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Banks, Bailout and Billions – The ins & outs of “Securitization”

January 10, 2009 1 comment

Ok, so let’s break this down a bit because the pundits and the politicians are each spinning this in their own direction and one has to have some serious fog lights to eat through the “haze” that these guys spin in. Throw in the fact that no one is really exposing the REAL issues here to see if the actual bailout plan will truly deal with the real issues.

First, we need something to be done. Let’s get past this. It is true our entire financial sector is going through the dry heaves here as there’s not much more it can throw up. The entire financial system is starting to seize up and the constant coverage on these issues is pumping fear into the system and the heart of every American and even the foreign markets. So, if we can all agree that all of us losing our pensions, retirement funds, stocks, money market funds, and more home value is not a good thing then we can move on to what the solution should look like fundamentally because we do need a big solution to right the ship.

To start, one must have a basic understanding of the root of the problem. Yep, you guessed it, the mortgage meltdown which has led to the foreclosure crisis. Financial institutions, mainly the largest banks and investment banks on Wall Street are essentially holding large pools of residential and commercial loans (notes and corresponding mortgages) that are, for all intents and purposes, worthless – right now. Worthless because they cannot find a buyer for these notes (loans) with the current state of affairs. We all know that these “assets” are worth something and probably a lot more than just “something” BUT, if you can’t find a buyer then it’s really hard to place any real value on them currently. The assets are literally “backed” by mortgages and, ultimately, the real estate they’re tied to. We know the homes are worth something. That’s obvious.

Without getting into a lot of complicated explanations, this is the root of the problem. Now, you need to understand the process of the mortgage market because this is EXTREMELY important in the entire crisis. Almost 100% of all residential and commercial loans made since the late ’90′s were made by a “bank” or “lender.” Almost immediately after closing (and often before closing), these lenders sold these loans in “pools” to an “aggregator” of loans. Ok, a little glossary break down here. A pool of loans is two or more loans combined into a package. Smaller lenders might sell a package or pool of 50-100 loans to larger lender. The larger lender might buy 30 pools of 100 loans from 30 different smaller lenders. Now they have 3000 loans that they pool together into one big pool. You with me so far???

Ok, next here’s what happens… a larger bank (Chase, Countrywide, Wachovia, GMAC, Homecomings Financial, Fremont, Option One, etc) then sells these 3000 loans to another entity. This “other” entity is often a subsidiary but sometimes not and this other entity is a “Sponsor” and usually a “Master Servicer” entity. This means that this company is going to be the servicer of these loans. A servicer is the company that is going to collect the monthly payments, manage the escrow accounts, etc. Now, most people think that this is who they owe the money to for the loan they have because they received that notice about 60 days after closing notifying them that the “Servicing” of their loans was being transferred to XYZ Company. Because they make the payments to this servicer they automatically assume that this is now their “lender.” Remember when I just said that these large pools are usually sold to subsidiaries of the large banks? Well, it’s no wonder that these Master Servicing companies have highly similar names. What’s the difference between “America’s Wholesale Lender” and “Countrywide Home Loans, Inc.?” Well, a lot and very little. Both do business as “Countrywide.” One is a lender and one is a Master Servicer. Confusing? Yes. Purposefully? Yes. If there is confusion in Wall Street, it’s on purpose because these guys aren’t “stupid.” Stay with me here…

So here’s what happens to this pool of 3000 loans. The Master Servicer then sells these same 3000 loans to a “Depositor.” What really and actually happens is a bona fide sale of all of these loans. Now, here’s an EXTREMELY important point, pay attention right here. When a “loan” is sold, what is really sold is the “Note.” The Note is sometimes called the “Promissory Note.” The Note is the only and real evidence of the debt. The ORIGINAL Note that is. That’s why you’ll sometimes here this called “selling the paper.” The paper debt, the NOTE, is the debt and has an actual value because you, the homeowner and borrower, have signed that note with your signature and pledged (promised) to pay that debt back. The MORTGAGE is what you give to the original lender (and any subsequent purchase of the Note) as “security” in case you don’t pay the debt back. The mortgage gives the owner of that Note the security (the home or property) and thus the right to foreclose if you don’t pay it back.

