from tier 2 yield spread premiums, which were huge (especially in loans classified as subprime) together with the payoffs from entities who contractually agreed to waive subrogation, left the investors with no way to know, much less understand, that trillions of dollars were being paid on notes, whether they were in default or not — because they were in pools where the Master Servicer ordered a write-down of the pool.

Like any PONZI scheme, two things are true here i the scheme that is papered over with false claims of securitization and assignments: the deal falls apart when people stop buying the bogus mortgage bonds and when it comes time to pay up or prove the transaction, there is no money to cover it. So the banks painted themselves into a corner that is causing the long arm of the law to close in on them due to upcoming statutes of limitations: in an ironic twist, if the loans turn out to be performing or were false declared to be in default or were false declared to be devalued, then the money received by the banks is due back to the insurers and other parties who paid.

And that is why the insurers and counterparties are suing the banks — based upon the misrepresentation of the quality of the loans or even the existence of the loans, and the fact that the payment was predicated upon a good faith belief that defaults had occurred when in fact they had not.

Since the loans were aggregated into false mortgage bonds, the banks were able to sell the same pool  multiple times which they called leveraging. And THAT is why a modified loan represents a huge loss to them. When the number of modified, reinstated or  settled loans reaches critical mass, the recipients of the insurance, credit default swap and federal bailouts must pay that money back under either contract law or tort law (fraud). In monetary terms a $30 million commercial loan might have been sold a few times with the “lender” receiving tens of millions of dollars, or even hundreds of millions of dollars (depending upon how bold they became).

So the “lender” must do everything within its power to maintain the appearance of a default even if there was no default or else they not only give up their claim for default interest, they must give up multiples of the original loan that they received from third parties based upon false pretenses.

It gets worse. Having received the insurance, credit default swap and federal bailout money, the original debt has been extinguished because the “creditor” has been paid in full according to the paperwork existing at the time of the payment from these co-obligors. The parties that paid would ordinarily have a claim for contribution against the borrower, but in most cases they contracted that right away. Hence the commercial property could emerge debt free and definitely unencumbered by a mortgage.

Whether we are discussing residential loans or commercial property loans, the borrower should do their homework and realize that they actually have more leverage than the lender who is pressing for foreclosure. We already have had one case where a whistle-blower received a huge sum of money for reporting these practices and the IRS collected enormous tax revenues from one deal.

The article below shows that out of the $13 trillion in mortgages, most of it followed a path of false paper and diverted money; the liability for the professionals that put these deals together might include a criminal conspiracy — but even without that the REMIC rules are very clear. Violation means double taxation, and with interest and penalties that alone could be enough to change the landscape of banks, insurers, law firms and accountants.

That failure appears to cause the trusts to fail both the definitional requirement and the timing requirement that are necessary to elect REMIC status. They fail the definition requirement because they do not own obligations, and what they do own does not appear to be secured by interests in real property.

Wall Street Rules Applied to REMIC Classification

By Bradley T. Borden & David Reiss 

(Bradley T. Borden & David Reiss are professors atBrooklyn Law School.1)

“They take aggressive positions, and they figure that if enough of them take an aggressive position, and there’s billions of dollars at stake, then the IRS is kind of estopped from arguing with them because so much would blow up. And that is called the Wall Street Rule. That is literally the nickname for it.”2

Investors in mortgage-backed securities, built on the shoulders of the tax-advantaged Real Estate Mortgage Investment Conduit (“REMIC”), may be facing extraordinary tax losses because of how bankers and lawyers structured these securities.  This calamity is compounded by the fact that those professional advisers should have known that the REMICs they created were flawed from the start.  If these losses are realized, those professionals will face suits for damages so large that they could put them out of business.  That is, unless the Wall Street Rule is applied.

The issue of REMIC failure for tax purposes is important in at least three contexts:

(1) in any potential effort by the IRS to clean up this industry;

(2) in civil lawsuits brought by REMIC investors against promoters, underwriters, and other parties who pooled mortgages and sold mortgage-backed securities; and

(3) state and federal prosecutors and regulators who consider bringing criminal or civil claims against promoters, underwriters, and other parties who pooled mortgages and sold MBSs.

A History of REMIC-able Growth

The first mortgage-backed securities (“MBS”) were issued by entities related to the federal government, like Fannie Mae and Freddie Mac, in the early 1970s.  These MBS paid out to investors from their proportional share of ownership of a securitized pool of mortgages’ cash flow.  Starting in the late 1970s, private issuers such as commercial banks and mortgage companies began to issue residential mortgage-backed securities.  These “private label” securities are issued without the governmental or quasi-governmental guaranty that a federally related issuer would give.  Private label securitization gained momentum during the savings-and-loan crisis in the early 1980s, when Wall Street firms were able to expand market share at the expense of the beleaguered thrift sector.

Before 1986, mortgage-backed securities had various tax-related inefficiencies.  First among them, such securities were taxable at the entity level, thus investors faced double taxation.  Wall Street firms successfully lobbied Congress to do away with double taxation in 1986.  This legislation created the REMIC, which was not taxed at the entity level.  This one change automatically boosted its yields over other types of mortgage-backed securities.  Unsurprisingly, REMICs displaced these other types of mortgage-backed securities and soon became the dominant choice of entity for such transactions.

A REMIC allows for the pooling of mortgage loans that can then be issued as a mortgage-backed security.  It is a pass-through entity for tax purposes, meaning that unlike corporations, they do not pay income tax and their owners thereby avoid the double taxation they would face from receiving corporate dividends.  A REMIC is intended to be a passive investment.

Because of its passive nature, a REMIC is limited as to how and when it can acquire mortgage.  In particular, a REMIC must in most cases acquire its mortgages within 90 days of its start-up.3  The Internal Revenue Code provides for draconian penalties for REMICs that fail to comply with applicable legal requirements.

In the 1990s, the housing finance industry, still faced with the patchwork of state and local laws relating to real estate, sought to streamline the process of assigning mortgages from one mortgage pool to another.  Industry players, including Fannie and Freddie and the Mortgage Bankers Association, advocated for The Mortgage Electronic Recording System (“MERS”), which was up and running by the end of the decade.

A MERS mortgage contains a statement that “MERS is a separate corporation that is acting solely as nominee for the Lender and Lender’s successors and assigns. MERS is the mortgagee under this Security Instrument.”4

MERS is not named on any note endorsement.  This new system saved lenders a small but not insignificant amount of money every time a mortgage was transferred.  However, the legal status of this private recording system was not clear and had not been ratified by Congress.  Notwithstanding that fact, nearly all of the major mortgage originators participated in MERS and MERS registered millions of mortgages within a couple of years of being up and running.

Beginning in early 2000s, MERS and other parties in the mortgage securitization industry began to relax many of the procedures and practices they originally used to assign mortgages among industry players.  Litigation documents and decided cases reveal how relaxed the procedures and practices became.  Hitting a crescendo right before the global financial crisis hit, the practices became egregiously negligent.

The practices at Countrywide Home Loans Inc. (then one of the nation’s largest loan originators in terms of volume and now part of Bank of America) illustrate the outrageous behavior of mortgage securitizers that was typical during that period.

Kemp-temptable Practices

 In re Kemp demonstrates that securitizers did not follow the rules applicable to REMICs when issuing mortgage-backed securities.

On May 31, 2006, Countrywide Home Loans Inc., lent $167,000 to John Kemp.5  At that time, Kemp signed a note listing Countrywide Home Loans Inc., as the lender; no indorsement appeared on the note.

An unsigned allonge (a piece of paper attached to a negotiable note that allows for the memorialization of additional assignments if there is not sufficient room on the note itself to do so) of the same date accompanied the note and directed Kemp to “Pay to the Order of Countrywide Home Loans Inc., d/b/a America’s Wholesale Lender.”

On the same day, Kemp signed a mortgage in the amount of $167,000, which listed the lender as America’s Wholesale Lender.  The mortgage named MERS as the mortgagee and authorized it to act solely as nominee for the lender and the lender’s successors and assigns.  The mortgage referenced the note Kemp signed, and it was recorded in the local county clerk’s office on July 13, 2006.

On June 28, 2006, Countrywide Home Loans Inc., as seller, entered into a Pooling and Servicing Agreement (PSA) with CWABS, Inc., as depositor; Countrywide Home Loans Servicing LP as master servicer; and Bank of New York as trustee.  The PSA provided that Countrywide Home Loans Inc., sold, transferred, or assigned to the depositor “all the right, title and interest of [Countrywide Home Loans, Inc.] in and to the Initial Mortgage Loans, including all interest and principal received and receivable by” Countrywide.

