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EDITOR’S NOTE: Now Banks are facing the consequences of their own wrongful actions in originating, servicing and foreclosing on homes. They are carrying property on their balance sheet as “real-estate owed” (REO) when in fact they don’t own it, they never financed it and they never bought any receivable coming out of it.

In turn, the inflated appraisals, defective mortgages have left homeowners with the need and desire to get or take what they can from the house before the “Bank” moves in. 

Instead of correcting the problem and enabling an economic recovery, the government is compounding the problems, essentially increasing leverage again through loan guarantee on homes that can’t support even today’s prices. Rolled into each 30 year loan under the 203(k) program are unrecoverable costs of replacement of appliances, carpeting and window treatments that the prior occupant took with him.

Same old Same old. Those that fight for  their homes will get, collectively, better results than those who don’t. But the majority of homeowners don’t know or don’t care whether they have remedies and real defenses to foreclosure, much less counterclaims for amounts that are multiples of the principal balance on the mortgage claimed to be enforceable.

The title problems that will come up over the years will also be an interesting show to watch as legislatures are pressed to reset the title chains artificially to make up for the fact that the mortgage before was invalid, the note was invalid, the obligation was not in default, and the owner of the obligation didn’t want to get involved in the messy foreclosure market.

The failure of a creditor to submit a credit bid combined with the fact that nobody paid cash means that the auction was conducted out of bounds and that any title derived from the  auction process is at best problematic and most probably fatally defective, meaning that the old homeowner still owns the property and the new buyer is sliding into den of snakes.

May 12, 2011

Financing Foreclosed Homes


FORECLOSED homes don’t show very well — financially strained borrowers may ignore maintenance; lenders turn off the water and power to cut the cost of letting the place sit. A poor appearance can complicate financing, but it doesn’t prevent sales.

Most of what people call foreclosed homes are being sold by lenders saddled with a property because there were no other takers at the foreclosure auction. The borrower on such a house owes more on it than the house is worth. These are known as R.E.O. houses, short for “real estate owned” on a bank’s balance sheet.

Distressed properties — those sold at a discount — made up 40 percent of resales in March, up from 35 percent a year earlier, according to the National Association of Realtors. (That includes not only R.E.O. but also short sales, in which a buyer pays less than the loan balance, once it gets the bank’s blessing.) Though not a record, it is a huge portion of sales compared with what used to be considered normal.

Where the money comes from depends on the buyer and the property. If a house was in relatively good physical shape — with water and power turned on — it could be eligible for standard financing.

Otherwise, right now, all-cash sales are at their highest level ever — 35 percent of total sales, according to the Realtors. Cash buyers, often investors who don’t plan to live in the home, “are a major player in the R.E.O. market,” said Tom McGiveron of Realty Connect in Hauppauge, N.Y., a real estate agent who specializes in foreclosures on Long Island. “Asset managers want to move their portfolios as fast as possible,” he added.

For would-be owner-occupants without cash, the federally insured 203(k) loan is key, said Mark Yecies, the president of SunQuest Funding in Cranford, N.J. Borrowers can roll projected rehab costs into the loan.

As Mr. McGiveron put it, “Since most R.E.O.’s are as is, and the heat, plumbing and electric are turned off frequently, a 203(k) loan is necessary to cover the borrower and the lender — a lender will not lend money on a home where the major heating and electrical systems are not operable.”

Buyers generally hire an independent consultant certified by the Federal Housing Administration to review contractor cost estimates and architectural plans for things like whether the work will bring the property up to minimum standards while not going overboard on improvements.

“In other words,” Mr. Yecies said, “if you’re buying a home in Newark and you want to put in a Viking range, it’s not going to happen.”

Yet in a higher-priced neighborhood like Short Hills, N.J., he added, you probably would be able to borrow for more upscale appliances. The F.H.A. appraiser takes the consultant’s report into account when reviewing a property and determining how big the loan can be.

Not all R.E.O. properties are eligible, Mr. Yecies pointed out. For instance, a partially built house that has never had a certificate of occupancy requires a construction loan of the kind that a commercial developer would use.

