FedUpUSA

Archive for the ‘Securitization’ Category

Amazing coming from this nozzle….

WASHINGTON (MarketWatch) — Treasury Secretary Timothy Geithner on Monday urged global regulators to cooperate and develop common standards to ensure banks trading in the derivatives market have sufficient collateral, or margin, to weather future economic crises.

That’s simple:

• All derivatives must be exchange-traded.  NOT “clearinghoused”, exchange-traded, so that they are double-blinded and the buyers and sellers have no idea who the other party is.

• All derivatives must be margined nightly against cash just like every other exchange-traded product.

End of problem.  Trade ‘em all you want, but:

• You can’t screw people.

• You can’t claim to have a risk covered when the counterparty cannot pay.

That’s all that needs to be done, it’s what I’ve advocated for years and it is the only solution that will actually work and cannot be gamed.

The Market-Ticker

Fortune examined hundreds of foreclosure documents to determine the validity of mortgage securitizations after Bank of America debunked testimony about them last fall. The results raise more questions than they answer.

FORTUNE — Are Countrywide mortgage-backed securities really mortgage-backed? Do banks even have the legal right to foreclose on certain homes?

These are just a few of the questions raised since the foreclosure crisis revealed shoddy mortgage servicing practices at many of the big banks – practices that have led to countless investigations and lawsuits. Court testimony by a former Countrywide employee added to the intrigue last fall, because she confessed that many loans there weren’t properly handled, bringing into doubt the validity of Countrywide’s securitization process. Bank of America, which owns Countrywide, quickly silenced the discussion with firm denials.

But Fortune has examined dozens of court records that corroborate the employee’s testimony. And if Countrywide’s mortgage securitizations systematically failed as it appears they did, Bank of America’s potential liability dwarfs its shareholder equity, as the Congressional Oversight Panel points out.

Last November, a decision in a New Jersey bankruptcy case brought to light the testimony of Linda DeMartini, operational team leader for the litigation management department for Bank of America, which intended to prove the bank had the right to foreclose on a debtor’s mortgage. Instead, her testimony was key to the judge’s ruling that Bank of America (BAC) couldn’t foreclose, and along the way DeMartini made two statements that called into question the securitization of Countrywide loans. She testified that Countrywide didn’t deliver the notes to the securitization trustee, and that Countrywide notes weren’t endorsed except on a case-by-case basis generally long after securitization ostensibly occurred. Both steps are required, in one form or another, under all securitization contracts.

Only the delivery issue was really scrutinized at the time, because without a doubt the failure to deliver the notes would invalidate the securitization. The other issue, failure to endorse the notes, sparked a debate: the American Securitization Forum argues the notes would still have been securitized without endorsement, while Adam Levitin, associate professor of law at Georgetown Law, convincingly argues that they would not have been.

If the securitization failed, a variety of securities fraud charges could follow. Indeed, one investor lawsuit based in part on DeMartini’s testimony about endorsements and delivery has already been filed. And investors aren’t the only possible pursuers of securities fraud — New York Attorney General Eric Schneiderman is investigating mortgage securitizations by three banks, including Bank of America.

Bank of America vigorously denied DeMartini’s testimony, insisting that as a member of Countrywide’s mortgage servicing department, she didn’t know what was happening during securitization. Besides, BofA insisted, its policy was and always has been to comply with the securitization contracts.

No endorsements

Although law enforcement should be able to answer the delivery question easily — DeMartini indicated that Bank of America has FedEx tracking records for each note — it’s impossible for the public to check. But the endorsement of notes is easy to test. In every foreclosure, the bank must give the court the note or an accurate copy of it. And those notes are either properly endorsed or they’re not.

To check DeMartini’s testimony, Fortune examined the foreclosures filed in two New York counties (Westchester and the Bronx) between 2006 and 2010. There were 130 cases where the Bank of New York (BK) was foreclosing on behalf of a Countrywide mortgage-backed security. In 104 of those cases, the loan was originally made by Countrywide; the other 26 were made by other banks and sold to Countrywide for securitization.

