Wells Fargo as MBS trustee ‘looted’ trusts to pay legal fees

(Reuters) – Several Pimco investment funds are accusing the mortgage-backed securities trustee Wells Fargo of misusing noteholder money to pay its own legal expenses.

In a newly filed complaint in Manhattan State Supreme Court, the Pimco funds are asking for a declaratory judgment that Wells Fargo is not entitled to use MBS trust money to fund its defense against noteholder claims that the bank breached its duties as an MBS trustee. Pimco’s lawyers at Bernstein Litowitz Berger & Grossmann allege that Wells Fargo has improperly reserved about $95 million across 20 MBS trusts.

The Pimco complaint is the latest wrinkle in increasingly complex litigation between MBS noteholders and trustees. Pimco is one of several major institutional investors pursuing Wells Fargo, Deutsche Bank, HSBC and other MBS trustees for supposedly failing to take action against MBS sponsors as the trusts began to lose money. As I’ve reported, noteholders have managed to get past trustee dismissal motions in several big cases in state and federal court, but still face the considerable obstacle of providing loan-specific proof that trustees were obliged to demand the repurchase of deficient underlying mortgages and didn’t live up to that obligation.

The trustees have aggressively defended the cases. In May, for example, Wells Fargo’s lawyers at Jones Day filed third-party complaints in Manhattan federal court against the advisory arms of three of the funds suing the trustee, claiming that the advisory firms knew as much as Wells Fargo about problems in the MBS market and should be jointly liable if the trustee is socked with a judgment for tort damages.

The new Pimco complaint alleges that Wells Fargo is improperly paying its lawyers in the trustee breach cases with money that rightfully belongs to noteholders. The trustee’s litigation reserves were exposed in April, according to the complaint, when an entity called New Residential Investment Corp exercised rights to call in Wells-overseen trusts with an unpaid principal balance of about $309.5 million. The complaint alleges that Wells Fargo withheld $57.2 million to establish “trustee reserve accounts” to cover legal expenses stemming from litigation over its conduct as trustee. (Nomura analysts disclosed the Wells Fargo reserve accounts in a report in June.)

Pimco contends Wells Fargo is not permitted, under the MBS contracts for the 11 trusts at issue in its suit, to use trust money to defend against allegations of willful wrongdoing, bad faith or negligence. Those are precisely the claims at issue in noteholder litigation against the MBS trustee, according to the complaint. “Neither the (MBS contracts) nor the law permit Wells Fargo’s taxing of the investors it was supposed to protect to indemnify itself and to finance its actual and expected defense costs,” the complaint said.

Pimco’s suit isn’t the first time a noteholder has raised questions about the funding of an MBS trustee’s defense in this wave of investor litigation. In March, lawyers for Royal Park Investment (RPI) moved for a court order requiring MBS trustee Deutsche Bank to disclose any legal fees and expenses it had billed to MBS trusts at issue in RPI’s case against the trustee. Like Pimco in the new Wells Fargo case, RPI and its lawyers from Robbins Geller Rudman & Dowd claimed that the trust contracts did not indemnify Deutsche Bank for claims of negligence or misconduct.

Deutsche Bank’s lawyers from Morgan Lewis & Bockius countered that the trust agreements expressly indemnify the MBS trustee from fees and costs associated with its duties as trustee. The judge overseeing the dispute, U.S. Magistrate Barbara Moses of Manhattan, ruled that RPI’s request was outside the scope of her jurisdiction. She suggested that if RPI wanted to pursue the matter, it should file a preliminary injunction motion – although she also warned at oral argument that if she were RPI, “I wouldn’t be terribly optimistic about the outcome of that motion.” (There’s no indication in the RPI docket that Robbins Geller filed a preliminary injunction motion on Deutsche Bank’s legal fees.)

Wells Fargo sent an email statement on the new Pimco suit. The bank said that as an MBS trustee, it “is entitled to indemnification of its legal fees and expenses under the contractual agreements at issue. We believe the lawsuit filed by the Pimco funds has no merit and will be vigorously defending the claim.”

Pimco counsel Blair Nicholas of Bernstein Litowitz declined to provide a statement.

The Neil Garfield Show: Why the Trusts are Busts

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Or call in at (347) 850-1260, 6pm Eastern Thursdays

The settlements with the banks are a scam. Yesterday RBS settled with US authorities for skullduggery in the name of “so-called residential mortgage-backed securities.”  They took in over $30 billion and only have to pay about 20% of the theft ($5.5 billion).  No criminal charges apply.

