Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Tue Oct 19th, 2010 at 04:07:22 AM EST
The Peruvian economist Hernando de Soto has been pilloried before here on ET for suggesting (paraphrased, maybe distorted) that all that's necessary for developing countries to pull themselves up by their bootstraps is to give poor people property titles on the houses they occupy and the land they till, and then proceed to monetize all this property in order to kick-start an economic boom. However, leaving aside the suggestion that this is the way to fuel economic development, he does have a point when he says that
In the West, this formal property system begins to process assets into capital by describing and organizing the most economically and socially useful aspects about assets, preserving this information in a recording system--as insertions in a written ledger or a blip on a computer disk--and then embodying it in a title. A set of detailed and precise legal rules governs this entire process. Formal property records and titles thus represent our shared concept of what is economically meaningful about any asset. They capture and organize all the relevant information required to conceptualize the potential value of an asset and so allow us to control it ...
The reason capitalism has triumphed in the West and sputtered in the rest of the world is because most of the assets in Western nations have been integrated into one formal representational system ... By transforming people with real property interests into accountable individuals, formal property created individuals from masses. People no longer needed to rely on neighborhood relationships or make local arrangements to protect their rights to assets. They were thus freed to explore how to generate surplus value from their own assets.
-Hernando de Soto, The Mystery of Capital
(last quoted on ET here
Another quotation of De Soto on ET is this by Chris Cook
Hernando de Soto Says Toxic Assets Emerged From a Shadow Economy (March 25, 2009) - WSJ.com
Property is much more than a body of norms. It is also a huge information system that processes raw data until it is transformed into facts that can be tested for truth, and thereby destroys the main catalysts of recessions and panics -- ambiguity and opacity. To bring derivatives under the rule of law, governments should ensure that they conform to six longstanding procedures that guarantee the value and legitimacy of any kind of paper purporting to represent an asset:
- All documents and the assets and transactions they represent or are derived from must be recorded in publicly accessible registries. It is only by recording and continually updating such factual knowledge that we can detect the kind of overly creative financial and contractual instruments that plunged us into this recession.
- The law has to take into account the "externalities" or side effects of all financial transactions according to the legal principle of erga omnes ("toward all"), which was originally developed to protect third parties from the negative consequences of secret deals carried out by aristocracies accountable to no one but themselves.
- Governments can no longer tolerate the use of opaque and confusing language in drafting financial instruments. Clarity and precision are indispensable for the creation of credit and capital through paper. Western politicians must not forget what their greatest thinkers have been saying for centuries: All obligations and commitments that stick are derived from words recorded on paper with great precision.
Above all, governments should stop clinging to the hope that the existing market will eventually sort things out. "Let the market do its work" has come to mean, "let the shadow economy do its work." But modern markets only work if the paper is reliable.
The importance of the rule of law has also been emphasised by Jérôme repeatedly (sorry, no links) when he dismissed suggestions that the dollar would be dropped for other currencies or that alternative markets spearheaded by Russia, Venezuela, China or Iran could take off. The rhetorical question goes "would you trust contracts that defer to the Russian or Iranian courts for dispute resolution rather than English or US courts?", and the answer is "of course not", as Krugman reminded us in his recent NY Times op-ed The Mortgage Morass
American officials used to lecture other countries about their economic failings and tell them that they needed to emulate the United States model. The Asian financial crisis of the late 1990s, in particular, led to a lot of self-satisfied moralizing. Thus, in 2000, Lawrence Summers, then the Treasury secretary, declared that the keys to avoiding financial crisis were "well-capitalized and supervised banks, effective corporate governance and bankruptcy codes, and credible means of contract enforcement." By implication, these were things the Asians lacked but we had.
However, the financial crisis threatens to undermine that perception. Krugman continues
The accounting scandals at Enron and WorldCom dispelled the myth of effective corporate governance. These days, the idea that our banks were well capitalized and supervised sounds like a sick joke. And now the mortgage mess is making nonsense of claims that we have effective contract enforcement -- in fact, the question is whether our economy is governed by any kind of rule of law.
As I wrote earlier this week
, if you take the view that the rule of law and a functioning property register are some of the key institutional factors explaining the success of capitalism in the last couple hundred years, you're potentially looking at the end of capitalism as we know it in the US. The alternative is a complete rout of the US financial system, which is another way for capitalism as we know it in the US to, if not end, at least get reset to a tabula rasa
Follow me below the fold for a summary of the "mortgage mess" situation, how it got to be this way, and what might happen in the near future.
Update [2010-10-17 4:47:47 by Migeru]:
It all started with fraud at mortgage origination. Recall The Two Documents Everyone Should Read to Better Understand the Crisis
(by William K. Black in the Huffington Post on February 25, 2009)
As a white-collar criminologist and former financial regulator much of my research studies what causes financial markets to become profoundly dysfunctional. The FBI has been warning of an "epidemic" of mortgage fraud since September 2004. It also reports that lenders initiated 80% of these frauds. When the person that controls a seemingly legitimate business or government agency uses it as a "weapon" to defraud we categorize it as a "control fraud" ("The Organization as 'Weapon' in White Collar Crime." Wheeler & Rothman 1982; The Best Way to Rob a Bank is to Own One. Black 2005). Financial control frauds' "weapon of choice" is accounting. Control frauds cause greater financial losses than all other forms of property crime -- combined. Control fraud epidemics can arise when financial deregulation and desupervision and perverse compensation systems create a "criminogenic environment" (Big Money Crime. Calavita, Pontell & Tillman 1997.)
The widespread claim that nonprime loan originators that sold their loans caused the crisis because they "had no skin in the game" ignores the fundamental causes. The ultra sophisticated buyers knew the originators had no skin in the game. Neoclassical economics and finance predicts that because they know that the nonprime originators have perverse incentives to sell them toxic loans they will take particular care in their due diligence to detect and block any such sales. They assuredly would never buy assets that the trade openly labeled as fraudulent, after receiving FBI warnings of a fraud epidemic, without the taking exceptional due diligence precautions. The rating agencies' concerns for their reputations would make them even more cautious. Real markets, however, became perverse -- "due diligence" and "private market discipline" became oxymoronic. These two documents are enough to begin to understand:
- the FBI accurately described mortgage fraud as "epidemic"
- nonprime lenders are overwhelmingly responsible for the epidemic
- the fraud was so endemic that it would have been easy to spot if anyone looked
- the lenders, the banks that created nonprime derivatives, the rating agencies, and the buyers all operated on a "don't ask; don't tell" policy
- willful blindness was essential to originate, sell, pool and resell the loans
- willful blindness was the pretext for not posting loss reserves
- both forms of blindness made high (fictional) profits certain when the bubble was expanding rapidly and massive (real) losses certain when it collapsed
- the worse the nonprime loan quality the higher the fees and interest rates, and the faster the growth in nonprime lending and pooling the greater the immediate fictional profits and (eventual) real losses
- the greater the destruction of wealth, the greater the (fictional) profits, bonuses, and stock appreciation
- many of the big banks are deeply insolvent due to severe credit losses
- those big banks and Treasury don't know how insolvent they are because they didn't even have the loan files
- a "stress test" can't remedy the banks' problem -- they do not have the loan files
We have known this for 18 months (even Hernando de Soto could see that in his ESJ op-ed), but we have suspected it for a lot longer. At about the same time that this article came out Gaianne, in an ET thread on whether there was "fraud in the legal sense"
in the mortgage bust, linked to a post at the blog Cryptogon
about "Wall Street Chop Shops". The post dates from September 2006
Cover of Business Week: How Toxic Is Your Mortgage?
The firm's strategy was to acquire fly-by-night companies who were dealing in these dodgy (sub-prime) loans and making impossible to imagine amounts of money at it. The outward public appearances of these acquired companies did not change. Some of the fly-by-night, fast-and-loose, make-it-up-as-you-go and illegal activities were transformed into probably-no-jail-time best-practices. The CFO had a habit of putting me on hold without muting the headset. He always seemed to be talking about "scratch and dent deals" with someone else in his office. "Oh sh*t. They're not going to like this. *rhetorical chuckle* What's a few million dollars between friends..."