The PSA further provided that the depositor would then transfer the Initial Mortgage Loans, which include Kemp’s loan, to the trustee in exchange for certificates referred to as Asset-backed Certificates, Series 2006-8.  The depositor apparently then sold the certificates to investors.

The PSA also provided that the depositor would deliver “the original Mortgage Note, endorsed by manual or facsimile signature in blank in the following form: ‘Pay to the order of ________ without recourse’, with all intervening endorsements from the originator to the Person endorsing the Mortgage Note.”

Although Kemp’s note was supposed to be subject to the PSA, it was never endorsed in blank or delivered to the depositor or trustee as required by the PSA.  At that time, no one recorded a transfer of the note or the mortgage with the county clerk.

On March 14, 2007, MERS assigned Kemp’s mortgage to Bank of New York as trustee for the Certificate Holders CWABS Inc. Asset-backed Certificates, Series 2006-8.  The assignment purported to assign Kemp’s mortgage “[t]ogether with the Bond, Note or other obligation described in the Mortgage, and the money due and to become due thereon, with interest.”  That assignment was recorded on March 24, 2008.

On May 9, 2008, Kemp filed a voluntary bankruptcy petition.  On June 11, 2008, Countrywide, identifying itself as servicer for the Bank of New York, filed a secured proof of claim noting Kemp’s property as collateral for the claim.  In response, Kemp filed an adversary complaint on October 16, 2008, against Countrywide Home Loans, Inc., seeking to expunge its proof of claim.

At trial, Countrywide Home Loans, Inc., produced a new undated Allonge to Promissory Note, which directed Kemp to “Pay to the Order of Bank of New York, as Trustee for the Certificate-holders CWABS, Inc., Asset-backed Certificates, Series 6006-8.”  A supervisor and operational team leader for the apparent successor entity of Countrywide Home Loans Servicing LP testified that the new allonge was prepared in anticipation of the litigation and was signed weeks before the trial.  That same person testified that the Kemp’s original note never left the possession of Countrywide Home Loans, Inc., but instead, it went to its foreclosure unit.  She also testified that the new allonge had not been attached to Kemp’s note and that customarily, Countrywide Home Loans, Inc., maintained possession of the notes and related loan documents.  In a later submission, Countrywide Home Loans, Inc., represented that it had the original note with the new allonge attached, but it provided no additional information regarding the chain of title of the note.  It also produced a Lost Note Certificate dated February 1, 2007, providing that Kemp’s original note had been “misplaced, lost or destroyed, and after a thorough and diligent search, no one has been able to locate the original Note.”

The court therefore concluded that at the time of the filing of the proof of claim, Kemp’s mortgage had been assigned to the Bank of New York, but Countrywide had not transferred possession of the associated note to the Bank of New York.

By failing to transfer possession of the note to the pool backing the securities, Countrywide failed to comply with the requirements necessary to obtain REMIC status.  Numerous other filings and reports suggest that Countrywide’s practice was typical of many major lenders during the early 2000s.  Thus, although we rely on the facts in the Kemp case in this brief article, it has very broad application.

Sloppiness and REMICs Rules Don’t Mix Well

Even though a minority of securitizers may have followed the terms contained in the applicable Pooling and Servicing Agreements, there is very low tolerance for deviation in the REMIC rules.  This suggests that compliance in a minority of situations would not prevent the IRS from finding that individual REMICs fail to comply with their strict requirements in an overwhelming number of cases.  And the failure of a very small number of mortgages to comply with the rules would be sufficient to cause a putative REMIC to lose its preferred-tax status.

Federal tax treatment of REMICs is important in two respects.  First, it treats regular interests in REMICs as debt instruments.6 Second, federal tax law specially classifies REMICs as something other than tax corporations, tax partnerships, or trust and generally exempts them from federal income taxation.7

These two aspects of REMICs work hand in hand to provide REMICs favorable tax treatment.  REMICs must compute taxable income, but because the regular interests are treated as debt instruments, REMICs deduct amounts that constitute interest payments to the holders of residual interests.8

Without these rules, a REMIC could be a tax corporation and the regular interests could be equity interests.  If that were the case, the REMIC would not be able to deduct payments made to the regular interest holders and would owe federal income tax on its taxable income.  That is how the REMIC classification provides significant tax benefits.

To obtain REMIC classification, a trust must satisfy several requirements.  Of particular interest is the requirement that within three months after the trusts startup date, substantially all of its assets must be qualified mortgages.9  The regulations provide that substantially all of the assets of a trust are qualified mortgages if no more than a de minimis amount of the trust’s assets are not qualified mortgages.10 

The regulations do not define what constitutes a de minimis amount of assets, but they provide that substantially all of the assets are permitted assets if no more than one percent of the aggregate basis of all of the trust’s assets is attributed to prohibited assets.11  If the aggregate basis of the prohibited assets exceeds the one percent threshold, the trust may nonetheless be able to demonstrate that it owns no more than a de minimis amount of prohibited assets.12 Thus, almost all of a REMIC’s assets must be qualified mortgages.

A ‘qualified mortgage’ is an obligation that is principally secured by an interest in real property.13  The trust must acquire the obligation by contribution on the startup date or by purchase within three months after the startup date.14  Thus, to be a qualified mortgage, an asset must satisfy both a definitional requirement (be an obligation principally secured by an interest in real property) and a timing requirement (be acquired within three months after the startup date).

Industry practices raise questions about whether trusts satisfied either the definitional requirement or the timing requirement.  The general practice was for trusts and loan originators to enter into PSAs, which required the originator to transfer the mortgage note and mortgage to the trust.  Nonetheless, as with Kemp, reports and court documents indicate that originators and trusts frequently did not comply with the terms of the PSAs and the originator typically retained the mortgage notes and mortgages.

That failure appears to cause the trusts to fail both the definitional requirement and the timing requirement that are necessary to elect REMIC status. They fail the definition requirement because they do not own obligations, and what they do own does not appear to be secured by interests in real property.

They fail the timing requirement because they do not acquire the requisite interests within the three-month prescribed time frame.  And even if the trusts acquired some obligations principally secured by interests in real property, many of their assets would not satisfy the REMIC requirements.  This would result in the trusts owning more than a de minimis amount of prohibited assets.  If more than a de minimis amount of a trust’s assets are prohibited assets, then it would not be eligible for REMIC status.

The Un-MERS-iful Stringency of the REMIC Regulations

Federal tax law does not rely upon the state-law definition of ownership, but it looks to state law to determine parties’ rights, obligations, and interests in property.15  Tax law can also disregard the transfer (or lack of transfer) of formal title where the transferor retains many of the benefits and burdens of ownership.16

Courts focus on whether the benefits and burdens of ownership pass from one party to another when considering who is the owner of property for tax purposes.17  As the Tax Court has stated, to “properly discern the true character of [a transaction], it is necessary to ascertain the intention of the parties as evidenced by the written agreements, read in light of the attending facts and circumstances.”18

If, however, the transaction does not coincide with the parties’ bona fide intentions, courts will ignore the stated intentions.19  Thus, the analysis of ownership cannot merely look to the agreements the parties entered into because the label parties give to a transaction does determine its character.20  Consequently, the analysis must examine the underlying economics and the attendant facts and circumstances to determine who owns the mortgage notes for tax purposes.21 

Courts in many states have considered the legal rights and obligations of REMICs with respect to mortgage notes and mortgages they claim to own.  The range of issues state courts have considered with respect to REMIC mortgage notes and mortgages range from standing to foreclose,22 entitlement to notice of bankruptcy proceeding against a mortgagor,23 to ownership of a mortgage note under a state’s commercial code.24 As these cases indicate, at least with respect to the question of security interest, the courts are split with some ruling in favor of MERS and others ruling in favor of other parties whose interests are adverse to MERS. Apparently, no court has considered how significant these rules are with respect to REMIC classification. Standing to foreclose and participate in a bankruptcy proceeding will likely affect the analysis of whether REMIC trust assets are secured by an interest in real property, but they probably do not affect the analysis of whether the REMIC trusts own obligations. This analysis turns on the ownership of the mortgage notes.