None of the 104 Countrywide loans were endorsed by Countrywide – they included only the original borrower’s signature. Two-thirds of the loans made by other banks also lacked bank endorsements. The other third were endorsed either directly on the note or on an allonge, or a rider, accompanying the note.

The lack of Countrywide endorsements, combined with the bank’s representation to the court that these documents are accurate copies of the original notes, calls into question the securitization of these loans, as well as Bank of New York’s right, as trustee, to foreclose on them. These notes ostensibly belong to over 100 different Countrywide securities and worse, they were originally made as long ago as 2002. If the lack of endorsement on these notes is typical — and 104 out of 104 suggests it is — the problem occurs across Countrywide securities and for loans that pre-date the peak-bubble mortgage frenzy.

The lack of Countrywide endorsements also corroborates DeMartini, who said that in her 10 years at Countrywide she had never seen a note with an endorsement, and that as foreclosures had been increasingly litigated, she had been handling the original notes, not just the copies scanned into the bank’s database.

Bank of New York maintains that it had the right to foreclose on the notes. “The assignment language included in the pooling and servicing agreements that govern the trusts, along with the actual transfer of the mortgage note to the trustee and/or custodian, provide the trustee with the proper legal standing,” Bank of New York spokesman Kevin Heine said in a statement. But even if true, the right to foreclose must be demonstrated in every case, and it doesn’t seem to have been in any of these cases from New York.

As for the endorsements, foreclosure defense attorneys say a troubling phenomenon has been happening: “magically” appearing endorsements. That is, the note originally given the court has no endorsement, but after the defense points out the problem, an endorsed note is submitted. Here are several examples from Florida cases, all involving loans serviced by Countrywide, half of which were also made by Countrywide. Here is an example from a California bankruptcy case.

Todd Allen, the Florida attorney who shared the Florida examples, says the problem occurred with all the banks, not just Countrywide: “Magically appearing endorsements happen so often in Florida that I expect the banks’ explanation to begin with: ‘Once upon a time, in a land far, far away.’  Unfortunately, the courts often turn a blind eye to the banks’ shell game and homeowners are left with the empty shell.”

Bank of America continues to deny that it failed to endorse mortgages as DeMartini claimed, even after seeing the cases Fortune uncovered from New York. It issued this statement in response: “Bank of America’s policy is to conduct foreclosures in accordance with all applicable laws. After halting foreclosures last year, we reviewed our process with regulators and continue to do so as we incorporate improvements. Reviews have shown that foreclosed loans were seriously delinquent and that we could support our legal standing to foreclose. We believe the files referenced contain appropriate documentation. We offer home retention options and foreclosure avoidance programs to our distressed customers. Foreclosure is our last resort.”

It will be left to the investigators – and possibly ultimately the courts – to decide whether the applicable laws were indeed followed. Meanwhile, Countrywide managers have given interviews to Moody’s Investor Service, which led Moody’s to reassure investors that notes were systematically endorsed, either in blank on the note or via allonge.

But if that’s accurate, why don’t the sampled court records reflect it?

CNNMoney

Here we join everyone’s favorite Communist dictator in his bunker after receiving the news that the truth has come out about MERS (Mortgage Electronic Registration Systems) and that the key to his little mortgage securitization scheme has been exposed.  (Warning: NSFW, strong language.)

Maybe….

Mr. Schneiderman will hold meetings with executives of several major banks, including Bank of America Corp., Morgan Stanley and Goldman Sachs, according to people familiar with the investigation. He intends to discuss securitization of mortgage loans and other mortgage practices and has requested related documents from the firms, these people said. The meetings over securitization are expected to happen in the coming week.

Oh come on, there’s nothing wrong that happened here.  I mean, it’s not like a former executive of one of the big banks testified that by 2007 80% of the loans they were making didn’t meet quality standards but they sold them anyway, right?

“In mid-2006, I discovered that over 60 percent of these mortgages purchased and sold were defective,” Bowen testified on April 7 before the Financial Crisis Inquiry Commission created by Congress. “Defective mortgages increased during 2007 to over 80 percent of production.”

Oh wait…. one of them did….