I noticed that the scam seemed very similar to the way the CIA runs cut outs. Except with this, the firm was only concerned with its public image; it's no secret who owns whom in this game, if you know where to look, and everything had been done according to federal regulations that this firm probably wrote, so it's not a question of legal or illegal. When it comes time to shut down offices and roll up the operations, they want it to go smoothly. And if Joe and Jane Six pack start to wonder who actually sold them their dodgy loan, it won't be immediately apparent. And, if Joe and Jane Six pack read the fine print, they will find that they screwed themselves by signing on the dotted line anyway. When the press interviews these people, they will talk about how "Bob's-Dodgy-Loans-While-You-Wait" screwed them over, and how they didn't know, this, that and the other thing, etc...
See, I also handled issues for the used-car-salesman-type 'account executives'. Just before I left, the company switched loan origination systems. The people writing these loans were pissed because they were no longer able to get loans approved for people with fraudulent social security numbers. They would actually complain because the system was telling them that the would-be borrower was using a false/fake/invalid SSN.
So, anyway, by late 2006 the general public knew (or could have known) via BusinessWeek that the banks were engaging in predatory lending by giving people toxic "Option ARM" mortgages. As William K. Black reminds us, in predatory lending the lender engages in "control fraud". And Fitch, the rating agency, was disconcerted to find "fraud in almost every file" when doing a back-check of mortgage pools it had itself rated fraudulently by not bothering to check the original documentation. We also know the FBI knew about an "epidemic of mortgage fraud" by at least 2004.
There was fraud on a massive scale, it was clearly intentional and run by people who knew what they were doing, and it could have been stopped by law enforcement but wasn't.
But, in addition, the monetary authorities aided and abetted the fraud by doing their best to convince financially unsophisticated people that a toxic mortgage made sense. "ARM" above stands for "Adjustable-Rate Mortgage", and this is what none other than Alan Greenspan had to say about those in February 2004:
One way homeowners attempt to manage their payment risk is to use fixed-rate mortgages, which typically allow homeowners to prepay their debt when interest rates fall but do not involve an increase in payments when interest rates rise. Homeowners pay a lot of money for the right to refinance and for the insurance against increasing mortgage payments. Calculations by market analysts of the "option adjusted spread" on mortgages suggest that the cost of these benefits conferred by fixed-rate mortgages can range from 0.5 percent to 1.2 percent, raising homeowners' annual after-tax mortgage payments by several thousand dollars. Indeed, recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade, though this would not have been the case, of course, had interest rates trended sharply upward.
American homeowners clearly like the certainty of fixed mortgage payments. This preference is in striking contrast to the situation in some other countries, where adjustable-rate mortgages are far more common and where efforts to introduce American-type fixed-rate mortgages generally have not been successful. Fixed-rate mortgages seem unduly expensive to households in other countries. One possible reason is that these mortgages effectively charge homeowners high fees for protection against rising interest rates and for the right to refinance.
American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.
He was saying this when the interest rates were at historical lows. When interest rates are at a low one would want to lock in the low rates, not gamble that rates are going to go even lower. So, while it was true in 2004 that mortgagees would have benefitted if they had entered into a variable rate mortgage years earlier, it was not true that the right thing in 2004
was to offer (and accept) variable rates. People who were paying attention were not amused
There are already numerous variable and short-term instruments available for the sophisticated (or naive) homeowners. Greenspan's speech is an encouragement to use these short-term instruments. As the Wall Street Journal comments, "It is almost unheard of for an official of the central bank to offer advice on interest rates, over which it has enormous influence."
Update [2010-10-17 7:18:47 by Migeru]:
We would go much further than this: unless Greenspan clarifies his comments, he must resign. Calling on homeowners to leverage their personal finances using short-term debt is a financial distress call. Greenspan must be desperate to get consumers to take ever more money out of their homes, to inflate home prices. He can only make such a statement if he knows short-term rates will stay low for years to come, at any cost. The "cost" will be sharply higher long-term rates and a faltering dollar.
We very much hope that Greenspan will put his words into perspective. It is our view, however, that Greenspan is indeed desperate and means exactly as he said. Greenspan's entire monetary policy has been based on wealth creation through higher real estate prices; he is taking this concept to new levels thereby risking an unprecedented real estate bubble, and a subsequent collapse of unprecedented proportions.