The importance of this particular report is the way it was written. Attorney Neil Garfield says, “this is the first time I have seen “so-called residential mortgage-backed securities” used in mainstream reporting.” The significance is that the term “so-called” while penned by the author of the article indicates skepticism as to whether the certificates were ever backed by mortgages. And if they were not, then the certificates were in fact securities that could be regulated as securities, free from the 1998 exemption that classified them as private contracts.

Of maximum importance to homeowners and foreclosure defense lawyers is that they make the obvious connection, to wit: if the securities were not mortgage-backed, there is only one logical conclusion— the trust never owned the mortgages that were described generically in the prospectus. If the trust had owned mortgage loans, then the securities would have been mortgage backed, in which case there would have no charges against RBS much less a settlement.

THAT means that the Trusts could never be named as Plaintiff in judicial states or beneficiary in non-judicial states without misrepresenting the nature of the so-called trust that existed only on paper and frequently incomplete paper that did not include signatures or exhibits. The mortgage loan schedule was never attached in any trust. The MLS attached to the PSA was specifically disclaimed in the prospectus as being there by way of example only and that none of the “loans” described in the MLS actually existed, but would be replaced by real loans.

This leads in turn to a single logical conclusion. Assuming the Trust existed on paper that was properly completed, the Trust either (a) never received, directly or indirectly, the original loan documents or (b) the trust did receive the loan paperwork but has received no authority to do anything with it. The Trust is therefore not a creditor, not a lender, not a servicer and not an agent for a creditor from whom the trust could have received authority to enforce. The trust, therefore, becomes a sham conduit used solely for the purpose of foreclosures and otherwise was completely ignored.

In terms of litigation, if you would like to discuss how to address this in discovery, please contact Neil Garfield for a consultation.  He can explain the relevance of the existence of the trust, real world transactions and how attorneys and homeowners can leverage these findings.

Attorney Charles Marshall can be reached at:

cmarshall@marshallestatelaw.com

619-807-2628

 

Neil F. Garfield can be contacted at info@lendinglies.com

MAIN NUMBER: 202-838-NEIL (6345).

Get a Consult!

https://www.vcita.com/v/lendinglies to schedule, leave message or make payments.

 

SEC/DOJ go after MBS Traders for Fraud- while the Big Bank Instigators go Free

By Ben Lane/Housing Wire

https://www.housingwire.com/articles/40445-former-nomura-rmbs-trader-found-guilty-of-securities-wire-fraud-conspiracy

Nearly two years ago, the Securities and Exchange Commission and the U.S. Attorney’s Office for the District of Connecticut charged three former Nomura Securities International residential mortgage-backed securities traders with fraud, alleging that they “repeatedly lied” to customers about the pricing information of mortgage bonds and defrauded customers out of millions of dollars.

Earlier this year, the Department of Justice hit the three RMBS traders, Michael Gramins, Ross Shapiro, and Tyler Peters with additional charges, including one count of conspiracy, two counts of securities fraud and six counts of wire fraud.

The three traders went on trial last month, and a jury handed down a verdict this week.

All in all, only Gramins was found guilty – and only on one charge.

According to the U.S. Attorney’s Office for the District of Connecticut, Gramins was found guilty on one count of conspiracy, and not guilty of one count of securities fraud and five counts of wire fraud.

The jury could not reach a verdict on one count of securities fraud and one count of wire fraud.

The jury also found Shapiro not guilty of two counts of securities fraud and six counts of wire fraud, but could not reach a verdict on the conspiracy count.

The jury found Peters not guilty of all nine counts of the indictment.

The traders were originally charged with misrepresenting the bids and offers being provided to Nomura for mortgage bonds, as well as the prices that Nomura bought and sold the securitizations and the spreads the firm earned facilitating RMBS trades.

The original indictment stated that Shapiro, Gramins, and Peters supervised the RMBS desk at Nomura in New York.

Shapiro served as the managing director, and oversaw all of Nomura’s trading in RMBS. Gramins was the executive director of the RMBS Desk and principally oversaw Nomura’s trading of bonds composed of sub-prime and option ARM loans.

Peters was the senior-most vice president of the RMBS desk and focused on Nomura’s trading of bonds composed of prime and Alt-A loans.

The indictment claimed that Shapiro, Gramins, and Peters also engaged in fraudulently deflating the price at which Nomura could sell a RMBS bond to induce their customers to sell bonds at cheaper prices, thereby causing Nomura and the three defendants to profit illegally.