The Market-Ticker

I suppose the fact that the New York Fed hosted a meeting last week with a group of solons is a sign that it is finally taking mortgage documentation and resulting foreclosure issues seriously. But the Fed’s spin is diverges from the reading I got from attorneys who have a vantage on the process. Per Housing Wire:

But the New York Fed said solutions are on the way. The Uniform Law Commission and the American Law Institute, which facilitated the recent meetings, seek to clarify and update federal and state laws governing the securitization process.

I’m bothered by the dishonest presentation, which a close reading of the related NY Fed document confirms. Let’s start with its opening paragraph:

Problems with mortgage foreclosures have been in the headlines during the past several months. The media attention arises from several concerns. One concern relates to whether lending institutions have followed proper foreclosure procedure. Another reflects a popular misconception among many that a mortgage can become separated from the note it secures. Yet another concern arises out of the complexity of some of the structured transactions involving the mortgages.

This seeks to present the concerns as mere noise in the media, rather than a result of troubling incidents and widespread abuses. In addition, notice the failure to mention the elephant in the room: chain of title issues, which are so widespread that a borrower challenging a foreclosure in a post 2004 securitization has a decent chance of winning if he argues that the trust lacks standing.

The Big Lie here is that the problem lies with “the complexity, and the outdated nature of the relevant law.” The NY Fed argues that the real estate regime was fine when banks held the mortgage to maturity and everything that was important that needed to happen took place in the same local area.

The paper, astonishingly, acts as if the operational requirements of mortgage securitization have led servicers to lose money. The argument made in these two paragraphs is pure fabrication:

The process of selling loans and mortgages requires that there be some method of determining the current owner of each particular loan and mortgage. In fact, that is a necessary component of the foreclosure process. The loan and mortgage owner, or a servicer who is acting as the owner’s agent, must determine whether it is appropriate to exercise foreclosure rights. When a loan and mortgage securing the loan is created, the initial lender will ensure that the mortgage is recorded in the correct real estate records based upon the location of the real property. However, when the loan and mortgage are sold, the manner of transferring the right to realize on the security for the loan does not typically require that an assignment of the mortgage be recorded in the real estate records. In many cases the loan and mortgage will be registered with an entity called MERS, which is a tracking system, so that interests in it can be followed when the loan and mortgage are transferred. In some cases, MERS also is listed as the mortgagee in the mortgage as an agent of the initial lender and all of the initial lender’s subsequent assignees (buyers of the loan and mortgage).

This division and fractionalization whereby there are entities that are owners of the loan and mortgage (or some part of the loan and mortgage), a servicer for the loan and mortgage, and a named mortgagee that is not necessarily the owner of the loan and mortgage has caused significant confusion. Mark Kaufman, Commissioner of the Maryland Office of Financial Regulation (OFR) testified about the remarkable changes in securitization and third-party servicing before a Congressional legislative committee, noting that these developments “forever changed the mortgage landscape.” Today, he said community banks only hold a fraction of mortgage loans in Maryland and account for next to none of the foreclosure complaints received. “The unbundling process may have facilitated the flow of cheap capital, but it has also fragmented roles, distorted market incentives, and severely complicated the task of modifying loans to avoid preventable foreclosures.” Moreover, Kaufman continued, the same economies of scale drove consolidation in the mortgage servicing business line, so that today the top five mortgage servicers are responsible for over 60% of the mortgages serviced. Every one of the five is owned by a major bank holding company. He noted that this concentration not only created an enormous management challenge, but left money losing servicers trapped in too-big-to-fail institutions. As a result, “the invisible hand of the market will not fix this.”

Notice how there is no timeline in this discussion? If you were to read the paper, you’d think banks created this great system called securitization which “enables the initial lender to replenish its supply of capital to make new loans.” But whoops! They somehow didn’t realize there would be a lot of operational demands, and now we have “money losing servicers trapped in too-big-to-fail institutions.” Notice NO OTHER EXPLANATION is offered. The only possible culprit is therefore those pesky but important legal requirements that bit the securitizers in the ass.

Utter hogwash. Securitization has been around since 1970. Private label securitization started to become a meaningful activity in the later 1980s. And most important, the industry managed to satisfy all those operational requirements and servicing was seen as a decent, even attractive business Remember how Bank of America was falling all over itself to buy Countrywide? The prize was Countrywide’s servicing unit.

