Kenneth Eric Trent, P.A. of Broward County has amended the Class Action complaint Figueroa v. MERSCORP, Inc. et al filed on July 26, 2010 in the Southern District of Florida.
Included in the amended complaint is MERS shareholders HSBC, JPMorgan Chase & Co., Wells Fargo & Company, AIG, Fannie Mae, Freddie Mac, WAMU, Countrywide, GMAC, Guaranty Bank, Merrill Lynch, Mortgage Bankers Association (MBA), Norwest, Bank of America, Everhome, American Land Title, First American Title, Corinthian Mtg, MGIC Investor Svc, Nationwide Advantage, Stewart Title, CRE Finance Council f/k/a Commercial Mortgage Securities Association, Suntrust Mortgage, CCO Mortgage Corporation, PMI Mortgage Insurance Company, Wells Fargo and also DJS Processing which is owned by David J. Stern.
Banking Executives Tell Obama Officials Government Needs To Play Large Role In Mortgage Market
(AP) WASHINGTON (AP) – The Obama administration invited banking executives Tuesday to offer advice on changing the government’s role in the mortgage market. Their response: stay big.
While the executives disagreed on the exact level of support needed, the group overwhelmingly advocated the government should maintain a large role propping up the nearly $11 trillion market.
Bill Gross, managing director of bond giant Pimco, said the economic recovery required more government stimulus, particularly in the housing market. He suggested the administration push for the automatic refinancing of millions homes backed by mortgage giants Fannie Mae and Fannie Mac.
Refinancing those homes at the lowest mortgage rates in decades would give Americans more money each month. That would boost consumer spending by $50 billion to $60 billion and lift housing prices by as much as 10 percent, he said.
Without such stimulus in the next six months, Gross said, the economy will move at a “snails pace.”
Treasury officials have said they have no plans to enact such a plan, which has been the subject of intense rumors on Wall Street in recent weeks.
Tuesday’s conference at the Treasury Department is the administration’s first of many steps toward restructuring the troubled industry. So far, rescuing Fannie and Freddie has cost the government more than $148 billion. That number is expected to grow.
Treasury Secretary Timothy Geithner pledged “fundamental change” to the structure of Fannie and Freddie. The mortgage giants profited tremendously during good times but burdened taxpayers with losses when the housing market went bust. He said the two companies weren’t the only cause of the financial crisis, but made it worse.
Fannie and Freddie buy mortgages and package them into securities with a guarantee against default. They have ensured that millions of Americans can get home loans – even after the housing market collapsed.
The two companies, the Federal Housing Administration and the Veterans Administration together backed about 90 percent of loans made in the first half of the year, according to trade publication Inside Mortgage Finance.
Geithner did not offer a specific exit strategy for Fannie and Freddie. He agreed that the government could remain involved in the mortgage system by guaranteeing investors in mortgage-backed securities get paid, even when borrowers default.
There is a “strong case to be made” for such an arrangement, Geithner said.’
But Geithner suggested that Fannie and Freddie’s replacements could pay the government to insure the loans. That money could be tapped if the housing market collapses and would ensure taxpayers do not get hit with losses in the future.
“It is our responsibility to make sure that we create a system that is not vulnerable to these same failures happening again,” Geithner said.
Republicans are expected to pick up seats in Congress in November and the Obama administration will need support from both parties to enact changes next year.
The Obama administration’s management of Fannie and Freddie has been under fire for months from Republicans on Capitol Hill. In December, the Treasury Department eliminated a $400 billion cap on how much money it would give the mortgage giants to keep them from failing.
Rep. Spencer Bachus, the top Republican on the House Financial Services Committee, accused the Obama administration of excluding critics of the government’s role in the mortgage system from Tuesday’s conference.
In a letter to Geithner, Bachus said Treasury appears to be “laying the groundwork for a predetermined policy outcome that looks uncomfortably similar to the failed status quo.”
But the industry executives and experts at the conference seemed to agree that the government should maintain a role in the mortgage market, even if Fannie and Freddie disappear someday. Where they disagreed was on the level of government involvement and whether it should be reduced gradually.
Gross advocated the biggest government role. He said Fannie and Freddie’s function should be consolidated into one government agency that would issue mortgage-backed securities. Without such a solid guarantee, mortgage rates would soar, he warned.
Gross said he is skeptical of having those securities issued by the private sector, saying that doing so would favor “Wall Street as opposed to Main Street.”
Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Washington Post Staff Writer
Monday, August 16, 2010; 7:32 PM
A federal judge on Monday refused to accept a $75 million settlement between the Securities and Exchange Commission and Citigroup, the second time in a year that the agency’s attempt to sanction a major bank was foiled by a judge with questions about the appropriateness of the agreement.
Judge Ellen S. Huvelle of the U.S. District Court of the District of Columbia raised questions during a hearing Monday about why the SEC chose to penalize Citigroup financially when it’s the company’s shareholders who will ultimately bear the price of the sanction, according to lawyers who were present. She also asked why the agency decided to charge only two executives with wrongdoing when other more senior executives were involved with Citigroup’s actions, the lawyers said.
Huvelle demanded more information from SEC and Citigroup and scheduled another hearing for Sept. 24.
We are pleased to present this guest post by April Charney.
If you are an attorney trying to help people save their homes, you had better be PSA literate or you won’t even begin to scratch the surface of all you can do to save their homes. This is an open letter to all attorneys who aren’t PSA literate but show up in court to protect their client’s homes.
First off, what is a PSA? After the original loans are pooled and sold, a trust hires a servicer to service the loans and make distributions to investors. The agreement between depositor and the trust and the truste and the servicer is called the Pooling and Servicing Agreement (PSA).
According to UCC § 3-301 a “person entitled to enforce” the promissory note, if negotiable, is limited to:
(1) The holder of the instrument;
(2) A nonholder in possession of the instrument who has the rights of a holder; or
(3) A person not in possession of the instrument who is entitled to enforce the instrument pursuant to section 3-309 or section 3-418(d).
