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The Alphabet Problem and the Pooling and Servicing Agreements

posted by O. Max Gardner III

The securitization of residential mortgage notes has created a maze of complex issues and problems for the bankruptcy and foreclosure courts. One fundamental issue is who is the actual holder and owner of the mortgage note. In order to answer this question, it is necessary to dig deep into the contracts, warranties and representations that were executed in the formation of the securitized trust.

The Pooling and Servicing Agreement (PSA) is the document that actually creates a residential mortgage backed securitized trust and establishes the obligations and authority of the Master Servicer and the Primary Servicer. The PSA also establishes some mandatory rules and procedures for the sales and transfers of the mortgages and mortgage notes from the originators to the trust. It is this unbroken chain of assignments and negotiations that creates what I have called “The Alphabet Problem.”

In order to understand the “Alphabet Problem,” you must keep in mind that the primary purpose of securitization is to make sure the assets (e.g., mortgage notes) are both FDIC and Bankruptcy “remote” from the originator. As a result, the common structures seek to create at least two “true sales” between the originator and the Trust.

You therefore have in the most basic securitized structure the originator, the sponsor, the depositor and the Trust. I refer to these parties as the A (originator), B (sponsor), C (depositor) and D (Trust) alphabet players. The other primary but non-designated player in my alphabet game is the Master Document Custodian (MDC) for the Trust. The MDC is entrusted with the physical custody of all of the “original” notes and mortgages and the assignment, sales and purchase agreements. The MDC must also execute representations and attestations that all of the transfers really and truly occurred “on time” and in the required “order” and that “true sales” occurred at each link in the chain.

Section 2.01 of most PSAs includes the mandatory conveyancing rules for the Trust and the representations and warranties. The basic terms of this Section of the standard PSA are set-forth below:

2.01 Conveyance of Mortgage Loans. (a) The Depositor, concurrently with the execution and delivery hereof, hereby sells, transfers, assigns, sets over and otherwise conveys to the Trustee for the benefit of the Certificateholders, without recourse, all the right, title and interest of the Depositor in and to the Trust Fund, and the Trustee, on behalf of the Trust, hereby accepts the Trust Fund.

    (b) In connection with the transfer and assignment of each Mortgage Loan, the Depositor has delivered or caused to be delivered to the Trustee for the benefit of the Certificateholders the following documents or instruments with respect to each Mortgage Loan so assigned:

    (i) the original Mortgage Note (except for no more than up to 0.02% of the mortgage Notes for which there is a lost note affidavit and the copy of the Mortgage Note) bearing all intervening endorsements showing a complete chain of endorsement from the originator to the last endorsee, endorsed "Pay to the order of _____________, without recourse" and signed in the name of the last endorsee. To the extent that there is no room on the face of any Mortgage Note for an endorsement, the endorsement may be contained on an allonge, unless state law does not so allow and the Trustee is advised by the Responsible Party that state law does not so allow. If the Mortgage Loan was acquired by the Responsible Party in a merger, the endorsement must be by "[last endorsee], successor by merger to [name of predecessor]". If the Mortgage Loan was acquired or originated by the last endorsee while doing business under another name, the endorsement must be by "[last endorsee], formerly known as [previous name]";

A review of all of the recent “standing” and “real party in interest” cases decided by the bankruptcy courts and the state courts in judicial foreclosure states all arise out of the inability of the mortgage servicer or the Trust to “prove up” an unbroken chain of “assignments and transfers” of the mortgage notes and the mortgages from the originators to the sponsors to the depositors to the trust and to the master document custodian for the trust. As stated in the referenced PSA, the parties have represented and warranted that there is “a complete chain of endorsements from the originator to the last endorser” for the note. And, the Master Document Custodian must file verified reports that it in fact holds such documents with all “intervening” documents that confirm true sales at each link in the chain.

