NOTICE: The information contained on this blog is based upon fact when stated as fact and theory when stated as theory. We are well aware that the facts presented on this blog are contrary to the facts as presented by mainstream media, the executive branch of government and even the judicial branch of government. We do not consider anything to be fact unless it is corroborated in at least three ways. Some of the information is based upon extensive interviews with industry insiders who have shared information based upon a promise of anonymity. Some of the information is based upon intensive research into specific companies and specific people including the hiring of investigative services. Some of the information is based upon personal knowledge of Neil Garfield during his tenure on Wall Street and in his investment banking activities related to the trading of commercial and residential real estate. All fact patterns presented as true in this blog are additionally subjected to the test of logic and the presence or absence of a contrary explanation.
THE TRUE NARRATIVE OF SECURITIZATION
Think about it. When the bond sells or is repurchased, what happens to the loans. The bond “derives” its value from the loans (hence “derivative”). So if you sell the bond you have sold a share of the underlying loans, right? Wrong — but only wrong if you believe the spin from Wall Street, and the Federal Reserve cover for quantitative easing (expansion of the money supply not required by demand caused by increased economic activity). Otherwise you would be entirely correct.
If you buy a share of General Motors you can’t claim direct ownership over the cars and equipment. That is because GM is a corporation. A corporation is a valid “legal fiction”. When you create a corporation you are creating a legal person. Now let’s suppose you give your broker the money to buy a share of General Motors, does that give the broker to claim ownership over your investment? Of course not — with one major glaring exception. The exception is that securities are often held in”street name” rather than titled to you as the buyer. You can always demand that the stock certificate be issued in your name, but if you don’t then it will be held in the name of the brokerage house that executed the transaction for you. So on paper it looks like the share of GM is titled to the brokerage house and not you. It is standard practice and there is nothing wrong with it in theory until you take away accountability for malfeasance.
Before brokers were allowed to incorporate, the owners or partners were individually liable for everything that happened in the brokerage company. So they were not likely to claim your security held in street name as their own. In fact, the paper crash in the late 19060’s was directly related to the fact that the securities held in street name did not match up with the statements of investors who had accounts with the brokerage houses who screwed up the paperwork so badly, that some firms crashed and to this day there are unresolved certificates in which the identity of the actual owner is unknown.
And if they sold your share of GM, the proceeds were supposed to be yours. In the yesteryear of Wall Street rules they would only execute a sell of your share of GM if you ordered it. It can be fairly stated that the reason why the financial system broke down is that brokers had nothing stopping them from claiming ownership over the investors money (thus stealing both the money and the identity of the investor) and nothing stopping them from claiming ownership over a loan that was issued by a borrower and used by the broker to sell, trade and profit from exotic securities using the investors’ money without accounting to either the investor or the borrower (or the regulators) of the details of such trades.
Today it is still supposed to be true that the brokers are “honest” intermediaries just like your commercial bank that handles your checking account, but as it turns out neither the investment banks nor the commercial bank have a culture of caring for or about their customers or depositors. The system has broken down.
And so the moral hazard of having corporations managed by officers who are not likely to go to jail or go bankrupt when the system of gambling with customer money goes bad, they suffer nothing. They get paid bonuses for any upside event but they never feel the pain when things go bad. Back “in the day” there were three things stopping bankers from defrauding the public: personal responsibility, agency regulation and industry pressure from peers who feared the public would stop doing business with them if it became known that their deposits were being “managed” in ways most people could not be true.
Now we can return to the question of what is the legal result of a transfer of a mortgage backed bond. You have given the brokerage house the money to buy the bond (let’s say you are a pension fund). The brokerage house should have given your money to the “legal person” that issues or owns the bond. So if you are the first buyer of the bond, then the money should go to the trustee of the New York common law trust (REMIC) that issues the bond to you — except that it is in reality issued in “street name” — I.e., in the name of the brokerage house. This is contrary to the intent of the prospectus and PSA given to investors but it is left intentionally vague as to whether this path is legally mandated. The courts are all caught up in the paperwork instead of looking at the actual transactions and matching those transactions with common law principles that have been presumptively true for centuries.
The 1998 law exempts mortgage back bonds from being called securities so it could be argued that they should not be issued in street name, a process applicable to securities trading. Without the devices of “Selling Forward” (selling what you don’t have — yet) and issuing ownership in “Street name” it would have been very difficult for any of this mayhem to have grown to such pornographic proportions.
NOW HERE IS WHERE THE CRIME STARTED: No trust agreement was ever created, so this gave the bankers wiggle room in case they wanted to avoid trust law. The creation of the trust is said to be in the PSA and prospectus and one could be implied from the wording, but it is difficult in plain language to confirm the intent to create a trust. Nonetheless it became part of Wall Street parlance to refer tot he special purpose vehicles qualifying for special tax treatment under REMIC statutes as “trusts.”
No bond was issued in most cases. The bond issued by the “trust” in reality was merely notated on the books of the investment banking brokerage. Nearly all bonds therefore have no paper certificate even available (called non certificated). The “private label” bonds are so full of legal holes that they could not hold air, much less water.