A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument.
Although “holder” is not defined in UCC § 3-301, it is defined in § 1-201 for our purposes to mean a person in possession of a negotiable note payable to bearer or to the person in possession of the note.
So we now know who can enforce the obligation to pay a debt evidenced by a negotiable note. We can debate whether a note is negotiable or not, but I won’t make that debate here.
Under § 1-302 persons can agree “otherwise” that where an instrument is transferred for value and the transferee does not become a holder because of lack of indorsement by the transferor, that the transferee is granted a special right to enforce an “unqualified” indorsement by the transferor, but the code does not “create” negotiation until the indorsement is actually made.
So, that section allows a transferee to enforce a note without a qualifying endorsement only when the note is transferred for value.? Then, under § 1-302 (a) the effect of provisions of the UCC may be varied by agreement. This provision includes the right and ability of persons to vary everything described above by agreement.
This is where you MUST get into the PSA. You cannot avoid it. You can get the judges to this point. I did it in an email. Show your judge this post.
If you can’t find the PSA for your case, use the PSA next door that you can find on at www.secinfo.com. The provisions of the PSA that concern transfer of loans (and servicing, good faith and almost everything else) are fairly boilerplate and so PSAs are fairly interchangeable for many purposes. You have to get the PSA and the mortgage loan purchase agreement and the hearsay bogus electronic list of loans before the court. You have to educate your judge about the lack of credibility or effect of the lifeless list of loans as the Uniform Electronic Transactions Act specifically exempts Residential Mortgage-Backed Securities from its application. Also, you have to get your judge to understand that the plaintiff has given up the power to accept the transfer of a note in default and under the conditions presented to the court (out of time, no delivery receipts, etc). Without the PSA you cannot do this.
Additionally the PSA becomes rich when you look at § 1-302 (b) which says that the obligations of good faith, diligence, reasonableness and care prescribed by the code may not be disclaimed by agreement, but may be enhanced or modified by an agreement which determine the standards by which the performance of the obligations of good faith, diligence reasonableness and care are to be measured. These agreed to standards of good faith, etc. are enforceable under the UCC if the standards are “not manifestly unreasonable.”
The PSA also has impact on when or what acts have to occur under the UCC because § 1-302 (c) allows parties to vary the “effect of other provisions” of the UCC by agreement.
Through the PSA, it is clear that the plaintiff cannot take an interest of any kind in the loan by way of an “A to D” assignment of a mortgage and certainly cannot take an interest in the note in this fashion.
Without the PSA and the limitations set up in it “by agreement of the parties”, there is no avoiding the mortgage following the note and where the UCC gives over the power to enforce the note, so goes the power to foreclose on the mortgage.
So, arguing that the Trustee could only sue on the note and not foreclose is not correct analysis without the PSA.? Likewise, you will not defeat the equitable interest “effective as of” assignment arguments without the PSA and the layering of the laws that control these securities (true sales required) and REMIC (no defaulted or nonconforming loans and must be timely bankruptcy remote transfers) and NY trust law and UCC law (as to no ultra vires acts allowed by trustee and no unaffixed allonges, etc.).
The PSA is part of the admissible evidence that the court MUST have under the exacting provisions of the summary judgment rule if the court is to accept any plaintiff affidavit or assignment.
If you have been successful in your cases thus far without the PSA, then you have far to go with your litigation model. It is not just you that has “the more considerable task of proving that New York law applies to this trust and that the PSA does not allow the plaintiff to be a “nonholder in possession with the rights of a holder.”
And I am not impressed by the argument “This is clearly something that most foreclosure defense lawyers are not prepared to do.”?Get over that quick or get out of this work! Ask yourself, are you PSA adverse? If your answer is yes, please get out of this line of work. Please.
I am not worried about the minds of the Circuit Court Judges unless and until we provide them with the education they deserve and which is necessary to result in good decisions in these cases.
It is correct that the PSA does not allow the Trustee to foreclose on the Note. But you only get there after looking at the PSA in the context of who has the power to foreclose under applicable law.
It is not correct that the Trustee has the power or right to sue on the note and PSA literacy makes this abundantly clear.
Are you PSA literate? If not, don’t expect your judge to be. But if you want to become literate, a good place to start is by attending Max Gardner’s Mortgage Servicing and Securitization Seminar.
THE Federal National Mortgage Association — known as Fannie Mae — and the Federal Home Loan Mortgage Corporation — Freddie Mac — were poorly structured from the time, 40 years ago, when they were set up as so-called government-sponsored enterprises. Both of these technically private companies, designed to foster the issuance of home mortgages, enjoyed implicit federal backing in the event they got into financial trouble but only weak regulation to prevent such trouble. Essentially, the federal government insured the companies’ liabilities but never charged a premium.
Fannie and Freddie had a license to print money. They could borrow at an interest rate only a bit over the Treasury rate and then accumulate large portfolios of mortgages and mortgage-backed securities earning the market rate. What a deal — borrow at the low rate, invest at a higher one, hold little capital and let the federal government bear the risk! Investors enjoyed high returns, and management enjoyed high salaries. Incidentally, politicians also got a steady flow of campaign contributions from the companies’ executives.
Fannie and Freddie’s risky policies led to their near collapse; in September 2008, the federal government brought them under federal conservatorship. Fannie and Freddie have cost taxpayers about $150 billion so far.
On Tuesday, the Obama administration plans to hold a conference to address the question of what to do with the two companies. Clearly, it would be an inexcusable mistake to reconstitute them as private companies in anything close to their prior form. Some people have suggested recasting them as a single new “Fan-Fred agency” that would continue to securitize and guarantee home mortgages. It’s true that Fannie and Freddie played an important role in developing the market for mortgage-backed securities. But they have completed that work, and they should not be preserved in any form. They should be thanked for their successes and gracefully retired.
William Poole, a senior fellow with the Cato Institute and a distinguished scholar in residence at the University of Delaware, was president of the Federal Reserve Bank of St. Louis from 1998 to 2008.
