Table Funded: The Student Loan Scam

The essential question I pose is this: if the student loan was table funded (and it does appear to me that they were, in many cases), then why is the originator/broker receiving the government guarantee and the exemption from discharge? By definition they didn’t loan any money to the student. It seems to me that government, lawyers, and courts are overlooking the fact that many banks (large and small) have been acting as brokers and not as lenders.

Like the so-called mortgage loans, the underwriting decisions lie outside of the organization that “granted” the alleged loan from an undisclosed third party. Yet they claim and receive and sell government benefits as though they were lenders.

My theory under current law is that if the loan was funded from the sale of student debt pools there are two outcomes, to wit: (1) the government guarantee does not attach because there is no loan or risk of loss to guarantee and because the actual lender is not the broker, pretender who appears on the note, (i.e., they were not entitled to the government protections because they brokered the transaction instead of loaning the money) and (2) since the government guarantee and other conditions are no longer involved, there is no reason to prevent discharge in bankruptcy.




Wall Street is like that closet in your house where you throw everything in that you probably won’t need for a while or maybe not at all. When you open the closet door everything falls out on top of you. In this case it is $1.2 Trillion on student debt with “default” rates rising sharply and interest rates rising into double digits. We are in effect making it impossible for the brightest minds to get the education we need for the sake of our society. Anyone want a doctor or lawyer who has been poorly education or not educated at all?

It’s all about money in education. Like medical insurance, the more distance you put between the consumer and the the actual delivery of the service, the less people think about it and the the more the vendors charge. In the end education becomes a process of justifying the cost of a commodity rather than creating the best possible education possible.

Somehow the banks managed to intervene between students and institutions of higher learning, such that they enjoy very high interest rates (after the student completes education) and a guarantee from the Federal government or at least a guarantee that the debt cannot be discharged in bankruptcy.

The government loans work the way they are intended and there are many programs to provide relief to students who in many cases are burdened for life with student debt. But the private loans, which now dominate the marketplace, are putting a drag on our prospects as a nation — but still great business for the banks. Most other countries do not allow graduating students to be burdened by this debt; and those countries that provide free tuition (up to a point) or who pay for their citizens to travel and learn in countries who have quality institutions for higher learning, end up with an increasing GDP stemming from the contribution and productivity of highly educated, trained people who became employees, officers and leaders.

But here is the rub — banks making student loans in most cases  enjoy immunity from bankruptcy and so they use all sorts of sales techniques to get the prospective student to borrow as much as possible for tuition and”expenses.” They do this for the same reasons that homeowners or home buyers were encouraged to put as much into  their alleged mortgage loan as possible — landscaping and other improvements to the house that did not raise the value of the home.

The game, once again, is securitization. Even if we assume that the claims of securitization of these loans are true, we see a basic inconsistency in the choices the banks make as to how to deal with the risk of loss. The answer, like the mortgage loans, is that they have no risk of loss. They have already sold the student loans into a secondary market for securitization. That being true, the premise behind the exclusion of student debt from the benefits of bankruptcy is false.

The first premise is that banks would not provide funding for higher education without the guarantee that the loans cannot be discharged in bankruptcy and, in other cases, without the guarantee of repayment by the government. This is not true. By securitizing the loans (or at least subjecting them to claims of securitization in the secondary market), the banks are making tons of money as brokers and conduits without any risk of loss whatsoever. Our previous system of public loans for high learning worked far better than the current one in which private lenders dominate the market despite the “reforms” that have been enacted.

The second premise is that both the loans and these government guarantees are salable to “investors.” This is the controversial part. Given the premise behind the government guarantees, why should a broker be able to sell that government guarantee at a profit? What gives them the right to sell government promises? The object was to provide capital to students — not to increase the number of arcane financial products in the marketplace. If the loans are not salable without those government guarantees, it is because (as we know from the mortgage market) the loans make no sense. These are flawed financial products based upon the same “bad underwriting” we have seen in the continuing mortgage crisis.

Thus my premise and my question are the same: why should a bank or other “lender” make a profit on a bad loan? Why should banks be freed from the risk of loss that the government guarantees are meant to cover? Why have we strayed from existing law in which the “banks” (which we have all presumed to be “lenders”) are the party primarily responsible for the viability of the loan? Why should these bad loans be subject to sale to “investors” whose only interest in the student loans is the elimination of risk because the government has guaranteed benefits? Why should young people, before they get their education, be held to a higher standard of responsibility than the banks who are setting them up for failure?