Mr. Yecies estimated that an F.H.A-certified consultant would cost $500 to $1,200, depending on the extent of the repairs and the number of units in a property.

The interest rate on a 203(k) loan is about a quarter of a percentage point higher than on a standard F.H.A.-insured loan, and a buyer also can expect to pay 1 or 2 points, he said. (A point is an upfront charge equivalent to 1 percent of the loan amount.)

As with other F.H.A.-backed loans, down payments may be as low as 3.5 percent, and loan limits apply. Currently, most F.H.A. loans in the area are capped at $729,750. (Energy-efficient rehabs may be eligible for more.)

Despite the extra steps, these loans work, Mr. Yecies said. “We’re doing a half dozen a month here,” he said. “They can be done in a normal period of time, as long as everyone cooperates.”


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EDITOR’S NOTE: For those of you who have followed the blog from the beginning in 2007, you know that I have pounded on the idea that investors ans borrowers had a common interest and that if they got rid of the middlemen, they could work things out. It’s not that anyone would get a windfall, but everyone with a real interest in the property and the loan would be treated as fairly as possible. The method I suggested was equity sharing wherein the principal is corrected back down to 80% of current fair market value, the resulting balance is amortized over 30 years, with a reasonable rate that could be adjusted every seven years or so. For the investor, they would have a bottom established, and they would keep their claims against the investment bankers, and they would get a share in any increase in equity that could be split 50-50 for the investor or some other acceptable number.

So far I have received nothing but silence, but now someone from the real estate industry is proposing something that is close to what I have been saying and it appeared in the New York Times which means that a lot of people have seen it. See article below. So I decided to try this experiment.

If you are an investor who would wants to pursue this further, then write to me and tell me so at

If you are a borrower who would like to explore this option then write to me and tell me so at

Let’s see what happens.


THREE years after the mortgage crisis began, there are still 11 million to 15 million homeowners who owe more than their home is worth, meaning that about 25 percent of all mortgage holders are underwater. As a result, foreclosures continue to mount; many homeowners can’t make their payments and are tempted to simply walk away from their debt. Meanwhile, the lenders and investors who own the loans are unwilling to work out a deal if, as is usually the case, it means losing money.

Fortunately, there is a solution. Rather than be at odds, homeowners and investors should partner in long-term equity-sharing arrangements.

Here’s how it would work. Let’s say a homeowner purchased a house in 2004 for $300,000 with no money down, and the property is now worth $150,000 — a 50 percent drop in value.

In an equity-sharing arrangement, the lender would write a new loan for $150,000, retire the original $300,000 loan and, to make up for that loss, take a 50 percent deeded ownership interest in the property. The homeowner would also agree to split 50 percent of the net proceeds of any future sale of the property with the lender. The new arrangement would also include a buyout provision, so that if the homeowner ever wanted to take over the lender’s share, he would simply pay the lender a predetermined amount of cash.

Such a plan would be relatively easy to put in place, assuming the lender held the loan in its own portfolio. In most cases, however, lenders immediately sold their loans to investors and merely performed loan-servicing duties like collecting monthly payments and sending statements.

In those instances, the lender would have already made its money when the loan was originated, the proceeds from the new loan and the 50 percent deeded interest in the property would go to the investor, not the lender. The investor would also benefit from any future sale or when the homeowner exercised the buyout provision.

Equity-sharing would be a boon for everyone involved. Homeowners could stay in their houses and preserve their credit (assuming they stay current on the new loan). The neighborhood would avoid a foreclosure, which can depress property values. And the lender or investor could participate in the upside potential when the house eventually sells. Best of all, it wouldn’t cost taxpayers a dime.

A major reason the mortgage mess has gone on so long is that homeowners, lenders and investors assume their interests are at odds. An equity-sharing arrangement would bring all three onto the same side — and help solve America’s foreclosure crisis.

Alex Perriello is the president and chief executive of a real estate franchise organization.


