By Daniel Edstrom
DTC Systems, Inc.
We all see what we want to see. But when others control the conversation, it is easy to miss the point. As a regulator the Office of the Comptroller of the Currency should be taking the lead and controlling the conversation, but in reality, they have been bridled and are being led around by the nose. Conspiciously absent are numerous issues they as a regulator have the responsibility of dealing with. This article is timely in response to an article by Neil F. Garfield (http://livinglies.wordpress.com/2011/12/27/the-big-lie-banks-did-nothing-illegal/), which is a response to Yves Smith of Naked Capitalism article (http://www.nakedcapitalism.com/2011/12/more-msm-criticism-of-obama-nothing-illegal-here-move-along-stance-on-foreclosure-fraud.html), which is a response to a Reuters article (http://www.reuters.com/article/2011/12/22/us-foreclosures-idUSTRE7BL0MC20111222). But I found none of these articles until I was finished writing this post. Take the following random and critical issues:
- Are the loans in the pool? Were the loans ever in the pool? Does the pool exist? Did the pool perfect interest in any of the loans? This issue is very political and the OCC in our opinion will never address this issue or look into this.
- What loans are in default? Can a loan be in default? What comes first, the default or the loss?
- Are there any compliance issues?
Here we will only take a look at one or two compliance issues to show massive failures in all stages of regulation and compliance. We will make no assumptions that the loans are in or not in the pools, only that the claim is being made that the loans are in the pool and as such, certain requirements must be met in regards to those alleged pool assets.
Requirements and Obligations
Nearly all, if not in fact all REMIC pools require that the servicers pay required installments of principal and interest due under the loan obligation. This requirement exists whether or not the servicer receives the required installment of principal and interest from the maker. The servicer keeps track of all accounting between the maker and the servicer. Additionally, and usually without any knowledge of the maker, the servicer is also responsible for keeping track of the accounting to the master servicer or trustee. While it can be more complicated, we will leave it at this level for this discussion. Besides these two accountings (otherwise known as two sets of books, the servicers are typically required to keep a 3rd set of books. the Pooling and Servicing Agreement usually states something similar to the following:
The servicer will keep track of advances on a loan-by-loan basis in a separate accounting
So now we have three sets of books, or three separate accountings. This works out rather conveniently for the servicers because they can produce an accurate accounting based on whoever is asking. For instance if the homeowner asks for an accounting, either directly, through an attorney or in a judicial proceeding, the servicer turns over the accounting of their interactions with the homeowner. This is usually accompanied with an affidavit from somebody who is familiar with how the servicer keeps records in relation to the homeowner. Surprisingly enough this person has no knowledge of the existence of the other sets of books or the other departments which maintain this information.
There are guidelines and laws regarding servicer activities in regard to what the servicer does. We will come back to this later.
Keeping track of the (alleged) assets in the pool is typically determined by the governing documents, as well as guidelines established by those creating these complex securitizations. For instance, Fannie Mae and Freddie Mac both have published guidelines, as does Ginnie Mae. GMAC / Ally has published guidelines for public securitizations, as do most, if not all others.
The issue is that it seems there is no way to connect these accountings together to come up with a unified accounting that can be relied on by all parties. While this should be done in all cases, this issue has been systematically ignored by those involved with securitization, including major auditing firms which purport to “audit” these transactions. In actuality, they seem to be ignoring GAAP (Generally Accepted Accounting Principles) and GAAS (Generally Accepted Accounting Standards).
Coming full circle we will now listed some SEC (Securities and Exchange Commission) and USAP (Uniform Single Attestation Program) requirements. Consider the following from SEC Regulation AB Item 1122 Servicing Criteria and USAP Minimum Servicing Standards. Specifically look at the following regulations or standards:
- Sec. § (d)(3)(i)(D) / USAP Standard # IV.1
- Sec. § (d)(4)(iv) / USAP Standards # II.2 – II.4
- Sec. § (d)(4)(v) / USAP Standard # V.1
- Sec. § (d)(4)(xiii) / USAP Standard # III.2
|Sec. §||Regulation AB – 1122 Description||Standard #||USAP Standard
|(d)(2)(iii)||Advances of funds or guarantees regarding collections, cash flows or distributions, and any interest or other fees charged for such advances, are made, reviewed and approved as specified in the transaction agreements.||I.2||Funds of the servicing
entity shall be advanced
in cases where there is an overdraft in an investor’s
or a mortgagor’s account.
