Bankruptcy Lawyers: it starts in the schedules — admission of secured debt is deadly

I was traveling and re listening to an older lecture given by 2 Bankruptcy judges generally held in high esteem. The largest point was that naming a party as the creditor and checking the right boxes showing they are secured basically ends the discussion on the motion to lift stay and restricts your options to either filing an adversary lawsuit attached to the administrative bankruptcy petition or filing an action in state court which is where you will be if you don’t follow this same simple direction. If you file schedules attached to your petition for bankruptcy relief, as you are required to do, these are basically the same as sworn affidavits. They will be used against you in any contested hearing.

So the judge lifts the stay and then often mistakenly enters additional language in the order ending the issue of whom is the real lender. After all, that is who you were making the payments to, right, so they must be a creditor. And this is all about a mortgage foreclosure so they must, in addition to being a creditor, they must be a secured creditor. And if the collateral is worth less than the claim, there is not much else to talk about it is simple to these Judges because nobody has shown them differently and one of the Judges is retired now. By definition when the Bankruptcy Judge says in the order who is the creditor, he or she has gone beyond their jurisdiction and due process because there was no evidentiary hearing.

This all results from a combination of technology (garbage in, garbage out), inexperience with securitized mortgages, laziness and failure to do the research to determine what is the truth and what is not. If you are a bankruptcy practitioner who uses one of the desktop bankruptcy programs, then the questions, boxes, and fill-ins are intuitively placed in the schedule that your client swears to. No problem unless the schedules are wrong. And they are wrong where the debt runs from the Petitioner to the REMIC trust beneficiaries and is unsecured by any mortgage that the homeowner borrower petitioner ever signed or meant to sign.

The first point is that the amount if the debt is unknown and we now this for a fact because there are multiple offsets for Third party payment (like Servicer advances) that must be examined one by one. It could be zero, it could be there is money due to the borrower, it could be more or less what is being demanded by the Servicer or trustee. Another thing we know is that neither the Servicer or trustee is likely to know the amount of their claim. So send out a QWR to all addresses for the Servicer and the REMIC trustee.

If you get several different payment histories it is a fair bet they came off of different records, different systems and require the records custodian to authenticate each Servicer’ rendition, of beginning balance, ending balance and every transaction in between. The creditor who filed a proof of claim has the burden of showing a color able right to enforce the mortgage. That can only come from the pooling and servicing agreement. The parties to the PSA are the REMIC Trust, the REMIC Trust beneficiaries and the broker dealer who sold the bonds issued by the REMIC trust.

But if there is no trust or the REMIC trust never actually acquired the subject loan, then the appointed Servicer in the PSA draws no power from a PSA for a nonexistent or empty trust (at least empty of the subject loan.) it is not the Servicer by right, it has become the Servicer by its intervention into the contractual right between the borrower homeowner and the lender (the REMIC trust beneficiaries). The “apparent authority” of the Servicer will only take it so far.

And every transactions means that as a Servicer they were paying or passing on the borrower’s payments . Where are those records — missing. Does the corporate representative know about those payments? Who was the creditor paid. When did the payments from Servicer start and when did they stop — or are they still on-going right up to and including trial, foreclosure sale auction and final disposition of proceeds from an REO sale.

So from the perspective of the Petitioner he might have made payments to an entity that claimed to be the Servicer and those payments are due back not the bankruptcy estate. OOPS but that is what happens when a company arrogated unto itself the powers of a Servicer for loans that are claimed to be in a trust — where the trust doesn’t own the loan, note or mortgage (deed of trust). Thus the Servicer would be owed zero but you would show them in the unsecured column, unliquidated and disputed. This could have a substantial income on the amount of the claim, whether part or all of it is secured.

But no matter, if you fail to take a history from the client, get the closing documents, title and securitization report together with loan level analysis, you are going to do a disservice to your client. We provide litigation support and analysis to give you the data to make an informed decision, fight the POC, MLS, turnover of rents, etc. Then you might avoid the dreaded call of calling your insurance carrier who will probably tell you neither paid for nor received a tail on your claims made policy.

LAWYERS: Go to and start journey toward the light.

Foreclosure Defense: AG’s Hit Countrywide

They don’t have it all, but reading the complaint and getting copies of discovery and motions will help anyone contesting the foreclosure and of course, going further to the main target: HAVING THE MORTGAGE ENCUMBRANCE REMOVED FROM THE PROPERTY AND ELIMINATING LIABILITY ON THE NOTE.



Countrywide’s Pressures Mount

Three States File
Legal Actions;
Holders Clear Sale
June 26, 2008; Page A3

The legal and financial pressures on Countrywide Financial Corp. mounted Wednesday as officials in three states filed separate legal actions against the mortgage lender.

The actions, by the attorneys general of California and Illinois, and the Washington State Department of Financial Institutions, came on the same day that Countrywide shareholders voted to approve the sale of the company to Bank of America Corp. The all-stock transaction was valued at $4 billion when Bank of America agreed to buy Countrywide in January. But Bank of America shares have since slipped, and the value has fallen to about $2.8 billion. The transaction is scheduled to close on July 1.

The California action, filed in state court by Attorney General Edmund G. Brown Jr., alleges that Countrywide used “misleading marketing practices” to steer home buyers into “risky and costly loans” without regard to borrowers’ ability to pay. Mr. Brown alleges that Countrywide, based in Calabasas, Calif., was driven by an effort to boost the company’s market share and fill demand from Wall Street for loans that could be packaged into securities. The 46-page complaint also names Countrywide Chairman Angelo Mozilo and the company’s president, David Sambol.


Separately, the Washington State Department of Financial Institutions filed an administrative action against Countrywide alleging that the company engaged in discriminatory lending practices. Meanwhile, Illinois Attorney General Lisa Madigan, as expected, filed a separate civil action in state court accusing Countrywide of “unfair and deceptive practices” in the sale of mortgage loans.

