The Logic of Wall Street “Securitization:” The transaction that never existed

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The logic of Wall Street schemes is simple: Create the trusts but don’t use them. Lie to everyone and assure everyone that Trusts were used to “securitize” loans. The strategy is so successful and the lie is so big and has been going on for so long, that most people believe it.

You see it in the decisions of the appellate courts who render opinions like the recent 3rd district in California which expresses the premise that the borrower was loaned money by the originator. Once you start with THAT premise, the outcome is no surprise. But start with reverse premise — that the borrower was NOT loaned money BY THE ORIGINATOR and you end up with a very different result.

We could assume that Wall Street is reckless in lending money. They can afford to be reckless because they are using investor money. And, so the story goes, the boys on Wall Street got a little wild with loans that they would never have approved for themselves.

Without risk of any loss, Wall Street investment banks make money regardless of whether the loan succeeds or goes into default.

But Wall Street is not content with earning fees. The basic credo is a question: “How can we make YOUR money OUR money.” And they have successfully devised and followed that goal for many years. As one insider told me in an interview that must remain anonymous, “It is like a magic trick. You create a trust and everyone is looking at the trust and everyone is looking at transactions affecting the trust, when in fact all the action is occurring off record, off the books and away from scrutiny by investors, trustees, rating agencies, insurers, borrowers, and of course, the courts.” 

So the question becomes “what happens to investor money after it is received by the investment bank?” If the money passes from the bank account of the managed fund (pension) fund to the bank account of the investment bank that sold bonds issued by a Trust then the Trust would receive the money. It didn’t.

The Trust would then issue funds for the origination or acquisition of loans. In return it would get the loan documents and they would be placed with the Depositor or Depository — pretty much the way ordinary loans are done. It didn’t. Instead we had millions of loan documents lost or destroyed and then re-created for litigation purposes. Why would an entire industry have engaged in that behavior? Was it really a “volume” problem where there was too much paper or was it something more sinister?

The problem is that the investment bank that acts as broker in selling the bonds is in control of the loans and investments of the Trusts. Since the fees of the investment bank are based on the existence of transactions in which the Trust issues money in exchange for investment certificates, the Wall Street bank is incentivized to make that Trust money move regardless of the quality of the investment. And since the Trust has no say in the actual underwriting decision to originate or acquire the loan, the investment bank is the only one in charge. That leaves the fox guarding the hen house.

But that doesn’t satisfy Wall Street either. They realized that they can create “proprietary profits” for the investment banks by creating a yield spread premium. A yield spread premium is the difference in value between two different loans to the same party for the same transaction — one is the honest one and the other is fictitious.

At closing the borrower is steered into the fictitious one which is far more risky and expensive than the one the borrower is actually qualified to receive.

At the investor level the “trust” is ordered to take loans that are far less valuable than they appear. This means that the Trust buys the investment bonds or shares that the investment bank has created with nobody checking the quality or ownership of the investment. The Pooling and Servicing Agreement contains provisions that effectively bars the Trustee or the investors from knowing or even inquiring about these transactions. Look at any PSA and you will see it.

The bottom line is that the worse the loan terms for the borrower and the more likely it is that the loan will fail, the lower the value of the loan. But if it is sold as though it was an ordinary conventional loan at 5%, then the price, charged for a crappy loan is much higher than its true value. Same scenario as the inflated appraisals of real property and homes. 

So the investment bank inserts itself as the Seller of the loan to the trust. At their proprietary trading desk the investment bank sells its ownership interest in the loan to the trust for the higher “value” because the investment bank is making the decisions on what loans the trust will buy. Meanwhile they have created loans that are worth far less and even have principal due on the “notes” that is far less than what the trust is forced to “pay.”

Checking with informed sources, it is evident that those proprietary transactions were fictitious and allowed the investment banks to report huge “profits” while everyone else was losing their shirts trading bonds, equities and anything else. The transaction at the proprietary trading desk of the investment bank was fictitious because the trust did not issue any payment to the investment bank, who never formally owned the loan in the first place.

You don’t see investment banks anywhere in the chain of title whether you review public records or even MERS. So you have the investment bank selling a loan they don’t own to a trust that never paid for it. The entire transaction is recorded but does not exist.

In the case of a 15% $300,000 loan to a “borrower”, it is “SOLD” as a 5% conventional loan giving the investment bank a reason to declare that it made a profit on a “proprietary trade.” How much profit? Figure it out — on the back of a napkin you can see how the investment banks “sold” the $300,000 loan but “received” $900,000 from the Trust leaving the investors with an instant $600,000 loss and the probability of losing the rest of the $300,000 as well. This is exactly opposite to the provisions of the Prospectus and PSA.