In re Kemp addressed the issue of enforceability of a note under the uniform commercial code (UCC) for bankruptcy purposes.25 The court in that case held that a note was unenforceable against the maker of the note and the maker’s property under New Jersey law on two grounds.26 The court held that because the owner of the note, the Bank of New York, did not have possession and the lack of proper indorsement upon sale made the note unenforceable.27 Recognizing that the mortgage note came within the UCC definition of negotiable instrument,28 the court then considered who is a party entitled to enforce a negotiable instrument.29

Only the following three types persons are entitled to enforce a negotiable instrument:

1) “the holder of the instrument,”

2) “a nonholder in possession of the instrument who has the right of a holder,” or

3)  “a person not in possession of the instrument who is entitled to enforce the instrument pursuant to UCC § 3-309 or 3-418(d).”30

The Kemp court then explained why the Bank of New York did not come within the definition of a party entitled to enforce the negotiable instrument.

This analysis illustrates how courts may reach results that undercut arguments that REMICs were the owners of the mortgage notes and mortgages for tax purposes.  But even if the majority of states rule in favor of REMICs, the few that do not can destroy the REMIC classification of many MBS that were structured to be – and promoted to investors as – REMICs.

Because rating agencies require that REMICs be geographically diversified in order to spread the risk of default caused by local economic conditions, REMICs hold notes and mortgages from multiple jurisdictions.  Most, if not all, REMICs own mortgages notes and mortgages from states governed by laws that the courts determine do not support REMIC eligibility for the mortgages from those jurisdictions.  This diversification requirement ensures that REMICs will have more than a de minimis amount of mortgages notes that do not come within the definition of qualified mortgage under the REMIC regulations.

IRS-ponsible Industry Regulation

Law firms issued opinions that MBS transactions would qualify as REMICs.  They did so even though they knew or should have known that an insufficient percent of trust assets would satisfy the definition of qualified mortgage under the REMIC rules.  Nonetheless, the IRS does not appear to be engaged in auditing REMICs.  Its reasons for not challenging REMIC status at this time may be justified as they study the issue and observe the outcome of the numerous actions against REMICs and originators.

Because REMICs did not file the correct returns and may have committed fraud, the statute of limitations for earlier years will remain open indefinitely, giving the IRS adequate time to pursue REMIC litigation after it obtains the information it needs.  If the IRS does not take action at the appropriate time, however, it will be a serious failure and will result in the loss of billions of dollars of tax revenue for the federal government.

More troubling still is the IRS’s failure to address the wide-scale abuse and problems that existed during the years leading up to the financial meltdown.  The IRS’s failure to adequately police REMICs is one more reason that the mortgage industry was able to overly inflate the housing market.  And that, inexorably, led to the crash and our tepid recovery from it.

More generally, by overlooking the serious defects in the transactions, courts and governmental agencies encourage the type of behavior that led to the financial crisis.  Lawmakers, law enforcement agencies and the judiciary cede their governing functions to private industry if they allow players to disregard the law and stride to create law through their own practices.

If we allow the Wall Street Rule to apply, then Wall Street rules.  If the rule of law is respected, then Main Street can look forward to the equal protection of the law and returned prosperity without fear of bubbles inflating because powerful special interests can flout the law that applies to the rest of us.

Notes

1          This brief article is drawn from a forthcoming study by the authors.  © 2012 Bradley T. Borden and David Reiss.

Professor David Reiss is the founding director of the Community Development Clinic at Brooklyn Law School and teaches property law and real estate law. His articles expound upon the secondary mortgage markets, predatory lending, and housing policy and he is a regular commentator in the news on these topics.

Professor Bradley Borden is a leading authority on taxation of real property transactions and flow-through entities. He teaches Partnership Taxation, Taxation of Real Estate Transactions, and a general income tax course. He is also a prolific writer whose articles appear in numerous journals and is the author or co-author of several books. He is also a regular commentator on these topics in the news.

2          Lee Shepard,  Bain Capital Tax Documents Draw Mixed Reaction, ALL THINGS CONSIDERED, (NPR Business broadcast Aug. 28, 2012) (discussing taxation of private equity management compensation), available at http://www.npr.org/player/v2/mediaPlayer.html?action=1&t=1&islist=false&id=160196045&m=160201502 (emphasis added).

3          26 U.S.C. § 860G(a)(3), (9).

4          See, e.g., Brook Boyd, Real Estate Financing § 14.05[9] (2005).

5          See In re Kemp, 440 B.R. 624, 627 (Bkrtcy D.N.J. 2010).

6          SeeIRC §§ 860B(a), 860C(b)(1)(A).

7          SeeIRC § 860A(a).

8          SeeIRC §§ 163(a), 860C(b)(1)(A).

9          SeeIRC § 860D(a)(4).

10        SeeTreas. Reg. § 1.860D-1(b)(3)(i).

11        SeeTreas. Reg. § 1.860D-1(b)(3)(ii).

12        See Treas. Reg. § 1.860D-1(b)(3)(ii).

13        SeeIRC § 860G(a)(3)(A).

14        SeeIRC § 860G(a)(3)(A)(i), (ii).

15        See, e.g., Burnet v. Harmel, 287 U.S. 103, 110 (1932).

16        See Bailey v. Comm’r, 912 F.2d 44, 47 (2d Cir. 1990).

17        Grodt & McKay Realty, Inc. v. Comm’r, 77 T.C. 1221, 1237 (1981).

18        See Haggard v. Comm’r, 24 T.C. 1124, 1129 (1955), aff’d 241 F.2d 288 (9th Cir. 1956).

19        See Union Planters National Bank of Memphis v. United States, 426 F.2d 115, 117 (6th Cir. 1970).

20        See Helvering v. F. & R. Lazarus & Co.308 U.S. 252, 255 (1939).

21        See Helvering v. F. & R. Lazarus & Co., 308 U.S. 252, 255 (1939).

22        See Bain v. Metropolitan Mortgage Group, Inc., 2012 WL 3517326 (Wash. 2012) (holding that MERS was not a beneficiary under Washington Deed of Trust Act because it did not hold the mortgage note); Eaton v. Federal National Mortgage Association, 462 Mass. 569 (Mass. 2012); Ralph v. Met Life Home Loans, ____ (5th D. Idaho August 10, 2011) (holding that MERS was not the beneficial owner of a deed of trust, so its assignment was a nullity and the assignee could not bring a nonjudicial foreclosure against the borrower); Fowler v. Recontrust Company, N.A., 2011 WL 839863 (D. Utah March 10, 2011) (holding that MERS is the beneficial owner under Utah law); Jackson v. Mortgage Electronic Registration Systems, Inc., 770 N.W.2d 487 (Minn. 2009) (holding that MERS, as nominee, could institute a foreclosure by advertisement, i.e., a nonjudicial foreclosure, based upon Minnesota “MERS statute” that allows nominee to foreclose).

23        See Landmark National Bank v. Kesler, 289 Kan. 528, 216 P.3d 158 (Kan. 2009) (holding that MERS had no interest in the property and was not entitled to notice of bankruptcy or to intervene to challenge it).

24        See In re Kemp, 440 B.R. 624 (Bkrtcy.D.N.J. 2010).

25        See In re Kemp, 440 B.R. 624 (Bkrtcy.D.N.J. 2010). A claim in bankruptcy is disallowed after an objection “to the extent that . . . such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured.” See id. at 629 (citing 11 U.S.C. § 502(b)(1). New Jersey adopted the UCC in ____. See ____. This article cites to the UCC generally instead of specifically to the New Jersey UCC to illustrate the general applicability of the holding.

26        See In re Kemp at 629–30.

27        See In re Kemp at 629–30.

28        See In re Kempat 630.

29        See In re Kempat 630.

30        SeeUnif. Commercial Code § 3-301.

Arizona Supreme Court Hogan Case Holds that Note is Not required to Start Foreclosure

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the trustee owes the trustor a fiduciary duty, and may be held liable for conducting a trustee’s sale when the trustor is not in default. See Patton v. First Fed. Sav. & Loan Ass’n of Phoenix, 118 Ariz. 473, 476, 578 P.2d 152, 155 (1978).” Hogan Court

Editor’s Comment: Here is another example of lawyers arguing out of a lack of understanding of the securitization process and trying to compress an elephant into a rabbit hole. They lost, unsurprisingly.

If you loaned money to someone, you want the money repaid. You DON’T want to be told that because you don’t have the note you can never enforce the loan repayment. You CAN start enforcement and you must prove why you don’t have the note in a credible way so that the court has footprints leading right up to the point that you don’t have the note. But the point is that you can start without the note. 

The Supreme Court apparently understood this very well and they didn’t address the real issue because nobody brought it up. The issue before them was whether someone without the note could initiate the foreclosure process. Nobody mentioned whether the same party could submit a credit bid at the auction which is what I have been pounding upon for months on end now.

