The Definition of Dichotomy

There have been times in my life when certain words gained meaning all of a sudden.  Like, I knew the word before and even its definition, but then I reached a point in my life where I really knew what a certain word meant.  I’ll give you an example… and I’ve said this before… I never really understood anger, joy, fear or sadness until I had my daughter.  I mean, I knew what the words meant before she was born, of course, but I then again I didn’t really.

Well, yesterday I had another one of those types of experiences… no… my wife and I didn’t have another baby… actually I think the experience had been building inside and around me and yesterday it all came colliding together… and all over a sudden I understood the definition of the word, “dichotomy.”

It’s a big word… dichotomy… it means… oh, I don’t know, the word “contrast” comes to mind.  It’s sort of the separation of irreconcilable things.  A contradiction is perhaps the better way to define it.

I’ll tell you this though… when you run into a true dichotomy you’ll know it, that’s for darn sure.  It sort of leaves you sitting there staring at the wall unsure of what to do next.  The idea of screaming from the top of the tallest hill in town seems potentially gratifying at such a moment.

I’ll share my experience with you now, and see what you think about the whole… well… the dichotomy, I suppose.  Here goes… just as it happened to me.


“We are now well into the fourth year of the foreclosure crisis, and there is no end in sight.  Since mid-2007 around eight million homes entered foreclosure, and over three million borrowers lost their homes in foreclosure.  As of June 30, 2010, the Mortgage Bankers Association reported that 4.57% of 1-4 family residential mortgage loans (roughly 2.5 million loans) were currently in the foreclosure, process a rate more than quadruple historical averages.  Additionally, 9.85% of mortgages (roughly 5 million loans) were at least a month delinquent.”

Who the heck said that?  He sounds like me, don’t you think?  I feel like I might be quoting myself, which is weird.

Actually, I’m flattering myself because those are the words found in Georgetown Law Professor Adam Levitin’s written testimony in provided to House Financial Services Committee, Subcommittee on Housing and Community Opportunity on November 18, 2010.  The topics being covered by his testimony:

“Robo-Singing, Chain of Title, Loss Mitigation, and Other Issues in Mortgage Servicing”

“To this sad state of affairs, there now come a variety of additional problems:  faulty foreclosures due to irregularities ranging from procedural defects (including, but not limited to robo-signing) to outright counterfeiting of documents; predatory servicing practices that precipitate borrower defaults and then overcharge for foreclosure services that are ultimately paid for by investors; and questions about the validity of transfers in private-label mortgage securitizations.”

The chain of title problems are highly technical, but they pose a potential systemic risk to the US economy.  If mortgages were not properly transferred in the securitization process, then mortgage-backed securities would in fact not be backed by any mortgages whatsoever.

The chain of title concerns stem from transactions that make assumptions about the resolution of unsettled law.  If those legal issues are resolved differently, then there would be a failure of the transfer of mortgages into securitization trusts, which would cloud title to nearly every property in the United States and would create contract rescission/put-back liabilities in the trillions of dollars, greatly exceeding the capital of the US’s major financial institutions.

These problems are very serious.  At best they present problems of fraud on the court, clouded title to properties coming out of foreclosure, and delay in foreclosures that will increase the shadow housing inventory and drive down home prices.  At worst, they represent a systemic risk that would bring the US financial system back to the dark days of the fall of 2008.

Okay, so you know what Professor Levitin is talking about there, right?  He’s saying that we are in deep Kim chi, that’s what he’s saying.  He’s saying that the loans were not properly transferred into the trusts that are now trying to foreclose on homes… and apparently, they can’t seem to come up with anything that says they own the loan… but they want to foreclose anyway.

He’s also saying that when the banksters figured out that they could come up the proper documents to conduct the foreclosure legally, they decided that the path to take… the best way to solve the problem… the optimal answer to this dilemma was… to commit forgery and fraud.

Yes, it’s true.  The banksters, unable to establish that they complied with just about ANY of the laws governing the transfer of property, much less the requirements as set for in a Pooling and Servicing Agreement, came up with a plan.  Let’s forge them and see if we can’t defraud the court.  Yeah, great idea… run with it.