Upon examination, my sources tell me, the money to cover that declared “trading” profit does exist at the investment bank. That is because the investment bank took the money from investors, never funded the trust, and pocketed the $600,000 in advance of the “proprietary trade, which they could cause to be recorded and reported at any time, since the investment bank was in total control.

Enter moral hazard.

The only incentive that the investment bank to stay honest is to report good results so the managed funds buy more bonds. But that does not protect investors. The investment bank creates a classic PONZI scheme in which it uses investor money to make the monthly payments on the bonds or shares and reports that “all is well.” The report disclaims reliability, credibility and authenticity. Wells Fargo has an especially strong disclaimer on the distribution report to investors. The disclaimers were ignored as “boiler plate” by fund managers who made the investment on behalf of the their pensioners or mutual fund shareholders.

All the fund managers needed to know was that they were getting paid — but they did not realize that a significant part of the payment came from their own investment dollars advanced to the investment bank, as broker for the purchase of trust bonds or shares.

So the investment bank makes much less money on good investments for the trust than on really bad investments. In fact they have the  incentive to make certain the loan fails. Not only do they get the yield spread premium described above, the investment bank, is trading on inside information in which only the investment bank knows the truth. It places bets against the viability of the loan and bets further against the value of the mortgage bonds, and buys contracts for insurance, betting that the value of the bond will fall in a “credit event” without the necessity of an actual default.

SO IF THE INVESTMENT BANK DID NOT GIVE THE TRUST THE MONEY FROM INVESTORS, WHERE DID THE INVESTORS’ MONEY GO?

That is the trillion dollar question. And THIS is where the Courts have it completely wrong. Either we are a nation of laws or a nation governed by the financial industry. The banks bet on themselves, and so far, they were right to do so.

The money given to the investment banks was spread out over a long list of intermediaries owned or controlled by the investment bank. AND then SOME of it was spread out funding loans to borrowers. But the investment bank obviously could not name itself on the note and mortgage. That would have revealed that the tax advantages of a REMIC trust were nonexistent because the trust was not involved in the transaction.

So an elaborate, complicated, circuitous route was chosen for the “approval” of loans for origination or acquisition. First you have a nominee, which is often MERS plus a “lender” who was also a nominee even though they were called lender. The “lender” was subject to an assignment and assumption agreement that prohibited the “lender” from exercising any control over the closing on the loan that was being “originated.” In short, they were being paid to pretend to be a lender — hence the term pretender lender. 

The closing agent, whose fee depends upon actually closing, and the mortgage broker, whose fee depends upon actually closing, and the title company, whose fee depends upon the actual closing, have no interest in protecting the borrower from what is about to transpire.

The closing agent gets money from any one of a variety of sources OTHER THAN THE “LENDER.” The closing agent applies those funds to the closing as though the “Lender” made the loan. As stated by one mortgage document specialist for a large “originator”, “We knew that table funded loans were predatory and illegal, but we didn’t take that seriously. And the borrowers didn’t know who the lender was — that was the point. We used table funded loans to conceal the actual lender.”

Those funds came from the investors, although the money did not come through the trust. It came from the investment bank which was acting in the capacity, as they tell it, as a depository bank — which is why the Federal government allowed them to become commercial banks able to act as depositories. And every effort was made to prevent any evidence as to whose money was actually involved in the loan. Since it was the investor money that was used to originate or acquire the loan, it should have been the investors who were named as owner of the loan and recorded as such in the public records.

If you look at the PSA, it requires funding of the trust, of course. But it also requires that its acquisition of loans contain all the elements of a holder in due course, thus barring any claims from borrowers about irregularities at the closing, violations of state and federal law, etc. In summary the only defenses a borrower could raise against a holder in due course is that they paid or that they never signed the note. So a person who pays money in good faith without knowledge of the borrower’s defenses is pretty well protected. In litigation with borrowers, borrowers would be told they must sue the intermediaries that caused the problems with their loans.

The fact that no foreclosure of a loan subject to “claims of securitization” alleges HDC (holder in due course) status is very substantial corroboration that the Trust did not pay for the loan in good faith without knowledge of the borrower’s defenses.

The banks have been betting on a lot of things and winning every bet. In court they are betting that they will be treated as holders in due course and not as simply holders either with or without any right to enforce where they might be required to prove the actual loan of money from the originator, or the payment of money for an assignment and endorsement. And THAT is why the appellate court is assuming that the loan actually occurred — you, know, the loan that is underlying the execution of the note and mortgage, because the borrower didn’t know the truth.

The factual problem is that the presumptions and assumptions relied upon by the courts are in direct conflict with the real facts. The legal problem is that starting with the original loan, many cases, and always with the assignment of loan, is that somewhere in the chain (and probably at more than one point in the “chain”) there is no underlying transaction for the paper upon which the bankers rely in foreclosure.