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“In short, loan servicing is a perfect setup for administrators who want to take advantage of both borrowers and lenders.” (Editor’s Note: Notice that the investors are referred to as lenders, hence the term “pretender lender” as to all others pretending to be lenders.)

“The investors also said that when borrowers tried to pay off or otherwise resolve defaulted loans, Compass/Silar refused to negotiate. In other cases when Compass/Silar urged the investors to modify troubled mortgages, the servicer reaped undisclosed fees in the deals.

The jury affirmed every claim the plaintiffs had brought against Compass/Silar, including conspiracy, as well as breach of contract, of fiduciary duty, and of good faith and fair dealing. The jury found improper actions by Compass/Silar on eight loans.”


EDITOR’S ANALYSIS: For those slow learners out there practicing law, this might get your attention. The compensatory damages were $79,000. Punitive damages: $5,100,000. If the lawyers were on contingency, they just made over $2 million.

Besides the obvious importance of this case for investors and what is about to happen, you’ll notice that all the things we have been saying about the borrowers were alleged and proven against the servicer with respect to the investors. Thus you can understand why I have been saying that the interests of the investors and the interests of the borrowers are very similar and the factual basis of their claims are the same. The jury said GUILTY on breach of contract, of fiduciary duty, and of good faith and fair dealing. Sound familiar?

Borrowers take hope. The investors are doing some of your work for you. So is the SEC now and the attorney generals of all 50 states. But you have to take a stand if you want to play in this high stakes game. You can’t just wait for lightening to strike. Nobody is going to come knocking on the door handing you the deed to a home you thought you already lost and moved out of or satisfaction of mortgage or a check. It’s time for ALL homeowners who EVER had a loan (especially if originated after 1999) to go back to their paperwork and have it examined for potential claims. There’s probably gold in those mounds of paper.


Opening the Bag of Mortgage Tricks


ALL the revelations this year about dubious practices in the mortgage servicing arena — think robo-signers and forged signatures — have rightly raised borrowers’ fears that companies handling their loans may not be operating on the up and up.

But borrowers aren’t the only ones concerned about potential mischief. Investors who hold mortgage securities are increasingly worried that servicers may be putting their interests ahead of those who own the loans.

A servicer might, for example, deny a loan modification to a borrower because it also owns a second mortgage on the same property and doesn’t want to write down that asset, as required in a modification. Levying outsize default fees is another tactic — the fees typically go to the servicer, not the lender, but they can still propel a property into foreclosure more quickly. And foreclosures aren’t a good outcome for investors.

Last week, a jury in federal district court in Reno, Nev., awarded a group of 50 mortgage investors $5.1 million in punitive damages against defendants in a loan servicing case. Although the numbers in the case aren’t large, its facts are fascinating. Indeed, the case exposed some of the tricks of the servicers’ trade.

The case is also notable because the main defendant, Silar Advisors, was one of the institutions that struck a deal in 2009 with the Federal Deposit Insurance Corporation to buy the assets of a notorious failed bank, IndyMac. Of the $5.1 million in damages awarded in the case, Silar must pay $3 million.

John W. Bickel II, a co-founder of Bickel & Brewer in Dallas, represented the investors in the case. Because he represents an additional 1,450 investors whose loans were serviced by Silar, he said more suits like this one would follow soon.

Loan servicers act as intermediaries between borrowers and their lenders, collecting monthly payments and real estate taxes and forwarding them to the appropriate parties. As long as borrowers meet their payments, such operations typically run smoothly.

Defaults and foreclosures, however, complicate servicers’ duties. As the Silar matter shows, borrower difficulties also open the door to improprieties.

Because loan servicers operate behind the scenes, it’s hard for investors who own these mortgages to monitor fee-gouging. In addition, the servicing contracts make it difficult to fire administrators — under a typical arrangement, investors holding at least 51 percent of the loans must agree on termination.

In short, loan servicing is a perfect setup for administrators who want to take advantage of both borrowers and lenders.

