Mortgage Securities It Holds Pose Sticky Problem for Fed

STICKIER THAN THEY THINK: These are not the only mortgage securities they hold and they all amount to ownership of the risk on every loan they purchased. The purchase of course was accomplished in one of many ways — direct and indirect.
But when you come down to it, between the GSE’s (which are now departments of the Federal Government), TARP, and the outright purchase by the Fed, SOMEONE received 100 cents on the dollar for every loan, whether in default or otherwise.
Add in insurance, credit default swaps and credit “enhancements” (i.e., commingling of money contrary to the explicit terms of the borrowers’ promissory notes) like over-collateralization and cross collateralization, it would be a fair statement to say that everyone of the mortgages CLAIMED to be in pools that were subject to various securitization instruments, have been paid in whole or in part.
THAT IS WHAT I MEAN BY THIRD PARTY PAYMENTS. The legal issue is who got the money and why? The practical impact is that if those payments were related to individual mortgages, which indeed they must have been, then they were received into what should have been an escrow account and allocated to each loan.
Now add the fact that very nearly NONE of the loans were in fact the subject of an actual assignment, recorded instrument, endorsement or delivery while they were performing and before the cutoff date in the securitization enabling documentation, and you really have an interesting conclusion: the loans never made it into the pool, which makes securitization a giant Ponzi scheme that paid investors long enough out of their own money to lend credibility to the scheme.
But it is also true that borrowers made payments and where those went, and in what amounts is a clouded mystery because every lawsuit I know of that has asked for the accounting is stalled. So with nothing in the pools, nothing in the mortgage bonds, and the CDO’s based upon the mortgage bonds, and the credit default swaps referencing the mortgage bonds, and the synthetic CDOs consisting of CDS instruments referring to the mortgage bonds, they were all worthless from beginning to end. In short, the government bought nothing from bankers who had already made a ton of money, most of it parked off-shore.
The real reason the government can’t sell these securities is that nobody will pay for them. Any due diligence down to the loan level will reveal that the loans were never subject to legally required execution, delivery and recording of transfer or assignment documents, together with indorsements etc. In some cases, this is correctable — at considerable legal expense. In most cases, they are not correctable. The bottom line is really simple: the obligation was created, the note was extinguished, and the security instrument became unenforceable, and separated from the note. The illusion that it is otherwise is what is keeping us in stagnation, preventing a solution.
July 22, 2010

Mortgage Securities It Holds Pose Sticky Problem for Fed

By BINYAMIN APPELBAUM

WASHINGTON — The Federal Reserve provided most of the money for new mortgages in the United States last year, effectively lending more than $1 trillion to American homeowners.

Now the legacy of that extraordinary intervention is hanging over the central bank as it faces growing demands for an encore to help revive the flagging economy.

While officials and economists generally regard the program as successful in supporting the housing market, it has left the Fed holding a vast pile of mortgage securities — basically i.o.u.’s from homeowners — that it does not want and cannot sell.

Holding the securities could cost the Fed a lot of money and hamper its ability to fight inflation, while selling the securities could drain needed money from the still-weak economy.

Fed officials have expressed confidence that they can finesse the dilemma by gradually selling the securities as the economy starts to recover. But they are not eager to expand the challenge they face by beginning a new round of asset-buying, one tool the Fed could use to try to stimulate growth.

“In my view, any judgment to expand the balance sheet further should be subject to strict scrutiny,” Kevin M. Warsh, a Fed governor, said in a speech last month in Atlanta. He warned that new purchases could undermine the Fed’s “most valuable asset”: its credibility.

Some Democrats want the Fed to pump more money into the economy to help reduce unemployment, one of the central bank’s basic responsibilities. In testimony before Congress this week, Chairman Ben S. Bernanke said that the Fed retained that option, but did not now plan to expand on the steps it had already taken.

In part, Bernanke and other Fed officials say they believe that new asset purchases would be less effective now that private investors have returned to the market.

