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    About a year ago, I sent an unsolicited securitization audit to Judge Elizabeth Magner in the case of Ron Wilson, LaRhonda Wilson (U.S. Bankruptcy Court for the Eastern District of Louisiana, case no. 07-11862). This Judge first won the affection of millions of homeowners as she accused Lender Processing Services “LPS” of fraud.

    In her April 7 opinion, Judge Magner said LPS’s wrongdoing was symptomatic of wrongdoing by the entire mortgage servicing industry. “The fraud perpetrated on the Court, Debtors, and trustee would be shocking if this Court had less experience concerning the conduct of mortgage servicers,” the judge wrote.
    When I read about this case I thought, here’s a judge that we need to give all the ammo she needs to attack and kill these parasites. So, I did what I call a down and dirty audit of the securitization holding the Wilson’s loan. This was completely unsolicited.
    So….I gave here links to the FWP, 424B5, POOLING AND SERVICING AGREEMENT(PSA), TRUST INDENTURE, ISDA SWAP AGREEMENT, 10D, 15D, and LOAN TAPE. That way she would know how to find this in other cases that may be before her, if she was so inclined to look.

    She already knew the loan was purported to be securitized in Option One Mortgage Loan Trust 2007-6 (the “Issuing Entity”) a New York common law trust established pursuant to the Pooling Agreement, but I wanted to tell her a few things she did not know about how predatory this loan was and the discrimination that took place through a securitization analysis.

    1. This loan was clearly a predatory high interest adjustable loan even though
    the credit profile of the borrower in the securitization trust is listed as AA paper.

    2. The loan has predatory terms such as a balloon, a large prepayment penalty,
    and only a 2 year fixed period before the loan adjusts every 6 months according to an index plus a high margin OF 6.05%.

    3. It was clear from an audit that other borrowers with similar or worse
    credit profiles received better terms from the same lender at the same point of origination.

    4. Other borrowers with the same or worse credit profile obtained better
    terms, lower interest rate, no prepayment penalties, and better types of loans such as longer reset time or even a fixed rate. How is that not discriminatory?

    2 Only 2 loans had worse interest rates
    2 Only 2 loans had worse interest caps ( highest rate charge possible)
    0 Loans had worse interest rate floors (lowest rate charge possible)
    0 Loans had worse loan type 2/28 adjustable with 6% margin
    8 Loans had lower rated paper(A, B, C) but received better terms
    7 Loans with same rated paper (AA) –received better terms
    11 Loans received NO Prepayment penalty

    In addition, I wanted her to understand the chain of title from origination through securitization, excessive servicing fees, credit enhancements/insurances, the fact that the borrower was set up to fail and insured to fail, unclean hands of ALL participants and the connections and conspiracy between the parties.

    I wanted her to get mad that the current holders of the securities include The Federal Reserve in Maiden Lane II LLC created as part of the rescue and payouts of insurance derivative contracts with AIG subsidiaries. How many times should the loans be covered?

    I wanted her to understand the conflicts of interest between the servicer and the trust investors. The trust language states: “The Servicer will initially, directly or indirectly, own all or a portion of the Class C Certificates, the Class P Certificates and the Residual Certificates. The timing of mortgage loan foreclosures and sales of the related mortgaged properties may affect the weighted average lives and yields of the Class A and Mezzanine Certificates. Investors should consider that the timing of such foreclosures or sales may not be in the best interests of all certificate holders and that no formal policies or guidelines have been established to resolve or minimize such a conflict of interest.”

    I wanted her to understand Wells Fargo’s role. They made an affirmative
    representations that they had taken delivery and receipt of the loan files, had reviewed them and was safekeeping them. So where the hell are all the original documents?

    “Wells Fargo Bank, N.A. serves or may have served within the past two years as loan file custodian for various mortgage loans owned by the Sponsor or an affiliate of the Sponsor and anticipates that one or more of those mortgage loans may be included in the Trust. The terms of any custodial agreement under which those services are provided by Wells Fargo Bank, N.A. are customary for the mortgage-backed securitization industry and provide for the delivery, receipt, review and safekeeping of mortgage loan files.”

    I wanted her to understand that trust documents state that a loan file review would be
    conducted within 45 days of the closing date to determine missing documents, including assignments.

    “On the Closing Date, the Depositor will transfer to the Trust all of its right, title and interest in and to each Mortgage Loan, the related mortgage note, Mortgage, assignment of Mortgage in recordable form in blank or to the Trustee and other related documents (collectively, the “Related Documents”), including all scheduled payments with respect to each such Mortgage Loan due after the Cut-off Date. The Trustee, concurrently with such transfer, will deliver the Certificates to the Depositor. Each Mortgage Loan transferred to the Trust will be identified on a schedule (the “Mortgage Loan Schedule”) delivered to the Trustee pursuant to the Pooling Agreement. The Mortgage Loan Schedule will include information such as the Principal Balance of each Mortgage Loan as of the Cut-off mortgage note, a lost note affidavit executed by the Originator Date, its Mortgage Rate as well as other information with respect to each Mortgage Loan.”