All these problems came about the same time MERS came to existence…now tell me something? Isn’t this a tad of a coincidence these issues became at the same time sub-prime loans hit peak?
Janet Tavakoli of Tavakoli Structured Finance tells what she thinks of recent fines the SEC has imposed on Wall Street giants and where she would like future investigations take place.
MERS was created in 1995 under the auspices of the Mortgage Bankers Association (MBA), as the mortgage industry’s utility, to streamline the mortgage process by using electronic commerce to eliminate paper. Our Board of Directors and shareholders are comprised of representatives from the MBA, Fannie Mae, Freddie Mac, large and small mortgage companies, the American Land Title Association (ALTA), the CRE Finance Council, title underwriters, and mortgage insurance companies.
Our initial focus was to eliminate the need to prepare and record assignments when trading mortgage loans. Our members make MERS the mortgagee and their nominee on the security instruments they record in the county land records. Then they register their loans on the MERS® System so they can electronically track changes in ownership over the life of the loans. This process eliminates the need to record assignments every time the loans are traded. Over 3000 MERS members have registered more than 65 million loans on the MERS® System, saving the mortgage industry hundreds of millions of dollars in the process. The Federal Housing Administration (FHA) and Veterans Administration (VA) approved MERS for government loans because they recognized the value to consumers. On table-funded loans, MERS eliminates the cost to the consumer of the mortgage assignment ($30 – $150). In addition, the MERS process ensures that lien releases are not delayed by eliminating potential breaks in the chain of title. Similar to the residential product, we also addressed the assignment problem in the commercial market with MERS® Commercial, on which is registered over $110 billion in Commercial Mortgage-Backed Securities (CMBS) loans.
More than 60 percent of existing mortgages have an assigned MIN, making a total of 65,000,000 loans registered since the inception of the system in 1997. The corresponding data for these mortgages is tracked on the MERS® System from origination through sale and until payoff. MERS therefore offers a substantial base of historical data about existing loans that can be harnessed to bring transparency to existing MBS products. Attached are letters from the MBA, FHA, Fannie Mae and Freddie Mac on this point.
Federal probes of the collapsed mortgage-bond boom are shedding light on how Wall Street firms sometimes created securities and sold them to one set of investors, while advising others to bet against them.
One firm that was a major player in mortgage securities, Deutsche Bank AG, illustrates a pattern investigators are looking at. While creating and selling mortgage securities to some of its clients, the big German bank was not only advising other clients to bet the other way, but also sometimes doing so itself.
A Deutsche trader helped create an index that made it easy to bet against housing, and the bank itself then used the index to do just that.
After the collapse of mortgage securities led to a costly bailout of the firm that insured many such securities—American International Group Inc.—some of the federal cash that was sunk into AIG flowed to Deutsche, to cover bearish bets by its hedge-fund clients.
Deutsche’s actions are a vivid example of potential conflicts on Wall Street—the way big financial firms play both sides of the fence with investors. The issue became more extreme during the mortgage bubble and subsequent bust because of the size of the bets on Wall Street and subsequent losses on Main Street.
Regulators now are grappling with whether the business-as-usual conduct at financial firms merely looks bad in hindsight, or whether there were misrepresentations or other legal issues that need to be further investigated and guarded against in the future. “This is a gray area that we need more investigation into,” says Andrew Lo, a finance professor at Massachusetts Institute of Technology and a hedge-fund manager.
Deutsche says that helping investors bet either way—either for or against an asset—is part of doing business for a securities firm.
“Some clients sought more exposure to the housing market, while others sought less,” a spokesman for Deutsche said. “We served clients whatever their investment objective, but only after being satisfied that they had arrived at their view after thorough consideration.”
KUDOS to the Federal Housing Finance Agency, overseer of Fannie Mae and Freddie Mac, the crippled mortgage finance giants. While some in Washington have continued to coddle the big banks even after they drove our economy into the ditch, this agency seems serious about recovering money for taxpayers by holding bad financial actors to account.
The agency announced last Monday that it had issued 64 subpoenas to a throng of unidentified financial services institutions, seeking documents related to mortgage securities that Fannie and Freddie bought from Wall Street during the boom years.
The subpoenas are designed to tell the agency what many of us want to know: How did Wall Street package and sell private-label mortgage securities to investors, even though the nature and quality of some of the loans crammed inside those tidy little packages were, at best, suspect?
Once that question has been answered, Fannie and Freddie can force the institutions that sold the securities to repurchase the improper loans, allowing taxpayers to recover some of the losses they’ve swallowed on Fannie’s and Freddie’s federal bailout.
Investigating this aspect of the mortgage mess seems a pretty logical step for a regulator. But in the topsy-turvy world of Washington, the housing finance agency’s move is unusually aggressive. Edward J. DeMarco, its acting director, seems to be that rarity — a regulator who not only talks about looking out for the taxpayer, but actually does something about it.
The subpoenas went to companies that act as trustees for mortgage pools or that service the loans in them. The housing finance agency wants to see loan files and transaction documents related to those pools, including mortgage applications and property appraisals. Recipients of the subpoenas have 30 days to produce the requested documents. Additional subpoenas may follow, it said.
The agency had to resort to subpoenas, it said, because when it asked the institutions for the records it got nowhere for many months. “Difficulty in obtaining the loan documents has presented a challenge to the enterprises’ efforts” to ascertain whether losses at the companies are the responsibility of others, its press release said.
Fannie and Freddie bought only the highest-rated pieces of these deals, but they bought buckets of them. During 2006-7, these entities bought $294 billion of so-called private-label securities. Not all of these purchases are under scrutiny, the agency said.
It is clearly turning up the heat on the major players in mortgage servicing and securitization. Among the bigger trustees in the business are Deutsche Bank and the Bank of New York, while loan servicers include Bank of America and many more. None of the banks would confirm if they had received subpoenas.
WILL WE FIND OUT THE TRUTH…THESE LOANS NEVER MADE IT TO THE POOLS?? NEVER SECURITIZED??
WASHINGTON – July 16, 2010 – A federal regulator is taking steps that could lead to the recovery of some losses sustained by mortgage giants Fannie Mae and Freddie Mac.
The Federal Housing Finance Agency said Monday it is looking to get back money that the two government-controlled companies have lost on mortgage securities packaged and sold by Wall Street firms.
During the housing market’s boom years, the two government-sponsored companies snapped up those securities, which contained some of the riskier loans made during the housing boom years. But they declined dramatically in value after the market went bust.
The regulatory agency said it has issued 64 subpoenas seeking loan files and other documents to determine whether the sellers of those securities made any false statements or omissions. Fannie and Freddie had tried to do so themselves but have faced resistance in getting the loan documents, said the agency, which was given subpoena power two years ago.
The agency said in a statement that it is “prepared to take appropriate action to ensure compliance, if necessary.” Any money recovered by the government would offset losses at Fannie and Freddie, which have cost taxpayers $145 billion so far.
Many analysts agree that Fannie and Freddie fed the boom in shady mortgage lending by snapping up billions in dubious mortgage investments and by lowering standards for the mortgages they guaranteed.
“It’s a shame Fannie and Freddie didn’t ask these questions themselves when they were buying these securities in the first place,” said Howard Glaser, a Washington mortgage industry consultant who formerly had both companies as clients. “The truth is that they never really wanted to dig too deep into the true nature of the loans they were buying.”
But the government’s ability to recover money will depend on whether the mortgage companies that made the loans are still operating, said Scott Buchta, chief mortgage strategist with Braver Stern Securities. Many of the lenders who made the worst-performing loans have gone out of business.
“It’s going to be a long process,” Buchta said.
Fannie and Freddie currently hold about $255 billion of these mortgage-backed investments, known as “private label” securities. They amount to less than 5 percent of the $5.5 trillion in mortgage securities the companies own or guarantee and are separate from those issued by Fannie Mae and Freddie Mac themselves.
Fannie and Freddie have also been trying to recover money on their own securities by forcing lenders to buy loans that have gone into default. Copyright 2010 The Associated Press, Alan Zibel (AP Real Estate Writer). All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Other defendants in the case, aside from Countrywide, several of its former top executives, and Bank of America, include 16 underwriters of more than $350 billion in Countrywide securities, among them J.P. Morgan, Deutsche Bank, Bear Stearns, UBS, Morgan Stanley, Edward Jones, Citigroup, Goldman Sachs and Credit Suisse.
July 15, 2010, 8:00 a.m.
False and Misleading Offering Documents Detailed in Class Action Lawsuit Against Countrywide Financial
Cohen Milstein Files Amended Consolidated Complaint in Case Involving $350 Billion of Mortgage-Backed Securities
WASHINGTON, July 15, 2010 /PRNewswire via COMTEX/ — Cohen Milstein Sellers & Toll PLLC filed an Amended Consolidated Class Action Complaint this week in its landmark litigation against Countrywide Financial Corporation and other underwriter defendants who were prominently involved in the failure of mortgage-backed securities over the last several years.
Countrywide, since acquired by Bank of America, was one of the largest and most controversial institutions involved in mortgage-backed securities. Other defendants in the case, aside from Countrywide, several of its former top executives, and Bank of America, include 16 underwriters of more than $350 billion in Countrywide securities, among them J.P. Morgan, Deutsche Bank, Bear Stearns, UBS, Morgan Stanley, Edward Jones, Citigroup, Goldman Sachs and Credit Suisse.
Cohen Milstein is Lead Counsel for the Class and Counsel for the Lead Plaintiff, the Iowa Public Employees’ Retirement System, as well as the Oregon Public Employees’ Retirement System and Orange County Employees’ Retirement System. The General Board of Pension and Health Benefits of the United Methodist Church is also named as a plaintiff in the litigation.
“Amidst all this high finance, it’s too easy to lose sight of the fact that pension funds invested heavily in these mortgage-backed securities and so retirees are the real victims here,” commented Steve Toll, Managing Partner at Cohen Milstein and co-chair of its Securities Fraud/Investor Protection practice group.
In the amended complaint, the Plaintiffs further buttress their allegation that the defendants published false and misleading offering documents, including registration statements, prospectuses, and prospectus supplements. Specifically, these documents misrepresented or failed to disclose that underwriting guidelines for the mortgages backing the securities had been systematically disregarded.
According to the lawsuit, from 2005 through 2007 Countrywide was the nation’s largest residential mortgage lender, originating in excess of $850 billion in home loans throughout the United States in 2005 and 2006 alone. Countrywide’s ability to originate residential mortgages on such a massive scale was facilitated, in large part, by its ability to rapidly package or securitize those loans and then, through the activities of the underwriter defendants, sell them to investors as purportedly investment grade mortgage-backed securities.
In order to generate a steady flow of mortgage loans to sustain this mass production of mortgage-backed securities, Countrywide routinely issued loans to borrowers who otherwise would never have qualified for them – and indeed, did not qualify for the loans they received — through, for example, “low doc” and “no doc” loan programs, often with adjustable interest rates that had been designed for borrowers with higher incomes and better credit.
Upon pooling these mortgages and issuing them as MBS certificates, over 92% received the very highest, investment-grade ratings from rating agencies; ultimately, however, 87% were downgraded to junk. Tellingly, one year after the date of the certificate offerings, delinquency and default rates on the underlying mortgages had increased 2,525% from issuance. In explaining such an unprecedented collapse in ratings on these certificates in 2008 and 2009, the rating agencies noted that they were forced to change their models because of previously undisclosed and systematic “aggressive underwriting” practices used to originate the mortgage loan collateral. Along with the exponential increases in delinquency and default rates of the underlying mortgages and the collapse of the certificates’ ratings, the value of the certificates plummeted.
Plaintiffs’ complaint alleges that the Defendants’ actions violated Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, legislation, still on the books, originally enacted in response to similar abuses that led to the Great Depression.
