The Truth Keeps Coming: When Will Courts Become Believers?

Mar 13, 2013

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Editor’s Comments and Practice Suggestions: On the heels of AG Eric Holder’s shocking admission that he withheld prosecution of the banks and their executives because of the perceived risk to the economy, we have confirmation and new data showing the incredible arrogance of the investment banks in breaking the law, deceiving clients and everyone around them, and covering it up with fabricated, forged paperwork. And they continue to do so because they perceive themselves as untouchable.

Practitioners should be wary of leading with defenses fueled by deceptions in the paperwork and instead rely first on the money trail. Once the money trail is established, each part of it can be described as part of a single transaction between the investors and the homeowners in which all other parties are intermediaries. Then and only then do you go to the documentation proffered by the opposition and show the obvious discrepancies between the named parties on the documents of record and the actual parties to the transaction, between the express repayment provisions of the promissory note and the express repayment provisions of the bond sold to investors.

Practitioners should make sure they are up to speed on the latest news in the public domain and the latest developments in lawsuits between the investment banks, investors and guarantors like the FHA who have rejected loans as not conforming to the requirements of the securitization documents and are demanding payment from Chase and others for lying about the loans in order to receive 100 cents on the dollar while the actual loss was incurred by the investors and the government sponsored guarantors.

Another case of the banks getting the money to cover losses they never had because at all times they were mostly dealing with third party money in funding or purchasing mortgages. It was never their own money at risk.

Three “deals” are now under close scrutiny by the government and by knowledgeable foreclosure defense lawyers. For years, Chase, OneWest and BofA have taken the position that they somehow became the owner of mortgage loans because they acquired a combo of WAMU and Bear Stearns (Chase), IndyMac (OneWest), and a combo of Countrywide and Merrill Lynch (BofA).

None of it was ever true. The deals are wrapped in secrecy and even sealed documents but the truth is coming out anyway and is plain to see on some records in the public domain as can be easily seen on the FDIC site under the Freedom of Information Act “library.”

The naked truth is that the “acquiring” firms have very complex deals on those mortgage loans that the acquiring firm chooses to assert ownership or authority. It is a pick and choose type of scenario which is neither backed up by documentation nor consideration.

We have previously reported that the actual person who served as FDIC receiver in the WAMU case reported to me that there was no assignment of loans from WAMU, from the WAMU bankruptcy estate, or the FDIC. “if you are looking for an assignment of those loans, you are not going to find it because there was no assignment.” The same person had “accidentally” signed an affidavit that Chase used widely across the country stating that Chase was the owner of the loans by operation of law, which is the position that Chase took in litigation over wrongful foreclosures. Chase and the receiver now take the position that their prior position was unsupportable. So what happens to all those foreclosures where the assertions of Chase were presumed true?

Now Chase wants to disavow their assumption of all liabilities regarding WAMU and Bear Stearns because it sees what I see — huge liabilities emerging from those “portfolios” of foreclosed properties that were foreclosed and sold at auction to non-creditors who submitted credit bids.

You might also remember that we reported that in the Purchase and Assumption Agreement with the FDIC, wherein Chase was acquiring certain operations of WAMU, not including the loans, the consideration was expressly stated as zero and that the bid price from Chase happened to be a little lower than their share of the tax refund to WAMU, making the deal a “negative consideration” deal — i.e., Chase was being paid to acquire the depository assets of WAMU. Residential loans were not the only receivables on the books of WAMU and the FDIC receiver said that no accounting was ever done to figure out what was being sold to Chase.

Each of the deals above was complicated by the creation of entities (Maiden Lane LLCs) to create an “off balance sheet” liability for the toxic loans and bonds that had been traded around as if they were real.

Nobody ever thought to check whether the notes and mortgages recorded the correct facts in their content as to the cash transaction between the borrower and the originator. They didn’t, which is why the investors and the FDIC both now assert that not only were the loans not subject to underwriting rules compatible with industry standards, but that the documents themselves were not capable of enforcement because the wrong payee is named with different terms of repayment to the investors than what those lenders thought they were buying.

In other words, the investors and the the government sponsored guarantee organizations are both asserting the same theory, cause of action and facts that borrowers are asserting when they defend the foreclosure. This has been misinterpreted as an attempt by borrowers to get a free house. In point of fact, most borrowers simply don’t want to lose their homes and most of them are willing to enter into modifications and settlements with proceeds far superior to what the investor gets on foreclosure.

