Securitization is Hybrid of Supply Chain Finance: The Key word is CHAIN

First, let me say that there is nothing wrong with supply chain finance. In one form or another, it has been used for thousands of years. The same can be said for securitization — if that is what is really happening.

Second I have been getting quite a lot of questions about my articles and one of the more common questions can be paraphrased as “So where does the money come from?” I want to re-emphasize that while it doesn’t hurt to understand this scheme better, the details are most likely outside the purview of any points that homeowners should be using in litigation — in pleadings, discovery demands, and argument.

The answer is something called Supply Chain Finance. “It works by partnering with a supply chain finance company that extends you trade credit, and it acts as an intermediary between your company and your suppliers. … Once your supplier gets the purchase order, they produce and deliver the goods to you. The finance company pays your supplier and issues an invoice to you.”

So in securitization, this deal unfolds like this. Credit Suisse, for example, might extend short-term credit to JPM Chase, using certificates that are issued and being sold to investors as collateral for the loans. The Credit Suisse money is used to pay homeowners and the homeowners execute notes and mortgages. Those notes and mortgages are used as reference points for the promises of JPM Chase to investors that the investors will receive scheduled payments. Those promises are contained in “certificates”. When the certificates are sold by JPM Chase, the loan from Credit Suisse is paid off and retired.

From the perspective of Credit Suisse in the above example, the transaction is a simple loan and payback with one additional step — it is funding the payment to the homeowner while accepting repayment from JPM Chase after the sale of the certificates.

From the perspective of JPM Chase, the transaction is a simple sale of securities with one additional step — Credit Suisse extends the money that is paid to the homeowner. This enables the claim that a loan was created when the homeowner signed the documents. This JPM Chase is enabled to issue and sell certificates that reference that loan and JPM Chase receives the proceeds of the sale of certificates.

From the perspective of the homeowner, the transaction is simple but wrongly perceived because they are not aware of the above facts. The homeowner has applied for a loan generally with a mortgage loan broker who then presents the homeowner with the name of an institutional or noninstitutional “lender.” A closing agent is selected who will receive funds from Credit Suisse and pay the homeowner or make payments on behalf of the homeowner.

That “lender” has entered into a purchase and assumption agreement, sometimes bearing the title of a warehouse credit agreement, in which the designated “lender” is in substance an originator who waives all right, title and interest to any transaction or documents obtained from the homeowner at closing. So the designated lender becomes only an “originator” which is just another word for a nominee.  It is a placeholder.

The homeowner, believing it has received money from the originator, executes a note and mortgage payable to the originator. But the originator does not and will not receive any payments from the homeowner.

This is why you often see the “endorsement” or “allonge” executed within days after the homeowner leaves the office of the closing agent. That endorsement is usually blank but sometimes fabricated as a specific endorsement to a REMIC Trust. the signor, most often, is the mortgage broker who has no authority to sign anything on behalf of the originator, JPM Chase or Credit Suisse.

The important thing is that NO TRANSACTION has occurred in which the originator received any money because the originator did not advance any money, even on paper. The originator has no claim to receive any money other than the retention of fees as set forth in the purchase and assumption agreement. And there is no reason to pay anyone for ownership of the underlying obligation of the homeowner arising from his/her promise to pay. Hence the obligation is issued by the homeowner but never transferred from the originator to anyone else because that would involve payment of value.

Since it was Credit Suisse who advanced the funds at the very beginning and Credit Suisse has been repaid by the sale of certificates, it has no legal or equitable interest in the alleged debt, note, and mortgage signed by the homeowner.

With JPM Chase the story is different. It could have reported the homeowner transaction as a loan but it didn’t. If it had reported the homeowner transaction as a loan, it would be the lender and it would be required to comply with Federal and state lending laws, rules and regulations. It would also have a risk of loss if the “loan” was not “repaid.” But in this example, JPM Chase has no interest in becoming a lender. It wants the profits (shared with credit Suisse) from the sale of derivatives which includes but is not limited to the sale of certificates.

