Fannie and Freddie Demand $6 Billion for Sale of “Faulty Mortgage Bonds”

Posted on October 21, 2013 by Neil Garfield

You read the news on one settlement after another, it sounds like the pound of flesh is being exacted from the culprits again and again. This time the FHFA, as owner of Fannie and Freddie, is going for a settlement with Bank of America for sale of “faulty mortgage bonds.” And most people sit back and think that justice is being done. It isn’t. $6 Billion is window dressing on a liability that is at least 100 times that amount. And stock analysts take comfort that the legal problems for the banks has basically been discounted already. It hasn’t.
For practitioners who defend mortgage foreclosures, you must dig a little deeper. The term “faulty mortgage bonds” is a euphemism. Look at the complaints there filed. When they are filed by agencies it means that after investigation they have arrived at the conclusion that something was. very wrong with the sale of mortgage bonds. That is an administrative finding that concluded there was at least probable cause for finding that the mortgage bonds were defective and potentially were criminal.
So what does “defective” or “faulty” mean? Neither the media nor the press releases from the agencies or the banks tell us what was wrong with the bonds. But if you look at the complaints of the agencies, they tell you what they mean. If you look at the investor lawsuits you see that they are alleging that the notes and mortgages were “unenforceable.” Both the agencies and the investors filed complaints alleging that the mortgage bonds were a farce, sham or in other words, a PONZI Scheme.
Why is that important to foreclosure defense? Digging deeper you will find what I have been reporting on this blog. The investors money was not used to fund the REMIC trusts. The unfunded trusts never had the money to buy or fund the origination of bonds. The notes and mortgages were never sold to the Trusts even though “assignments” were executed and shown in court. The assignments themselves were either backdated or violated the 90 day cutoff that under applicable law (the laws of the State of New York) are VOID and not voidable.
What to do? File Freedom of Information Act requests for the findings, allegations and names of investigators for the agency that were involved in the agency action. Take their deposition. Get documents. Find put what mortgages were looked at and which bond series were involved. Get a list of the mortgages and the bonds that were examined. Get the findings on each mortgage and each mortgage bond. Use the the investor allegations as lender admissions admissions in court — that the notes and mortgages are unenforceable.
There is a disconnect between what is going on at the top of the sham securitization chain and what went on in sham mortgage originations and sham sales of loans. They never happened in the real world, no matter how much paper you throw at it.
And that just doesn’t apply to mortgages in default — it applies to all mortgages, which is why all the mortgages that currently exist, and most of the deeds that show ownership of the property have clouded and probably “defective” and “faulty” titles. It’s clear logic that the government and the banks are seeking to avoid, to wit: that if the way in which the money was raised to fund the loans or purchase the loans were defective, then it follows that there are defects in the chain of title and the money trail that were obviously not disclosed, as per the requirements of TILA and Reg Z.
And when you keep digging in discovery you will find out that your client has some clear remedies to collect the profits and compensation paid to undisclosed recipients arising out of the closing of the “loan.” These are offsets to the amount claimed as due. If the loan was not funded by the Trust, then the false paper trail used by the banks in foreclosure is subject to successful attack. If the loans were in fact funded directly by the trust complying with the REMIC provisions of the Internal Revenue Code, then the payee on the note and the mortgagee on the mortgage would be the trust — or if the loan was actually purchased, the Trust would have issued money to the seller (something that never happened).
And lastly, for now, let us look at the capital structure of these banks. A substantial portion of their capital derives from assets in the form of mortgage bonds. This is the most blatant lie of all of them. No underwriter buys the securities issued by the company seeking financing through an offering to investors. It is an oxymoron. The whole purpose of the underwriter was to create securities that would be appealing to investors. The securities are only issued when you have a buyer for them, and then the investor is the owner of the security — in this case mortgage bonds.
The bonds are not issued to the investment bank as an asset of the investment bank. But they ARE issued to the investment bank in “street name.” That is merely to facilitate trading and delivery of certificates which in most cases in the mortgage bond market don’t exist. The issuance in street name does not mean the banks own the mortgage bonds any more than when you a stock and the title is issued in street name mean that you have loaned or gifted the investment to the investment bank.
If you follow the logic of the investment bank then the deposits of money by depository customers could be claimed as assets — without the required entry in the liabilities section of the balance sheet because every dollar on deposit is a liability to pay those monies on demand, which is why checking accounts are referred to as demand deposits.
Hence the “asset” has been entered on the investment bank balance sheet without the corresponding liability on the other side of their balance sheet. And THAT remains that under cover of Federal Reserve purchase of these bonds from the banks, who don’t own the bonds, the value of the bonds is 100 cents on the dollar and the owner is the bank — a living lies fundamental. When the illusion collapses, the banks are coming down with it. You can only go so far lying to the public and the investment community. Eventually the reality is these banks are underfunded, under capitalized and still being propped up by quantitative easing disguised as the purchase of mortgage bonds at the rate of $85 Billion per month.
We need to be preparing for the collapse of the illusion and get the other financial institutions — 7,000 community and regional banks and credit unions — ready to take on the changes caused by the absence of the so-called major banks who are really fictitious entities without a foundation related to economic reality. The backbone is already available — electronic funds transfer is as available to the smallest bank as it is to the largest. It is an outright lie that we need the TBTF banks. They have failed and cannot recover because of the enormity of the lies they told the world. It’s over.