Now, from reading the above you might get the impression (and I did at the time) that, while mortgage applicants may have lied on their applications, or fly-by-night mortgage brokers may have used false data (such as fake Social Security Numbers) to enter into the systems, or even that mortgages may have been given to non-qualifying borrowers, at least the mortgage actually existed. After all, Fitch was able to find fraud "in almost every file" which means they at least were able to look at the files (which S&P wasn't allowing its analysts to request to do).
However, since people in the US started defaulting on their mortgages en masse (and we're not talking just about subprime borrowers but about prime borrowers exploiting "strategic default" as a possibility to get out form under a negative-equity mortgage), there has been a trickle of reports that some foreclosures were hitting the minor obstacle that it wasn't clear who actually held the mortgage and so had standing to foreclose. We'll get into how it was possible to lose track of the notes when we talk about securitization, but what's important now is that, in the drive to recover some of the asset value lost to default, corners have been cut (again) resulting in massive foreclosure fraud. But the really worrisome bit is the collusion of the powers of the state by setting up Kangaroo foreclosure courts, or proposing legislation to allow foreclosures to proceed without the proper documentation. This is what Krugman above refers to when he writes the question is whether [the US] economy is governed by any kind of rule of law.
Update [2010-10-17 18:6:20 by Migeru]:
The level of impunity involved in the foreclosure "industry" is perhaps best illustrated by the banks changing the locks on the doors of properties they haven't obtained a foreclosure on. This from Naked Capitalism
It turns out that banks in [Florida] are so confident of their above the law status that they’ve also taken to casually changing the locks on and entering homes they don’t own, meaning haven’t foreclosed upon. This has become sufficiently common that the local press has taken notice. From the Sarasota Herald Tribune:
It is illegal for any bank representative to enter a property if they have not yet retaken it at a foreclosure sale, especially if there is any sign the home is occupied, foreclosure experts say.
Breaking the law (destroying private property, namely the locks, to prevent consumer access to their property) isn’t criminal intent? What about “harassment”and “extortion” don’t these investigators understand? This looks to be more a matter of local law enforcement officials being unwilling to deploy resources.
The process of banks hiring people to break into homes, even when occupied, is just the latest oddity of the messy foreclosure crisis in Florida.
Some property owners are reporting the break-ins to law enforcement as burglaries. Yet investigators consider the disputes a civil matter because the contractors do not display criminal intent.
So that was law enforcement potentially being lazy or willfully indifferent. Now here's the court system being subverted in the interest of speedy foreclosures. From Naked Capitalism
Given the success that local attorneys are having (it has reached the point where the state attorney general’s office has opened an investigation into three so-called foreclosure mills operating in the state), pushback by the mortgage industrial complex was inevitable. The old saw about “best government money can buy” now looks to apply to the courts, the one area most people assume to be relatively free from tampering by well funded interests.
These new foreclosure-only courts are special creations of the Florida legislature, funded separately from the usual court system. They are manned by retired judges, which means in many cases they are not familiar with real estate law.
Moreover in Florida, the public is being barred from observing these trials. In Duval County, Palm Beach County, and Hillsborough County (and this is not a full list), police are refusing entry, claiming safety issues (overcrowding) when lawyers and defendants report there are plenty of open seats. The First Amendment Foundation has urged concerned parties to write letters of protest to judges denying access, including camera access. That battle has not yet been escalated.
That article contains egregious examples of these specially created and separately funded foreclosure-only courts running roughshod over due process. Go and read it.
Note the implication that these foreclosure courts are a manoeuvre by the banks' rent-a-legislators in response to the relative success people are having in challenging foreclosures when the putative lender doesn't have the proper documentation to prove they have standing to foreclose. Other strategies include Counterfeit court summons (via Zero Hedge)
Today, courtesy of Alan Grayson's office we discover that not only are servicers foreclosing on mortgages to which nobody apparently owns the title, but that servicers, representing such reputable firms as Deutsche Bank National Trust Company, are willing to counterfeit court summons in their pursuit of a clean and efficient foreclosure mill. As Grayson's office points out: "Apparently what’s happening is that private process servicer companies may not be serving people with summons, and are simply counterfeiting the documents so they can keep the fees without doing the work. That means that you could theoretically be foreclosed on without ever knowing there was even a foreclosure case against you." What it also means, is that banks may have been participants in this outright criminal judicial fraud, which we are confident will be uncovered in many more cases, as this is highly unlikely to be an isolated case.
But it gets better
In Florida, a suspiciously large number of Affidavits of Lost Summons have been filed in foreclosure cases. In only three counties so far in 2010 over 9,000 summons have been “lost”. These are the documents that are legally required to be served to homeowners notifying them of impending foreclosure and eviction. Many of the Affidavits of Lost Summons do not even identify the party that was supposedly served with the original summons. How could a legal summons be served to a homeowner, then lost, and suddenly no one can remember who the homeowner is? Could this possibly be the reason for persistent stories of homeowners being evicted without being aware they were in foreclosure? Are many of these Affidavits of Lost Summons actually just covering for the fact that was no original summons?
Update [2010-10-18 6:1:2 by Migeru]:
Florida stays in the foreclosure fraud news spotlight with a fired employee from one of the law firms under investigation by the State Attorney General’s Office. The woman has given the Attorney General a statement, under oath and with her attorney present, going into great detail how the law firm set up production lines to produce up to 2,000 fraudulent documents each day. Lawyers at the firm were reportedly worried about breaking the law and being disbarred but even more worried about being fired for refusing to cooperate. Other employees were required to practice the CFO’s signature so they could replicate it on documents while the CFO supervised. Notary stamps were casually passed around and piles of blank documents were notarized so they could be filled in at a later time. This is very damaging information, to put it mildly.
In fact, there is a whole industry dedicated to forging documents, as related by Naked Capitalism
We finally have concrete proof of how widespread document fabrication was. For some reason the ScribD embeds aren’t working correctly, you can view the entire Lender Processing Services price sheet here, and here are the germane sections.
Not only are there prices up for creating, which means fabricating documents out of whole cloth, and look at the extent of the offerings. The collateral file is ALL the documents the trustee (or the custodian as an agent of the trustee) needs to have pursuant to its obligations under the pooling and servicing agreement on behalf of the mortgage backed security holder. This means most importantly the original of the note (the borrower IOU), copies of the mortgage (the lien on the property), the securitization agreement, and title insurance.
Also notice that there is a price for creating allonges. We discussed earlier that phony allonges have become the preferred fix for the failure to convey notes properly:
The cure for the mortgage documents puts the loan out of eligibility for the trust. In order to cure, on a current basis, they have to argue that the loan goes retroactively back into the trust. This is the cure that the banks have been unwilling to do, because it is a big problem for the MBS. So instead they forge and fabricate documents.
The letter in particular mentions an allonge. An allonge is a separate sheet of paper which is attached to a note to allow for more signatures, in this case, endorsements, to be added. Allonges have had a way of magically appearing in collateral files while trails are in progress (I’ve seen it happen in cases I was tracking; it’s gotten so common that some attorneys warn judges to be on the alert for “ta dah” moments).
The wee problem with an allonge miraculously being discovered is that the allonges that show up are inherently in violation of UCC (Uniform Commercial Code) provisions (UCC has been adopted by all states, a few states have minor quirks, but the broad provisions are very similar).
An allonge is NOT to be used unless all the space on the original note, including the margins and the back side of pages, has been used up. This is never the case. Second, an allonge has to be so firmly attached to the original document as to be inseparable. Thus an allonge suddenly being discovered is an impossibility (well impossible if it were legit), yet it seems to happen all the time.
