How to Understand Debt and Money in Foreclosures Today

Everything is summed up in the words of Reynaldo Reyes from Deutsche Bank: It’s all very counterintuitive, which means that the truth runs against basic assumptions that once worked. The assumptions are not true and the truth seems to be untrue.

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For 13 years I have been trying to distill into words a description of securitization as practiced by the investment banks. In theory securitization is neither a dirty word nor an immoral practice. And to be fair, the illegality of today’s foreclosures is partially the responsibility of legislators and regulators who failed to keep up with financial innovation.

I’ve hit upon an analogy that might prove helpful to many people.

After centuries of scientific theory and investigation, physicists came up with a hypothetical particle called an atom. Later I use the atom as an analogy to an actual cash debt owned by a borrower to some legal person who has suffered a risk of loss relating to nonpayment of the debt.

Eventually the atom was proven to be an actual particle. Then scientists fairly quickly discovered that atoms were in turn composed of even smaller attributes or particles — electrons, protons and neutrons.

With debts, financial analysts and innovators discovered that a debt can be broken up into different attributes — interest, principal, monthly payments, fees etc. And they found that each of these attributes could be separately sold. But this created a monetary split which the law did not recognize. Nevertheless it occurred. The law requires the presence of a specific legal person who possesses a claim based upon actual loss from nonpayment. With the split the potential claimants immediately broadened to everyone who had purchased any attribute of the debt.

This makes it  difficult if not impossible to present or even identify one legal person who actually has the legal standing to bring a claim for nonpayment. Hence no creditor is alleged or identified and no ownership of the debt is alleged or proven.

After parsing out the main attributes of atoms, scientists discovered many hypothetical particles that were not completely or directly observable but whose existence could be determined by reference to certain behavior of the some of the known attributes. Some particles were not only difficult to observe, their presence at any location was based upon calculations of probability rather than any actual observation of real world events. Other particles came into existence and then disappeared in microseconds. Some eventually have been proven. Others are still subject to scientific investigation. That is particle physics. And of course we all know that this knowledge developed into a theory for producing a bomb of heretofore unimaginable power to destroy — or power the planet depending upon how it was used.

Careful analysis shows that atomic theory closely correlates with securitization of debt.

Securitization, to be clear, is the process of distributing the risk of any investment to many people. There is nothing wrong with it. It has been done for centuries and it is the basis for capitalism which is our system and seems, by general agreement, to be the best economic system humans have yet to devise, despite its obvious shortcomings.

“Securitization” since 1983 has taken on a more particular meaning, i.e., the distribution of risk on consumer debt, and in particular residential loans because those are the biggest debts. All paper instruments that declare ownership of a particular asset derive their value from that asset. So all such paper instruments are by definition derivatives whether the paper is certificate of common stock, a bond, car title or anything else. “Derivatives” has taken on a more particular meaning, i.e., instruments that derive their value from debt.

In theory securitization of debt can be accomplished on one of two ways: either many people invest in one debt or many people invest in many debts. The obvious answer is that diversification of investment diminishes the risk of a total loss. So securitization became the investment by many people into many debts.

So far, so good.

In the ordinary way of doing business on Wall Street, brokerage houses are fee-based intermediaries who facilitate the purchase of investments in various types of paper instruments including regulated securities. So for example an initial public offering of securities by a company, the brokerage house underwrites the offering by taking on some risk and receiving a fee for its role in creating and selling the securities offered to the public.

And that is how it worked in all legal transactions. People who were or said they were licensed brokers and sold nonexistent shares of nonexistent companies or who took a position in the ownership of equity (stock) of a bankrupt company and then sold them to the public making outlandish claims were routinely closed down, jailed, fined and subject to asset seizure.

Three things happened that changed Wall Street.

First accounting rules starting  changing in the 1960’s that allowed for something called “off balance sheet” transactions. This enabled management of a company or a brokerage company to manipulate the economic and financial reports relating to securities trading on Wall Street. Despite outcries from conservative members of the American Institute of Certified Public Accountants, the practice  was institutionalized and continually widened in its application ever since. This prompted the publication of Unaccountable Accounting by Abraham Briloff in the 1960’s.

Second, brokerage houses were allowed to convert from partnerships in which the managers had personal risk in everything that was performed in the name of the brokerage house to corporations that could actually issue their own stock. This produced capital for the brokerage house, but it also eliminated management’s personal responsibility for the losses or illegality of actions undertaken by the brokerage house which had been mounting campaigns to call themselves “investment banks.”

So Wall Street continued to be largely governed by its members when they were no longer actually accountable for anything that happened. After that they pursued strategies that would never have been undertaken when they were personally liable. Junk bonds emerged out of the undervalued bond market. And then “mortgage bonds” (derivative certificates) emerged in which the junk was massaged into triple AAA rated investments.

Knowing that the investments were junk, the brokerage houses used their extensive influence and leverage in Washington DC and managed to convince Congress and President Clinton that it was good idea to repeal the Glass-Steagal act and deregulate the “mortgage bonds” and all other instruments deriving their value from mortgage bonds. This eliminated government oversight except for the Federal Reserve at which Alan Greenspan admits now that he had 100 PhD’s working for him a Chairman of the Fed, none of whom understood the complex derivative agreements. Greenspan admits that he erroneously decided that market forces would make any needed correction in whatever  Wall Street was doing. What he now understands is that market forces could not operate in the environment that Wall Street created and controlled.

Third once upon a time when you bought a stock you received a certificate. In the 1960’s a new practice evolved — encouraging investors to keep their stocks in “street name.” That simply meant that the brokerage house would have its own name put on the certificate and would simply issue statements to the investor confirming they were holding the certificates for the investor. That seemingly simple event opened the door to a level of moral hazard that eventually resulted in the great recession of 2008. That risk manifested in the “paper crash” of the late 1960’s where some brokerage houses went out of business reportedly because they couldn’t properly account for the location or ownership of stock certificates.

The explanation I learned while I was counting certificates in the back office of one brokerage, turned out to be simple and simply horrifying — the brokerage houses — nearly all of them — were using street name securities on which they borrowed money and traded securities, covered short sales, options etc. Today if you want the certificate you might need to pay several hundred dollars — a distinctive bar to accountability for investments supposedly held at brokerage houses/ “investment banks”

Back to the atom. Each debt is like an atom with its own unique properties. The component parts of the debt, unlike the component parts of an atom, were turned into commodities in which brokerage houses were converted from being intermediaries into principals and assets were converted into revenue. The practice of selling unregulated securities issued in the name of nonexistent legal person or companies became institutionalized rather than illegal.

So among the things that Wall Street brokerage houses sold were cash flow derived from a promise by the investment bank to make the payment through intermediaries, interest rates, hedge contracts, credit default swaps, risk of loss, principal, servicer advances, and options in which various investors took various positions as a bet on whether the value of a certificate would go up or down, whether the rates would go up or down, etc.

In plain language it was the investment bank that issued loans, always through conduits. The borrower was never aware that the sale of that loan product purchased by the consumer was part of a much larger scheme in which his loan would be immediately converted into revenue for the investment bank and its affiliates.

Theoretically there would be nothing wrong with this infrastructure except for one thing. The value of the certificates was largely determined by an index derived from the value of the collateral pledged by borrowers when they took the loan. That index was and remains mostly a lie, but not entirely. The holder of certificates has no relationship to any debt, note or mortgage and is therefore not “mortgage backed” as advertised.

But the more basic problem is that under our current laws, the ONLY claim  allowed by law in foreclosure is one in which a actual legal person claims that it suffered an actual financial loss and that the loss occurred as a result of the borrower’s failure to pay. There is no such loss and there is no such person. The investment bank cannot show its face (1) because it no longer has any interest in the debt and can’t make the required claims and (2) because it can’t admit to a pattern of violating disclosure rules under federal and state lending laws.

So instead, the brokerage or investment banks created an elaborate evolving structure in which a central repository stored all known information about the loans. This repository today is mostly Black Knight. The task of the central repository was to collect data and arbitrarily fill in gaps with data that supported claims to enforce the debt.

In turn, the investment banks used companies that were dubbed “Servicers” that were routinely rotated and appointed to assume the role of administrator over the loans, ownership of which had been parsed and disbursed to thousands of investors most of whom were unrelated to any REMIC Trust name used by the investment bank.

These servicers were given IT platforms that accessed the central repository, but their central  role was to help create the illusion that the records were based upon original notations made at or near the time of transactions that had been transferred to each Servicer. In fact, the only thing that changed was the login and password for each “new servicer.” They would use the term “boarding process” when none was needed nor was any performed. But the use of that term enabled the introduction in court of “business records” that were neither original nor accurate nor audited in any way by anyone. Those records were only reviewed and edited for their value to enforce the debt.

The debt meanwhile had been converted from actual to theoretical like the particles that physicists investigate now. It started out as an asset but evolved into revenue to the players who were involved. The illusion of the debt’s continued existence is maintained solely to enforce it to create additional revenue. In truth, the amount of revenue received from each loan average 11.75 times the the amount of the loan.

