If a bank modifies a loan, the modification can result in damage to certain classes of investors. Such financially disadvantaged investors can then sue the banks for improper investment management resulting in billions of dollars of liability. Foreclosure, the generally accepted and prescribed measure in investment documents to cure defaults on securitized loans, avoids risk and liability for lenders.
Securitized mortgages are subject to the rules created in the investment documents and the rules issued by the Internal Revenue Service to ensure favorable tax treatment for the securitized loans. These rules limit the ability of banks to modify mortgages. These rules may include the following:
(a) Impose restrictions on the mortgage modification that must be performed to qualify for transfer tax treatment under IRS regulations.
(b) Impose restrictions on the number of mortgages in the pool that can be modified.
(c) Provide a procedure and fees to pay for the foreclosure, but no procedure to modify the loan as an alternative dispute resolution.
(d) Create securities with property classes (“tranches”) with adverse and opposing financial interests that result in the so-called “tranche war” so that a modification that favors one tranche may harm another.
(e) Restrict the ability to reduce interest payments on the note.
(f) Restrict the ability to increase the number of payments to be made.
(g) Restrict the ability to defer payments.
(h) Restrict the possibility of extending the term of the mortgage.
(i) Restrict the ability to impose a temporary moratorium on payments.
(j) Restrict the ability to accept “short sales.”
(k) Create potential liability for a specific class of certificate holders by entering into a modification agreement required for alternative dispute resolution.
(l) Require the managing agent to purchase any loan that has been modified.
These restrictions imply a modification of the Transaction without the consent of the borrower. This constitutes a breach of contract or unlawful interference with a contract, or both. Failure to obtain the consent of the borrower for the securitization of the mortgage is a legally fatal default.
Following the rules imposed on securitized mortgages restricts and restricts the ability of banks to modify loans. Even when the loan is modified only by extending the term of the loan so that the original principal and interest rate do not change, the cash flow generated may not be sufficient to allow the loan modification if investors hold fixed rate bonds. In short, banks charge fees when they foreclose; banks incur actual and potential liabilities when banks modify mortgages.
The Administration and the banks have shown nothing more than a willingness to talk lip-service to achieve loan modifications instead of foreclosures. Documents issued by federal financial agencies and Congressional committees show that the government is fully aware of institutionalized limitations, but is reluctant to discuss such limitations with the public. Our government has made no serious effort to address and overcome the institutionalized limitations for loan modification. Until there is a serious countervailing force to force lenders to modify mortgages that overrides institutionalized restrictions, the dismal foreclosure rate will continue unabated. Unless that countervailing force arises from the private sector or from the need to respond to massive political pressure, very little is likely to change.
The above discussion has shown that the holder of the note disappears in the securitization and the securitization functions as an illegal modification of the Transaction without the consent of the debtor. As organized, securitisations have a third major difficulty. Generally, a third party to the Transaction is required to make any monthly payments to the certificate holders that are in default. In other words, if a specific mortgagor does not make the January payment, a third party will make the payment for the mortgagor. Consequently, the allegation in a foreclosure proceeding that the January payment was missed and is in arrears is false. The January payment was paid to investors. How many times must investors be paid the January payment? Once is enough. Is there a requirement in the Transaction or elsewhere that only the designated mortgagor can make the required January payment to the servicing agent? Absolutely not.
It may well be that a third party who has made payments in arrears is entitled to a legal recovery against the debtor. However, that party is not part of the mortgage or a successor in the interests of the mortgagee and therefore has no right to foreclose to effect repayment. Using the foreclosure mechanism to recover debt from a third party perpetrates fraud and misuse of foreclosure procedures. The mortgage is not intended to guarantee anyone’s repayment. It is intended solely to guarantee the payment of interests of the mortgagee and the successors of the mortgagee. In the case of securitization, the third parties making delinquent payments are not indisputably the successors in interest of the original mortgagee.
It is only a matter of time until Congress and the courts are forced to recognize that securitization, as practiced and without any public regulation, has resulted in “Morgicide,” the illegal and intentional destruction of mortgages by Wall. Street. The result of this Morgicide will be the realization that the nation’s largest banks and financial institutions have caused millions of illegal foreclosures. Think of it this way. Your neighbor bought a new car with an installment credit loan. Your neighbor has not made the monthly installment payments. The merchant has the right to regain possession. Instead, I come and take the car. The police arrest me and charge me with Grand Theft Auto. At trial, I defend myself by arguing that since my neighbor was in default, I had the right to repossess the car. Sorry, this won’t work and I’m going to jail.
The judge will rule that only the merchant, not me, has the right to regain possession. I acted like a simple thief in the night. Similarly, financial institutions acting as plaintiffs in the foreclosure of securitized mortgages are acting as thieves in the night. They are taking the house on behalf of the secured party without being the secured party.
Until now, as in the Sherlock Holmes mystery known as “Silver Blaze” where the dog did not bark at night, our judges have been suspiciously silent. This will change as more and more lawyers become more familiar with securitization. Seek out multi-million dollar wrongful foreclosure class action lawsuits as part of the shameful legal legacy of unregulated securitization. As long as attorneys chase ambulances and sue for negligence, Morgicide will not go unpunished.