Allocation of Third Party Payments and Loans to Specific Loan Accounts

TURNING A DEFENSE INTO AN AFFIRMATIVE DEFENSE FOR SET OFF AND A CLAIM OR COUNTERCLAIM FOR DAMAGES AND ATTORNEY FEES

So the question is how would you allocate third party payments and what difference will that make to a Judge hearing the case.

ASSUMPTION: XYZ Investment Banking Holding company has received a total of $50 billion in third party payments from insurance, counterparties, credit enhancements (moving money from one tranche to another within the SPV “Trust”), and federal assistance or bailout. Each one of these is subject to separate analysis, but for simplicity we will treat them all the same.

• The money received was for “toxic assets” meaning bad mortgages or pools that were written down in value because of the presence of bad loans in the pools. Whether those loans really made it into the pool when the “assignment” was years after the cutoff date in the PSA and was for a non-performing loan which is specifically excluded in the PSA is yet another issue that requires separate analysis.
• Out of the many SPV entities created and sold to investors, 50 were in the status of default or write-down, triggering the insurance, bailouts etc.
• Arithmetically, assuming $1 billion goes to each pool under the assumption they were all the same size (not true in reality, so you would be required to make a calculation to arrive at the prorata share of each pool which involve several factors and is subject to a whole separate analysis that will be ignored for purposes of this example).
• Out of each pool, 50% of the loans were in some stage of negative credit event. Thus we have $1 billion to allocate to 50% of the loans.
• For purposes of this example, the assumption is that each loan was the same size and that there are 4000 loans each with a nominal principal balance of $350,000 claimed.
• For purposes of this loan each borrower stopped making payments under identical terms 6 months before the receipt of the third party payments.
• If we ignore the payments then each loan would be entitled to a credit of $250,000 and the investors in each pool would receive a pro rated share of the $1 billion, which amounts to $250,000 per loan.
• If we don’t ignore the payments and assume that the payments under the note would have been $2,000 per month principal and interest only, then $12,000 wood first be allocated to the past due payments and the default, in relation to the creditors (investors) would be cured. This would be in accordance with the note provisions that first allocate receipts to the payments due.
• Then fees and costs would be paid off, which we will assume are $13,000, as per the terms of the note.
• Thus the $250,000 allocation would be reduced by $25,000 before application to principal. That leaves $225,000 allocated to principal.
• Reducing the principal by $225,000 leaves a balance due on the obligation of $125,000 ($350,000-$225,000).
• Reducing the balance for the appraisal fraud at origination: (1) appraisal for this example was $370,000 (2) real fair market value was $250,000 (3) borrower made down payment of $20,000 (4) total damages for appraisal fraud = $120,000.
• After reduction for appraisal fraud the balance on the obligation in our example here is $5,000.
• Under TILA the failure to disclose the hidden fees and hidden parties and resulting effect on the APR, would mean that the borrower is entitled to either rescission or return of all payments made including the costs of closing and points on the loan, plus attorney fees and possibly treble damages which would mean that someone owes the borrower money, the obligation has been extinguished, the note is evidence of an obligation that has been paid in full, and the mortgage secured is incident to a note securing a non-existent obligation. Either way, under rescission or allocation, the borrower owes nothing.
• The net result for the creditor is that they get or should get $250,000 cash plus a claim for damages against numerous parties for ratings fraud, appraisal fraud and securities fraud.
• The net result for the intermediaries who stole all the money including the third party payments is that they get the shaft including possible criminal liability.

A very similar allocation procedure would be appropriate for the top quality performing loans under the theory of identity theft. Without using these high FICO credit-worthy people’s identity and loan score they would not have had the golden cover to the heap of dog poop stinking underneath.

Tags: Allocation of Third Party Payments, appraisal fraud, default, FICO, HERS, identity theft, Mortgage, note mortgage, Obligation, payments, principal, securities fraud
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