I like this post from a reader in Colorado. Besides knowing what he is talking about, he raises some good issues. For example the original issue discount. Normally it is the fee for the underwriter. But this is a cover for a fee on steroids. They took money from the investor and then “bought” (without any paperwork conveying legal title) a bunch of loans that would produce the receivable income that the investor was looking for.

So let’s look at receivable income for a second and you’ll understand where the real money was made and why I call it an undisclosed tier 2 Yield Spread Premium due back to the borrower, or apportionable between the borrower and the investor. Receivable income consists or a complex maze designed to keep prying eyes from understanding what theya re looking at. But it isn’t really that hard if you take a few hours (or months) to really analyze it.

Under some twisted theory, most foreclosures are proceeding under the assumption that the receivable issue doesn’t matter. The fact that the principal balance of most loans were, if properly accounted for, paid off 10 times over, seems not to matter to Judges or even lawyers. “You borrowed the money didn’t you. How can you expect to get away with this?” A loaded question if I ever heard one. The borrower was a vehicle for the commission of a simple common law and statutory fraud. They lied to him and now they are trying to steal his house — the same way they lied to the investor and stole all the money.

  1. Receivable income is the income the investor expects. So for example if the deal is 7% and the investor puts up $1 million the investor is expecting $70,000 per year in receivable income PLUS of course the principal investment (which we all know never happened).

  2. Receivable income from loans is nominal — i.e., in name only. So if you have a $500,000 loan to a borrower who has an income of $12,000 per year, and the interest rate is stated as 16%, then the nominal receivable income is $80,000 per year, which everyone knows is a lie.

  3. The Yield Spread premium is achieved exactly that way. The investment banker takes $1,000,000 from an investor and then buys a mortgage with a nominal income of $80,000 which would be enough to pay the investor the annual receivable income the investor expects, plus fees for servicing the loan. So in our little example here, the investment banker only had to commit $500,000 to the borrower even though he took $1 million from the investor. His yield spread premium fee is therefore the same amount as the loan itself.  Would the investor have parted with the money if the investor was told the truth? Certainly not. Would the borrower sign up for a deal where he was sure to be thrown out on the street? Certainly not. In legal lingo, we call that fraud. And it never could have happened without defrauding BOTH the investor and the borrower.

  4. Then you have the actual receivable income which is the sum of all payments made on the pool, reduced by fees for servicing and other forms of chicanery. As more and more people default, the ACTUAL receivables go down, but the servicing fees stay the same or even increase, since the servicer is entitled to a higher fee for servicing a non-performing loan. You might ask where the servicer gets its money if the borrower isn’t paying. The answer is that the servicer is getting paid out of the proceeds of payments made by OTHER borrowers. In the end most of the ACTUAL income was eaten up by these service fees from the various securitization participants.

  5. Then you have a “credit event.” In these nutty deals a credit event is declared by investment banker who then makes a claim against insurance or counter-parties in credit default swaps, or buys (through the Master Servicer) the good loans (for repackaging and sale). The beauty of this is that upon declaration of a decrease in value of the pool, the underwriter gets to collect money on a bet that the underwriter would, acting in its own self interest, declare a write down of the pool and collect the money. Where did the money come from to pay for all these credit enhancements, insurance, credit default swaps, etc? ANSWER: From the original transaction wherein the investor put up $1 million and the investment banker only funded $500,000 (i.e., the undisclosed tier 2 yield spread premium).

  6. Under the terms of the securitization documents it might appear that the investor is entitled to be paid from third party payments. Both equitably, since the investors put up the money and legally, since that was the deal, they should have been paid. But they were not. So the third party payments are another expected receivable that materialized but was not paid to the creditor of the mortgage loan by the agents for the creditor. In other words, his bookkeepers stole the money.

Very good info on the securitization structure and thought provoking for sure. Could you explain the significance of the Original Issue Discount reporting for REMICs and how it applies to securitization?

It seems to me that the REMIC exemptions were to evade billions in taxes for the gain on sale of the loans to the static pool which never actually happened per the requirements for true sales. Such reporting was handled in the yearly publication 938 from the IRS. A review of this reporting history reveals some very interesting aspects that raise some questions.

Here are the years 2007, 2008 and 2009:

2009 reported in 2010

2008? is missing and reverts to the 2009 file?? Don’t believe me. try it.–2009.pdf

2007 reported in 2008–2007.pdf

A review of 2007 shows reporting of numerous securitization trusts owned by varying entities, 08 is obviously missing and concealed, and 2009 shows that most reporting is now by Fannie/Freddie/Ginnie, JP Morgan, CIti, BofA and a few new entities like the Jeffries trusts etc.

Would this be simply reporting that no discount is now being applied and all the losses or discount is credited to the GSEs and big banks, or does it mean the trusts no longer exist and the ones not paid with swaps are being resecuritized?

Some of the tell tale signs of some issues with the REMIC status especially in the WAMU loans is a 10.3 Billion dollar tax claim by the IRS in the BK. It is further that the balance of the entire loan portfolio of WAMU transferred to JPM for zero consideration. A total of 191 Billion of loans transferred proven by an FDIC accounting should be enough to challenge legal standing in any event.

I believe that all of the securitized loans were charged back to WAMU’s balance sheet prior to the sale of the assets and transferred to JPM along with the derivative contracts for each and every one of them. [EDITOR’S NOTE: PRECISELY CORRECT]

The derivatives seem to be accounted for in a separate mention in the balance sheet implying that the zeroing of the loans is a separate act from the derivatives. Add to that the IRS claim which can be attributed to the gain on sale clawback from the voiding of the REMIC status and things seem to fit.

I would agree the free house claim is a tough river to row but the unjust enrichment by allowing 191 billion in loans to be collected with no Article III standing not only should trump that but additionally forever strip them of standing to ever enforce the contract.

The collection is Federal Racketeering at the highest level, money laundering and antitrust. Where are the tobacco litigators that want to handle this issue for the homeowners? How about an attorney with political aspirations that would surely gain support for saving millions of homes for this one simple case?

Documents and more info on the FDIC litigation fund extended to JPM to fight consumers can be found here:

You can also find my open letter to Sheila Bair asking her to personally respond to my request here:

Any insight into the REMIC and Pub. 938 info is certainly appreciated

3 Responses

  1. U.S. Rep Paul Ryan, 1st Congressional District, Wisconsin, had an op-ed piece in the Sunday Chicago Tribune titled “America’s First Debt Crisis”. Look up Shay’s Rebellion. This guy is proving that he has the integrity to mount this fight. He’s on the precepice of acknowledging what has happened. Let’s give him a hearty “Hello”.

  2. Gordon Brooks
    the proceeds from the Foreclosure went into the pockets of these thieves. they have already been paid and this is a civil theft and Fraud.Our Government knows this because they were in the same bed with these thieves.If the Government just set a few examples then foreclosure will stop. This money does not belong to these thieves.

  3. My question is: where in this mess do the proceeds from sales of foreclosed properties go? Actual case (mine): loan amount ~203K, Deutsche Bank Trust pays 133K at “auction,” then sells for 178K. Whence the 133K (and what is the source for that figure) and where does the 178K go?

    I think I know the answer, but I have no way to prove it.

    BTW, in my case, the servicer turned down a short offer of 193K from the SAME buyer that eventually paid 178K. Interesting, huh?

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