Troubles for investors in the Silar matter began back in 2006 when the USA Commercial Mortgage Company went bankrupt. Founded in 1989, the company had underwritten and serviced short-term commercial real estate loans. It sold them to private investors, typically older people who hoped to live off the income generated by the loans. At the time of its bankruptcy, USA Commercial serviced 115 loans worth almost $1 billion.

After the company collapsed, a small firm called Compass Partners bought the servicing rights to these assets for $8 million. A short time later, Silar Advisors, a company overseen by Robert Leeds, a former Goldman Sachs executive, got involved by financing Compass. Compass/Silar began servicing the loans for the investors.

Almost immediately, the plaintiffs in the suit contended, Compass/Silar started siphoning off money owed to investors holding the loans. Among the servicer’s tactics, the plaintiffs said, were improperly charging default interest, late fees and loan origination fees that reduced amounts due to investors.

The investors also said that when borrowers tried to pay off or otherwise resolve defaulted loans, Compass/Silar refused to negotiate. In other cases when Compass/Silar urged the investors to modify troubled mortgages, the servicer reaped undisclosed fees in the deals.

THE jury affirmed every claim the plaintiffs had brought against Compass/Silar, including conspiracy, as well as breach of contract, of fiduciary duty, and of good faith and fair dealing. The jury found improper actions by Compass/Silar on eight loans.

A Silar spokesman said the firm was pleased that the jury awarded only $79,000 in compensatory damages to the plaintiffs but was disappointed by the punitive-damages assessment. “The jurors are to be commended for their careful consideration of the facts in a very lengthy trial,” the spokesman said. He declined to comment as to whether Silar was currently servicing any loans.

One loan history, on a defaulted asset known as Standard Property, indicates what these investors were up against with their servicer.

In March 2007, immediately after Compass/Silar took over administration of the investors’ loans, the Standard Property mortgage had a principal value of $9.64 million. The borrower wanted to repay the loan at that time, but instead of directing it to pay principal and the accrued interest to the holder of the loan, as required by the servicing agreement, Compass/Silar arranged for the borrower to refund only the principal.

At the same time, court papers show, Compass/Silar quietly took in almost $860,000 in late fees, default interest and other costs from the Standard Property borrower. This ran afoul of the servicing agreement governing the Standard Property mortgage. The agreement stated that such fees could go to the servicer only after investors had been paid principal and accrued interest on a loan.

“No one really knows what is in the black box known as loan servicing, and most investors don’t even think of their servicer taking advantage of them,” Mr. Bickel said in an interview. “There’s not a lot of transparency, and I think this case is going to bring to the forefront the potential for abuse.”

It is obvious that we are in the litigation stage of the financial debacle of 2008. That usually means shining the light on dark corners and watching what scurries away. The view may not be pretty, but at least in this case, investors got some recompense in addition to an education.

FORMS: Kentucky RICO Class Action v MERS, GMAC, DEUTSCH, Nationstar, Aurora, BAC, Citi, US Bank, LSR, DOCX, LPS, and attorneys


“To the judges throughout the Commonwealth and to the homeowners, the foreclosing Plaintiff, a servicing company or “Trust” entity appears to be a bank or lender.    This falsity is due to its name in the style of the case.    They are not banks or lenders to the loan.    They are not a beneficiaries under the loan.    They do not possess a Mortgage in the property.    They will never have a right to posses a mortgage in the property.    It would have been a more honest representation for the foreclosing entity to called itself something like “Billy Bob’s Bill Collectors,”

10.03.10KENTUCKY RICOClassActionComplaint

Salient allegations in very well written complaint, although I still have some doubts about whether they will get the class certified. Kentucky is a non-judicial state”

“Come the Representative Plaintiffs, by counsel, on behalf of themselves and others so situated as putative class members pursuant to Fed. R. Civ. P. 23.    and for their Class Action Complaint against the name Defendants and yet to be named Defendants, make their claim for treble and punitive damages, costs and attorneys fees under 18 U.S.C. 1962 and 1964, otherwise known as the “racketeer Influenced and Corrupt Organizations Act,” hereinafter (“RICO”) and for all violations of law heretofore claimed.

