Sunday, November 29, 2009

Case Study for Testimony / Existing Clients (11/24/2009)

IndyMac INDX Mortgage Loan Trust 2006-AR13Sponsor, seller and servicer IndyMac INDX Mortgage Loan Trust 2006-AR13issuing entity
By M.Soliman

Foreclosure sales are typically public sales whereby a purchaser bids in excess of the lender's lien. Frequently the sale is not to a third party. This is because of the difficulty of determining the exact status of title to the property. One prohibiting factor as a barrier to liquidation by a lender is the requirement that the purchaser pay for the property in cash or by cashier's check.

A foreclosing lender should purchase the property from the trustee or referee for an amount equal to the principal amount outstanding under the loan, accrued and unpaid interest and the expenses of foreclosure. Thereafter, the lender will assume the burden of ownership, including obtaining hazard insurance and making repairs at its own expense necessary to render the property suitable for sale. The lender will commonly obtain the services of a real estate broker and pay the broker's commission in connection with the sale of the property. Depending upon market conditions, the ultimate proceeds of the sale of the property may not equal the lender’s investment in the property.
I know firsthand from experience attending trustees meeting of creditors how the Courts have imposed general equitable principles upon foreclosure. Its intention is assumed by designed to mitigate the legal consequences to the borrower of the borrower's defaults under the loan documents. The issue of whether federal or state constitutional provisions reflecting due process concerns for fair notice have forced the courts to require that borrowers under deeds of trust receive notice longer than that prescribed by statute.

Many of these cases have found that the sale by a trustee under a deed of trust does not involve sufficient state action to afford constitutional protection to the borrower. In other words the Courts have upheld the notice provisions as being reasonable.

When the beneficiary under a junior mortgage or deed of trust cures the default and reinstates or redeems by paying the full amount of the senior mortgage or deed of trust, the amount paid by the beneficiary becomes a part of the indebtedness secured by the junior mortgage or deed of trust. Subject to the California Civil Code under California law, the "Notice of Default (NOD)" commences subsequent to a notice being delivered to the borrowers. Thereafter a private sale of the real property securing a loan is anticipated to take place sometime 90 days thereafter. Before a foreclosure sale is actually conducted, the borrower may "cure" the default and thereby rescind the NOD.

On or about March 31 2006 the loan subject loan secured by real property located at 617 W 97th Street, Los Angeles, CA 90044 was settled and funded by a wire through the Federal Reserve causing funds to be deposited with the settlement agent through Investors title Company. Through the life of the loan and prior to January 2008, the borrowers herein maintained a “Paid as Agreed” account status with the lender’s servicing agent.
The lender and servicing agent are considered to be both one in the same according to public information published by the registrant for an SEC indentured trust investment. A dispute with the servicing agent and borrowers developed thereafter concerning the amount necessary to cure the NOD. Upon the servicing agents alleged determination of 60 days delinquency the borrowers account was ruled to be in “default” and subject to commencing a foreclosure action. A servicing function is to collect payments due from current borrowers both and those suffering delinquencies. A security holder is entitled to enforce a foreclosure sale afforded to the security after determining a default which is typically after 60 days delinquency. A delinquent borrower condition allows a lender to foreclose assuming it has met the states rules and procedures code. Otherwise, an improper application of the civil code in a lenders recovery effort can come under a courts scrutiny which can delay a sale for months and even years.
Upon the borrowers hitting a 60 days delinquency mark the servicing agent was obligated to assure the borrower’s right to “cure” the “arrearage”. California real property law provides for extra-judicial foreclosure of a Deed of Trust (a Deed of Trust is in effect a mortgage with a power of sale). Lenders enjoy an efficient process from start to finish totaling four months. Under California Civil Code ("CC") §§2924-2924(k) the statute offers broad framework for the oversight of non-judicial foreclosure sales. The statutory procedure maintains in a default by the borrower, the lender may declare a default. Upon such notice the lender may proceed with a non-judicial foreclosure sale. Under CCC§2924 / 2923.5 a lender must provide the delinquency with a meaningful workout option under recently passed legislation. From the 60 days delinquency mark and thereafter the servicing records offered by the lender are uncertain as to the servicing agent’s compliance with state civil code. Therefore it is unknown what rights the lender maintains in a foreclosure and trustees sale of the subject property for any alleged delinquency and upon denying the borrowers fundamental rights prior to conducting a Trustee’s sale.
(1) A right to cure the delinquent amount
(2) The right to a notice of intent to foreclose
(3) A right to a meaningful offer to a workout
A claim brought by the borrowers stems from plaintiff allegations made in a wrongful foreclosure claim under California’s Non-Judicial Deed of Trust Foreclosure Process. The matter will point out the necessity for a lender to pay attention. Maintaining timeliness is not just a smart idea but it ensures both appropriate and spontaneous intelligent approaches to managing delinquency. Where the courts have made known their tendencies to not see the lender as a fiduciary the servicing agent none the less maintains a higher level of responsibility to the borrower. The current administration in Washington has made it very clear through the office of the Secretary of the treasury the same is not true for the servicing agent.
Violations align with the lenders servicers’ refusal of the borrower’s tender of "cure" from the time of the NOD. Therein is a logical judicial argument for plaintiffs to bring a wrongful foreclosure lawsuit. Its mind boggling to say the least; where servicer and lenders may better be served to avoid the legal risks and costs that can arise from this ongoing and redundant predicament.