All states are seeking restitution for borrowers. If the states can persuade the courts to grant restitution, it “could be a staggering blow against Countrywide,” said Kurt Eggert, a law professor at the School of Law at Chapman University, in Orange, Calif. “Countrywide could be required to give back its profit on all those loans and conceivably give back houses on which it has foreclosed.”

A Countrywide spokesman didn’t respond to requests for comment. A Bank of America spokesman had no comment on the litigation Wednesday. But Bank of America Chairman and CEO Kenneth D. Lewis has said in the past that he believes the relatively low deal price gives plenty of cushion for potential damages, settlements and other litigation costs.

Litigation against Countrywide continues to pile up. In addition to the state cases, Countrywide and its top executives are under investigation by several federal agencies, including the Federal Bureau of Investigation and the Securities and Exchange Commission, and are the subject of numerous lawsuits from employees, shareholders and borrowers.

Analysts have estimated that Bank of America could face more than $9 billion in write-downs related to Countrywide.

The California suit is particularly notable because of the scale of Countrywide’s business in the state. California, the nation’s biggest housing market, accounts for a disproportionately large share of delinquent home loans and Countrywide was one of the largest mortgage lenders in the state. California attorney general Brown said in an interview that “Countrywide certainly contributed substantially to the overall problems” in the mortgage market. As custodians of the company, he added, Messrs. Mozilo and Sambol “have the legal and moral responsibility to protect their borrowers and they ultimately failed.”

While subprime loans — or loans to borrowers with poor credit — have captured most headlines in recent years, the attorneys general appear equally concerned about so-called option adjustable-rate mortgages, a type of loan taken out largely by prime borrowers. Payment-option ARMs, as they are often called, allow borrowers to make a minimum payment that may not even cover the interest due. Gross profit margin on these loans was roughly 4%, compared with 2% for loans guaranteed by the Federal Housing Administration, according to the California complaint.

In addition, the California lawsuit alleges that Countrywide loosened its underwriting standards and then often granted exceptions to those looser standards. The company’s Structured Loan Desk in Plano, Texas, was “specifically set up by Countrywide, at the direction” of Messrs. Mozilo and Sambol, to grant underwriting exceptions, the lawsuit says. In 2006, it processed 15,000 to 20,000 loans a month, the lawsuit says.

The California and Illinois actions “are both aggressive lawsuits” in that they “assert a responsibility on the part of the lender to offer appropriate products to the homeowner” in addition to making more traditional claims that lenders made deceptive statements to borrowers, said Prentiss Cox, an associate professor of law at the University of Minnesota.

These suits “have a much greater chance of succeeding now than they would have a few years ago because everyone will understand the consequences” of the practices alleged in the lawsuits, he said. “Before, there was a presumption that these are large financial companies and they surely know what they are doing. No one assumes that anymore.”

Connecticut Attorney General Richard Blumenthal said he is likely to file a lawsuit as part of a second wave of civil actions brought by states against Countrywide. Among the issues Connecticut would allege is “falsely promising refinancing opportunities and lying to consumers about possible risks,” said Mr. Blumenthal. Attorneys general in Florida and Iowa also say they are weighing their options.

–Amir Efrati and Valerie Bauerlein contributed to this article.

Write to Ruth Simon at ruth.simon@wsj.com5

Foreclosure Defense and Offense: Good News For Class Actions and Individual Actions

As with all cases cited here, you should get on line and capture the pleading documents and other pertinent motions, discovery etc. It would help us and thousands of others, if you would send what you find to


McKell v. Washington Mutual-Class Action Defense Cases: Defense Motion To
Dismiss Class Action Improperly Granted As To Breach of Contract And UCL
Claims Based On Federal RESPA Violations California Court Holds
California Court Holds as Matter of First Impression that RESPA Prohibits
Lender from Marking Up Costs of Another Provider's Services Without
Providing Additional Services of its Own 

Plaintiffs filed a putative class action lawsuit against Washington Mutual
Bank in California state court alleging inter alia violations of
California’s unfair competition laws (UCL), Consumers Legal Remedies Act
(CLRA), and breach of contract. “The basis of all causes of action was
defendants’ overcharging plaintiffs for underwriting, tax services, and wire
transfer fees in conjunction with home loans. Defendants charged plaintiffs
more for these services than defendants paid the service providers.” McKell
v. Washington Mutual Bank,___ Cal.App.4th___, 2006 WL 2664130 (Cal.App.
September 18, 2006) [Slip Opn., at 2]. Plaintiffs’ UCL claim was premised
upon alleged violations of the California Residential Mortgage Lending Act
(CRMLA) and the federal Real Estate Settlement Procedures Act (RESPA) and
Regulations X, among other state and federal laws. Slip Opn., at 5. The
trial court granted a defense motion to dismiss the class action complaint,
presumably on the ground that the claims “turn on the alleged existence of
an agreement requiring Washington Mutual to charge no more than pass-through
costs for underwriting, tax services, and wire transfers,” id., at 3, which
plaintiffs could not do. The California Court of Appeal affirmed in part and
reversed in part. We do not here discuss those aspects of the trial court’s
ruling that the divided appellate court opinion affirmed. Rather, we focus
on the Court of Appeal’s holdings that plaintiffs had adequately pleaded UCL
and breach of contract claims.

The appellate court first held that the trial court did not err “in
requiring plaintiffs to plead a factual basis for implying an agreement by
[the Bank] to charge only pass-though costs,” Slip Opn., at 8. But in
analyzing the UCL claims, the Court of Appeal explained at page 10,

A cause of action for unfair competition under the UCL may be established
“‘independent of any contractual relationship between the parties.’” . . .
Thus, the determination whether plaintiffs have stated a cause of action for
violation of the UCL is not dependent upon their ability to plead the
existence of an implied agreement to charge only pass-through costs for
underwriting, tax services and wire transfer services.” (Citations omitted.)
Plaintiffs’ fraudulent business practices claims survived demurrer because
“a reasonable consumer likely would believe that fees charged in connection
with a home mortgage loan bore some correlation to services rendered.” Slip
Opn., at 11. The Court rejected the Bank’s argument that Regulation X “only
requires that the HUD-1 statement itemize the charges imposed on the buyer
and seller” because listing the charge “does not preclude a finding [that]
it is deceptive.” Id. (citations omitted).

