Part 3 of My RC Report: Undisclosed Risk to Borrowers

Go here for Introduction to Report
Go here for Part 2

Section 2. UNDISCLOSED RISK TO BORROWERS

• “Almost 50 years ago, admittedly in the context of exclusion clauses, the courts propounded the fundamental principle that the more unreasonable a clause, the greater the notice which must be given of it. Lord Justice Denning, in the English Court of Appeal, expressed the principle eloquently in a well-known dictum, observing that ‘some clauses, which I have seen, would need to be printed in red ink on the face of the document, with a red hand pointing to it before the notice could be held to be sufficient’.  
It seems difficult to argue convincingly that this principle should not apply equally to bringing the risks of securitisation to the attention of home loan borrowers today.”  Doctor Pelma Jacinth Rajapakse¹. Australia
• “… no-one who has a loan secured by a mortgage on his home is safe.”  Marie McDonnell²
• The sale of mortgage bundles worldwide was done “without full disclosure of the … risks.”  Max Wolff³

Some of the Risks:
a.   i.  Australia’s Dr Pelma Rajapakse exposes the long term risk of claims against Borrowers even if the Borrower is completely up-to-date with payments.  
‘… in practice, most borrowers are oblivious to the risk that their homes (or investment dwellings) could be sold by downstream financial intermediaries who have ‘purchased’ the bank’s or IMP’s mortgagee rights, not due to a failure to pay on the part of the borrower, but as a result of some act or omission by a downstream financial intermediary in the supply chain.'
Page 86 of the Master Information Memorandum (MIM) for PUMA S-2 securitisation trust, confirms this. In certain circumstances, unrelated to the borrower, the Secured Creditors may direct the Security Trustee to ‘appoint a receiver over the Trust assets’ (which includes loans and mortgages), ‘declare all Secured Moneys (the loans) immediately due and payable’, and “enforce the charge’ - i.e. ‘sell and realise the assets’ (including mortgaged property) of the Trust’.
Page 19 of the PUMA S-2 Security Trust Deed (STD) at 8.2  Extraordinary Resolutions also exposes Borrower risk through the power of the Security Trustee  to demand immediate and full repayment of loans and/or to strip borrowers of their properties.  “The Secured Creditors may direct the Security Trustee by Extraordinary Resolution to: 
     (a) Accelerate Secured Monies - declare the Secured Monies immediately due and payable; 
     (b) Appoint a Receiver;  
     (c)  Exercise power of Sale over charged property - to sell and realise the charged Property; 
     (d) other action as sees fit.’

In other words, given certain circumstances over which the borrower has no control, the Trust asserts the right to demand immediate payment of your loan and/or sell your property even if you have never missed a payment.
     ii. The risk that a borrower’s property could be sold by downstream financial intermediaries remains for the life of the securities that were created from their mortgage. In the case of PUMA S-2, that is until the Maturity Date of May 2037 - about 31 years

b. There is real risk that entities unrelated to the loan/mortgage transaction the borrower originally entered into will claim the right to foreclose on borrowers.  
A San Fransisco study found that at least 65% of all foreclosures were initiated by ‘strangers to the transaction’. No studies have been done in Australia, so some will be tempted to say, ‘but that’s in the US; things are different here’.
Yes, some of our laws do differ from the US, but securitisation the world over has many aspects in common - and many of our laws do correlate well with US law on these matter. Rather than defensively jumping to conclusions, let me ask you to consider the fact that people who are qualified to speak call Securitisation a 'global ponzi scheme' (Martin Wolff), and that this ‘global ponzi scheme’ ‘spread through the global system’ (Mike Whitney⁴).
It’s not irrational to at least contend that banks which are not playing this securitisation game according to the strict requirements of the Pooling and Servicing Agreement and other Trust documents, and which are flaunting law in the US and other countries, are very unlikely to be doing everything by the book here in Australia.

c. Claims by multiple entities that they have the right to foreclose. eg. in GMAC Mortgage v Debbie Visicaro the Judge stated, ‘There was a different plaintiff pursuing a foreclosure proceeding on the same note and mortgage as the one that was being proceeded on.  Both of the cases contained allegations in the original complaints that the separate plaintiffs were the owners and holders of the note …”  Yes, this, and others like it, is a US case. However, because of the way securitisation is practiced, the risk of claims on Australian borrowers by multiple entities is very real.

d. Presumptions by the judiciary that prejudice them against borrowers - leading to unjust judgements.  The practice of securitisation has rendered many presumptions obsolete. (See section 19 on ‘Presumptions’)

e. Predation by banks by various means resulting in unaffordable loans that are calculated to fail - discussed very briefly in Section 1 - and creates huge bank profit via Securitisation and Credit Default Swaps (Section 17).

f. Undisclosed Table Funding of loans creates another risk to Borrowers - that of being foreclosed when, despite the appearance of things, there are actually no valid instruments connecting the loan and/or mortgage to the bank and/or Trust. 
(Section 20 will discuss this further)

Pelma Rajapakse explains, non-disclosure of borrower risk in Australia ultimately puts the banks themselves at risk: '… they could ultimately face a wave of litigation similar to that precipitated by the foreign currency loan scandals of the mid-to-late 1980s. In essence, all of that litigation arose, not from the complicated nature of the (then) ‘novel’ financing arrangements, but from the banks’ failures to notify borrowers of the risks involved.'
I suggest failure by banks to notify borrowers of the risks they face because their loan and mortgage have been securitised, has been intentional, and a calculated risk by banks. They know that the chance of a borrower having the knowledge, the money, and the legal support to litigate are minimal. From beginning to end of the securitisation process, conflicts of interest and secrecy abound, and the profit motive - at the expense of the Borrowers and the Investors - wins.
As things stand, in the world of securitisation, the banks have little motive to change their behaviour, thus leaving Australian borrowers unwittingly at risk of serious loss.

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1.  Dr Pelma Rajapakse - B Commerce (Hons), M Arts, M Laws, PhD. Senior Lecturer, Griffith Business School, Brisbane Australia.
2.  Marie McDonnell - Mortgage Fraud and Forensic Analyst, Expert Witness, and Certified Fraud Examiner
3.  Max Wolff - Economist and strategist with 10 years experience in alternative assets and 10 years teaching Economics and Statistics at the graduate level. He has made hundreds of appearances and published articles in leading media outlets including Bloomberg TV, CNBC, Fox News, The Financial Times, CBS Evening News, ABC News, BBC, and The Wall Street Journal.
4.  Mike Whitney - Global Research 2009.  Securitization: The Biggest Rip-off Ever. Financial Deregulation has Opened Up A Pandora's box.