Now, this is important… the Mortgage doesn’t give just <i>anyone</i> the right to foreclose, It gives the actual OWNER of the Note the right to foreclose. The owner of the actual and original Note. Not a copy of the Note but the ORIGINAL note. This is a very important point that must be understood and grasped, by everyone, including the US Government. I think that it’s highly possible that this bailout package might be relieving financial institutions of defaulted debt even thought that same institution may not even have the actual Notes to evidence the defaulted debt. And, is it really defaulted? How do we know that these entities weren’t already paid for these Notes? It depends on exactly WHO they are bailing out but if it’s any entity other than the Trust, those entities have already been paid for the Notes!

Back to this pool of 3000 loans… so the Master Servicer has sold the 3000 loans to a Depositor for about 102.5% of the face value of these Notes. When a sale of these 3000 loans is made, the Depositor literally pays the seller of the loans a lump sum of money and the Master Servicer in turn hands over the Notes for that payment of money. And then this same Depositor sells the 3000 loans to a Trust and “deposits” (hence the name “Depositor”) these Notes into the Trust. The Trust pays the Depositor a lump sum of money and in return receives the Notes. The Master Servicer or “Servicer” gives the Notes, receives a lump sum payment and then promises to “pay” the trust a monthly payment on the money that the Trust paid it. This large monthly payment to the Trust is usually guaranteed by the Servicer and is an aggregate or sum of all of the individual 3000 borrowers who paid their monthly payment to that Servicer. The servicer collects all of those monthly payments, takes off their fees, disburses some of it to escrow accounts, etc. and then makes the payments to the Trust. The Servicers also have multiple layers of insurance that insure them against borrower defaults because the Servicers do in fact make representations and warranties on the monthly payments to the Trust that really owns these Notes.

This whole process is called “Securitization.” This is a simplified explanation of what happens. Through this Securitization process, these Notes are packaged into what’s called “Asset Backed Securities” or “Mortgage Backed Securities” in what’s called a CDO (Collaterlized Debt Obligation) and are sometimes called ABS or MBS Pools. The Depositor creates something called a “Special Purpose Vehicle” (SPV) to deposit these Notes into the SPV and then these Notes are sold and deposited into the Trust. The Trust is owned by all sorts of investors, individual and companies, pension funds, foreign investors. etc. They collectively own these Trusts. A “Trustee” acts as an Agent for the Trust and on behalf of the Trust in a fiduciary relationship.

So, now that you’re a securitization guru, let’s get the rubber to meet the road in all of this.

Here’s the real rub. I told you that, legally speaking, the only evidence of this debt (the loan) is the actual and original Note; and this makes sense! If not, anyone could create a Note, get a copy of your signature (which they can get in public records on the mortgage you signed and was subsequently recorded in public records), paste it on that created Note and allege that you owe them this money. Also, because this Note is changing hands some 3-6 times in the securitization process, everyone touching it can create a copy and allege you owe them the money even though they’ve already sold the original Note and have been paid for it by the new buyer! Just like a personal check, the Note has to be “Endorsed” to the new buyer of the Note by the Seller of that Note. They literally need to stamp on the last page of the Note, “Pay to the Order of Without Recourse” and then stamp or write in the name of the new buyer. On a bona fide Note, this is EXACTLY what you will see and find. Everytime this Note changes hands, it needs an actual endorsement.

So here’s what literally happening with ALL of these foreclosures… the Trusts are the actual owners of the majority of all of these Notes. Yes, the Trusts. A trust has a funky name such as Harborview Mortgage Loan Trust 2006-5 or Meritage Loan Trust 2007-2. There’s no such Trust named Countrywide Home Loans or Chevy Chase Bank or Citimortgage or GMAC Mortgage Co. or Residential Funding Corporation or Amtrust Bank or Fremont Investment and Loan or Option One Mortgage Co. – you get the point. All of these entities are either lenders or servicers. Period. They are NOT the Trusts that your loan and everyone’s loans were sold to. Don’t let anyone fool you. Over 98% of all loans made since 2000 were securitized in just the fashion I described above.