The complete inability of the mortgage servicers and the Trusts to produce such unbroken chains of proof along with the original documents is the genesis for all of the recent court rulings. One would think that a simple request to the Master Document Custodian would solve these problems. However, a review of the cases reveals a massive volume of transfers and assignments executed long after the “closing date” for the Trust from the “originator” directly to the “trust.” I refer to these documents as “A to D” transfers and assignments.

There are some serious problems with the A to D documents. First, at the time these documents are executed the A party has nothing to sell or transfer since the PSA provides such a sale and transfer occurred years ago. Second, the documents completely circumvent the primary objective of securitization by ignoring the “true sales” to the Sponsor (the B party) and the Depositor (the C party). In a true securitization, you would never have any direct transfers (A to D) from the originator to the trust. Third, these A to D transfers are totally inconsistent with the representations and warranties made in the PSA to the Securities and Exchange Commission and to the holders of the bonds (the “Certificateholders”) issued by the Trust. Fourth, in many cases the A to D documents are executed by parties who are not employed by the originator but who claim to have “signing authority” or some type of “agency authority” from the originator. Finally, in many of these A to D document cases the originator is legally defunct at the time the document is in fact signed or the document is signed with a current date but then states that it has an “effective date” that was one or two years earlier.

Hence, we have what I call the Alphabet Problem. Now, I want to admit that I have never been strong in math or in spelling. But, the way I see all of this spells out the word FRAUD.


Another formula suggested by Judge Boyko, N.D. Ohio:

"The Court will illustrate in simple terms its decision: “Fluidity of the market”-“X” dollars, “contractual arrangements be-tween institutions and counsel”-“X” dol-lars, “purchasing mortgages in bulk and securitizing”-“X” dollars, “rush to file, slow to record after judgment”-“X” dol-lars, “the jurisdictional integrity of United States District Court”-“Priceless.”

...For all the foregoing reasons, the above-captioned Foreclosure Complaints are dismissed."

August 16, 2009

For more information contact:
Richard F. Kessler
Documentary Clearing House LLC.
[email protected]

Ready-to-File Document Establishes Rationale to Render Securitized Mortgages Unenforceable

Of the $10 trillion of mortgages in effect in the United States, up to $8 trillion may have become unenforceable because the mortgages were improperly converted into securities, says Richard F. Kessler, C.E.O. of Documentary Clearing House LLC (DCH).
Until the banks have more to lose by pursuing foreclosure than they have to gain, the foreclosure mills will continue to grind unchecked, he says. Neither the federal government nor the banks have any real incentive to modify loans in default. Accordingly, “Cancel the Mortgage-Now “ is a new strategy to render trillions of dollars of securitized mortgages unenforceable and give banks a powerful incentive to seek an alternate dispute resolution to foreclosure.
DCH was established to compel reform of foreclosure and the secondary mortgage market. The company is offering for sale its new, ready-to-file Cancel the Mortgage Now! Omnibus Motion to Dismiss, a comprehensive set of well-documented and researched legal arguments that conversion of a mortgage into a security renders the mortgage unenforceable, says Kessler.

If the Omnibus Motion prevails across the country, the magnitude of the consequences is stunning. It will result in the invalidation of trillions of dollars worth of mortgages and compel the Federal Government to step in and reform and regulate the secondary mortgage market, a promise made by this Administration but not kept.
Filing the Omnibus Motion in defense against foreclosure serves a greater public good according to Kessler. “It establishes a future rationale to hold the leading financial institutions that sold trash—an unenforceable mortgage—for cash accountable to mortgage debtors who were lent money upon terms they could not afford and investors who were sold certificates secured by unenforceable mortgages,” he says.
As a first step to the introduction of the Omnibus Motion, DCH is sending the following message to the more than 48,000 members of the Florida Bar:

“Your client’s defense against foreclosure is incomplete unless you file the Omnibus Motion to Cancel the Mortgage-Now ! If the mortgage was converted into a security, the conversion rendered the mortgage unenforceable. Don’t simply delay foreclosure; end it by cancelling the mortgage. If you are defending a client whose mortgage was converted into a security from foreclosure, your defense is incomplete unless you file this motion. You have a professional obligation to raise this defense.” ‘Cancel the Mortgage-Now!’ will become the new rallying cry to defeat mortgage foreclosure.”

