PTSD: A Breakdown of Securitization in the Real World

By using the methods of magicians who distract the viewer from what is really happening the banks have managed to hoodwink even the victims and their lawyers into thinking that collection and foreclosure on “securitized” loans are real and proper. Nobody actually stops to ask whether the named claimant is actually going to receive the benefit of the remedy (foreclosure) they are seeking.

When you break it down you can see that in many cases the investment banks, posing as Master Servicers are the parties getting the monetary proceeds of sale of foreclosed property. None of the parties in the chain have lost any money but each of them is participating in a scheme to foreclose on the property for fun and profit.

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It is worth distinguishing between four sets of investors which I will call P, T, S and D.

The P group of investors were Pension funds and other stable managed funds. They purchased the first round of derivative contracts sometimes known as asset backed securities or mortgage backed securities. Managers of hedge funds that performed due diligence quickly saw that that the investment was backed only by the good faith and credit of the issuing investment bank and not by collateral, debts or mortgages or even notes from borrowers. Other fund managers, for reasons of their own, chose to overlook the process of due diligence and relied upon the appearance of high ratings from Moody’s, Standard and Poor’s and Fitch combined with the appearance of insurance on the investment. The P group were part of the reason that the Federal reserve and the US Treasury department decided to prop up what was obviously a wrongful and fraudulent scheme. Pulling the plug, in the view of the top regulators, would have destroyed the investment portfolio of many if not most stable managed funds.

The T group of investors were traders. Traders provide market liquidity which is so highly prized and necessary for a capitalist economy to maintain prosperity. The T group, consisting of hedge funds and others with an appetitive for risk purchased derivatives on derivatives, including credit default swaps that were disguised sales of loan portfolios that once sold, no longer existed. Yet the same portfolio was sold multiple time turning a hefty profit but resulted in a huge liability when the loans soured during the process of securitization of the paper (not the debt). The market froze when the loans soured; nobody would buy more certificates. The Ponzi scheme was over. Another example that Lehman pioneered was “minibonds” which were not bonds and they were not small. These were resales of the credit default swaps aggregated into a false portfolio. The traders in this group included the major investment banks. As an example, Goldman Sachs purchased insurance on portfolios of certificates (MBS) that it did not own but under contract law the contract was perfectly legal, even if it was simply a bet. When the market froze and AIG could not pay off the bet, Hank Paulson, former CEO of Goldman Sachs literally begged George W Bush to bail out AIG and “save the banks.” What was saved was Goldman’s profit on the insurance contract in which it reaped tens of billions of dollars in payments for nonexistent losses that could have been attributed to people who actually had money at risk in loans to borrowers, except that no such person existed.

The S group of investors were scavengers who were well connected with the world of finance or part of the world of finance. It was the S group that created OneWest over a weekend, and later members of the S group would be fictitious buyers of “re-securitized” interests in prior loans that were subject to false claims of securitization of the paper. This was an effort to correct obvious irregularities that were thought to expose a vulnerability of the investment banks.

The D group of investors are dummies who purchased securitization certificates entitling them to income indexed on recovery of servicer advances and other dubious claims. The interesting thing about this is that the Master Servicer does appear to have a claim for money that is labeled as a “servicer advance,” even if there was no advance or the servicer did not advance any funds. The claim is contingent upon there being a foreclosure and eventual sale of the property to a third party. Money paid to investors from a fund of investor money to satisfy the promise to pay contained in the “certificate” or “MBS” or “Mortgage Bond,” is labeled, at the discretion of the Master Servicer as a Servicer Advance even though the servicer did not advance any money.

This is important because the timing of foreclosures is often based entirely on when the “Servicer Advances” are equal to or exceed the equity in the property. Hence the only actual recipient of money from the foreclosure is not the P investors, not any investors and not the trust or purported trustee but rather the Master Servicer. In short, the Master servicer is leveraging an unsecured claim and riding on the back of an apparently secured claim in which the named claimant will receive no benefits from the remedy demanded in court or in a non-judicial foreclosure.

NOTE that securitization took place in four parts and in three different directions:

  1. The debt to the T group of investors.
  2. The notes to the T and S group of traders
  3. The mortgage (without the debt) to a nominee — usually a fictitious trust serving as the fictitious name of the investment bank (Lehman in this case).
  4. Securitization of spillover money that guaranteed receipt of money that was probably never due or payable.

Note that the P group of investors is not included because they do not ever collect money from borrowers and their certificates grant no right, title or interest in the debt, note or mortgage. When you read references to “securitization fail” (see Adam Levitin) this is part of what the writers are talking about. The securitization that everyone is talking about never happened. The P investors are not owners or beneficiaries entitled to income, interest or principal from loans to borrowers. They are entitled to an income stream as loans the investment bank chooses to pay it. Bailouts or even borrower payoffs are not credited to the the P group nor any trust. Their income remains the same regardless of whether the borrower is paying or not.

Believe It Or Not It’s Getting Worse

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Editor’s Comment: 

Foreclosures And The Bottomless Pit

Written by: Mike Whitney

“There are many good reasons to believe that the 5.5 million foreclosures we have seen are barely halfway through their full course. The United States may end up with a total of 8-10 million foreclosures before we are finished.” – Barry Ritholtz, The Big Picture

It all gets down to supply and demand. The banks have been keeping millions of homes off the market until a settlement was reached in the $25 billion robosigning scandal. Now that the 49-state deal has been finalized, the banks are preparing to put more of their of distressed homes up for sale. That will lead to lower prices and the next leg down in the 6-year long housing crisis.

According to Reuters, new foreclosures “begun by Deutsche Bank were up 47 percent from 2011. Those of Wells Fargo’s rose 68 percent and Bank of America’s, including BAC Home Loans Servicing, jumped nearly seven-fold — 251 starts versus 37 in the same period in 2011.”

So BofA, which unwisely purchased Countryside following the Crash of ’08, is scrambling to get its house in order by removing the deadwood from its balance sheet. Good luck with that.

In order to avoid a sudden plunge in prices–which would be devastating for bank balance sheets–the banks will continue to control the number of homes that are released onto the market. In 2011, existing home inventory shrunk by 20 percent year over year while the shadow backlog of distressed homes continued to grow in leaps and bounds. This shows that the banks are managing inventory to minimize their losses.

But even though “visible” inventory has shrunk by as much as 30 percent in some markets, housing prices have continued their downward trek, dropping roughly 4 percent in 2011. This reflects the truly dismal condition of the underlying economy that is wracked by high unemployment, flat wages, and soaring personal debt. Absent another round of fiscal stimulus, there’s little chance that housing sales will rebound in 2012 despite historic low rates and myriad government loan modification programs.

The biggest problem facing housing now is that ordinary working people can’t make their monthly payments. An article in Reuters summed it up like this: “The subprime stuff is long gone,” said Michael Redman, founder of 4closurefraud.org. “Now the folks being affected are hardworking, everyday Americans struggling because of the economy.”

So what we’re seeing now is the knock-on effects from high unemployment, tight credit, shitty wages and deep protracted economic stagnation. This is a policy issue, but policymakers refuse to address it, so housing will bump along the bottom for years to come. Now take a look at this article in the Wall Street Journal:

“Delinquent mortgage borrowers, take note: Banks still aren’t moving very fast to kick you out of your homes. February’s foreclosure settlement between big U.S. banks and state attorneys general should have been bad news for mortgage deadbeats — and for house prices. Having resolved charges that they had filed bogus documents to speed up repossessions, the banks should have felt free to move ahead with millions of foreclosures. They should also have started selling more repossessed houses, an influx of cheap supply that would weigh on the market.

So far, though, that’s not happening. …. as a result, the average number of days since the last mortgage payment had been made on homes in the foreclosure process rose to 667, up from 660 the previous month and 253 in February 2008. In other words, the average delinquent borrower could live rent-free for nearly two years without getting evicted, assuming the borrower chose to stay in the house.” (“The Foreclosure Deal Spares the Housing Market (So Far)”, Bloomberg)

Just to be clear, we do not agree with the author that the people who were victims in this vast criminal mortgage laundering scam– that destroyed the financial system and pushed the global economy into a Depression–can be fairly characterized as “mortgage deadbeats”. Even so, the point he makes is important, because it illustrates how the banks are fiddling with supply to avoid the losses on non-performing loans. Screwball accounting regulations allow the banks to keep mortgages on their books at fictitious prices (artificially high) until the house is sold. Only then, are they required to write down the difference. Considering that they still have millions of distressed homes on their books, this is no small matter. An accurate accounting of bank real estate inventory would show that most of the biggest banks in the country are technically insolvent.

So what does this mean for people who are thinking about buying a house in the near future? Should they hang on to their money and wait for another year or so or jump at that $450,000 McMansion with the Gothic parapets and custom Swedish sauna that’s been marked-down to a mere $185,000?