From there it’s almost like they were barely trying, as if “we” are so stupid that you can fool us just as you might a three year-old.  Just pick a short name and have everybody sign it.  Yeah, Linda Green’s fine, I was thinking, Don Ho, but you’re right, Linda Green is better.  Yep, just sign it over and over, they’ll never notice… silly humans.

I’ve said it before and I’ll say it again… nobody chooses “robo-signing” hundreds of thousands of affidavits and various other documents off of a list of other viable alternative solutions to your problem.  When you find yourself checking “YES” on robo-signing… when you’re a bank that chooses to open a fraud and forgery department… well, something has left the building, let’s say that.

So, a lot of people have been talking about this for some time now, so what’s new?

Well, both The New York Times and the Huffington Post are reporting on state investigations into the practices surrounding the packaging of mortgage-backed securities and their brethren.  And even though the bank’s response has been basically flowers in springtime, the New York and Delaware Attorneys General say they’re quite serious.

He’s saying that this could be a game changer depending on how this is handled.  We could explode… or maybe implode.  I’m not entirely sure.  But it’s bad.  The kind of thing you wouldn’t want to have to live through twice.

So, clicking around yesterday, at Huff-Po it was Shahien Nasiripour with the story… still can’t pronounce it and for that I am deeply ashamed, but it is to be expected.  He wrote about the New York Attorney General “launching” an “investigation into mortgage securitization.”  Heady stuff, I’m sure you’d agree.

“New York Attorney General Eric Schneiderman has targeted Bank of America, the biggest U.S. bank by assets, in a new probe that questions the validity of potentially thousands of mortgage securities and their associated foreclosures, two people familiar with the matter said.

The investigation, which began quietly in recent weeks, is part of a larger inquiry that is scrutinizing whether mortgage companies and Wall Street firms took the necessary steps under New York state law when creating mortgage-backed securities, these people said, who requested anonymity because they weren’t authorized to speak publicly about the probe.

Court testimony and independent studies have raised questions over whether banks and other financial firms passed along the required documents to trusts, the independent entities that oversee securities for investors. In some cases where trusts moved to seize borrowers’ homes, judges have determined the trusts lacked legal standing due to faulty documentation.

The inquiry could prove explosive: Wall Street’s great mortgage securitization machine took millions of home loans and bundled them into securities for sale to investors. If the legal steps that guide securitization — like taking mortgage documents from one party to another, a critical step under New York law — were not undertaken, then the investors who bought the bundled loans could force the companies to buy them back, compelling them to eat enormous losses.

New York state investigators could also find that those securities aren’t valid financial instruments at all and take action under state law.

But an investigation into whether the securities these companies created are even valid represents a new front in his ongoing probe and raises fresh questions into the potential liability sellers of these mortgage instruments face.

“If mortgages were not properly transferred in the securitization process, then mortgage-backed securities would in fact not be backed by any mortgages whatsoever,” says Adam J. Levitin.

Levitin also said that the problem could “cloud title to nearly every property in the United States” and could lead to trillions of dollars in losses.”

Shahien’s “exclusive” soon had company, Gretchen Morgenson of The New York Times also ran a story saying that both the Attorneys General from New York and Delaware were conducting such an investigation into the practices surrounding and involved in mortgage-backed securities.  And if you’re wondering what’s the big deal about New York and Delaware, well… I’ll tell you…

“The trusts were governed by the laws of the states in which they were set up. Roughly 80 percent of the trusts are governed by New York law with the rest by Delaware law.”

See… I told you.  So, here’s how the Times described the same topic…

The investigation is being led by Eric T. Schneiderman, the attorney general of New York, who has teamed with Joseph R. Biden III, his counterpart from Delaware. Their effort centers on the back end of the mortgage assembly lines — where big banks serve as trustees overseeing the securities for investors — according to two people briefed on the inquiry but who were not authorized to speak publicly about it.

The attorneys general have requested information from Bank of New York Mellon and Deutsche Bank, the two largest firms acting as trustees. Trustee banks have not been a focus of other investigations because they are administrators of the securities and did not originate the loans or service them. But as administrators they were required to ensure that the documentation was proper and complete.