Plaintiffs’ unfair business practices allegations also survived demurrer
because “the determination whether [a business practice] is unfair is one of
fact which requires a review of the evidence from both parties” and “thus
cannot usually be made on demurrer.” Id., at 12. The Court of Appeal
rejected the Bank’s judicial abstention argument because the Court was
“doing no more than enforcing already-established economic policies.” Id.,
at 13. The Court rejected also the Bank’s argument that the Court “should
not interfere” because “lending practices are strictly regulated” because
plaintiffs are not challenging the amount of the fees per se but rather the
business practice of “lead[ing] borrowers to believe it is charging them for
the cost of certain services it provides, when in reality it is charging
them substantially in excess of such costs.” Id., at 13-14.

Turning to the RESPA claim, the Court of Appeal quoted at length from Kruse
v. Wells Fargo Home Mortgage, Inc., 383 F.3d 49 (2d Cir. 2004), Slip Opn.,
at 16 et seq. Kruse analyzed HUD’s interpretation of section 8(b) and
concluded that it “prohibits a ‘“settlement service provider” from
“mark[ing]-up the cost of another provider’s services without providing
additional settlement services.”’” Id., at 19 (quoting Kruse, at 61-62). As
a matter of first impression, the California appellate court agreed with
Kruse and “adopt[ed] that court’s reasoning as our own.” Id. In accepting
HUD’s interpretation of section 8(b), the Court also noted that “its
interpretation of section 8(b) is consistent with Congress’s stated intent
to protect consumers from unnecessarily high settlement charges.” Id., at 20
(citation omitted).

The Court rejected defense arguments that RESPA and Regulation X expressly
preempt state law claims alleging violations of RESPA and Regulation X, Slip
Opn., at 21-24, and additionally rejected defense claims that plaintiffs’
claims were preempted by the federal Home Owners’ Loan Act (HOLA), 12 U.S.C.
§ 1461 et seq., id., at 24-31. With respect to the HOLA preemption claim,
the appellate court observed that “plaintiffs are not attempting to employ
the UCL to enforce a state law purporting to regulate the lending activities
of a federal savings association” but rather “to enforce federal law
governing the operation of federal savings associations.” Id., at 27. As the
Court explained at page 29,

Insofar as plaintiffs are using the UCL to enforce federal laws as set forth
in RESPA, they are not seeking to enforce “state laws affecting the
operations of federal savings associations.” (§ 560.2(a).) The UCL does not
“purport[] to regulate or otherwise affect [a savings’ association’s] credit
activities” (ibid.) but only provides a means of enforcing federal
requirements. It is thus the type of state law not preempted by federal law.
With respect to the breach of contract claim, the appellate court admitted
that “[p]laintiffs have still failed to identify the contract and
contractual provision under which [the Bank] required them to pay
underwriting and wire transfer costs” but that they identify the deed of
trust for the fee for tax services. Slip Opn., at 32. The Court agreed that
“[t]he deed of trust . . . required that any tax services fee [the Bank]
charged plaintiffs comported with RESPA,” id., at 33. Because plaintiffs
alleged the fee violated RESPA, they adequately pleaded a breach of contract
claim so as to survive demurrer. Id. 

NOTE: The Court of Appeal had no trouble in affirming the dismissal of the
CLRA claim: “Plaintiffs cite no authority or make no argument demonstrating
that Washington Mutual’s actions were undertaken ‘in a transaction intended
to result or which results in the sale or lease of goods or services.’ . . .
Rather, its actions were undertaken in transactions resulting in the sale of
real property. The CLRA thus is inapplicable . . . ” Slip Opn., at 31
(citation and footnote omitted). The Court also affirmed dismissal of the
common law claims for unjust enrichment, bailment, and conversion, id., at

One of the appellate court judges issued a concurring and dissenting opinion
in which he expressed the view that “this entire action is preempted by
federal law,” specifically, the Home Owners’ Loan Act (HOLA). Slip Opn.,
Vogel, J., concurring and dissenting, at 4


Foreclosure Offense and Defense for Borrower’s and Their Lawyers


Deed of Trust
An instrument signed by a borrower, lender and trustee that conveys the legal title to real property as security for the repayment of a loan. The written instrument in place of mortgage in some states.




In a conventional mortgage transaction, a mortgage is in default when any of its terms are breached. While there are cases where the default consists of compromising the security (e.g. failure to insure — favorite among predatory lenders who “force place” insurance at exorbitant rates without just cause), the most common default claimed is in the event that the borrower fails to make the payments as agreed to in the original promissory note.

In the Mortgage Meltdown context, the entire concept of default has been redefined by

(1) disengagement of the borrower’s obligations from the security instrument and note

(2) substitution (novation) of parties with respect to all or part of the risk of default

(3) substitution (novation) of parties with respect to the obligations and provisions of the security instrument (mortgage) and promise to pay (promissory note)

(4) merger of mortgage obligations with other borrowers

(5) addition of third parties responsibility to comply with mortgage terms, especially payment of revenue initiated in multiple mortgage notes and

(6) a convex interrelationship between

(a) the stated payee of the note who no longer has any interest in it

(b) the possessor of the note who is most frequently unknown and cannot be found and therefore poses a threat of double liability for the obligations under the note and

(c) 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.