The Countrywide case is pending before Judge Mariana R. Pfaelzer in the U.S. District Court for the Central District of California.
Cohen Milstein has been named lead or co-lead counsel by courts in eight of the most significant mortgage-backed securities cases currently being litigated, including Lehman Brothers, Bear Stearns and Washington Mutual as well as Countrywide.
INVESTORS who lost billions on boatloads of faulty mortgage securities have had a hard time holding Wall Street accountable for selling the things in the first place.
For the most part, banks have said they can’t be called out in court on any of this because they had no idea that so many of these loans went to people who lacked the resources to make even their first mortgage payment.
Wall Street firms were intimately involved in the financing, bundling and sales of these loans, so their Sergeant Schultz defense rings hollow. They provided hundreds of millions of dollars in credit to dubious underwriters, and some even had their own people on site at the loan factories. Many Wall Street firms owned mortgage lenders outright.
Because many of the worst lenders are now out of business, investors in search of recoveries have turned to the banks that packaged the loans into securities. But successfully arguing that Wall Street aided lenders in a fraud is tough under federal securities laws. This is largely a result of Supreme Court decisions barring investors from bringing federal securities fraud cases that accuse underwriters and other third parties as enablers.
Where there’s a will, however, there’s a way. And state courts are proving to be a more fruitful place for mortgage investors seeking redress, legal experts say.
In late June, for example, Martha Coakley, the attorney general of Massachusetts, extracted $102 million from Morgan Stanley in a case involving Morgan’s extensive financing of loans made by New Century, a notorious and now defunct lender that was based in California.
Morgan packaged the loans into securities and sold them to clients, even after its due diligence uncovered problems with the underlying mortgages that New Century fed to the firm, Ms. Coakley said. In settling the matter, Morgan neither admitted nor denied the allegations. Her investigation is continuing.
One of the most interesting aspects of this case “is the active role of state regulators relying upon state law to protect investors,” said Lewis D. Lowenfels, an authority on securities law at Tolins & Lowenfels in New York. “This state focus may well fill a void left by the U.S. Supreme Court’s increasingly narrow interpretation of the antifraud provisions of the federal securities laws as well as the relatively few S.E.C. enforcement actions initiated in this area.”
Last Friday, an investment management firm that lost $1.2 billion in mortgage securities it bought for clients filed suit in Massachusetts state court against 15 banks, accusing them of abetting a fraud. The firm, Cambridge Place Investment Management of Concord, Mass., purchased $2 billion in mortgage securities from the banks, and it says the banks misrepresented the risks in the underlying loans — both in prospectuses and sales pitches.
The complaint says the banks misled Cambridge Place by maintaining that the mortgages in the securities it bought had met strict underwriting requirements related to the borrowers’ ability to repay the loans. Cambridge also contends it relied on the banks’ claims of having conducted due diligence to verify the quality of the loans bundled into the securities.
The complaint also details the anything-goes lending practices during the subprime mortgage boom.
Interviews in the complaint with 63 confidential witnesses turned up such gems as Fremont Investment & Loan, which had been based in California, approving loans for pizza delivery men with reported monthly incomes of $6,000, and management at Long Beach Mortgage, also in California, directing underwriters to “approve, approve, approve.”
One Long Beach program made loans to self-employed borrowers based on three letters of reference from past employers. A former worker said some letters amounted to “So-and-so cuts my lawn and does a good job,” adding that the company made no attempt to verify the information, the complaint stated.
Such tales are hardly shockers. But they provide important context when Cambridge moves up the ladder to the banks that bundled and sold the loans.
For example, the complaint contended that Credit Suisse, from whom it bought $88 million of mortgage securities in 2005 and 2006, told Cambridge of its “superior” due diligence, including a performance review of every loan. Three-quarters of these loans are delinquent, in default, foreclosure, bankruptcy or repossession, the complaint said.
Bear Stearns, now a unit of JPMorgan Chase, sold Cambridge $65 million of securities. It owned three mortgage lenders and told Cambridge it sampled the loans it sold to check underwriting procedures, borrower documentation and compliance, the complaint said.
CAMBRIDGE’S lawyers brought its case in Massachusetts under laws barring those who sell securities from making false statements about them or omitting material facts. Jerry Silk, a senior partner at Bernstein Litowitz Berger & Grossmann who represents Cambridge, said, “This case represents yet another example of Wall Street banks’ failure to live up to their basic responsibility to investors — to tell the truth about the securities they are selling.”
Mr. Silk’s firm has jousted with Wall Street underwriters before. In 2004, it recovered $6 billion in a suit against banks that underwrote debt issued by WorldCom, the defunct telecom. Denise L. Cote, the federal judge overseeing that matter, concluded that because investors rely so heavily on underwriters, courts must be “particularly scrupulous in examining the conduct,” she said.
It is too soon to tell if investors will recover losses in mortgage securities. But the efforts are reminiscent of those in the mid-90s against brokerage firms that cleared trades and provided capital to dubious penny-stock outfits such as A. R. Baron and Sterling Foster.
For decades, companies that cleared such trades — Bear Stearns was a big one — escaped liability for fraud at these so-called “bucket shops.” But regulators went after clearing firms by accusing them of facilitating such acts; in a 1999 lawsuit, the Securities & Exchange Commission accused Bear Stearns of enabling a fraud at A. R. Baron. Bear Stearns paid $35 million in fines and restitution to settle the case.
If trust in capital markets is to return, investors must be able to believe what they read in prospectuses. Without that minimum standard, how can Wall Street expect the markets to function again?
A version of this article appeared in print on July 11, 2010, on page BU1 of the New York edition.
The Mortgage Foreclosure Maze: Securitization with a Twist
The cases and commentary, the blogs and discussions tend to focus on the legal details. Lawyers without
substantial knowledge of the securitization process attempt to shoehorn the resultant obfuscations into
often-arcane statutes and even more antiquated case law. The result is a bewildering array of conflicting
and confusing case law. Defendants “cannot see the forest for the trees”. This is the intended outcome:
the securitization process practiced by the numerous now defunct fly-by-night originator-securitizers
created a complex maze of internally contradictory documents that only a finance MBA can unravel.
