A Replay of 2008 in the Works

Amongst the constant placement of article promoted and paid for by the banks that celebrate our supposed recovery from the mortgage meltdown is a new spate of articles that say otherwise. Rather than recovering we have merely papered over the problem allowing the banks to do it again. And worse, I would add, is the continuation of a general policy and perception that foreclosures are the way out of the mess created by the banks.


I know this stuff is dense and filled with financial concepts that can only be understood by those of us who have direct knowledge, experience, training and certification in securities and securitization of debt, but the lay articles at least give you a sense of what is truly happening. The above linked article by an investment banker, warning of the continuing moral and financial hazards, states it plainly.

A decade ago, the high-yield investment du jour pushed by Wall Street was mortgage-backed securities — home mortgages that had been packaged up and sold as “safe” investments all over the world. Nowadays bankers and traders are pushing another form of supposedly “safe” investment, the “collateralized loan obligation,” or C.L.O.

C.L.O.s are nothing more than a package of risky corporate loans made to companies with less than stellar credit. The big Wall Street banks make these loans to their corporate clients and then seek to move them off their balance sheets as quickly as possible, in the same way that a decade ago they packaged up and offloaded risky mortgage securities.

What is missing from all analyses of “repackaging” or “securitization” is that the failure of government to regulate this practice opens the door to extreme moral hazards enabling the banks to create financial weapons of mass destruction.

One backdoor risk is exacerbated by a tactic of some all-too-clever hedge fund managers. They buy a little of the debt of risky companies at a discount, and then buy a much larger amount of insurance on that debt — so-called “credit default swaps” — to theoretically hedge their risk. These wiseguys then do everything they can to force the company into a bankruptcy filing, which contractually triggers the insurance payoff on the debt. Since the insurance payment exceeds by far the overall cost of the discounted debt, the hedge fund profits handsomely.

The problem, of course, is that the bankruptcy filing can send the company and its creditors, including investors in C.L.O.s, into a downward spiral, hurting everyone but the architect of the scheme [e.s.]That’s what happened to Windstream, an Arkansas-based telecom company that was sent into bankruptcy protection in February. These “empty creditors,” as Henry Hu, a professor of law at the University of Texas has dubbed them, are rewarded for pushing companies into an otherwise unnecessary bankruptcy. That’s not the way the markets are supposed to work.

Sound familiar? It’s still happening with residential loans. The legal and policy question is whether it is good for the economy or good for society to have people profit off of a bad loan — especially when the the loan was intentionally made bad so it would fail? The architects of the scheme are the major investment banks. They never lose because they never actually take a risk. They know the loans will fail and manage to get investors to sell them credit default swaps and other disguised sale products so that the investors lose, but not the bank. Then the investors pass on the debt (risk of loss) to still more investors who are buying “minibonds” (coined by Lehman Brothers).

The end result is that the “borrower” is just a pawn. Instead of a traditional loan model, we have something far more sinister: the product sold by borrowers is their signature and from that signature the bank and hedge fund players make $10-$20 for each dollar that is described as a loan. The actual debt is disbursed to dozens if not hundreds of investors who have no direct right, title or interest to enforce the debt, note or mortgage.

And yet the debt, note and mortgage is allowed to be enforced by courts who don’t care about anything except that the loan once existed and even if it no longer exists the courts want to see it enforced.

Adding insult to injury, remote vehicles commissioned by the conduit players get still more “profit” by selling property that was foreclosed in the name of an entity that either doesn’t exist or has no interest in the debt, note  or mortgage and is so thinly capitalized that it cannot answer to even awards of costs and fees for unsuccessful attempts to enforce fabricated documents. The proceeds of sale go not to any named claimant but to a party claiming the proceeds as “recovery” of advances that were never funded by the “Master Servicer.”

This is insane. It has always been insane. I’m a capitalist, a former investment banker, commercial banker, and attorney who represented financial institutions. Generically speaking securitization is the bedrock of capitalism. But like a car driven into a crowd of people it can become a vehicle of terror.

As it is currently practiced, securitization of debt is constantly undermining our financial system and our society because it is not balanced by any assumption of risk.

The problem is laziness and billions of dollars in “donations” or “contributions” from the bank that enabled the banks to thwart reasonable regulation of mortgage backed securities to make sure they are at least backed by mortgages in a meaningful way and to make sure they are regulated securities. As it stands, MBS are not backed by the assets referenced in the offering documents. That means they are not MBS. And that means the exemption for MBS contracts does not apply and they should be regulated as securities.

And one more thing. The banks are going to hate this. The issuance of notes and mortgages by homeowners or corporate borrowers is not a traditional loan contract. It is an essential part of a securitization scheme. Without it, the scheme can’t exist. So notes and mortgages should be treated as securities. The definition of a security requires this categorization. The purchase of the debt, note or mortgage is no longer a purchase of a loan receivable. It is a passive vehicle for passive income generated by trading.