Thus the issue of repayment is far less significant than an ordinary loan. And that is the center of what is counterintuitive. Everything is relative in physics and finance. From the borrower’s point of view he must have a debt because he still has not paid it back. And yet there is nobody to whom he can make payment that will take the money, deposit it into an account and record the transaction as a deduction from an asset on its balance sheet showing a loan receivable. In plain language no payment from such  borrowers ever goes to pay down then debt on the books of any player. And that includes the proceeds of a foreclosure sale.

The last element required for any valid court claim is that the remedy sought will fix something that has been broken. Our system of laws requires that. But no such party exists in virtually all cases.

And just to editorialize, fixing the law to provide that any disinterested party could be nominated to enforce the debt does not solve the deeper problem.

The removal of risk from underwriting residential loans fundamentally changed the loan transaction in myriad of ways — each contrary to federal and state lending laws. It virtually guaranteed that the brokerage house would support any effort to get people to sign their names to new and ever more complex loan products that could be parsed and sold within 30 days of creation. It virtually guaranteed a complete disregard for whether the loan, if it can still be called that, would ever be repaid. The risk of loss was not diminished. It was eliminated.

Hence the market forces that ordinarily would bring lenders into line because of risk factors that would produce losses are no longer present, thus completely changing the apparent contract with the borrower into something much larger and broader.

A bright lawyer who can handle complex legal theory can easily make a case and most likely prove a case for implied contract — one that does not negate the loan agreement but rather expands it to include the borrower’s entitlement to share in the unexpected bounty of profits that were generated as a result of this elaborate scheme.

If that concept gets traction THEN it might be possible for a court in equity or a legislature to change the statutory and common law schemes to allow for the appointment of a representative who does not own the debt but nevertheless seeks enforcement so that the derivative infrastructure based upon that loan does not collapse. But first there would need to be an accounting for the profits generated from the origination or acquisition of the loan and then an allocation to the borrower thus reducing the amount he owes.

Then and only then will all the cards be on the table.

14 Responses

  1. Hi Anon. Have you filed a lawsuit for declaratory relief (and later seeking injunction) seeking the identity of the person entitled to receive your mortgage payments? If you have been paying all along, you should be successful (like the person from Florida that Neil posted about in the past)

  2. Hi Anon. Have you filed a lawsuit for declaratory relief (and later seeking injunction) seeking the identity of the person entitled to receive your mortgage payments? If you have been paying all along, you should be successful (like the person from Florida that Neil posted about in the past).

  3. […] Source: How to Understand Debt and Money in Foreclosures Today […]

  4. corruptionpedia2- thank you for all your research, you have a great propensity for the facts and the truth, please don’t stop digging!

  5. summer.chicago3@yahoo.com.

    Anyone who has questions can email, I will try to respond to all

  6. corruptionpedia2 – wow – you did your homework.

    Can you give me your email? There is no way the little guy can fight all of this alone.

    Thanks.

  7. Ok, I think I know that it means.

    We all are victims of the most cynical fraud, money laundering and tax evasion scheme ever existed.

    I found who is TransCentra – it is banks platform to launder money through US housing market and evade taxes.

    TransCentra is registered in Delaware as DISC corporation. Description* below.

    Here is how a scheme works: (of course many details are hidden)

    A Big Bank register CDO ( a shell company) on Cayman Islands and fund it with money from unidentified investors who transfer funds into CDO through companies like Transcentra.

    Besides payment processing for banks, TC also offers a f remote deposit and mobile deposit technologies; and Private Label Processing Solutions designed to help their bank client, achieve your objectives through Transaction Management System (TMS) platform with the largest outsourced payment processing network in the United States to deliver: Wholesale Lockbox Automated Wholesale (“Whole-tail”) Lockbox; Retail Lockbox Remote Lockbox.

    After that money wired through TransCentra to banks subsidiaries in the USA, like Lone Star Fund; BlackRock, BlackStone, ect – who pass it to their subsidiaries like Caliber, PennyMac, Bayview. – while sell bogus CDOs; /derivatives to institutional investors as Pension Funds claiming enormous returns from defaulted loans.

    These subsidiaries – Caliber, PennyMac, Bayview, ect – pass it in the form of credit to smaller lenders who impersonate as actual “lenders” who give you money for the mortgage. Although the wire at the closing likely came from an impersonator-lender, the actual sender would probably be using TransCentra’s platform to hide its identity.

    When borrowers start to make payments, “Servicers” who are rotated through data management companies like Black Knight, collect checks and deposit it into TransCentra accounts for a benefit of a “within payee” and without prejudice – which means that TC should not be held liable for banks fraud if the borrower discover this scheme.