So let us step back and focus on the bigger policy perspective and attendant questions commonly
asked—never definitively answered.
Why do servicers resist loan modifications when the clear economic consequences in terms of net
present value to the “lender” would appear to yield much better results than a foreclosure sale in a
distressed market, less costs of administration? Many focus upon the latter as the driver: the servicers
generate substantial fees in the foreclosure process. The government programs fix upon this aspect and
attempt to sway the servicers’ economic decision by offering a few thousand dollars for modification to
offset the benefits of foreclosure-related fees. But this has not worked—not at all. The reason is clear if
we step back two more steps.
At the inception, the securitizations were mass-produced models of complexity. They are a bewildering
assembly of “boiler plate” common to financings plus special twists that make each one a little different
from the next. These little twists make calculation of the specific payouts across dozens of the trusts
uncommonly difficult. Imagine a servicer with “rights” to service dozens of different trusts with complex
internal ladders of senior/junior tranches that drive re-allocation of payments from one group of
investor payees to another. These are often referred to as “waterfalls”. These waterfalls are driven by
“designed to fail” mortgage loans that go into default. The effect was intended, the triggers to default
were combinations of negative amortization, illusory teaser interest rates and last but not least a very
steep “cliff” that homeowners face when the current payment amounts hit a rest calculation 3-5 years after loan origination. Again the question arises as to why an originator would intentionally create a predictably defective loan. Again the answer lies buried among the boilerplate paragraphs in the seldom-read twists.
In the beginning, the trusts were constructed of ladders of “groups” of mortgage loans [promissory
notes] associated with “classes” of so-called mortgage-backed securities [“MBS”]. The various Classes
are commonly referred to as tranches—using finance terminology that usually referred to different
maturity classes in a conventional securitization pool. For example, a pool of “Group I” mortgage loans
were associated with a pool of “Class I” MBS. The two were theoretically matched: payments in from
homeowners were pooled and paid out to MBS investors. However, these “senior” Class I MBS payouts
were further “supported” by current payments received from mortgage loans associated with junior
classes of MBS. Some refer to this as “over-collateralization”. The investors themselves bought “notes”
issued by the special purpose vehicles [“SPVs”], which could either be affiliates of the originator/securitizer or the so-called trusts. The senior Class I MBS “notes” are payable as ARM investments with periodic payments set to match the full life of the associated mortgage loans. As noted above, the senior Class I MBS investors actually looked to forecast interest rates and the prospect of future payments out of all of the mortgage loans associated with the entire trust—all classes. In other words the senior investors’ returns are virtually guaranteed by all the payments of all the homeowners. There was little risk. These investors paid a premium for these senior classes to refect lack of risk due to over-collateralization, combined with an apparent solid expectation of rising interest rates. The underwriters set up these structures with a view to marketing. The underwriter could approach an investor and tout the safety of seniority and upside of interest rates. A guaranteed “IOU”. Although there were associated mortgage loans, these investors’ due diligence did not require investigation of the quality of the loans in the associated Group I mortgage loans. These investors looked to over-collateralization for payment. The MBS were marketed in this way. Nobody felt a need to look at the quality of these Group loans. That is why the worst loans, the predatory loans, the “air” loans [eg. falsified loans on non-existent condos located above the top story of a high rise] were concealed in the group I loan pool. The concealment was furthered by fairly consistent patterns of failure to file
“mortgage loan schedules” typically required by the securitization documents. These documents—
usually the Indenture—expressly provided for the filings of loan lists detailing aspects of the loans with
both Securities Exchange Commission [“SEC”] and (usually) the Delaware Secretary of State UCC
“financing statement” records. The failures to file loan lists—“missing loan schedules” are observable
from the docket of the SEC for every trust, in tandem with identification of the provision in the
Indentures where a “manually filed” exhibit is referenced. Any losses suffered by owners of these MBS
in 2007-2008 were due to unknowing panic sales or sales that were forced to meet margin requirements
elsewhere. There was no investor fraud associated with these senior classes.
Conversely, some investors in more junior classes received a different marketing pitch and product. For
argument’s sake, let’s say that the trust also included a pool of “Group III” mortgage loans. The Group III
loans are “salt of the earth” loans. These loans are straightforward 30 year fixed rate plain vanilla
conventional loans with no bells and whistles, good documentation, etc. [please note this is a premise
not necessarily a fact]. These Group III loans were superficially associated with junior Class III MBS. The
class III prospective buyers were directed by marketers to look to the associated “safe” mortgage loans
for recovery of investment—and interest. These investors either ignored, overlooked or were misdirected.
They did not take into account the impact of the over-collateralization benefits granted to the
senior Class I MBS holders. These investors needed to examine the quality of the toxic Group I loans that
purportedly supported the senior Class I holders. They did not. They did not even perform the due
diligence necessary to make the simplest of determinations—that in most cases the loan lists were
never filed with the government agencies that the SEC filings represented. These investors were the
teachers and other pension funds. The extent of the fraud on these investor managers was matched
only by their negligence/assumption of risk.
The foregoing sets the stage for the events 2007-8. The original toxic trusts began to really blossom in
2004. They took off. Massive outreach programs were launched to train mortgage loan broker personnel
how to aggressively market the Group I toxic and other loans to “anybody with a pulse”. They needed to
produce loans rapidly to feed the securitization and earn the tax-free SPV premiums. This is well-known.
By 2007, the earliest toxic loans were hitting the “cliff”—facing unsustainable dramatically higher
payment resets. Now the rest of the structure begins to kick in and the motivations of the then creators
and today’s servicers comes into focus.