Borrowers admit receiving money, but not from the originator or any of the participants in what turned out to be a false chain of securitization which existed only on paper. The Borrowers had no knowledge nor even access to the knowledge that they were actually entering into a loan transaction with a stranger to the documents presented at the loan “closing.” This pattern of table funded loans is branded by the Truth in Lending Act and Reg Z as “predatory per se.” The coincidence of the money being received by the closing date was a reasonable basis for assuming that the originator was not play-acting, but rather actually acting as lender and underwriter of the loan, which they were certainly not.

The deals cut by Chase, OneWest and BofA are models of confusion and shared losses with the FDIC and other investors who participated in the Maiden Lane excursion. The actual creditor is definitely not Chase, OneWest nor BofA. Bank of America formed two corporations that merely served as distractions — Red Oak Merger Corp and BAC Home Loans and abandoned both after several foreclosures were successfully concluded by BAC, which owned nothing.

As we have previously shown, if the mortgage securitization scheme had been a real financial tool to reduce risk and increase lending, the REMIC trust would have ended up on the note and mortgage, on record in the office of the County Recorder. There would have been no need to establish MERS or any other private database in which trades were made and “trading profits” were booked in order to siphon off a large chunk of the money advanced by investors.

The transferring of paper does not create a transaction wherein a loan is proven or established in law or in fact. There must be an actual transaction in which money exchanged hands. In most cases (nearly all) the actual transaction in which money exchanged hands was between the borrower and an undisclosed third party entity.

This third party entity was inserted by the investment bankers so that the investment bank could claim ownership (when legally the loans already were owned by the investors) and an insurable interest in the loans and bonds that were supposedly backed by the loans. This way the banks could assert their right to proceeds of sale, insurance, and credit default swaps leaving their investor clients out in the cold and denying the borrowers the right to claim a reduction in the liability for their loan.

In litigation, every effort should be made to force the opposition to prove that the investor money was deposited into the a trust account for the REMIC trust and that the REMIC trust actually paid for the loans. Actually what you will be doing is forcing an accounting that shows that the REMIC was never funded and was never the buyer of the loans. Hence nobody in the false securitization chain had any ownership of the debt leading to the inevitable conclusion that for them the note was unenforceable and the mortgage was a nullity for lack of consideration and a lack of a meeting of the minds.

Once you get to the accounting from the Trustee of the Trust, the Master Servicer and the subservicer, you will uncover trades that involve representations of the investment bank that they owned the loans and in fact the mortgage bonds which were clearly pre-sold to investors before the first application for loan was ever received.

Thus persistent borrowers who litigate for the actual truth will track the money and then show that the cash transactions differ from the documented transactions and that the documented transactions lacked consideration. The only way out for the banks is to claim that they embraced this convoluted route as agents for the investors, but then that still means that money received in federal bailouts, insurance and credit default swaps would reduce the receivable of the actual creditors (investors) and thus reduce the amount payable by the actual borrowers (homeowners).

The unwillingness of the Department of Justice to enforce long standing laws regarding fraud and deceit, identity theft and other crimes, tends to create an atmosphere of impunity a round the banks and a presumption that the borrowers are merely technical objections of a certain number of documents not having all their T’s crossed and I’s dotted.

From a public policy perspective, one would have to concede that protecting the banks did nothing for liquidity in the marketplace and nothing for the credit markets in particular. Holder’s position, which I guess is also Obama’s position, is that it is better to allow average Americans to sink into poverty than to hold the banks and bankers accountable for their white collar crimes.

Legally, if the prosecutions ensued and the cases were proven, restitution would be ordered based not on some back-room deal but on approval of the Court. Restitution would clawback much of the capital of the mega banks who are holding that money by virtue of illegal transactions. And restitution would provide the only stimulus to the economy that would be fundamentally sound. Investors and borrowers would both share in the recovery of at least part of the wealth lost to the banks during the mortgage maelstrom.

I have no doubt that the same defects will appear in auto loans, student loans and other forms of consumer loans especially including credit card loans. The real objection of the banks is that after all this effort of stealing the money and the homes they might be forced to give it all back. The banks perceive that as a “loss.” I perceive it as simple justice applied every day in the courtrooms of America.