Another Resource Corroborating Our Securitization Model

See Asset Securitization Comptroller’s Handbook

The basic model we have developed tracks the money and with that, the intent behind seemingly irrational decisions.

For example, why would any lender seeking to make a profit grant a loan whose interest payments were greater than the gross income of the borrower? That is not taking a risk. That is betting on a sure thing. The loan will fail. It follows that if the parties creating these loans had a betting vehicle to make money based upon the guaranteed failure of a specific pool of loans, the premiums paid for such a bet would be chump change compared to the payoff.

For example, assume a loan for $250,000 with a 10 (10%) percent interest which means that the Note says the borrower will be paying $25,000 per year in interest, plus principal, taxes and insurance. Further assume that the borrower has a gross income of $20,000. Unless the borrower hits the lottery or an inheritance we know as a certainty that this loan and all others like will fail as soon as the teaser payment of $300 per month is reset to normal amortization.

First the intermediary securitizers go out and sell the $25,000 interest income to a hedge fund or pension fund seeking to get a couple of points over the money market rates. If the Hedge Fund is satisfied with 5% return, rated AAA (investment grade) and “insured” then the Hedge Fund will purchase $500,000 in 5% mortgage backed bonds yielding the same $25,000. Note that funding of the loan is only $250,000 while the Wall Street underwriters have pocketed the balance ($250,000) of the $500,000 invested by the pension fund or hedge fund. That is a $250,000 profit on a $250,000 loan. Get it? Of course the essential strategy here is to make absolutely certain that the hedge fund never meets the borrower and vica versa. Imagine the attitude of a hedge fund manager who finds out that his $500,000 bought a $250,000 mortgage.

Now in order to cover the difference between the amount invested and the amount funded, they must purchase a “bet” on the base loan of $250,000 and then a naked “bet” on the $250,000 that was not funded (except into the underwriter’s pocket). AIG (among many others) was more than happy to accommodate since they couldn’t pay off any of these bets anyway and were just collecting premiums. While there are numerous ways of betting the principal bet of choice was the credit default swap, which was excluded from regulation under a 1998 law passed by congress. The players were planning this a long time before all this mess surfaced.

Now assume that the underwriter is intentionally setting up some pools that are weighted extra heavily with the bad loans. This presents an opportunity they could not pass up. If you knew that a horse was going to break a leg mid way through the race and you had the ability to bet on that how many bets would you place on the that horse losing? ANSWER: as many as you could if you really knew for sure. That is precisely what happened on Wall Street. Certain pools were weighted extra heavily with loans that could not perform. Everyone piled in with the purchase of Credit Default Swaps betting against those pools (at the same time they were selling to hedge funds as investors on one end and homeowners as investors on the other end of the securitization chain). Goldman Sachs reversed position in 2006. They stopped creating the pools and started buying insurance on pools of assets that never involved them. They made a killing because AIG and others were given the money (courtesy of Secretary Paulson, ex CEO of Goldman) to make good on those bets.

The relevance of this to foreclosure defense and offense is that the intermediaries not only knew, they intended the loans to fail — even the good loans that were in bad pools. Those loans HAD to fail in order for them to make a killing. If the loans were somehow saved, then the money spent on premiums would have been a loss and the stock of the investment banks would have plummeted permanently.

Which brings us to loan modifications. If the loans are successfully modified the insurance doesn’t pay off. So the money they expect to make evaporates. Hence they have left the modifications in the hands of servicers who have no right to modify a loan with the idea that the whole modification idea turns out to be a bust for reasons that nobody understood at the time — except now you do.

Tags: borrower, disclosure, foreclosure defense, foreclosure offense, fraud, Lender Liability, mortgage meltdown, predatory lending, securitization
Posted in bubble, Eviction |