They Own Nothing

Apparently, Judge Christopher A. Boyko of the Eastern Ohio United States District Court, on October 31, 2007 dismissed 14 Deutsche Bank-filed foreclosures. The original article can be viewed here. In the post, it states that the ruling was based on lack of standing for not owning/holding the mortgage loan at the time the lawsuits were filed.

[..]The Court's amended General Order No. 2006-16 requires Plaintiff (Deutsche Bank) to submit an affidavit along with the complaint, which identifies Plaintiff as the original mortgage holder, or as an assignee, trustee or successor-interest.

Apparently Deutsche bank submitted several affidavits that claim that Deutsche was in fact the owner of the mortgage note, 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 Deutsche Bank was in fact the "legal" note holder. [..]

The other items in the post, that will take some further investigation and dissemination of the facts, include the revelation that Deutsche Bank was not the originator of the notes, only the assignee under its securitization agreement, and is attempting to foreclose on these assigned notes without taking possession or proving factual assignment. Thus, these MBS or CDO pool holders own nothing. It's worth further investigation to confirm.

[..]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 nonjudicial foreclosure fraud where the securitized trusts are filing foreclosures when they never own/hold the mortgage loan at the commencement of the foreclosure.

That means that the 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 also means that many securitized trusts don't really, legally own these bad loans.

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.[..]

Level 3 Assets Are Surging

The FASB 157 rule is set to take effect on the brokerage houses, banks and financial institutions, in case you haven't noticed the latest 5 day drop in the Dow, S&P and Nasdaq. In today's Bloomberg article:

...Under the rule, Level 1 assets are those for which market prices are readily available. Level 2 holdings are valued based on ``observable inputs,'' or prices of similar assets traded in the market. Assets fall into the Level 3 category when there aren't even any observable inputs, and the firm has to rely on in-house models to calculate potential gains or losses... While those typically fall into the Level 3 category, assets such as leveraged loan commitments shift from one level to another depending on market conditions...

The Rule is specific about unobservable inputs (Level 3 category) and their intended use (FAS 157):

...The notion of unobservable inputs is intended to allow for situations in which there is little, if any, market activity for the asset or liability at the measurement date. In those situations, the reporting entity need not undertake all possible efforts to obtain information about market participant assumptions. However, the reporting entity must not ignore information about market participant assumptions that is reasonably available without undue cost and effort.

This Statement clarifies that market participant assumptions include assumptions about risk, for example, the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and/or the risk inherent in the inputs to the valuation technique. A fair value measurement should include an adjustment for risk if market participants would include one in pricing the related asset or liability, even if the adjustment is difficult to determine. Therefore, a measurement (for example, a “mark-to-model” measurement) that does not include an adjustment for risk would not represent a fair value measurement if market participants would include one in pricing the related asset or liability...

As these real estate assets are lumped into the Level 3 category on the financial institutions' books, the value of the write-downs are going to become larger as we've been seeing in the past week (Bloomberg):

...Goldman's Level 3 assets, for which market prices are so scarce that companies use internal models to gauge their value, accounted for 6.9 percent of the New York-based firm's $1.05 trillion total at the end of August, according to a filing with the U.S. Securities and Exchange Commission. Citigroup classified 5.7 percent of its assets as Level 3 on Sept. 30 and Merrill reported 2.5 percent.

Investors have grown wary of banks and brokerages with difficult-to-sell securities on their books, after profits at Citigroup and Merrill were crippled by at least $19 billion of writedowns, mostly from bonds backed by home loans to borrowers with poor credit histories. While Goldman officials say the firm won't report an ``extraordinary'' drop in its subprime holdings, investors remained skeptical, pushing its shares down 15 percent this month through yesterday in New York Stock Exchange composite trading.

``It's hard to believe Goldman is perfect,'' said Jon Fisher, who helps oversee $22 billion at Minneapolis-based Fifth Third Asset Management and sold his Goldman, Merrill and Morgan Stanley shares in the past 12 months. ``Their losses might be smaller than others, but that doesn't mean they don't have a problem.''...

It's the Fed's next move to determine if they're going to drop interest rates to curb these expanding portfolio losses on the Street, or keep interest rates in check with commodities to curb inflation on Main Street. In last week's post, Level 3 Assets Broken Down:

If we look at the major institutions and divide their Level III assets by their equity capital base, we arrive at the following calculations:

• Citigroup: Equity base: $128 billion, Level III: $135 billion. Ratio: 105%
• Goldman: $39 billion, Level III: $72 billion. Ratio: 185%.
• Morgan Stanley: $35 billion. Level III: $88 billion. Ratio: 251%.
• Bear Stearns: $13 billion. Level III: $20 billion. Ratio: 154%.
• Merrill Lynch: $42 billion. Level III: $16 billion. Ratio: 38%.

Again, whether this "matters" remains to be seen. What I will offer, with some degree of certainty, is that Hank, Ben and the rest of the den are fully aware of this dynamic. That's likely why we saw such aggressive actions from global central banks and, to that end, why the Treasury is pushing the super-conduit emergency bailout plan.

OFHEO Response Letter to NY AG - Cuomo

Yesterday's 300+ pt loss in the Dow was partially a response to New York Attorney General's demand from the OFHEO to investigate Fannie Mae and Freddie Mac and the loans with Washington Mutual..

Second, as part of a wider probe of the mortgage industry, the New York Attorney General Andrew Cuomo demanded that Fannie Mae (Charts) and Freddie Mac (Charts, Fortune 500) examine whether mortgages sold to them by Washington Mutual were for homes that had been appraised at an artificially high price.

The fear is that Fannie and Freddie might cut back on purchases and guarantees of loans from WaMu (Charts, Fortune 500). That would be a crippling blow for the bank, because the market for loans that Fannie and Freddie buy is the only part of the mortgage market that has substantial volume.

Today, I received the email link for the response letter from James Lockhart with the OFHEO:

...OFHEO shares your concerns about fraudelent appraisals and their impact on the mortgage markets and homeownership. Additionally, we have a core interest in the safety and soundness of the Enterprises (GSEs). These allegations of appraisal fraud are a serious matter to the Enterprises and OFHEO and require vigilant attention by all relevant government agencies. Active and early consultation is appropriate in such circumstances.

After reviewing these materials, I feel that you and your staff may not fully understand the differences between the mortgage-backed securities (MBS) issued by the GSEs and those issued by other entites. In particular, unlike the issuers of private label MBS, when Fannie Mae or Freddie Mac issues an MBS, they retain the credit risk on the underlying mortgages by guaranteeing repayment to MBS holders...