The SEC claimed that the lies and omissions made to customers by Shapiro, Gramins, and Peters generated at least $5 million in additional revenue for Nomura, and the lies and omissions by the subordinates they trained generated at least $2 million in additional profits for the firm.

But when it came to their trial, the jury didn’t agree, finding Gramins guilty on just on count.

Gramins now faces a maximum sentence of five years.

“This has been a demanding prosecution, and I thank the jury for its service,” U.S. Attorney Deirdre Daly said. “Our investigation into fraudulent trading practices in the RMBS and other financial markets has had a marked impact on the industry and will continue.”

S&P: Mortgage-backed security market making a comeback in 2017 First quarter issuance doubled 2016’s total

First quarter issuance doubled 2016’s total

By Ben Lane at Housingwire.com

http://www.housingwire.com/articles/39794-sp-mortgage-backed-security-market-making-a-comeback-in-2017

Editor’s Note: Does anyone else seek stark similarities between what happened in 2007/08 and what is happening now?  This is evidence that the housing bubble is complete.  By now we know how this will play out in the near future.

money

Back in February, DBRS predicted that the residential mortgage-backed security market could see a resurgence in 2017 thanks to rising interest rates, which both drive down refinances and make securitization a more financially appealing option.

As it turns out, that’s exactly what’s happening.

A new report from Standard & Poor’s Global Ratings shows that RMBS-related issuance, which S&P defines as prime, re-performing/nonperforming, rental bonds, servicer advances, and risk-sharing deals, doubled in the first quarter of 2017 compared to last year.

According to S&P’s report, there was $14 billion in RMBS-related issuance in 2017’s first quarter, up from $7 billion in the same time period in 2016.

As a result of the strong first quarter, S&P said that it is increasing its 2017 forecast for RMBS issuance from $35 billion to $50 billion.

It should be noted that even if 2017’s total RMBS issuance reaches $50 billion, it would still be below 2015’s total of $54 billion. But $50 billion would top 2016’s total of $34 billion and 2014’s total of $38 billion.

According to the S&P report, 2017’s first quarter issuance consisted of $5 billion in credit risk-sharing deals from Fannie Mae and Freddie Mac and $4 billion of re-performing/non-performing loans.

S&P noted that the rise in jumbo issuance and non-conforming issuance is “positive for markets as issuers are now supplying enough issuance to support the development of a secondary market.”

And if that continues, a “broader scope of mainstream fixed-income investors” should be attracted to the market, S&P adds.

“Given this RMBS issuance surge, we are adjusting our 2017 forecast up to $50 billion and will have to continue monitoring the various components,” S&P states in the report. “The $5 billion of (risk-sharing) issuance suggests it reaching an issuance pace that has allowed it to be an ongoing investment program for many market participants.”

S&P’s report also compared securitization volume for consumer loans (auto loans, credit cards, commercial loans) and residential mortgages over the last 15 years.

The report shows that all four loan categories have grown substantially since 2001, but the volume of securitization in each category is down.

“Compared to 2007 leverage levels, residential mortgages today are $1 trillion less, whereas the other three loan products have substantially more leverage,” S&P notes in its report.

“Looking at the share of those that are securitized, all markets have seen lower utilization of securitization, with auto loans at 17.5% securitized, credit cards at 13%, CMBS at 17%, and non-agency RMBS at only 8%,” the report continues. “For the various products, these utilization rates are significantly lower than rates used in 2001, 2004, or 2007.”

The report states auto, credit card, and residential loans each saw an increase in the first quarter, which could be the start of some institutions increasing their securitization utilization. On the other hand, it may reflect the issuers taking advantage of “near-ideal issuance conditions and demand,” the report states.

 

California Suspends Dealings with Wells Fargo

The real question is when government agencies and regulators PLUS law enforcement get the real message: Wells Fargo’s behavior in the account scandal is the tip of the iceberg and important corroboration of what most of the country has been saying for years — their business model is based upon fraud.

Wells Fargo has devolved into a PR machine designed to raise the price of the stock at the expense of trust, which in the long term will most likely result in most customers abandoning such banks for fear they will be the next target.

