«DECONSTRUCTING THE BLACK MAGIC OF SECURITIZED TRUSTS: HOW THE MORTGAGE-BACKED SECURITIZATION PROCESS IS HURTING THE BANKING INDUSTRY’S ABILITY TO ...»
DECONSTRUCTING THE BLACK MAGIC OF SECURITIZED TRUSTS:
HOW THE MORTGAGE-BACKED SECURITIZATION PROCESS IS
HURTING THE BANKING INDUSTRY’S ABILITY TO FORECLOSE
AND PROVING THE BEST OFFENSE FOR A FORECLOSURE
Roy D. Oppenheim Oppenheim Law Jacquelyn K. Trask Oppenheim Law ________________________________________________________________________
Stetson Law Review (forthcoming Spring 2012) This article was reproduced with the permission of the author.
DECONSTRUCTING THE BLACK MAGIC OF SECURITIZED TRUSTS: HOW
THE MORTGAGE-BACKED SECURITIZATION PROCESS IS HURTING THE
BANKING INDUSTRY’S ABILITY TO FORECLOSE AND PROVING THE BEST
OFFENSE FOR A FORECLOSURE DEFENSE
ROY D. OPPENHEIM AND JACQUELYN K. TRASK-RAHN1INTRODUCTION
SETTING THE STAGE: A BRIEF HISTORY OF SUB-PRIME MORTGAGELENDING AND THE BEGINNING OF THE SECURITIZATION CRISIS.......... 4 Bait and Switch: The Rise of Sub-Prime Lending
That Old Black Magic: Traditional Mortgage Loans Before the Subprime Lending Crisis, and the Securitization Takeover.......... 7 SELLING THE AUDIENCE: SO WHAT IS “SECURITIZATION?”
Credit Rating-Agencies: Making a Silk Purse Out of a Sow’s Ear...... 10
THE SHELL GAME: THE POOLING AND SERVICING AGREEMENT
ANDWHAT THE BIG BANKS DON’T WANT THE JUDICIAL SYSTEMTO KNOW
Assistant’s Revenge: Liability of the Trustee and Servicer Under the PSA
PULLING A RABBIT OUT OF A HAT: THE FUNDAMENTAL CONCEPT OF
STANDING AND HOW SECURITIZATION HAS RUN AMUCK WITH ABASIC LEGAL REQUIREMENT
THE TRICK IS NOT A TRICK: WITH SECURITIZATION, SUBSTANCE IS THEFORM AND THE FORM IS THE SUBSTANCE
Handcuff Secrets: Lenders Recognize their Own Illusion, So Why Is the Judiciary Still Being Taken In?
The Prestige: The American Securitization Forum and Private Sector Experts Disagree on the Basics
“ABRACADABRA” JUST ISN’T CUTTING IT IN SOME COURTS
1. Roy D. Oppenheim is a senior partner at Oppenheim Law, a South Florida law firm focusing on real estate and foreclosure defense law. Mr. Oppenheim is a recognized expert in foreclosure defense, and has been used as a source by major media outlets including the Wall Street Journal, NewYork Times, AP, USA Today, FOX, NBC, CBS, the BBC and The Florida Bar News as well as The Daily Show and 60 Minutes. Mr. Oppenheim graduated cum laude with a B.A. from Princeton University in 1982 and received a J.D. from Northwestern School of Law in 1986. Mr. Oppenheim is a member of the New York and Florida Bars.
Jacquelyn K. Trask-Rahn is an associate at Oppenheim Law. Mrs. Trask-Rahn graduated with a B.S. from the University of Michigan in 2006 and graduated summa cum laude with a J.D. from Nova Southeastern University Shepard Broad Law Center in 2011. Mrs. TraskRahn was a Merit Scholar and former Articles Editor for the Nova Southeastern University Law Review. Mrs. Trask-Rahn is a member of the Florida Bar.