The Group I loans that go into default cease current payments to the trust. However, the Class I MBS
investors MUST BE PAID. The waterfall kicks in. Current payments by Group III mortgage loan payers are,
in effect, diverted from paying Class III MBS teachers pensions to paying the holders of the Class I MBS
preferred “in the know” underwriter customers. The senior status of the Class I investors went into
effect. As the 2007-2008 debacle gains momentum, more group I mortgages fail and more current
payments are diverted from the Class III investors to Class I investors. Panic sets in and the entire MBS
structure comes under a cloud. In the know bottom feeders buy up Class I MBS for a fraction of their still
solid NPV. Class III investors are coming up short with worse times to come. These MBS sell for pennies.
These investors look to government buyout programs, insurance—anything to recoup.
The disintegration of the group I mortgages accelerates as all approach reset and the economy tanks.
Homeowners lose long-held jobs and must relocate to find new jobs. Their homes are now well below
water, no matter what the original loan to value ratio. They abandon homes to the foreclosure mills.
This is a well known scenario. But the unanswered question remains: What happens to the growing
volumes of incoming foreclosure proceeds? Who gets these monies?
The answer to this seeming imponderable is found in the servicing agreements. The servicer deposits all
receipts from current payments and foreclosure proceeds into a “collection account”. Payments are
made as per the terms of the MBS to the MBS investors from this account. However, the twist is that the
payments to the junior MBS classes, such as the Class III MBS, can be sourced exclusively from current
mortgage loan payments after the re-allocation of payments to the senior Class I MBS. By EOY 2008,
70% of the early 2004 Group I loans have defaulted—no current payments made. This 70% shortfall in
receipts available to the Class I holders is “made up” by shifted funds from Class III holders. At the same
time as the servicer is short-paying the Class III holders, the servicer is literally swamped with incoming
proceeds of foreclosure from all Groups—worst being toxic Group I mortgage loans. The terms of the
trust do not allow the servicer to distribute the foreclosure proceeds. The foreclosure proceeds instead
cause the servicer’s “collection account” balance to grow exponentially. The terms of the servicing
agreement, not surprisingly, contemplate this easily foreseeable eventuality.
Under older less aggressive securitizations and escrow arrangements a common benefit to servicers and
banks alike was the ability to retain the income from investment of the collection account balance. In
the “old days” this balance typically arose from timing differences between escrowed insurance and real
estate tax receipts versus payments to insurers and county governments. However, the same rules were
applied to these trusts. The balance of the entire trust’s loan amounts outstanding was and is shrinking.
Simultaneously the servicer’s related “collection account” is burgeoning with foreclosure proceeds.
Theoretically these proceeds must be held intact until the amounts are called upon to make distributions in the distant future to the Class I senior MBS holders. So after the Class III salt of the earth payers have themselves failed or refinanced, the proceeds might be needed. The servicer is stuck with large cash surpluses in the collection account. Once again by careful forethought the servicing agreement provides that the servicer may invest the proceeds of the surplus [foreclosure proceeds] in some worthwhile investment of several types typically set out in the servicing agreement. But there is no oversight and only in years’ far in the future will failed or fraudulent investments be felt by the Class I investors for whose purported benefit these sums are maintained. However, the servicer is expressly entitled to retain the entire income stream from this collapsed structure.
This series of events explains why servicers are REALLY anxious to foreclose—even if the decision
appears from the outside to make no sense. It explains why servicers have paid large sums for the
“servicing rights”—which most unknowing souls believe relates primarily to skimming fees. The true
incentive for the servicer is control over the ever-growing pool of foreclosure proceeds—similar to a life
estate. This is the last step on a long trail of American tears. It appears superficially to be legal but for
the original deceptions. That is why the worst trusts were made by fly by nights and they conveniently
file for bankruptcy. By connecting the servicers today to the original trust structure planning, the
servicers be deprived of their ill gotten gains and justice be done. This cycle will repeat itself absent
intercession by government.
Once more they are going after the WRONG PARTY and they KNOW IT!
Fannie and Freddie were responsible for so much of this meltdown – and now we have to listen to their ranting and thuggery. Is there a hole deep enough for these guys?
They are so angry because their precious RMBS trusts are being exposed as schemes to loot pension funds, and that will make it harder to sell the next batch of poison they are cooking up.
First Posted: 06-23-10 11:03 PM | Updated: 06-23-10 11:28 PM
Taxpayer-owned mortgage giant Fannie Mae is targeting families by going after struggling homeowners who strategically default on their mortgage, the firm announced Wednesday.
A default is considered strategic when homeowners have the capacity to pay, yet choose to walk away from their mortgage. The trigger, researchers say, is negative equity: When the value of a home is less than what the lender is owed on it, borrowers are more likely to strategically default.
About 11.3 million homeowners with a mortgage, or 24 percent, owe more on their mortgage than the home is worth, according to real estate research firm CoreLogic. Another 2.3 million have less than 5 percent equity in their homes. All told, about 29 percent of all homeowners with a mortgage are either underwater or very close to it. The firm estimates that the typical underwater homeowner won’t return to positive equity until late 2015 or early 2016.
And Fannie Mae, an arm of the federal government and a big part of the Obama administration’s housing policy, wants to make sure that if struggling families walk away, they suffer for it.
Homeowners who strategically default or did not work “in good faith” to avert foreclosure through other means will be ineligible for new Fannie Mae-backed mortgages for seven years. The firm said it will also pursue homeowners in court, seeking so-called “deficiency judgments” to recoup outstanding debt by seizing borrowers’ other assets. Thirty-nine states do not limit the ability of lenders to recover what they’re owed.
Fannie Mae said that next month the firm “will be instructing its servicers to monitor delinquent loans facing foreclosure and put forth recommendations for cases that warrant the pursuit of deficiency judgments.”
“Walking away from a mortgage is bad for borrowers and bad for communities and our approach is meant to deter the disturbing trend toward strategic defaulting,” Terence Edwards, Fannie’s executive vice president for credit portfolio management, said in a statement.