My proposed legal theory is that once a bank makes the election to sell the student loan into the secondary market, the government guarantees should vanish. My theory under current law is that if the loan was funded from the sale of student debt pools there are two outcomes, to wit: (1) the government guarantee does not attach because there is no risk of loss to guarantee and because the lender is not the broker, pretender who appears on the note, (i.e., they were not entitled to the government protections because they brokered the transaction instead of loaning the money) and (2) since the government guarantee is no longer involved, there is no reason to prevent discharge in bankruptcy.

Then we will have close attention paid to the value of the loans and the manner in which they were sold. Once sold, these loans should be dischargeable in bankruptcy. Once sold these loans should offer no safe haven to investors that the loan will be paid by the U.S. government. Whether this can be done in the courts under current law is debatable. But it can and should be done through Congress and state legislatures. Without these reforms we are essentially eating our young.

MISSION CREEP NOTICE: Wall Street is now looking to “Securitize” health care loans. There is hardly anything they are not claiming to securitize.

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The PR of Modifications: Banks Want Foreclosure Not Reinstatement of Loan

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Editor’s Comment: There has been a spike of questions about modifications, short sales and settlements with the banks. My unvarnished opinion is that all this activity is Public Relations and a substantive policy intended to increase rather than avert foreclosures. Quite the contrary, offers of modifications are excuses to drag more money out of borrowers, give them a “trial run” and then deny the modification. I will admit that there have been more modifications of late but they are few in comparison to the number of loans that should be modified, naming the creditor, the balance due, the terms of repayment and perfecting what is now an empty unperfected lien.

In the law we look to the intent to determine the intent. If a reasonable person would understand the consequences of their actions, it is deemed intentional despite all protestations to the contrary.

The result we see from bank policies and conduct is that people go into a declared “default” on a false loan because the bank representative who has no money in the game told them that the only way they can apply for relief is by being behind in their payments at least 90 days. Translation: We are advising you to breach your loan documents and go into debt on past due payments such that you won’t be able to reinstate.

People go into trial modifications on a false loan with a bank or entity with no authority to offer it during which they deplete their savings and retirement, go totally broke from paying the “offer of trial modification” thinking they are saving their home. Then they are told that the permanent modification was denied because of some obscure reason and they have a few days to reinstate the loan with money they don’t have and with a credit score that took a major hit because of the reporting by the same non-creditor who threatened them with foreclosure.

The objective is to wear people down financially, emotionally and physically. Turmoil in the household caused by the stress of impending foreclosure causes divorce, physical ailments and even suicides. The result is that the house goes into foreclosure despite the fact that the borrower made a perfectly valid offer of modification whose proceeds far exceed the proceeds from foreclosure.

The banks are like any other business searching for profit. So at first blush one might assume that anything they can do to mitigate their loss they would jump at, which is the way it always was until the whole “securitization” thing came along. What changed was that instead of having a risk of loss if the loan failed, the banks made tons of money betting on the failure. So as soon as mortgages were declared in default, they collected 100 cents on the dollar, insurance and the proceeds of hedges like credit default swaps. The irony here is that the banks collected the mitigation payments from insurance and credit default swaps while it was investors who were actually losing the money.

The payment from insurance and credit default swaps was triggered by a declaration from the Master Servicer that the value of the portfolio had decreased. This was not subject to challenge by the insurance company or the counterparty of the credit default swap contract. So in effect the loans were being sold multiple times. In the case of Bear Stearns, they were leveraged as much as 42 times. That means they were in a double bind position of taking fees for insuring portfolios that were sure to fail or at least sure to be declared as having failed, and they were getting money on their own insurance and credit default swap protections.

Translation: a loan that comes out of delinquency or declared default represents a huge liability for a bank that has already collected millions of dollars on a $200,000 loan. If everyone paid off their loan, the banks would owe back the money they received from insurance and credit default swaps. It isn’t the difference between the foreclosure proceeds and the offer of modification that motivates them, it is the difference between the millions they already received from insurers and counterparties and the nominal principal of the loan. And the only way they can be sure that they never have that liability to pay back millions of dollars on a loan they declared in default is by forcing it into foreclosure.