It may fairly be argued that there is no claim for default without (1) ALL the real parties in interest being present to assert their claims, (2) a complete accounting for revenue flows related to a particular mortgage and note including payments from third parties, sinking funds, reserve funds from proceeds of sale of multiple ABS instruments referencing multiple portfolios of assets in which your particular mortgage and note may or may not be affiliated and (3) production of the ORIGINAL NOTE (probably intentionally destroyed because of markings on it or other tactical reasons or in the possession of an SIV in the Cayman Islands or other safe haven.

In ALL cases, including recent ones in Ohio, New York, Maryland and others, it is apparent that the “lender” is either not the lender or upon challenge, cannot prove it is or ever was the lender. Wells Fargo definitely engaged in the practice of pre-selling loans upon execution of loan applications rather than assignment AFTER a loan had actually been created. In nearly all cases the Trustee or MERS or mortgage service operation has no knowledge of where the original note is, has no interest in the note or mortgage, and has no knowledge of the identity, location or even a contact person who could provide information on the real parties in interest in a particular mortgage note.

The “clearing and settlement” of “sale” or “assignments’ of mortgages, notes, ABS instruments and collateral exotic derivatives whose value is derived from the original ABS of the SPV which received representations from an unidentified SIV (probably off-shore).

The abyss created in terms of identifying the actual owner of the mortgage and note was intentionally created to avoid liability for fraudulent representations on the sale of the derivative securities to investors. The borrower’s signature on an application or closing documents was part of the single transaction process of the sale of ABS unregulated security instruments to qualified investors based upon fraudulent appraisals of (1) the underlying real property, (2) the financial condition of the “borrower” and (3) the securities offered to investors.



Housing Bubble: How We All Got Screwed

  • And now, because nobody stepped in before the flood began, a new industry is born — bigger than personal injury lawsuits — it the flood of claims under TILA, RESPA, RICO, Securities laws, common law fraud and state and federal laws concerning false and deceptive business practices. People will be rescinding or simply voiding their mortgage transaction through rescission remedies provided under statutory law and common law. They will be seeking and getting damages, treble damages, exemplary damages, punitive damages. Lawyers will be happy. Anyone who says the worst is behind us is, to say the least, overly optimistic.

The bottom line is pressure, greed, arrogance, power, and recklessness. In the excellent article that follows, you can pick out the trail of fraud and deception, self-deception and how “everyone” was on board with the mortgage meltdown and how everyone knew it would bust.

By false and deceptive representations, by improper relationships with rating “agencies” (actually private companies out to make a buck just like everyone else in the process) and by creation of complex instruments wherein the buyer relied on the integrity of the firms involved in the issuance of derivative securities, demand for these high yielding “no-risk” AAA rated securities was insatiable. Wall Street was awash in money and put the screws on everyone down the line including the borrower who would buy real estate that was as falsely appraised in value as the security that provided the the money to fund the loan.

What started as an innovative way to increase liquidity and disperse risk ended up being institutionalized theft. As the success of derivative securities (measured by sales and demand from investors) rose, so did the pressure on lenders to increase their “output” of loans, no matter how ridiculous. In fact, the more ridiculous, the better — because the the lower the grade of the borrower, the higher the interest rate.

By parsing and packaging loans together, mortgage aggregators were able to report that a loan which started out at 1%, negative amortization, adjustable rate, with resets every 3 months, was actually a 12% loan or more. This allowed the CDO manager to “secure” the top tranche in an SPV with “income” left over for the lower the tranches. It all looked so good on paper.

The pressure was on — lenders threw out all their underwriting standards, while they and mortgage brokers, appraisers, and others conspired to simply get that signature on the loan documents, the devil be damned if he/she paid anything on the loan.  Get rid of the escrow for taxes and insurance and “qualify” the borrower based upon the very first teaser rate and PRESTO! a guy with an income of $30,000 can get a mortgage loan of $1 million, with negative amortization and adjustments to his payments. Using the same tactics as the time-share sales people of times past, they assure the borrower that his lack of understanding of how he could get a mortgage so big is understandable, but that the world of finance, rising home prices that will continue to rise, and the integrity of the lender, the mortgage broker, the appraiser and underwriting department is something he can rely on. 

The more they ran out of people to make loans to the lower the standards for lending. Nobody cared because they knew they were just middlemen taking their cut out of the pie created by the investment of some money manager in asset backed securities that were neither backed nor had assets.  The fall would be taken by the investors in CDOs issued by SPVs, and holders of credit default swaps and synthetic derivatives that were too complicated for anyone to understand without the assistance of a computer powerful enough to run our defense department. 

Then the developer’s ran out of product, as prices skyrocketed and people were lining “free money” loans. So the lender’s threw construction loan money at the developers — and sent THOSE loans upstream to be securitized. Developer’s filed for hundreds of thousands of permits, completing the picture of a market that was in a permanent spiral upward. The illusion that there was not enough housing drowned out the little voices of older, wiser people, who asked “where is all this demand coming from and why had we not noticed it before?”

Cities, counties, states all revised their budgets based upon increased revenues and increased demands on their infrastructure. Now they are committed to projects, some of them started, without any prospect of being able to fund their completion. Local governments are looking to the Federal government to make up the shortfall — for good reason.

Those in the Federal government who had anything to do with legislating or regulating lending and securitization were receiving “perks” which sometimes were as simple as getting a mortgage loan under market and sometimes involved much more than that. Congress made sure they played their part with REMIC legislation ostensibly to prevent double taxation of “revenue” that was in actuality mostly smoke and mirrors. But in so doing, Congress institutionalized the process of fraud, deception and crisis.

And of course there was the Federal Reserve, which had opened its loan window to investment bankers, accepting as collateral the face value of virtually worthless securities. The window is not open to ordinary people who got screwed, or their cities, counties and states. It is only open to the people who caused the mess to begin with.