An ongoing criminal investigation has been in place in the state of Florida by both the Florida Attorney General and the Justice Department.    Upon information and belief, a parallel investigation is ongoing in the state of Kentucky and at least three other states.

Defendant Merscorp, Inc., is a foreign corporation created in or about 1998 by conspirators from the largest banks in the United States in order to undermine and eventually eviscerate long-standing principles of real property law, such as the requirement that any person or entity who seeks to foreclose upon a parcel of real property: 1) be in possession of the original note, 2) Have a publicly recorded mortage in the name of the party for whom the underlying debt is actually owed and who is the holder of the original Promissory Note with legally binding assignments, and 3) possess a written assignment giving he, she or it actual rights to the payments due from the borrower pursuant to both the mortgage and note.

MERS is unregistered and unlicensed to conduct mortgage lending or any other type of business in the Commonwealth of Kentucky and has been and continues to knowingly and intentionally illegally and fraudulently record mortgages and conduct business in Kentucky on a large scale and systematic fashion..

LSR Processing LLC, is a document processing company, based in the state of Ohio to generate loan and mortgage documents.    Upon information and belief it is owned by one or more of the partners of LSR law firm.    LSR Processing was created in order to facilitate the conspiratorial acts of the Defendants in relation to the creation of fraudulent Promissory Notes, Note Assignments, Affidavits and Mortgage Assignments LSR Processing has a pattern and practice of drafting missing mortgage and loan documents and in turn, having them executed by their own employees.

This case arises due to the fact that for the Class Plaintiff and the members of this putative class, their Mortgages and in some cases, the foreclosures that followed, were and will be based upon a mortgage and a note in the mortgage that are not held by the same entity or party and are based upon a mortgage that was flawed at the date of origination of the loan because Mortgage Electronic Registration Systems (“MERS”) was named as the beneficiary or nominee of the lender on the mortgage or an assignee and because the naming of MERS as the beneficiary was done for the purpose of deception, fraud, harming the borrower and the theft of revenue from in all one hundred (120) Kentucky Counties through the illegal avoidance of mortgage recording fees. (e.s.)

In the case where a foreclosure has been filed, the entity filing the foreclosure has no pecuniary in the mortgage loan.    The foreclosing entity is a third party.    The entity lacks standing, and most times, the capacity to foreclose.    The entity has no first hand knowledge of the loan, no authority to testify or file affidavits as to the validity of the loan documents or the existence of the loan. The entity has no legal authority to draft mortgage assignments relating to the loan.    The foreclosing entity and its agents regularly commit perjury in relation to their testimony.

The “lender,” on the original Promissory Note was not the lender. The originators of the loan immediately and simultaneously securitized the note.    The beneficial interest in the note was never in the lender.    MERS, acting as the mortgagee or mortgage assignee, was never intended to be the lender nor did it represent the true lender of the funds for the mortgage. The Servicer, like GMAC Mortgage, or some party has or is about to declare the default, is not in privity with the lender.    The true owner or beneficiary of the mortgage loan has not declared a default and usually no longer have an interest in the note. The Servicer is not in privity nor does it have the permission of the beneficial owners of the Note to file suit on their behalf.

The obligations reflected by the note allegedly secured by the MERS mortgage have been satisfied in whole or in part because the investors who furnished the funding for these loans have been paid to the degree that extinguishment of the debts has occurred with the result that there exists no obligations on which to base any foreclosure on the property owned by the Class Plaintiffs. Defendants have and will cloud the title and illegally collect payments and attempt to foreclose upon the property of the Plaintiffs when they do not have lawful rights to foreclose, are not holders in due course of the notes.
42.    Any mortgage loan with a Mortgage recorded in the name of MERS, is at most, an unsecured debt.    The only parties entitled to collect on the unsecured debt would be the holders in due and beneficial owners of the original Promissory Note.
43.    The loan agreements were predatory and the Defendants made false representations to the Class Plaintiffs which induced the Class Plaintiffs to enter into the loans and the Defendants knew the representations were false when they were made.

