Mortgage bond holders get legal edge; buybacks seen

By Al Yoon

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

© 2010-19 FORECLOSURE FRAUD | by DinSFLA. All rights reserved.

A MUST READ!

via: 83jjmack

Copyright (c) 2010 Pepperdine University School of Law
Pepperdine Law Review

Author: Dale A. Whitman*

The premise of this paper is that the concept of negotiability of promissory notes, which derives in modern law from Article 3 of the Uniform Commercial Code, is not only useless but positively detrimental to the operation of the modern secondary mortgage market. Therefore, the concept ought to be eliminated from the law of mortgage notes.

This is not a new idea. More than a decade ago, Professor Ronald Mann made the point that negotiability is largely irrelevant in every field of consumer and commercial payment systems, including mortgages. ¹ But Mann’s article made no specific recommendations for change, and no change has occurred.

I propose here to examine the ways in which negotiability and the holder in due course doctrine of Article 3 actually impair the trading of mortgages. Doing so, I conclude that these legal principles have no practical value to the parties in the mortgage system, but that they impose significant and unnecessary costs on those parties. I conclude with a recommendation for a simple change in Article 3 that would do away with the negotiability of mortgage notes.

I. The Secondary Mortgage Market

In this era, it is a relatively rare mortgage that is held in portfolio for its full term by the originating lender. Instead, the vast majority of mortgages are either traded on the secondary market to an investor who will hold them, ² or to an issuer (commonly an investment banker) who will securitize them. Securitization …

[ipaper docId=32796250 access_key=key-n62ohszj7y8skrfnvs2 height=600 width=600 /]

© 2010-19 FORECLOSURE FRAUD | by DinSFLA. All rights reserved.

Via: Livinglies

Now that these venerable institutions have turned into ankle biter’s, their claims to compel production and other forms of discovery are being heard by the same judges that turn down similar claims from borrowers. In this case AMBAC is suing one of the mortgage aggregators alleging that the aggregator  caused loans to be originated without regard to the ability of of the borrower to repay the loan. They allege that despite the claim that the mortgage “pools” were sampled, many of the loans consisted of transactions in which the borrower was known not to have the capability of even making the first payment. In other cases, as we know, the loans were “qualified” simply on the ability of the borrower to make the first payment, which was substantially reduced by allowing the borrower to pay less than the accrued interest and not of the principal. AMBAC is therefore making the same claims as borrowers and investors.

It is clear from this case and other recent decisions at the trial court level that the defensive stonewalling tactics which were used successfully against borrowers are not working when the litigants are both institutions. This particular case was submitted to me by Max Gardner, who recognizes the significance of this development. It may seem like technical procedure to most people but the fact remains that these “pretender lenders” simply do not have a factual defense. The only thing they have our lawyers who are skilled in using civil procedure to avoid any possibility that the case will be  heard on the merits. This tactic, while successful against borrowers, is obviously going down the tubes in connection with litigation between institutions.

This will have an obvious and palpable effect on litigation with borrowers. Borrowers or their attorneys that represent them will merely cite  rulings in the same or nearby jurisdiction wherein discovery was allowed to proceed. Our experience in monitoring thousands of cases indicates that in the relatively few cases where judges allow discovery to proceed the matter was quickly settled or the party seeking foreclosure simply vanished, allowing the borrower to either get a judgment for quiet title by default or to sit in limbo with no party seeking payments or foreclosure.

[ipaper docId=34218867 access_key=key-2b903o42cdjk7ti4nw45 height=600 width=600 /]

© 2010-19 FORECLOSURE FRAUD | by DinSFLA. All rights reserved.

Hat Tip to a viewer for writing this as a post submission…

By: DinSFLA 7/8/2010

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.

© 2010 FORECLOSURE FRAUD | by DinSFLA

[ipaper docId=34072178 access_key=key-1jcw5r661a7av4jfmuba height=600 width=600 /]

© 2010-19 FORECLOSURE FRAUD | by DinSFLA. All rights reserved.

Double Standard here now…but they can foreclose on us using the worthless assignments!

[UPDATE]

Freddie Mac Tells Servicers NOT To Foreclose In MERS 4/1/2011

________

MERS Tells Servicers to Stop Foreclosing in Their Name

[ipaper docId=29248253 access_key=key-2nz158afqy34iblgiqm0 height=600 width=600 /]

Source: b.daviesmd6605

© 2010-19 FORECLOSURE FRAUD | by DinSFLA. All rights reserved.