|(d)(3)(i)||Reports to investors, including those to be filed with the Commission, are maintained in accordance with the transaction agreements and applicable Commission requirements. Specifically, such reports:|
|(A) Are prepared in accordance with timeframes and other terms set forth in the transaction agreements;|
|(B) Provide information calculated in accordance with the terms specified in the transaction agreements;|
|(C) Are filed with the Commission as required by its rules and regulations; and|
|(D) Agree with investors’ or the trustee’s records as to the total unpaid principal balance and number of pool assets serviced by the servicer.||IV.1||The servicing entity’s
investor reports shall
agree with, or reconcile
to, investors’ records on
a monthly basis as to
the total unpaid principal balance and number of
loan serviced by the
|(d)(4)(i)||Collateral or security on pool assets is maintained as required by the transaction agreements or related pool asset documents.|
|(d)(4)(iii)||Any additions, removals or substitutions to the asset pool are made, reviewed and approved in accordance with any conditions or requirements in the transaction agreements.|
|(d)(4)(iv)||Payments on pool assets, including any payoffs, made in accordance with the related pool asset documents are posted to the applicable servicer’s obligor records maintained no more than two business days after receipt, or such other number of days specified in the transaction agreements, and allocated to principal, interest or other items (e.g., escrow) in accordance with the related pool asset documents.||II.2 – II.4||II. 2 Mortgage payments
made in accordance with
the mortgagor’s loan
documents shall be
posted to the applicable mortgagor records
within two business days
II.3 Mortgage payments
shall be allocated to
insurance, taxes, or
other escrow items in
accordance with the
II.4 Mortgage payments identified as loan
payoffs shall be allocated
in accordance with the
|(d)(4)(v)||The servicer’s records regarding the pool assets agree with the servicer’s records with respect to an obligor’s unpaid principal balance.||V.1||The servicing entity’s
mortgage loan records
shall agree with, or
reconcile to, the records
of mortgagors with
respect to the unpaid
principal balance on a
|(d)(4)(xii)||Any late payment penalties in connection with any payment to be made on behalf of an obligor are paid from the servicer’s funds and not charged to the obligor, unless the late payment was due to the obligor’s error or omission.||III.4||Any late payment
penalties paid in
conjunction with the
payment of any tax bill
or insurance premium
notice shall be paid
from the servicing
entity’s funds and not
charged to the
mortgagor, unless the
late payment was due
to the mortgagor’s error
|(d)(4)(xiii)||Disbursements made on behalf of an obligor are posted within two business days to the obligor’s records maintained by the servicer, or such other number of days specified in the transaction agreements.||III.2||Disbursements made on
behalf of a mortgagor or investor shall be posted
within two business days
to the mortgagor’s or
maintained by the
Summing it up all in one place, the above regulations state the following:
- Reports to investors, including those to be filed with the Commission, are maintained in accordance with the transaction agreements and applicable Commission requirements. Specifically, such reports:
- Agree with investors’ or the trustee’s records as to the total unpaid principal balance and number of pool assets serviced by the servicer.
- Payments on pool assets, including any payoffs, made in accordance with the related pool asset documents are posted to the applicable servicer’s obligor records maintained no more than two business days after receipt, or such other number of days specified in the transaction agreements, and allocated to principal, interest or other items (e.g., escrow) in accordance with the related pool asset documents.
- The servicer’s records regarding the pool assets agree with the servicer’s records with respect to an obligor’s unpaid principal balance.
- Disbursements made on behalf of an obligor are posted within two business days to the obligor’s records maintained by the servicer, or such other number of days specified in the transaction agreements.
There is a huge difference between a performing asset and a non-performing asset. If they want to show their capital is intact and the assets look good, they showcase the set of books showing the loans are current and the loans should be kept at value. If they want to show how the loans are delinquent and homeowners are not making the payments, they produce another set of books.
In court, or in a non-judicial proceeding, it does not make sense to show the set of books used for the investors, so the servicers produce the books showing only the accounting between the homeowner and the servicer.
In both cases above, the transaction parties are concealing, failing to disclose and misrepresenting the true nature of the transaction.
What entitles the homeowner to the full accounting? Read the note, read the security instrument and read the Uniform Commercial Code.
- Promissory Note: Obligations of Persons Under this Note
- Uniform Commercial Code: 3-602
Who is the creditor? Is the servicer the creditor? Does the servicer have power of sale? Is the maker’s obligation discharged upon payment to the servicer? Is the maker’s obligation discharged upon payment to the trust or trustee? Is the maker’s obligation discharged upon payment to the investors who purchased securities from the trust?
What obligations do an endorser, guaranty or surety have? Does a payment by an endorser, guaranty or surety discharge the obligation to make the payment?
If a surety meets the obligation to make a payment, can the maker or an endorser be forced to meet the same obligation? If a maker meets the obligation to make a payment can the guaranty be forced to meet the same obligation?
This same issue keeps rearing its head everywhere I turn – all of the loans were in default that were foreclosed on. So even though we had minor irregularities, or even major irregularities, the borrowers did not deserve to keep the houses. I maintain that this is the biggest lie of all. While it is true that some of these loans may have been truly in default, the vast majority of them were performing as bargained for and expected by the homeowner and as drafted by the other side. The servicers bargained for and willingly acquired the servicing rights and the obligations and requirements required by their position. This includes the obligation to meet SEC Regulation AB Item 1122 Servicing Criteria and USAP Minimum Servicing Standards.