The Number of resales of the Same Residential Loan is Infinite: Will the Real Holder in Due Course Please Stand Up?

Distressed mortgage securitizations are special purpose vehicles that issue securities primarily to institutional investors; invest the proceeds mainly in distressed mortgage loans; and apply the interest, principal, and sale proceeds they receive to pay interest and principal on the securities that they issue. Distressed mortgage securitizations allow hedge funds and other institutional investors to make a leveraged, tax-efficient investment in a pool of distressed mortgage loans, and allow banks, real estate investment trusts, and other mortgage loan originators to finance or sell their distressed mortgage loan portfolios, freeing up capital that they can then use to make or acquire additional mortgage loans.

Under the distressed mortgage REMIC structure, a REMIC uses the proceeds of its issuance of regular interests to acquire a pool of distressed mortgage loans. Hedge funds and institutional investors that want a leveraged return on the distressed mortgage loans acquire the more junior regular interests. Investors seeking a more typically debtlike return acquire the more senior regular interests. [e.s.]

* are distressed mortgage loans qualified mortgage loans, even after they are modified? If not, the REMIC would fail to be a REMIC.11 In this regard, although the REMIC rules generally allow loans to be tested for qualified mortgage loan status retroactively to their origination date (before they became distressed), and accommodate workouts and sales of distressed loans, Congress does not appear to have contemplated the use of REMICs to acquire and work out pools composed entirely of distressed mortgage loans.

Second, do a distressed mortgage REMIC’s regular interests entitle holders to principal amounts that are unconditionally payable, even when its assets are unlikely to pay in full? If not, the REMIC would fail to be a REMIC.12 Read literally, the REMIC rules allow expected defaults on underlying mortgage loans to affect the amount and timing of principal payments on REMIC regular interests.


NOTE: The assumption presented is not entirely true. Investments are not equal to the purchase of distressed loans. This is another example of hidden yield spread premiums. Investors bargain for a defined rate of return and then investment banks seek loans in which the stated rates are much higher, thus producing a windfall of money that never needs to be used for lending or acquisition.


  • Investor buys certificate for $1,000.
  • The investors get a discretionary promise from the investment bank to pay them a return of 6%.
  • 6%=$60 per year.
  • Investment bank goes out to buy distressed loans whose interest rate is an average of 7%, but because they are distressed, they get a discount of 30%+ (because of decline in value of collateral).
  • How much does the investment bank need to buy in order to satisfy the promise made to investors?
  • Remember they are seeking to justify the promise of $60 per year.
  • The answer is they only need to buy $816 in loans to cover the $1,000 investment by investors.
  • This produces a yield spread premium of $186 or $18.6%.
  • But then when we factor in the falsely labeled servicer advances that are paid from investors funds the Master Servicer lays claim to the balance recovered as revenue to the investment bank and all others enlisted to support the foreclosures.
    • The distressed property is subject to a foreclosure proceeding.
    • The distressed value of the property is now 50% of the original loan amount.
    • The investment bank takes all the money
    • But the investment bank keep making payments to investors not because they must but because they want to pay investors in order to create the false impression that this is a legitimate marketplace and that that the investment is safe so that investors will buy more certificates.

3 Responses

  1. And Java – right on. Not going to fix this alone. No one will fix this alone. NO ONE.

  2. Also need info on “residual holders” – and REMIC structures. Thanks.

  3. Please xplain what happened with the loans Freddie sold in this link. And how should homeowners defend against The fraudclosure

Contribute to the discussion!

%d bloggers like this: