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    IS FORECLOSURE IN THE BEST INTEREST TEST OF THE INVESTORS? HELL NO

    IS FORECLOSURE IN THE BEST INTEREST TEST OF THE INVESTORS? HELL NO

     

                   Before we begin with this analysis, let’s just make sure we have the rules straight. The Trustee, Master Servicer and Servicer have a duty to do what is in the best interest of the investors, right? 

     

                   In theory this is true, however in reality all of the participants who sold the investors all the garbage no longer have any financial benefits and are only left with the pain of the scheme they concocted.  Servicers who collected $100,000 to $300,000 for servicing per month on each trust, now routinely advance more than they collect for delinquent homeowners.   Trustees, underwriters, and trust creators are being sued for inflated appraisals, robo-signing, failure to enforce repurchases, and assorted other breaches of their duties.  Insurers are falling like dominos creating uncertainty about recovery on all those undisclosed layers of insurance placed on loans. So with all this going on, the race is on to liquidate the loans, after all you can’t repurchase what is already liquidated, the investor can only get the proceeds for the liquidated loans.  Wow, is anyone paying attention?

     

                   One example of a servicer who signed on for the glory but wants out of the pain is Wilbur Ross, the vulture investor who purchased American Home’s servicing platform(“AHMSI”) out of the bankruptcy. He may just have shot himself in the foot this time.  A  January 2008 article in Fortune Magazine asked if Ross had “Lost His Mind,” for investing in AMBAC the distressed insurer. 

     

    http://money.cnn.com/2008/01/25/news/newsmakers/boyd_ross.fortune/

     

                   My most recent research revealed that he is out close to 4 billion in servicing advances, and his latest servicer advance bond (yes they ask investors to buy those too) did not receive a AAA rating. Anyone who buys these bonds is crazy as a loon. 

     

                The American Home Mortgage SART deal possesses characteristics more inline with mid-investment grade ratings, Fitch said. Fitch specifically made that statement about American Home Mortgage “AHM SART 2011-1″ transaction.  American Home terminated the agreement with Fitch, the ratings agency said, after not getting the triple-A status. Fitch said it had a responsibility to publicized the development.

    http://www.housingwire.com/tag/american-home-mortgage-servicing

    http://www.dbrs.com/research/239589/ah-mortgage-servicer-advance-revolving-trust-1-advance-receivable-backed-notes-series-2011-1-rating-report-series-2011-1.pdf

    According to Fitch Ratings, RMBS servicer advance receivable transactions “are comprised of a pool of receivables that loan servicers expect for advances made on delinquent loans. These usually include principle, interest, taxes, insurance, and property upkeep and maintenance.”

                   Anyway I digress, my point is that even if it was in the best interest of the pension funds, retirement funds, and assorted AAA investors ( these are the only active tranches left in the securitizations), these “trust managers” want to obliterate this stuff off the face of the map.

    You, my friend are nothing more than road kill. They won’t even stop to pick up your carcass as they speed on to the final destination.

     

                So what are they thinking….Let’s peek into the devilish minds. 

     

    According to a white paper written by Jordan Dorchuck executive vice president and chief legal officer of AHMSI, Lockhart, vice chairman of WL Ross & Co., and Pete Mills, managing director of Mortgage Banking Initiatives Inc.:

    1)      The PSAs don’t authorize these distressed mortgage loan sales because loss of accounting sale treatment would have resulted in potentially financially costly results for the securitization sponsors, but a change in accounting rules last year no longer constrains servicers from selling distressed notes out of securitization trusts, the paper says.

    NOTE: Was your loan transferred after default?? Don’t you think you should find out? Per Dodd Frank, you must be notified of a change in ownership by the purchaser of the loan.

    2)      While there are a substantial number of homeowners underwater on their mortgage — where they owe more than the property is worth — servicers are reluctant “to reduce principal for fear of investor dissatisfaction and out of concern for moral hazard.”

    NOTE: Wow, now the servicer are worried about moral hazard? I guess all the pesky illegal activity such as creating and using fraudulent documents, was moral? Whenever these ass wipes use moral hazard as an argument, I want to shove some hazard where the sun don’t shine.

    3)      Dorchuck, Lockhart and Mills also said the massive volume of distressed properties interferes with servicers’ ability modify loans. “Removing these loans from securitization trusts at NPV positive prices, and allowing private sector distressed asset purchasers to compete for and acquire the loans, should provide a material benefit to borrowers by giving them the one last clear chance that HAMP was intended to provide, but appears unable to deliver to many homeowners,” they said.

    NOTE: If any of this makes sense to you, please do fill me in. How is selling your loan to a vulture bad debt buyer instead of working it out with you going to give you a shot at a loan mod? Anyone out there ever dealt with Kondaur or other bad mortgage buyers. These bottom feeders are out for blood when they try and foreclose. 

    4)      “From the MBS investor perspective, market prices of their securities already reflect large foreclosure losses. Short sales of mortgage loans should reduce those expected losses and achieve ‘finality,’ quickly.  After the sale, smaller, default management-oriented special servicers would be engaged by the new owners to handle these borrowers and assets, according to the white paper.

     

    NOTE: My point is clear in this statement – they want out QUICK. Forget how it hurts you, the investors or the real estate market, just get it over with quick. For them it’s like pulling the proverbial bandaid. Frankly I’d like to see them suffer for years. They just want to get rid of their servicing responsibilities on those notes.

    5)      There are roughly 4 million residential mortgages in some stage of default or already foreclosed on. Dorchuck and his co-authors cite a report from Amherst Securities in early October that states another 5 million to 7 million borrowers may enter the foreclosure process before the end of 2012.”Without changes, the volume of foreclosures will continue to outpace the number of loan modifications,” Dorchuck, Lockhart and Mills wrote in the white paper.

    SO THAT BRINGS US TO MY POINT – ARE THEY ACTING IN THE BEST INTEREST OF THE INVESTORS?

     

    Here is one test -Luminent Mortgage Trust 2007-2

     

    SEPTEMBER INVESTOR REPORT FOR LUMINENT 2007-2

    The remaining loans in the trust are 1160 loans with a value of $357,226,082.44.

    HYPOTHETICAL

    If all 1120 loans were modified to a 2% interest rate, cash flow of $1,469,260 would be available for distribution to the investors each month as opposed to the current $151, 905 per month.

    RESULT

    MONTHLY  INCREASE OF $1,317,355

     

    LIFE OF THE LOAN TEST

    Over the life of the loans without any extension of time on loan contracts(remaining term of 26 years), the investors would receive $101,183,038 in interest as opposed to the current loss severity of  50-60%.

    RESULT

    GAIN OF $458,409,120 as opposed to a loss of $178,613,041( 50% of $357,226,082) or total recovery of $178,613,041 as opposed to $458,409, 120.

     

    DOES THIS MAKE ANY SENSE?

    I can tell you that the securitizers will argue that if LIBOR goes back up, they would be

    on the hook for higher pass through to the investors which would result in them being on the hook to make up the difference between the 2% and the promised pass-through. I can easily defeat this argument. These trusts are liquidating so that they will never have to pay out when LIBOR goes up. And as an investor shouldn’t you be pissed off enough at the fraud that got you in this predicament in the first place.  Can’t you see they are manipulating LIBOR so you are screwed as well? WAKE UP and demand that they work out the remaining loans before you lose the rest of what you have left by continuing to suffer massive losses upon liquidation. I have news for you, you are being screwed along with the homeowners!

     

    CONCLUSION

    The best interest test of the investors is not met when loan liquidations result in loss of principal invested while loan modifications result in no losses and pass through over the life of the loan is well over the original principal invested. The investor will not receive any more interest if the borrower pays 10% or 2%. The pass through is tied to LIBOR ( current LIBOR)plus a small margin.

     

     

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