The Fed became one of the world’s largest mortgage investors because no one else was interested. During the fall 2008 financial crisis, investors stopped buying the mortgage securities issued by the housing finance companies Fannie Mae and Freddie Mac. The two companies buy mortgages made by banks and other lenders, providing money for new rounds of lending, then package those loans into securities for sale to investors, replenishing their own coffers.

Two days before Thanksgiving 2008, the Fed announced that it would buy $500 billion in securities issued by the two companies. By the time the program wound down in March 2010, it had spent more than twice that amount. The central bank now owns mortgage securities with a face value of $1.1 trillion.

A wide range of economists say the Fed’s program — so big that purchases outstripped the issuance of new securities in some months — helped to preserve the availability of mortgage loans and helped to hold interest rates near record lows. Rates that exceeded 6 percent in late 2008 remain below 5 percent today.

But the Fed now must deal with the cleanup.

The central bank could hold the securities until the borrowers repaid or refinanced their loans. Brian P. Sack, an executive at the Federal Reserve Bank of New York, estimated in March that borrowers would repay $200 billion by the end of 2011. And in the meantime, the Fed is collecting regular interest payments.

  • HOW IS THIS MONEY REACHING THE FED? WHO IS GETTING PAID FOR HANDLING IT?

    WHY IS NOT THE FED’S INTEREST RECORDED IN THE PROPERTY RECORDS OF THE COUNTY IN WHICH THE PROPERTY IS LOCATED (ANSWER — BECAUSE THEY DON’T HOLD THE SECURITY, JUST THE RECEIVABLE, CALLED “SPLITTING NOTE FROM MORTGAGE”).

  • IF THE FED OWNS THESE LOANS WHY DON’T THEY SHOW UP AS A PARTY IN FORECLOSURES?

  • WHO IS THE TRUSTEE ON DEEDS OF TRUST?

  • WHO ARE THE BENEFICIARIES?

  • WHO ARE THE MORTGAGEES ON MORTGAGE DEEDS?

“We’ve been earning a fairly high income from our holdings and remitting that to the Treasury,” Mr. Bernanke told Congress on Wednesday.

But holding the securities could make it harder to control inflation as the economic recovery gains strength, said Vincent Reinhart, the former head of the Fed’s monetary policy division, now a resident scholar at the American Enterprise Institute.

The Fed bought the securities by pumping new money into the economy, stimulating growth. It could be difficult to reverse that effect without draining the money from the economy by selling the securities, Mr. Reinhart said.

“They created reserves, and those reserves ultimately can be inflationary,” Mr. Reinhart said. “The chief risk of keeping the balance sheet big and raising rates is that you might not be able to raise rates successfully” because the impact would be mitigated by the effect of the extra money still sloshing around the system.

Holding the securities also could cost the Fed a lot of money.

The Fed paid some of the highest prices on record for mortgage securities, basically accepting very low rates of interest on its investments. As the economy recovers and interest rates rise, the Fed will need to accept increasingly large discounts to make the securities attractive to other investors.

David Zervos, head of global fixed-income strategy at the investment bank Jefferies & Company, estimates that the value of the portfolio will drop almost $50 billion each time interest rates increase by one percentage point.

Selling the securities at a loss would reduce the Fed’s ability to transfer profits to the Treasury Department. Large enough losses could reduce the amount of capital held by the Fed, although it can always create more money.

But perhaps the greatest risk is that investors will begin to doubt the Fed’s willingness to raise interest rates, knowing that each increase will damage its own balance sheet.

“It compromises their integrity and their inflation-fighting mandate, because fighting inflation would be a direct detriment to their portfolio,” Mr. Zervos said.

The Fed could avoid these problems by selling the securities now, before interest rates start to rise. But doing so would reverse the benefits of the original program, draining money from the economy while it still is weak. It would also fly in the face of the demands for the Fed to do more for the economy.

A fire sale also could damage the banking industry by driving down the value of the comparable mortgage securities that banks hold in large quantities.

So far the Federal Open Market Committee, comprising the board of governors and a rotating selection of presidents from the regional reserve banks, has chosen to wait.