But the government and public are expecting the banks to act reasonably in the context of the old mortgages where the lenders had a risk of loss if the borrower didn’t pay. Now they have a risk of loss of the borrower does pay. Confusion over this had led the government, courts and borrowers to expect that the modification process would bring a stop to the tsunami of foreclosures, but as we have seen in recent weeks, the wave of foreclosures is coming again and millions of people are going to lose their homes to non-creditors who have already been paid multiple times for the “value” of the loan.

The only way out of this which has received some traction in the courts is to allege that contrary to the requirements of HAMP and HARP and other programs, the servicer and creditor did NOT “Consider” the modification proposal, which of course is an accurate portrayal of the the real world of loans that are subject to claims of securitization —  even though those claims are probably false.

People who have made this challenge and who do so with professional help point out the obvious: that the proceeds from the modification are far better than the proceeds of a foreclosure. But the question is better for whom? If we take the real creditors, the investor lenders, the analysis is simple. They want the most money they can get. Since they were not included in the payment of insurance and credit de fault swaps, their only hope to mitigate their real loss is by real money from the homeowner which the homeowner is offering, based upon real documentation which is enforceable unlike the current fabricated, forged documents done without authority, right justification or excuse.

So the banks have an interest that is entirely adverse to that of the investors who were their clients. The banks want foreclosure so they can keep the insurance money and the investors want the loans reinstated so they can get their money back. This conflict of interest is so severe that the country is barely grinding through a recession that is entirely caused by the behavior of these banks who sucked the money out of the economy and are now holding it all over the world in tens of thousands of  shell companies around the world.

The moral of the story is that if you are serious about modification or short-sale be prepared for a long journey where in the end your petition is denied and you must still litigate. For those who get the modification they want arising from the cover-up PR campaign of the banks, congratulations you are one in thousands who should have received the same benefit.

Deny and Discover — Where the Rubber Meets the Road


What’s the Next Step? Consult with Neil Garfield

For assistance with presenting a case for wrongful foreclosure, please call 520-405-1688, customer service, who will put you in touch with an attorney in the states of Florida, California, Ohio, and Nevada. (NOTE: Chapter 11 may be easier than you think).

Editor’s Analysis: The banks are broke and this rule properly applied will reveal exactly how badly they fall short of capital requirements. It can be found at Volume 77, No. 169 of the Federal Register dated, Thursday, August 30, 2012 2012-16759 Capital Risk Disclosure Requirements Under Dodd Frank.

Admittedly this is not for the feint of heart or those with limited literacy in economics, accounting and finance; but if you find yourself in the position of not understanding, then go to any economist or banker or finance specialist or accountant  and they will explain it to you.

Lewtan which produces ABSnet is offering a service to banks that will give the banks and plausible deniability when the figures come up all rosy for the banks. Lewtan should be careful in view of the action being taken against the ratings companies, which is the start of an assault on the citadel of evil intent on Wall Street.

The fundamental aspect of these new rules are that the bank must report on the degree of risk it has taken on in any activity or holding. They must also  show how they arrived at that assessment and under the Freedom of Information Act (FOIA) you might be able to get copies of their filing whether they do it themselves (doubtful) or hire someone like Lewtan which is obviously going to do the bidding of its paying clients.

The main problem for the banks is that they are holding overvalued assets and some non-existent assets on their balance sheet. A review to assess risk if properly conducted, will definitely turn up both kinds of assets reported on the balance sheet of the banks, which in turn will reduce their reported capital reserves, which in turn will result in changing the ratio between capital and risk.

This might sound like gumbo to you. But here is the bottom line: the banks were using investor money. We all know that. In baby language, the question is if they were using someone else’s money how did the banks lose any money?

They did receive the money from investors like pension funds, and other managed funds for retirement or contingencies. But they diverted the money and the documents to make it appear that the bank owned the assets that were intended to be purchased for the REMIC trusts. The Banks then purchased and claimed to be an insured or a party who had sustained a loss when in fact the loss was incurred by the investors and the mortgage bonds and loans were owned collectively by the investors.