    At the same time banks need to accelerate borrower’s actual default. They use various methods, most common are manipulations with escrow accounts; junk insurances, lost payments; short payment deadlines; late fees for nothing, ect. Flood insurance on properties located on hills in a desert are very helpful.

    In my situation, flood insurance determination was requiested for Perl by A Black Knight (aka LPS- DocX).

    So, mortgage payments are collected by a payee whom borrowers not suppose to know; and definitely not for the benefit of GSE.

    When these money can be safely transferred through TC back to Cayman Islands and distributed to secretive investors – corrupt politicians who steal their countries budgets; drug lords; weapons sellers, ect.

    These inverstors do not want wait 30 years while American borrowers pay their loans. they need money laundered faster, preferably in 3-5 years.

    Which leads to a conclusion the 2002-2008 “crisis” was international mafia’s unsuccessful attempt to expedite money laundering mill through subprime mortgages given to anybody who has pulse.

    *A DISC is a U.S. corporation which has elected DISC status and meets certain other largely symbolic requirements.[1] A corporation so electing is not subject to U.S. Federal income tax.[2] Properly structured, a DISC has no activities other than on paper and no activities not related to the export of qualifying goods.[3]
    Mechanism for benefit: A DISC contracts with a producer or reseller of U.S. made goods or provider of certain qualifying construction-related services to provide “services” to such related supplier for a fee. The fee is determined under formulas and rules defined in the law and regulations.[4] Under these regulations, the fee is deductible by the related supplier and results in a specified net profit to the DISC. This net profit is not subject to Federal income tax. The DISC then distributes the profit to its shareholders, who are taxable on the income as a qualified dividend.[5] If the shareholders are U.S. resident individuals or others eligible for the reduced rate of tax (now between 0% and 20%, depending on ordinary income level) on qualified dividends, then the tax rate on the income allocated to the DISC is reduced.
    The pricing rules in the law and regulation are independent of the transfer pricing rules normally applicable to transactions between related parties. Thus, DISC profits are not dependent on the economic contribution of the DISC, and a DISC need have no substance.
    Since a DISC has no substance, implementation and maintenance is fairly easy. Complexities can arise, however, in making calculations of the permitted DISC income due to rules designed to help maximize the subsidy.[6] These rules include a “no loss” rule, overall profit percentage, grouping, marginal costing and other techniques, use of which may be improved by software tools.
    Additional substantial rules apply.[7]
    DISCs were challenged by the European Community under the GATT. The United States then counterclaimed that European tax regulations concerning extraterritorial income were also GATT-incompatible. In 1976, a GATT panel found that both DISCs and the European tax regulations were GATT-incompatible. However, these cases were settled by the Tokyo Round Code on Subsidies and Countervailing Duties (predecessor to today’s SCM), and the GATT Council decided in 1981 to adopt the panel reports subject to the understanding that the terms of the settlement would apply. However, the WTO Panel in the 1999 case would later rule that the 1981 decision did not constitute a legal instrument within the meaning of GATT-1994, and hence was not binding on the panel. The Foreign Sales Corporation (FSC) was created in 1984 as an alternative to the DISC. In 1984, partially in response to international pressure, also amended the rules applicable to DISCs to provide that a DISC and its shareholders could continue to defer tax on the DISC’s income, but only if the DISC shareholders paid interest on the deferred tax.[8]

  8. Kali – can’t say here but judicial state.

    corruptionpedia2 — I do not know exactly what that means. Have been to banks to ask and they are not sure. But it is a red flag to me.

    I have that on cancelled checks twenty years ago. Able to trace also what bank the check was cashed at by ABA routing number. AND this is when my problems started (I don’t find out until much later – and that is why I went back to look at the cancelled checks I have). These checks I have that have the same thing are specifically just before a refinance that I did.

    What I do know now those checks – addressed to a big bank who diverted money from a GSE, and put me in internal default. These checks never went to the right party – and neither did the payoff check (also diverted to another bank). All beginning of my hell. .

    Today most is wire, and we don’t see backside of a cancelled check.
    If this is a current check you have — get to authorities to trace.

    Nothing is paid where anyone tells you it is. This is why I should have stopped paying a long time ago.

    Would appreciate more input on this from others as to exactly what it means. .

    Thanks. .

  9. I keep investigating the payment transaction and found interesting details.

    1. The known by me payee was Caliber whom I issued the payment.

    2. Caliber was not actual payee and did not endorse the check.Transcentra indorsed the check and merely stated that they credit my payment to somebody within credit to the account within named payee without prejudice.

    Presuming that the payee – Caliber – authorized Transcentra (a financing institution) to indorse my check.