M.Soliman is an expert witness based in Los Angeles, California. Soliman has served as an analyst to the subprime sector and has personally underwritten, serviced and sold over one billion in closed whole loan transactions.

Tuesday, September 22, 2009

Sub Prime Lenders Held Out

As these sub prime lenders held out as primarily a conduit of prime quality mortgage loans, qualitatively different from competitors who engaged primarily in riskier lending. Specifically, lenders developed what was referred to unique business strategy, where it attempted to offer any product that was offered by any competitor. By the end of2006, lenders underwriting guidelines were broad and expansive and lenders were writing high risk weighted loans.

Even these expansive underwriting guidelines were not sufficient to support lenders desired growth, so lenders wrote an increasing number of loans as "exceptions" that failed to meet its already wide underwriting guidelines even though exception loans had a higher rate of default.

Lenders was more dependent than many of its competitors on selling loans it originated into the secondary mortgage market, an important fact it disclosed to investors. But management expectations were for the deteriorating quality of the loans that lenders was writing, and the poor performance over time of those loans, would ultimately curtail the company's ability to sell those loans in the secondary mortgage market.

Management was unconcerned for the increased risk that lenders were assuming. Thus, the defendants were aware, but failed to disclose, that lenders current business model was unsustainable.

Management was responsible for lenders fraudulent disclosures. From 2005 through 2007, these senior executives misled the market over and over again by falsely assuring investors that lenders was primarily a prime quality mortgage' lender which had avoided the excesses of its competitors.
Lenders forms 10-k for 2005, 2006, and 2007 falsely represented that lenders "manage[d] credit risk through credit policy, underwriting, quality control and surveillance activities," and the 2005 and 2006 forms 10-k falsely stated that lenders ensured its continuing access to the mortgage backed securities market by "consistently producing quality mortgages."
Lenders loan products and the risks to lenders in continuing to offer or .hold those loans, while at the same time management continued to make public statements obscuring lenders risk profile and attempting to differentiate it from other lenders.
Referring to a particularly profitable subprime product as "toxic," management had "no way" to predict the performance of its heralded product, the pay-option arm loan. Management believed that the risk was so high and that the secondary market had so mispriced pay-option arm loans that he repeatedly urged that lenders sell its entire portfolio of those loans.
Despite their awareness of, and the executive management severe concerns about, the increasing risk lenders was undertaking management hid these risks from the investing public at the expense of the consumer.
Defendants misled investors by failing to disclose substantial negative information regarding lenders loan products, including:

• The increasingly lax underwriting guidelines used by the company in 18 originating loans;

• The company's pursuit of "matching strategy" in which it matched the terms of any loan being offered in the market, even loans offered by primarily subprime originators;

• The high percentage of loans it originated that were outside its own already widened underwriting guidelines due to loans made as exceptions to 23 guidelines;

Lenders definition of “prime" loans included loans made to borrowers with fico scores well below any industry standard definition of prime credit quality; the high percentage of lenders subprime originations that had a loan to value ratio of 100%, for example, 62% in the second quarter of 28 2006; and LENDERS subprime loans had significant additional risk factors, beyond the subprime credit history of the borrower, associated with 2 increased default rates, including reduced documentation, stated income, 3 piggyback second liens, and loves in excess of 95%.