By doing that the insurance proceeds were paid to the banks creating an instant liability to the investors to whom they owed a common law and contractual duty to provide an accounting and distribution based upon the insurance recovery. At no time did the banks ever have a risk of loss nor an insurable interest in their own name. And at not time were they bound by the REMIC documents because they ignored the REMICs and conducted transactions through an entirely different superstructure.

As agents of the investors they should have followed the REMIC documents and purchased the insurance and CDS protection for the benefit of the investors. But they didn’t do that. They kept the money for the bank who never had any proof of loss, proof of payment and was a mere intermediary claiming the rights of the principal. The same thing happened with Credit Default Swaps and Federal bailouts.

That is why the definition of toxic assets changed over a weekend when TARP was started. It was thought that the mortgages had gone bad for the banks.

Then they realized that the mortgages weren’t going bad to the extent reported and that the bank was suffering no loss because they were using investor money to create the funding of loans and the funding of proprietary trading in which they masked the theft of trillions from investors.

So the government quietly changed the definition of toxic assets to mortgage bonds — but that ran into the same problem, to wit: the mortgage bonds were underwritten by the banks but purchased by the investors (pension funds etc.).

Now the rubber meets the road. The claim that somehow the banks got stuck with mortgage bonds is patently absurd. If they have mortgage bonds it is not because they bought them, it is because they created them but were unable to sell them because the market collapsed and the PONZI scheme fails whenever the suckers stop buying.

The actual proceeds from theft from the investors and the borrowers is parked off shore around the world. The Banks having been feeding the money back in very slowly because they want to create the appearance of an increasingly profitable bank, when in fact, their revenues sand earnings are slipping away quickly — except for the bolstering they get from repatriating stolen money from investors and borrowers and calling them “proprietary trades.”

Nobody on Wall Street is making that kind of money on trades, proprietary or otherwise, but the banks are claiming ever increasing profits, raising their stock price, defrauding their stockholders. So against each overvalued and non-existent asset claimed by the mega banks on their balance sheet is a liability of far exceeding the assets or even the combined assets of the banks. Treasury knows, this, the Fed knows this and central bankers around the world know it. But they have been drinking the Kool-Aid believing that if they call out the mega banks on this fake accounting, the entire financial system will collapse.

So yes there is a consensus between those who pull the levers of power that they will allow the banks to pretend to have assets, that their liabilities are fairly low, and that the risks associated with their business activities, assets and liabilities are minimal even while knowing the converse is true. The system’s foundation is a loose amalgamation of lies that will eventually collapse anyway but everyone likes to kick the can down the road.

You are getting in this article a sneak peek into why the banks all rushed to foreclose rather than modify or settle on better terms. What is important from the practice point of view is that (1) the “Consideration” mandated by HAMP is not happening and you can prove it with the right allegations and discovery and (2) the reports tendered to OCC and the Fed under this rule will reveal that the issue of proof of loss, risk of loss, proof of payment and ownership is completely muddled — unless you follow the money trail (see yesterday’s article). You can subpoena the reports given by the banks from both the bank itself or the agency. My opinion is that you fill find a treasure trove of information very damaging to the banks and the Treasury Department.

There will be caveats in the notes that express the risk of inaccuracy and which reveal the possibility that the banks neither own nor control the mortgages except as agents for the investors, that the liability to the investors is equal to the money received from insurance, CDS, and bailouts, and that the borrower’s loan payable balance was corresponding reduced as to the investor and increased to entities that are not or cannot press any claims against the borrowers. Educate yourself and persist — the tide is turning.

Excerpt from attached section of Federal Register:

The bank’s primary federal supervisor may rescind its approval, in whole or in part, of the use of any internal model and determine an appropriate regulatory capital requirement for the covered positions to which the model would apply, if it determines that the model no longer

complies with the market risk capital rule or fails to reflect accurately the risks of the bank’s covered positions. For example, if adverse market events or other developments reveal that a material assumption in an approved model is flawed, the bank’s primary federal supervisor may require the bank to revise its model assumptions and resubmit the model specifications for review. In the final rule, the agencies made minor modifications to this provision in section 3(c)(3) to improve clarity and correct a cross-reference.

