They Just Don’t Get It: Meltdown Primer

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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.

Deutsch: Trustee in name only

TOO BIG TO GO TO JAIL?!?
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Editor’s Comment: Echoing the analyses presented here over the last few weeks, our senior securitization analyst wrote me this note which corroborates the basic assumption that everything is upside down. In the recorded words of Reynaldo Reyes at Deutsch — “it is all very counter-intuitive.” It is also wrong, illegal and probably criminal.
That is a euphemistic way of referring to a shell game that is covering up the largest Ponzi scheme in human history — and one which is still on-going because regulators and law enforcement either refuse to see it or simply don’t have the resources to study it.
We are left with the appearance of a REMIC — the equivalent of what I once called a holographic image of an empty paper bag. We have a paper trust that is both unfunded and in which there are no assets, that was routinely ignored by the investment bankers who directed them to be written but not used. We have beneficiaries who think they are holding asset-backed mortgage bonds when there are no assets to back up the bonds because the bonds were issued by the empty trust. Investors are paid out of their own money and the sale of new “mortgage bonds.” Classic PONZI.
Then as Dan so simply explains it, you have a paper “trustee” over the paper trust, where the paper trustee has been stripped of all powers — powers that are 100% delegated (back to the banks acting as servicers) in the documents written for the trust, unless the investors say otherwise, but there is no way for investors to identify other investors in the paper trust in order to compare notes and give instructions to the trustee.
Same as the homeowner who has kept asking “which trust owns my loan.” The answer is that none of them do. The banks don’t own the loan either. It is the investors who own the loan receivable, but the loan receivable is neither documented nor secured.
Everything else is just paper and ink that didn’t matter to the investment banks who were creating servicing entities and other exotic vehicles through which they could “trade” loans that didn’t belong to them, receive insurance on losses they didn’t have, get federal bailouts on lies about mortgage defaults when it was only the threat of NOT receiving an undeserved windfall that the banks were worried about — 100 cents on the dollar for loans and fictitious pools for each insurance or CDS contract they purchased — using the investors money.
As Dan points out, the entire scam comes back to one thing, as it always does in an illegal fraudulent scheme — control was by the banks who should have only served as intermediaries both on paper and in action. They did neither. They posed as the investor when it suited them and even changed MERS records to show that, as if it were true. They posed as owners of an obligation from homeowners when they neither funded nor purchased the loans.
AND they convinced Judges that millions of foreclosures should be allowed where the bank acting for itself and on behalf of the paper trust, submitted a credit bid from entities that never had any money or assets, much less ownership of the loan receivable.
The plain simple truth is that if you compare what should have been done if this was honest dealing, is that the money invested would have gone into the pool (REMIC, SPV, Trust) and the used to fund mortgages. Instead the money went elsewhere and no loans were assigned into the pool, the mortgage bonds were worthless, and the complexity of the fraud has so far been too daunting for law enforcement and regulators to step in.
If this was a legal transaction in which the  intent of the investment banks was honest, the instructions to the closing agent and the documents and disclosures would have the name of the pool all over them. Instead they put in the names of entities who were neither acting as brokers nor lenders. And the purpose of the banks was to “borrow” the funds from one end and “borrow” the fraudulent documents on the other end and trade for their own benefit. Obama’s advisers are just plain wrong when they tell him that the transactions were bad or wrong, but legal under existing laws and regulations.
I still believe that law enforcement and regulators are both stepping in and getting their ducks in a row. Unraveling something this complex on paper, requires a solid foundation of knowledge in which they can ignore the paperwork just like the banks did. After that it becomes clear that this is just another Ponzi scheme based upon tens of millions of fraudulent documents were produced supporting tens of millions of transactions that were never completed in which tens of millions of recorded documents lie ticking like a time bomb in the county recorders’ offices, only to surface later as a blight on a corrupted title system.
From Dan:
Here is how out of control the situation is. The Trustee (Deutsche in this case) has serious concerns over the servicing and foreclosure activity of the servicers.  Deutsche has (by contract) given control to the servicers.  Deutsche has no ability to interfere with what the servicers are doing (unless instructed by the investors). [Editor’s Note: But they knew this going in meaning they were accepting “trustee” fees without acting as trustees, which is why these paper trusts were never administered from the trust department of ANY of the banks alleging they are trustees for the on-existent trusts. An unfunded trust is no trust at all. It is fictitious.]
On the other side, Deutsche is constrained and cannot exercise control over the servicers unless and until a certain percentage of the investors give written authorization and agree to indemnify Deutsche. [Editor’s Note: That percentage can only be reached when the investors know who the other investors are. So far the banks have succeeded in keeping most of the information secret — as both investors and homeowners unravel the mystery of vanishing documents and money in flight]
The scenario created by Wall Street is a sinking ship that does not allow the officers of the ship (Deutsche), to interfere with workers repairing a hole in the bottom of the ship, unless the ship owners (the investors) get together and give them (the officers) written authorization to remediate the actions of the workers.
This ship is going down and there is no stopping it. [Editor’s Note: When those “assets” on the balance sheets of the mega banks turn out to be at best worthless and at worst fraudulent, the bank’s financial condition will be changed from viable to impossible and they will be broken up. But as Iceland showed us clearly, the other banks pick up the pieces, the household debt is reduced forcing the banks to cooperate, and as much money as possible is returned to the investors who were the first victims in this fraudulent PONZI scheme]
This type of contractual relationship is against public policy and should be unenforceable.
Once again, the principal is not exercising any control over the agent (investors and trustee).
Once again, the principal is not exercising any control over the agent (trustee and servicers).
Once again, the principal is not exercising any control over the agent (foreclosure trustee and beneficiary).  In fact the foreclosure trustee does not even know who the beneficiary is.
Thx,
Office: 530.392.4681

