Sunday, January 8, 2012

WHAT ABOUT THE WAMU PLEDGED LOANS & THE FEDERAL HOME LOAN BANK

PLEDGED LOANS
WASHINGTON MUTUAL BANK & THE FEDERAL HOME LOAN BANK: 


A Potential Argument as to Why JPMorgan Chase Bank NA May Have No Status AS
“HOLDER IN DUE COURSE”

A Collaboration by Brenda Reed & James M. Kelley

This article is for information purposes only.
We are not attorneys.  Nothing stated herein should be construed as legal advice.
Always consult with a qualified attorney.


Gradually the truth unfolds.

Prior to becoming a “failed bank” Washington Mutual Bank had membership in the Federal Home Loan Bank of San Francisco while Washington Mutual Bank Fsb was a member of the Federal Home Loan Bank of Seattle. Membership does not appear to have existed in the name of “Washington Mutual Bank FA” at the time of failure. Both banks had the ability to borrow from the FHLBanks and did so to the sum of $78.999 billion prior to the failure of Washington Mutual Bank through a financial instrument known as a “pledged loan.” 

On September 25, 2008, the Office of Thrift Supervision appointed the  FDIC as receiver of the failed Washington Mutual Bank.[i]  Previously on June 30, 2008 the OTS reported that Washington Mutual Bank had total assets of $307.02 billion; total borrowings of $82.9 billion primarily comprising Federal Home Loan Bank advances of $85.4 billion and $7.8 billion of subordinated debt.  WMB held $118.9 billion in single-family homes for investment that included $52.9 billion in payment option ARMs and $16.05 billion in subprime mortgage loans.

A “pledged loan” is defined as a mortgage loan that has been identified and set aside as security by the holder of the mortgage; particularly a loan that has been pledged as security for an advance from a Federal Home Loan Bank.  (Source:TeachMeFinance.com – explain pledged loan.)

On that very same date, September 25, 2008 in a Purchase and Assumption Agreement with the FDIC, JPMorgan Chase Bank, N.A. (who had previously attempted to buy WMB in March 2008) acquired deposits, assets, and certain liabilities of Washington Mutual Bank (WMB) and Washington Mutual Bank FSB’s (WMBfsb) banking operations for $1.9 billion and assumed the following:  
  1. outstanding advances [ii]made by the Federal Home Loan Bank of San Francisco to Washington Mutual Bank as of September 30, 2008  --  $63.283 billion. [iii]  
  2. outstanding advances from the Federal Home Loan Bank of Seattle to Washington Mutual Bank FSB as of September 30, 2008  --  $15.713 billion.  This includes $3 billion in Federal Home Loan Bank of New York advances from the acquisition of Dime Savings Bank of New York, FSB, a former member of the FHL Bank of New York." 
  3. total “Pledged Loans” to Federal Home Loan Banks  as of September 30, 2008  --  $78.999 billion
Washington Mutual, Inc. reported $107 billion of residential first loans in its portfolio in June 2008 on its 10-Q.  It looks like the bulk of these loans were pledged to the Seattle and San Francisco Federal  Home Loan Banks. It requires the delivery of the note, inter alia. There is more information here:


On September 30, 2008 Washington Mutual Bank and Washington Mutual Bank FSB had a total of  $78.999 billion in "Pledged Loans" with the Federal Home Loan Bank.  This indicates that prior to September 25, 2008, the date that the Office of Thrift Supervision seized the failed Washington Mutual Bank and placed it in receivership with the FDIC, that the Federal Home Loan Bank, if acting responsibly, had taken possession of  WMB and WMBfsb loan collateral (Notes) valued in excess of $78,999 billion – thus eliminating any possibility that JPMorgan Chase Bank NA may have the special status of "holder in due course.”[iv]

Source: 

NOTE:

However ---- JPMorgan Chase Bank NA, could be a holder of the note.

And ---- JPMorgan Chase Bank NA could be a holder of the note without being the owner of the note.

A mortgage holder is a person or company that has a right to enforce a mortgage loan agreement. The mortgage loan consists of a promissory note and a security interest, which is the actual mortgage or, in some states, a deed of trust. The mortgage holder is the person with the legal right to enforce repayment under the notes or foreclosure under the security interest.  Mortgage holders can generally enforce repayment of the mortgage loan by demanding payment under the note, and if that doesn't work, by enforcing the lien through a foreclosure sale of the collateral under the security interest.  The mortgage lender that provides the mortgage funds to the borrower is the loan originator and the initial mortgage holder. However, it is common in the U.S. economy for the mortgage holder to change, because mortgage lenders often purchase and sell mortgage loans in the secondary market.

