Wall Street "Securitizing" Everything

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THE FOLLOWING ARTICLE IS NOT A LEGAL OPINION UPON WHICH YOU CAN RELY IN ANY INDIVIDUAL CASE. HIRE A LAWYER.

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see http://www.bloomberg.com/news/articles/2016-01-14/deutsche-bank-said-to-probe-sales-of-subprime-auto-securities

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I wouldn’t grade this quite up to “self-policing” but Deutsch is now counted as one of the banks that does not think it was so smart to take fees for being the fake trustee of an empty trust whose mortgage backed securities were being sold on multiple false pretenses to investors who assumed that if Deutsch was the Trustee they would perform due diligence. Nobody read the fine print. Nobody checked the money trail.

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Now investors and other co-venturers are placing themselves among those who were duped by the Wall Street myth of securitization. In plain language, the banks wrote up a trust or some other special purpose vehicle and wrote out the duties and even eliminated the authority of the Trustee to inquire, examine or audit the things being done in their name. At first the “Trustee” banks thought it was a great idea — no work, no duties, no risks, and expenses — just collect fees for being and doing nothing. Their name was being rented to give MBS and ABS the illusion of being solid investments. Anyone who has seen “The Big Short” or other similar movies and books knows that was never true. But it  also turns out in lawsuit after lawsuit that the Trustees DO have risk.

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And that makes for a mixed pot. In some cases investors are suing the Trustees, as are borrowers, for being part of a scheme where the money invested was to have been managed inside a Trust administered by, say Deutsch, even if the money was not in their Trust department and even if the “Trust” never even had a bank account. None of that ever happened. [And by the way this is the reason why the “new normal” in the mortgage marketplace consisted of intentional destruction of loan documents, fabrication of loan documents, forging assignments, robo-signing — and robo witnesses who when push comes to shove don’t know anything other than what is on the paper they are holding as “business records.”]

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In other cases the same “Trustees” that are being sued are trying to cover their tracks by suing the investment bank/Master Servicer for stealing the money or intentionally making bad loans devaluing the value of the imaginary portfolio that is actually in a giant slush bucket.

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So Deutsch here is being a little more proactive. The reason is that despite the restrictive contractual language in the pooling and servicing agreements, there is nonetheless statutory and common law duties for those who are named as Trustees, whether they like it or not and regardless of how much they are paid. If Deutsch is named as Trustee over the money the investor is about to invest, and knows its name is being used for that purpose, the PRIMARY responsibility lies with Deutsch to at least make sure that the Trust gets the money from the sale of MBS or ABS from that “Trust.” Secondly, the “Trustee” has a responsibility to peek under the hood despite the prohibitions in the Pooling and Servicing Agreement. We have gone far beyond the stage where Deutsch could plead that they had no knowledge of what was really going on.

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The announcement by Deutsch is a message to regulators that it is self-policing itself and will report on the unsafe or nonexistent loan portfolios. Some of you might remember that Deutsch already was a little proactive when it sent out a memo to all servicers saying that nobody should use the Deutsch name in foreclosure actions because they are not the Plaintiff. That was around 2010.  That didn’t stop people from using the Deutsch name as Trustee for the XYZ Trust — or as Trustee for the holders of certificates (which would be an entirely different trust than the one described in the pooling and servicing agreement — meaning that Deutsch never agreed to be THAT Trustee for the holders of certificates).

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At the end of the day, everyone knows everything. Whether the loan is for real estate, a car, a boat or even student loans, there are multiple defenses that can be raised — not because securitization is illegal, but because there was only the false pretense of securitization. The investors got nothing and the borrowers were being convinced they were getting free money. Next time someone says “just sign here”, think about it.