The Myth of the Credit Bid – Red-Handed

COMBO TITLE and SECURITIZATION Search, Report, Documents and Comprehensive Analysis

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Credit Charles Koppa (Poppa Koppa) with putting me onto this. He does GREAT work. poppakoppa@hotmail.com. He’s not lawyer but I trust him more than I do most lawyers to get to the bottom of things. He’s kind like one of those dogs that gets a bite of something and then NEVER lets go as the teeth go in deeper and deeper. I like that approach. The pretenders deserve it.

Credit Dan Edstrom with compiling everyone’s work including my own into securitization commentaries that work the material they way it should be done. Besides doing the Subscriber Members COMBO TITLE and Securitization Analysis, and the component parts, he also does a magnificent job of drilling down even further proving two points: (1) that while the borrower is dealing with a “Notice of Default” the Trust and investors are getting reports specifically stating that the same loan is performing — and they a re getting paid! and (2) that the distribution reports at the pool level are either on-going (Meaning the pool still exists) or they are no longer being sent (meaning the pool has been dissolved).

There are so many chairs and shells moving around I know it is difficult to keep them straight. That is exactly the point. The pretender lenders are going to keep them moving as long as they can because they are getting thousands of free houses every week through intimidation, fraud and deception of borrowers, court clerks, and Judges. But there are a few points in time at which the the chairs and shells stop moving or at least slow down. One of them is at the sale on the courthouse steps.

Charles Koppa pointed out the chicanery when he shared an ongoing study with me that showed changes in the bid price just hours before the sale and the resulting windfall to the new “buyer.” With pretenders swarming like flies around you-know-what it is no wonder that they find it easy to slip different entities in and out of the foreclosure process. But here is a simple proposition with far reaching implications regarding tracking the money, tracking the title and tracking the real obligation and the real creditor. ONLY THE CREDITOR CAN MAKE THE CREDIT BID. Anyone else must actually pay money.

Oops. It turns out that virtually no money is exchanging hands at these sales. And the Trustee is accepting a credit bid from an entity that wasn’t even named in the Notice of Default or the Trustee is issuing the deed to an entity that never made the credit bid or any bid at all. THAT TRANSACTION IS VOID ACCORDING TO MY READING OF THE STATUTES, WHETHER YOU ARE IN A JUDICIAL OR NON-JUDICIAL STATE. Maybe in some states it would be considered voidable but either way there is no “clear title” transferred and there is no successor in interest, which means that the homeowner still owns the home after the sale and can file a quiet title action against the originating lender and the party who received the title from the Trustee or Clerk, depending upon the procedure used. There is no defense as far as I can see and there might not even be an attempt at defending. Easier to let one slip by than risk a ruling that says these sales are all void.

But there is the rub. You can kick the can down the road for only so long. It doesn’t change the facts. NONE of the creditors filed foreclosure actions or sales in any of the securitized loan transactions. NONE of the creditors even knew the loan was not performing because they were being told quite the contrary by the very same group that declared the loan in default. ALL of the loans had co-obligors who in fact did pay but were not disclosed to either the borrower or the actual lender (investor). NONE of the notes were assigned at or near the time of the closing of the loans. NONE of the security interests were assigned at or near the time of the loan closing. NONE of the notes or security interests were endorsed or even transmitted to anyone after the loan closed unless the case went into litigation in which case they either “found” or re-created the documentation without admitting what they had done.

NONE OF THE OBLIGATIONS WERE COMPLETELY DESCRIBED IN THE NOTE, MORTGAGE OR DEED OF TRUST. AS PAUL  HARVEY LIKED TO SAY, THE “REST OF THE STORY” WAS IN THE MORTGAGE BOND, PROSPECTUS, PSA, ASSIGNMENT AND ASSUMPTION, INSURANCE CONTRACTS, CREDIT DEFAULT SWAPS, TRANCHE STRUCTURING THAT THE LENDER RECEIVED. As I said at the beginning of this blog, this is all going to come down to two doctrines that are inescapably in favor of the homeowners and borrowers, including the ones who THINK they lost their homes: the single transaction doctrine and the step transaction doctrine. NONE of the actions of the securitization intermediaries would have any business reason to occur without the investment by the lender (investor) and the acceptance of the obligation by the borrower. That makes it ONE transaction between the the investor and the borrower no matter how complicated you WANT to describe it.

THE ONLY THING THAT WAS ACTUALLY MOVED WAS MONEY UNDER QUESTIONABLE CIRCUMSTANCES. A SPREADSHEET WAS USED AND SENT ELECTRONICALLY UPSTREAM TO TRANSMIT THE ALLEGED RECEIVABLES THAT WOULD BE CLAIMED AS PART OF POOLS THAT WERE NEVER OFFICIALLY FORMED. THE TERMS OF THAT TRANSACTION INCLUDED CO-OBLIGORS WITHOUT WHICH THE LENDERS WOULD NOT HAVE ADVANCED THE FUNDS FOR WORTHLESS (AND IN MANY CASES NON-EXISTENT) MORTGAGE BONDS.

THE WAY THEY DID IT WAS SIMPLE: GIVE THE BORROWER MONEY, HAVE THE BORROWER SIGN A NOTE TO A SHAM ENTITY AND GIVE THE LENDER EVIDENCE OF A BOND WHICH HAS ENTIRELY DIFFERENT TERMS FROM THE NOTE. THAT WAY THEY COULD USE PLAUSIBLE DENIABILITY AND PLAUSIBLE EXCUSES FOR NOT SHARING CONFIDENTIAL INFORMATION WITH THE THE ONLY TWO REAL PARTIES TO THE TRANSACTION — THE BORROWER AND THE LENDER.

So they wait until nobody is looking, for that moment that appears clerical (ministerial) in nature and then they slip in new entities again, thus cheating the lender (again), but leaving the homeowner with legal title. The homeowner walks from the deal thinking it is over. But in truth, it is only just beginning. Now we enter the NEXT chapter of the mortgage meltdown.

EXPLAINING THE ADDITION OF CO-OBLIGORS WITHOUT YOUR KNOWLEDGE OR CONSENT

THANK YOU DAN EDSTROM:

Hats off to Dan for explaining the logistics of how additional people were added toy our deal, that you have a  right to know who they are and how their addition to your deal changes everything. Here is what he said:

So the homeowner gave an unconditional promise to pay. The “investors” who purchased securities from the issuing entity (the trust) stood up as the lender and provided the money. Now is where it gets tricky. Another 3rd party sprang up between the two and became the obligor to the lender. That is, they took over the CONDITIONS for providing payments to the “investors”. As Maher just said, they sliced and diced everything up into small pieces. But one thing is for sure, the relationship between the original borrower and the ultimate lender was bifurcated. They abstracted out the borrowers obligation to pay and replaced it with another 3rd party obligation to pay that is jacked up full of all kinds of goodies that apply not only to the investors, but to the borrowers also. This 3rd party took over the borrowers obligation to pay such that the borrower does not have to make payments and the “investor” lender’s payments are still “magically” made.

What are these “goodies” and magic? Advances, credit default swaps, hedges, insurance, over-collateralization, extra pools of funds, payments from borrowers in lower level tranches, you name it. And of course this does not even include government bailouts, write-offs, charge-offs, etc. The homeowners obligation to pay has been eviscerated.

Thanks,
Dan Edstrom
dmedstrom@hotmail.com

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