Apparently, right or wrong, the feeling of the courts is that there is a very light burden on the right to initiate a foreclosure whether it is judicial or non-judicial. It is very close to the burden of the party moving to lift stay in a bankruptcy procedure. Practically any colorable right gives the party enough to get the stay — because the theory goes — whether it is a lift stay or starting the ball rolling on a foreclosure there is plenty the borrower can do to  oppose the enforcement procedure. I don’t agree with either standard or burden of proof in the case of securitized mortgages but it is about time we got real about what gets traction in the courtroom and what doesn’t.

In the Hogan case the Court makes a pretty big deal out of the fact that Hogan didn’t allege that WAMU and Deutsch were not entitled to enforce the note. From the court’s perspective, they were saying to the AG and the borrowers, “look, you are admitting the debt and admitting this is the creditor, what do you want from us, a free pass?”

This is why you need real people with real knowledge and real reports that back up and give credibility to deny the debt, deny the default, deny that WAMU and/or Deutsch are creditors, plead payment and force WAMU and Deutsch to come forward with pleadings and proof. Instead WAMU and Deutsch skated by AGAIN because nobody followed the money. They followed the document trail which led them down that rabbit hole I was referencing above.

In order to deny everything without be frivolous, you need to have concrete reasons why you think the debt does not exist, the debt does not exist between the borrower and these pretender lenders, the debt was paid in full, and deny that the loan was NOT secured (i.e. that the mortgage lien was NOT perfected when filed).

For anyone to do that without feeling foolish you must UNDERSTAND how the securitization model AS PRACTICED turned the entire lending model on its head. Then everything makes sense, which is why I wrote the second volume which you can get by pressing the appropriate links shown above. But it isn’t just the book that will get you there. You need to give rise to material, relevant issues of fact that are in dispute. For that you need a credible report from a credible expert with real credentials and real experience and training.

I follow the money. In fact the new book has a section called “Show Me the Money”. To “believe” is taken from an ancient  language that means “to be willing”. I want you to believe that the debt that the “enforcers” doesn’t exist and never did. I want you to believe that the declarations contained in the note, mortgage (deed of trust), substitution of trustee etc. are all lies. But you can’t believe that unless you are willing to consider the the idea it might be true. That I might be right.

At every “Securitized” closing table there were two deals taking place — one perfectly real and the other perfectly unreal, fake and totally obfuscated. The deal everyone is litigating is the second one,  starting with the documents at closing and moving up the chain of securitization. Do you really think that some court is going to declare that everyone gets a free house because some i wasn’t dotted or t crossed on the back of the wrong piece of paper when you admit the debt, the default and the amount due?

It is the first deal that is real because THAT is the one with the money exchanging hands. The declarations contained in the note, mortgage and other documents all refer to money exchanging hands between the named payee and secured party on one side and the borrower on the other. The deal in those documents never happened. The REAL DEAL was that money from investor lenders was poured down a pipe through which the loans were funded. The parties at the closing table with the borrower had nothing to do with funding; acquiring, transferring the receivable, the obligation, note or the mortgage or deed of trust.

Every time you chase them down the rabbit hole of the document trail you miss the point. The REAL DEAL had no documents and couldn’t possibly be secured. And if you read the wording from the Hogan decision below you can see how even they would have considered the matter differently if the simple allegation been made that the borrower denied that WAMU and Deutsch had any right to enforce the note either as principals or as agents. They were not the creditor. But Hogan and its ilk are not over — yet.

There is still a matter to be determined as to whether the party who initiated the foreclosure is in fact a creditor under the statute and can therefore submit a credit bid in lieu of cash. THAT is where the rubber meets the road — where the cash is supposed to exchange hands. And THAT is where nearly all the foreclosures across the country fail. The failure of consideration means the sale did not take place. If the borrower was there or someone for him was there and bid a token amount of money it could be argued in many states that the other bid being ineligible as a credit bid, the only winning bidder is the one who offered cash.

————————————————————

Hogan argues that a deed of trust, like a mortgage, “may be enforced only by, or in behalf of, a person who is entitled to enforce the obligation the mortgage secures.” Restatement (Third) of Prop.: Mortgages § 5.4(c) (1997); see Hill v. Favour, 52 Ariz. 561, 568-69, 84 P.2d 575, 578 (1938).

-6-
We agree. (e.s.) But Hogan has not alleged that WaMu and Deutsche Bank are not entitled to enforce the underlying note; rather, he alleges that they have the burden of demonstrating their rights before a non-judicial foreclosure may proceed. Nothing in the non-judicial foreclosure statutes, however, imposes such an obligation. See Mansour v. Cal-Western Reconveyance Corp., 618 F. Supp. 2d 1178, 1181 (D. Ariz. 2009) (citing A.R.S. § 33-807 and observing that “Arizona’s [non-]judicial foreclosure statutes . . . do not require presentation of the original note before commencing foreclosure proceedings”); In re Weisband, 427 B.R. 13, 22 (Bankr. D. Ariz. 2010) (stating that non-judicial foreclosures may be conducted under Arizona’s deed of trust statutes without presentation of the original note).

———————AND SPEAKING OF  DEUTSCH BANK: READ THIS AS GRIST FOR THE ABOVE ANALYSIS——-

Disavowal by-DEUTSCHE-BANK-NATIONAL-TRUST-COMPANY-AS-TRUSTEE-NOTICE-TO-CERTIFICATE-HOLDERSForeclosure-Practice-Notice-10-25[1]

Pandemic Lying Admission: Deutsch Bank Up and Down the Fake Securitization Chain

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Editor’s Comment:

One problem with securitization in practice even under the academic model is the effect on potential enforcement of the obligation, even assuming that the “lender” is properly identified in the closing documents with the buyer of the loan product and the closing papers of the buyer of the mortgage bonds (and we’ll assume that the mortgage bonds are real and valid, as well as having been issued by a fully funded REMIC in which loans were properly assigned and transferred —- an assumption, as we have seen that is not true in the real world). Take this quote from the glossary at the back of this book and which in turn was taken from established authoritative sources used by bankers, securities firms and accountants:

cross guarantees and credit default swaps, synthetic collateralized asset obligations and other exotic equity and debt instruments, each of which promises the holder an incomplete interest in the original security instrument and the revenue flow starting with the alleged borrower and ending with various parties who receive said revenue, including but not limited to parties who are obligated to make payments for shortfalls of revenues.

Real Property Lawyers spot the problem immediately.

First question is when do these cross guarantees, CDS, Insurance, and other exotic instruments arise. If they are in existence at the time of the closing with the borrower homeowner then the note and mortgage are not properly drafted as to terms of repayment nor identity of the lender/creditor. This renders the note either unenforceable or requiring the admission of parole evidence in any action to either enforce against the borrower or enforce the cross obligations of the new cross creditors who supposedly are receiving not just rights to the receivable but to the actual note and the actual mortgage.

Hence even a truthful statement that the “Trustee” beings this foreclosure on behalf of the “trust” as creditor (assuming a Trust existed by law and that the Trustee, and beneficiaries and terms were clear) would be insufficient if any of these “credit enhancements” and other synthetic or exotic vehicles were in place. The Trustee on the Deed of Sale would be required to get an accounting from each of the entities that are parties or counterparties whose interest is effected by the foreclosure and who would be entitled to part of the receivable generated either by the foreclosure itself or the payment by counterparties who “bet wrong” on the mortgage pool.

The second question is whether some or any or all of these instruments came into existence or were actualized by a required transaction AFTER the closing with the homeowner borrower. It would seem that while the original note and mortgage (or Deed of Trust) might not be affected directly by these instruments, the enforcement mechanism would still be subject to the same issues as raised above when they were fully actualized and in existence at the time of the closing with the homeowner borrower.

Deutsch Bank was a central player in most of the securitized mortgages in a variety of ways including the exotic instruments referred to above. If there was any doubt about whether there existed pandemic lying and cheating, it was removed when the U.S. Attorney Civil Frauds Unit obtained admissions and a judgment for Deutsch to pay over $200 million resulting from intentional misrepresentations contained in various documents used with numerous entities and people up and down the fictitious securitization chain. Similar claims are brought against Citi (which settled so far for $215 million in February, 2012) Flagstar Bank FSB (which settled so far for $133 million in February 2012, and Allied Home Mortgage Corp, which is still pending. Even the most casual reader can see that the entire securitization model was distorted by fraud from one end (the investor lender) to the other (the homeowner borrower) and back again (the parties and counterparties in insurance, bailouts, credit default swaps, cross guarantees that violated the terms of every promissory note etc.