The fact that the foreclosure “race” was on and could only end in disaster was of little concern to the Federal Reserve in accepting those securities at face value. Only two outcomes were possible — either the house would be acquired by the lender (95% of the cases) and then left to rot, be vandalized and robbed of everything of value right down to windows, doors, wiring and plumbing — or the “inventory” of homes would be shifted from seller’s to “lenders” — with big question on who the “lender” actually is anymore. It certainly is not anyone who was present at closing.

In many cases the houses are subject to the first scenario as there are organized crime groups making a business out of stripping unoccupied dwellings. The COST of either demolishing the house or renovating the house back to salable condition with warranties exceeds the “value” of the land and any existing structure on it. Thus the value of this investment is either already less than zero or headed there. Thus the value of the securities accepted by the Fed at their window is negative. The holders of those securities are upside down just like the borrowers but the investment bankers and banks have the Fed. Everyone else has nothing. 

And now, because nobody stepped in before the flood began, a new industry is born — bigger than personal injury lawsuits — it the flood of claims under TILA, RESPA, RICO, Securities laws, common law fraud and state and federal laws concerning false and deceptive business practices. People will be rescinding or simply voiding their mortgage transaction through rescission remedies provided under statutory law and common law. They will be seeking and getting damages, treble damages, exemplary damages, punitive damages. Lawyers will be happy. Anyone who says the worst is behind us is, to say the least, overly optimistic.


MSN Tracking Image
The housing bubble, in four chapters
How homeowners, speculators and Wall Street rode a wave of easy money
By Alec Klein and Zachary A. Goldfarb
The Washington Post
updated 2:10 a.m. MT, Sun., June. 15, 2008

The black-tie party at Washington’s swank Mayflower Hotel seemed a fitting celebration of the biggest American housing boom since the 1950s: filet mignon and lobster, a champagne room and hundreds of mortgage brokers, real estate agents and their customers gyrating to a Latin band.

On that winter night in 2005, the company hosting the gala honored itself with an ice sculpture of its logo. Pinnacle Financial had grown from a single office to a national behemoth generating $6.5 billion in mortgages that year. The $100,000-plus party celebrated the booming division that made loans largely to Hispanic immigrants with little savings. The company even booked rooms for those who imbibed too much.

Kevin Connelly, a loan officer who attended the affair, now marvels at those gilded times. At his Pinnacle office in Virginia, colleagues were filling the parking lot with BMWs and at least one Lotus sports car. In its hiring frenzy, the mortgage company turned a busboy into a loan officer whose income zoomed to six figures in a matter of months.

“It was the peak. It was the embodiment of business success,” Connelly said. “We underestimated the bubble, even though deep down, we knew it couldn’t last forever.”

Indeed, Pinnacle’s party would soon end, along with the nation’s housing euphoria. The company has all but disappeared, along with dozens of other mortgage firms, tens of thousands of jobs on Wall Street and the dreams of about 1 million proud new homeowners who lost their houses.

The aftershocks of the housing market’s collapse still rumble through the economy, with unemployment rising, companies struggling to obtain financing and the stock market more than 10 percent below its peak last fall. The Federal Reserve has taken unprecedented action to stave off a recession, slashing interest rates and intervening to save a storied Wall Street investment bank. Congress and federal agencies have launched investigations into what happened: wrongdoing by mortgage brokers, lax lending standards by banks, failures by watchdogs.

Seen in the best possible light, the housing bubble that began inflating in the mid-1990s was “a great national experiment,” as one prominent economist put it — a way to harness the inventiveness of the capitalist system to give low-income families, minorities and immigrants a chance to own their homes. But it also is a classic story of boom, excess and bust, of homeowners, speculators and Wall Street dealmakers happy to ride the wave of easy money even though many knew a crash was inevitable.

Chapter I: ‘A lot of potential’
For David E. Zimmer, the story of the bubble began in 1986 in a high-rise office overlooking Lake Erie.

An aggressive, clean-cut 25-year-old, armed with an MBA from the University of Notre Dame, Zimmer spent his hours attached to a phone at his small desk, one of a handful of young salesmen in the Cleveland office of the First Boston investment bank.

No one took lunch — lunch was for the weak, and the weak didn’t survive. Zimmer gabbed all day with his clients, mostly mid-size banks in the Midwest, persuading them to buy a new kind of financial product. Every once in a while, he’d hop a small plane or drive his Oldsmobile Omega out for a visit, armed with charts and reports. The products, investments based on bundles of residential mortgages, were so new he had to explain them carefully to the bankers.

“There was a lot of education going on,” Zimmer said. “I realized, as a lot of people did, this was a brand new segment of the market that had a lot of potential, but I had no idea how big this would get.”

Zimmer joined the business as enormous changes were taking hold in the mortgage industry. Since World War II, community banks, also called thrifts or savings and loans, had profited by taking savings deposits, paying their customers interest and then lending the money at a slightly higher rate for 30 years to people who wanted to buy homes. The system had increased homeownership from less than 45 percent of all U.S. households in 1940 to nearly 65 percent by the mid-’60s, helped by government programs such as G.I. loans.

In 1970, when demand for mortgage money threatened to outstrip supply, the government hit on a new idea for getting more money to borrowers: Buy the 30-year, fixed-rate mortgages from the thrifts, guarantee them against defaults, and pool thousands of the mortgages to be sold as a bond to investors, who would get a stream of payments from the homeowners. In turn, the thrifts would get immediate cash to lend to more home buyers.

Wall Street, which would broker the deals and collect fees, saw the pools of mortgages as a new opportunity for profit. But the business did not get big until the 1980s. That was when the mortgage finance chief at the Salomon Brothers investment bank, Lewis Ranieri — a Brooklyn-born college dropout who started in the company’s mailroom — and his competitor, Laurence Fink of First Boston, came up with a new idea with a mouthful of a name: the collateralized mortgage obligation, or CMO. The CMO sliced a pool of mortgages into sections, called “tranches,” that would be sold separately to investors. Each tranche paid a different interest rate and had a different maturity date.