The person who takes over a mortgage loan and becomes a new holder does so by receiving a transfer and assignment of the mortgage loan. Generally, the new mortgage holder will pay the originator or another mortgage holder a certain amount in relation to the amount owed on the loan. The new mortgage holder assumes all the same legal rights that the previous mortgage holder had.

The mortgage loan does not change simply because the mortgage holder changes. Instead, the mortgage loan always operates according to the original terms and conditions contained in the mortgage documents, meaning the note and the security document. The mortgage holder never has the right to unilaterally change the mortgage documents. Therefore, a change in the mortgage holder on your mortgage loan will not result in a change in any of the terms of your mortgage loan.


It is worth noting that JPMorgan Chase Bank NA was put on notice that the loans being acquired were questionable.

The Federal Home Loan Banks do not offer any direct guarantees of mortgage security performance.  Rather they serve as a collateralized lender to members accepting mortgage loans and other qualifying real estate collateral[v] as security for advances. As a collateralized lender, the Federal Home Loan Bank does not hold the original mortgage loan on its balance sheet;  the loan is held on the balance sheet of the member bank (i.e. Washington Mutual Bank) that generally originated the loan. The FHLBank requires the member institution to sign an “advances and security agreement” that establishes the FHLBank’s security interest in the member’s assets (i.e. mortgage Notes).

Each FHLBank has specific policies that define eligible collateral and its valuation as security for extensions of credit. Depending upon the Federal Home Loan Bank’s credit underwriting criteria, the security interest in the members’ assets fall into three categories applicable to real estate-related loans:
  1.   No delivery (“blanket lien”),[vi] or 
  2.  Segregation of collateral against advances at the member’s site - often referred to as a “listing;” or 
  3. “Delivery,” i.e. the delivery of loans to the Federal Home Loan Bank or third party custodian. All securities are delivered to the Federal Home Loan Bank or its third-party custodian

However, if an FHLBank has perfected a security interest in delivered collateral by filing a Uniform Commercial Code (UCC) financing statement, the UCC gives the FHLB priority over unsecured creditors or other secured creditors without possession in receivership. (State laws may conform to the UCC.)

Most Federal Home Loan Banks also have internal risk ratings to determine collateral pledging status (blanket lien, listing or delivery), the type and amount of loans eligible to be submitted for collateral if delivery is required, and the loan value of the collateral.


The FHL Banks limit their risk of loss on advance by: 
  1. Securing borrowings with sufficient acceptable collateral;   
  2. Having the ability to demand additional collateral or substitute collateral, during the life of an advance;  
  3.  Monitoring the creditworthiness and financial condition of borrowers, and 
  4.  Performing collateral reviews and valuation procedures.

Furthermore the FHL Bank
  • Gives the FHL Banks the authority to protect their security position with respect to advances, including requiring the posting of additional collateral, and 
  • Grants the FHLBanks a priority over the claims and rights of any party, including any receiver, conservator, trustee or similar lien creditor.


FHLBanks have several ways to protect their security interest if a member borrower’s financial condition deteriorates. 
  • First, an FHLBank may change collateral status from blanket/listing to delivery.  This change can result in increased costs for the members such as charges for delivery and release of loan, provision of regular reports that updates information on each loan delivered and ancillary expenses associated with preparing the loans for delivery (copying, packaging, and shipping). 
  • Second, most FHLBanks will shorten the term of borrowing as well as reduce the available credit line for members with deteriorating risk ratings. 
  • And finally, collateral valuation may be lowered.

To reiterate the FHLBanks have a “super lien” against the assets of a failed institution.  To protect their position as creditor, they have a claim on any of the additional eligible collateral in the failed bank.  In addition, the FDIC has a regulation that reaffirms the FHLBs priority and the FHLBs can demand prepayment of advances when institutions fail.  But this arrangement was under growing scrutiny by federal regulators.


ENDNOTES:
[i] As of June 30, 2008, Washington Mutual Bank had total assets of US$ 307 billion, with 2,239 retail branch offices operating in 15 states, with 4,932 ATMs, and 43,198 employees. It held liabilities in the form of deposits of $188.3 billion, and owed $82.9 billion to the Federal Home Loan Bank, and had subordinated debt of $7.8 billion. It held as assets of $118.9 billion in single-family loans, of which $52.9 billion were "option adjustable rate mortgages" (Option ARMs), with $16 billion in subprime mortgage loans, and $53.4 billion of Home Equity lines of Credit (HELOCs) and credit cards receivables of $10.6 billion. It was servicing for itself and other banks loans totaling $689.7 billion, of which $442.7 were for other banks. It had non-performing assets of $11.6 billion, including $3.23 billion in payment option ARMs and $3.0 billion in subprime mortgage loans.[
On September 15, 2008, the holding company received a credit rating agency downgrade; from that date through September 24, 2008, customers withdrew $16.7 billion in deposits, which ultimately led the Office of Thrift Supervision to close the bank.


