Stop Assuming You Know Investment Banking

Jun 9, 2021

The greatest challenge in unraveling the securitization mess is that that courts, judges, homeowners, and lawyers think they know what they are talking about. They do not. Without any statement on record, they assume things that are not even alleged much less be proved by a shred of competent evidence. They all rely on factual assumptions that are at best implied, and at worst unstated.

The warehouse loans were not paid because they too were not loans. The use of the label “warehouse” loan was used to disguise the real agreement which had previously been called the “Purchase and Assumption Agreement” where it was clear that the originator had no right to take or touch any money other than what was paid to it as a fee. In all “warehouse” labeled deals the “borrower” is the thinly capitalized eternity that had no credit history and no credit rating. It was unnecessary because credit was not involved. The originator as “borrower” in agreements titled as “warehouse”, enters the typical transaction with the homeowner as merely a sales agent.

This has a very substantial effect on the legal status, duties, rights, and obligations of the parties that are concealed from that point forward. Since the originator never received any money, it was neither a borrower nor a lender. The mask of advancing money on behalf of the originator is removed when the process of underwriting and accounting for the transaction is analyzed. And this is common sense.

No Wall Street company (or anyone else!) is going to pump hundreds of billions of dollars into or on behalf of a company that can’t possibly answer for mistakes, errors, omissions, or malfeasance (see Taylor Bean and Whitaker). It may have occurred a couple of times, but on the whole, it would be just stupid to allow the temptation of skimming the money flow to the tune of hundreds of millions or even billions of dollars. And no Wall Street company has agreed to do that. There is no warehouse loan. This is a table-funded transaction that was not even a loan at all.

It’s easy to get lost in the weeds. Courts do it all the time. I just read a case from December 2020 in which the court recited, as though it was already firmly established, that the certificates sold to investors were collateralized with loans (the underlying obligation, legal debt, note, and mortgage) of borrowers. It is recited as true, even axiomatic.

And THAT is why the courts assume that even if the foreclosure documents are irregular, the proceeds from the forced sale of a homestead will eventually get to those investors. But they never see a penny.

But it isn’t true and it never was true. And the courts (and others), filled with judges who know virtually nothing about investment banking, continue to analyze agreements between the various players as if they know something or understand it. I can guarantee you that no party ever told that court that the certificates were collateralized by homeowner transactions. Yet the court makes that leap every time.

The lawyers for the investment banks consistently stay away from directly making those assertions in writing and even in argument they do not expressly state that the loans are linked to the securities at all much less as collateral for the IOU’s issued as “Certificates” or “Mortgage Bonds.” Those lawyers know that their task is merely to avoid disabusing the court of the notion that the loans were real, the ownership of them is real and that they are to be treated as real for all purposes that serve the investment bank.

But when it comes down to liability for representations and warranties, it turns out that the “trustee” has absolutely no right, title, or interest in the certificates or any transaction with any homeowner.

Neither the trustee nor the investment bank bookrunner accepts any liability for misrepresentations concerning the contents of a fictitious loan portfolio — nor improper underwriting (appraisal fraud etc.) of the transactions they wish the court to consider as “loans,” (but without any liability for violating laws, rules and regulations governing lending,s servicing, collection and administration of loan accounts).

And lawyers for the investors (pension funds etc.) are stuck with the requirement of preserving the “investment” of their client while alleging or trying to allege (without effect) that the reasons for the investment did not exist. The truth is that it was not an investment at all. it was an unsecured loan for a completely discretionary promise to make scheduled payments to investors. the promise was made by the investment bank acting under the name of a fictitious trust and in many cases, the documents between the parties say exactly that.

Without access to the accounting records of all the parties involved in a securitization scheme, no homeowner and no lawyer is going to be able to produce evidence supporting a claim that the entire scheme was fiction.

But lawyers and homeowners can and must undermine claims that rely on securitization as real. This is easier to do than most might think. The reason is that the current statutory and common law supports two notions: (1) assignment of mortgage is a legal nullity without the transfer of the debt and (2) no foreclosure allowed unless value has been paid for the underlying obligation. In the context of securitization, the lawyers representing the named designated claimant cannot and will not respond to demands that such transaction(s) occurred.

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Neil F Garfield, MBA, JD, 74, is a Florida licensed trial and appellate attorney since 1977. He has received multiple academic and achievement awards in business and law. He is a former investment banker, securities broker, securities analyst, and financial analyst.

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