    “The Pooling Agreement will require that, within the time period specified therein, the Depositor will deliver or cause to be delivered to the Trustee (or a custodian, as the Trustee’s agent for such purpose) the mortgage notes and the Related Documents.
    Within 45 days of the Closing Date, the Trustee will review the Mortgage Loans, in each case, together with the Related Documents pursuant to the Pooling Agreement and if any Mortgage Loan or Related Document is found to be defective in any material respect and such defect is not cured within 120 days (subject to the terms of the Pooling Agreement) following receipt of notification thereof to the Originator from the Trustee, the Originator will be obligated to either (i) substitute for such Mortgage Loan a Qualified Substitute Mortgage Loan; provided, however, such substitution is permitted only within two years of the Closing Date and may not be made unless an opinion of counsel is provided to the effect that such substitution will not disqualify any of the REMICs (as defined in the Pooling Agreement) as a REMIC or result in a prohibited transaction tax or prohibited contributions tax under the Code or (ii) repurchase such Mortgage Loan at a price (the “Purchase Price”) equal to the outstanding Principal Balance of such Mortgage Loan as of the date of purchase, plus all accrued and unpaid interest thereon, computed at the Mortgage Rate through the end of the calendar month in which the purchase is effected, plus the amount of any unreimbursed Advances and Servicing Advances (each as defined herein) made by the Servicer, plus any costs and damages incurred by the Trust in connection with any violation by such loan of any predatory or abusive-lending law.”

    I wanted her to understand the layers and layers of insurances or as I like to say, the incentive to foreclose. Stress tests and modeling assumptions revealed most of the highly predatory loans would fail and that they were in fact setting up the borrower to fail.

    I wanted her to understand the final step in the fraud scheme is to foreclose, complete the theft of the home, and collect on the insurances proceeds which exceed the value of the property.

    I wanted her to understand that the pass through rate to the investors was only —–and they would receive no more if the Wilson’s paid 10% or 2%. Who is hurting the investors? Not the homeowners, the FED for keeping LIBOR at near zero helps the banks, large hedge funds, and the Federal Reserve holding residual classes of securities hoping for excess cash flow for excessive interest charges.

    I wanted her to understand that the predatory excessive interest rate structure and prepayment penalty was for the benefit of Option One upon securitizing the loan. The Debt to Income ratio of 55.37% was not making a reasonable determination of the borrower ability to repay. Consider the following language from the trust:

    Underwriting Standards
    “The Mortgage Loans were also generally underwritten with a view toward resale in the secondary market. The Mortgage Loans generally bear higher rates of interest than mortgage loans that are originated in accordance with customary Fannie Mae and Freddie Mac standards.”

    “Option One Underwriting Guidelines require a reasonable determination of an applicant’s ability to repay the loan. Such determination is based on a review of the applicant’s source of income, calculation of a debt service-to-income ratio based on the amount of income from sources indicated on the loan application or similar documentation, a review of the applicant’s credit history and the type and intended use of the property being financed.”

    I wanted her to know that OPTION ONE CORPORATION and its securitizer partners,
    Banc of America Securities LLC and Citigroup Global Markets Inc., RBS Greenwich Capital, and H&R Block Financial Advisors ( parent of Option One), had full knowledge and was well aware they were putting these borrowers at severe risk of financial devastation and loss of their home.

    I wanted her to know that all of these participants in the scheme knew these were risky loans originated under “teaser” rates. Doesn’t that sound like a nice word for deceit? I’ll tease you to entice you into this exploding arm loan that I know you don’t really understand. I understand that the index is rising and we are going to make a bundle off of you. And if you can’t pay, don’t worry we have insurance out the kazoo.

    “Investors should note that substantially all of the adjustable-rate Mortgage Loans were originated at rates below the sum of the index at origination and the related gross margin (the “Teaser Rate”). In addition, on the first adjustment date following the origination of the adjustable-rate Mortgage Loans, the mortgage rate can increase by as much as 5.000% per annum. The underwriting standards of the Originator in determining a borrower’s ability to pay generally (i) allows debt-to-income ratios higher than Fannie Mae and Freddie Mac standards, (ii) looks at the Teaser Rate on the adjustable-rate Mortgage Loan and not the related fully-indexed mortgage rate and (iii) generally does not include tax and insurance payments.”
    “The factors described in the preceding paragraph may result in the adjustable-rate Mortgage Loans experiencing increased delinquency, foreclosure, bankruptcy and loss than other Mortgage Loans

    I wanted her to understand the full depth of the fraud and corruption of the
    background story, the connections and cooperation of ALL the securitization parties, and that LPS is simply a hired gun in order to attempt to create an appearance of an arm’s length transaction to commit fraud.

    I wanted her to not just let LPS take the bullet, but to sanction each participant for their conduct and conspiracy to defraud the homeowners. I can only hope that in her latest spanking of Wells Fargo, I contributed in some small way to her outrage.

    I think if more judges understood the whole story, they would be angry too.

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