“A complex process that produced hundreds of billions of dollars in securities during the lending boom, the issuance of mortgage securities began with home loans, which were then bundled into investments and sold to pension funds, mutual funds, big banks and other investors. The bundles were created as trusts overseen by institutions such as Bank of New York and Deutsche Bank; they were supposed to make sure the complete mortgage files for each loan were delivered within a specified time and with the proper documentation.”

“The stakes are potentially high. If the trustees did not follow the rules set out in the prospectus, they may be liable for breaching their duties to investors who bought the securities. That could expose the banks to costly civil litigation.”

“Spokesmen from Bank of New York and Deutsche Bank declined to comment about the investigation, as did representatives from the offices of both attorneys general.”

Okay, so Gretchen and Shahien seem to be in a race.  It seems to me that they’ve both found a bush and they want to see who can be the first to beat around it.  In fairness to them, it may be their editors that hold them back, but the point is, what they’re talking about is the 800 pound gorilla in the room.

Or, another way of putting it… in the contest to see whether mortgage-backed securities either “taste great” or are “less filling,” it’s seems that “less filling” has taken the lead.

We’re talking about mortgage-backed securities without the “mortgage-backed” part.  Empty securities.  Like a Twinkie without the creamy filling inside.  Securities fraud.  Bad, very bad.  The sort of thing for which one gets sued… or possibly even charged.

Once again, Professor Adam Levitin’s testimony tells it best…

“Many of the issues relating to foreclosure fraud by mortgage servicers, ranging from more minor procedural defects up to outright counterfeiting relate to the need to show standing.  Thus problems like false affidavits of indebtedness, false lost note affidavits, and false lost summons affidavits, as well as backdated mortgage assignments, and wholly counterfeited notes, mortgages, and assignments all relate to the evidentiary need to show that the entity bringing the foreclosure action has standing to foreclose.

Concerns about securitization chain of title also go to the standing question; if the mortgages were not properly transferred in the securitization process (including through the use of MERS to record the mortgages), then the party bringing the foreclosure does not in fact own the mortgage and therefore lacks standing to foreclose.  If the mortgage was not properly transferred, there are profound implications too for investors, as the mortgage-backed securities they believed they had purchased would, in fact be non-mortgage-backed securities, which would almost assuredly lead investors to demand that their investment contracts be rescinded, thereby exacerbating the scale of mortgage put-back claims.

Many of the problems in the mortgage securitization market (and thus this testimony) are highly technical, but they are extremely serious.  At best they present problems of fraud on the court and questionable title to property.  At worst, they represent a systemic risk of liabilities in the trillions of dollars, greatly exceeding the capital of the US’s major financial institutions.  While understanding the securitization market’s problems involves following a good deal of technical issues, it is critical to understand from the get-go that securitization is all about technicalities.

Securitization is the legal apotheosis of form over substance, and if securitization is to work it must adhere to its proper, prescribed form punctiliously.  The rules of the game with securitization, as with real property law and secured credit are, and always have been, that dotting “i’s” and crossing “t’s” matter, in part to ensure the fairness of the system and avoid confusions about conflicting claims to property.

Close enough doesn’t do it in securitization; if you don’t do it right, you cannot ensure that securitized assets are bankruptcy remote and thus you cannot get the ratings and opinion letters necessary for securitization to work.

Thus, it is important not to dismiss securitization problems as merely “technical;” these issues are no more technicalities than the borrower’s signature on a mortgage.  Cutting corners may improve securitization’s economic efficiency, but it undermines its legal viability.”

So… any questions about that?  It’s a big deal.  A really big deal.  The banking industry associations say it’s not, but it quite obviously is.  You know, there are reasons we have the laws we do governing the transfer of property rights, it’s not like such laws were created on a whim.  And the pooling and service agreements, or PSAs, govern how loans are to be transferred into the REMIC trusts are some 500+ pages long, in most cases, and call me crazy, but compliance with such a document doesn’t sound like a trivial matter either.

So, now the Attorneys General from New York and Delaware are investigating in order to find out whether trillions of dollars in loans were seriously mishandled and therefore are not in the trusts, as the banksters said they were.  The IRS is investigating too.  And at least two large investors have already filed lawsuits alleging that they were sold “empty trusts.”