This revelation touches every major servicer and RMBS trustee in the US. DocX is a part of of Lender Processing Services. Lender Processing Services has three lines of business, the biggest of which is “default services”, representing close to half its revenues of this over $2 billion in revenues company. DocX is its technology platform it uses to manage its national network of foreclosure mills. Note that DocX closed one of its offices in Alpharatta, Georgia earlier this year, per StopForeclosures:
As Ellen Brown
puts it, you can't recover what doesn't exist
The judicial fraud detailed in above became "necessary" as soon as it is clear to the banks that "recovery" of any value from a delinquent loan is impossible because of faulty documentation. As Naked Capitalism
The admission by GMAC that it produced improper affidavits, followed by suspension of foreclosures by GMAC, Chase, and Bank of America in 23 judicial foreclosures states, is the tip of the iceberg of widespread foreclosure abuses. Yet comparatively few members of the media have asked the right question: why would servicers and law firms engage in fraudulent activity on such a widespread basis?
The ugly answer, as we have detailed long form in earlier posts (see here and here for more detail) is just as the front end of the mortgage securitization pipeline broke down, with originators increasingly simply pumping any deal through in the interest of pulling out fees, the same behavior spread to the back end.
Evidence is mounting that the various parties responsible for getting the notes (the borrower IOU into the securitization trust, failed to perform a series of tasks that were clearly set forth in the governing contract, the pooling and servicing agreement. These procedures were designed to thread a path through a complex thicket of multiple legal considerations (state real estate statutes, federal securities law, trust law, IRS provisions, to name a few). The failure to do it right means any retrospective fixes run afoul of multiple boundary conditions. Thus to industry participants, fraud, bizarrely, looks to be less bad than admitting to their colossal failures to respect contractual obligations and legal requirements.
(emphasis added in the last paragraph)
Now, the reason why the proper documention to prove standing to foreclose is not there is that the mortgage securitization process (the process whereby a pool of mortgage loans is sliced and diced into a bond that can be rated and sold to investors) was run just as shoddily as the mortgage origination. The following just boggles the mind: FUBAR Mortgage Behavior: Florida Banks Destroyed Notes; Others Never Transferred Them
But to give readers the latest report of modern FUBAR, mortgage edition, let us continue with the sorry saga of “Where’s My Note?” For the benefit of newbies, what everyone calls a mortgage actually has two components: the note, which is the borrower IOU, and the mortgage (in some states, it’s called a deed of trust) which is the lien on the property. In 45 states, the mortgage is a mere accessory to the note; you must be the real party of interest in the note in order to foreclose.
The pooling and servicing agreement, which governs who does what when in a mortgage securitization, requires the note to be endorsed (just like a check, signed by one party over to the next), showing the full chain of title, and the minimum conveyance chain is A (originator) => B (sponsor) => C (depositor) => D (trust). The endorsements also have to be wet ink; no electronic signatures permitted.
I’ve had a lot of anecdotal evidence to support the idea that these procedures, which were created in the early days of mortgage securitizations, were simply not observed on a widespread, if not a universal basis. My sense is that the breakdown in practice was well underway by 2004, but it may have taken place earlier. For instance, a group of over 100 lawyers in a loose network around Max Garndner, a North Carolina bankruptcy lawyer who has taken a serious interest in this area, now has a standing joke that the first one that finds a deal where the note was correctly endorsed must bronze it and hang it on their wall. In other words, in none of the cases this large group has seen were the notes transferred to the trust properly.
The link between securitization and foreclosure is explained in this blog post
(This is a series giving a basic explanation of the current foreclosure fraud crisis: This is Part One. Here is Part Two, Part Three, Part Four, and Part Five.)
Update [2010-10-19 4:7:22 by Migeru]:
Some people are going as far as to allege (in a 124-page racketeering lawsuit filing!) conspiracy to commit fraud
MERS/MBS/Foreclosure Goes RICO - MarketTicker Forums
This is a rather lengthy filing, 124 pages worth. It asserts virtually everything that I've written about for the last three years related to REMICs and MBS (that the notes were not conveyed and now can't be under the law), and alleges Racketeering.
I've read the whole thing, and want to present just a few short cites, but am embedding the entire document as well for those who "want it all".
REMICS were newly invented in 1987 as a tax avoidance measure by Investment Banks. To file as a REMIC, and in order to avoid one hundred percent (100%) taxation by the IRS and the Kentucky Revenue Cabinet, an MBS REMIC could not engage in any prohibited action. The "Trustee" can not own the assets of the REMIC. A REMIC Trustee could never claim it owned a mortgage loan. Hence, it can never be the owner of a mortgage loan.
