October 22, 2010

Finally, proof positive has emerged as to something we have been talking about and telling the courts about for now into our third year: that those involved with the securitization of mortgage loans analyzed the loans in the pool, in advance, and determined (a) that certain mortgage loans would default; (b) when they would default; and (c) knowing this, they undertook measures to cover the realized losses ahead of time. At least that is what they told the investors.

From a Prospectus Supplement and Base file number 424b, the following was taken from the SEC’s website:

     In the following yield tables for classes B-2 and B-3, we assumed that:

       – scheduled interest and principal payments on the mortgage loans are received timely, except for mortgage loans on which defaults occur in accordance with the indicated percentages of SDA,

      – defaults on the mortgage loans in each pool will at all times occur at the same rate;

      – all defaulted loans are liquidated after exactly 12 months,

        – there are realized losses of a percentage (referred to in the tables as the “loss severity” percentage) of the principal balance at liquidation of the defaulted mortgage loans,

         –all realized losses are covered by subordination.

Here are some of the preliminary questions:

   (a)  how did the securitizers know in advance, for purposes of disclosing to potential investors and when the MBS had not even been released yet, which particular loans would default? (Answer: because the borrowers were only qualified at the initial or “teaser” rate and not qualified to meet the debt service on the life of the loan, especially when an Option ARM bump kicked in which guaranteed a default at that point);

   (b)  how did they know which defaults in each pool would occur “at all times at the same rate”? (Answer: see answer to first question above, and so that they could structure, in advance, the appropriate amount of insurance and protections to cover the losses realized by these pre-programmed defaults);

   (c)  what does it mean when they say that all defaulted loans would be liquidated after “exactly” 12 months (e.g. did they have a David Stern-style foreclosure mill (judicial states) or “successor” trustee and trustee sale company (non-judicial states) in tow ready to railroad foreclosures through the system in that timeframe no matter what)?

   (d)  what the realized losses would be in advance so as to properly structure the subordination protections. (Answer when you read other answers above)

Now we have it. Now we can go to the courts and show why the securitization discovery, which many courts in several states have already ordered produced, is not only relevant in securitization cases, but is also material to both defenses and damage claims (e.g. known predatory lending claims).

This is just the tip of an iceberg the size of Mount Everest. We will continue to provide more of this information as our researchers uncover more details.

Jeff Barnes, Esq., www.ForeclosureDefenseNationwide.com