That’s hard to say. It depends on one’s own priorities. But one thing is certain, housing prices won’t be going up for a very long time. Maybe never. Moody’s ratings agency forecasts that we’ll see ”an 8% to 10% decline in housing prices” due to a 25 percent uptick in repossessed properties from 1 million in 2011. Unfortunately, Moody’s calculations are far too optimistic. In fact, “top housing analyst Laurie Goodman estimates the amount of shadow inventory at between 8 and 10 million homes, and Michael Olenick, using a different methodology, comes in at just under 9 million homes.” (Moody’s Foresees 10% Drop in US Housing Prices, naked capitalism)

Even if Goodman-Olenick’s predictions are wrong by half–which is unlikely–prices have a long way to go before they hit bottom.

Moody’s: Jumbos Are Now at Greatest Risk for Default

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MORAL DOUBLE STANDARD FOR RICH AND POOR

EDITOR’S COMMENT: It’s really simple. Most people with jumbo mortgages are people who are more savvy with money than those who have much smaller homes. They are used to having money, not losing it. To them it is a simple calculation: if they stay with the home and pay off the mortgage, they are going to lose a couple of hundred thousand dollars. If they don’t stay with the house and take the hit on their credit score, they don’t lose that money. They have already lost their down payment and whatever extra money they put into the house when they thought they own it forever. Why throw good money after bad?

The answer for those  who are called rich is that they are walking away like any businessman does when he realizes the deal has gone bad. And the great likelihood is that the number of defaults will surge substantially as this new wave of foreclosures based upon strategic defaults come to the fore. The curious thing is that there seems to be a moral double standard at play here — the more money you have, the less likely you are to be stigmatized for simply refusing to pay.

The Wealthy Are Also Defaulting on Their Mortgages

There are many who believe that mortgage delinquencies in their region are concentrated in the middle-to-lower income neighborhoods. Actually, the research shows the number of delinquencies in the higher priced sections are currently exceeding the percentages in less affluent areas.

The most recent Mortgage Monitor issued by LPS reports that the largest increase in both delinquencies and foreclosures, as compared to 2008 levels, are in ‘jumbo’ mortgages. A jumbo mortgage, according to Wikipedia, is:

“a mortgage loan in an amount above conventional conforming loan limits…the limit is $417,000 for most of the US.”

In some parts of the country, that limit can be over $625,000. This type of loan finances the higher priced properties in a marketplace.

According to LPS, the percentage increase in jumbo mortgages is as follows:

  • Delinquencies: increased 281%
  • Foreclosures: increased 589%

Again, these numbers are greater than any other type of loan including Option ARMs and Sub-prime loans.

Strategic Defaults

That doesn’t necessarily mean that the more affluent don’t have the money to meet their mortgage obligations. In some cases, they see their home as a depreciating asset and determine that continuing to put money into it makes little sense. The Washington Post recently reported on this. In the article, they explained:

“The ratings agency Moody’s said that based on its analysis of mortgage-backed bond portfolios, homeowners with jumbos now constitute “greater strategic default risk” than any other type of borrowers, including subprime. That’s because an exceptionally high number of jumbo owners — many in high-cost markets hit by real estate deflation over the past several years — are stuck with persistent negative equity.”

Bottom Line

We often explain that the number of distressed properties in a neighborhood adversely impacts values of other homes in that area. It now appears that even the most affluent areas will be dealing with a supply of discounted properties entering the market as foreclosures.

E

 

Foreclosure Defense and Mortgage Meltdown: Worse than you think

Take a look at the article (link below) which highlights the essential issues. It’s a bit choppy in reading but it makes the points you should consider as you plan your strategy for dealing with life over the next 10 years.

Despite assurances from the administration and those on Wall Street who are trying to bolster confidence in U.S. financial markets, the trust level between bankers, the key indicator of our economic future, has never been lower. Even Libor which is the holy grail of indexes has been manipulated during the last 4 years. Moody’s admitted yesterday that a computer “mistake” caused it to miss the “downturn” in the value  and rating of certain securities — the very same ones they overrated in the first place because the analysts were literally given fishing trips and pressured from the top to keep the “client” through “negotiation” of the rating that Moody’s would apply. 

What you have is a picture of obfuscation.

Imagine on the right side,  an opaque cloud of misrepresentations, ratings and false insurance protection on a securities that are so complex the number of variables rose to as high as 125 and it took a modern computer an entire weekend to come up with a price that, like election results from an entirely electronic system, cannot be audited for integrity or credibility.

  • Imagine the AAA ratings that investors believed, because the rating agencies were reasonably trustworthy and accurate in the past. Imagine insurers putting their stamp of approval based upon negotiation and the false credit ratings. 
  • And know that the entire class of securities that are “asset-backed” consists of extremely high risk predatory lending practices including but not limited to originating loans to people with interest only negative amortization for sometimes over a million dollars where the borrower is out of work and disabled.
  • These are the “cash equivalent” securities that unsuspecting managers of pension funds, government funds, mutual funds, hedge funds and others were buying. 
  • Imagine them buying derivatives on derivatives thinking they were hedging their losses when in fact they were multiplying them.
  • And now imagine that investors bought $62 trillion dollars (yes that IS the figure — 4 times our GDP) of this garbage backed by unpayable mortgages, auto loans, credit cards, student loans, and other consumer and small business debt.