Manhattan U.S. Attorney Recovers $202.3 Million From Deutsche Bank And Mortgageit In Civil Fraud Case Alleging Reckless Mortgage Lending Practices And False Certifications To HUD

FOR IMMEDIATE RELEASE                  Thursday May 10, 2012

Preet Bharara, the United States Attorney for the Southern District of New York, Stuart F. Delery, the Acting Assistant Attorney General for the Civil Division of the U.S. Department of Justice, Helen Kanovsky, General Counsel of the U.S. Department of Housing and Urban Development (“HUD”), and David A. Montoya, Inspector General of HUD, announced today that the United States has settled a civil fraud lawsuit against DEUTSCHE BANK AG, DB STRUCTURED PRODUCTS, INC., DEUTSCHE BANK SECURITIES, INC. (collectively “DEUTSCHE BANK” or the “DEUTSCHE BANK defendants”) and MORTGAGEIT, INC. (“MORTGAGEIT”). The Government’s lawsuit, filed May 3, 2011, sought damages and civil penalties under the False Claims Act for repeated false certifications to HUD in connection with the residential mortgage origination practices of MORTGAGEIT, a wholly-owned subsidiary of DEUTSCHE BANK AG since 2007. The suit alleges approximately a decade of misconduct in connection with MORTGAGEIT’s participation in the Federal Housing Administration’s (“FHA’s”) Direct Endorsement Lender Program (“DEL program”), which delegates authority to participating private lenders to endorse mortgages for FHA insurance. Among other things, the suit accused the defendants of having submitted false certifications to HUD, including false certifications that MORTGAGEIT was originating mortgages in compliance with HUD rules when in fact it was not. In the settlement announced today, MORTGAGEIT and DEUTSCHE BANK admitted, acknowledged, and accepted responsibility for certain conduct alleged in the Complaint, including that, contrary to the representations in MORTGAGEIT’s annual certifications, MORTGAGEIT did not conform to all applicable HUD-FHA regulations. MORTGAGEIT also admitted that it submitted certifications to HUD stating that certain loans were eligible for FHA mortgage insurance when in fact they were not; that FHA insured certain loans endorsed by MORTGAGEIT that were not eligible for FHA mortgage insurance; and that HUD consequently incurred losses when some of those MORTGAGEIT loans defaulted. The defendants also agreed to pay $202.3 million to the United States to resolve the Government’s claims for damages and penalties under the False Claims Act. The settlement was approved today by United States District Judge Lewis Kaplan.

Manhattan U.S. Attorney Preet Bharara stated: “MORTGAGEIT and DEUTSCHE BANK treated FHA insurance as free Government money to backstop lending practices that did not follow the rules. Participation in the Direct Endorsement Lender program comes with requirements that are not mere technicalities to be circumvented through subterfuge as these defendants did repeatedly over the course of a decade. Their failure to meet these requirements caused substantial losses to the Government – losses that could have and should have been avoided. In addition to their admissions of responsibility, Deutsche Bank and MortgageIT have agreed to pay damages in an amount that will significantly compensate HUD for the losses it incurred as a result of the defendants’ actions.”

Acting Assistant Attorney General Stuart F. Delery stated: “This is an important settlement for the United States, both in terms of obtaining substantial reimbursement for the FHA insurance fund for wrongfully incurred claims, and in obtaining the defendants’ acceptance of their role in the losses they caused to the taxpayers.”

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www.justice.gov/usao/nys/pressreleases/may12/deutschebankmortgageitsettlement.html                  1/45/16/12                  USDOJ: US Attorney’s Office – Southern District of New York

HUD General Counsel Helen Kanovsky stated: “This case demonstrates that HUD has the ability to identify fraud patterns and work with our partners at the Department of Justice and U.S. Attorney’s Offices to pursue appropriate remedies. HUD would like to commend the work of the United States Attorney for the Southern District of New York in achieving this settlement, which is a substantial recovery for the FHA mortgage insurance fund. We look forward to continuing our joint efforts with the Department of Justice and the SDNY to combat mortgage fraud. The mortgage industry should take notice that we will not sit silently by if we detect abuses in our programs.”

HUD Inspector General David A. Montoya stated: “We expect every Direct Endorsement Lender to adhere to the highest level of integrity and accountability. When the combined efforts and attention of the Department of Justice, HUD, and HUD OIG are focused upon those who fail to exercise such integrity in connection with HUD programs, the end result will be both unpleasant and costly to the offending party.”

The following allegations are based on the Complaint and Amended Complaint (the “Complaint”) filed in Manhattan federal court by the Government in this case:

Between 1999 and 2009, MORTGAGEIT was a participant in the DEL program, a federal program administered by the FHA. As a Direct Endorsement Lender, MORTGAGEIT had the authority to originate, underwrite, and endorse mortgages for FHA insurance. If a Direct Endorsement Lender approves a mortgage loan for FHA insurance and the loan later defaults, the holder of the loan may submit an insurance claim to HUD for the costs associated with the defaulted loan, which HUD must then pay. Under the DEL program, neither the FHA nor HUD reviews a loan before it is endorsed for FHA insurance. Direct Endorsement Lenders are therefore required to follow program rules designed to ensure that they are properly underwriting and endorsing mortgages for FHA insurance and maintaining a quality control program that can prevent and correct any deficiencies in their underwriting. These requirements include maintaining a quality control program, pursuant to which the lender must fully review all loans that go into default within the first six payments, known as “early payment defaults.” Early payment defaults may be signs of problems in the underwriting process, and by reviewing early payment defaults, Direct Endorsement Lenders are able to monitor those problems, correct them, and report them to HUD. MORTGAGEIT failed to comply with these basic requirements.

As the Complaint further alleges, MORTGAGEIT was also required to execute certifications for every mortgage loan that it endorsed for FHA insurance. Since 1999, MORTGAGEIT has endorsed more than 39,000 mortgages for FHA insurance, and FHA paid insurance claims on more than 3,200 mortgages, totaling more than $368 million, for mortgages endorsed for FHA insurance by MORTGAGEIT, including more than $58 million resulting from loans that defaulted after DEUTSCHE BANK AG acquired MORTGAGEIT in 2007.

As alleged in the Complaint, a portion of those losses was caused by the false statements that the defendants made to HUD to obtain FHA insurance on individual loans. Although MORTGAGEIT had certified that each of these loans was eligible for FHA insurance, it repeatedly submitted certifications that were knowingly or recklessly false. MORTGAGEIT failed to perform basic due diligence and repeatedly endorsed mortgage loans that were not eligible for FHA insurance.

The Complaint also alleges that MORTGAGEIT separately certified to HUD, on an annual basis, that it was in compliance with the rules governing its eligibility in the DEL program, including that it conduct a full review of all early payment defaults, as early payment defaults are indicators of mortgage fraud. Contrary to its certifications to HUD, MORTGAGEIT failed to implement a compliant quality control program, and failed to review all early payment defaults as required. In addition, the Complaint alleges that, after DEUTSCHE BANK acquired MORTGAGEIT in January 2007, DEUTSCHE BANK managed the quality control functions of the Direct Endorsement Lender business, and had its employees sign and submit MORTGAGEIT’s Direct Endorsement Lender annual certifications to HUD. Furthermore, by the end of 2007, MORTGAGEIT was not reviewing any early payment defaults on closed FHA-insured loans. Between 1999 and 2009, the FHA paid more than $92 million in FHA insurance claims for loans that defaulted within the first six payments.

***

Pursuant to the settlement, MORTGAGEIT and the DEUTSCHE BANK defendants will pay the United States $202.3 million within 30 days of the settlement.

As part of the settlement, the defendants admitted, acknowledged, and accepted responsibility for certain misconduct. Specifically,

MORTGAGEIT admitted, acknowledged, and accepted responsibility for the following:

www.justice.gov/usao/nys/pressreleases/may12/deutschebankmortgageitsettlement.html                  2/4

5/16/12                  USDOJ: US Attorney’s Office – Southern District of New York

MORTGAGEIT failed to conform fully to HUD-FHA rules requiring Direct Endorsement Lenders to maintain a compliant quality control program;

MORTGAGEIT failed to conduct a full review of all early payment defaults on loans endorsed for FHA insurance;

Contrary to the representations in MORTGAGEIT’s annual certifications, MORTGAGEIT did not conform to all applicable HUD-FHA regulations;

MORTGAGEIT endorsed for FHA mortgage insurance certain loans that did not meet all underwriting requirements contained in HUD’s handbooks and mortgagee letters, and therefore were not eligible for FHA mortgage insurance under the DEL program; and;

MORTGAGEIT submitted to HUD-FHA certifications stating that certain loans were eligible for FHA mortgage insurance when in fact they were not; FHA insured certain loans endorsed by MORTGAGEIT that were not eligible for FHA mortgage insurance; and HUD consequently incurred losses when some of those MORTGAGEIT loans defaulted.

