How did Wall Street make all that money on “securitization.”

Servicers did not make any advances. They never did and they never will. They said they did but they didn’t. If you read the prospectus carefully you will see that the money from investors is divided into three parts.

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The first part is the purchase of a certificate that promises payments to the investor based upon a formula that is independent of any homeowner debt, note or mortgage. It does not commit the Investment Bank to using the funds in any particular way. But the payments are partially indexed on the performance of an arbitrarily chosen group of loans that are not owned by anyone.
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The second part is the establishment of a pool of funds controlled by the Investment Bank which also does not have any restrictions as to its use. The prospectus reveals that investors may be receiving payments out of the pool of funds, which obviously comes from their own money. This is the source of what is labeled as servicer advances.
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By labeling these payments as servicer advances, and by providing that servicer advances will be paid to the master servicer (i.e., the Investment Bank) the so-called securitization scheme creates another Profit Center.
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Investment Banks can claim return of servicer advances that they never advanced. By doing that they not only create the profit Center but they also able to claim that it was not Revenue for tax purposes.  A lot of the bookkeeping, financial reporting and tax reporting is based on this strategy.
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In my opinion it is not legal. But I am certain that it is not legal from the perspective of the homeowner, who gets no credit for any payments or profits made in the scheme because nobody maintains an account in which the homeowners debt is claimed as an asset; this results in literally no place to credit the homeowners debt for incoming payments and profits that actually offset any potential liability of the homeowner.
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The third part exists by implication. The normal agreement (prospectus) would provide for a specific use of proceeds from the proceeds of an offering of any Securities or certificates for mortgage bonds. This is absent.
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The reason that it is absent is because the balance of the funds are pure profit to the Investment Bank. this is because of the second tier of a yield spread premium that is not widely understood in legal circles because in legal circles they mostly have no experience or knowledge of Finance. I do. As a former investment banker who actually practiced literally on Wall Street I understand exactly how this happened.
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The investment bank has complete discretion as to what to do with the money that investors have paid them — something that never exists in the offering of securities to investors but does exist in so-called securitization plans. This is the holy grail for investment banks — issuing securities in the name of nonexistent entities. Instead of getting their normal fee of at most 15% of the proceeds, they get it all. 100%.
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They issue certificates in the name of a trust that does not exist. The actual Trust Agreement (NOT THE PSA) corroborates this by stating that the trustee has only one function: to hold legal title to loan documents. The beneficiary is the Investment Bank.
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And of course the role of a trustor or settlor is completely absent because there is nobody who has paid value in exchange for receiving a convenience of ownership of the underlying debt of any homeowner. *
So the Investment Bank, to simplify for this article, is promising to pay the investor at a rate which appears to the investor to be in excess of market rate but is far below the amount charged to homeowners. This strategy enables the Investment Bank to profit on several different levels.
  • first, the yield spread premium is the difference between the amount of money that needs to be paid to homeowners for issuance of what is labeled as loan documents, versus the amount of money the investment bank received from investors.
    • So if an investor paid $1,000 expecting a 5% return, the investor was expecting $50 per year.
    • But the Investment Bank funded a loan at 7.5%.
    • This means that in order to satisfy what they had to pay to the $1,000 investor they only needed to to pay the homeowner around $666 leaving a $334 pure untaxed profit.
    • Right there for every $1 they paid the owner the investment bank received $0.50.
    • In addition, by placing themselves in the position of Master servicer, they were the ultimate recipient of payments received from homeowners which in many cases exceeded any planned payments to investors.
    • NOTE THAT THIS IS WHY SUBSERVICERS LIKE OCWEN ET AL REFUSE TO TELL YOU WHERE PAYMENTS FROM HOMEOWNERS ARE SENT. FIRST THEY DON’T ACTUALLY RECEIVE THE MONEY AND SECOND THE MONEY IS NOT BEING SENT TO THE CLAIMANT IN FORECLOSURE, CORROBORATING THE DEFENSE NARRATIVE THAT THE NAMED PLAINTIFF OR BENEFICIARY IS NOT THE PROPER CLAIMANT NOR DOES IT POSSESS ANY CLAIM AGAINST THE HOMEOWNER.
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The fourth aspect is that under current systems and processes that are generally accepted on Wall Street, most Investments are held in street name. Investors do not receive any written document like a stock certificate or a bond when they buy it. Holding a security in street name means that for all practical purposes the Securities firm owns it for the benefit of an investor. THE ONLY EVIDENCE OF OWNERSHIP THE INVESTOR GETS IS A STATEMENT FROM THE SECURITIES FIRM IN WHOSE NAME THE SECURITY IS REGISTERED.
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And while it is true that the law says that an investor is the beneficiary of an arrangement wherein the securities firm holds title in trust for the investor, there’s nothing to stop the Securities firm from trading on the existence of the certificate as if it were their own. This Is how they are able to obtain insurance contracts and hedge contracts that are payable to the investment bank rather than the investors who put up the money.

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Note that this sleight of hand maneuver lies at the center of what is falsely labelled as the securitization of residential mortgage debt. The designation of a competing bank to serve as trustee of a nonexistent trust gives the scheme an institutional appearance, which in turn causes lawyers and judges, who know nothing of finance, to assume that they are dealing with an institution versus a lowly homeowner.
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They further assume that XYZ law firm represents U.S. Bank as trustee blah blah blah. But U.S. Bank has no retainer agreement with XYZ law firm and never heard of them. U.S. bank neither directs the lawyers nor will it allow its name to be used on any settlement or modification agreement that in the ordinary course of business would be legally signed by U.S. Bank. Any insistence that U.S. Bank sign, even though it is named as beneficiary or Plaintiff, is simply a deal killer.
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And don’t forget that U.S. Bank is not a trustee. That is another label used to misdirect homeowners, lawyers and judges. A trustee is someone who actively manages the active affairs of trust property. there is no trust property. There is no trust business. ANd the party named as “trustee” doesn’t even have the power to inquire as to any matter that might be called the business, assets, liabilities, income or expenses of the so-called trust.
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By naming U.S. Bank as the legal title owner for the benefit of the investment bank they are saying nothing. U.S. Bank did not receive legal title to anything. In order to get legal title it had to be the recipient of a conveyance. That is where the banks want the court to stop. But the conveyance, under all current law going back centuries can ONLY be issued by one who possesses rights to the asset conveyed to the trustee to hold in trust for the beneficiary of the trust.
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Note also that investors are not and never have been beneficiaries and that claims or arguments or implications that they are somehow, as creditors, represented by a nonexistent trust or nonexistent trustee are preposterous.
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In fact, there is no claimant, the foreclosure mill has no client that is in litigation and the named Plaintiff usually does not exist.
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Neil F Garfield, MBA, JD, 73, is a Florida licensed trial attorney since 1977. He has received multiple academic and achievement awards in business and law. He is a former investment banker, securities broker, securities analyst, and financial analyst.

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4 Responses

  1. Excellent explanation Summer. And, this is why Congress ignores us.

  2. Here is how it works. Each of us fail a prey to a group of Investment banks each of whom operates its own securitization scheme, This is not like one Servicer woks for one Stockbroker, its a more sophisticated scheme. Big Banks structured it to keep their presence secretive. At the beginning of the scheme in 2001, Big Banks hired smaller companies like Countrywide, Fremont, ext whom they provided Lines of Credit directly which CWF passed to borrowers as “loans” Of course CWF knew that their conduct is illegal and created their own sham conduit, America’s Wholesale Lender, a non-existing Corporation which “originated” loans on behalf of CWF. Big Banks acted as “underwriters” whose only liability could be “negligence” because of CWF actions and concealments. It worked.

    CWF were cleared from charges for fraud (thanks to enormous corruption in the public offices) because many Senators like Dodd were Mozilo’s clients.

    Of course Mozilo, Kurland, Spector and other mob were aware of their illegal conduct – but it was the only way how they can money.

    Big Banks wanted to continue their scheme, but more secretive. So, instead of hiring and training new people , they revitalized old resources under different names – and started a new scheme which they decided to upgrade to the next level.

    Now Big Banks do not give lines of credits to Servicers like CWF/PennyMac/Caliber.

    They either “buy” their “securities” (read: provide funds to operate”) or provide lines of credit to Black Knight, who since 2015 operates 62 % of ALL mortgage originations, servicing, foreclosures, ect.

    The point is – to remove money trail.

    So, when homeowners communicate with Lenders and pay servicers, they in fact dealing with a totally different crowd. Big Bank, Black Knight and Transcentra/Regulus who originate (BKvia LoanSphere Empower module) , collect payments (Transcentra); cash these payments via one of Big Banks and facilitate all data manipulations with stolen from borrowers identities.

    Read the Agreement between Black Knight and Big Banks to see where money are coming from for your “loans”

    The same Banks are underwriters and purchases of PennyMac “securities”

    CREDIT AND GUARANTY AGREEMENT
    dated as of May 27, 2015 among

    BLACK KNIGHT INFOSERV, LLC,
    as Borrower,
    BLACK KNIGHT FINANCIAL SERVICES, LLC,
    as Holdings
    THE SUBSIDIARIES OF THE BORROWER FROM TIME TO TIME PARTY HERETO
    The LENDERS FROM TIME TO TIME PARTY HERETO, JPMORGAN CHASE BANK, N.A.,
    as Administrative Agent, Swing Line Lender and L/C Issuer
    and
    BANK OF AMERICA, N.A.,
    as a Swing Line Lender and L/C Issuer
    _______________________________

    J.P. MORGAN SECURITIES LLC,
    MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED,
    U.S. BANK NATIONAL ASSOCIATION, and WELLS FARGO SECURITIES, LLC,
    as Joint Lead Arrangers and Joint Bookrunners,

    BANK OF AMERICA, N.A.
    U.S. BANK NATIONAL ASSOCIATION, and WELLS FARGO BANK,
    NATIONAL ASSOCIATION,
    as Co-Syndication Agents,

    SUNTRUST BANK, BANK OF MONTREAL, REGIONS BANK,
    CREDIT SUISSE SECURITIES (USA) LLC, GOLDMAN SACHS BANK USA, and CITIBANK, N.A.,
    as Co-Documentation Agents, and

    FIFTH THIRD BANK, CITIZENS BANK, N.A.,
    PNC CAPITAL MARKETS LLC, and BBVA COMPASS,
    as Senior Managing Agents

    https://www.sec.gov/Archives/edgar/data/1627014/000162701415000004/ex101bkfscreditagreement.htm

  3. Okay – where did everybody go? Come on people, get with it.

  4. This is all true. And, I think, it is criminal.

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