“DCH enlisted the finest legal minds and legal resources, and invested nine months in the conduct of exhaustive research and analysis to produce the Omnibus Motion,” says Barry Wilhelm, company president.

“Such a protracted undertaking is beyond the financial means of most defendants facing foreclosure. Accordingly, this product is intended to provide a resource to litigating counsel which would, under normal circumstances, be unavailable because of constraints of time and cost,” he says.

DCH will authorize use of the Omnibus Motion by organizations engaged in the defense of mortgage foreclosure without compensation. As of today, Gulf Coast Legal Services and the Yale Law School Legal Services Program have been authorized to use the Omnibus Motion for the defense of their clients, Wilhlem stated.
What makes the Omnibus Motion unique as a defense to foreclosure? If the Omnibus Motion prevails, the mortgage is unenforceable; the other side will not anticipate the arguments; the motion puts the other side at risk from potential liability from investors in security certificates; the other side will have to spend the time and money to respond to six thoroughly researched arguments which their attorneys have never seen before; the Omnibus Motion is ready-to-file by filling in the blanks; the filing of the motion creates a powerful incentive for the other side to utilize an alternate dispute resolution and modify the mortgage; the mortgage defendant only pays a fraction of the actual cost of producing the motion making use of this Omnibus Motion as an affirmative defense widely affordable; counsel can use the mortgage again for each mortgage defendant client with a securitized mortgage.
Lenders consistently opt for foreclosure in lieu of an alternate dispute resolution. More than 1.5 million foreclosures have occurred since January according to Realty Trac, an online database. Foreclosures may top 3 million this year. Aside from pious pronouncements in favor of alternate dispute resolutions in the face of this displacement of so many American families, the federal government has done little to reduce the flow of foreclosure and the plaintiff lenders have done even less. The federal program for intervention known as “Making Home Affordable” has only assisted 9% of the 2.7 million delinquent borrowers eligible for assistance according to a report issued by the Treasury Department.
Cancel the Mortgage-Now! is a ready-to-file affirmative defense to foreclosure of a securitized mortgage. Simply fill in the blanks, sign and file. It asserts that any mortgage converted into a security is unenforceable because the plaintiff lacks standing and the complaint fails to state a cause of action for which relief can be granted. The mortgage is unenforceable because the plaintiff lacks standing to foreclose on behalf of the certificate holders, the mortgage has been converted into an instrument not enforceable by foreclosure and the debtor/mortgagor did not consent to conversion of the mortgage.
DCH hopes to cause widespread dissemination of this Omnibus Motion. Each purchaser will be asked to sign a licensing agreement whereby the purchaser agrees that use, republication and reproduction of the Omnibus Motion will be limited to the purchaser, either a single practitioner or a law firm, and the client’s of the purchaser. Purchasers are not authorized to publish or otherwise disseminate the motion for the use of other persons.
The initial price of the Omnibus Motion is $599.00 for a single practitioner and $799.00 for a law firm. Payment is to be made by credit card or Paypal. The Omnibus Motion is available for download in PDF Format or Word. A hard copy is available by mail upon request for a slight additional charge.
Richard Kessler is a graduate of Yale Law School and a Washington, D.C. attorney. He has made a career of innovative and first-time legal strategies.

