11 October 2010 By Ellen Brown Amid a snowballing foreclosure
fraud crisis, President Obama today blocked
legislation that critics say could have made it more
difficult for homeowners to challenge foreclosure
proceedings against them. The bill, titled The Interstate
Recognition of Notarizations Act of 2009, passed the
Senate with unanimous consent and with no scrutiny by
the DC media. In a maneuver known as a "pocket veto,"
President Obama indirectly vetoed the legislation by
declining to sign the bill passed by Congress while
legislators are on recess. The swift passage and the
President's subsequent veto of this bill come on the
heels of an announcement that Wall Street banks are
voluntarily suspending foreclosure proceedings in 23
states. By most reports, it would
appear that the voluntary suspension of foreclosures
is underway to review simple, careless procedural
errors. Errors which the conscientious banks are
hastening to correct. Even Gretchen Morgenson in the
New York Times characterizes the problem as
"flawed paperwork." But those errors go far deeper
than mere sloppiness. They are concealing a massive
fraud. They cannot be corrected
with legitimate paperwork, and that was the reason the
servicers had to hire "foreclosure mills" to fabricate
the documents. These errors involve perjury
and forgery -- fabricating documents that never
existed and swearing to the accuracy of facts not
known. Karl Denninger at MarketTicker
is calling it "Foreclosuregate." These problems cannot be swept
under the rug as mere technicalities. They go to the
heart of the securitization process itself. The
snowball has just started to roll. Yves Smith of Naked
Capitalism has uncovered a price list from a
company called DocX that specializes in "document
recovery solutions." DocX is the technology platform
used by Lender Processing Services to manage a
national network of foreclosure mills. The price list
includes such things as "Create Missing Intervening
Assignment," $35; "Cure Defective Assignment," $12.95;
"Recreate Entire Collateral File," $95. Notes Smith: [C]reating . . . means
fabricating documents out of whole cloth, and look at
the extent of the offerings. The collateral file is
ALL the documents the trustee (or the custodian as an
agent of the trustee) needs to have pursuant to its
obligations under the pooling and servicing agreement
on behalf of the mortgage backed security holder. This
means most importantly the original of the note (the
borrower IOU), copies of the mortgage (the lien on the
property), the securitization agreement, and title
insurance. How do you recreate the
original note if you don't have it? And all for a flat
fee, regardless of the particular facts or the
supposed difficulty of digging them up. All of the mortgages in
question were "securitized" – turned into Mortgage
Backed Securities (MBS) and sold off to investors. MBS
are typically pooled through a type of "special
purpose vehicle" called a Real Estate Mortgage
Investment Conduit or "REMIC", which has strict
requirements defined under the U.S. Internal Revenue
Code (the Tax Reform Act of 1986). The REMIC holds the
mortgages in trust and issues securities representing
an undivided interest in them. Denninger explains that
mortgages are pooled into REMIC Trusts as a tax
avoidance measure, and that to qualify, the properties
must be properly conveyed to the trustee of the REMIC
in the year the MBS is set up, with all the paperwork
necessary to show a complete chain of title. For some
reason, however, that was not done; and there is no
legitimate way to create those conveyances now,
because the time limit allowed under the Tax Code has
passed. The question is, why weren't
they done properly in the first place? Was it just
haste and sloppiness as alleged? Or was there some
reason that these mortgages could NOT be assigned when
the MBS were formed? Denninger argues that it would
not have been difficult to do it right from the
beginning. His theory is that documents were "lost" to
avoid an audit, which would have revealed to investors
that they had been sold a bill of goods -- a package
of toxic subprime loans very prone to default. Here is another possible
explanation, constructed from an illuminating CNBC
clip dated June 29, 2007. In it, Steve Liesman
describes how Wall Street turned bundles of subprime
mortgages into triple-A investments, using the device
called "tranches." It's easier to follow if you watch
the clip (here), but this is an excerpt: How do you create a subprime
derivative? . . . You take a bunch of mortgages . . .
and put them into one big thing. We call it a Mortgage
Backed Security. Say it's $50 million worth. . . . Now
you take a bunch of these Mortgage Backed Securities
and you put them into one very big thing. . . . The
one thing about all these guys here [in the one very
big thing] is that they're all subprime borrowers,
their credit is bad or there's something about them
that doesn't make it prime. . . . Watch, we're going to make
some triple A paper out of this. . . Now we have a $1
billion vehicle here. We're going to slice it up into
five different pieces. Call them tranches. . . . The
key is, they're not divided by "Jane's is here" and
"Joe's is here." Jane is actually in all five
pieces here. Because what we're doing is, the BBB
tranche, they're going to take the first losses for
whoever is in the pool, all the way up to about 8% of
the losses. What we're saying is, you've got losses in
the thing, I'm going to take them and in return you're
going to pay me a relatively high interest rate. . . .
All the way up to triple A, where 24% of the losses
are below that. Twenty-four percent have to go bad
before they see any losses. Here's the magic as far as
Wall Street's concerned. We have taken subprime paper
and created GE quality paper out of it. We have a
triple A tranche here. The top tranche is triple A
because it includes the mortgages that did NOT
default; but no one could know which those were until
the defaults occurred, when the defaulting mortgages
got assigned to the lower tranches and foreclosure
went forward. That could explain why the mortgages
could not be assigned to the proper group of investors
immediately: the homes only fell into their designated
tranches when they went into default. The clever
designers of these vehicles tried to have it both ways
by conveying the properties to an electronic dummy
conduit called MERS (an acronym for Mortgage
Electronic Registration Systems), which would hold
them in the meantime. MERS would then assign them to
the proper tranche as the defaults occurred. But the
rating agencies required that the conduit be
"bankruptcy remote," which meant it could hold title
to nothing; and courts have started to take notice of
this defect. They are concluding that if MERS owns
nothing, it can assign nothing, and the chain of title
has been irretrievably broken. As foreclosure expert
Neil Garfield traces these developments: First they said it was MERS
who was the lender. That clearly didn't work because
MERS lent nothing, collected nothing and never had
anything to do with the cash involved in the
transaction. Then they started with the servicers who
essentially met with the same problem. Then they got
cute and produced either the actual note, a copy of
the note or a forged note, or an assignment or a
fabricated assignment from a party who at best had
dubious rights to ownership of the loan to another
party who had equally dubious rights, neither of whom
parted with any cash to fund either the loan or the
transfer of the obligation. . . . Now the pretender
lenders have come up with the idea that the "Trust" is
the owner of the loan . . . even though it is just a
nominee (just like MERS) . . . . They can't have it
both ways. My answer is really simple.
The lender/creditor is the one who advanced cash to
the borrower. . . . The use of nominees or straw men
doesn't mean they can be considered principals in the
transaction any more than your depository bank is a
principal to a transaction in which you buy and pay
for something with a check. Garfield's proposed solution is
for the borrowers to track down the real lenders --
the investors. He says: [I] f you meet your Lender
(investor), you can restructure the loan yourselves
and then jointly go after the pretender lenders for
all the money they received and didn't disclose as
"agent." Karl Denninger concurs. He
writes: Ellen Brown is an attorney
and the author of eleven books. In
Web of Debt: The Shocking Truth About Our Money
System and How We Can Break Free, she shows
how the Federal Reserve and "the money trust" have
usurped the power to create money from the people
themselves, and how we the people can get it back. Her
websites are
webofdebt.com,
ellenbrown.com, and
public-banking.com.
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