| If a bank modifies a loan, the modification may result in | | | | institutionalized constraints, the sorry rate of |
| injury to certain classes of investors. Such financially | | | | foreclosures will continue unabated. Unless such a |
| injured investors may then sue the banks for improper | | | | countervailing force emerges from the private sector |
| administration of the investment resulting in billions of | | | | or from a need to respond to massive political |
| dollars of liability. Foreclosure, the measure generally | | | | pressure, very little is likely to change. |
| accepted and prescribed in the investment documents | | | | The discussion above has shown that the note holder |
| to cure default of securitized loans, averts risk and | | | | disappears in securitization and the securitization works |
| liability for lenders. | | | | an illegal modification of the Transaction without the |
| The securitized mortgages are subject to rules | | | | consent of the debtor. As organized, securitizations |
| created in the investment documents and rules issued | | | | have a third major difficulty. Typically a third party to |
| by the Internal Revenue Service to secure favorable | | | | the Transaction is required to make any monthly |
| tax treatment for securitized loans. These rules | | | | payment to the certificate holders which is in default. In |
| constrain the ability of the banks to modify mortgages. | | | | other words, if a specific mortgagor fails to make the |
| Such rules may include the following: | | | | January payment, a third party will make the payment |
| (a) Imposing the restrictions on mortgage modification | | | | for the mortgagor. Accordingly, the allegation in a |
| required to be made to qualify for pass through tax | | | | foreclosure proceeding that the January payment was |
| treatment under IRS regulations. | | | | not made and is in default is false. The January |
| (b) Imposing restrictions upon the number of | | | | payment was paid to the investors. How many times |
| mortgages in the pool which may be modified. | | | | must the investors be paid the January payment? |
| (c) Providing a procedure and fees to be paid for | | | | Once is enough. Is there any requirement in the |
| foreclosure but no procedure to modifying the loan as | | | | Transaction or anywhere else that only the named |
| an alternate dispute resolution. | | | | mortgagor can make the required January payment to |
| (d) Creating securities with classes of ownership | | | | the servicing agent? Absolutely not. |
| ("tranches") with adverse and opposing financial | | | | It may well be that such a third party who has made |
| interests resulting in so called "tranche warfare" so that | | | | payments in default is entitled to a legal recovery |
| a modification which favors one tranche may work a | | | | against the debtor. However, that party is not a party |
| detriment upon another. | | | | to the mortgage or a successor in interest to the |
| (e) Restricting the ability to lower interest payments on | | | | mortgagee and therefore has no right whatsoever to |
| the note. | | | | foreclose to effect repayment. To use the mechanism |
| (f) Restricting the ability to increase the number of | | | | of foreclosure to recover the third party debt |
| payments to be made. | | | | perpetrates a fraud and misuse of the foreclosure |
| (g) Restricting the ability to defer payments. | | | | proceedings. The mortgage is not intended to secure |
| (h) Restricting the ability to extend the term of the | | | | repayment of anyone. It is intended only to secure |
| mortgage. | | | | repayment of the mortgagee and the mortgagee's |
| (i) Restricting the ability to impose a temporary | | | | successors in interest. In the case of securitization, the |
| moratorium on payments. | | | | third parties making payments in default are |
| (j) Restricting the ability to accept "short sales". | | | | indisputably not the successors in interest of the original |
| (k) Creating potential liability to a specific class of | | | | mortgagee. |
| certificate holders by entering into a modification | | | | It is but a question of time until Congress and the |
| agreement required for an alternate dispute resolution. | | | | courts are compelled to recognize that securitization, |
| (l) Requiring the servicing agent to purchase any loan | | | | as practiced and without any public regulation, has |
| which has been modified. | | | | resulted in "Morgicide", the illegal and intentional |
| These restrictions work a modification of the | | | | destruction of mortgages by Wall Street. The upshot |
| Transaction without the consent of the borrower. This | | | | of this Morgicide will be the realization that the nation's |
| constitutes either a breach of contract or a tortious | | | | largest banks and financial institutions have caused |
| interference with a contract, or both. Failure to have | | | | millions of illegal foreclosures. Think of it this way. Your |
| obtained the consent of the borrower to a | | | | neighbor purchased a new car with an installment |
| securitization of the mortgage is a legally fatal flaw. | | | | credit loan. Your neighbor has failed to make monthly |
| Following the rules imposed on securitized mortgages | | | | installment payments. The dealer has the right to |
| constrains and restricts the ability of banks to modify | | | | repossess. Instead, I come along and take the car. The |
| loans. Even where the loan is modified only by | | | | police arrest me and charge me with Grand Theft |
| extending the term of the loan so that the original | | | | Auto. At trial, I defend myself by arguing that since my |
| principal and interest rate are unchanged, the cash | | | | neighbor was in default, I had the right to repossess |
| flow generated may not be sufficient to permit | | | | the car. Sorry, this will not work, and I am going to jail. |
| modification of the loan if the investors hold fixed rate | | | | The judge will rule only the dealer, not me, has the right |
| bonds. In short, banks make fees when they foreclose; | | | | to repossess. I acted as a mere thief in the night. |
| banks incur actual and potential liability when banks | | | | Similarly the financial institutions acting as plaintiffs in the |
| modify mortgages. | | | | foreclosure of securitized mortgages are acting like |
| The Administration and the banks have shown nothing | | | | the thief in the night. They are taking the house on |
| more than a willingness to pay lip service to the | | | | behalf of the secured creditor without being the |
| achieving loan modifications instead of foreclosure. | | | | secured creditor. |
| Documents issued by federal financial agencies and | | | | So far, just as in the Sherlock Holmes mystery known |
| Congressional Committees show that the government | | | | as "Silver Blaze" where the dog did not bark in the |
| is fully aware of the institutionalized constraints but | | | | night, our judges have been suspiciously silent. This will |
| loath to discuss such constraints with members of the | | | | change as more and more lawyers become familiar |
| public. There has been no serious effort by our | | | | with securitization. Look to see multibillion dollar class |
| government to address and overcome the | | | | actions suits for wrongful foreclosure as part of the |
| institutionalized constraints to loan modification. Until | | | | shameful legal legacy of unregulated securitization. As |
| there is a serious countervailing force to compel | | | | long as lawyers chase ambulances and sue for |
| lenders to modify mortgages which overrides the | | | | malpractice, Morgicide will not go unpunished. |