Investors flocked to the new, more flexible products. By the time Zimmer joined First Boston, $126 billion in CMOs and other mortgage-backed securities were being sold annually. “Growth is really poised to take off,” Zimmer thought.

After a few years at First Boston, Zimmer eventually ended up at Prudential Securities on the tip of Manhattan near the World Trade Center, selling increasingly exotic securities based not only on mortgages but also credit card payments and automobile loans.

As Wall Street’s securities grew more complex and lucrative, so did the mathematics behind them. Zimmer would walk over to Prudential’s huge “deal room.” The room was filled with quantitative researchers — “quants” — a motley crew of math wonks, computer scientists, PhDs and electrical engineers, many of them immigrants from China, Russia and India. The quants built new mathematical models to price the securities, determining, for example, what borrowers would do if interest rates moved a certain way.

The industry, which came to be known as structured finance, grew steadily. Zimmer grew with it. He got married, raised two kids and climbed to the level of senior vice president, a top salesman at Prudential.

Zimmer’s clients through the 1990s were mutual funds, pension funds and other big investors who dealt in big numbers: sometimes hundreds of millions of dollars. He’d get up at 4:30 a.m., be out of the house by 5, catch the 5:30 train from Princeton, N.J., be locked to his desk for 10 hours, devouring carbs — pizza, lasagna — and consumed by stress, but thinking nonetheless, “It was so much fun.”


Chapter II: ‘Extraordinary’ boom
April 14, 2000. A rough day on Wall Street. The technology-laden Nasdaq stock index, which had more than doubled from January 1999 to March 2000, falls 356 points. Within a few days, it will have dropped by a third.

Although the business of structured finance grew during the 1990s, Internet companies drew the sexiest action on the Street. When that bubble popped, average Americans who had invested in the high-flying stocks saw their savings evaporate. Consumer and business spending began to dry up.

Then came the 2001 terrorist attacks, which brought down the twin towers, shut down the stock market for four days and plunged the economy into recession.

The government’s efforts to counter the pain of that bust soon pumped air into the next bubble: housing. The Bush administration pushed two big tax cuts, and the Federal Reserve, led by Alan Greenspan, slashed interest rates to spur lending and spending.

Low rates kicked the housing market into high gear. Construction of new homes jumped 6 percent in 2002, and prices climbed. By that November, Greenspan noted the trend, telling a private meeting of Fed officials that “our extraordinary housing boom . . . financed by very large increases in mortgage debt, cannot continue indefinitely into the future,” according to a transcript.

The Fed nonetheless kept to its goal of encouraging lending and in June 2003 slashed its key rate to its lowest level ever — 1 percent — and let it sit there for a year. “Lower interest rates will stimulate demand for anything you want to borrow — housing included,” said Fed scholar John Taylor, an economics professor at Stanford University.

The average rate on a 30-year-fixed mortgage fell to 5.8 percent in 2003, the lowest since at least the 1960s. Greenspan boasted to Congress that “the Federal Reserve’s commitment to foster sustainable growth” was helping to fuel the economy, and he noted that homeownership was growing.

There was something very new about this particular housing boom. Much of it was driven by loans made to a new category of borrowers — those with little savings, modest income or checkered credit histories. Such people did not qualify for the best interest rates; the riskiest of these borrowers were known as “subprime.” With interest rates falling nationwide, most subprime loans gave borrowers a low “teaser” rate for the first two or three years, with the monthly payments ballooning after that.

Because subprime borrowers were assumed to be higher credit risks, lenders charged them higher interest rates. That meant that investors who bought securities based on pools of subprime mortgages would enjoy higher returns.


Credit-rating companies, which investors relied on to gauge the risk of default, gave many of the securities high grades. So Wall Street had no shortage of customers for subprime products, including pension funds and investors in places such as Asia and the Middle East, where wealth had blossomed over the past decade. Government-chartered mortgage companies Fannie Mae andFreddie Mac, encouraged by the Bush administration to expand homeownership, also bought more pools of subprime loans.

One member of the Fed watched the developments with increasing trepidation: Edward Gramlich, a former University of Michigan economist who had been nominated to the central bank by President Bill Clinton. Gramlich would later call subprime lending “a great national experiment” in expanding homeownership.

In 2003, Gramlich invited a Chicago housing advocate for a private lunch in his Washington office. Bruce Gottschall, a 30-year industry veteran, took the opportunity to pull out a map of Chicago, showing the Fed governor which communities had been exposed to large numbers of subprime loans. Homes were going into foreclosure. Gottschall said the Fed governor already “seemed to know some of the underlying problems.”


Chapter III: ‘Half-truths’ and lies
The young woman who walked into Pinnacle’s Vienna office in 2004 said her boyfriend wanted to buy a house near Annapolis. He hoped to get a special kind of loan for which he didn’t have to report his income, assets or employment. Mortgage broker Connelly handed the woman a pile of paperwork.

On the day of the settlement, she arrived alone. Her boyfriend was on a business trip, she said, but she had his power of attorney. Informed that for this kind of loan he would have to sign in person, she broke into tears: Her boyfriend actually had been serving a jail term.

Not a problem. Almost anyone could borrow hundreds of thousands of dollars for a house in those wild days. Connelly agreed to send the paperwork to the courthouse where the boyfriend had a hearing. As it happened, he was freed that day. Still, Connelly said, “that was one of mine that goes down in the annals of the strange.”

Strange was becoming increasingly common: loans that required no documentation of a borrower’s income. No proof of employment. No money down. “I was truly amazed that we were able to place these loans,” Connelly said.

It was a world removed from his start in the business, in 1979, when the University of Maryland graduate joined the Springfield office of a savings and loan. For most of his 25 years in the industry, home buyers provided reams of paperwork documenting their employment, savings and income. He’d fill out the forms and send away carbon copies for approval, which could take 60 days.