Management knew this negative information from numerous reports they regularly received and from emails and presentations prepared by the company’s chief credit risk officer. Defendants nevertheless hid this negative information from investors. During the course of this fraud, the executive management engaged in insider trading in lenders securities. The executive management established sales plans pursuant to rule 9 10b5-1 of the securities exchange act in October, November, and December 2006 while in possession of material, non-public information concerning lenders increasing credit risk and the risk that the poor expected performance of company originated loans would prevent lenders from continuing its business model of selling the majority of the-loans it originated into the secondary mortgage market.

From November 2006 through august 2007, management exercised over 5.1 million stock options and sold the underlying shares for total proceeds of16 over $139 million, pursuant to 10b5-1 plans adopted in late 2006 and amended in 17 early 2007.

Lenders financial corporation, a Delaware corporation, was a mortgage lender based in Calabasas, California. During all times relevant to this complaint, its stock was registered pursuant to section 12(b) of the exchange act and was listed on the New York stock exchange, and, until the demise of the pacific stock exchange, it was listed on that exchange as well.

NUVEEN, MERRILL, CONTIGROUP AND LENDERS OVER AUCTION RATE SECURITIES
Fraud claims against the defendant are nothing at all new or uncommon as of this week, investor sues
A retired securities lawyer and his wife have filed suit in the u. S. District court for the middle district of North Carolina over losses they sustained as a result of investing in preferred stock auction rate securities issued by Nuveen investments. Auction rate securities are debt instruments -- in this case preferred stock-- for which interest is regularly reset through a Dutch auction. Auction rate securities were once routinely marketed as safe, cash equivalents that were highly liquid, but the broker-dealers who sold them failed to disclose that liquidity was entirely dependent upon the success of the auction process, which was being artificially supported by the undisclosed participation of brokers bidding in auctions where they had an interest. The North Carolina suit alleges fraud and securities law violations at all levels, including claims against the issuers, the underwriters, and the broker-dealers who sold the securities and managed the auction process.

In May 2004, on behalf of investors in two investment funds controlled, managed and operated by lenders and advised by dc investment partners, life caresser filed lawsuits for alleged fraudulent conduct that resulted in an aggregate loss of hundreds of millions of dollars. The suits named as defendants lenders and its subsidiaries Alex brown management services and lenders securities, members of the funds' management committee, as well as dc investments partners and two of its principals. Among the plaintiff-investors were 70 high net worth individuals.

Judge Christopher a. Boyce of the eastern Ohio United States district court, on October 31, 2007 dismissed 14 lenders-filed foreclosures in a ruling based on lack of standing for not owning/holding the mortgage loan at the time the lawsuits were filed.

Judge boycott issued an order requiring the plaintiffs in a number of pending foreclosure cases to file a copy of the executed assignment demonstrating the plaintiff (lenders) was the holder and owner of the note and mortgage as of the date the complaint was filed, or the court would enter a dismissal.

The court’s amended general order no. 2006-16 requires the plaintiff (lenders) to submit an affidavit along with the complaint, which identifies them as the original mortgage holder, or as an assignee, trustee or successor-interest.

Apparently lenders submitted several affidavits that claim that they were in fact the owner of these mortgage notes, but none of these affidavits mention assignment or trust or successor interest.

Thus, the judge ruled that in every instance, these submissions create a “conflict” and they “do not satisfy” the burden of demonstrating at the time of filing the complaint that lenders was in fact the “legal” note holder.

While the decision is great for homeowners in distress (due to providing a new escape hatch out of foreclosure), it also represents a serious roadblock. If the toxic mortgage fiasco is to be cleaned up, there must be a simple means of identifying what banks own and what they do not own. This judgment is an example of the enormous task ahead in sorting out the mortgage mess.

Jacksonville area legal aid attorney, April charney, broke this news to us via email and made these comments in regards to the Ohio federal court ruling (emphasis ours):

“This court order is what I have been saying in my cases. This is rampant fraud on every court in America or no judicial foreclosure fraud where the securitized trusts are filing foreclosures when they never own/hold the mortgage loan at the commencement of the foreclosure.”