The approach favored by most of the committee, according to the minutes of its June meeting, is to start raising interest rates before beginning to sell the securities. By waiting “until the economic recovery was well established,” the minutes said, the Fed would limit the impact of the asset sales on the broader market.

22 Responses

  1. “WHY IS NOT THE FED’S INTEREST RECORDED IN THE PROPERTY RECORDS OF THE COUNTY IN WHICH THE PROPERTY IS LOCATED”

    Look in to the borrower in custody program the FED runs.
    The are supposed to record mortgages pledges to the Fed as collateral on a UCC 3 financing statement.

    There is not a single UCC3 filed in any state I could find.

    So either the Fed has NEVER used the program or they are breaking the law.

  2. Sagittarius,

    Meant to comment on your post and say,
    You’ve closed a hole I had in the puzzle.
    Now I know why when you sign the note, the ‘lender’ takes it out of the room to make copies, leaving you there to sign the Deed of Trust (without) the Note in the same room.

    Patriot communities always said you paid for the obligation before you created it, and I always knew the note left the room because I re-fi ‘d a few times to drop interest rates so I saw it happen at the first sale, the re-fi and the re-fi.

    And you explained to me why it happened and why the obligation remained.

    Those tricksters.

    Tell you what.
    Next time I buy a home, all papers come to my side of the table.
    I sign one by one, and they stay with me, until the last page is signed. We either have a deal or not.

    I still can’t get over how I allowed someone to charge me an interest rate, over and over and over and over on a debt for 30 years.

    My ignorance let that happen.

    Any person with normal intelligence would say, hey, it costs this, add this percentage interest and let me have it.

    But no…some fool from the past accepted those terms and the rest of us bought into it and became debt slaves.

    I’m glad the shirt I bought at 8.25% tax isn’t taxed every year that I own it minus some depreciation.

    That’s pretty much what our ignorance did when it came to our homes.

    Never again…never.

    from now on, I’m taking a more direct interest in whatever it is I sign, and protecting my interests or no deal.

    I will never leave a bank with a note if I don’t get the home, after seeing people walk away from a sale and their note gets traded anyway and someone comes after them for the debt.

    No way….on the settlement papers I’ll probably say the contract is not signed until sealed with a red ink thumbprint or some other stamped seal or something..who knows.

    Sagittarius…thanks for the extra knowledge…it did get noticed and appreciated.

    I know nothing and if I think I know something I know nothing. I do not give legal advice because I don’t know legal things. Everything written is an opinion, even my experiences with the legal system are only my opinion of what I experienced.

  3. Mario Kenny,

    Do you have a reliable expert in Florida/Broward County that can analize my note ? The pretender Trust ( that does not have my loan listed) filled an “original” note and I am almost sure it is a fake one. Thank you for your great information.

    BTW i am not ProSe but i like to “help”my attorney.

  4. “the obligation was created, the note was extinguished, and the security instrument became unenforceable, and separated from the note. The illusion that it is otherwise is what is keeping us in stagnation, preventing a solution.”

    When the above referenced is in a pleading/argument that is accepted by a judge, please let me know.

  5. Our answer to our lawsuit is due this week . I hope we can get the discovery we need. US Bank is the Trustee in our case suing on behalf of xyz trust. I have so much that I will be able to share soon. We plan to proceed slowly and let Plaintiff continue to dig themselves a deeper hole. The great thing about our case is that there is nothing they can “fix”…without pissing the Judge off…it is all public records…and will require them to produce a LOT of information JUST to show standing and capacity to proceed.

  6. *Mario – great work! But what happens if Plaintiff used the autopen to fabricate their note… I’m assuming there is a way to detect that as well right?

    BTW – wasn’t it the board of governors of the FEDERAL RESERVE that approved an amendment allowing BANK SECTION 20 SUBSIDIARIES to trade Mortgage Backed Securities without having to demonstrate that the underlying collateral met the board’s “appraisal standards.”

    I head they didn’t think it would cause a ‘systemic risk’ to the banking system.

    Federal Reserve: WHAT SAY YOU?

