PTSD: A Breakdown of Securitization in the Real World

By using the methods of magicians who distract the viewer from what is really happening the banks have managed to hoodwink even the victims and their lawyers into thinking that collection and foreclosure on “securitized” loans are real and proper. Nobody actually stops to ask whether the named claimant is actually going to receive the benefit of the remedy (foreclosure) they are seeking.

When you break it down you can see that in many cases the investment banks, posing as Master Servicers are the parties getting the monetary proceeds of sale of foreclosed property. None of the parties in the chain have lost any money but each of them is participating in a scheme to foreclose on the property for fun and profit.

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It is worth distinguishing between four sets of investors which I will call P, T, S and D.

The P group of investors were Pension funds and other stable managed funds. They purchased the first round of derivative contracts sometimes known as asset backed securities or mortgage backed securities. Managers of hedge funds that performed due diligence quickly saw that that the investment was backed only by the good faith and credit of the issuing investment bank and not by collateral, debts or mortgages or even notes from borrowers. Other fund managers, for reasons of their own, chose to overlook the process of due diligence and relied upon the appearance of high ratings from Moody’s, Standard and Poor’s and Fitch combined with the appearance of insurance on the investment. The P group were part of the reason that the Federal reserve and the US Treasury department decided to prop up what was obviously a wrongful and fraudulent scheme. Pulling the plug, in the view of the top regulators, would have destroyed the investment portfolio of many if not most stable managed funds.

The T group of investors were traders. Traders provide market liquidity which is so highly prized and necessary for a capitalist economy to maintain prosperity. The T group, consisting of hedge funds and others with an appetitive for risk purchased derivatives on derivatives, including credit default swaps that were disguised sales of loan portfolios that once sold, no longer existed. Yet the same portfolio was sold multiple time turning a hefty profit but resulted in a huge liability when the loans soured during the process of securitization of the paper (not the debt). The market froze when the loans soured; nobody would buy more certificates. The Ponzi scheme was over. Another example that Lehman pioneered was “minibonds” which were not bonds and they were not small. These were resales of the credit default swaps aggregated into a false portfolio. The traders in this group included the major investment banks. As an example, Goldman Sachs purchased insurance on portfolios of certificates (MBS) that it did not own but under contract law the contract was perfectly legal, even if it was simply a bet. When the market froze and AIG could not pay off the bet, Hank Paulson, former CEO of Goldman Sachs literally begged George W Bush to bail out AIG and “save the banks.” What was saved was Goldman’s profit on the insurance contract in which it reaped tens of billions of dollars in payments for nonexistent losses that could have been attributed to people who actually had money at risk in loans to borrowers, except that no such person existed.

The S group of investors were scavengers who were well connected with the world of finance or part of the world of finance. It was the S group that created OneWest over a weekend, and later members of the S group would be fictitious buyers of “re-securitized” interests in prior loans that were subject to false claims of securitization of the paper. This was an effort to correct obvious irregularities that were thought to expose a vulnerability of the investment banks.

The D group of investors are dummies who purchased securitization certificates entitling them to income indexed on recovery of servicer advances and other dubious claims. The interesting thing about this is that the Master Servicer does appear to have a claim for money that is labeled as a “servicer advance,” even if there was no advance or the servicer did not advance any funds. The claim is contingent upon there being a foreclosure and eventual sale of the property to a third party. Money paid to investors from a fund of investor money to satisfy the promise to pay contained in the “certificate” or “MBS” or “Mortgage Bond,” is labeled, at the discretion of the Master Servicer as a Servicer Advance even though the servicer did not advance any money.

This is important because the timing of foreclosures is often based entirely on when the “Servicer Advances” are equal to or exceed the equity in the property. Hence the only actual recipient of money from the foreclosure is not the P investors, not any investors and not the trust or purported trustee but rather the Master Servicer. In short, the Master servicer is leveraging an unsecured claim and riding on the back of an apparently secured claim in which the named claimant will receive no benefits from the remedy demanded in court or in a non-judicial foreclosure.

NOTE that securitization took place in four parts and in three different directions:

  1. The debt to the T group of investors.
  2. The notes to the T and S group of traders
  3. The mortgage (without the debt) to a nominee — usually a fictitious trust serving as the fictitious name of the investment bank (Lehman in this case).
  4. Securitization of spillover money that guaranteed receipt of money that was probably never due or payable.

Note that the P group of investors is not included because they do not ever collect money from borrowers and their certificates grant no right, title or interest in the debt, note or mortgage. When you read references to “securitization fail” (see Adam Levitin) this is part of what the writers are talking about. The securitization that everyone is talking about never happened. The P investors are not owners or beneficiaries entitled to income, interest or principal from loans to borrowers. They are entitled to an income stream as loans the investment bank chooses to pay it. Bailouts or even borrower payoffs are not credited to the the P group nor any trust. Their income remains the same regardless of whether the borrower is paying or not.

11 Responses

  1. Sandy L, — looks like just from 2012 — or possibly three years before. Financial Crisis securitizations not included.

  2. And Boots — sure Neil can get if for you too!!!!

  3. Boots — follow the contact.

    keepon — maybe Neil can answer this. I know 15D was filed on many trusts which allowed no more filings with SEC if less than a certain amount of investors. But, 15-G — looks like a duty to report!!!!

  4. Anon, thanks for your response. I will try to go to that website to find out. I’m not a tech savy and typing is also my handicapped.

  5. Anybody know what an “ABS-15G Asset-backed securitizer report pursuant to Section 15G, item 1.02” is? This is from the SEC site. It also notes “(DF Act)” I assume Dodd Frank.

    This is related to an HSBC Nomura “trust.” What’s a securitizer report?

  6. Hi Boots – you are back– try Deadly Clear. If anyone gets these “snapshots” you will see that most of the “tranches” have been prematurely paid – quite some ago. If anything is left it is only mezzanine tranches. There is simply no “cash pass through” occurring at all.

    There is a waterfall structure to securitization. When that waterfall is disturbed, the whole structure is dissolved and torn apart into other directions. Why courts still “buy” that the structure is intact is beyond me.

    What Neil describes is truly a complex Ponzi scheme originated to deceive.

    The problem is that the government (by Hank’s and others control) decided to bail our the schemers and let the homeowners fall. These homeowners are the sacrificial lambs of a bailout that was poorly handled with repercussions that continue to date. Hank and others destroyed peoples’ lives. And, the worst part is that they still think they did the right thing.

    Neil is onto something. Good luck Neil.

  7. Modern home loans should actually be sold to prospective buyers like a Certificate of Deposit (CD) where the buyers down payment and use of their personal credit to provide the initial funds to the security are recognized as ‘positive’ value not debt, and the homeowner receives a monthly interest dividend payment from the bank instead of a bill to pay more. How ’bout it?

    (PS I am not the new user going by ‘boots’)

  8. can someone help me connect to bloomberg screenshot to find out a certain named trust? really appreciates any helps.

  9. I really need to understand how a Servicer SLS who just showed up after some funky assignment of mortgage from Wells Fargo, is now able to be the plaintiff in a judicial fraudclosure, claiming to be the creditor of the note and mortgage, while Fannie Mae website says that Fannie Mae, who is nowhere named in the fraudclosure complaint, is owner of the mortgage ????
    It seems impossible that they have any standing whatsoever!!!

  10. There is a 5th class-the “V” class. Vultures who swooped in on FHA/Fannie/Freddie delinquent Note Sales.

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