Connelly was now brokering loans for Orlando-based Pinnacle or for subprime specialists such as New Century Financial that went to borrowers with poor credit history or other financial limitations. Connelly said he secured many loans for restaurant workers, including one for $500,000 for a McDonald’s employee who earned about $35,000 a year.

Lenders saw subprime loans as a safe bet. Home prices were soaring. Borrowers didn’t have to worry about their payments ballooning — they could sell their homes at any time, often at a hefty profit. Jeffrey Vratanina, one of Pinnacle’s co-founders, said Wall Street wanted to buy more and more of the mortgages, regardless of their risk, to pool them and then sell them to investors. “Quite candidly, it all boils down to one word: greed,” he said.

In the Washington area, the housing boom coincided with a surge in the immigrant population, especially Latinos in places such as Prince William County. For many of them, subprime and other unconventional loans were the only way to attain the American dream of owning a home. Pinnacle’s customers included construction workers, house cleaners and World Bankemployees, who “saw an opportunity to get into a house without putting much money on the table — to save money to buy furniture to decorate the house,” said Mariano Claudio, who in his late 20s was helping run Pinnacle’s emerging-markets division, which was dedicated to immigrants.

Pinnacle ran ads on Spanish-language television and radio, set up booths at festivals and sponsored soccer matches at George Mason University. Brokers would hold raffles for gift cards or digital music players to collect names, addresses and phone numbers. It was “a great way to assemble a database of potential clients,” Connelly said.

He said his commission and fees depended on how much work he did on the loan, a common industry practice that often led to higher charges for subprime borrowers. Connelly said he carefully reviewed fees with his customers. “The way it’s justified morally and ethically is [that] the deal requires more work for a first-time home buyer or one with inferior financial history,” Connelly said. “It’s a balancing act of morals and ethics — and the need to make a living.”

Some brokers ignored the balance. Connelly began to hear about loan officers who charged low-income borrowers fees of as much as 5 percent of the loan or got a kickback by tacking extra percentage points to the interest rate on a mortgage. “Many borrowers are overwhelmed by the sheer volume of paperwork, disclosures, etc., and they’re just not equipped to fully understand,” he said. “There were half-truths and downright lies and severe omissions.”

A mortgage lender could hire practically anybody. “It’s not rocket science,” Connelly would tell new hires, such as the busboy who quickly traded in his Toyota Tercel (value: $1,000) for a Mazda Miata sports car (value: $25,000). Pinnacle was running out of office space, forcing some loan officers to work on window ledges or out of their cars.

Then came the party at the Mayflower at the end of 2005, a celebration hosted by the emerging-markets division. In June 2003, the division had originated $500,000 in loans. By the end of 2005, it was doing $500 million with hundreds of brokers across the country.

“It built to a head,” Connelly said of the times. “You could point to the Christmas party as the pinnacle.”

Chapter IV: Warning sign
Jan. 31, 2006. Greenspan, widely celebrated for steering the economy through multiple shocks for more than 18 years, steps down from his post as Fed chairman.

Greenspan puzzled over one piece of data a Fed employee showed him in his final weeks. A trade publication reported that subprime mortgages had ballooned to 20 percent of all loans, triple the level of a few years earlier.

“I looked at the numbers . . . and said, ‘Where did they get these numbers from?’ ” Greenspan recalled in a recent interview. He was skeptical that such loans had grown in a short period “to such gargantuan proportions.”


Greenspan said he did not recall whether he mentioned the dramatic growth in subprime loans to his successor, Ben S. Bernanke.

Bernanke, a reserved Princeton University economist unaccustomed to the national spotlight, came in to the job wanting to reduce the role of the Fed chairman as an outsized personality the way Greenspan had been. Two weeks into the job, Bernanke testified before Congress that it was a “positive” that the nation’s homeownership rate had reached nearly 70 percent, in part because of subprime loans.

“If the housing market does slow down,” Bernanke said, “we’ll want to see how strong the subprime mortgage market is and whether or not we’ll see any problems in that market.”

Staff writers David Cho and Neil Irwin and staff researchers Richard Drezen and Rena Kirsch contributed to this report.


Foreclosure Offense and Defense: DISCOVERY OF Insurance Policies and Applications Reveal ALL

The simple mortgage on a home had been broken into many pieces (tranches — See Special Purpose Vehicle (SPV)) each having characteristics of entities unto themselves. The term “borrower” was severed from the the obligation to pay. The term “lender” was severed from the risk of loss and the right to payment from the borrower. The term “investor” was severed from the actual ownership of any asset, except one deriving its value from conditions existing between a myriad of third parties, but which nonetheless carried with it a right to receive payments from many different entities and people, the “borrower” being just one of many.


In the Mortgage Meltdown context, the challenge is to prove the point that this was a fraudulent scheme, a Ponzi arrangement that was a financial pandemic. You get that information through discovery, but unless you know what you are looking for, you will merely come up with volumes of paper that do not, in and of themselves reveal all the points you need to make — but they WILL lead to the discovery of admissible evidence (the gold standard of what is permitted in discovery) if you understand the scheme.

The nucleus of the scheme is the virtually unregulated creation of the Special Purpose Vehicle (SPV), which is a corporation formed by the investment banker to “own” certain rights to the loans and mortgages and perhaps other assets that were packaged for insertion into the SPV. The SPV issues securities and those securities are sold to investors with fake ratings and “assurances” and insurance that is falsely procured, but where the insurers or assurers were under common law, state law and/or federal law, required to perform their own due diligence, which they did not (in the mortgage meltdown). The proceeds of the sale of ABSs (CDO/CMO) go into the SPV.

The directors and officers of the SPV entity order the disbursement of those proceeds. (see INSURANCE in GARFIELD’s GLOSSARY).

