Good information sometimes bears repeating.
The over-burdened judiciary isn’t always up to speed as quickly as it ought to be and good case law doesn’t always make it to the top of the pile for the clerks to review and digest. Even good attorneys occasionally miss pertinent material.
So, let’s go back to about 2 years ago when Yves Smith, who is an absolutely brilliant author and blogger of “NakedCapitalism” and 4closureFraud, truly a leader in the foreclosure defense blogging pack, wrote about an Alabama securitization case named U.S. BANK v. ERICA CONGRESS.
Of course the case went to appeal and the outcome of the appellate decision was a unanimous decision, the Alabama Court of Civil Appeals reversed a lower court decision on a foreclosure case, U.S. Bank v. Congress and remanded the case to trial court. The reasons hinged upon 2 superb expert witnesses. The Alabama Court of Civil Appeals opined:
“Congress challenged that evidence by presenting the testimony of Thomas J. Adams, an expert in mortgage securitization, who stated that the fact that the allonge was physically located in a different part of the custodial file indicated to him that it had been created at a later time. In addition, as the trial court noted in its judgment, there was some confusion regarding where the custodial file was actually kept pending GMAC’s request for the file, which, the trial court stated, at least indicated “an opportunity for the documents to be altered or manipulated.”
Thomas J. Adams was partner with the firm of Paykin, Krieg & Adams in New York and his expertise is in the field of securitization. Reading Mr. Adams’ affidavit along with another expert used by Ms. Congress, Professor Ira Mark Bloom, who was employed as the Justice David Josiah Brewer Distinguished Professor of Law at the Albany Law School in Albany, New York begins dissecting the characterizations of what constitutes the legal entry into a securitized trust.
Professor Bloom’s area of expertise is in the law of Trusts, Property, Estates, and Taxation with an emphasis on New York law. Are you in love yet? Professor Bloom states in his affidavit starting at paragraph 7:
“7. In formulating my opinion, I have relied upon applicable New York law because Section 11.04 of the trust agreement, which is called a Pooling and Servicing Agreement (PSA) and under which plaintiff purports to be Trustee, provides in applicable part that the trust agreement “shall be governed by and controlled in accordance with the laws of the State of New York …”
8. In formulating my opinion, I have been guided by the following trust and property law rules under New York law:
A. Unless an asset is transferred into a lifetime trust, the asset does not become trust property. (NY Estates, Powers and Trusts Law § 7-1.18).
B. The assignment of a mortgage without transfer of the underlying promissory note is a nullity. (Merritt v Bartholick, 36 N.Y 44 (1867); Kluge v. Fugazy, 145 A.D. 2d 537 (1988)).
C. A trustee’s act that is contrary to the trust agreement is void. (NY Estates, Powers and Trusts Law § 7-2-4).”
Two years ago, many judges had no clue about securitization; and, outside of New York – dealing in NY trust law would be like counting money in a foreign country. The judges weren’t alone. Attorneys had trouble handicapping this race horse too. NakedCapitalism gets into the meat of the matter and tears apart the Deutsche Bank’s argument against the comments from another well known Georgetown University law professor, Adam Levitin.
NakedCapitalism comments on the Deutsche diatribe:
“This is simultaneously laughable and damaging. The argument basically boils down to: “Gee, the fact that no one bothered to observe the contracts means they never intended to. So we’ll just pretend those provisions don’t count.” Does that mean that people who promptly went into default obviously never intended to pay, and should therefore get free houses? Or that when a borrower sends a payment a day or two late, they clearly intended to pay on time, so no late fees should apply? I think a lot of people would agree to that theory of contracts as long as it applied to consumers as well as banks.
But notice the amazing admission: “then to have systematically failed to observe those expanded requirements.” This is even better than Kemp v. Countrywide! The head of the ASF tells the public in Congressional testimony that the entire industry group he represents “systematically failed” to honor their own agreements!”
And they got bailed out with BILLION$ in TARP funds for their failures. Let’s think about this for a moment from a different perspective – premeditation (which we all know at some level there had to have been a plan because not EVERYBODY fails to assign the mortgages by accident or mistake). Mr. Adams states in paragraph 22:
22. Based upon the information provided to me and the documents that I have reviewed I can state that the allegation that the Trust obtained this promissory note on July 29, 2008 would violate the REMIC provisions of the IRS tax code for a number of reasons. First, the loan was in default on July 29, 2008. Therefore the loan could not have been a “qualified mortgage loan” under the IRS tax code because a qualified mortgage loan is a performing mortgage loan…
Here we are again, the REMIC Has Failed! However, what if the loan was not actually in default? Well, 2 years later and after reviewing hundreds of Pooling and Servicing Agreements (“PSA”), the thought crossed our minds that maybe the loans were not actually shown to be in default because maybe Mr. TARP was paying off the tranches?