In these cases, the property could be foreclosed by default, sold and transferred without ANY real party in interest having ever come to Court and with out the name of the “Trust” or the owners of the mortgage loan, ever having been revealed. Many times the Servicer will fraudulently keep the proceeds of the foreclosure sale under the terms of a Pooling and Servicing Agreement as the “Trust” no longer exists or has been paid off.    The Court and the property owner will never know that the property was literally stolen.
52.    After the property is disposed of in foreclosure, the real owners of the mortgage loan are still free to come to Court and lay claim to the mortgage loan for a second time.    These parties who may actually be owed money on the loan are now also the victims of the illegal foreclosure.    The purchaser of the property in foreclosure has a bogus and clouded title, as well as all other unsuspecting buyers down the line.    Title Insurance would be impossible to write on the property.

Although the Plaintiffs attempting to foreclosure refer to themselves as “Trustees” of a “Trust,” the entities are not “Trustees” nor “Trusts” as defined by Kentucky law.    Neither are the entities registered as Business Trusts or Business Trustees as required by Kentucky law. In every case, where one of these MBS have come to a Kentucky Court the entity foreclosing lacked capacity sue to file suit in the State of Kentucky.    There is no “Trust Agreement” in existence.    The entity filing has utilized a Kentucky legal term it has no right to use for the sole purpose of misleading the Court.
55.    Although the “Trust” listed may be registered with the Securities and Exchange Commission (“SEC”) and the Internal Revenue Service (“IRS”) as a Real Estate Mortgage Investment Conduit (“REMIC”), more often than it is not properly registered in any state of the union as a Corporation, Business Trust, or any other type of corporate entity.    Therefore, the REMIC does not legally exist for purposes of capacity for filing a law suit in Kentucky or any other State.

The transfer of mortgage loans into the trust after the “cut off date” (in the example 2006), destroys the trust’s REMIC tax exempt status, and these “Trusts” (and potentially the financial entities who created them) would owe millions of dollars to the IRS and the Kentucky Revenue Cabinet as the income would be taxed at of one hundred percent (100%).
64.    Subsequent to the “cut off date” listed in the prospectus, whereby the mortgage notes and security for these notes had to be identified, and Note and Mortgages transferred,    and    thereafter, the pool is permanently closed to future transfers of mortgage assets.
65.    All Class members have mortgage loans which were recorded in the name of MERS and/or for which were attempted through a Mortgage Assignment to be transferred into a REMIC after that REMIC’s “cut off” and “closing dates.”
66.    In all cases, the lack of acquisition of the Class Members’ mortgage loans violates the prospectus presented to the investors and the IRS REMIC requirements.
67.    If an MBS Trust was audited by the IRS and was found to have violated any of the REMIC requirements, it would lose its REMIC status and all back taxes would be due and owing to the IRS as well as the state of Kentucky.    As previously stated, one hundred percent (100%) of the income will be taxed.




Editor’s Note: Matis Abravanel, practicing in South Florida has drafted and filed a motion that is a classic in its construction. The result was that BAC caved, which is good, but what really draws my attention to this work is its masterful presentation. Lawyers would do well to look carefully at this pleading. He carefully weaves the securitization facts into a language and context that any Judge can understand. And unlike the opposition he has the goods. So do you, if you know how to use them.

Matis H. Abravanel, Esq.


A Smith Hiatt and Diaz case in Broward County Florida…

Some short background information on this pleading, it’s an emergency
motion to cancel a final sale based upon Fraud on the Court. This
client came to us a month before his final sale date, and already had
a default and a final summary judgment entered against him. Besides
non-compliance with the pooling and servicing agreement, we uncovered
notary fraud (see paragraphs 1-4 and attached exhibits) and a
fraudulent assignment and endorsement of a note that was dated in
January of 2006, to U.S. Bank National Association, as successor
Trustee to Bank of America, National Association as successor by
merger to LaSalle Bank, N.A.. However its interesting to note that
Bank of America didn’t take over LaSalle Bank until October of 2007,
over 1 and 1/2 years later! (see paragraph 17 and attached exhibits).
Once the ‘pretender lender’ received our motion they immediately
called us and canceled the sale, and we haven’t heard back from them
since. We are waiting to have our evidentiary hearing for Fraud on
the Court.

