Lex, Lies and Losers

Mayer Soliman suggested that we consider throwing the SPV Trusts into receivership. Here was my response:

MSOLIMan: Forcing the trust into receivership might be a good idea — or even forcing into involuntary bankruptcy. But be careful here. While the Trustee maintains that a trust exists and that the trustee has powers over the subject matter (res) of the trust, my analysis indicates that by the very nature of a REMIC, whose last word is “Conduit” there are questions about the existence of this “Trust.”

First since the SPV is REMIC and a REMIC is a conduit and must be a conduit to maintain its non-tax status (thus preventing double taxation of the investors) Thus the SPV, often referred to as a Trust does not exist as a trust. By definition there can nothing in it. It serves as a distribution tool and the indenture of each and every bond purchased by investor contains language of conveyance in which it is the investor and not the SPV/Trust that will supposedly own the underlying mortgages and notes.

Adding to the conclusion is the fact that most indentures admit that the attached list of underlying mortgages and notes are not real but will replaced with real ones whenever the CDO manager gets around to it.

Adding to that confusion is the fact that the conveyance is from a party who does not own the loan in the first place and you end up with an empty “Trust.”

That leaves the possibility that a second trust was created equitably or legally by granting the Trustee powers to act on behalf of the owners of mortgage-backed securities. Careful reading of the indenture leads one first to conclude that some powers to represent the investors exist but then later, deep into the indenture, are restrictions on that power that transform the agency to a contingent agency. Thus no trust seems to exist and even the power of agency is contingent, based upon specific express written consent from the investors and their agreement to pay costs and fees and their agreement to hold the Trustee harmless.

The US Bank as trustee for the owners of mortgage backed securities series 2007-1234 is neither an agent nor a trustee. And there is no trust. The ONLY party, as I have repeatedly said, who can seek to enforce the obligation (probably without the help of the non-negotiable note executed by borrower and probably without the help of the mortgage or deed of trust) is the hedge fund or pension fund that bought the security. But none of them are doing so and there are some pretty good reasons for them doing so.

Filed under: CDO, Eviction, GTC | Honor, Investor, Mortgage, bubble, currency, foreclosure | Tagged: borrower, disclosure, foreclosure defense, foreclosure offense, fraud, Lender Liability, mortgage meltdown, predatory lending, securitization, trustee | Leave a Comment »
Mortgage Meltdown: The institutionalization of fraud and criminality
Posted on July 12, 2009 by livinglies

GRETCHEN MORGENSON of the New York Times Keeps Getting It Better and Better. In Today’s article she demonstrates tenacity, insight and combines it with her excellent writing skills. Send her some fan mail. What follows is one of my annotations on one of the many books, treatises and articles that I am constantly reading on behalf of all of us involved in the Homeowner’s War.

Rethinking Bank Regulation: Till Angels Govern, by James R. Garth, Gerard Caprio, and Ross Levine, Cambridge University Press, 2006
- [ ] “Crises are considered a manifestation of imperfect information coupled with externalities.” p.26

- [ ] Relevance: Withholding relevant information from both investor and “borrower” they concealed the true nature of the scheme, to wit: the use of the borrower’s signature as a vehicle for the issuance of an unregulated security under false pretenses. The externalities were the incentives causing “lenders” to jettison underwriting standards in favor of fee income without creating “risk” in an accounting sense but causing great damage to both real parties in interest — the borrower/issuer of an instrument intended to be conveyed as a negotiable instrument and sold as a security to unwary (or maybe notso unwary) investors. Failing to disclose the right to rescind under securities laws, rules and regulations — coupled with the necessary disclosures of the idenity andscope of activities of all the players and their”compensation” creates an absolute permanent right to rescind in addition to the TILA rescission.

The limitations on TILA rescission would not apply if in fact the transaction was substantively a securities transaction for all practical purposes. The transaction was a securities transaction under the single transaction theory — i.e., the primary purpose of getting the borrower’s signature was not to create an asset (i.e., a loan that would be repaid) but rather to fill in the blanks, coupled with plausible deniability for each player as to the true value and nature of the “asset” so that the investor would be misled into thinking that the
triple AAA rating and “insurance (without assets to secure the payment of liability) could be relied upon in purchasing a mortgage backed security. To be sure, it is doubtful that any sophisticated investment manager of a hedge fund, pension fund or sovereign wealth fund could not have have at least suspected the truth. But these were people whose sole economic incentive was to achieve bonuses through apparently outperforming the market — even if later it resulted in huge losses they would blame on external third parties.
July 12, 2009
Fair Game