In the trust tranche detail excel spreadsheets we’ve examined – losses don’t start showing up until late 2010, if at all [Ed. note: some losses may have occurred earlier but those examined in our batch appeared to have been paid – by someone]. An example of a partial trust excel report for INDX 2007-AR5, 3 tranches (4A11, 4A12, 4A21) show no losses. Only 4A12 begins to show a loss on December 25, 2012. Merry Christmas.
Even more interesting when reviewing trust tranche detail, for example, in the INDX 2007-AR5 there are 12 of the 19 tranches that pave been paid off (see the grey areas) – again by whom and how? Unknown info, but thank you very much.
Knowing where your loan is, of course is extremely important. Getting your information before the trust winds down is even more important – even if you are not facing foreclosure.
What do we do with this information? Hypothetically, let’s think about this. What “if” there are contracts and agreements by other guarantors or surety(s) that the borrow is not privy to, and didn’t agree to reimburse? There is a paragraph in most Promissory Notes that has never been dissected – or at least not very well:
The TARP bailout was due to an economic force majeure caused by Wall Street corruption that did not stem from homeowners failing to make payments. It was a much bigger Ponzi scheme than that and we have to face the fact that these crooks were the King of CYA – so would it be surprising that someone would underwrite your obligation without your knowledge? Do you owe someone who gives you a gift? If Grandma (or your Sugar Daddy) makes your mortgage payments and you have no contract of repayment – is it legally paid? The IRS says as long as neither you or your Grandma (or Sugar Daddy) claim a deduction – they have no problem with it.
And frankly, how would you ever know that the bank hadn’t transferred and assigned the notes properly? Many people didn’t, they just couldn’t get a timely refinance – even with good credit because the banks could not perform… long before the borrowers fell into default.
Where is the moral hazard here? The homeowners could have refinanced if the Wall Street banksters had made legitimate mortgages… but they didn’t. Any investor lawsuit will tell you that the banks inflated the appraisals, systematically abandoned the underwriting guidelines and purposely over-rated the bonds. This was not the fault of the homeowner.
Reading Neil Barofsky’s BAILOUT links the thought process with the fact that HAMP was designed to “foam the runway” for the banks, not bailout the homeowners. So, were TARP funds used to prop up the insurance companies and pay off the tranches and keep the loans current?
And why would they want to do that? Maybe to keep even more investors from suing or to make some payments and negotiate settlements with investors while the banks tended to their fraudulent foreclosure process? NakedCapitalism questions the “continued timidity” of investors to confront the fraudulent assignment issue:
“Nevertheless, it’s possible no investor will decide to pursue this sort of case, which would leave this question unsettled (trustees are apparently threatening investors not to, and I am told a lot of buy side investors are loath to alienate the dealer firms on which they think they depend for information. But there are some major actors, like Wells Fargo and US Bank who would seem not terribly well positioned to retaliate even if these concerns were valid). However, consumer lawyers are getting more and more sophisticated in using the PSA arguments to fight foreclosures, and the more bad press the banks have gotten, the more receptive judges appear to be becoming.”
Well, its 2 years later and more judges are listening to these arguments and on the heels of understanding the fraudulent assignments comes along the rigged LIBOR rates – ANOTHER FRAUD UPON THE HOMEOWNER. It’s certainly time to level the playing field. Maybe this securitized trust information, for example, can be used in arguendo –
“Your honor, the Plaintiff Trustee before you represents a trust that alleges my client’s loan belongs to. Although we believe the Plaintiff has unclean hands in this court of equity, we would like the court to compel the Trustee to provide the spreadsheets from the Trust that is actively trading and indicate the tranche(s) my client’s loan is alleged to have participated in; and should the court find that at the time of the foreclosure, my client’s loan tranche(s) are found to be current, we respectfully submit that the Court dismiss the Plaintiff’s action with prejudice.”
So, what’s it going to be for these banks – copping to falsifying Bloomberg Terminal and SEC records and fabricating statements provided to the investors’ management – who don’t want to know the ugly truth because they’d have to tell all the retirement and pension fund employees about the loss and the fraud?
Yup, that’s why investors aren’t screaming about the lack of proper assignments – at the homeowner’s expense… and this is where the rest of the moral hazard is hidden.
Are you getting the big picture, yet?