Judge Boyko Not Fooled by the Illusion, Tells Lender “This Court Possess the Independent Obligations to Preserve the Judicial Integrity of the Federal Court”
The Wise Man Does At Once What the Fool Does Finally: Magic Tricks No Longer Fool Bankruptcy Courts
Keeping Your Eye on the Queen: State Courts Have Finally Started to Pay Attention to the Sleight of Hand Tricks of the Banks
YOU CAN FOOL ALL OF THE PEOPLE SOME OF THE TIME, AND SOME OF
THE PEOPLE ALL OF THE TIME, BUT YOU CANNOT FOOL ALL OFTHE PEOPLE ALL OF THE TIME
From 2003 to 2007, Florida saw the largest real estate boom in its history. Real estate sold at astonishing prices as people were sold a bill of goods known as the “American Dream.” But for many, that American Dream turned out to be the American Nightmare. From sub-prime mortgage lending and predatory practices by mortgage brokers, lenders and improper securitization of mortgages, this era of economic boom led to the largest crash in the history of the real estate market2, a crash from which Florida has yet to recover, and to which we have not yet seen the end. The full extent of the damage inflicted by these practices has not yet been felt, but millions of homeowners nationwide have suffered from financial crisis, foreclosure and bankruptcy. And what is worse yet is that the systemic fraud and illegal conduct of the banks has continued to pervasively infect court systems throughout the nation; further, the Florida court system has suffered from extreme abuse at the hands of the banks that have high jacked it and effectively turned it into a private collection agency for the banking industry.3
2. Roy D. Oppenheim, Florida Housing Crisis Worse than Great Depression?, South Florida Law Blog, June 16, 2011, http://southfloridalawblog.com/2011/06/16/from-bad-toworse-securitized-trusts-face-scrutiny-and-housing-crisis-now-worse-than-the-greatdepression/ (last visited Sept. 30, 2011). As of June 2011 home prices had fallen more than 33%, 2% lower than the hit the market received in the 1930s. Id. In addition, prices in South Florida have likely not hit their low, as thousands of foreclosures continue to occur, home prices could decrease an additional 10-15%. Id.
3. Roy D. Oppenheim, Roy Oppenheim to the Wall Street Journal: “Your Editorial will make future investors think twice about entire system,” South Florida Law Blog, Oct. 19, 2010, [hereinafter Roy Oppenheim to the Wall Street Journal] http://southfloridalawblog.com/2010/10/19/roy-oppenheim-to-the-wall-street-journalE2%80%9Cyour-editorial-will-make-future-investors-think-twice-about-entireTHE SECURITIZATION CRISIS 3 Mortgage securitization is perhaps one of the least understood areas of the real estate industry, and for good reason. With phrases such as mortgage bundling, securitized trusts, and tax-exempt structures known as Real Estate Mortgage Investment Conduits (“REMICS”), there are many terms employed to describe massive collections of bundled mortgages which were broken up and sold off in pieces. While this method of bundling mortgages was once looked at as perhaps the best thing to ever happen to the mortgage industry, allowing large scale investors such as pensions and retirement funds to own interests in mortgages in a way that was deemed “safe,”4 the securitization process has become a nightmare for the American homeowner fighting foreclosure. In fact, the securitization process has made it impossible in many, if not all cases where a mortgage is held in a securitized trust, to determine who actually owns a mortgage and note, a fact which until recently has done little to slow down the foreclosure rocket-docket.5 However, there is a great deal which should be understood about securitized trusts which can aid in the foreclosure defense and provide the judiciary with further insight, especially when it comes to the constitutional and judicial requirement of standing, which derives from “case and controversy” requirements in Article III of the U.S. Constitution.6 This article will review the creation of subprime mortgage lending and securitized trusts, the nature of standing in foreclosure actions, the process of securitization of mortgages and the problems the foregoing have created for foreclosing lenders who lack the proper documentation and chain of title to properly foreclose.
system%E2%80%9D/ (last visited Sept. 30, 2011); Roy D. Oppenheim, Foreclosure Jurisprudence, THE FLORIDA BAR NEWS, July 1, 2011; Jose Pagliery, Canady Returns to Well to Replenish State Courts, DAILY BUSINESS REVIEW, A1, Sept. 30, 2011.
4. Ironically, these securities were deemed safe because they had Triple-A ratings (similarly to U.S. Treasury bills). Now, neither have Triple-A ratings due in part to the imploding economy caused by the financial crisis. Had these securities never been given inflated TripleA ratings, the entire crisis may have been averted.
5. This failure prevented homeowners and the government from creating a true solution to the crisis through mortgage modifications by making it so unclear as to who owned the mortgages that investor approval could never be obtained. On the other hand, title underwriters seem to ignore the issue and gladly write title insurance over foreclosed properties that may not have a clear chain of title.