No money was given to the trustee or the trust. No assets were deposited into the trust. The trust never acquired or originated any loans because it didn’t pay for them. It didn’t pay for them because it had no money to pay for them. The money you gave to purchase a bond never went to the trustee or the trust. In fact the trustee failed to start a file on your “trust” and therefore never assigned it to their trust department. The trustee also never started a depository account for the trust. It would have been named “XYZ Bank in trust for ABC trust”. That never happened except when they were piloting the scheme that become the largest Economic crime in human history.
Banks diverted your money from the trust into their own pockets. Without telling you, they put the money into a commingled undifferentiated account. The notation was made that the investor was credited with the purchase of one bond but the bond was never issued and the trust didn’t get the money so there was no deal or transaction between you and the trust. You gave the brokerage firm your money for the bond but you never got the bond. The issuance of the bond from the trust was a fiction perpetrated by the brokerage house. Since neither the trustee nor the trust had any records nor an account where your money could be deposited, it never came into legal existence, but more importantly it lacked the funds to buy or originate residential mortgage loans.
Money was controlled by the investment banks, not the trusts or the trustees. That money was sitting in the the brokerage account along with thousands of investors who thought they were buying millions of bonds in thousands of trusts. Having voluntarily ignored the existence of the allegedly existing trust, it doesn’t matter whether the trust did or did not exist because it was never funded and therefore was a nullity. In reality, the investors were not owners of a trust or beneficiaries of a trust, they were common law general partners in a scheme that rocked the world.
From the start the money chain never matched the paperwork. The brokerage house wired money to the depository account (checking account) of the closing agent (usually a title agent) “on the ground” who also received closing papers from Great Loans, Inc. (not a real name, but represents the “originators” as they came to be called whose name showed up on all the settlement papers and disclosures required for a real estate closing with a “lender). The payee on the note and the mortgagee on the mortgage was named “lender” even though they had never made a loan.
Donald Duck was your lender. The entire lender side of the closing was fictitious. The originators were not just naked nominees, they were fictitious nominees for a fictitious lender who was never disclosed. Under Reg Z and TILA this is a “table funded loan” and it is illegal because the borrower, by law, is required to be given information about the identity of his lender and all the fees, commissions and other compensation paid to various parties.
The investment bank owes the borrower all of its compensation, plus treble damages, attorney fees and costs. A table funded loan is one in which the borrower is deprived of the choice guaranteed by the Federal Truth in Lending Act. It is defined as “predatory per se” which means that all you need to show is that the closing parties, including the closing agent, engaged in a pattern of conduct in which the identity of the real lender was withheld.
Terms of payment and repayment were never disclosed to the lenders and never disclosed to the borrowers. The borrower is also supposed to know, as part of the disclosures of compensation, the terms of repayment. In this case the prospectus and PSA disclose a repayment scheme that makes you, the investor, a co-obligor on repaying your own investment. This is because the terms of the “bond” clearly state that the brokerage house can pay the interest or principal on your investment out of your own funds. That provision is used by the FBI in thousands of PONZI scheme investigations as a red flag for the presence of fraud.
The Terms of the loan were never disclosed to the investor or the buyer. The behavior of the banks can only be considered as legal or excusable if the enabling language existed to allow trading using your money as an investor/depositor/lender. The behavior of the banks does not match up with either the paper trail or the money trail of actual transactions.
AND HERE IS WHERE IT GETS INTERESTING. The closing agent knows they got money not from the originator and not even from the party that later claims to have made the loan. But they go ahead anyway, issue worthless title insurance, and they close the loan, distributing money as stated in the closing settlement papers; but what is not disclosed in the closing settlement papers is that the terms of repayment for the bond are different from the terms of repayment on the note. And another thing not disclosed is what happened to your money that was supposedly invested in the purchase of a bond payable by a “trust” that didn’t have the money to originate or acquire loans because the brokerage house never tendered it to the trust. The trustee knew it was playing a part in a fictional play and the only thing they were interested in was getting their paycheck for pretending to be the trustee, when in fact there was no trust account, no trust assets, and no bond actually issued by the trust.
The Secret Yield Spread Premium in which the banks stole part of your money when you gave them money to buy into mortgage bundles immediately reduced the amount invested to a level that guaranteed that you would never be repaid. Many different types of loans were made this way. In fact, 96% of all loans made during the mortgage meltdown period were initiated this way. The brokerage house had an affiliated company that was called an aggregator. The aggregator would collect up all the loans that were REPORTEDLY closed, whether they really closed or not. This information came from the loan originator who in effect was billing for services rendered: pretending to be a lender at a closing I which it had no interest. The collection of loans included as many toxic loans as could be found because on average, the collection of loans would have a higher expected interest rate than without the toxic loans. Toxic loans (loans that are known will die in default) carry a very high rate of interest even if the first payment is a teaser payment of one-tenth the amount of the actual augment of principal and interest that would ordinarily apply, and which was applied later when the loans were foreclosed.