  7. That’s a good question… why isn’t the FED’s interest recorded at the county recorder.

    Answer: It doesn’t need to be.
    There is already a first lien held by the FED on all the property purchased with it’s money. We have a single payor currency system. That’s why when you dont pay income tax you get a NOTICE of Federal Tax lien. There is already a lien. you are simply getting a notice of it for not paying your use income tax. Income tax is an excise tax which is a use tax.

    The script has been flipped. The banks have been circulating our individial promissory notes and owed US a tax on there use… the same as you owe a tax when you use their Federal Reserve Notes.

    it would be redundant and pointless to make a secondary lien.

  8. Please read this set of research it will help the homeowner very much.

    http://mariokenny.wordpress.com/2010/07/16/yellow-dots-of-mystery/

  9. Deb wynn,

    I am not an attorney – but sounds like Monkey-business malpractice to me.

    These attorneys should be ashamed of themselves.

    You have options. Maybe independent action for fraud – do not give up – and maybe also against attorney.

    Keep plugging!!!! Been there – know to not give up!!!.

  10. Fact of the matter is I spent close to 30 k so far on attorney fees audits and mod scams I still had my home stolen under power of sale I never got the accounting for life of the loan nor answers to basic request under respa none of thatvworks my home is gone we are all spinning our wheels at great cost not just financially there is no due process there I’d no justice do how to navigate THAT is my problem

  11. How will the trust ever be restored tell me

  12. My eviction was from a Special Warranty Deed handed to
    Federal National Mortgage Association by the pretender lender.

    The document is based upon fraud, and it’s not from the pretenders’ Trustee Deed also based on Fraud.

    So my appeal is against Fannie Mae…go figure!

  13. Mario Kenny has an excellent point. Color laser printers and digital color photocopiers are required to encode their brand , model , s/n info in tiny yellow dots .. This was codified to protect the government from people printing up $100 bills on their home printer. The easiest way to find them is to use an ordinary (high powered) flashlight with a blue lense (or just use some blue cellophane in front of the light) .. That would be a showstopper if you find the same pattern of dots on an assignment or two and on the note… I’d reopen and challenge anything touched by docX…

  14. http://mariokenny.wordpress.com/2010/07/16/yellow-dots-of-mystery/

    here is some info on the photocopied notes and mortgage

  15. I was just looking around and found foreclosures done simply as US Bank as Trustee for the Maiden Lane Asset Backed Securities Trust 2008 1. One of them was done with a MERS assignment from a defunct originator to US Bank as Trustee…hmm

  16. can the owner/borrower unilaterally record a substitution of the trustee on the Deed of Trust?
    can the owner/borrower do this at the court house level?
    will that be legal?

  17. I went jogging today and I could not believe how many more foreclosures in my neighborhood. I mean, dang. This is crazy. How can this be happening? It is unreal! And our government is not doing a thing about it. The same institutions that brought this upon us have received aide and are recovering nicely, while “We the People,” have been left damaged and nobody gives a shit.

    I can’t afford my mortgage. If and when I get evicted, I won’t be able to afford to rent a place. I no longer have the credit to buy another home which at today’s market, my house payment would be less than $600.00 including property taxes and insurance. That’s half of our current mortgage payments. This just kills me because we were prime customers with excellent credit.

    Okay, my rant is over. Thanks for letting me vent.

  18. The reason the “banks” won’t answer questions or offer an accurate accounting is because a debtor/creditor relationship does not impose a fiduciary duty upon the banks to disclose anything to a “debtor”. It’s all about the type of relationship we created with these institutions. Is the relationship general (debtor/creditor) or is it special (trust) ??? The other reason we don’t get disclosure is because the bank’s transactions are all done in TRUST and are therefore PRIVATE. Trust relationships are confidential. Try getting a bank to show you their Off-Balance Sheets! We gifted the banks our notes and instruments and abandoned them. They accepted them as gifts and put them into their own trusts. Finders keepers man!