The DEUTSCHE BANK defendants admitted, acknowledged, and accepted responsibility for the fact that after MORTGAGEIT became a wholly-owned, indirect subsidiary of DB Structured Products, Inc and Deutsche Bank AG in January 2007:

The DEUTSCHE BANK defendants were in a position to know that the operations of MORTGAGEIT did not conform fully to all of HUD-FHA’s regulations, policies, and handbooks;

One or more of the annual certifications was signed by an individual who was also an officer of certain of the DEUTSCHE BANK defendants; and;

Contrary to the representations in MORTGAGEIT’s annual certifications, MORTGAGEIT did not conform to all applicable HUD-FHA regulations.

***

The case is being handled by the Office’s Civil Frauds Unit. Mr. Bharara established the Civil Frauds Unit in March 2010 to bring renewed focus and additional resources to combating financial fraud, including mortgage fraud.

To date, the Office’s Civil Frauds Unit has brought four civil fraud lawsuits against major lenders under the False Claims Act alleging reckless residential mortgage lending.

Three of the four cases have settled, and today’s settlement represents the third, and largest, settlement. On February 15, 2012, the Government settled its civil fraud lawsuit against CITIMORTGAGE, INC. for $158.3 million. On February 24, 2012, the Government settled its civil fraud suit against FLAGSTAR BANK, F.S.B. for $132.8 million. The Government’s lawsuit against ALLIED HOME MORTGAGE CORP. and two of its officers remains pending. With today’s settlement, the Government has achieved settlements totaling $493.4 million in the last three months. In each settlement, the defendants have admitted and accepted responsibility for certain conduct alleged in the Government’s Complaint.

The Office’s Civil Frauds Unit is handling all three cases as part of its continuing investigation of reckless lending practices.

The Civil Frauds Unit works in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force, on which Mr. Bharara serves as a Co-Chair of the Securities and Commodities Fraud Working Group. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.

Mr. Bharara thanked HUD and HUD-OIG for their extraordinary assistance in this case. He also expressed his appreciation for the support of the Commercial Litigation Branch of the U.S. Department of Justice’s Civil Division in Washington, D.C.

www.justice.gov/usao/nys/pressreleases/may12/deutschebankmortgageitsettlement.html                  3/4

5/16/12                  USDOJ: US Attorney’s Office – Southern District of New York

Assistant U.S. Attorneys Lara K. Eshkenazi, Pierre G. Armand, and Christopher B. Harwood are in charge of the case.

REGISTER OF DEEDS JEFF THIGPEN (NC) AND JOHN O’BRIEN (MA): REQUIRE ALL PAST AND PRESENT MERS ASSIGNMENTS TO BE FILED

COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary SEE LIVINGLIES LITIGATION SUPPORT AT LUMINAQ.COM

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GETTING CLOSER TO THE TRUTH

EDITORIAL COMMENT: Every day we take a little more lipstick off the pig and discover, of all things, A PIG! This is a basic challenge to Wall Street that is so simple and so right that there is nothing to do but obey — but they won’t. If all the MERS transactions are recorded, it would not only recover billions in unpaid recording and registration fees, but trigger other tax liabilities on Federal, State and Local levels. The whole REMIC exemption is based upon the REMIC vehicle being closed within 90 days.

Oops! Nearly all REMIC (SPV, TRUST) vehicles are still open (i.e., empty) after many years. And Wall Street’s fees taken under the cover of the REMIC transactions and hidden from all, would be painfully obvious resulting not only in monumental income tax liability but liability for fraudulent sale of securities, appraisal fraud on the property, RICO and many other causes of action too numerous to mention (see Causes of Action on left side of this Blog).

But that is just a dream. There is no way they can record all 80 million MERS transactions because many of them don’t actually exist. In the end, the issue is simple — are we going to sacrifice a system of title recordation in place for centuries with an exemption (get out of  jail free) card for Wall Street and thus create commercial chaos for decades or centuries to come? Or are we going to let the chips fall where they will? If the chips fall naturally, some people will make money and some people will lose money. Some people will be satisfied and some people will be mad as hell. That’s what happens in a free market, isn’t it?

All we are offered is POLICY argument that says POLICY is more important than the law. That has never been true in theory. But now the only way out for Wall Street is to make it true in theory as well as in practice. Abandoning the separate but equal powers of the judiciary and thus removing one leg of the three legged stool the founders created when they launched the USA would be the single most important element in the destruction of the country as it is presently constituted — causing a secession battle and the same problems that Russia had when stopped being the Soviet Union.

Basically Wall Street is saying “we went to all this trouble and expense to cheat and deceive you and we ought to be able to keep it. Screw you if you think you are getting any of it back.” The government is nodding its head like a head on a spring in the back seat of the car. The people are saying we want governance not pie-splitting. How this will all end up is going to be interesting and profound. Unless we apply the rule of law suggested simply by applying the requirement of recording transactions in a public registry, we will have about as much confidence in the stability of U.S. commerce as there is in any of the third world countries.

Every PONZI scheme fails. All efforts by Wall Street and the government controlled by Wall Street have failed to find an alternative way around the rule of law that doesn’t strike at the heart of our constitutional system. All the people who lose money in a PONZI scheme wish the scheme had gone on just long enough for THEM to get their money back and someone else to lose THEIR money. That’s where we are, folks, and the time to end every PONZI scheme is immediately before another person gets hurt.

These foreclosures are virtually all based on factually false and fraudulent representations, documentation, and premises. Practically none of the “mortgages” are legal and if any one of them was singularly the subject of a quiet title action, the homeowner would win on the merits, based upon the facts. It is only because of the volume of transactions that legislators and bureaucrats are scurrying around looking for a novel way out of this scam, because they are getting “benefits” from Wall Street. The requirement of recording, will expose the truth: (1) that the only real parties to the transaction are not present in any existing documents and (2) that the existing documents describe transactions that never actually took place. They can’t record these documents because most states make it a criminal offense to record, execute, witness or notarize fraudulent documents.

FOR IMMEDIATE RELEASE:

Greensboro, NC

April 7, 2011

Contact:

Jeff Thigpen, Guilford County Register of Deeds

Ph. 336-451-5300

Ph. 336-641-3239

jthigpe@co.guilford.nc.us

REGISTER OF DEEDS JEFF THIGPEN (NC) AND JOHN O’BRIEN (MA) ASK 50 STATE ATTORNEY GENERAL FORECLOSURE WORK GROUP TO REQUIRE ALL PAST AND PRESENT MERS ASSIGNMENTS TO BE FILED!

JOHN L. O’BRIEN, JR.                                                                                                          JEFF L. THIGPEN
Register of Deeds                                                                                                                    Register of Deeds

Commonwealth of Massachucetts                                                                            Guilford County, North Carolina
Phone: 978-542-1704                                                                                                           Phone: 336-451-5300
Fax: 978-542-1706                                                                                                                  Fax: 336-641-5778
website:
www.salemdeeds.com website: www.guilforddeeds.com

April 6, 2011

The Honorable Tom Miller
Iowa Attorney General
1305 E. Walnut Street
Des Moines IA 50319

Dear Attorney General Miller,

We appreciate your leadership in the mortgage foreclosure working group, as part of a coordinated national effort by states, to review the practice of “robo-signing” within the mortgage servicing industry.   We understand this investigation is nearing conclusion, but we want to implore you to act on a very important issue to homeowners across the country.

As County Land Record Recorders in Massachusetts and North Carolina, we have been gravely concerned about the role of the Mortgage Electronic Registration Systems (MERS) in not only foreclosure proceedings, but as it undermines the legislative intent of our offices as stewards of land records.   MERS tracks more than 60 million mortgages across the United States and we believe it has assumed a role that has put constructive notice and the property rights system at risk.    We believe MERS undermines the historic purpose of land record recording offices and the “chain of title” that assures ownership rights in land records.

