Fannie Mae Explains Securitization and Distribution of Ownership of Debt

As a quasi government agency Fannie Mae is forced to be forthcoming about its role in lending. But the wording of disclosures mostly come from Wall Street investment banks.

In the latest description of Fannie’s current activities the wording is carefully crafted to avoid referring to ownership of the debt, but the substance is the same. By shifting the 95% risk of loss to investors they are transferring ownership of the debt and legal standing to those investors. By using separate agreements that are often described as “bets” they maintain the false illusion that they are not selling the debts, and that therefore they can sell 3000% of any debt because they are only selling “risk.”

The reason legal standing is at issue is simple. Only an injured party can sue. In this case Fannie retains a nominal interest while the investors move into Fannie’s shoes after Fannie has moved into the shoes of an originator by paying the investment bank that actually funded the loan. The investment bank is paid with certificates issued in the name of a “bankruptcy remote trust” that are then sold through brokers to pension funds and other types of investors.

If there are defaults on borrower obligations it is the investors who suffer a loss, directly or indirectly but not the investment bank, not the trust, not the trustee and not the “lender.”

But which investors? Apparently all of them. When Fannie acquires a loan it is described as “depositing” the loan into a “bankruptcy remote trust.” Fannie usually retains the role as “Master Trustee” but the named Trustee on the Bankruptcy Remote Trust is your familiar US Bank et al. Here is the kicker: the reason it is “bankruptcy remote” is that it doesn’t own any loans and doesn’t manage any loans and doesn’t handle any money. It is a legal fiction to take advantage of some tax avoidance structure in the Internal Revenue Code.

That doesn’t grant it legal standing. Like the NINJA loans, if there is no income, no assets and no business the trust doesn’t exist nd even if it was construed to be an inchoate trust, it still doesn’t own the loan nor suffer any injury if a borrower doesn’t pay on the debt.

In Rogue Trusts this infrastructure is presented without any reality. No loan was acquired by anyone. But the risk of loss on non performance of the debt is scattered in hundreds or thousands of instruments including but not limited to those falsely described as “mortgage backed securities” and “risk sharing instruments.”

Thus when a foreclosure is filed the lawyers are using a name that is either concocted out of thin air or appointed by some unauthorized party who sounds “institutional.” The proceeds of foreclosure never go to the named claimant. Some portion of the proceeds might find its way to investors but a large portion of then proceeds are simply retained by the investment bank and hidden in the category of “trading profits.”

Look no further than the following link to find that all the “competitors” on Wall Street are actually in tacit or express agreements as co-venturers in a scheme that only looks like securitization because the investment bank insulates itself from liability if it appears to be only an intermediary. In reality it is the principal and it sells off virtually all aspects of the debt to investors who are relying on the illusion.

seehttp://www.fanniemae.com/portal/funding-the-market/credit-risk/conn-ave.html

For purposes of foreclosure the chain started by the investment bank thus links to either no creditor or a nominal creditor with no risk of loss or shared risk of loss on debts. This means that standing might exist for many parties, because they are diversified, but not for one party. It also means that standing exists for parties who have not been identified and probably cannot be identified without recourse to the actual contract documents under which the investor counterparties assumed various portions of the risk of loss.

A tally of all such instruments far exceeds 100% of the debt so the chain started by the investment bank is all paid off with no standing and no financial injury.

But discovery of those documents is blocked by parties claiming the information is private and proprietary — until some enterprising and highly aggressive lawyer pierces through those specious arguments and gets an order from a judge requiring the documents to be delivered. At that point the case settles under seal of confidentiality and the public none the wiser  continues to think that securitization is real and that most foreclosures are actually properly done and result in paying down the debt of a borrower.

Rinse and repeat. Every borrower starts from scratch whereas the banks and servicers continue to promote their schemes.

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