Matis H. Abravanel, Esq.


Wells Fargo-Cendent-Cayman Connection Described


Submitted by Mary Cachrane

Editor’s Note: This is where the original SIV’s stashed the illicit profits they received by taking more money from investors than the amount they intended to use to fund mortgages. We call that the tier two yield spread premium that is also undisclosed at the time of borrower’s closing and which is a ticking time bomb… waiting for some smart competent lawyer to look up the statutes and realize that there’s money in them thar hills. I’m talking gold here.

Your have to find all of the agreements for all of the third partys to show the relationship back to WFC HOLDINGS CORP who benefits (1) owner thru Cayman Islands – since purchase 11/1998 of Wells Fargo & Co. logo. Afterall its just an address of an entity registered in DE organized to appear American – it’s not America.

PHH core of secondary sub-servicing relationships pulled into WFC in 1998 thru over

Depository Trust Company
CeCE & Co.
55 Water Street, NY NY 10041
representing sole registra on behalf of brokers, dealers, banks and other participatns in the DTC system. Such participants may hold Certificates for their own accounts.
Filed on behalf of Cendant Mortgage Capital LLC,
by Cendant Mortgage Corporation as Master Servicer for
CDMC Mortgage Pass-Through Certificates, Series 2002-1.

Mortgage bond holders taking collective action


EDITOR’S NOTE: Another entry under the category of “I told you so.” Sooner or later the investors were going to figure out that they had real claims against the investment bankers and other intermediary entities in the illusion of the securitization chain, together with the servicers and other players at the loan closing. Not long ago investors would not talk with each other. Now they are banding together. Things change. This development will lead to further unraveling of the factual constipation that those players arrogantly thought they keep a lid on. The inevitable and only logical outcome here is the entry of real facts portraying the reality of these transactions.

The current reality is very simple: the investors were tricked, the borrowers were tricked, and the intermediaries took all the money. The ONLY way this can be fixed from a National perspective is to bring the borrowers and the investors together, realizing that they both have the same interests — recovery from their financial ruin. Investors need to bring certainty to what is left of their “investments.” They need to know the value of their investments and how best to recover that value. Without that they can’t bring a specific action for damages. Without that they can’t fire the intermediaries and get an honest deal launched with borrowers on property that just isn’t worth what was advertised.

There is no way to avoid principal reduction in some form because it is already there. The value is down to where it should have been at the beginning and it isn’t going up. Investors, sellers,, buyers and borrowers need to accept this fact and government, including the judiciary, need to realize that this wasn’t normal market movement, this was cornering the market and manipulating it. The investors will prove that in their own lawsuits.

A direct approach from investors to borrowers will eliminate the ridiculous fees being sucked out of what is left of these deals, and allow the investors to recoup far more than  what they are being offered. Most homeowners would be willing to accept a principal reduction that splits the loss fairly between the investors and borrowers if they were able to get fair terms.

The difference is night and day. What would have been zero recovery for the investor could be as much as $100,000 or more in a genuine modified or new mortgage. And with cooperation between borrower and investors the security interest, which is in my opinion completely invalid and unenforceable, could be perfected, title cleared and the marketplace renewed with confidence in contract , property laws and the rights of consumers and investors. Community banks could fund the new mortgages  giving the investors an immediate exist or the investors could hold the paper through REAL special purpose vehicles that were REALLY created and REALLY existing.

Mortgage bond holders get legal edge; buybacks seen

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Wed Jul 21, 2010 2:44pm EDT

By Al Yoon

NEW YORK July 21 (Reuters) – U.S. mortgage bond investors have quietly banded together to gain the long-sought power needed to challenge loan servicers over losses the investors claim resulted from violations in securities contracts.