Basic Pleading Defects Reveal Fatal Flaws in Foreclosures

by Neil Garfield

I have frequently made the point that if you want to protect your case on appeal, you must have a coherent and accurate record established in the court file or you will be shunted away on a technicality of some sort. The strategy I endorse, and the only one I use is aggressive litigation from the start. This alone will help remove your case from the pile of deadbeat borrowers who are just trying to string out the inevitable. In order to do that, you must reject the paradigm that the debt, loan, note, mortgage, default and notice of default are valid and that the sale was valid. In order to do that you need to do your research. It is my opinion that there is going to be a wave of malpractice suits against lawyers who told their clients "there is nothing you can do."

In most cases, this is not true. There are plenty of defenses, chief among them PAYMENT and denial that the contract was ever formed --- because neither the forecloser nor any of its predecessors loaned any money to the homeowner.

The flip side of the coin is also true. If the other side pleads improperly and fails to prove their case, they have a poor record for appeal and usually won't. Applying basic rules of law and pleading, it is apparent that most foreclosures are based on pleadings that don't have two essential ingredients. They don't allege that the borrower received money from the forecloser or its predecessor and they don't allege financial injury. The first defect leads to the conclusion that there can be no injury if the loan was not made by the forecloser or its predecessors. The second defect fails to invoke the court's jurisdiction.

It is well-settled in the law that in order to invoke the court's jurisdiction the Pleader must allege an injury that is recognizable by law. This allegation is required in every type of lawsuit. It is equally well-settled that the Pleader must allege a short plain statement of ultimate facts upon which relief could be granted. Further, it is well settled that the facts alleged cannot be formulaic conclusions. ---- a point that is always hammered by the Banks when confronted with a claim or counterclaim from homeowners. They are right. But what is good for the goose is good for the gander.

In the days before the dust cloud of sham securitizations a Bank had to allege it made a loan to the homeowner or that it had purchased a loan, or acquired it through merger from an entity that made the loan. Why then are Banks skipping this essential allegation? And why are the Banks avoiding any allegation that they suffered financial injury?

In the old days if a lawyer went to court on an uncontested Motion for Summary Judgment, if his pleading and affidavit did not allege and prove the existence of the loan he was sent packing until he could come back with his papers in order. In other words, in uncontested hearings where the homeowner did not even show up, the Judge denied or continued the Motion for Summary Judgment where the Bank failed to allege the loan and failed to allege financial injury.

Fast forward to 2013. Foreclosers routinely omit any allegation that the borrower received a loan from the entity foreclosing on the house. They routinely omit any allegation of financial injury. Instead, they merely assert they are the holder of the note and mortgage. This is important because allowing the Banks to avoid alleging the existence of the loan shifts the burden of pleading and proof onto the Homeowner, thus leaving the hapless homeowner with the burden of chasing a ghost instead of simply defending their property.

If the Banks were required to plead that a loan was given to the borrower and the lender in that transaction was the Foreclosers or that it had purchased the loan, the Bank has the burden of proving the existence of the loan. So why did Banks stop pleading the loan? And why did they stop pleading financial injury?

The answer is simple. They didn't make the loan and they don't own the loan. Wall Street Banks created a cloud in which they controlled all the appearances and illusions starting with conflicting paperwork given to the lenders (investors) and borrowers (homeowners). If lawyers fail to deny or at least state they are without knowledge as to the essential allegations of the complaint they are making a mistake --- one that will move the case inexorably toward foreclosure. If lawyers fail to seek dismissal of the case or vacation of the notice of sale (non-judicial states) on the basis that that the forecloser does not claim to be the lender or even represent the lender and that the lender does not allege financial injury they are making a mistake that will cost them in the trial court and on appeal.

Most lawyers are timid about taking this position despite the glaring absence of the allegations from the banks. They feel they will make fools of themselves by denying the existence of the debt, note, mortgage, and default when they know their client received a loan. Money was on the table. How can you deny that?

The answer is that if the money didn't come from the payee on the note, the mortgagee on the mortgage, the beneficiary under the deed of trust, then they cannot have any injury. And if they are not the actual owner of an unpaid account receivable, then they cannot submit a credit bid at eh auction. The banks know this. That is why they do a substitution of trustee in 100% of the cases brought to foreclosure in non-judicial states. Because if the original trustee was left there, the trustee might actually do his job --- and inquire where this new beneficiary came from and how they stand to lose any money through non payment by the homeowner.

And there is another reason why the banks avoid such issues like the plague. If they open up the issue of payments and money, then the inquiry in discovery will be about money, where it came from, where it went, who was paid, and when they were paid. If that cloud created by the illusion of securitization contains evidence of a principal agent relationship between the lenders (investors in mortgage bonds) and the third party intermediaries (investment banks and affiliates) then the money received for insurance, CDS, guarantees, and proceeds of sale to the Federal Reserve will reduce the accounts receivable and require a reduction in the accounts payable from the homeowners. And if that happens, the insurers and everyone else are going to be making claims based upon multiple payments on the same claim for a loss that the bank never incurred because it was always playing with investor money.