These loans are clearly in default at the time of any eventual transfer of the ownership of the mortgage loans to the trusts. This means that the loans are being held by the originating lenders after the alleged “sale” to the trust despite what it says per the pooling and servicing agreements and despite what the securities laws require. This means that many securitized trusts don’t really, legally own these bad loans. Regarding this mess charney further explains:

“In my cases, many of the trusts try to argue equitable assignment that predates the filing of the foreclosure, but a securitized trust cannot take an equitable assignment of a mortgage loan. It also means that the securitized trusts own nothing.”

This decision confirms that investors in the mortgage debacle may very well own nothing—not even the bad loans they funded! It seems their right to the cash flow from the underlying properties does not extend to ownership of the properties themselves; thus, clouding the recovery picture considerably.

Summarizing the problem charney concludes:

“This opinion once circulated and adopted by state and federal courts across the country, will stop the progress of foreclosures, at first in judicial foreclosure states, across America, dead in their tracks.”

We agree with the remarks charney makes pointing out that this decision will have major adverse implications for the prospects of an amicable financial workout for the various investor contingents in mortgage-backed securities (muses). Doubt is cast on where the full write-downs will eventually land, and this uncertainty can only be expected to further harm the market value of mobs and mobs-based synthetic securities, already in shambles purely due to rising underlying delinquencies.

Investors in these securities might have assumed—wrongly, it turns out—that they actually owned some “real estate” in these deals. Lenders remaining operation and employees have been transferred

More Investor Claims Focus on Sales of Preferred Stocks Issued by Financial Institutions
Investors are bringing an increasing number of legal claims against brokerage firms as a result of inappropriate sales of preferred stocks issued by financial institutions. For example, Merrill Lynch has been hit with an arbitration claim filed by an elderly couple that lost $650,000 in the preferred stocks of financial companies according to Sue Asti in her August 16 article in Investment News called “Merrill Lynch confronts arbitration claim involving financials’ preferred stock.” The claim, filed with FINRA, alleges that Merrill engaged in fraudulent sales practices, including self-dealing (more on that below).

Brokers and their firms have legal obligations to their customers not to recommend an investment or investment strategy that is unsuitable based on the client’s investment objectives, risk tolerance and financial situation, which brokers are required to know. In addition, they must fully disclose and not misrepresent all material facts and risks associated with any investment or investment strategy they recommend.

Based on those legal duties and obligations, brokers and their firms are required to diversify rather than concentrate most investors’ portfolios. A portfolio concentrated in one or a few financial sectors is unsuitable for most investors, and that is doubly true when the sectors themselves are inordinately risky.
By June 2007, there were articles in the financial press about Wall Street firms being hurt by the subprime crisis, two big hedge funds at Bear Stearns facing shut-down, how Bear Stearns itself was in trouble, and how Wall Street feared that Bear Stearns was just “the tip of the iceberg.” While it may have made sense for some risk-taking investors to own shares of financial stocks on the theory they were oversold and due for a rebound, it would defy common sense to concentrate the average retired couple’s portfolio in the financial sector, especially in and after June 2007.

Preferred shares are generally regarded as more “conservative” and brokers tend to recommend them for their retired clients seeking income, because they pay a higher dividend than non-preferred stocks. The preferred shares of financial companies had dividends that were higher than many other preferred. However, a concentration of financial preferred in mid-to-late 2007 was extremely risky and, therefore, unsuitable for most investors, and especially so for retired couples and those nearing retirement.
Why did Merrill and other firms recommend these securities? As the article points out, the claim alleges that Merrill was an underwriter of the preferred. The underwriter firms and their brokers make commissions on the sale of IPOs that are substantially higher than the commission paid on non-IPO shares. In addition, underwriters purchase the IPOs and, therefore, have inventories of shares to unload. By 2007, Merrill and other firms had reason not to continue to hold a large amount of securities of teetering Wall Street firms. If Merrill was conflicted in this way, recommending and selling such securities to unsuspecting clients would constitute self-dealing, and would violate a number of laws and FINRA rules, including, for example, FINRA Rule 2010, which states: “A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.”
Observers say that claims involving preferred stock of financial companies have doubled or even tripled this year. And that may be the tip of the iceberg. “I think people are still shell-shocked by what happened … {a] nod not a lot of people have come forward yet,” said one observer.
Investors who believe their portfolios may have been over-concentrated in the securities Wall Street firms and other financial companies may have compelling claims to recover their losses, and should consult with experienced counsel to evaluate their circumstances and determine their options.