Some OTHER transaction occurred, which is why the note is evidence of a loan that does not exist between the “lender” and the “borrower” and why the assignment is evidence of a transaction that does not exist between the assignor and assignee. The mistake being made is basic law: the courts are confusing “evidence” of a transaction with the transaction itself. In so doing they are escalating the status of the forecloser from a mere holder to a holder in due course without any actual claim or allegation of HDC status. Once that is done, the borrower is doomed.

The doom should fall on the investment bank and all the intermediaries that participated in this scheme. They left the investors with no coverage — the investors money was used in ways that were expressly prohibited by the offering, the PSA, and even the rules governing investments by stable managed funds whose risk is required to be extremely low in any investment. The investors are the involuntary lenders with no note and no mortgage.

The good news is that nearly all borrowers would be happy to execute a note and mortgage to investors who actually funded their loan or even a trust that was identified by the investors to represent them. The terms would be based upon current economic reality and would thus mitigate the damages to both the investor lenders and the borrowers. The balance, as we have already seen, lies in lawsuits for damages against the investment banks and their intermediaries demanding refunds, damages and even punitive damages. Those lawsuits are being brought by investors, borrowers, insurers, and guarantors and in some cases by counterparties to credit default swaps.

Without the execution of a real note and real mortgage, the foreclosures are fatally defective. So the bad news is that as long as the courts assume and then presume and then enter judgment for the foreclosing party, the Judge is inadvertently sealing a greater loss applied against the investor lender, removing the tax advantages of a REMIC trust, and creating another bar to liability and accountability of the investment bank who effectively has been lying and cheating its way through the system — using legal “presumptions” that are directly contrary to the facts.

30 Responses

  1. N, just talked to a friend of mine who lost her house about 3 years ago and a supercedeas bond for $10,000 and a check to pay off the arears for another 10k–she is going to sue for fraud which should be very interesting. She talked to an atty about this and his opinion is that she should sue for fraud. I thought this was very interesting, because I thought wrongful foreclosure would be good but atty says otherwise. Also, the title companies should have been included in the lawsuits right from the start. Now, you can see another avenue where attys are in on the fraud.

  2. Example Case. The Broker Dealer Firm of Lawyers merged the pretender lender mortg co n the capital asset funding co into thee self. Closed thee title office. Warranty Deed granted to capital asset co, thee long arm of the pretender lender. Lawyer sub trustee. No Trust! Seller estate trustee prior to death was theee own attorney. And thee is in a partnership with theee selves. Upon seller death, revocabe became irrevocabe, new trustee is beneficary. Trust to close after the assets were liquidatd. But thee trust was still open n generating cash flow 2yr later. Imagine the bebeficary trustee shock to find out theee attorney kept trust open forging POA for Trustee/Beneficary without authority. Lawyers snookering her and me. Bad Apples!

  3. @ Louise ,,

    WAY AHEAD OF YOU … The 3 partners of my first defense firm also happened to own the (since liquidated) title company that closed my loan , handled the wires and should have known the fraud ,, they were a worthless defender so I dumped them .. they will be my first target when I’m all clear on the current (FC) issue. I need to be first in line and grab what I can before they disappear.

  4. My fearless forecast is that we will be seeing more legal malpractice suits in the near future. There is so much lying to the court and fraud on the court that it has to come out.

  5. By the way The Courts in California sided with a lawfirm called Bryan Cave, LLC a multi national lawfirm who has a pending $100M lawsuit against them in California.

    http://www.law360.com/articles/521488/9th-circ-revives-100m-bryan-cave-legal-malpractice-suits

    Alleged Bully Judges who did everything in thir power as if they work for Bryan Cave, LLC.
    But can you blame the Judges they get paid no matter what. So why would they stick their knecks out for a poor homeowner?

    NEVER AGAIN

  6. Those turkeys as you call them
    As Marley wrote ” will eat the bread of sorrow and the bread of sad tomorrow”
    Karmic law.

  7. Neil do you have a rebuttal for this sorry decision.

    http://www.courts.ca.gov/opinions/documents/C071882.PDF

    NEVER AGAIN

    I guess we need to go to Federal Court in California. The sad part is that most of these judges were appointed by Democrats. Shame on America.

  8. Deb, No more research for me. The answers lead to more questions. This has just been to much to process from an investors , homeowner n taxpayers positions. These Turkeys get no more of our time. They suck the life right out of people. They should have given me a payoff n the title in 2010 as per my request. But Nooo, they wanted to play games and run up intrest n fees. I have said this a thousand times, we don’t do businees with these kind of people. It would be like my doc operatiing and amputating my leg when I was scheduled to have sinus surgery, I would pay for services rendered without question and be grateful I have a doc at all.