13 Responses

  1. Yep Ian — I know!!!!!!! Thanks.

  2. ANoN- that’s right, if you pay off your mortgage you will never have clear title to your property, as all the illegal actions leading up to your payoff still exist. And you are of course paying the wrong person, who for all you know, found a “certified copy” of your mortgage blowing around in an alley and waltzed into court and produced it after overhearing that you were months behind on your payments. Or they went to the courthouse and printed out a copy which of course is on file there. Who would know? There won’t be any endorsements but who cares? They can type in whatever they want.
    If thechain of title is corrupted, or clouded, and you pay off the mortgage, then the chain of tile is still corrupted. Hence, no clear title. Oh- try getting title insurance! ( I believe you know about this)

  3. Thanks Ian. Wow. Bottom line — if doesn’t matter if you pay or not on these “crisis” loans –you will never have clear title.

    I wonder if the government understood that when they concealed the fraud and implemented “HAMP.” as the only solution for “some” borrowers. Modifications continue the bad title. .

  4. ANON- the foreclosure process wipes the slate clean of all the false documents leading up to it, from the origination of the “loan” right through eviction. Lost notes, AOM from entities with no legal right to assign anything, lack of 2 true sales prior to depositing the loans into the trusts, ( where they were never deposited anyway), forged signatures, MERS “vice presidents’ “ attestations, missing the cutoff date for inclusion in the “trust” as per PSA, disregard of IRC provisions for REMICs, disregard of NY Trust Law requirements, false servicer advances, bogus force placed insurance, dual tracking. To name a few.
    It’s the same as money laundering except it’s being done with illicit mortgages rather than illicit cash.
    The title goes before the court irrevocably corrupted, and comes out clean. And there you have it.

  5. Kali — thanks. And, yes, but Courts won’t give.

  6. @ ANON

    Also, as I presume you’d agree, clouded title can be cleared by a COURT ORDER.

  7. @ ANON


  8. You know — just don’t understand why banks think a new buyer of foreclosed home will insulate the bank against default or another foreclosure. I know many people buying homes who cannot make the payments. Instead of working with the current borrower, the banks choose to foreclose and sell elsewhere. This makes no sense to me, and I use the word “banks” loosely.

    My conclusion is that title cannot be fixed until there is a foreclosure. Then records start all over again.

    Does anyone agree with this?

  9. Better to invest in 3rd world country than @WellsFargo they having the green light foreclosing without discriminating as long as they would fill their pocket over our broken back lack of morality

  10. USA housing market is full of properties whose new owners have absolutely no ownership rights due to fatally defective titles. How long judiciary plan to hold this boiling pot covered before it explodes and destroy the Country?

  11. Excellent article Neil. Everyone should read Paul Volker’s book — “Keeping At It.” He does not go much into the financial crisis, but it is clear that he does not believe “Financial Engineering” could produce anything good for the economy. It is just a way for some to get rich.

    Agree Java — unsecured. None of the “mortgage” crisis loans were ever accounted for as real loans – they were already reported in default whether people knew it or not, and before anyone actually defaulted. Yes, set up to fall.

    And boots is right — why doesn’t anyone do anything about it? Because the settlements were set up to cover up. And the real victims, the targets, the people, got nothing — nothing but a foreclosure.

  12. the only answer to this article is to look on Wells Fargo Bank’s accounting fraudulent records online. CTSLink websitesite. if your loan was under a trust and Wells Fargo is the master servicer of the trust, you can find defaulted accounts under this website with modified account numbers. WFB has too many trust whose loan has been defaulted and foreclosed upon even if the account has been cancelled or discharged. the website is a collection agency for WFB, any loan modification and foreclosed properties is considered a foreborne principal and a realized loss for them.. the defaulted loans has been sold to debt buyers again and again. Please read the Assumption and Assignment Agreement (AAR) part of the PSA of the named trust. the loans with negative amortization and LIBOR adjustable rate were the target of the AAR agreement, it means all loans who has that features were assigned under that agreement and anticipated it will fail. this is the reason CTSLink were created for that purposed alone. Why is WFB is getting bigger and stronger? because WFB did not only created a fake accounts on their client’s checking account, but also on fake mortgage accounts. a secret that needs to be investigated seriously.

  13. The Loans are UNSECURED.


    The Borrowers Signature makes the Loan. Thus they should see the windfall from the securitization.

    This fraud against the homeowners and the Courts cannot continue much longer. The people know they were lied to and robbed these past 12 years.

Contribute to the discussion!

%d bloggers like this: