Posted on October 24, 2009 by livinglies
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So called “auditors” will miss the fact that there are two yield spread premiums that were not disclosed to either the homeowner or the investor. Failure to account for the movement of money through the securitization chain and failure to account for appraisal fraud, essentially leaves 95% of the money on the table. Those who get paid recovering undisclosed yield spread premiums and profits and treble damages should want to take note. But it is easier to offer the less intensive “audit” (we like to call these forensic analyses because there is no audit in the accounting sense). This leaves most of your bargaining chips for modification or settlement sitting in the pocket of the pretender lender.
And this is why forensic reviewers and lawyers who understand the basics of securitization could go after the entire cruise ship but are walking away with only peanuts from the bar. SIGN UP FOR CLEARWATER, FLORIDA SEMINAR NOW
Let’s take a look at what I’m talking about. Example: You have a $300,000 loan that was “bumped” to a higher priced loan than what you would otherwise have qualified for.
This means the salesmen who sold you the loan product convinced you through misrepresentation of the loan and the marketplace that you will be better off with the worse loan. He knows it is worse but he gets paid for putting you in a worse loan. So he skews the facts and misdirects your attention until you come to “agree” that the worse loan is “better.”
If you would have qualified for a 5% annual interest rate, fully amortized, fixed rate for thirty years and instead you took some alternative flexible “loan” product to reduce your payments initially, the loan originator gets a yield spread premium which is required to be disclosed at your loan closing. Usually it isn’t. The amount of this first yield spread premium would probably be around $3,000. This is what the usual TILA “Audit” reveals. What they don’t reveal is an additional $180,000 undisclosed yield spread premium, plus the profit from payment from credit default swaps. So they are claiming around $10,000 in damages for you but they should be going after $600,000. Oops!
Same example with extra facts: The interest rate on the alternate loan that you signed calls for prepayment penalties and adjustable rates, resets of payments from interest only to fully amortized etc. In other words the risk of you defaulting on a loan that you could otherwise have easily paid, is increased immeasurably — a fact not lost on the securitization intermediaries. They, knowing the loan will probably fail, put your loan in a pool with similar loans that are likely to fail. Then they purchase credit default swaps betting that a substantial number of loans will fail thus receiving payment on the pool perhaps as much as thirty times over, because there were no limits on how many times they could insure the pool, even if they had no interest in it and even though they didn’t lend any money.
So it turns out that your real payment and real interest rate are much higher. Let’s say that it is a modest increase to 8% over some period of time. This interest rate is applied against the loan balance, $300,000 which means that for purposes of selling your loan to an investor, they are selling an “apparent” income of $24,000 per year plus a “guaranteed” return of principal.
What the investor doesn’t know is that you don’t qualify for an 8% loan and you can’t pay it. The investor (pension fund, hedge fund etc.) only knows that they are buying a bond which also gives them ownership in your loan and others in the pool. Since the bond is Triple AAA rated and “insured” (by AIG!), the risk is perceived by the investor as very low. So the investor is willing to accept a rate of return of only 5%, which is 1% higher than similar financial products on the market. The fund manager looks like a genius because the extra 1% translates to a 20% increase in fixed income. All the investor cares about at this point is that he just got an income of $24,000 per year virtually guaranteed, which gives him his 5% return.
Now for the analysis and why lawyers and forensic reviewers need to take note: Just take out a piece of paper, a calculator and try this for yourself. A new yield spread premium appears as a result of this shifty tactic of changing loan terms and it is huge. It turns out that the amount of the purchase price of the bond for a 5% return that equals $24,000 is $480,000. You can do the calculation as many times as you like but it comes out the same every time. They took $480,000 from the investor and gave you $300,000 keeping $180,000 for themselves. That means there is an additional yield spread premium of $180,000 that was undisclosed.
Under the TILA-Respa approach this means you are entitled to the first undisclosed yield yield spread premium of $3,000 (see above) PLUS the second yield spread premium of $180,000. And you may be entitled to treble damages. That could be $540,000 or perhaps twice the amount of your loan. That means you have a set off in an amount higher than the loan itself. That means they owe you more than you owe anyone. That means you can’t be in default. It means you are not in default. It means your foreclosure is improper, illegal, and immoral.
The moral of the story is stop looking for the easy cheap way out. Your house and your life are worth far more. Yes you will have to fight harder and longer to resolve the issues. And yes lawyers are slow to realize that this is a gold mine for themselves as well as you. But increasingly, judges, lawyers and homeowners are coming to realize that this was not a case where their eyes were too big for their stomach. This was a simple case of fast talking salesmen getting people into trouble without the slightest twinge of conscience. This wasn’t your fault. You are the victim, not the perpetrator of some great fraud on the financial industry. They knew exactly what they were doing when they cheated you and the investor in exactly the same ways.