The recipients are a large undisclosed pack of feeding sharks all claiming plausible deniability as to inflated appraisals of the residential dwelling, the borrower’s ability and willingness to pay, the underwriting standards applied (suspended because the lender was selling the risk rather than assuming it), and the inflated appraisal of the ABS (CDO/CMO) for all the same reasons — direct financial incentives, coercion (give us the appraisal we want or we will never do business with you against and neither will anyone else) or even direct threats of challenges to professional licenses.

In order to get this information, you must find the name of the SPV, which is probably disclosed in filings with the SEC along with the auditor’s opinion letter (see INSURANCE in GARFIELD’s GLOSSARY). You might get lucky and find it just by asking. Then demand production of the articles of incorporation and the minutes, agreements, signed and correspondence between the SPV and third parties and between officers and directors of the SPV. The entire plan will be laid out for you as to that SPV and it might reveal, when you look at the actual insurance contracts, cross collateralization or guarantees between SPV’s. Those cross agreements could be as simple as direct guarantees but will more likely take the form of hedge products like credit default swaps (You by mine and I’ll by yours — by express agreement, tacit agreement or collusion). 

You will most likely find that once you perform a thorough analysis of the break-up (“Spreading”) of the risk of loss, the actual cash income stream, the ownership of the note, the ownership of the security instrument (mortgage) and the ownership and source of payment for insurance and other contracts, that all roads converge on a single premise: this was a deal between the borrowers (collectively as co-borrowers) and the investors (collectively as co-investors). Everyone else was a middle man pretending to be NOT part of the transaction while they were collecting most of the proceeds, leaving the investor and the borrower hanging.

And there is no better place to start than with the insurance underwriting process — getting copies of applications, investigations, analysis, correspondence etc. Combined with the filings with the SEC you are likely to find virtual admissions of the entire premise and theme of this entire blog. I WOULD APPRECIATE YOU SENDING ME THE RESULTS OF YOUR ENDEAVORS.


promise of compensation for specific potential future losses in exchange for a periodic payment. Insurance is designed to protect the financial well-being of an individual,company or other entity in the case of unexpected loss. Some forms of insurance are required by law, while others are optional. Agreeing to the terms of an insurance policycreates a contract between the insured and the insurer. In exchange for payments from the insured (called premiums), the insurer agrees to pay the policy holder a sum of money upon the occurrence of a specific event. In most cases, the policy holder pays part of the loss (called the deductible), and the insurer pays the rest. IN FORECLOSURE OFFENSE AND DEFENSE, YOU WILL FIND ERRORS AND OMISSIONS POLICIES COVERING THE OFFICERS AND DIRECTORS OF THE INVESTMENT BANKING FIRM, THE SPV THAT ISSUED THE ASBs, THE RATING AGENCY FOR THE ASB (CMO/CDO), THE LENDER, THE MORTGAGE BROKER, THE REAL ESTATE AGENT, ETC. YOU WILL FIND MALPRACTICE INSURANCE FOR THE AUDITORS OF THE SAME ENTITIES WHICH RESULTED IN FALSE REPRESENTATIONS CONCERNING THE FINANCIAL CONDITION OF THE ENTITY. YOU WILL FIND LOSS COVERAGE FOR DELINQUENCY, DEFAULT OR NON-PAYMENT THAT MAY INURE TO THE BENEFIT OF THE BORROWER. By joining the borrower and the investor as victims in the fraudulent Ponzi scheme creating money supply with smoke and mirrors, it may be argued that the insurance premiums were paid by and equitably owned by the borrower and/or the investor. 



The Mysteries of Libor

And Other Revelations…







More than most financial crises of the recent past, the 2007-2008 credit crunch has exposed plumbing behind the walls of global finance, and the result is a lot of re-examination.


Let’s start with Libor. The London interbank offered rate, a figure drawn from dollar-lending rates among the biggest global banks, is used to set interest rates for a broad spectrum of borrowers, and it has provoked concern beyond banking circles lately thanks to some erratic movements. The Wall Street Journal decided to compare the borrowing costs reported by the 16 banks on the Libor-setting panel with a separate market that tracks the risk of lending and borrowing by these banks — the market for credit-default swaps, a form of default insurance. What the paper found is that Citigroup, UBS, J.P. Morgan Chase and some other Libor-panel members have been reporting borrowing costs that are lower than what the credit-default numbers suggest they should be. That has led Libor “to act as if the banking system was doing better than it was at critical junctures in the financial crisis,” the Journal says, which could cast doubt on the reliability of a number used to calculate home mortgages, corporate loans and a host of other borrowing around the world.


Some bankers have grown suspicious that rivals were low-balling their borrowing costs so they wouldn’t look desperate, and Libor’s overseer, the British Bankers’ Association, is expected to report on possible adjustments to the system tomorrow. But people familiar with the group’s deliberations tell the Journal no major changes are expected. The Libor and credit-default swaps rates have been diverging since late January, when the credit crunch was worsening and central bankers at the Federal Reserve and elsewhere started pulling out all the stops to calm the tumult. The BBA says Libor is reliable and that many financial indicators have acted funny during the crisis, while the Journal cites a number of reasons offered by analysts to explain the risk-rate disparity it finds: Lending between banks came to a halt for months amid the uncertainty, which added some guesswork to the borrowing-cost estimates; or Citigroup and others’ ability to tap their customers’ cash deposits and extra funds from the Fed could have reduced their borrowing needs.


Still, the Journal says, five banks in particular had wider gaps than the 11 others: Citigroup, WestLB of Germany, HBOS of Britain, J.P. Morgan Chase and Swiss lending giant UBS. And “one possible explanation for the gap is that banks understated their borrowing rates,” the paper says. “If dollar Libor is understated as much as the Journal’s analysis suggests, it would represent a roughly $45 billion break on interest payments for homeowners, companies and investors over the first four months of this year. That’s good for them, but a loss for others in the market, such as mutual funds that invest in mortgages and certain hedge funds that use derivative contracts tied to Libor.”

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