Fannie Mae Explains Securitization and Distribution of Ownership of Debt

As a quasi government agency Fannie Mae is forced to be forthcoming about its role in lending. But the wording of disclosures mostly come from Wall Street investment banks.

In the latest description of Fannie’s current activities the wording is carefully crafted to avoid referring to ownership of the debt, but the substance is the same. By shifting the 95% risk of loss to investors they are transferring ownership of the debt and legal standing to those investors. By using separate agreements that are often described as “bets” they maintain the false illusion that they are not selling the debts, and that therefore they can sell 3000% of any debt because they are only selling “risk.”

The reason legal standing is at issue is simple. Only an injured party can sue. In this case Fannie retains a nominal interest while the investors move into Fannie’s shoes after Fannie has moved into the shoes of an originator by paying the investment bank that actually funded the loan. The investment bank is paid with certificates issued in the name of a “bankruptcy remote trust” that are then sold through brokers to pension funds and other types of investors.

If there are defaults on borrower obligations it is the investors who suffer a loss, directly or indirectly but not the investment bank, not the trust, not the trustee and not the “lender.”

But which investors? Apparently all of them. When Fannie acquires a loan it is described as “depositing” the loan into a “bankruptcy remote trust.” Fannie usually retains the role as “Master Trustee” but the named Trustee on the Bankruptcy Remote Trust is your familiar US Bank et al. Here is the kicker: the reason it is “bankruptcy remote” is that it doesn’t own any loans and doesn’t manage any loans and doesn’t handle any money. It is a legal fiction to take advantage of some tax avoidance structure in the Internal Revenue Code.

That doesn’t grant it legal standing. Like the NINJA loans, if there is no income, no assets and no business the trust doesn’t exist nd even if it was construed to be an inchoate trust, it still doesn’t own the loan nor suffer any injury if a borrower doesn’t pay on the debt.

In Rogue Trusts this infrastructure is presented without any reality. No loan was acquired by anyone. But the risk of loss on non performance of the debt is scattered in hundreds or thousands of instruments including but not limited to those falsely described as “mortgage backed securities” and “risk sharing instruments.”

Thus when a foreclosure is filed the lawyers are using a name that is either concocted out of thin air or appointed by some unauthorized party who sounds “institutional.” The proceeds of foreclosure never go to the named claimant. Some portion of the proceeds might find its way to investors but a large portion of then proceeds are simply retained by the investment bank and hidden in the category of “trading profits.”

Look no further than the following link to find that all the “competitors” on Wall Street are actually in tacit or express agreements as co-venturers in a scheme that only looks like securitization because the investment bank insulates itself from liability if it appears to be only an intermediary. In reality it is the principal and it sells off virtually all aspects of the debt to investors who are relying on the illusion.

seehttp://www.fanniemae.com/portal/funding-the-market/credit-risk/conn-ave.html

For purposes of foreclosure the chain started by the investment bank thus links to either no creditor or a nominal creditor with no risk of loss or shared risk of loss on debts. This means that standing might exist for many parties, because they are diversified, but not for one party. It also means that standing exists for parties who have not been identified and probably cannot be identified without recourse to the actual contract documents under which the investor counterparties assumed various portions of the risk of loss.

A tally of all such instruments far exceeds 100% of the debt so the chain started by the investment bank is all paid off with no standing and no financial injury.

But discovery of those documents is blocked by parties claiming the information is private and proprietary — until some enterprising and highly aggressive lawyer pierces through those specious arguments and gets an order from a judge requiring the documents to be delivered. At that point the case settles under seal of confidentiality and the public none the wiser  continues to think that securitization is real and that most foreclosures are actually properly done and result in paying down the debt of a borrower.

Rinse and repeat. Every borrower starts from scratch whereas the banks and servicers continue to promote their schemes.

11 Responses

  1. Ian — Fed Res says the information should be available but it is not.

    A Public Private Investment Program was set up to sell what the government purchased. I do recall seeing some of the names that were managing the auctions, including Blackrock, but who they were sold to is not available. If they went to unregulated entities, such as hedge funds or shadow banking entities, the information will not be publicly available.

    I was told that these trusts are CLOSED. That is not what foreclosure attorneys state in courts. Quite some time ago, I was told by an attorney that the “pools” still exist. If that is correct, we don’t know where those “pools” are, and we have no way to find out.

  2. ANON- one of the Maiden Lane entities contained a lot of Lehman-issued loans, mostly commercial.
    At the time, I read thru all three, and remember when they were “sold”, and trying to find out who bought them. I was never able to find out. I saw the face values, and the sales prices, as they were in WSJ, but the buyers identity wasn’t mentioned. It was no doubt the Fed, as part of their QE1 program, purchasing 85-100 bn per month of (non)Mortgage Backed Securities.

  3. You may consider cross referencing IRS Form 938 with SEC filings: https://www.irs.gov/publications/p938

  4. Java — I don’t think there is any such thing. Has to be within a FHLMC REMIC — I find no such thing as FHLMC BAC 131. Usually written as a four digit number – such as Freddie Mac REMIC “3846”.. These FHLMC REMICs that invested in the investment bank trust tranches — all paid off — all gone. And, again, why did they invest in the first place? Most of these loans came from F/F in the first place!!!!!!