So how did the originator get designated or selected? Continuing with the JPM only as an example, JPM Chase agrees to appoint a financial institution as the feeder for the procurement of homeowners who will sign loan documents. With Chase that was usually Washington Mutual (WAMU). WAMU was actually just an aggregator who like the originator waived all right, title, and interest to any “loan.”

WAMU in turn would hire other feeders who were not financial institutions and who could be folded up in bankruptcy at the first hint of trouble. That was often Long Beach Mortgage, who is the name often appearing on such loan documents. That is also the name used to identify the “REMIC Trust” in whose name JPM Morgan issued the certificates. That “Trust” owns nothing although it receives bare naked claims of title through fabricated assignments of mortgage and note endorsements. No money exchanges hands.

Nobody even establishes a loan account receivable because that would make them responsible for compliance with lending laws. Instead, JPM Chase appoints a company to act as a “servicer.” For example, Select Portfolio Servicing, owned by Credit Suisse. Like all the other previously identified parties, the servicer is not allowed to claim or touch any money receipts or disbursements and is merely a nominee who is tasked with pulling reports off of servers owned by third-party vendors and operators like Black Knight and Core Logic.

The servicer then produces the report prepared by Black Knight and/or Core Logic, for example, and then sends a contract laborer to testify that the report is a business record of the servicer. But in fact, it is a business record kept by Black Knight and Core Logic and does not include all receipts and disbursements on the loan account receivable. That is because there is no loan account receivable on the accounting ledgers of any entity. So the report is just a payment history for the period of time that the technology vendors were processing payments using mostly automated reading and input from either paper checks or electronic funds transfer receipts.

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Neil F Garfield, MBA, JD, 74, is a Florida licensed trial and appellate 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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5 Responses

  1. Yeah – “nice” Ian. And the administration’s housing authority wants to increase rental availability by even building new units. Article I read today – the author states – “what about home ownership?”
    After WW2, many small homes were built to accommodate a return of our servicemen, and to rebuild the American dream. That dream is gone for many. .
    Summer — I don’t think JPM needed to borrow any money from Credit Suisse. There may be connections, but JPM was first in line for crisis loans, and first to get out. Each of the big banks gave warehouse lines of credit to the non-banks. They sometimes shared in security underwriting. All crashed at crisis explosion. The point I am making is that once the non-banks could not pay their warehouse loans, all shut down, and the warehouse lender (big banks) took the collateral. Collateral being the house. In effect, homeowners became nothing more than renters by crisis loans. Isn’t that what the administration still wants?

  2. Oops- I meant the eviction/foreclosure moratorium, they want it stopped and the homes foreclosed and put up for resale

  3. Neil, Summer and ANON- all good points. In an unrelated observation, over at HousingWire, yesterday they were advocating giving a “drop dead “ date to stop the eviction/foreclosure in order to free up homes for sale, as there is a shortage which is driving prices up.
    Nice, huh?

  4. Neil is brilliant as always. Anon, you did not pay attention to details.

    The LENDER is Credit Suisse who lent money to JPM under guarantee of sales of certificates backed by borrowers identities.

    So, when you submit an application for a loan, it works as a letter of credit to JPM.

    As soon as JPM repay THEIR debt to Credit Suicce – all other chain of assignment does not matter. The LENDER was repaid.

    Homeowners get commission to their CONTINUING participation in the scheme, as unpaid contractors.

    Warehouse Lenders merely pose as “lenders” since all money go though Black Knight or similar. You can call them bystanders with the same level of authority.

    Since it was not a loan from the beginning, it cannot be secured by home as a collateral – because the “Lender” had no legal rights to it.

    Banks just razzle-dazzle us.

  5. Glad you brought up the warehouse lender. But, your example uses two banks. This was not the case in crisis loans as there were non-banks involved that had warehouse lines of credit with the banks who wore many hats — servicer to GSEs, warehouse line of credit, security underwriter, and purchaser of collection rights. If the non-bank did not pay their lines of credit, they are just done. And, that is what happened with the financial crisis – with the warehouse lender taking the PROPERTY as collateral. All collapsed because the non-banks had no authority to form REMICs for securitization. They never owned the loans, never had any loans on balance sheet, never had the right to securitize, and never had the right to form any REMIC. Collateral is not the loan – it is the property.

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