The undisclosed yield spread premium is certainly due back to the borrower with treble damages under current law. An investment carrying a higher rate of return usually is worth more on the open market than one with a lower rate of return — assuming the risk on both is comparable. The brokerage house managed to use its influence and money to get the rating agencies to say that these collections of mortgages (bundles) were “investment grade” securities (forgetting that the 1998 law exempted these bonds as “securities”). So for example, let’s take your investment and see what happened. The brokerage house pretended to report that your money had gone into the trust which we already know did not happen. The interest rate of return you were expecting from the highest grade “investment securities” was lower than the average rate of return on investments on average. After all you knew the risk was zero, so the return is lower.
PLAIN LANGUAGE: Brokers took a part of your investment money and created a fictitious transaction in which they always made a large profit (15%-30%). The brokerage house took the bundle of loans created by the aggregator with an inflated rate of return caused by including toxic mortgages with 15% interest rates, and SOLD those loans to itself in “street name” for fair market value which was inflated because of the toxic loans being part of the package. Yes, that is right. The brokerage house created a fictional transaction in which it pretended the bonds were issued and then sold the bundle of mortgages at a fictions profit. They sold the mortgages to themselves and then booked the transaction as a “proprietary trading” profit which is one of many pieces of compensation that was never disclosed to the borrower.
Under law that compensation is due back to the borrower along with treble damages, interest, and all other payments plus attorney fees and costs. The proprietary trading profit reported by the banks was fictional just as all the other elements of the transaction were fictional. It is called a yield spread premium which is the difference in the fair market value of the same loan at two different interest rates. YSPs are common at ground level with the borrower and his mortgage broker etc., but never before present in any large scale operation up at the lender level, where you are, since you have given the brokerage house money to execute a transaction, to wit: purchase mortgage backed bond from a particular trust.
WHAT HAPPENED TO TITLE? It was defective from the start. Neither the originator nor MERS or anyone else had an actual interest in the proceeds of payments on that mortgage. They were just play-acting. But here in the real world they got away with playing with real money (so far). If your money had gone into the trust with the trustee managing the trust assets (because there were trust assets), then the name of the trust should have been placed on the note as payee because the trust made the loan. And the name of the trust should have been on the mortgage as mortgagee or beneficiary under a deed of trust because the trust made the loan. Instead, the brokerage firms set up an elaborate maze of companies under cover or sponsorship from the big banks all pretending to be trading a loan for which both the note and mortgage were known to be defective.
And then the banks claimed to have taken a loss on the bonds (never issued to begin with) for which they were richly rewarded by receiving payments of insurance and credit default swaps, bailout and of course the Federal Reserve program of buying $85 billion PER MONTH in bonds that the Board of Governors knows were never issued from a trust that never existed. And instead of giving you your money back with interest they said “see, there is the huge loss on these bonds and the underlying loans” and they to,d you to eat the loss. But you responded with “Hey. I gave you money to buy those bonds. You were my agent. I don’t care how complex the exotic maze, if you were the agent who took my money then you were the agent who diverted my money and then said it is all the same thing. You brokers owe me my money back.
Meanwhile the aggregators who are really the same brokerage companies are being sued by Fannie, Freddie, investors and other state and federal agencies for selling worthless paper whose value dropped to pennies on the dollar despite the value of the underlying mortgages. And the aggregators are being forced to buy back the crap they sold. So we have the trust, the trustee and you, the investor who never had any investment of value, and the instrument you were supposed to get (mortgage backed bonds) paid off in a dozen different ways.
Which leaves you with the question of every investor in these bogus bonds. What is the value or even the utility of a worthless bond which even if it had been real, has already been aid off? How can the note provisions survive to be enforced on a debt that has been paid off several times over? Why are courts allowing lawsuits, including Foreclosures, on bogus claims where the creditor, the alleged lender, and the alleged trustee of the issuer have no interest in the outcome of litigation and have given warning to all Servicers NOT to use their names in the foreclosure suits — because they have no trust account, they have no account receivable, they have no bond receivable and they have no note receivable?
And why are the courts ignoring the fact that even if the bonds were real, the Federal Reserve now owns most of them. The short answer is that nothing happens to the bond or the loan because they were never connected the way they were supposed to be. The signature of the borrower did not give rise to any debt. The loan from the brokerage house did not give rise to any debt because the broker got paid. And if the principal debt was extinguished at the loan closing (most cases) or after the loan closing, there is no amount due. And even if the insurance and other payments were not enough to any off the loans, the receipt of even one nickel should have reduced the amount due to you the investor and you would have expected a nickel less from the borrower.
HSBC faces $1.6B payout over mortgage bonds • HSBC (HBC) faces having to pay $1.6B in a lawsuit from the Federal Housing Finance Agency over soured mortgage bonds that the bank sold to Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB). The bank made the disclosure yesterday. • The figure is well above the $900M that analysts at Credit Suisse had estimated. • In total the FHFA has sued 18 banks over mortgage bonds; should HSBC’s calculations for its liabilities be applied to some of the defendants with the largest exposure, including Bank of America (BAC), JPMorgan (JPM) and RBS (RBS), they would have to pay over $7B each. Should these banks make payments in proportion with a recent UBS deal, the bill would above $4B.