Financial markets evolve rapidly, and internal models that were state-of-the- art at the time they were approved for use in risk-based capital calculations can become less effective as the risks of covered positions evolve and as the industry develops more sophisticated modeling techniques that better capture material risks. Therefore, under the final rule, as under the January 2011 proposal, a bank must review its internal models periodically, but no less frequently than annually, in light of developments in financial markets and modeling technologies, and to enhance those models as appropriate to ensure that they continue to meet the agencies’ standards for model approval and employ risk measurement methodologies that are, in the bank’s judgment, most appropriate for the bank’s covered positions. It is essential that a bank continually review, and as appropriate, make adjustments to its models to help ensure that its market risk capital requirement reflects the risk of the bank’s covered positions. A bank’s primary federal supervisor will closely review the bank’s model review practices as a matter of safety and soundness. The agencies are adopting these requirements in the final rule.

Risks Reflected in Models. The final rule requires a bank to incorporate its internal models into its risk management process and integrate the internal models used for calculating its VaR-based measure into its daily risk management process. The level of sophistication of a bank’s models must be commensurate with the complexity and amount of its covered positions.

Appraisal Fraud and Facts: Essential to Securitization Scam

The REMICS are mirror images of the NINJA loans — no income, no assets, no job

the borrower did not realize that the false appraisal and other deficiencies in underwriting had shifted the risk of loss to the homeowner and the investors

Editor’s Notes: Our economy and the economic structure in other countries is stuck because of the false appraisal reports that supported funding of at least $13 trillion (U.S. only) of loans that were so complex that the Chairman of the Federal Reserve, Alan Greenspan didn’t understand them nor his staff of more than 100 PhDs. They were intentionally opaque because complexity is the way you get the other side of the “deal” (the buyer) to accept your explanation of the transaction. It also is designed to avoid criminal penalties even when the scheme unravels. Getting a Judge or Jury to understand what really happened is a challenge that has been insurmountable in both civil and criminal cases and investigations.

As stated in the 2005 petition to Congress from 8,000 appraisers who did not want to “play ball” with the banks, the appraisers were faced with a choice: either they submit appraisal reports $20,000 higher than contract and earn more money for each appraisal and earn  more money through volume, OR they won’t work at all.

Developers, mortgage brokers, and the “originators” (sales organization that pretended to be the lender), sellers and homeowners needing cash in an economy where there wages and earnings were not keeping up with the cost of living —- all reacted with glee when this system went into action. As “prices” rose by leaps and bounds — fed by a flood of money and demands for more mortgages — everyone except the banks ended up crashing when the money stopped flowing. That is how we know that it was the money that made prices rise, rather than demand.

So most appraisers were both stuck and pleasantly enjoying incomes 4-10 times what they had previously received, and obediently submitted appraisal reports that were in fact unsupportable by industry standards or any other standards that a reasonable and rational lender would use — if they were lending their own money. By lending money from investors the risk of loss was entirely removed. The originators got paid regardless of whether the mortgage was paid, or went underwater or caused the homeowner to execute a strategic default.

By using the originators as surrogates at the closing, the appraisal report was accepted without the required due diligence and confirmation that would be present if you went to the old style community bank loan department. The fact is that there was NO UNDERWRITING involved as we knew it before the securitization scam. The “extra” interest charged to No DOC loans (usually 3/4%-1.5%) and the premium interest charged on NINJA (No income, no assets, no job) loans was sold to borrowers on the premise that the “lender” was taking a higher risk. But the truth is they didn’t do any due diligence or underwriting of the loans regardless of whether or not the borrower was submitting information that confirmed their income, assets and ability to pay.  Thus the premium for the “extra risk” was based upon a false premise (like all the other premises of the securitization PONZI scheme).

The normal way of judging the price of a loan (the interest rate) was the perceived risk composed of two elements: ability to repay the loan, and the value of the property if the loan is not repaid. The banks that foisted the securitization scam upon the world got rid of both: they did nothing to confirm the ability to repay because they didn’t care if the borrower could repay. And they intentionally hyped the “value” of the property far above any supportable level as is easily shown in the Case Schiller index.

This is where PRICE and VALUE became entirely different concepts. By confusing the homeowner and hoodwinking the investors with false appraisals, they were able to move more money into the PONZI Scheme, as long as investors were buying the bogus mortgage bonds issued by fictitious entities that had no assets, no income and no prospects of either one. The REMICS are a mirror image of NINJA loans.