6. U.S. CONST. art. III, §2. It is also important to note that the Florida Constitution limits cases to those in which a party has proper standing, and provides constitutional protections similar to those of the U.S. Constitution to its residents. FLA. CONST. art. I, §21.
SETTING THE STAGE: A BRIEF HISTORY OF SUB-PRIME MORTGAGE LENDING
AND THE BEGINNING OF THE SECURITIZATION CRISISSub-prime lending is “a fancy financial term for high-interest loans to people who would otherwise be considered too risky for a conventional loan.”7 These risky loans included enticingly low rates, often for the first few years of the loan with an adjustable rate after that initial honeymoon period.8 With short-sightedness, borrowers often were lured with these attractive rates, only to be shocked by “exploding adjustable rates” that they couldn’t possibly afford on their low salaries, and especially couldn’t afford once many homeowners in lower and middle class families became unemployed.9
Bait and Switch: The Rise of Sub-Prime Lending
Although the subprime mortgage lending practices developed gradually over time, the start of the industry was paved by three major events.10 In the 1980s several key pieces of legislation were passed by Congress.11 These various Acts created deregulation of the mortgage industry in an effort to encourage homeownership by the American public.12 First, The Depository Institutions Deregulation and Money Control Act of 198013 (DIDMCA) was passed allowing the subprime mortgage industry to flourish by charging rates that had previous been illegal practices.14 Further, although the current ConJohn Atlas and Peter Drier, The Conservative Origins of the Sub-Prime Mortgage Crisis, The American Prospect, December 18, 2007, http://prospect.org/cs/articles?article=the _conservative_origins_of_the_subprime_mortgage_crisis (last visited Sept. 30, 2011).
9. Id. The borrower often relied to their detriment on the broker or lender, whom they felt had superior knowledge and experience when it came to a mortgage-loan transaction, particularly in light of the fact that most Americans only go through such a transaction a few times in their life. What they failed to realize is that these parties had such a vested interest in selling high priced loans with exploding rates and getting inflated appraisals that they were putting their interests before those of the borrower, to the borrower’s ultimate detriment.
Further, since the lenders were no longer holding and servicing their own loans, the high-risk of default no longer discouraged them from such practices.
10. BITNER, CONFESSIONS OF A SUBPRIME LENDER: AN INSIDER’S TALE OF GREED, FRAUDAND IGNORANCE 23 (2008).
13. 12 U.S.C. §1821(2011).
14. BITNER, supra note 10, at 23; Federal Reserve Bank of Boston, Depository Institutions Deregulation and Monetary Control Act of 1980, April 1980, available at http://www.bos.frb.org/about/pubs/deposito.pdf; John Birger, How Congress Helped Create the Subprime Mess, CNNMoney.com, January 31, 2008, 2011] THE SECURITIZATION CRISIS 5 gress has been quick to point out that the predatory lending practice by banks are responsible for the current housing slump, they have failed to place some of the blame in their own lap for the legislation that contributed to the problem.15 Patricia McCoy, a Professor of Law at the University of Connecticut pointed out in a CNN Money article published towards the beginning of the crisis in 2008 that “neither the expansion of the subprime market nor the proliferation of exotic interest-only or option-ARM mortgages would have been possible without federal laws passed in the 1980s.”16 In 1982 the restrictions on mortgage lending were further decreased in what McCoy notes was the worst of the federal laws passed during the 1980s; The Alternative Mortgage Transaction Parity Act (AMPTA)17 was passed, making adjustable rate mortgages (ARMs) and balloon payments legal for the first time.18 Finally, the Tax Reform Act (TRA) of 198619 encouraged more homeownership by making the deduction more prevalent, “increasing the demand for mortgage debt.”20 Further, the Job Growth Tax Relief and Reconciliation Act of 200321 cut the tax rate on capital gains to 15%, adding fuel to the fire http://money.cnn.com/2008/01/30/real_estate/congress_subprime.fortune/ (last visited Sept.
30, 2011). Further, while most states place a cap on usury interest rates, these changed laws increased the ceiling on those rates, effectively increasing the chances that homeowners would get hit with higher interest than they could handle. Id.
15. Birger, supra note 14.
17. 12 U.S.C. §39 (2011).