The Securitization FraudPosted on November 3, 2012 by
A fraud has been perpetrated upon the American people all in the name of greed. Fraud is defined as deception in the execution of an agreement where some parties to the transaction are deceived as to the real nature of what is being agreed to. When some parties to an agreement are not clear, or some parties enter into the contract deceptively, then the agreement is null and void. A securitized loan is just such a fraudulent agreement.
A securitized loan is one where private investors, pension funds, insurance companies and others have purchased the cashflows from a group of mortgages that have been gathered into a trust in the form of a security assigned a particular risk value. Each mortgage-backed cashflow grouping is called a “tranche” and there are generally several tranches within a mortgage-backed trust. The cashflows are often sold multiple times to multiple investors. Securitization is a way that institutional lenders are able to leverage capital to support additional lending. When the economy is expanding securitization helps to grow the housing industry. When the economy is shrinking the flaw in the system reveals itself as investors begin to lose cashflow as a result of defaulted loans.
There are many other flaws in the securitization system, and they are of questionable legality in many ways. Here are a number of ways that securitization fails to maintain many of the basic requirements for a legal and binding contractual relationship between a borrower and a lender:
- The homeowner at the time the loan was concluded is given the impression that the party owed the debt is the mortgage lender on the mortgage paperwork. In a securitized loan there is actually an investor who is behind the loan. The named lender is just a pretender lender because they never paid a dime for that loan.
- The mortgage documents that are signed allow the pretender lender to get owners insurance to be paid in case of a serious default. It is not the private investor who paid for the loan who is secured against loss; it is the pretender lender. Once a borrower defaults (90 days from the start of the delinquency) the pretender lender can collect not only what is still owed, but the entire amount of the loan. The pretender lender was also able to get government bailout money on the basis of the mortgage portfolio held under its control. At any point the pretended lender could trade or sell the debt without the consent of the actual owners of the debt. Often the pretender lender has been repaid several times over by the time a property is sold through a foreclosure.
- The pretender lender faced with the burden of proof in a foreclosure process does not have both the original note and mortgage documentation to prove ownership. Faced with this problem documentation is almost inevitably forged. The homeowner routinely fails to deny the authenticity of the original documentation and lenders have gotten away with an astounding number of fraudulent foreclosures over the last 5 years.
- The pretender lender also lied to the investors in the mortgage-backed trust. The Pooling and Servicing Agreement (PSA) for the trust prescribes that the loan must be transferred to the trust within 90 days. Often the note gets to the trust late, or not at all as we’ve seen in several deals we are currently working. Payments are guaranteed under the PSA. Investors were guaranteed that the investments were of a given qualify level; often well above what was actually the case. Investors thought they were buying AAA level securities, when in fact they had a higher risk of default than they ever could have imagined.
Can there be any doubt that the pretender lenders have gotten far more than they deserve and that the parties on the losing end have been the original investors and the homeowners?
We are using this information to force the banks to negotiate on our terms, instead of begging them to accept out short sale offers. We use detailed forensic and securitization audits to spell out exactly how the banks cheated, and use that info to pick up houses at some pretty incredible bargains. Not only that, but we are able to help underwater homeowners get out of a financial hole.
If you are interested in learning more about this awesome new strategy, give my office a call at 706-485-0162!