Obligations and Defaults

If you haven’t heard of John Courson,

I want to change that.

John is the President and CEO of the Mortgage Bankers Association.

by Daniel Edstrom

Mr. Courson believes that it is a moral imperative to keep your financial obligations.  If you haven’t seen the video here http://www.thedailyshow.com/, you should.

Now let’s look at the alleged obligations and who is actually obligated.  This will lead us down the road to defaults and who is actually in default.  If you have a mortgage, you by default are the obligor because you are the one with the “obligation” to repay.  The note you signed is not the obligation but is evidence of the obligation.  The obligation arose when money was advanced by a “creditor” and you accepted the money.  So even if the note doesn’t exist there is still an obligation.  A default occurs when you fail to meet the terms of your obligation.  In days gone by this would be the end of the story, but thanks to Wall Street financial engineering we haven’t even reached the beginning yet.

We now jump ahead in the story and skip all the details of securitization including when, if and how your loan was allegedly transferred into the mortgage loan pool (the securitization trust).  We will just assume for the sake of argument that your loan is in the pool and that everything is A-OK, which is what the big banks with the robo-signing blues are saying anyway.  The SEC Filings are the governing documents and because they are typically a thousand pages of legal gibberish, you have to understand what words mean, such as “obligation” and “default”.  Let’s start with default.  Here is what US Bank, N.A., which acts as Trustee on thousands of securitized trusts says a default is (from http://www.usbank.com/cgi_w/cfm/commercial_business/products_and_services/corp_trust/terms_ps.cfm#d):

Default: The issuer’s failure to pay principal or interest when due. Default may occur as a result of bankruptcy or failure to meet non-payment obligations, such as reporting requirements.

Are they talking about the borrower / homeowners?  No.  Here is the Wikipedia definition of an issuer:

Issuer is a legal entity that develops, registers and sells securities for the purpose of financing its operations.

Issuers may be domestic or foreign governments, corporations or investment trusts. Issuers are legally responsible for the obligations of the issue and for reporting financial conditions, material developments and any other operational activities as required by the regulations of their jurisdictions.

The most common types of securities issued are common and preferred stocks, bonds, notes, debentures, bills and derivatives

The default is defined as when an issuer fails to meet its obligations and an issuer is defined as being legally responsible for the obligations.  Notice that borrowers and homeowners are not involved.  We now go to the SEC filings which state that the trust (issuer) is the SOLE OBLIGOR to the investors.   Why does this matter?  Because homeowners believe they have an obligation to make payments to the lender/creditor.  The lender/creditor in securitized transactions is the party who will receive the payments (the trustee has bare legal title and is the penultimate receiver of payments from homeowners).  All other parties between the investors and the homeowner are intermediaries and have no stake in the transaction.  For instance the trustee allegedly has legal title, but this is considered bare legal title because the trustee is not the beneficial or equitable owner of the loans.

According to the SEC Filings, this is an event of default:

EVENTS OF DEFAULT

Events of default under the pooling and servicing agreement for a series of certificates will include for example:

• any failure by the servicer, if the servicer is a party to the pooling and servicing agreement, or master servicer to make a required deposit to the Certificate Account or, if the master servicer is the paying agent, to distribute to the holders of any class of certificates of that series any required payment which continues unremedied for five days after the giving of written notice of the failure to the master servicer by the trustee or the depositor, or to the master servicer, the depositor and the trustee by the holders of certificates of such class evidencing not less than 25% of the aggregate percentage interests constituting that class

• any failure by the master servicer or Certificate Administrator, as applicable, duly to observe or perform in any material respect any other of its covenants or agreements in the pooling and servicing agreement with respect to that series of certificates which continues unremedied for 30 days, or 15 days in the case of a failure to pay the premium for any insurance policy which is required to be maintained under the pooling and servicing agreement, after the giving of written notice of the failure to the master servicer or Certificate Administrator, as applicable, by the trustee or the depositor, or to the master servicer, the Certificate Administrator, the depositor and the trustee by the holders of any class of certificates of that series evidencing not less than 25%, or 33% in the case of a trust including mortgage securities, of the aggregate percentage interests constituting that class

Failure to deposit money into the certificate account and/or the failure to distribute to investors any required payments, these are events of default.  According to the SEC Filings, what money gets deposited into the certificate account and what are required payments?  Here are some quotes:

Payments on the Offered Certificates

Amount available for monthly distribution. On each distribution date, the trustee will make distributions to investors. The amounts available for distribution will include:

o   collections of monthly payments on the mortgage loans, including prepayments and other unscheduled collections; plus

o   advances for delinquent payments on the mortgage loans; minus

o   fees and expenses of the subservicers and the master servicer for the mortgage loans, including reimbursement for advances.

See “Description of the Certificates—Glossary of Terms–Available Distribution Amount” in this prospectus supplement.

Advances

With respect to any month, if the master servicer does not receive the full scheduled payment on a mortgage loan, the master servicer will advance its own funds to cover that shortfall. However, the master servicer will make an advance only if it determines that the advance will be recoverable from future payments or collections on that mortgage loan.

See “Description of the Certificates—Advances” in this prospectus supplement.

Advances

Prior to each distribution date, the master servicer is required to make Advances out of its own funds, advances made by a subservicer, or funds held in the Custodial Account, with respect to any distributions of principal and interest, net of the related servicing fees, that were due on the mortgage loans during the related due period and not received on the business day next preceding the related determination date.

Advances are required to be made only to the extent they are deemed by the master servicer to be recoverable from related late collections, Insurance Proceeds, or Liquidation Proceeds. The purpose of making Advances is to maintain a regular cash flow to the certificateholders, rather than to guarantee or insure against losses. The master servicer will not be required to make any Advances with respect to reductions in the amount of the scheduled monthly payments on the mortgage loans due to Debt Service Reductions or the application of the Relief Act or similar legislation or regulations. In connection with the failure by the related mortgagor to make a balloon payment, to the extent deemed recoverable, the master servicer will Advance an amount equal to the monthly payment for such balloon loan due prior to the balloon payment. Any failure by the master servicer to make an Advance as required under the pooling and servicing agreement will constitute an event of default under the pooling and servicing agreement, in which case the trustee, as successor master servicer, will be obligated to make any such Advance, in accordance with the terms of the pooling and servicing agreement.

Any failure by the master servicer to make an Advance as required under the pooling and servicing agreement will constitute an event of default under the pooling and servicing agreement, in which case the trustee, as successor master servicer, will be obligated to make any such Advance, in accordance with the terms of the pooling and servicing agreement.

Here is a summary of what we just learned:

1. The real creditors are the investors because they are the ultimate recipient of the borrower’s payments (the beneficiary)
2. The Trust is the sole obligor to the investors, meaning the trust is responsible for the payments to the investors
3. The servicers are responsible for paying principal and interest regardless of whether or not they receive principal and interest payments from the borrowers
4. The trustee is responsible as successor master servicer for paying principal and interest on the loans if the servicers do not provide these payments

So Wall Street turned the obligations and defaults around on their head in that nearly every one of intermediary parties is obligated to make payments, not just the borrower.

Am I crazy or could it be that somebody else is responsible for my payment?  Does this have anything to do with my obligation?  Take a look at the section in your note saying who is obligated (usually but not always section #9).

Did somebody forget to tell you that the servicer(s) and trustee are obligated the same as YOU?

I am intentionally leaving out Section #9 from the note because you should have read and understood your note and your security instrument.  You were kept in the dark on what was going on, until now that is.

Reinforcements have arrived and are taking up positions.