Now, I can only speak to the 100 or so foreclosure cases I have personally read the complaints on in Florida and a few in Ohio. In 100% of these foreclosure cases, the suit is being brought NOT by the Trust but by the servicer or the trustee. Both of these entities are agents for the Trust but they are NOT the owners of these Notes unless they show that they re-purchased that Note from the Trust. In about 70% of the foreclosure cases we have seen, the Plaintiff (usually the servicer) is also alleging that they have LOST THE NOTE or that is has been destroyed. No, that was NOT a typo or mistake. Well, if the Note is actually lost, they don’t have any actual evidence of the debt anymore.

So here’s the question to start asking your Congressman or Congresswoman, your State Senators, your Governor and every other politician that has any influence and may want to be re-elected… if the Federal Government is going to buy all of these non-performing or defaulted loans (ie. Notes), who are they actually going to buy them from? The Trusts or the Servicers?

And, if they can actually tell us this in plain language, are they actually going to buy the original Notes? Not a copy and not some affidavit from some $15/hour employee who is swearing that they saw the original note before it was actually lost or destroyed but the original Note?

I’m not kidding here. I’m seeing 70% of the cases allege a Lost Note! When they produce the Note, what this Servicer alleges is the original note is, in fact, only a COPY of the note and is NOT the original. Want to know how I know it’s NOT the original?

This is easy folks. The entire securitization process that any and all Notes are involved is and must be disclosed in filings with the SEC. Yes, every Note is involved a securitization. And this MUST be filed with the SEC. And in these filings with the SEC, these companies MUST disclose all of the parties involved in that process and what that “chain” of securitization actually follows. That chain MUST be evidenced on every single Note on the last page of that Note in the form of an endorsement. “Pay to the order of…” Every Note should have at a minimum of 2 endorsements and more likely, 4-5 endorsements. If a Servicer or an attorney for that Lender or Servicer produces a copy of a Note that they allege is the original Note, all one needs to do is look for those endorsements. If the endorsements don’t follow EXACTLY what they have already filed with the SEC, they got real problems folks. Either they are lying to the court (called fraud) or that Note is faulty in that the proper endorsements aren’t there and most likely, both are real legal issues.

Also, in these foreclosure cases, the Plaintiff (a Servicer or Trustee) is actually alleging that they have the RIGHT to foreclose and that they are the <u>owner and holder of the Note</u> (which gives rise to the right to foreclose). Now, us folks and attorneys who are wise to this charade know that they are NOT the owner of these Notes because they actually disclose these facts right in their SEC filings! But no judge in this country is going to or has the time to go and do fact checking on these issues and hold these Plaintiffs accountable to what they are alleging in their foreclosure lawsuits. 98% of all foreclosure filings go uncontested by the borrower. This means that 98% of the time, the foreclosure process is nothing more than a rubber stamp process with judges defaulting borrowers who don’t show up to defend themselves. The Servicing companies are getting away with highway robbery – rather, home robbery. Yes, this is happening. Entities like large banks and servicing companies are taking the homes of hard-working citizens and they do NOT own the mortgages or notes secured by that home. Yes, these homeowners owe the money to someone but that someone is NOT the actual owner of that Note. And, if I’m the homeowner, I’d like the opportunity to have a meaningful chance to work something out with the real owner. Because what happens in foreclosures is that the wrongful party gets the home in a foreclosure sale, puts it back on the market for sale and sells it for about 80-90% of its CURRENT VALUE! Now, why not keep that same homeowner in the house and let them pay 80-90% of it’s current value??? Heck, make it 100% of current value. Granted this won’t work 100% of the time but I’m betting at least 50% of the time and probably closer to 70% is realistic. We have large financial institutions wrongfully foreclosing, kicking people out of their flippin homes and flipping those homes to someone else for a bargain while the hard working homeowner goes down the block to rent another foreclosed home from an institution that wrongfully kicked that homeowner out most likely! What the heck is wrong with us folks? We gotta take stand on this. This is the definition of absurdity ten times over!