The value of the property was not the same as the prices supported by the false appraisal reports. The prices were going up because of the sales efforts of the banks to get homeowners giddy over the the numbers, making them feel, for a few moments as though they were more wealthy than they were in reality. But median income was flat or declining, which means that the value was flat or declining.

Thus prices went up while values of the homes were going down not only because of the median income factor but because of the oversold crash that was coming. Thus the PONZI scheme left the homeowner with property that would most likely be valued at less than any value that was known during the time the homeowner owned the property, while the contract price and appraisal report “valued” the property at 2-4 times the actual value.

The outcome was obvious: when all was said and done, the banks would be holding all the money and property while the investors, taxpayers, and homeowners were all dispensable pawns whose losses came under the category of “tough luck.”

While this might seem complex, the proof of appraisal fraud is not nearly as difficult as the explanation of why the banks wanted false appraisals. In the civil actions for wrongful lending or wrongful foreclosure, the homeowner need only show that the lender intentionally deceived the borrower as to the value of the property.

And the lack of actual underwriting committees and confirmations is essentially the proof, but you would be wise to have an appraiser who can testify as an expert as to what standards apply in issuing an appraisal report, to whom the appraisal report is addressed (i.e., the “originator”). Then using the foundation for the standards apply it to the property at hand at the time the original appraisal report was issued. It might also help if you catch the “originator” getting a part of the appraisal fee (like Cornerstone Appraisals, owned by Quicken Loans).

The borrower testifies that they were relying upon the “lender” representation that the loan had been carefully reviewed, underwritten, confirmed and approved based upon market conditions, ability of the borrower to repay and the value of the property. After all it was the “lender” who was taking the risk.

Thus the borrower did not realize that the false appraisal and other deficiencies in underwriting had shifted the risk of loss to the homeowner and the investors whose money was used to fund the loan — albeit not in the way it was presented in the prospectus where the REMIC was the supposed vehicle for the funding of the loans or the purchase of the loans.

Everyone in the securitization PONZI Scheme got paid. When you look at it from the perspective described above then you probably arrive at the same conclusion I did — all that money that was made and paid and not disclosed to the borrower changes the dynamics of the deal and the undisclosed compensation and profits should be paid to the borrower who was the party with the real risk of loss.

And in fact, if you look at the Truth in Lending Act, THAT is exactly what it says — all undisclosed compensation (which is broadly defined by the Act) is refundable with treble damages. Why lawyers have not taken action on this highly lucrative and relatively easy case to prosecute is a mystery to me.

Because of the statute of limitations applied in TILA cases, the TILA cause of action might not survive, especially in today’s climate, although more and more  judges are starting to see just how badly the banks acted. I therefore recommend to attorneys to use alternative pleading and add counts under other federal statutes (RICO, etc) and state statutes of deceptive lending, and common law fraud. The action for common law fraud, is the easiest to prosecute as I see it.

The interesting aspect of this that will lead to early settlement is that the pleading is simple as to the elements of the cause of action and can easily survive a motion to dismiss, the facts are clearly going to be in dispute which makes survival on a motion for summary judgment a much higher probability, and in discovery you have a nuclear option: since your cause of action is for return or sharing of the unlawful booty that was paid, plus treble, punitive or exemplary damages, discovery into all the different parties who made money in the chain is far easier to argue than the usual defensive foreclosure case.

The other thing you have is the possibility of stating a cause of action to force the retention of the property, to protect the homeowner in the collection of damages rendered by the final verdict. A lis pendens might be appropriate, and the bond need not be much more than nominal because unless the bank or servicer has a BFP to buy the property, you can easily show that your client is already posting bond every month they pay the utilities and maintain the property.

The compensatory damages would be a measure of the difference between the actual value of the deal and the deal that was offered to the homeowner. In simple terms, it could be that the appraisal report was $250,000 higher than the actual value of the property. As a result, the damages include the $250,000 plus the interest paid on that $250,000 and where appropriate, the loss of the house in foreclosure, plus interest from the date of the fraud (i.e. the closing), attorney fees, and costs of the action.

This action might also have special applications in commercial property cases where the appraisals are known to have come in much higher than the owner or buyer had ever expected. In some cases the “appraisal” actually changed the terms of the contract on the assumption that the property was worth much more than the original offer.

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

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


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

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

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

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

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

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

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


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


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