LINKING SECURITIZATION AND TILA

NOTE: Working on one of my expert declarations I figured I would share my computations with the readers. In order to protect privacy I am deleting any identifying information.

In this case there was a $1 billion offering of non-certificated mortgage backed securities, which is a fancy way of saying there was no certificate, just a book entry. The Master Servicer is the one with all the power to write-down the value of the pool to what the Master Servicer deems to be fair market value. You might call that a license to steal. The use of proceeds does not list any specific uses. It merely says that the money is going for general operational purposes.That is contrary to the usual standards of an offering prospectus which gives at least some specifics on use of proceeds. Thus it didn’t take much effort to see $1 billion worth of non-certificated mortgage backed securities and only use 75% of it to invest in mortgages.

So it is easy as in this case to take $747,000 from an investor, lend out $377,000, pocket the rest. Then when the guaranteed to fail loans start failing, the Master Servicer announces that the pool is no longer viable and the Master Servicer buys it at a small percentage of the nominal value of the mortgages.

Then because the pool is deemed a failure, say by Goldman Sachs (who bought credit default swaps against the pool), the Master Servicer collects on the insurance and other credit enhancements. Since the investors no longer own anything they don’t have a claim, or so the scheme says.

So even if  a particular loan does NOT fail on schedule, they can still declare the pool as failed, and still collect the third party payments that were originally promised to the investors. But none of this takes away from the fact that all these institutions were part of a single securitization chain which is to say a single transaction in which the investor was the lender and the homeowner was the borrower. If they collected money and didn’t give to the investor it still doesn’t mean that the profit should not be allocated to the debtor’s loan account.

And if, as in this case, they collected a yield spread premium (Yield spread premium #2 in prior posts) created as a result of cheating the investor, well, whether the investor wants to press that claim or not, it is a yield spread premium, it is a single loan transaction, and TILA says you must disclose it — or give it back. Since the originating “lender” is the face they put on the transaction and since the originating “lender” is the only party of record in the title records, the yield spread premium must be applied to the benefit of the borrower. In this case, the YSP is almost the same as the loan amount, and with interest, vastly exceeds it. And then there is the issue of treble damages.

What many lawyers are missing because they are intimidated by the complexity of this thing, is that there are a lot of damages that can be collected from deep pockets and there is also a recovery of attorney fees.

Let’s see what happened in this case:

$1 billion (approximate) in securities offering. No showing of actual proceeds or any limitations on issuer. Second yield spread premium may exist in this unknown spread or in the spread between the offering amount and the unknown actual amount funded.

Extrapolating from yields disclosed in the prospectus the actual yield promised to investors was approximately 7%, with the right to reduce same under a variety of circumstances wholly in control of the underwriters. The nominal yield weighted average is stated in several different ways in order to confuse the reader and make computation more challenging. Based upon computations made directly from the prospectus and comparing it with similar prospectuses involving most of the same parties, the nominal actual average interest was sold to the SPV at approximately 9.6%. Thus, rounding down, the yield spread premium was 2.5%. 2.5% is 26% of the nominal 9.6% rate. Applying 26% to the declared proceeds, the dollar yield spread, undisclosed to either the investors or the borrowers, was approximately $250,000,000. The nominal principal of the debtor’s note is approximately $377,000.

The non-weighted yield spread premium at this level of the lending chain should therefore be expressed as either $94,250 or $82,500 (25%, non-weighted, or dollar weighted without regard to actual rates and data from this particular case). Applying an average between the two methods, the estimated non-weighted yield spread premium on this loan is approximately $88,000 without weighting for the actual rate spread. Applying the customary weighting using the actual nominal rate sold on this debtor’s loan (14.1%), the estimated yield spread premium earned by participants in this lending chain from this level of the lending chain was in fact approximately $369,460 (almost equal to the loan itself). Adding customary interest ($232,759.80) and treble damages ($1,108,380) under the Federal Truth and Lending Act the net actual dollar liability for yield spread premium at said level due from the lending chain on debtor’s loan would therefore be expressed as $ $1,341,139.80 due to borrower. This amount is subject of course to a determination of all other claims and defenses each or any of the parties may have.

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