How will this help in non-judicial foreclosure states? CA judges keep coming back to the notion that there are no free lunches. While the suits I file are aimed at proving Deeds of Trust with straw beneficiaries are void ab initio this would only render an obligation unsecured, not extinguish it. Here the number of judicial foreclosures I witnessed in 27 years in the financial services industry can be counted on one hand. I do however see rampant non-compliance with our non-judicial foreclosure statutes which REQUIRE a foreclosing trustee include a declaration as to "each and every default then known to the BENEFICIARY." Beneficiaries of Deeds of Trust in California have been identified as the obligee of the note secured by the deed of trust (Civil Code section 2936 and over 100 years of decisional law). This is where we attack the pending foreclosure since NO ONE knows who the obligee of the note is and, therefore, it is not possible for a trustee to have been told by the actual beneficiary of a deed of trust that a default even exists.

Walter Hackett

My case is slightly different. I am NOT in foreclosre and attempt to thwart these creeps BEFORE it get to that point. I have been fighting these creeps since 2006. I am STILL in my house NOT in forclosure. I also have not paid mortgage since that time. OCWEN has failed to service my loan. I filed a complaint and recorded a lis pendens on my property. Since I am not an attorney, I had to get the court's permission to do this. The court agreed with me.

What I need is information on the duties of a "loan servicer".
New Century fraudulently transferred my property to OCWEN one day before they filed chap 11 and thereby failing to provide respa required notices. I sued Ocwen for the wrong reasons and was advised to pursue new century. Since I had filed a valid claim, I filed an adversary proceeding in that matter. New Century is trying to say my claim is invalid, I have proof that claim is false. I am preparing to appeal any adverse decision of the delaware court, which appears to favor new century over the clear bankruptcy law.

In the meantime I filed chapter 13, since the BK court is so supportive of crooks, maybe a consumer can get some protection as well. Ocwen has of course, filed a proof of claim and I am preparing to deal with that right now. I also filed an adversay proceeding against them and I have to thwart that as well.

My Adv case in BK court in Delaware is 09-50422. If you have pacer from there you can see my cases filed in the Northern District of California.

I have learned it is NOT what you know, NOR what is RIGHT, or even what is LEGAL it is WHAT YOU CAN PROVE. ANy help would be most appreciated please email any case info relating to OCWEN or Judges favoring the consumer to [email protected]. Please put Subprime Cases or something similar in the subject line. THanks to all for your help.

Mr. Gardner:

Please hear my plea/

While Iam on board, and fully understand the theory being advanced as to why the necessity of the transfers from A thorugh D are required for bankruptcy remoteness, REMIC, and filings under the SEC, I am still trying to make the succinct connection between these events and their effect (specifically) as to vitiating the trusts standing as a holder of a borrowers note (based upon the failure to follow this protocol).

Imagine that the lead partner of your firm has issued the job of instructing a Jury as to exactly why the failure of the "complete unbroken chain of assignments of the note under the PSA / PS" fails to provide the trust holder status

What would you say, specifically

"Well the trust is not a holder entitled to enforce the obligations under the note, or power of sale in the mortgage, because it violated the PSA, and more succinctly because it wasnt in prior to the cutoff date and it was an A to D transfer".

Okay great, so how does this prevent the trust from being a holder?

(playing the lenders role here fyi)

"Well counselor, your client (the borrowera) are not a party to the PSA, therefore any violation of it does not effect him/her, therefore he/she has no standing to complain about the PSA

While I agree with the concept, no where have I read the exact controlling authority (legally, regulatory, or otherwise)that states that any deviation from the PSA (or prospectus supplement)will vitiate the holder status of the true

You have been given this research task by the head of your law firm, how would you respond?

ANY reply would be greatly appreciated sir.

Thank you

I'm in foreclosure and everything that I'm reading is actually happening and has happened. These theives have committed securities fraud by monetizing my promissory note and acquired Federal Reserve Notes from an account in my name paid the seller and has sold it over and over all without my knowledge. Contract is only between my wife and myself, therefore a unilateral contract. No consideration was given at closing. I'm fighting it basically demanding that they show me the original note. The attorney's court docs they filed are asking the court to accept a copy because of course the original is "lost,stolen or destroyed. Do not have an attorney and can't afford one. Just hope the judge sees through the smoke and mirrors they continue to present to the courts.

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