So, to bring this full circle in relation to the latest talk of Banks, Bailout and the 700 Billion to do it, I want to know exactly what our taxpayer dollars are actually going to buy? I think we have the right to know this. I want to make sure that the Federal Gov’t is going to buy actual Notes and yes, the originals, not some fraudulent copy. I don’t trust one of these banks… These guys have bilked billions out of us and after what I have seen in what they file, what they are alleging in these foreclosures, etc. I put nothing past them including purposefully “losing” notes so that they can sell them multiple times to multiple Trusts or investors. And now they’re whining for a bailout to the madness they’ve brought on us all. I can’t tell you how many people I’ve talked to that have tried desperately and in good faith to work something out with these thieves and they don’t even answer the phone! You wait on hold for 30 minutes to talk to someone half way around the world who tells you to fill out 10 pages of information, fax it in and someone will get back to you – which never happens!!!

Folks, knowledge of these facts and issues is what we all need to make sure we can and do hold our government and these politicians to some sort of order and accountability before we just bail out one more flippin company!

Hope this helps educate you on the real happenings in this big convoluted mess we’re all in. If nothing else, you can now impress your cohorts at the water cooler with some sophisiticated mortgage speak.

Lane Houk

Investigate that Note!

January 9, 2009 1 comment

A law firm I work with had a case the other day that underscores the importance of this post… the Plaintiff (Taylor, Bean & Whitaker Mortgage Corp.) in the case was pushing for Summary Judgment. In preparation, they filed the “Original Note and Certified Copy of the Mortgage” in the case record. They also filed an “Affidavit in Support of Motion for Summary Judgment” the same day. The Affidavit was given and signed by an employee named Erla Carter-Shaw who was supposedly in charge of the record keeping, etc. In her “affidavit” she alleged that the Note had not been endorsed to anyone else and thus Taylor, Bean & Whitaker was the owner of the Note. Now, mind you that they had originally filed for a “Re-establishment of the Note” in the original Complaint because they alleged that it had been lost or destroyed… Well, purportedly, they found that original Note and they alleged it hadn’t been endorsed at all. Well, we investigated the Note they attached in their filing and what do you know, there’s an endorsement on the last page of the Note! It was endorsed in blank and guess who had signed the endorsement stamp? Oh yeah, you guessed it, Erla Carter-Shaw. So she alleges in her Affidavit that the Note has NOT been endorsed and then she attaches an Endorsed Note alleged to be the original.

Another simple but important issue to investigate is the Note that the Plaintiff actually attaches (if and when they do attach a copy of the Note). What you want to zero in on are the endorsements on the Note (or usually, the lack thereof). Understanding the securitization process is key in what you’re looking for on the Note. The endorsements should absolutely follow the chain of ownership from Originator to Seller to Sponsor/Master Servicer to Depositor to Trustee. If you’re not seeing at least 3 endorsements on the Note then you know that this is NOT an original Note regardless of what’s alleged and/or claimed as to its authenticity. We know Portfolio Lending is a dinosaur and literally >95% of all residential loans made since the late 1990′s are/were securitized. Given these facts, we know exactly what to look for.