Here’s an excerpt from a real lawsuit lawsuit filed this past April 21st by the Federal Home Loan Bank of Boston, an investor in mortgage-backed securities, against just about everyone you’ve ever heard of in the financial, services industry, from Aurora to Wells Fargo… you’ll find it on page 28 of the complaint, item ‘f’.

“In order for a mortgage to be enforced, basic steps need to be taken to validly assign the mortgage and mortgage loan to the trust and ensure that the trustee has the proper papers.  These basic steps, and the representations made about these steps, were critical to investors because if a mortgage cannot be enforced, then the mortgage loans and the certificates dependent on these loans, are worthless.  The Offering Documents failed to disclose that in fact basic steps regarding the transfer of mortgages and mortgage loans were not followed – mortgage loans were not validly assigned, and papers necessary to ensure enforceability of the mortgage were never transferred to the trustee.”

Have I made my case yet?  It’s important stuff, right?  The New York Times and the Huffington Post write about state Attorneys General investigating trustees about the issue, Professor Adam Levitin testifies in Congress about the issue, and the Federal Home Loan Bank of Boston files a lawsuit that incorporates the issue into its 575-page complaint.

So, you agree, right?  It’s a serious issue, how loans are transferred into trusts as part of the securitization process.  Right?  Right.

Okay, so here’s PHASE TWO of yesterday’s news:

FADE IN: We’re in the United States Bankruptcy Court, Northern District of California, in front of The Honorable Edward D. Jellen, a United States Bankruptcy Judge.  We’re watching an Evidentiary Hearing on Debtor’s Objection to Proof of Claim, which is another way of saying that the homeowner is saying there’s something wrong with what the bank is claiming he owes.

The homeowner’s name is Felipe Zulueta, Jr. and he’s representing himself in these proceedings… pro per, or pro se… I can never figure out which is which or why to use one over the other.  The point is that he doesn’t have a lawyer… he’s representing himself.

It is 9:35 AM on November 3, 2010 when the Clerk says…

The Clerk: All rise.

This is the United States Bankruptcy Court for the Northern District of California,                                      The Honorable Edward Jellen presiding.

Be seated.

Mr. Chun: Thank you, Your Honor.

Mr. Zulueta: Thank you, Your Honor.

The Court: This is the matter of Zulueta.  May I have the appearances, please?

Mr. Zulueta: Felipe Zulueta, Jr. Your Honor, Debtor.

The Court: Okay.

Mr. Chun: Joseph Chun representing the secured creditor.

The Court: All right.  Mr. Zulueta, are you going to be presenting any evidence to show that                                         they don’t have standing?

Mr. Zulueta: Actually, Your Honor, I was going to address the exhibits that they’re                                                              going to present today.

The Court: Yeah.  My question was, do you have an evidence of your own…

Mr. Zulueta: No.

The Court: … that shows…

Mr. Zulueta: No.

The Court: All right.  Mr. Chun, according to your trial brief, you have exhibits, is that correct?

Mr. Chun: That’s correct, Your Honor.

Mr. Zulueta: Your Honor?

The Court: Yes.

Mr. Zulueta: I just wanted to clarify, Your Honor, if counsel is representing One West Bank or                                       Deutsche Bank National Trust Company as trustee for the mortgage loan trust.

Mr. Chun: We’re representing One West Bank, the servicing agent – who’s the servicing agent                                  for Deutsche.

Mr. Zulueta: Okay, so I just wanted to find out, Your Honor, if One West Bank has the proper                                         authorization from Deutsche Bank to authorize them, because I don’t see any power                                  of attorney presented.

The Court: All right.  Well, you know, the bottom line is you’re not getting a free house.

Mr. Zulueta: I’m not asking for a free house, Your Honor.  I just want to make sure that the                                             proper paperwork is in place so I can pay the right creditor.


Mr. Zulueta: Okay, so the first thing I want to point out, Your Honor, is, number one, on the                                            bottom of the page of the recorded document, there’s a handwritten scribble on the                                    bottom after the signature of the notary that says, a notary on the basis within                                            capacity under – which means that this is not a true and correct copy.

The Court: What difference does it make?