An aside: that dramatic quote also implies these horrible servicing operations are a serious drain on those fragile too big to fail banks. Yes, they are cash flow negative, but no, they do not pose a threat to their health.

So what happened? Three things. First, the banks created MERS to improve their profits. That took place in the later 1990s but it did not start to be widely used until the early 2000s. Second, starting in the 2002-2003 refi boom, originators and packagers started cutting corners on the carefully crafted procedures for notes (the borrower IOU) to be conveyed to the securitization trust. This change not only ran afoul of some legal requirements but also was a violation of the requirements of the pooling and servicing agreements, the contracts that govern the securitization. Third was the global financial crisis left a record number of foreclosures in its wake, far higher than ever contemplated when these deals were designed. Servicing highly delinquent portfolios is a money-losing proposition.

So the real reason that industry is having trouble with foreclosures and servicers are losing money has absolutely nothing to do with the reasons suggested by the Fed. Two of the three are due to the industry running roughshod over the law. MERS was vetted only on a Federal law level; no review was ever undertaken of whether it would work under the laws of all the states. It was brazenly assumed that if MERS was imposed, the states would roll. That proved to be a tad optimistic. The second reason, the abandonment of established procedures, is fraud pure and simple. The packagers and trustees lied in the PSAs and the ongoing certifications.

And since any fix is going to be prospective rather than retrospective, invoking the losses servicers have now is irrelevant. The “invisible hand” contention is nonsense. If the servicers are losing money on their current pricing, they have to live with that and figure out how to reprice their offerings once their current portfolios run off. Businesses make bad decisions all the time and get in situations where they are losing money on a product or in a certain geography. They don’t go running to some of the best legal minds in the US demanding waivers to fix their business models. Oh, I forgot, we are dealing with banks, who will try any and every trick they can if there is a buck to be made.

There was another worrisome bit, per Housing Wire:

The two organizations also drafted a report to guide judges and lawyers involved in the transactions, and, the central bank said, should make the application of present laws more transparent.

The Housing Wire declaration that “solutions are on the way” is wildly premature. At this stage, the legal heavyweights are simply discussing whether to draft to provisions. Thus the Fed is trying to prod them to do so.

The good news is the lawyers who are watching the state of play seem to think this is more bluster than real. If anything were to happen, it would involve amending the Uniform Commercial Code, which is about as fast-moving a process as drafting and implementing new Basel rules, but with more philosophizing involved (see here for an overview). Moreover, the fact that a change to the UCC is published does not mean states will adopt it. A major revision to Article 2 of the UCC was proposed in 2003 and no state has implemented it.

One DC source indicated this was all theatrics to try to sway state court judges; all stressed that any change would have no impact on the current mess.

I’m nevertheless disturbed by the Fed trying to insert itself in a process in which it has no legitimate role, and as its paper indicates, in which it is willing to misrepresent facts to assist banks. Its concern instead should be for the public and the integrity of the housing market, both of which are victims of securitization industry greed and recklessness. But it will take root and branch reform of the Fed before that could ever happen.

Naked Capitalism

Former Assistant Secretary of Housing under George H.W. Bush Catherine Austin Fitts blows the whistle on how the financial terrorists have deliberately imploded the US economy and transferred gargantuan amounts of wealth offshore as a means of sacrificing the American middle class. Fitts documents how trillions of dollars went missing from government coffers in the 90′s and how she was personally targeted for exposing the fraud.

Fitts explains how every dollar of debt issued to service every war, building project, and government program since the American Revolution up to around 2 years ago – around $12 trillion – has been doubled again in just the last 18 months alone with the bank bailouts. “We’re literally witnessing the leveraged buyout of a country and that’s why I call it a financial coup d’état, and that’s what the bailout is for,” states Fitts.

Massive amounts of financial capital have been sucked out the United States and moved abroad, explains Fitts, ensuring that corporations have become more powerful than governments, changing the very structure of governance on the planet and ensuring we are ruled by private corporations. Pension and social security funds have also been stolen and moved offshore, leading to the end of fiscal responsibility and sovereignty as we know it.