Securitization Fail

Abigail Field on Securitization Fail, and its role in spawning the robo-signing that everyone is so concerned about, even though the more interesting question is why, and who directed this?  Why forge documents and fake transfers?   Here’s an excerpt, but go read Abigail’s full article at the link above.

Perhaps the most critical insight that flows from understanding securitization fail, however, is that the crimes will continue so long as we are processing foreclosures. When you understand securitization fail, you understand the scale of liability the Bailed Out Bankers created for themselves, and why foreclosure fraud is their preferred escape route. In fact, you’ll understand why the banks will continue to commit foreclosure fraud regardless of signing the settlement with law enforcers. Get securitization fail and you understand that a thorough investigation could straightforwardly document it, and create so much leverage for law enforcement that it could essentially dictate terms of settlement.

Caving on Securitization Fail

So that’s the multi-billion dollar question about the servicer “settlement” being foisted on the states by the big banks and the feds: is any attorney general who signs up for it is giving up any claims related to securitization fail and all the leverage that flows from them? Based on Nevada AG Masto’s letter, it sure looks like the AGs are. I only phrase it as a question because the actual settlement language isn’t public yet, and it runs counter to all the messaging that only post-securities conduct is covered by the settlement. Not that I think the messaging on the settlement is remotely credible as a general matter.

For reasons explained near the end of this post, only two AGs really have securitization fail claims: New York and Delaware. And DE AG Beau Biden has rejected the settlement, but NY AG Eric Schneiderrman is flirting with joining in. Given the likely release of securitization fail, Eric Schneiderman’s signing the deal would be a profound betrayal of New Yorkers, and frankly, all Americans.

Ok. To really understand the stakes, you need to understand securitization fail. Before you can understand securitization fail, you have to understand securitization.

The Securitization Idea

Imagine I come to you and say:

hey, have I got a great investment opportunity for you! Give me $100, and you’ll get $106 at the end of the year. Don’t worry, it’s virtually a sure thing. See, I’m going to take your hundred–and a lot of other investors’ $100s, and I’m going to buy the mortgages on houses all over town. And those homeowners’ payments are going to fund $106 to each of you.

But wait–it gets better. We can set this investment opportunity up to give you the lowest possible federal income tax bill. And at the same time, we’ll protect your $106 from my creditors–just in case I go broke. What’s the magic at the heart of the deal that lets us get those extra features, you ask? Simple! Our middleman.

I sell the mortgage loans to the middleman, who buys them with your money. Then the middleman gives you a piece of paper that says he’ll pay you $106 from the mortgage payments, if he can. That’s all it takes!

Well, really, it’s a teeny bit more complicated than that, but not much. There’s really two middlemen, neither human. One is a little paper entity and the other a gigantic Bailed Out Bank.

The little entity is the Trust. The Trust has no human component; it’s essentially a safe-deposit box in the heart of a vault. The Trust owns the mortgage loans for your benefit, gives you the piece of paper saying you get $106 if possible, and otherwise functions like a bank account.  That is, mortgage payments are deposited into the trust and then paid out to investors according to the pieces of paper you all have.

The Bailed Out Bank is the Trustee. It’s the Trustee’s job to take care of the Trust. Which really means the Trustee’s job is to make sure you get all the money you were promised, or as close to it as possible, including managing the bank account that is the Trust. So, that’s it: one middleman to own the loans and play bank account (the Trust), and one to take care of the money (the Trustee).

What do I mean that the Trustee has to take care of the money? Just a couple of basic things–it’s not like the Trustee collects mortgage payments or anything. A company called a mortgage servicer does that, “services” the mortgages. Then the servicer gives the money to the Trust, and the Trustee dishes it out.  Before any mortgage payments come in, however, the Trustee has one crucial, basic job: make sure the Trust really owns the loans I promise I’m going to sell it.

If the Trust doesn’t really own the loans, you see, our deal blows up. If the Trust doesn’t own the loans, the Trust doesn’t have a right to collect and give out the mortgage payments to you. The Trust also doesn’t have the right to foreclose on the homeowners. And any money the Trust pays you becomes subject to more tax and could be taken by my creditors. So really, my promises to give the Trust clear title to the mortgage loans are the most important promises I make to you; that’s why they’re not only in the contract, but we have the Trustee check to make sure I kept my word. With something so important, it’s like President Reagan said: Trust, but verify.

So that’s the pitch. And as long as I keep my promises in the contracts, and the Trustee double checks, it’s a good deal.

Seeing Securitization Fail

But here’s the thing: buying home mortgage loans isn’t like buying groceries. Special rules apply. Transferring ownership involves a couple steps and takes at least a few minutes. The reason it’s tricky is that historically, a lot of land was stolen from people, so the legal system developed rules to stop the theft. Since mortgage loans affect the ownership of the underlying land, the rules cover them too.

The special rules are why the Trustee has to really check out the documents I give the Trust. While it’s easy enough to do transfers correctly, failing to cross the t’s and dot the i’s invalidates the transfers. If I failed to cross those t’s and dot those i’s, and the Trustee didn’t catch me and force me to fix the problems in time, the piece of paper you hold promising you $106 is worth a whole lot less.

And any time a seller of securities–me in this story–lies to investors about something really important that destroys the value of the investment, it’s securities fraud. And what could be a more important, value-destroying lie than telling you (investors) that the Trust owns the loans when it doesn’t, because I didn’t keep my contractual promises?

Beyond the securities fraud I’d be committing by failing to give the Trust good title, I’d also create a massive problem with foreclosing. To foreclose on a loan, the Trust has to have good title. But if I didn’t transfer ownership to the Trust, the Trust and Trustee don’t have the papers needed to prove ownership. I mean, you can’t prove you have something you don’t have. That’s what “proof” is all about.

So what does a Trustee do if the Trust doesn’t have the documents needed to show clear title and foreclose, but the homeowner’s in default? Well, The Trustee (or someone working for it) has two choices: work out a deal with the homeowner, or commit fraud by fabricating the needed documents. Let’s pause a minute on the fabricating documents option, and notice just how attractive it is to the securities seller.

Fabricating the documents needed to foreclose solves two problems for the securities seller, if it gets away with it. 1) The foreclosure goes through. 2) If the seller can foreclose freely and give the money to the investors, that takes the securitizaton-fail securities fraud risk off the table, at least as far as investors (as opposed to law enforcers) goes. That’s because for investors, lying while selling securities only matters if the lies caused harm, and if the trust can get away with foreclosing, where’s the harm?

So foreclosure fraud minimizes the securities fraud liability.

But another thing happens if the Trustee (or somebody working for it) fabricates the documents and successfully forecloses. The property’s record of ownership–its chain of title–is now “clouded,” or subject to challenge. As a result of the banks’ wholesale foreclosure fraud-to-cover-up-securities-fraud, our chains of title nationwide are a mess.

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