    Wish these smiling campaign reps would get on the ball.

  5. To add Kali — there were three “Maiden Lanes” — first one was for the Bear Stearns held securities and loans. Chase acquired Bear Stearns but they did not want these securities and loans – so the government bought them with a loan from the people. Then the government sold them, but no one knows to WHO these loans were sold by Maiden Lane (the government). Do know that Blackrock was one of the administrators. .

    The other two Maiden Lane “trusts” were for securities backed by AIG. AIG could not pay, so the government bought those securities too. And the government sold them to who knows who. This information is not published.

    In fact, there is NO information as to where these loans and securities were sold. The “trusts” originally set up were, obviously, bogus, or the crisis would not have occurred. (and we all know where the loans originally came from). But, by the bail out, the government never anticipated title problems, foreclosure problems, loan modification problems (which, in my opinion are bogus as there is no valid title), and the government acted quickly without thought to the consequence.

    To add fuel to already lit fire, the loans that came after the crisis are in the hands of the same dubious servicers who continue to abuse the system, and F/F – now the government – just obliges it.

    It is a mess. Our representatives are in la la land. All need Neil’s help. This is highly complex.

  6. Kali – I do not disagree with your analysis. I am simply trying to point out that pre-crisis exposure, Freddie/Fannie ALSO invested in the securities of private label banks. Thus, depending on when loans originated, the complexities increase. My focus is, and has been, the loans “originated” during the financial crisis fraud. And, my number one question is — how did F/F come to invest in the (fake) securities of the the investment banks? Especially, when these loans were originally with F/F.. Thus, if your loan is a crisis era loan – there are serious problems with the party claiming collection rights, right to enforce, and property title. The “bail-out” failed to address these issues that remain across the country today. .

    You may recall HARP — this was not just for F/F direct owned loans, but also for loans derived from the securities that F/F invested in. How the heck did this even happen?

    I see foreclosures all the time – AFFIRMED — US Bank, Deutsche Bank – trustee on behalf of BS TRUST. Those trusts are gone. Trustees area gone. That is my focus. I do not dispute that loans after the crisis are not corrupt. Much depends on servicers, and the “dumping” of loans by F/F. Still — that is not my focus. My focus, again, is crisis era loans.

  7. America has about 50 millions bogus foreclosures, means totally void judgements which can be reversed at any time since plaintiffs had no standing and Court had no jurisdiction. Judges allowed 50 million of stolen in the Court properties to be sold to new buyers – so, that is next?

  8. [CLARIFICATION]: “…separation IN ORDER TO AVOID bankruptcy consolidation.”

  9. @ ANON

    As previously pointed to in the pre-crash letters published by FANNIE on FASB 140 (linked in a previous comment in another LL post), in part I respectfully disagree that the effect of FANNIE’s securitization model, policy, practice and/or custom applies only to post-crash transactions, to wit:

    Preceding the inception of the originating transaction, as it intended the TRANSFEROR (a/k/a originator) separated and divested any and all of its purported beneficial interest in the evidence of the originating transaction (NOTE & MORTAGAGE/DEED OF TRUST) through a “true sale” pursuant to FASB 140.

    I know you disagree, primarily because of the custom and practice of the TRANSFEROR failing to on-balance sheet the originating transaction, before making an off-balance sheet transfer into a securitization conduit; thus, the logical argument that there was nothing to transfer.

    However, as I’m certain you’re aware, in litigation the opposition asserts and relies upon the language that a NOTE & MORTGAGE/DEED OF TRUST can be sold multiple times as a counter to a homeowner’s assertion that the “originator” sold and divested any and all of its purported beneficial interest, as was intended by the “originator” at inception — a “true sale” in effect — even if the “originator” lingers as the “servicer”, in fact.

    INTENT: broker a securitization conduit transaction to eliminate any and all risk; earn fees; and separation for bankruptcy “clawback”, i.e., consolidation.

    No response requested.

  10. My creditor was listed as FHLMC BAC131. Any ideas ?? Looks like some freaked up combo of Freddie. Bank of America and CountryWide. Yet it is the debt collector scumbag servicer with no standing who stills trying to fraudclose as plaintiff.

  11. This is for loans today. After the financial crisis 95% of the loans go to Freddie/Fannie. If one has a crisis “trust” – F/F invested in those trusts. – usually the top tranches. This is evident from FHFA lawsuits against the investment banks security underwriters. The cusip numbers for the tranches F/F invested in the particular securities are given. Trusts before 2005 are not listed due to, I assume, statute of limitations.

    The process Neil describes is for loans after the crisis, and applies to loans sold directly to F/F. F/F, after the crisis, also extended the time (I believe to two years) in which they can hold defaulted loans in the REMICs. After that they are removed, and since the crisis the collection rights are usually sold in bulk. Believe the first bulk sale was in 2013 or 2014. Before then, collection rights could be sold individually and at any time the servicer deems loan not collectible.

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