As a result, we are asking as part of your probe, that this task force and the National Association of Attorney Generals require that all past and present MERS assignments of deeds of trust/mortgages be filed in local recording offices throughout the United States immediately.  Assignments are required by statute to be filed in Massachusetts, however they are not currently required to be recorded in North Carolina.   We feel, that it is important that the Registers of Deeds should have representatives at the table before any settlement is discussed or agreed to as it relates to MERS failure to record assignments and pay the proper fees.

This action would serve three specific purposes.   First, the filing of all assignments would help recover the chain of title that determines property ownership rights that has been lost and clouded over during the past 13 years because of the scheme that MERS has set in place.  Second, transparency and confidence in ownership rights would be restored and this would prevent the infringement upon those rights by others.   Third, this action would support a return to sound fundamentals in our economy between the financial services industry and public recording offices.

MERS has defended their practices by saying that they were helping the registries of deeds by reducing the amount of paperwork that needed to be recorded. This claim is outrageous.  This is help we did not ask for, nor was it help that we needed.  It is very clear that the only ones that they were helping were themselves. Over the past 10-12 years, recording offices across the United States have upgraded their internal and external technology to meet the demands of lenders, title underwriters, title searchers and citizens.  In fact, in 1998 the Southern Essex District Registry of Deeds in Massachusetts became the first registry of deeds to provide both document images and indices available to the public, 24 hours a day, free of charge on the world-wide-web. In doing so, the Registry received a Computerworld Smithsonian Award which recognized the innovative use of technology to benefit society. In 2009, the Guilford County Register of Deeds was given a Local Government Federal Credit Union Productivity Award by the North Carolina Association of County Commissioners for their technological innovations.  Nationally, over 93% of the public land records are up to date and current, according to Ernest Publishing.

As of today, there are over 600 recording jurisdictions, covering 43% of the US population that have incorporated an eRecording model into their document recording operations.   We believe these jurisdictions cover nearly 80% of the volume of assignments that should be recorded.  The remaining areas could be covered quickly, with legislation requiring such action by state legislatures.

Quite frankly, we believe this can and should be done.  It’s the right thing to do.

In the coming weeks, we will be working with our national organizations, the National Association of County Recorders, Election Officials and Clerks (NACRC) and the International Association of Clerks, Recorders, Election Officials, and Treasurers (IACREOT) to take the same position.   We are also sending a copy of this letter to the National Conference on State Legislatures (NCSL) and the National Association of Counties (NACO).

Thank you for your immediate attention.

Sincerely,

Jeff L.Thigpen
Guilford County Register of Deeds, NC

John O’Brien
Southern Essex District Registry of Deeds, MA

###

SOURCE: Jeff Thigpen

Mortgage Securities It Holds Pose Sticky Problem for Fed

STICKIER THAN THEY THINK: These are not the only mortgage securities they hold and they all amount to ownership of the risk on every loan they purchased. The purchase of course was accomplished in one of many ways — direct and indirect.
But when you come down to it, between the GSE’s (which are now departments of the Federal Government), TARP, and the outright purchase by the Fed, SOMEONE received 100 cents on the dollar for every loan, whether in default or otherwise.
Add in insurance, credit default swaps and credit “enhancements” (i.e., commingling of money contrary to the explicit terms of the borrowers’ promissory notes) like over-collateralization and cross collateralization, it would be a fair statement to say that everyone of the mortgages CLAIMED to be in pools that were subject to various securitization instruments, have been paid in whole or in part.
THAT IS WHAT I MEAN BY THIRD PARTY PAYMENTS. The legal issue is who got the money and why? The practical impact is that if those payments were related to individual mortgages, which indeed they must have been, then they were received into what should have been an escrow account and allocated to each loan.
Now add the fact that very nearly NONE of the loans were in fact the subject of an actual assignment, recorded instrument, endorsement or delivery while they were performing and before the cutoff date in the securitization enabling documentation, and you really have an interesting conclusion: the loans never made it into the pool, which makes securitization a giant Ponzi scheme that paid investors long enough out of their own money to lend credibility to the scheme.
But it is also true that borrowers made payments and where those went, and in what amounts is a clouded mystery because every lawsuit I know of that has asked for the accounting is stalled. So with nothing in the pools, nothing in the mortgage bonds, and the CDO’s based upon the mortgage bonds, and the credit default swaps referencing the mortgage bonds, and the synthetic CDOs consisting of CDS instruments referring to the mortgage bonds, they were all worthless from beginning to end. In short, the government bought nothing from bankers who had already made a ton of money, most of it parked off-shore.
The real reason the government can’t sell these securities is that nobody will pay for them. Any due diligence down to the loan level will reveal that the loans were never subject to legally required execution, delivery and recording of transfer or assignment documents, together with indorsements etc. In some cases, this is correctable — at considerable legal expense. In most cases, they are not correctable. The bottom line is really simple: the obligation was created, the note was extinguished, and the security instrument became unenforceable, and separated from the note. The illusion that it is otherwise is what is keeping us in stagnation, preventing a solution.
July 22, 2010

Mortgage Securities It Holds Pose Sticky Problem for Fed

By BINYAMIN APPELBAUM

WASHINGTON — The Federal Reserve provided most of the money for new mortgages in the United States last year, effectively lending more than $1 trillion to American homeowners.

Now the legacy of that extraordinary intervention is hanging over the central bank as it faces growing demands for an encore to help revive the flagging economy.

While officials and economists generally regard the program as successful in supporting the housing market, it has left the Fed holding a vast pile of mortgage securities — basically i.o.u.’s from homeowners — that it does not want and cannot sell.

Holding the securities could cost the Fed a lot of money and hamper its ability to fight inflation, while selling the securities could drain needed money from the still-weak economy.

Fed officials have expressed confidence that they can finesse the dilemma by gradually selling the securities as the economy starts to recover. But they are not eager to expand the challenge they face by beginning a new round of asset-buying, one tool the Fed could use to try to stimulate growth.

“In my view, any judgment to expand the balance sheet further should be subject to strict scrutiny,” Kevin M. Warsh, a Fed governor, said in a speech last month in Atlanta. He warned that new purchases could undermine the Fed’s “most valuable asset”: its credibility.

Some Democrats want the Fed to pump more money into the economy to help reduce unemployment, one of the central bank’s basic responsibilities. In testimony before Congress this week, Chairman Ben S. Bernanke said that the Fed retained that option, but did not now plan to expand on the steps it had already taken.

In part, Bernanke and other Fed officials say they believe that new asset purchases would be less effective now that private investors have returned to the market.

The Fed became one of the world’s largest mortgage investors because no one else was interested. During the fall 2008 financial crisis, investors stopped buying the mortgage securities issued by the housing finance companies Fannie Mae and Freddie Mac. The two companies buy mortgages made by banks and other lenders, providing money for new rounds of lending, then package those loans into securities for sale to investors, replenishing their own coffers.

Two days before Thanksgiving 2008, the Fed announced that it would buy $500 billion in securities issued by the two companies. By the time the program wound down in March 2010, it had spent more than twice that amount. The central bank now owns mortgage securities with a face value of $1.1 trillion.

A wide range of economists say the Fed’s program — so big that purchases outstripped the issuance of new securities in some months — helped to preserve the availability of mortgage loans and helped to hold interest rates near record lows. Rates that exceeded 6 percent in late 2008 remain below 5 percent today.

But the Fed now must deal with the cleanup.

The central bank could hold the securities until the borrowers repaid or refinanced their loans. Brian P. Sack, an executive at the Federal Reserve Bank of New York, estimated in March that borrowers would repay $200 billion by the end of 2011. And in the meantime, the Fed is collecting regular interest payments.

  • HOW IS THIS MONEY REACHING THE FED? WHO IS GETTING PAID FOR HANDLING IT?

    WHY IS NOT THE FED’S INTEREST RECORDED IN THE PROPERTY RECORDS OF THE COUNTY IN WHICH THE PROPERTY IS LOCATED (ANSWER — BECAUSE THEY DON’T HOLD THE SECURITY, JUST THE RECEIVABLE, CALLED “SPLITTING NOTE FROM MORTGAGE”).

  • IF THE FED OWNS THESE LOANS WHY DON’T THEY SHOW UP AS A PARTY IN FORECLOSURES?

  • WHO IS THE TRUSTEE ON DEEDS OF TRUST?

  • WHO ARE THE BENEFICIARIES?

  • WHO ARE THE MORTGAGEES ON MORTGAGE DEEDS?

“We’ve been earning a fairly high income from our holdings and remitting that to the Treasury,” Mr. Bernanke told Congress on Wednesday.