Get a consult! 202-838-6345

https://www.vcita.com/v/lendinglies to schedule CONSULT, leave message or make payments.
THIS ARTICLE IS NOT A LEGAL OPINION UPON WHICH YOU CAN RELY IN ANY INDIVIDUAL CASE. HIRE A LAWYER.
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see http://www.sacbee.com/news/politics-government/capitol-alert/article104739911.html

John Chiang, California Treasurer, has stopped doing business with Wells Fargo because of the scheme involving fraud, identity theft and customer gouging for services they never ordered on accounts they never opened. It is once again time for Government to scrutinize the overall business plan and business map of Wells Fargo and indeed all of the top (TBTF) banks.

Wells Fargo is attempting to do crisis management, to wit: making sure that nobody looks at other schemes inside the bank.

It is the Consumer Financial Protection Bureau (CFPB) that was conceived by Senator Elizabeth Warren who has revealed the latest example of big bank fraud.

The simple fact is that in this case, Wells Fargo management made an absurd demand on their employees. Instead of the national average of 3 accounts per person they instructed managers and employees to produce 8 accounts per customer. Top management of Wells Fargo have been bankers for decades. They knew that most customers would not want, need or accept 5 more accounts. Yet they pressed hard on employees to meet this “goal.” Their objective was to defraud the investing public who held or would buy Wells Fargo stock.

In short, Wells Fargo is now the poster child for an essential defect in business structure of public companies. They conceive their “product” to be their stock. That is how management makes its money and that is how investors holding their stock like it until they realize that the entire platform known as Wells Fargo has devolved into a PR machine designed to raise the price of the stock at the expense of trust, which in the long term will most likely result in most customers abandoning such banks for fear they will be the next target. Such companies are eating their young and producing a bubble in asset values that, like the residential mortgage market, cannot be sustained by fundamental facts — i.e., real earnings on a real trajectory of growth.

So the PR piece about how they didn’t know what was going on is absurd along with their practices. Such policies don’t start with middle management or employees. They come from the top. And the goal was to create the illusion of a rapidly growing bank so that more people would buy their stock at ever increasing prices. That is what happens when you don’t make the individual members of management liable under criminal and civil laws for engaging in such behavior.

There was only one way that the Bank could achieve its goal of 8 accounts per customer — it had to be done without the knowledge or consent of the customers. Now Wells Fargo is trying to throw 5,000 employees under the bus. But this isn’t the first time that Wells Fargo has arrogantly thrown its customers and employees under the bus.

The creation of financial accounts in the name of a person without that person’s knowledge or consent is identity theft, assuming there was a profit motive. The result is that the person is subjected to false claims of high fees, their credit rating has a negative impact, and they are stuck dealing with as bank so large that most customers feel that they don’t have the resources to do anything once the fraud was discovered by the Consumer Financial protection Board (CFPB).

Creating a loan account for a loan that doesn’t exist is the same thing. In most cases the “loan closings” were shams — a show put on so that the customer would sign documents in which the actual party who loaned the money was left out of the documentation.

This was double fraud because the pension funds and other investors who deposited money with Wells Fargo and the other banks did so under the false understanding that their money would be used to buy Mortgage Backed Securities (MBS) issued by a trust with assets consisting of a loan pool.

The truth has emerged — there were no loan pols in the trusts. The entire derivative market for residential “loans” is built on a giant lie.  But the consequences are so large that Government is afraid to do anything about it. Wells Fargo took money from pension funds and other “investors,” but did not give the proceeds of sale of the alleged MBS to the proprietary vehicle they created in the form of a trust.

Hence the trust was never funded and never acquired any property or loans. That means the “mortgage backed securities” were not mortgage backed BUT they were “Securities” under the standard definition such that the SEC should take action against the underwriters who disguised themselves as “master Servicers.”

In order to cover their tracks, Wells Fargo carefully coached their employees to take calls and state that there could be no settlement or modification or any loss mitigation unless the “borrower” was at least 90 days behind in their payments. So people stopped paying an entity that had no right to receive payment — with grave consequences.

The 90 day statement was probably legal advice and certainly a lie. There was no 90 day requirement and there was no legal reason for a borrower to go into a position where the pretender lender could declare a default. The banks were steering as many people, like cattle, into defaults because of coercion by the bank who later deny that they had instructed the borrower to stop making payments.

So Wells Fargo and other investment banks were opening depository accounts for institutional customers under false pretenses, while they opened up loan accounts under false pretenses, and then  used the identity of BOTH “investors” and “borrowers” as a vehicle to steal all the money put up for investments and to make money on the illusion of loans between the payee on the note and the homeowner.