    See Corpus Juris Secundum regarding Deposits, Equity and Trust. You will be amazed at what you read! Any local law library will have a full set of CJS and/or American Jurisprudence. Get a Black’s law dictionary and start translating the legalese code one word at a time. The words don’t always mean what you think. Even look up words you think you know. You’ll soon see that the doctrine of polarity, yin and yang, positive and negative, etc is alive and well in the world of commerce. We deposited our notes with the financial institutions as “general” deposits, thereby creating a debtor/creditor relationship. We had (and still do) the option of claiming our notes as trust corpus, creating the records to prove title (the signatures are ours afterall) and moving title accordingly to extinguish the debt using the doctrine of Merger. Once the debt title (deed of trust) is merged with the asset title (the note), the two cancel one another and the debt is extinguished. You won’t find much on the doctrine of merger at the law library for obvious reasons.

    See John Norton Pomeroy’s “A Treatise on Equity Jurisprudence as Administered in the United States of America” fifth edition Volume #3, beginning at page 140, section 786. He gives a pretty telling explanation on the doctrine of Merger.

    Our entire economy operates “left of zero,” meaning everything is a debt instrument including Federal Reserve Notes. We keep trying to pay debts with more debts. Once in trust, our notes represent trust assets because they are backed by our ability to create and perform labor as sentient, energetic beings. We are the gold backing the notes but we got conned into the debtor/creditor relationship because we got fooled into believing banks loan assets. Not true. And why is that so incomprehensible? Are we not finding out right here on this website that the financial institutions created empty straw-entities in order to foist a Ponzi scheme upon us with the blessing of our ever-so-loving government and Federal Reserve/Treasury/IMF?

    “The sleeper must awaken.” Dune- Frank Herbert

  19. FKA,

    U.S. Bank did not make the loans. They are merely the trustee under the PSA.

  20. What do you mean by this statement..

    “…every lawsuit I know of that has asked for the accounting is stalled.”

  21. I have seen US Bank listed as Trustee of Maiden Lane Asset Backed Securities 1 Trust 2008-1 in New York UCC filings. They were the secured party.

    I am curious as to why they are making money on these “toxic” assets? I know some of the assets came with the Bear Stern merger, what about the AIG bailouts?? Why was bailout required for performing securities???

  22. I love how the role of Fannie/Freddie is always explained in the news, which this article dutifully repeats–Fannie/Freddie buy mortgage loans from banks, which allows banks to then lend to more people, and then Fannie/Freddie sell securities based on the mortgage loans to make their money back.

    Nice and tidy, but it doesn’t explain how either the GSEs or the banks make any profits. That is to say, if we are to believe the above explanation, there is never any new money created–it’s all just even Steven. If that were the case, we’d have no inflation, but we all know that’s a bunch of horsefeathers.

    The Fed itself tells us that “banks actually create money when they lend it.” We also know that we have a fractional reserve banking system in which banks can loan out many times the amount of its deposits.

    So what I’m saying is that this nice, friendly, tidy explanation of the primary and secondary mortgage markets is poppycock. It’s complete rubbish–banks could lend out as much as they wanted to even if the GSEs never existed.

    It’s kind of like the inflated appraisals we all got, which operated under the assumption that if a buyer was willing to pay X amount for a house, then the house is therefore worth X amount and the appraiser only needed to ratify X amount by finding “comps” that had been appraised using the same pretzel logic.

    Similarly, if anyone walks into a bank and wants a loan of X amount, the bank can give it because they will get a promissory note equal to X amount, which the bank will then deposit within itself, creating a bigger deposit base off which it can justify more fractional reserve lending! Then the bank will probably sell off the X amount promissory note for X amount! They can’t lose money! There’s no risk for them. They can create as much money as anyone is willing to “borrow.”

    Neil correctly calls the whole derivatives sham a giant Ponzi scheme, but my God, the entire monetary system we’re laboring under is also a gigantic Ponzi scheme. None of it is real. It is all an illusion, or less charitably and more accurately, a lie. It’s the biggest lie there is, and that’s why people believe it so much. I certainly used to.

    All right, sorry…end of rant. Great points in this article, Neil. Especially the red questions you posted in the middle of it. The thing is, the Fed will never answer those questions. The entire country could join a class action suit against the Fed to try to get the answers to those questions, and they just simply will not answer them.

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