The FDIC then sold most of the bank's assets and liabilities, including secured debt to JPMorgan Chase for $1.9 billion. Claims of the subsidiary bank's equity holders, senior and subordinated debt (all primarily owned by the holding company) were not acquired by JP Morgan Chase.

[ii]  The FHL Banks make loans, called “advances” almost exclusively to their members on the security of mortgages and other collateral pledged by the borrowing member.  Advances are secured by mortgages held in member portfolios and other eligible collateral pledged by members.  Due to market, size or other limitations, lenders may originate loans that they want to hold in portfolio or are unable to sell in the secondary mortgage market.  FHL Bank advances can serve as a funding source for a variety of conforming and nonconforming mortgages.  FHL Bank advances support important and diverse housing markets, including those focused on very low-, low-, and moderate-income households.  For those members that choose to sell or securitize their mortgages, FHLBank advances can provide interim short-term funding.

The FHLBanks protect against credit risk on advances by collateralizing all advances. The FHLBank Act requires that FHLBanks obtain and maintain security interests from their members in acceptable collateral sufficient to secure all advances at all times that the advance is outstanding to protect against losses. The FHLBank Act also allows the FHLBanks to accept as eligible collateral for advances only certain United States government or government agency securities, residential mortgage loans and securities backed by such, cash, deposits in the FHLBank and other real estate related assets.

Collateral arrangements will vary with member credit quality, borrowing capacity and collateral availability as well as the FHLBank’s overall credit exposure to the member. An FHLBank establishes each member’s borrowing capacity by determining the amount it will lend against each collateral type. Members are also required to fully collateralize the face amount of any letters of credit issued for their benefit by an FHLBank. Each FHLBank can call for additional or substitute collateral during the life of an advance to protect its security interest. An FHLBank would require a borrower to substitute qualified collateral or to pay down advances if necessary to maintain sufficient qualified collateral to cover outstanding advances.

Substitution generally occurs if the borrower does not have sufficient excess collateral pledged to support outstanding credit exposure. The call for additional collateral can include requesting ineligible collateral to secure advances if an FHLBank believes that it needs the collateral in order to protect itself. However, such ineligible collateral cannot serve as the basis for issuing or renewing an advance for a member.


[iii] FHLBank of San Francisco.  On September 25, 2008, the FDIC was appointed receiver of Washington Mutual Bank.  In connection with the receivership, JPMorgan Chase Bank, National Association, a nonmember, assumed Washington Mutual Bank’s outstanding FHLBank of San Francisco advances and acquired the associated FHLBank of San Francisco’s capital stock, which became mandatorily redeemable.  As of the receivership date, Washington Mutual Bank was the FHLBank of San Francisco’s second largest borrower and stockholder.  JPMorgan Chase Bank National Association remains obligated for all of Washington Mutual Bank’s outstanding advances and continues to hold the FHLBank of San Francisco’s capital stock it acquired from the FDIC as receiver for Washington Mutual Bank.  On October 24, 2008, JPMorgan Bank and Trust Company, National Association, an affiliate of JPMorgan Chase Bank, National Association, became a member of the FHL Bank of San Francisco.

[iv] The Holder in Due Course (HDC) doctrine is a rule in commercial law that protects a purchaser of debt. The doctrine insulates the purchaser of debt, or other obligation to pay, against charges that either party to the original transaction might have had against the other.  In the context of negotiable instruments, a Holder in Due Course must have given value in good faith without notice of any previous dishonour in taking the bill, which appears to be complete and regular. Using the previous example, to qualify as someone who has given value in good faith without notice, C should have provided consideration to B in exchange for the transfer of the right to payment. He also must not have been aware of any defect in the right to payment. Then, if C fits the requirements of a HDC, he will take the bill free from any defect in title, such as any dispute between A and B.

U.C>C. § 3-302. Holder in Due Course.