In the end the only document that was legal in thee entire chain was a forced sale and/or judgment of foreclosure. When the deed issues in a forced sale, that creates virtually insurmountable presumptions that everything that preceded the sale was valid, thus changing history.

The residential mortgage loan market was considerably more complex than what Wells Fargo did with the opening of the unwanted commercial accounts but the objective was the same — to make money on their stock and siphon off vast sums of money into off-shore accounts. And the methods, when you boil it all down, were the same. And the arrogant violation of law and trust was the same.

 

Holland and Knight Published General Information on Securitizations

While I was researching securitization of BOAT LOANS I came across the following apparently published by Holland and Knight. Several of their statements could prove helpful especially where one is confronting that law firm as an adversary. I copied some of the more relevant statements.

I also stumbled across this PowerPoint presentation from the American Securitization Forum in 2009 which is available on the Internet. Securitization101ASF2009

see http://mx.nthu.edu.tw/~chclin/Class/Securitization.htm

MAJOR PLAYERS

The major “players” in the securitization game, all of whom require legal representation to some degree, are as follows (this terminology is typical, but different terms are used; for example the “originator” is often referred to as the “issuer” or “seller”):

Originator – the entity that either generates Receivables in the ordinary course of its business, or purchases and assembles portfolios of Receivables (in that sense, not a true “originator”). Its counsel works closely with counsel to the Underwriter/Placement Agent and the Rating Agencies in structuring the transaction and preparing documents and usually gives the most significant opinions. It also retains and coordinates local counsel in the event that it is not admitted in the jurisdiction where the Originator’s principal office is located, and in situations where significant Receivables are generated and the security interests that secure the Receivables are governed by local law rather than the law of the state where the Originator is located.

Issuer – the special purpose entity, usually an owner trust (but can be another form of trust or a corporation, partnership or fund), created pursuant to a Trust Agreement between the Originator (or in a two step structure, the Intermediate SPE) and the Trustee, that issues the Securities and avoids taxation at the entity level. This can create a problem in foreign Securitizations in civil law countries where the trust concept does not exist (see discussion below under “Foreign Securitizations”).

Trustees – usually a bank or other entity authorized to act in such capacity. The Trustee, appointed pursuant to a Trust Agreement, holds the Receivables, receives payments on the Receivables and makes payments to the Securityholders. In many structures there are two Trustees. For example, in an Owner Trust structure, which is most common, the Notes, which are pure debt instruments, are issued pursuant to an Indenture between the Trust and an Indenture Trustee, and the Certificates, representing undivided interests in the Trust (although structured and treated as debt obligations), are issued by the Owner Trustee. The Issuer (the Trust) owns the Receivables and grants a security interest in the Receivables to the Indenture Trustee. Counsel to the Trustee provides the usual opinions on the Trust as an entity, the capacity of the Trustee, etc.

Investors – the ultimate purchasers of the Securities. Usually banks, insurance companies, retirement funds and other “qualified investors.” In some cases, the Securities are purchased directly from the Issuer, but more commonly the Securities are issued to the Originator or Intermediate SPE as payment for the Receivables and then sold to the Investors, or in the case of an underwriting, to the Underwriters.

Underwriters/Placement Agents – the brokers, investment banks or banks that sell or place the Securities in a public offering or private placement. The Underwriters/Placement Agents usually play the principal role in structuring the transaction, frequently seeking out Originators for Securitizations, and their counsel (or counsel for the lead Underwriter/Placement Agent) is usually, but not always, the primary document preparer, generating the offering documents (private placement memorandum or offering circular in a private placement; registration statement and prospectus in a public offering), purchase agreements, trust agreement, custodial agreement, etc. Such counsel also frequently opines on securities and tax matters.

Custodian – an entity, usually a bank, that actually holds the Receivables as agent and bailee for the Trustee or Trustees.

Rating Agencies – Moody’s, S&P, Fitch IBCA and Duff & Phelps. In Securitizations, the Rating Agencies frequently are active players that enter the game early and assist in structuring the transaction. In many instances they require structural changes, dictate some of the required opinions and mandate changes in servicing procedures.

Servicer – the entity that actually deals with the Receivables on a day to day basis, collecting the Receivables and transferring funds to accounts controlled by the Trustees. In most transactions the Originator acts as Servicer.

Backup Servicer – the entity (usually in the business of acting in such capacity, as well as a primary Servicer when the Originator does not fill that function) that takes over the event that something happens to the Servicer. Depending upon the quality of the Originator/Servicer, the need and significance of the Backup Servicer may be important. In some cases the Trustee retains the Backup Servicer to perform certain monitoring functions on a continuing basis.