REPRESENTATIONS AND WARRANTIES AS TO MORTGAGE LOANS PURSUANT TO SECTION 2.03(b)
Representations and warranties as to mortgage loans.

The Master Servicer makes the following representations and warranties, as of the date of the initial issuance of The Certificates, pursuant to Section 2.03(b) of the Pooling and Servicing Agreement (the "agreement") to which this Exhibit is attached. Capitalized terms not defined in this instrument shall have the meanings specified in the agreement.
1. Execution and Delivery of Mortgage Loans. All parties executing each Mortgage Loan had full legal capacity To execute the Mortgage Loan documents executed by it and each Mortgage Note, Mortgage and other agreement or Instrument executed and delivered by each Mortgagor in connection with its Mortgage Loan has been duly executed And delivered by such Mortgagor and constitutes the legal, valid and binding obligation of such Mortgagor. Eachortgage contains customary and enforceable provisions which render the rights and remedies of the holder Adequate to realize the benefits of the security against the related Mortgaged Property, including: (1) in the case of a Mortgage designated as a deed of trust, by trustee's sale and (2) otherwise by foreclosure, and there is no homesteadOr other exemption available to the Mortgagor that would interfere with such right to sell at a trustee's sale or right to Foreclosure.
2. Compliance with Laws, Rules and Regulations. The Mortgagor’s application for each Mortgage Loan was
Taken and processed, and each Mortgage Loan was closed and made, in compliance with all requirements of any
Federal, state or local law or regulation applicable to such Mortgage Loan, including, without limitation, the Federal
Real Estate Settlement Procedures Act of 1974, the Consumer Credit Protection Act and Regulation Z promulgated Under it, the Fair Credit Reporting Act, the Equal Credit Opportunity Act and Regulation B promulgated under it,And all other laws, rules and regulations that impose requirements, restrictions or conditions on mortgage loan Companies, lenders, financial institutions or other persons in connection with the lending of money or the extension Of credit. None of the terms of the Mortgage Note or Mortgage or other documents evidencing any Mortgage Loan, Executed by the Mortgagor n connection with such Mortgage Loan violates or conflicts with any applicable usury Laws or governmental regulations or any other laws, rules or regulations that prohibit, restrict or impose limitations On any charge, fees or costs which the Mortgagor has paid or is or may be required to pay in connection with the Mortgage Loan, and the consummation of the transactions contemplated by the agreement, including, without limitation, the receipt of interest by Certificate holders, will not result in the violation of any of such laws.

3. Mortgage Constitutes First Lien. Each Mortgage is a valid, subsisting and enforceable first lien on the related Mortgaged Property including all improvements located on or affixed to it, and all additions,
alterations and replacements made at any time with respect to the foregoing and the Mortgagor holds good and marketable title to The Mortgaged Property subject only to exceptions permitted to be contained in title insurance policies under the Program Guide.

4. Compliance with Requirements under the Program Guide. Each Mortgage Loan and the related Mortgage
Property comply with all requirements under the Program Guide (as in effect on the day the Mortgage Loan was Submitted for review by Residential Funding or any of its affiliates) including, among other things, (a) requirements As to the types of residential property which may secure Mortgage Loans, (b) requirements that certain policies of Insurance, such as hazard insurance, title insurance (or, in Iowa, an attorney's opinion) and mortgage insurance be in effect in specified amounts and with certain qualified insurers, (c) requirements that the Mortgaged Property be appraised by an appraiser meeting certain minimum qualifications and that such appraisal show a minimum loan-to- value ratio, (d) requirements that the Mortgage Loan meet specified criteria as to amount, amortization, monthly payments and type, (e) requirements that Mortgaged Property be surveyed and (f) requirements for the creation of escrows for completion, taxes, insurance, Buy down Funds and other amounts.