A group holding a third of the $1.5 trillion mortgage bond market has topped the key 25 percent threshold for voting rights on 2,300 “private-label” mortgage bonds, said Talcott Franklin, a Dallas-based lawyer who is shepherding the effort.

Reaching that threshold gives holders the means to identify misrepresentations in loans, and possibly force repurchases by banks, Franklin said.

Banks are already grappling with repurchase demands from Fannie Mae and Freddie Mac, the U.S.-backed mortgage finance giants.

The investors, which include some of the largest in the nation, claim they have been unfairly taking losses as the housing market crumbled and defaulted loans hammered their bonds. Requests to servicers that collect and distribute payments — which include big banks — to investigate loans are often referred to clauses that prohibit action by individuals, investors have said.

Since loan servicers, lenders and loan sellers sometimes are affiliated, there are conflicts of interest when asking the companies to ferret out the loans that destined their private mortgage bonds for losses, Franklin said in a July 20 letter to trustees, who act on behalf of bondholders.

“There’s a lot of smoke out there about whether these loans were properly written, and about whether the servicing is appropriate and whether recoveries are maximized” for bondholders, Franklin said in an interview.

He wouldn’t disclose his clients, but said they represent more than $500 billion in securities managed for pension funds, 401(k) plans, endowments, and governments. The securities are private mortgage bonds issued by Wall Street firms that helped trigger the worst financial crisis since the 1930s.

Franklin’s effort, using a clearinghouse model to aggregate positions, is a milestone for investors who have been unable to organize. Some have wanted to fire servicers but couldn’t gather the necessary voting rights.

“Investors have finally reached a mechanism whereby they can act collectively to enforce their contractual rights,” said one portfolio manager involved in the effort, who declined to be named. “The trustees, the people that made representations and warranties to the trust, and the servicers have taken advantage of a very fractured asset management industry to perpetuate a circle of silence around these securities.”

Laurie Goodman, a senior managing director at Amherst Securities Group in New York, said at an industry conference last week, “Reps and warranties are not enforced.”

Increased pressure from bondholders comes as Fannie Mae and Freddie Mac have been collecting billions of dollars from lender repurchases of loans in government-backed securities. With Fannie and Freddie also big buyers of Wall Street mortgage bonds, their regulator this month used its subpoena power to seek documents and see if it could recoup losses for the two companies, which have received tens of billions in taxpayer-funded bailouts.

Some U.S. Federal Home Loan banks and at least one hedge fund are looking to force repurchases or collect for losses.

Investors are eager to scrutinize loans against reps and warranties in ways haven’t been able to before. Where 50 percent voting rights are required for an action, the investors in the clearinghouse have power in more than 900 deals.

Franklin said the investors are hoping for a cooperative effort with servicers and trustees. While he did not disclose recipients of the letter, some of the biggest trustees include Bank of New York, US Bank and Deutsche Bank.

A Bank of New York spokesman declined to say if the firm received the trustee letter. US Bancorp and Deutsche Bank spokesmen did not immediately return calls.

“You have a trustee surrounded by smoke, steadfastly claiming there is no fire, and what the letter gets to is there is fire,” the portfolio manager said. “And we are now directing you … to take these steps to put out the fire and to do so by investigating and putting loans back to the seller.”

Servicers are most likely to spot a breach of a bond’s warranty, Franklin said in the letter.

Violations could be substantial, he said. In an Ambac Assurance Corp review of 695 defaulted subprime loans sold to a mortgage trust by a servicer, nearly 80 percent broke one or more warranties, he said in the letter, citing an Ambac lawsuit against EMC Mortgage Corp.

The investors are also now empowered to scrutinize how servicers decide on either modifying a loan for a troubled borrower, or proceed with foreclosure, Franklin said. Improper foreclosures may be done to save costs of creating a loan modification, he asserted. (Editing by Leslie Adler)

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