CREDIT ENHANCEMENT

Credit enhancements are required in every Securitization. The nature and amount depends on the risks of the Securitization as determined by the Rating Agencies, Underwriters/Placement Agents and Investors. They are intended to reduce the risks to the Investors and thereby increase the rating of the Securities and lower the costs to the Originator. Typical forms of credit enhancement are:

1. Over-collateralization – transferring to the Issuer, Receivables in amounts greater than required to pay the Securities if the proceeds of the Receivables were received as anticipated). The amount of over-collateralization (usually 5% to 10%) is determined by the Rating Agencies and the Underwriters/Placement Agents, and this in turn will depend upon the quality of the Receivables, other credit enhancement that may be available, the risk of the structure (such as the possible bankruptcy of the Originator/Servicer), the nature and condition of the industry in which the Receivables are generated, general economic conditions and, in the case of foreign-based Securitizations, the “Sovereign risk” (see discussion below under “Foreign Securitizations”). If all goes well, it is repurchased at the end of the transaction (see “Anatomy of a Securitization”)or returned as part of the residual interest. This form of credit enhancement is required in virtually all Securitizations.

2. Senior/subordinated structure – issuance of subordinated or secondary classes of Securities, which are lower-rated (and bear higher interest rates) and sold to other Investors or held by the Originator. In the event of problems, the higher rated (senior) Securities receive payments prior to the lower rated (subordinated) Securities. It is not uncommon for there to be a number of classes of Securities that are each subordinated to the more highly rated, resulting in a complex “waterfall” of payments of principal and interest. In the common structure described above, senior and subordinated classes of Notes would be paid, in order of priority, prior to classes of Certificates, and Certificates prior to any residual interest in the Issuer. This form of credit enhancement has become routine, but cannot be used in a grantor trust structure, which is why the owner trust has become most common.

3. Early amortization – if certain negative events occur, all payments from Receivables are applied to the more senior securities until paid. Very common.

4. Cash collateral account – the Originator deposits funds in account with Trustee to be used if proceeds from Receivables are not sufficient. Adjustable depending upon events. May be in the form of a demand “loan” by the Originator to the account. (e.s.)

5. Reserve fund – subordinated Securities retained by the Originator or Trustee and pledged for the benefit of the Trust (and, therefore, the Investors).

6. Security bond – guarantee (or wrap) of all payments due on the Securities. Issued by AAA-rated monoline insurance companies (if available).

7. Liquidity provider – in effect, a guarantee by the Originator (or its parent) or another entity of all or a portion of payments due on the Securities. (e.s.)

8. Letter of credit (for portion of amounts due on Securities) – not used much anymore because of costs. These were common in the late 1980’s when issued by Japanese banks at low rates.

LEGAL OPINIONS

Legal opinions are very important documents in every Securitization and result in considerable negotiations among counsel for the Originator, Underwriter/Placement Agent and Rating Agencies. The opinions given by the Originator’s counsel are the most extensive, frequently running 50 or more pages because of the need for reasoned opinions, as courts have not ruled upon many of the underpinnings of the Securitization structure. In addition to the usual opinions regarding due organization, good standing, corporate power, litigation, etc, others deal with the validity and priority of security interests, true sale vs. secured loan, substantive consolidation in bankruptcy, fraudulent transfer, tax consequences and compliance with securities laws and ERISA. Opinions are also given by counsel for the Trustees and frequently by counsel to the Underwriter/Placement Agent in regard to tax and securities matters. As indicated above, local counsel opinions may be required as well.

For reasons of structuring and such opinions, in addition to attorneys who are experienced in Securitizations, expertise is required in the areas of securities law, tax law, bankruptcy and the UCC. Expertise is also required in many instances in the substantive laws relating the business of the Originator and the nature of the Receivables.

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

For more information on foreclosure offense, expert witness consultations and foreclosure defense please call 954-495-9867 or 520-405-1688. We offer litigation support in all 50 states to attorneys. We refer new clients without a referral fee or co-counsel fee unless we are retained for litigation support. Bankruptcy lawyers take note: Don’t be too quick admit the loan exists nor that a default occurred and especially don’t admit the loan is secured. FREE INFORMATION, ARTICLES AND FORMS CAN BE FOUND ON LEFT SIDE OF THE BLOG. Consultations available by appointment in person, by Skype and by phone.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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