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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

6 Responses

  1. When an unallowed action has been committed by a representative of a “Trust” then trust is lost.

    Whan a post dated (to closing date) assignment of mortgage is created and especially if it is “allowed” by the trust to represent an unallowed action of the trust, at that very moment not only does the trust lose it’s REMIC status… it also loses its status as a trust for,

    without trust there can be no “Trust”. EPTL §7-1.8

  2. Any act of the trustee contrary to the trust agreement (PSA) is void ( NY EPTL § 7-2.4).

    In New York, the mere intention to create a trust without delivery of the trust assets to the trustee has not legal consequences; it does not create a trust, if the Settler is the sale trustee, the transfer of Title assets is completed by recording the DEED or registering the securities or accounts in the name of the trust. If the trust names a third party as a trustee, the property, titled assets, documents evidencing ownership of the property must be formally transferred to the trustee. A transfer is not effected by mere recital of assignment, but the written assignment and all documents of property must be actually delivered to the trustee ( EPTL §7-1.8). As stated above the property is passed to the trustee with the intention to pass legal title thereto to it as trustee. Brown v. Spehr, 180 N.Y. 201 (N.Y. 1904). There is no valid trust until actual delivery of the assets to the trust. Riezel v. Central Hanover Bank and Trust Co..,_266 App. Div. 586.

    There is no trust if the trust fails to acquire the property. Kermani v. Liberty Mut. Ins. Co., 4 A.D. 2d 603 (N.Y. App. Div. sa Depart. 1957).

    The delivery of the property must be done to the trust as designated in the instrument creating the Trust ( EPTL §7.2.1(c)). The PSA prescribes the specific method of transfer. This is not subject to variation because it is set in the instrument. No court can ignore and create contractual remedies that were omitted in the PSA. Schmid v. Magnetic Head Corp., 468 NYS 2d 649 (NY App. Div. 1983). However, the court can enforce the prescription of the PSA. Morlee Corp. v. Manufacturer Trust Co., 172 N.E. 2d 280 ( N.Y. l96l). But no court can on the basis of contract law change a trust which is specifically governed by its business indenture.

    What is valid delivery to the trustee is governed by the corporate business indenture, because the Trustee in the present case is a corporate trustee. Under a corporate indenture the right of the trustee are not governed by fiduciary relationship but by the term(s) of the agreement (the PSA). The cases that do not see that it is not simply a matter of privity fail to see that if the property is not received in the manner prescribed by the indenture, then the property is not property of the trust, and if not delivered as prescribed and delivered in violation of it, there is not trust because there has not been complete and perfected delivery of the property to the trust. AG Capital Funding Partners, L.P. v. State St. Bank & Trust Co., 2008 N.Y. Slip Op. 5766; Hazard v. Chase National Bank, 159 Misc. 57, 287 N.Y.S. 541 (Sup Ct 1936) aff’d 257 A.D. 950 14 N.Y.S. 147 (1st Dept.) aff’d 282 N.Y. 652 cert. de. 311 U.S. 708 (1940). The duties and power of the trustee are set by the agreement (PSA). In RE IBJ Schroeder Bank and Trust Co., 271 A.D. 2d 322 (N.Y. App. Div. 1st Dept. 2000).

    The PSA is also the agreement that creates the trust, it is a mistake to think that under New York Law you can create a trust without complete delivery of the designated property of the trust and in the manner specified by the document that creates it. Without the delivery of the property designated to it, there is not trust.

    The delivery under the PSA requires, under the corporate indenture, strict compliance with the mandatory terms of the trust indenture, because the property has to be delivered as prescribed and the securities ascertained if not, no right to beneficiaries arise. Wells Fargo Bank, N.A. v. Farmer, 2008 N.Y. Slip OP. 51133 U 6 ( N.Y. Sup. Ct 2008) and no right in the trust arises without consideration paid (in this case the depositor to the sponsor).

    The delivery necessary to consummate a gift must be perfected as to the nature of the property. There must be actual surrender and control and authority over the things surrendered must be intended. It is the consummation that completes the transaction, intention alone is not sufficient. Vincent v. Putnam, 248 N.Y. 76 (N.Y. 1928). The Consummation Act of the delivery of all the property and documents is necessary. Phillipsen v. Emigrant Inds. Saving Bank, 86 N.Y.S. 2nd 133 ( N.Y. Sup. Ct. 1948). Therefore, if the note and the mortgage and the interim assignment were not delivered by the closing date (of the trust) they are not property of the trust.

