Securitization: A Refresher on The Biggest Fraud in American History

I’ve been writing this column for several years now, and I’ve covered a lot of in-depth information about the securitization swindle pulled by the major banks that led to the mortgage crisis and the Great Recession. What I’m going to do this month is to take a step back and give a quick recap of what the securitized loans scam is and how the banks got away with it for so long.

First a little background. The way a bond is supposed to work is that an investor purchases a bond from a trust. The trust then uses this money to purchase mortgages or originate their own. The trust then uses the money made off of these mortgages to pay off the bonds to their investors.

In the case of Mortgage Backed Securities (bonds issued by trusts that consist solely of mortgages), the money the investor paid to purchase the bond was never given to the trust. Since the money wasn’t paid into the trust, it never had any money to purchase or originate ANY loans. Instead the bank essentially put the investor’s money into its checking account. A note was made that said the investor purchased a bond, but the trust never received the money and a bond was never issued.

Some of the investor’s money was then sent by the broker to a closing agent for a mortgage who also received closing papers from a “lender.” The catch is that the entire lending side of the transaction was completely fictitious. The “lender” never existed, and the trust that the lender was acting on behalf of never had any money to lend!

From the new homeowner’s perspective, their loan is considered predatory because the Federal Truth in Lending Act states that the borrower is required to be given information about the identity of the lender and all fees, commissions, and other compensation paid to all parties.

This is where it gets tricky. The banks used aggregators to bundle up huge numbers of loans created with fictitious trusts. They threw in some risky loans to increase the value of the packages, then sold the bundle to itself at the inflated value and counted it as profit from proprietary trading. They used investors’ money to line their pockets while they purchased overly risky securities from themselves at an inflated price with the knowledge that, if they went bad, their insurance would pay them off!

But what does this all mean for the title on a property that had a loan go through this process?

Basically, the title was flawed from the get-go. Nobody who was a signatory to the loan had ANY interest in the repayment of that loan. Instead the banks set up huge mazes of companies to process the loans with defective notes and mortgages in order to hide the truth when homeowners defaulted and the banks decided to foreclose.

Why do the courts let this happen? There are a few answers. The first is that many judges have no clue what any of this stuff means. They just don’t have the knowledge to understand the situation and make an educated ruling. In some cases the court has ruled that the borrower agreed to pay the loan, so it doesn’t matter how fraudulent it was, they should pay. The more sinister answer is that sometimes the banks have been using fancy footwork, including producing fake documents to “prove” ownership of the loan and to deceive the courts.

There is good news, though. More and more rulings are coming down that expose the banks for the frauds that they are. As a result, homeowners across the country are finally receiving justice for wrongful foreclosures and unfair lending practices.

This is a great time to be a real estate investor working with distressed homeowners. Across the country we’ve seen that the law is finally catching up to the banks. Along with District and Appellate Courts all over the country, the Supreme Court has ruled as clearly as possible in the homeowners’ favor. The Supreme Court has clarified that TILA rescission is a powerful tool to stop foreclosure and help homeowners stay in their houses longer. It also creates an opportunity for investors to do some pretty amazing deals. The tides have turned and the banks are being forced to negotiate on our terms. No more begging the banks to accept our short sale and REO offers only to have them demand ridiculously high prices. We can now get the banks to the table to negotiate.

This makes it more important than ever that homeowners and real estate investors act NOW. This is a massive opportunity for real estate investors. If you know of anyone with a defaulted or underwater note, you need to get in contact with my office immediately at (706)-485-0162. I have spent the last two years building up a team of experienced attorneys and fraud examiners/forensic auditors who specialize in exposing fraud committed in the mortgage process and using that fraud as leverage to negotiate the sale of notes. This opportunity is not going to be available forever; we need to strike while the iron is hot!

We have a huge opportunity to help homeowners and do some great deals with multiple exit strategies. For more information, call me at 706-485-0162.