Strategic defaults among homeowners have been on the rise. More than a million homeowners went that route last year, nearly double the amount in 2008 and more than four times the level in 2007, according to a recent analysis by the credit reporting company Experian and Oliver Wyman, a management consulting firm. A study by a team of academics from the University of Chicago and Northwestern University estimated that nearly a third of home mortgage defaults in March were strategic. The deeper underwater homeowners are, the more likely they are to walk away from their mortgage, the researchers noted.
Earlier this month, the House of Representatives passed a bill barring strategic defaulters from obtaining home mortgages backed by the Federal Housing Administration. The agency guarantees nearly one in four new mortgages.
“I can’t help but notice that every group now frantically calling for tough penalties for homeowners who walk away was virulently opposed to judicial modification of mortgages in bankruptcy,” Rep. Brad Miller, a North Carolina Democrat, told the Huffington Post.
Bank of America and Citigroup, the nation’s largest and third-largest banks by assets, respectively, support changing existing law to give federal judges the power to modify mortgages in bankruptcy, otherwise known as “cramdown.” Proponents argue that if homeowners were able to modify their mortgages in bankruptcy, the number of strategic defaults would substantially decrease, if not nosedive.
About 3 million homes will receive foreclosure notices this year, real estate research firm RealtyTrac estimates. More than 1 million will be repossessed by lenders, adding to the nearly 2.2 million homes that lenders took over from 2007 to 2009.
Fannie Mae and its sister firm Freddie Mac guarantee nearly three out of every four new mortgages, according to leading industry publication Inside Mortgage Finance. The two firms control about $5.5 trillion in home mortgages, according to their federal regulator. That’s nearly half of all outstanding mortgage debt in the U.S. Their share of the mortgage market is nearly double what it was 20 years ago.
Because Fannie controls such a large portion of new mortgage issuance, the freezing out of homeowners for seven years could prove devastating.
Brent T. White, a law professor at the University of Arizona, recently wrote in an academic paper that most homeowners can recover from a foreclosure within two years. In fact, defaulting on a mortgage is not as bad as most people think, White notes.
“Lenders are unlikely to pursue a deficiency judgment even in recourse states because it is economically inefficient to do so; there is no tax liability on ‘forgiven portions’ of home mortgages under current federal tax law in effect until 2012; defaulting on one’s mortgage does not mean that one’s other credit lines will be revoked; and most people can expect to recover from the negative impact of foreclosure on their credit score within two years (and, meanwhile, two years of poor credit need not seriously impact one’s life),” he writes.
There is a “huge financial upside” for seriously underwater homeowners to strategically default on their mortgages, White said.
While it’s still taboo among most homeowners, it’s common behavior among corporations.
In December, Morgan Stanley, the nation’s sixth-biggest bank by assets, walked away from five San Francisco office buildings the $820-billion firm purchased as part of a landmark $2.43-billion deal near the height of the real estate boom. A group led by Tishman Speyer Properties gave up a 56-building apartment complex in Manhattan in January after defaulting on some $4.4 billion in debt. A spokesman for the California Public Employees’ Retirement System, the nation’s biggest municipal pension fund and one of several investors in the venture, told the Huffington Post that they “basically walked away from it.”
Fannie was effectively nationalized in September 2008. Taxpayers own 79.9 percent of Fannie and Freddie. The Obama administration announced on Christmas Eve that it would provide unlimited financial assistance to the firms, disregarding what was a $400 billion cap on taxpayer bailouts. Their debt is backed by the U.S. government.
The two firms, facing growing losses on sour mortgages in perhaps a worsening housing market, have already taken $145 billion from taxpayers. Fannie Mae is responsible for $83.6 billion of that bailout.
Freddie Mac did not say it would take a similar position on strategic defaulters.
“Such so-called strategic defaults, once rare, are now common enough to jeopardize the already-weak housing and mortgage markets,” wrote economists Celia Chen and Cristian deRitis of Moody’s Economy.com in an April 13 note. “If the trend continues, strategic defaults could both accelerate the pace of home foreclosures and also make it harder for new borrowers to obtain mortgages. Both factors would in turn worsen the decline in house prices.”
JPMorgan Chase, the nation’s second-largest bank by assets with more than $2.1 trillion, warmed investors last month that underwater homeowners may not continue to make their payments even when they’re able to, according to a May 10 filing with the Securities and Exchange Commission.
A top executive at Freddie Mac posted a note on the firm’s website pleading with homeowners to not intentionally walk away from their homes.
“Knowing the costs and factoring in the time horizon, some borrowers have made the calculation that it is better to purposely default on the mortgage. While I understand how that might well be a good decision for certain borrowers, that doesn’t make it good social policy,” Freddie Executive Vice President Don Bisenius argued in a May 3 note.
The firm warned investors and analysts about the risk of increased strategic defaults in March 2008. Referring to it as “ruthlessness,” Dick Syron, Freddie’s former chairman and CEO, said the firm was “seeing an increase in ruthlessness” that had “the potential for changing consumer behavior.”
Fannie Mae said Wednesday that borrowers who have “extenuating circumstances may be eligible for new loan in a shorter timeframe” than the seven-year period it’s warning about.
Republicans in the House recently tried to rein in the twin mortgage giants. Rep. Darrell Issa, the top Republican on the House Committee on Oversight and Government Reform, attempted Wednesday to amend the financial reform bill under consideration by the House and Senate to mandate that the federal government appoint an inspector general to oversee Fannie and Freddie. The mortgage behemoths’ federal regulator has been operating without an independent watchdog looking over it and Fannie and Freddie since 2008.
Republicans have also tried to amend the bill to subject Fannie and Freddie to the Freedom of Information Act so members of the public can keep tabs on the firms by compelling the disclosure of documents and records.
Both efforts were thwarted by House Financial Services Committee Chairman Barney Frank (D-Mass.), who ruled that they were not “germane” to the legislation under consideration.
Emails sent after normal business hours to spokesmen for the White House and Treasury Department requesting comment were not returned.
Ryan Grim contributed reporting. THE HUFFINGTON POST
Copyright 2010 The Associated Press, Alan Zibel (AP Real Estate Writer). All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
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