But holding the securities could make it harder to control inflation as the economic recovery gains strength, said Vincent Reinhart, the former head of the Fed’s monetary policy division, now a resident scholar at the American Enterprise Institute.

The Fed bought the securities by pumping new money into the economy, stimulating growth. It could be difficult to reverse that effect without draining the money from the economy by selling the securities, Mr. Reinhart said.

“They created reserves, and those reserves ultimately can be inflationary,” Mr. Reinhart said. “The chief risk of keeping the balance sheet big and raising rates is that you might not be able to raise rates successfully” because the impact would be mitigated by the effect of the extra money still sloshing around the system.

Holding the securities also could cost the Fed a lot of money.

The Fed paid some of the highest prices on record for mortgage securities, basically accepting very low rates of interest on its investments. As the economy recovers and interest rates rise, the Fed will need to accept increasingly large discounts to make the securities attractive to other investors.

David Zervos, head of global fixed-income strategy at the investment bank Jefferies & Company, estimates that the value of the portfolio will drop almost $50 billion each time interest rates increase by one percentage point.

Selling the securities at a loss would reduce the Fed’s ability to transfer profits to the Treasury Department. Large enough losses could reduce the amount of capital held by the Fed, although it can always create more money.

But perhaps the greatest risk is that investors will begin to doubt the Fed’s willingness to raise interest rates, knowing that each increase will damage its own balance sheet.

“It compromises their integrity and their inflation-fighting mandate, because fighting inflation would be a direct detriment to their portfolio,” Mr. Zervos said.

The Fed could avoid these problems by selling the securities now, before interest rates start to rise. But doing so would reverse the benefits of the original program, draining money from the economy while it still is weak. It would also fly in the face of the demands for the Fed to do more for the economy.

A fire sale also could damage the banking industry by driving down the value of the comparable mortgage securities that banks hold in large quantities.

So far the Federal Open Market Committee, comprising the board of governors and a rotating selection of presidents from the regional reserve banks, has chosen to wait.

The approach favored by most of the committee, according to the minutes of its June meeting, is to start raising interest rates before beginning to sell the securities. By waiting “until the economic recovery was well established,” the minutes said, the Fed would limit the impact of the asset sales on the broader market.

Credit Default Swaps Defined and Explained

Editor’s Comments: Everyone now has heard of credit default swaps but very few people understand what they mean and fewer still understand their importance in connection with the securitization of residential mortgage loans and other types of loans.The importance of understanding the operation of a CDS contract in the context of foreclosure defense cannot be understated.

In summary, a CDS is insurance even though it is defined as not being insurance by Federal Law. In fact, Federal Law allows these instruments to be traded as unregulated securities and treats them as though they were not securities.

Anyone can buy a CDS. In the securitization of loans, anybody can “bet” against a derivative security ( like mortgage backed bonds) by purchasing a CDS. FURTHER THEY CAN PURCHASE MULTIPLE BETS (CDS) AGAINST THE SAME SECURITY. In the mortgage meltdown, Goldman and other insiders created the mortgage backed bonds to fail — collecting a commission and profit in the process — and using the proceeds of sales of mortgage backed securities to purchase CDS contracts for themselves. So they were betting against the value of the security they had just sold to investors. The investors (pension funds, sovereign wealth funds etc.) of course knew nothing of this practice until long after they had purchased the bonds.

The bonds were represented to be “backed” by mortgage loans that collectively received a Triple AAA rating from the rating agencies who were obviously in acting in concert with the investment bankers who issued and sold the bonds. There were also other contracts that were purchased using the proceeds of the sale of the bonds that performed the same function — i.e., when the bonds were downgraded or failed, there was a payoff to the lucky investment banker who issued them or the lucky “trader” or bought the insurance or CDS. Sometimes the proceeds were used to pacify the investors and sometimes they were not.

The significance of this in foreclosure defense, is that while the investors were getting bonds for their investment, the bonds incorporated the mortgage loans, which is another way of saying that the investors were funding the loans through a series of steps starting with their purchase of mortgage backed bonds. Thus it was the investor who was the ONLY creditor in the transaction that funded a homeowner’s loan (at least initially before bailouts and payoffs of insurance and proceeds of CDS contracts).

The other item of significance is that the securities did not need to actually fail for the CDS to pay off. That is precisely why AIG got into an argument with Goldman Sachs that eventually led to the bailout. All that was needed was for the issuer or some other “trustworthy” source to downgrade the value of the bonds or announce that a substantial number of the loans in the pool were in danger of default, and that was enough to claim payment on the CDS contract.

The translation of that is that even if your loan was paid up or only slightly behind, someone was getting paid on a CDS contract in which a series of mortgage backed bonds were marked down in value. This payment was received by the investment banker who was the central figure in the securitization chain. And, as stated above, sometimes these proceeds were shared with investors and sometimes they were not — which is why identification of the creditor and getting a complete accounting is so important.

But the issue goes deeper than that. The investment banker was acting as the agent or conduit for both the actual creditor “investor) who was lending the money and the debtor (borrower or homeowner) who was borrowing the money. Therefore the payment of proceeds in a CDS may have accomplished one or more of the following:

  1. Cure of any default by the debtor as far as the creditor was concerned, since the investor or its agent received the money.
  2. Satisfaction through payment of all or part of the borrower’s obligation.
  3. Obfuscation of the real accounting for the money that exchanged hands
  4. Payment of an excess amount above the amount owed by the debtor which might be a liability to the debtor under TILA, a liability to the investor, or both, plus treble damages, rescission rights, and attorneys fees.
  5. Opening the door for non-creditors to step into the shoes of the actual creditor who has been paid, and claim that the debtor’s non-payment created a default even though the creditor or his agents is holding money paid on the obligation that either cures the default, satisfies the obligation in full, creates excess proceeds which under the note and applicable law should be returned to the debtor.
  6. Creates an opportunity for some party to get a “free house.” In the current environment nearly all of the houses obtained without investment or funding of one dime is going to these intermediaries whom I have dubbed pretender lenders. Note that the financial services industry has taken control of the narrative and framed it such that homeowners are claiming a free home when they borrowed money fair and square. But at least homeowners have put SOME money into the deal through payments, down payments, or lending their credit to these dubious transactions. The free house, as things now stand is going to parties who never invested a penny in the funding of the home and who stand to lose nothing if denied the right to foreclose.

FROM WIKIPEDIA —–The article below comes from www.wikipedia.com

A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument (typically a bond or loan) undergoes a defined ‘Credit Event‘, often described as a default (fails to pay). However the contract typically construes a Credit Event as being not only ‘Failure to Pay’ but also can be triggered by the ‘Reference Credit’ undergoing restructuring, bankruptcy, or even (much less common) by having its credit rating downgraded.

CDS contracts have been compared with insurance, because the buyer pays a premium and, in return, receives a sum of money if one of the events specified in the contract occurs. However, there are a number of differences between CDS and insurance, for example:

  • The buyer of a CDS does not need to own the underlying security or other form of credit exposure; in fact the buyer does not even have to suffer a loss from the default event.[1][2][3][4] In contrast, to purchase insurance, the insured is generally expected to have an insurable interest such as owning a debt obligation;
  • the seller need not be a regulated entity;
  • the seller is not required to maintain any reserves to pay off buyers, although major CDS dealers are subject to bank capital requirements;
  • insurers manage risk primarily by setting loss reserves based on the Law of large numbers, while dealers in CDS manage risk primarily by means of offsetting CDS (hedging) with other dealers and transactions in underlying bond markets;
  • in the United States CDS contracts are generally subject to mark to market accounting, introducing income statement and balance sheet volatility that would not be present in an insurance contract;
  • Hedge accounting may not be available under US Generally Accepted Accounting Principles (GAAP) unless the requirements of FAS 133 are met. In practice this rarely happens.

However the most important difference between CDS and Insurance is simply that an insurance contract provides an indemnity against the losses actually suffered by the policy holder, whereas the CDS provides an equal payout to all holders, calculated using an agreed, market-wide method.

There are also important differences in the approaches used to pricing. The cost of insurance is based on actuarial analysis. CDSs are derivatives whose cost is determined using financial models and by arbitrage relationships with other credit market instruments such as loans and bonds from the same ‘Reference Entity’ to which the CDS contract refers.

Insurance contracts require the disclosure of all risks involved. CDSs have no such requirement, and, as we have seen in the recent past, many of the risks are unknown or unknowable. Most significantly, unlike insurance companies, sellers of CDSs are not required to maintain any capital reserves to guarantee payment of claims. In that respect, a CDS is insurance that insures nothing.

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