Here’s a real example from an actual SEC Filed Prospectus linked to a real live Trust (called RFMSI Series 2007-S8 Trust) for more context…
1. Homecomings Financial was the original Lender to John Doe. Homecomings Financial is the “Originator” and “Seller” of this loan and they are the actual “Payee” on the Note the borrower signed at closing.
2. Before the loan even closed, Homecomings Financial knew it was selling this loan to a company called “Residential Funding Company, Inc.” (RFC). RFC always appears as the “Sponsor” and “Master Servicer” in the Prospectus filings with the SEC. – I’ve read well over a dozen Prospectus filings regarding RFC and their roles as Master Servicer NEVER deviates.
3. Homecomings Financial sells the loan (in a pool of loans) to RFC. Here is where you should see the FIRST ENDORSEMENT on the last page of the Note. It’s usually a stamped endorsement that says “Pay to the Order of, Without Recourse” and then you’ll see “Residential Funding Company, Inc.” just below that and the signature of an authorized signor for Homecomings Financial. That’s Endorsement #1.
4. Now, RFC isn’t going to hang on to this Note (pool of Notes) for very long. They have already setup an arrangement to sell these loans (Notes) to a company called “Residential Mortgage Securities I, Inc..” well in advance. This company is called the Depositor. They purchase the loans/notes (the entire pool) from RFC.
5. Here’s where you should see the SECOND ENDORSEMENT on the last page of the Note. “Pay to the Order of, Without Recourse” to Residential Mortgage Securities I, Inc.
6. Residential Mortgage Securities I, Inc., as Depositor is now going to Deposit these loans into the Trust and endorse the Notes to the Trustee.
7. US Bank National Association is the Trustee in this transaction as disclosed in the Prospectus, Form 424B5 (which you can actually get online at http://www.sec.gov by doing a search on EDGAR; if you know the name of the Trust, you can plug that name in exactly as it appears in a Google Search bar surrounded by quotes and you’ll get all the filings on that specific Trust usually)
8. Here’s where you should see the THIRD ENDORSEMENT on the last page of the Note… payable to US Bank National Association.

Now, what’s material here is that in this particular foreclosure case, the Plaintiff was “Residential Funding Company, Inc.” – here’s a short Quiz question, “Who is Residential Funding Company, Inc.?”
Do you think they own this Note? Even if they actually have the original, it doesn’t mean they’re the holder in due course or the real party in interest. But, if you file a Request for Production of Documents in the foreclosure case the Plaintiff probably won’t respond or they ‘ll try to object to your request. Why? Because, if they can find the original Note it will have these Endorsements on it showing the chain of transfers on it and they will have just produced evidence to the court which clearly evidences that they ARE NOT the owner and holder of the Note as they alleged in their Summons and Complaint.

Now, if you can believe it, we have cases where they have produced the note with endorsements on the last page that DIRECTLY contradict their allegations in the complaint. The attorney’s that work for many of these foreclosure mills aren’t very bright nor do they even understand these things often times.

Thus, you can attack this point in the form of misrepresentation or fraud on the court by showing the court the SEC filings from the Trust that this loan was deposited into. The Form 424B5 (Prospectus) will clearly disclose the parties involved, the chain of ownership and their roles. This is your evidence (as an Exhibit) that the Note in question is either not an original or there are some serious issues with its authenticity or that it contradicts their allegations. No opposing counsel will want a judge to get his/her eyes on this and will usually suspend their prosecution of a foreclosure case if you make your case right with them first via phone. We draft a Motion to Dismiss and attach the evidence as an Exhibit (the SEC Filings) and in the Motion to Dismiss will be points and elements outlining the misprepresentation on the part of counsel and the Plaintiff. My wife will then send this to opposing counsel first and find out what they want to do…

Lastly, often times we’ll see some endorsement(s) on a separate page (not on the last page of the Note) or an “allonge” to the Note. This can be attacked as well. An allonge is easy to create after the fact as it is not an actual part of the Note. Check your state statutes but most states will require endorsements to be on the last page of the Note as long as there is room on the last page. You can easily fit 4-5 endorsements on the last page of a Note.

When the law firm gets a new case, our goal is to raise enough doubt to survive Summary Judgment. Once you survive any motion for Summary Judgment, these cases get dropped off the map. We also request a jury trial in every case along with a Request for Production. If the Plaintiff doesn’t produce what we request (and they usually won’t) for reasons stated above, you’ve got yourself a case. Hope this helps all you folks out there trying to figure out how best to fight these boys at their own game.

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