    The delivery rule requires that the delivery necessary to consummate a gift must be perfected as to the nature of the property and the circumstances permit. Vincent v. Rix, 248 N.Y. 76 as cited in Gruen v. Gruen, 68 N.Y. 2d 48 ( N.Y. 1986). See also Sussman v. Sussman, 61 A.D, 2d 838 ( N.Y. App. Div. 2d Dept, 1978); Riegel v. Hanover Bank TrustCo., 266 App. Div. 586 there must be a change of dominion over the thing intended to be given. Vincent v. Putnam, 248 N.Y. 76, 82-84 ( N.Y. 1928).Undelivered note and assignments after the closing date if not contemplated in the PSA are not property of the trust. Any act, sale, and conveyance by the trustee in violation of the PSA is void under NY EPTL law § 7-2.4.

  3. Hi Neil, JohnR here… long time no reply but I’m still out here. Read your articel above and would like to interject a point if I may.

    In paragraph 9 of your article “A Foreclosure Judgment and Sale is a Forced Assignment Against the Interests of Investors and For the Interests of the Bank Intermediaries” you wrote…
    “The final judgment of foreclosure forces the “assignment” into a “trust” that was unfunded”

    and it is this point that I would like to refer too.

    And here is where I interject. As the trusts indenture states, all of the participants in the securitization schema, as per contractual obligation, have no right, no ability, they cannot perform any action that would jeopardize the REMIC status of the trust. The trust’s indenture also states that any action taken by any of the participants to the schema in contravention to the trust are VOID. It does not say… “oh… maybe sometimes they’re OK” it says “They are VOID”. The trust CANNOT be forced to take the note at all! It cannot be “forced” to do anything. It is a contractual agreement, not a human being with a gun to its head. It cannot accept the note & mortgage AT ALL! NY EPTL & IRS laws make this impossible.

    Both the Cut-Off date & the default status of the note cannot be ignored. It is not a matter of “forces the “assignment” into a “trust””, this action is specifically VOID due to the terms of the controlling indenture (PSA) the participants of the schema have agreed to be governed by, and by NY trust law. Therefore, the “trust”, unless the note & mortgage are properly delivered into it, the trust can NEVER own that note & mortgage nor can the trustee because the trustee is merely an incident, and held within the same boundaries of the trust.

    In essence, the trust is created just like a vehicle. Like a car, it was specifically designed to perform a very certain duty and that duty alone. You can drive it down a road. It’s not a boat, its not an airplane. That is not the purpose for which it was designed and therefore it has not that capability nor the capacity within it to allow it under ANY given circumstances.

    Like the example above, the trust was created to be a vehicle. A vehicle with very specific capabilities and with very specific limits all of which are memorialized within the the PSA.

    Even the mere hint that the trusts accepted a late note & mortgage is akin to saying “this car can fly”… it was not only never designed with that purpose in mind, within its own controlling document (PSA) and the controlling laws governing it (NY EPTL & IRS)(which the Parties to the schema all actually signed in agreement to), the right and ability to accept post cut-off notes and/or defaulted notes is specifically forbidden and any action by any participant to the securitization schema attempting to do so is VOID at its inception.

    Forbidden means forbidden… it does not mean “well, let’s just do it anyway”. It was specifically forbidden for a reason. That reason lies within the law under which the trust was created and is governed and is essential to the construction of the trust because without it, there is no trust (and I am referring to ‘trust” as in “we trust him” or “I trust you”).

    Haven’t finished reading or critiquing the piece yet… I’ll add more as I can find it.

    Otherwise though another great piece.

  4. Update the status of this post, please…..thanks.

  5. disappointing to hear that, Sam.

  6. I do not know if I trust anything you say Mr. Garfield. I paid you $1000 dollars to speak with my attorney, which you never did. I have called your office many times before to try to arrange the call but never got any call backs. In my opion you seem no better than the banks. Now as a widower with three small children we are losing our home. I had high hopes you would help but rather it seems you took my money and gave me nothing. Hopefully you will see this post and return my money. Sam Bass 405-833-6889

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