Mr. Zulueta: Well, it does make a difference, Your Honor, because I’m trying to establish a                                             pattern here of the fact that this document appears fraudulent.

The Court: Do you have any evidence that it’s fraudulent?  I mean, whether it’s recorded or not                                    doesn’t make any difference.

Mr. Zulueta: Well, it does, Your Honor, because all of the exhibits that counsel is presenting                                          today, there is a system of how my loan is supposedly deposited into the trust, and                                     since they’re representing the trust, I want to make sure that they’re the proper                                            creditor for my loan.

The Court: All right.  Who do you think is the proper creditor?

Mr. Zulueta: Right now, Your Honor, it’s a mystery.  I mean, after my research…

The Court: All right.  But you don’t get a free house.

Mr. Zulueta: I understand, Your Honor.

So, how about that?  And I’m not making any of that up, by the way… in fact, I didn’t even change a single word from the court transcript.  And you don’t even have to take my word for it, because the link to the court transcript can be found at the bottom of this post.

According to April Charney, of Jacksonville Legal Aid, this case goes before the 9th Circuit Court of Appeals next week.  Any guesses as to what will happen?  I don’t really care whether the documents are all fraudulent. I don’t really care how many laws were broken, or whether the REMIC trust is as empty as my wallet on December 26th… I only want to know one thing…

Will Mr. Zulueta get a “free house?”

Are you getting what I’m trying to say here?  Because we have here is a true “dichotomy,” wouldn’t you say?  It’s dichotomous, if you’re an adjective person.

That’s only two of the contrasting stories I had to work with that day.  At the same time, Fannie Mae announced that it would not participate in Hawaii’s new mediation program.  Why?  Because they don’t want to have to prove standing… that the servicer is foreclosing on behalf of the trust that actually owns the note… as is required by Hawaii’s new mediation program.

And this afternoon, a lawyer in Hawaii told me that he has learned that title insurance companies are refusing to write title insurance on non-judicial foreclosures in Hawaii.  And why in the world would that be, do you suppose?

Meanwhile, in Utah, a judge apparently granted Quiet Title to Scott Harvey, a homeowner, who promptly sells his now free and clear house after no one shows up to contest the matter.  Someone want to explain that one to me?

Harvey v Garbett, Quiet Title Case in Draper Utah

Oh, and Bank of America’s being accused of obstructing a federal investigation by HUD investigators in Arizona and now that fact has been added to the lawsuit filed by the State of Arizona against Bank of America less than a year ago, I believe.  So, go figure.

My Conclusion…

This is a mess.  A real mess.  And I see only one way out… follow the laws of our land.

Ours is a country built on laws, and forged by lawyers.  It is our laws that have held us together for over 200 years, and only adherence to our laws will get us through this mess.

Did Wall Street’s bankers screw up the securitization of millions of loans?  Well, obviously the answer is yes.  Does that mean that the REMIC trusts are going to collapse?  Yes it probably does at that.  Will that be the end of the world?  No, I don’t think it will.  Answers will be found… equitable answers.  And we will go on.

Want to know what won’t work… what will ultimately destroy us?  What we’re doing now.  The path we’ve been on for the last two years has been disastrous for tens of millions of Americans and we cannot stay on that path much longer.  The cost will simply be too great.

Whatever the answer the answer is, I’ll tell you what it is not… it’s not fraud and forgery… it’s not turning our country into a class society where the mega-rich live behind gates and the rest of us… well, eat cake… and it’s not free houses either.

We are only here because the bankers have proven themselves untrustworthy and abusive.  That’s right… that’s why we’re here, no other reason.  The anger is rising and palpable.  The banks continue to lie to homeowners every day.  They have already gone too far and will pay a huge price for years to come, but that price is going up every day, and someone has to find a more equitable path.

I think I can help.  I leave for Hawaii this coming Monday.  I’m meeting with members of the legislature and numerous others.  Wish me luck.  Pray for us all.

Mandelman out.

ZULUETA Initial Brief

ZULUETA Answer Brief Deutsche Bank

ZULUETA Bankruptcy Court Transcript

1-Federal Home Loan Bank of Boston v. IMH Assets Corp

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