Livinglies's Weblog

Hidden far away from public view and mainstream media is an enormous fight over who should suffer what loss over the labyrinth of defaults in the “mortgage bonds” also known as “mortgage backed certificates.” Within this fight it is clear that current law is simply nonexistent and ineffectual in achieving a legal or just result. It is the investors and borrowers who are consistently left out in the cold.

The certificates are merely a promise to pay issued by a securities brokerage firm in the name of a trust. Those certificates promise periodic income to be paid to investors on behalf of the trust. The trust actually owns nothing and does no business and may even not exist at all under current law.

In the “repo” agreements the securities are subject to a requirement of buyback, to wit: if the payments that are promised in the certificates don’t materialize then the securities brokerage firm (in this case Bear Stearns) must buy them back. Insurance and other hedge products are issued to cover the risk of the repo or buyback. But they are payable to the securities brokerage firm (also known as investment bank).

The interesting zig and zag is that the securities brokerage firm can “declare” a “default” even if it is still making payments to investors. Under Goldman Sachs contracts this declaration is in the sole discretion of the securities brokerage firm and this is the model for other such insurance and hedge contracts. It triggers payments to the securities brokerage firm (investment bank) based upon a presumed decline in “value” of various attributes of  the securities themselves, the loans upon which the securities are indexed (not not backed), interest rates, the value of collateral and other measures of value within the sole discretion of the securities brokerage firm.

This is how Goldman Sachs made a windfall profit in 2008. It had funded the origination and acquisition of loans using money advanced by investors for the purchase of these vague certificates. It never retained any risk of loss and the investors who had in substance paid value for the loans never acquired any right, title or interest in the loans. AIG, because Hank Paulson (Former CEO of Goldman Sachs) as Treasury Secretary through his entire career on the line to coerce a reluctant President Bush and Congress to bailout AIG who simply used the money to fund the insurance contracts with Goldman. Neither the investors nor the borrowers on the loans that were used as an index ever saw one penny of benefit from that insurance payout. In short it was the expectation of Goldman’s profit that was bailed out not any actual losses.

So the real question is whether these arrangements have any financial effect on anyone who is claiming the right to collect, process or enforce the loans that are claimed as part of the securitization scheme that produced the issuance of the certificates in the first place.

The answer appears to be in the negative because none of them were actually using their own money or credit to fund the origination or acquisition of the loans in the first place. Current law simply does not cover this situation so the banks are being allowed to make things up as they go along to the great detriment of both investors who were in substance the lenders and the borrowers who were in substance party to an undisclosed larger contract to issue and trade unregulated securities.

see 182887p  In re Homebanc Mortg. Corp., 573 B.R. 495 (Bankr. D. Del. 2017)

If we really want to make meaningful changes in the way residential mortgage loans are funded, originated, acquired, collected, processed and enforced, there need to be changes in the law for every step of that process. Current law does not allow for unilateral appointment of a fictional creditor to be part of that scheme. While securitization of mortgage loans is perfectly sound finance in theory, there are basic and fundamental changes in the statutes that are needed to make securitization of such loans legal as practiced by Wall Street.

The assumption that this is capitalism and free markets will make the necessary corrections is false. Neither the investors nor the borrowers have received any meaningful disclosures upon which they can make decisions or bargain effectively for better asurances or better terms or both. Free Market forces are simply not present if the information is not freely available. Hence no correction of questionable practices can occur without statutory changes to the rules of disclosure and the rules of engagement.

The current trend of piling presumptions upon assumptions upon inferences in the courts is unsustainable. At some point the lack of any nexus between the loan documents and any party suffering injury is going to be revealed. Instead of waiting for things to collapse we should be proactive and lobby legislatures across the country for better laws, while allowing a new legal fiction created by law to allow for the designation of a creditor that passes constitutional muster to present a real case in controversy.

Filed under: foreclosure |