    When they made it in violation of 31 CFR 240.13 because they failed to include sufficient indication of the indorser’s authority to act on behalf of payee.

    I don’t see if it was included anywhere on the check. I am going to dispute all my payments to Caliber and file a complaint with CFPB against Transcentra.

    CFPB does nothing to protect the customers, its just an expensive alternative to USPS mail carrier but at least they help to push criminals to answer (sometimes)

    (3)Indorsement of checks by a financial institution under the payee’s authorization. When a check is credited by a financial institution to the payee’s account under the payee’s authorization, the financial institution may use an indorsement substantially as follows: “Credit to the account of the within-named payee in accordance with the payee’s instructions. XYZ [Name of financial institution].” A financial institution using this form of indorsement will be deemed to guarantee to all subsequent indorsers and to the Treasury that it is acting as an attorney-in-fact for the payee, under the payee’s authorization, and that this authority is currently in force and has neither lapsed nor been revoked either in fact or by the death or incapacity of the payee.

    (4)Indorsement of checks drawn in favor of financial institutions. All checks drawn in favor of a financial institution, for credit to the account of a person designating payment so to be made, must be indorsed in the name of the financial institution as payee in the usual manner. However, no check drawn in favor of a financial institution for credit to the account of a payee may be negotiated by the financial institution after the death of the payee.

    (c)Unacceptable indorsements.

    (1) A check is not properly indorsed when the check is signed or otherwise is indorsed by a person without the payee’s consent or authorization.

    (2) Failure to include the signature of the person signing the check as required by paragraph (b)(1)(ii) of this section will create a rebuttable presumption that the indorsement is a forgery and is unacceptable.

    (3) Failure to include sufficient indication of the indorser’s authority to act on behalf of the payee as required by paragraph (b)(1)(ii) of this section will create a rebuttable presumption that the indorsing person is not authorized to indorse a check for the payee.

  10. I contacted my bank and asked who cleared my mortgage payments to Caliber Home Loans, Inc (aka Countrywide Financial #1″

    My check was processed by a company called :Transcentra.

    The endorsement on my check says: “credit to the account within named payee without prejudice”. Caliber never endorsed the check.

    Does anyone know that it means? Besides fraud, of course.

  11. @ ANON

    In what state are you domiciled?

  12. JAVA – you have been right on it for a long time. Unsecured.

    My technicalities, and evidence, is beyond comprehension by anyone.

    THANK YOU.

    Stand by my mistake.

  13. Hey debt collector scumbag. Let’s fraudclose on this house TOGETHER and split the windfall 50/50. That’s the only EQUITABLE solution.

    As for me. I prefer Atoms of Peace.

  14. This is an excellent explanation of what happened, and under the name of an “atom.” Very clever. Thank you, Neil.

    For those who know me, they know I have been here a very long time – this is a humble statement of regret that I must live with. .

    I was once asked, in a deposition, ten years ago:

    “What do you have against securitization?”

    “Nothing, I answered, as long as there is no fraud.”

    But, fraud we have. There was no guard, as Neil states, capable of even understanding the financial engineering. Laws were changed to accommodate. Paul Volcker, in his book “Keeping At It.” explains why financial engineering can be hugely destructive to our economy. Loans were moved from trusts to other trusts, and ownership from ownership – without borrowers EVER being informed or knowing what was happening. .

    Where did these loans come from? Suddenly, these loans were no longer to be sold to the GSEs — standard party for mortgage investment and securitization to promote a U.S. mortgage market. And, under the Community Reinvestment Act (CRA) – the GSEs were required to fund loans to lower and middle income America.

    The “investment” banks? How did they get control of these former GSE loans, and also allow the CRA to be satisfied? We know how, and it was not by anything that was not fraudulent. No one was given the details of what really occurred. No one was told – “your loan must be put in default before the investment bank will give you “credit.” And, that is all it was – “Credit.” No one told you – “you must first sell your soul.” No one told you what was occurring behind the scene.

    And, how did the government handle the collapse? Media outlets that told the public – “You bought too much house. You used your house like an ATM.”

    As Poppy as eloquently pointed out — NO ONE WAS TOLD. No one would have agreed to this if they knew the behind the scene details of what really occurred.

    Some victims and attorneys may get lucky. Power to them. For the most part, most affected will remain – VICTIMS.

    I made a big mistake. I kept paying. HUGE mistake. To stop paying and fight the foreclosure is the right thing to do. Whether you win or lose. I made a HORRIBLE mistake to keep paying.

    Fight the foreclosure whatever way you can. Please know, you did the right thing, and sleep at night. I was very wrong to keep paying, and I will never sleep at night because of that mistake. .

    Thanks again Neil.

    .

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