  • (a) Subject to subsection (c) and Section 3-106(d), "holder in due course" means the holder of an instrument if:
    • (1) the instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; and
    • (2) the holder took the instrument (i) for value, (ii) in good faith, (iii) without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series, (iv) without notice that the instrument contains an unauthorized signature or has been altered, (v) without notice of any claim to the instrument described in Section 3-306, and (vi) without notice that any party has a defense or claim in recoupment described in Section 3-305(a).
  • (b) Notice of discharge of a party, other than discharge in an insolvency proceeding, is not notice of a defense under subsection (a), but discharge is effective against a person who became a holder in due course with notice of the discharge. Public filing or recording of a document does not of itself constitute notice of a defense, claim in recoupment, or claim to the instrument.
  • (c) Except to the extent a transferor or predecessor in interest has rights as a holder in due course, a person does not acquire rights of a holder in due course of an instrument taken (i) by legal process or by purchase in an execution, bankruptcy, or creditor's sale or similar proceeding, (ii) by purchase as part of a bulk transaction not in ordinary course of business of the transferor, or (iii) as the successor in interest to an estate or other organization.
  • (d) If, under Section 3-303(a)(1), the promise of performance that is the consideration for an instrument has been partially performed, the holder may assert rights as a holder in due course of the instrument only to the fraction of the amount payable under the instrument equal to the value of the partial performance divided by the value of the promised performance.
  • (e) If (i) the person entitled to enforce an instrument has only a security interest in the instrument and (ii) the person obliged to pay the instrument has a defense, claim in recoupment, or claim to the instrument that may be asserted against the person who granted the security interest, the person entitled to enforce the instrument may assert rights as a holder in due course only to an amount payable under the instrument which, at the time of enforcement of the instrument, does not exceed the amount of the unpaid obligation secured.
  • (f) To be effective, notice must be received at a time and in a manner that gives a reasonable opportunity to act on it.
  • (g) This section is subject to any law limiting status as a holder in due course in particular classes of transactions.

[vi] Under the blanket lien status, an individual FHLBank allows a member to retain possession of eligible collateral pledged to the FHLBank, provided the member executes a written security agreement and agrees to hold the collateral for the benefit of the FHLBank. Note, however, that the blanket pledge is typically accepted by the FHLBanks only for loan collateral; most securities collateral must be delivered to the FHLBank or an FHLBank-approved third-party custodian and pledged to the benefit of the applicable FHLBank.  This is the least restrictive and the most widely used collateral arrangement by FHLBank members is the blanket lien pledge status. Currently, the majority of members may borrow under the blanket lien status. It is generally assigned to lower risk institutions pledging loan collateral. Under the blanket lien status, a member borrower is not required to deliver loan level detail on pledged loans. Typically, the FHLBanks monitor eligible collateral under blanket status using regulatory financial reports, which most members submit quarterly, and periodic collateral “certification” documents or reports submitted to the FHLBanks by all significant borrowers. Each borrowing member must execute a blanket pledge security agreement that sets forth the necessary collateral requirements. The FHLBanks’ blanket pledge security agreements typically cover the majority of the members’ assets whether or not the FHLBank accepts the assets as eligible collateral, although the FHLBanks can only originate new advances or renew advances against certain eligible collateral categories. A blanket lien can cover one-to-four-family mortgages, multifamily mortgages, home equity lines of credit, second mortgages, agricultural or commercial mortgages, small business (commercial and industrial) and agri-business loans. The FHLBanks generally require securities  collateral to be delivered to the FHLBank or to an FHLBank-approved third-party custodian.

7 comments:

  1. This comment has been removed by a blog administrator.

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  3. Read your blog its really informative and helpful keep updating with newer post on House loan

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  4. People seem to be having a hard time grasping certain facts about these Banks and their name games. FA and F.A., FSB and fsb, and NA and N.A., do not always mean the same thing for one. For example, FA could mean Federal Association while F.A. could be Foreign Association. FSB might be Federal Savings Associations while fsb a Federal State Bank.

    Further, and more importantly, these games: US BANK and U.S. Bank, JP Morgan Chase, J.P. Morgan Chase and JPMorgan Chase.

    Can you spot the differences? Because I can assure you, they may be under the same umbrella but each one is different and separate from it's counterpart. People need to pay closer attention because this is the exact reason many complaints went ignored, and rightfully so.

    US Bank, US BANK and U.S. Bank do not have to give a sh!t about what the other does, nor will they tell you there is a difference. Instead they play dumb and basically ignore you if your talking to the wrong one. Why do you think these institutions have so many businesses in the same or similar name?

    It's to intentionally confuse you and interfere with any actions you try to take against them for wrongdoing. Spinning tangled webs of confusion is what keeps them in business.

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  5. Here's another. Washington Mutual Bank in Stockton CA changed it's name to FA back in 1997. In 2005 they claimed they were a State Bank that merged with FA and ceased to exist. Everyone bought it hook line and sinker without ever thinking about the fact it was that very same "ceased to exist" Bank that moved headquarters to Henderson, NV, not Seattle.

    Every believed they amended their charter to have FA do business in the State Banks name, when in reality they became the State Bank doing business in FA's name pretending they were FA doing business in the State Banks name.

    Confused yet? That was the whole point!

    It's ok though, because even the experts still don't get it.

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  6. Only a handful of people actually get what happened. The rest think they know when in reality they know exactly what has been told, which is exactly what the Banks wanted them to know. Clearly from what I can still see here and other sites, all these bloggers still haven't got a clue.

    Even when some of their own posters have mentioned it.

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  7. How can there be a holder of a note if the Mortgages are chopped and sold off in pieces?

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