57. Additionally, and important to the issues presented with this particular action, is the fact that in order to keep its tax status and to fund the "Trust" and legally collect money from investors, who bought into the REMIC, the "Trustee" or the more properly named, Custodian of the REMIC, had to have possession of ALL the original blue ink Promissory Notes and original allonges and assignments of the Notes, showing a complete paper chain of title.
58. Most importantly for this action, the "Trustee"/Custodian MUST have the mortgages recorded in the investors name as the beneficiaries of a MBS in the year the MBS "closed." Every mortgage in the MBS should have been publicly recorded in the Kentucky County where the property was located with a mortgage in the name similar to "2006 ABC REMIC Trust on behalf of the beneficiaries of the 2006 ABC REMIC Trust." The mortgages in the referenced example would all have had to been publicly recorded in the year 2006.
59. As previously pointed out, the ¡°Trusts¡± were never set up or registered as Trusts. The Promissory Notes were never obtained and the mortgages never obtained or recorded.
60. The "Trust" engaged in a plethora of "prohibited activities" and sold the investors certificates and Bonds with phantom mortgage backed assets. There are now nationwide, numerous Class actions filed by the beneficiaries (the owners/investors) of the "Trusts" against the entities who sold the investments as REMICS based on a bogus prospectus.
61. In the above scenario, even if the attorney for the servicer who is foreclosing on behalf of the Trustee (who is in turn acting for the securitized trust) produces a copy of a note, or even an alleged original, the mortgage loan was not conveyed into the trust under the requirements of the prospectus for the trust or the REMIC requirements of the IRS.
62. As applied to the Class Members in this action, the end result would be that the required MBS asset, or any part thereof (mortgage note or security interest), would not have been legally transferred to the trust to allow the trust to ever even be considered a "holder" of a mortgage loan. Neither the "Trust" or the Servicer would ever be entitled to bring a foreclosure or declaratory action. The Trust will never have standing or be a real party in interest. They will never be the proper party to appear before the Court.
63. The transfer of mortgage loans into the trust after the "cut off date" (in the example 2006), destroys the trust's REMIC tax exempt status, and these "Trusts" (and potentially the financial entities who created them) would owe millions of dollars to the IRS and the Kentucky Revenue Cabinet as the income would be taxed at of one hundred percent (100%).
Yep. And this is just the first key into the circle of Hell where these folks are headed.
See, without standing they can't foreclose, but then we get back to "who can?" And what we find is that the originator was paid, and thus they can't either. Worse, for those originators that are bankrupt, their "assets", such as they are, can't go anywhere without a bankruptcy trustee's signature, and further, even if someone was to acquire that, which nobody has, THE REMICs CAN'T TAKE THE PAPER ANYWAY AS THEIR CLOSING DATE HAS EXPIRED.
So we have a bankrupt originator who was paid in full and can't foreclose, and we have a note that can't be transferred into the REMIC without destroying its tax preference (retroactively, incidentally), which instantaneously trashes the value of the MBS - probably by more than they could hope to recover if they were going to take the note anyway.
At the very least what I think happened is that the people running the mortgage securitization pipeline figured a default rate of maybe 1% and put that down to "cost of doing business". So it's possible that, contrary to claims that the intent was from the very beginning that the subprime mortgages would lead to foreclosures, the intent was never to worry about foreclosures. The money to be made was in the transaction volume and in selling the residential mortgage-backed securities to
. Not doing the paperwork properly meant that the RMBS were marketed on misrepresentation, but without a wave of defaults nobody would have noticed. So, as Drew puts it in order to save a billion on paperwork they created a 14 trillion hole
(and that's not even counting leverage). In addition, there was some tax arbitrage involved via these REMICs, and that may also have been improperly done, so things might get interesting if there is a tax audit of these entities. But I think the foreclosure fraud is just the attempted coverup of the securitization fraud. Whether this all amounts to a conspiracy in the eyes of the court system remains to be seen, but apart from class-action lawsuits from foreclosure victims, one should be expecting class-action lawsuits from RMBS
[editor's note, by Migeru] Work in progress...
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