Why Do Subservicers Continue to Pay Investors After Borrower Stops Paying?

It is now common knowledge that subservicers are continuing to pay investors and reporting the loan as “performing” after they have sent a default and right to reinstate notice as required by the mortgage (usually paragraph 22) and by the uniform debt collection laws. The first problem about this is that the actual creditor does not show a default whereas the bookkeeper Servicer is declaring the default. With the investor receiving his regular payments, how can a default exist? This appears to apply to securitized student loans as well.

Bottom line is that the subservicer is reporting to the borrower that the loan is in default but reporting to the investor (the creditor) that it isn’t in default. These payments have gone on for as long as 18 months that I have seen. Which brings us back to the first articles ever written on this blog.

The borrower is only required to make payments that are DUE. The payment isn’t due if it is already been made and there is nothing to reinstate if the creditor has already received his expected payment. The payments are NOT DUE TO THE SERVICER. They are due to the creditor. If the creditor received the payment on that loan as shown in the distribution report to the creditor, then the conditions necessary to declare that the loan is in default are not present. Remember that the presence of a table funded loan, an aggregator, the securitization, the trust was withheld from the borrower. The banks could have covered themselves by adding to the mortgage and note that third party payments to the creditor will not reduce the payments, principal or interest. But if they had done that, they would have required to answer so e uncomfortable questions.

The second issue is the constant question “Why would they continue making payments to the ‘creditor’ when they are not receiving payments from the borrower?” And “Where are they getting the money to pay the creditor?”

After talking with sources from deep inside the industry the answer to why they are paying is primarily to sell more bonds and hide the default issues. The secondary reason is to make the investor complacent about the accounting for what was really received on account of the loans and from whom. That inquiry could lead to a demand from the investor for payment in full and if the REMIC doesn’t pay, then the investors sue the investment banker who was the one playing with OPM (other people’s money).

The answer to the second question is that the money comes from the investment banker. Whether the investment banker is merely using the investor’s money (allowed under prospectus) or using insurance proceeds or payments on CDS (credit default swaps) or even sale proceeds to the Federal Reserve varies. Either way it is an effort to keep money that should go to the investor and reduce the amount payable to the investor and which would reduce or eliminate the debt owed by the homeowner to the investor. It is fraud, theft and probably a bunch of other things.

Tags: default, mortgage bonds, mortgages, payments, Servicing
Posted in bubble, Corruption, expert witness, foreclosure mill, Modification, securities fraud, Servicer |