Now on the left side imagine the same kind of opaque cloud of misrepresentations, pressure tactics to close, and outright fraudulent misrepresentation of “appraised” value (just like the rating agencies on securities), only less regulated and more decentralized). A subsequent TILA audit reflects the following facts:

  • Imagine a person who speaks no English, or a person who is totally unsophisticated in finance.
  • A builder with a criminal record makes deals with people at the local fronts for bigger players like Countrywide, Barclays, Wells Fargo etc. The people at these front organizations are now in prison, fired or both — a very typical story.
  • The builder finds our unsuspecting buyer and tells them that for only $2,000 per month they can get a 5 acre piece of land and build a $400,000 house on it. 
  • He gets them to pony up all the money they have — $250,000.
  • They even pony up another $150,000 borrowed from the trust fund for their disabled child, injured in an accident. Nobody cares about the personal stories here because they were all out to make a buck.
  • When the prospective borrowers start asking questions about how this could possibly work they are told: “Look, it is true you are not making the whole payment. But the way things work, housing prices always go up and down the road you either refinance and get money out of the house or you can sell at a handsome profit. Housing prices have never been steadier, growth is enormous. The lender has approved this and you know it is their money they are risking and they know a lot more then either of us, so if they are willing to take the risk, why wouldn’t you?”
  • NOT DISCLOSED: (1) the lender had no stake in the outcome of the loan except to close it and collect pass through fees. (2) The mortgage and note and servicing rights were all transferred around to mortgage aggregators, and investment banks who in turn sold derivative securities based upon this garbage loan. (3) Thus the lender was not taking on a risk and neither was anyone who handled this hot potato until it landed in the hands of an unsuspecting investor. (4) And the appraiser, eager to do more appraisals and earn more fees is allowed to know the amount of the mortgage and the contract price and conveniently and always comes in with an appraisal a few percentage points higher than the contract, so it looks good to the borrowers, and even to auditors at least at the beginning of this wild free money lending cycle. Unknown tot he borrower the “bank” is actually an unscrupulous mortgage broker steering the borrower to the worst possible deal because it nets him the highest fees, and submitting falsified income information sometimes without even the knowledge of the borrower, and sometimes with a statement to the borrower (“don’t worry” this is a no-doc loan, nothing will be checked and you won’t get into trouble because everyone wants this loan to close. (the only true statement in the entire affair). 
  • LATER THE LENDER WILL TAKE THE POSITION WITH THE FBI AND OTHER LAW ENFORCEMENT THAT IT WAS DEFRAUDED EVEN THOUGH IT DEFRAUDED ITSELF” BY HAVING ITS OWN AGENTS FALSIFY THE INCOME AND APPRAISAL INFORMATION.

NOW IMAGINE BETWEEN THE OPAQUE CLOUD ON THE LEFT (defrauding the borrower) AND THE OPAQUE CLOUD ON THE RIGHT (defrauding the investor) GOSSAMER THREADS REPRESENTING PLAUSIBLE DENIABILITY. All the people that were represented as principals and were in fact just sales people earning a commission on a sale. 

With nobody at risk but the least suspecting people who heard and read representations that were outright lies, misleading or only partial truths, lending standards when down the toilet. Nobody cared or had a stake in the outcome of the loan transaction except the borrower and the investor. The name of the game was “close as many loans as possible” because these investors are being offered just enough yield to be a little higher than other investments and were convinced by fraud that the perceived risk was much lower than the actual risk — after all Moody’s rated it AAA. 

The standard relationship between borrower and lender in which BOTH had  stake in a successful transaction was gone, but the borrower didn’t know it. How many people would have closed on their loans if they had known the truth? How many people would have bought these securities if they had known the truth. The answer is that the mortgage meltdown and general credit crisis would never have happened. Inflation would not be rising out of control.

Confidence in the the U.S. dollar and U.S. financial markets would not have sunk below zero. Borrowers and investors would still have their money and their lives and their credit ratings. Money managers would still have their jobs and the performance of the funds they managed would still be within acceptable bounds. And banks and investment banks would not be threatened with failure.

1,300,000 people would not be in foreclosure and 9 million people would not be “upside down” on the equity-loan ratio of their homes. 

Now  you can read the article I found on op-ed.

http://www.opednews.com/articles/1/opedne_stephen__080522__22immoral_hazard_22.htm

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