  9. Cookie – my advice don’t ask him. Do your research kiddo

  10. I find the conection between the REMIC tax status and the tax forgiveness program they had fuzzy. IRS can’t only attatch not FC. State can FC on property tax. Is there a conection here? My accountant has 20yrs prevous employment with IRS. He says I ask to many questions.

  11. Correction. You could settle or modify if the other party hadn’t been so hell bent on FC instead of correcting their own ut ummm mistake. Pisses me off when people don’t take responsibility for their actions.

  12. Guest
    Much appreciate that case you posted. Thanks.

  13. Agreed Deb. Failure to State a Claim

  14. Settlors with ROS n Benies . No Settle or Modify Irrevocable ones. It is as it was. No Trust, Fight Fire with Fire

  15. I know I’m pro se but I did try to have council. This stuff is killer and complex- my strength is this I know the reality of my situation and why I’m here and why my case is- where it is and why – no illusions, the case guest linked is worry some it’s a perfect example of alleging whatever you like but what do you have to back it up and the court will cut a pro se zero slack- do not Expect it.

  16. Oh Deb, how right you are. I wish I could go back 7yrs and tell myself what I know now. I just had to know how $13 trillion magically became $260 trillion in the shadow banking industry. More $ than exists on the entire planet. Three Words. Futures Sheeple Market.

  17. Guest the opening few paragraphs – need we keep reading

  18. California Court of Disgrace legalized NON-EXISTING SECURITIZATION + ROBO-SIGNING in this fresh decision of MENDOZA v. CHASE BANK:

    http://www.courts.ca.gov/opinions/documents/C071882.PDF

  19. Cookie it appears and I say appears ( nothing is ever what it seems) that the money was wired from.. I paid the fee for this wire and it purportedly went into the title companies ” abstract trust account” Google that. It means you hide the beneficiary. Then it all gets confusing from there the documents make no sense. Anyway …

  20. 99 Cookie Jars on the Wall. 98 Bottles of Wine on the Wall. Good Night n Many Blessings to All.

  21. I’ll teach that Fat Turkey a Tough Lesson. You steal anothers life estate, Shame On You! You get Greedy and Steal TWO! Shame On Me n Trip to the Cleaners for You! I Hope yoy like Oil of Olay, I hear it foams the runway. TeeeHeeeHeee

  22. KC said to Seller Estate Trustee..yada yada. Breech Breech. She hire her own attorney. Her parents Attorney Greedy Turkey. Any BS proclaimed n spewed to happen after that is MOOT! Just Thinking. Let’s Ride!

  23. Contract, Purchase n Sale Agreement. Escrow didn’t close? BOA Moot? Pissed Me Off but I didn’t peee my pants.

  24. Bottom line we are dealing with Bullies. We are dealing with BULLIES IN THE JUDICIAL SYSTEM.

    NEVER AGAIN

  25. And people put their money in there !

  26. Well if we have a situation where banks are more powerful than a judge then why do we have courts at all – consider this – giving the keys to the pharmacy to a heroine addict
    It’s the same thing they are greedy beyond belief they can’t eat enough they are always scheming for their next ” fix” and have proved there’s not enough money in the world to cover what they leveraged.

  27. Unfortunately, Deb, the judges do know what is going on, and they rule against us anyway.

  28. Basically Louise
    It’s all furtherance of a crime otherwise these foreclosures would not stink so much nor the means and methods of manipulating individuals to do the dirty work.
    Thing is you just can’t march into court and ask the judge if he can smell it even if he does you must show the evidence and how iit changes the presumed ” facts” of the case

  29. A friend of mine was very stressed because they had not been able to pay the adjusted payment of 6450. a month on a Americas Wholesale lender transaction with the preparer of every single document named,Jigger Jumamil.This is what I believe is going on in los angeles ,they felt as though the only thing to do was sell as there was still a good deal of equity in the house.I believe that the realtor had a straw type buyer all ready to go as this is a one of a kind property and only has been on the market once since built in 1932.I also believe that they do not pay the old loan yet manage with the title companies help to get the title transferred and recorded,but the loan still shows as open.We get fucked going in and the same going out.This is only my opinion but I feel it in my bones that this is the deal.I also told her when she was in escrow to cancel it and fire her broker.Its is extremely depressing.

  30. I think this post makes it a little clearer as to why the servicers are paying the mortgage payments, taxes and insurance. They need to make sure nobody figures out how many of these loans are going bad. –typical of Ponzi schemes. You can’t get more people to buy your bad investment bonds/securities if they are failing. What goes up, must come down.

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