Securitization May Create Securities Out of Loans and MBS

Get a consult! 202-838-6345

https://www.vcita.com/v/lendinglies to schedule CONSULT, leave message or make payments.

THIS ARTICLE IS NOT A LEGAL OPINION UPON WHICH YOU CAN RELY IN ANY INDIVIDUAL CASE. HIRE A LAWYER.

—————-

There is an untested theory that could have significant impact if it was attempted by experienced securities counsel. The foundation lies in the way that mortgage loans were sold first to consumers as loan products and then traded in the secondary and tertiary markets as “investments.”

 *

The industry parlance has consumers “purchasing” a loan product, which is generally sold as part of an investment plan based upon representations regarding the rising value of real estate. Thus the loan product offers cash or access to property that will rise in value without any action performed by the homeowner. The signature of the consumer becomes a tradable commodity, which some have labeled identity theft. The consumer owns the right to get and keep money for the purpose of making a profit due to rising real estate prices. Hence the “loan product” may well be a “security” regulated by the SEC under the securities and exchange acts of 1933 and 1934.

 *

The debt of the consumer arises out of the receipt of money from a pool of funds that should not exist and is never revealed. The note and mortgage are payable to an unrelated third party which has the effect of preventing the debt and the note from merging into one single liability. Merger only occurs where the owner of the debt and the payee are one and the same entity. Hence both the debt and the note become speculative investments and the title to the property offered by the consumer to collateralize the loan becomes the homeowner’s investment. Title is clouded by the new loan contract, thus introducing the element of title risk where that risk did not previously exist.

 *

The MBS issued by Special Purpose Vehicles (SPVs) may have been issued by purported REMIC Trusts. But the special tax treatment and the exemption of MBS collapse upon close examination. Analysis of hundreds of Trusts points to an inconsistent treatment of the REMICs with nobody who can complain — except the U.S. government for tax purposes and the U.S. government for securities regulation.

 *

Virtually none of the putative REMIC Trusts ever received the proceeds of sale of MBS issued on behalf of the REMIC Trust. Such trusts are unfunded. Hence, without funds the trusts could not purchase or originate any transactions.

 *

The only transaction that the investors intended was the purchase of existing loans — where the originators assumed the risk of loss. This did not happen as the money from investors was diverted into originations, regardless of whether the loan was originated by a major bank or a tiny company with a lender’s license. All of such “originators” were providing merely fee based services in which they did not loan any money and they assumed no risk of loss if the loan became nonperforming.

 *

Quite the contrary, the evidence is clear that the pressure from the mega-banks who were in control of the “Securitization” process was for the maximum amount of dollars to be moved regardless of the requirements of fair lending. The process of due diligence was turned on its head with originators and intermediaries like Countrywide pushing for ways to approve loans that clearly, on their face, could never perform or would fail at a specified time in the future.

 *

The money that was taken by the mega banks was largely the result of false claims of securitization and false claims in filing foreclosures or otherwise attempting to collect on the note when the debt was equitably due to the investors whose money was applied, without consent, to the loan originations. In the process of making false claims regarding securitization the mega banks entered into a tacit co-venture agreement to create a market for bonds that were never mortgage backed and therefore were not mortgage backed securities exempt under the 1999 law. This enabled the mega banks to create sales and the illusion of further sales of the same loans over and over again masquerading as a different type of transaction when the net result was sale of the loans.

 *

Hence the conclusion reached by some is that both the MBS and the notes are securities under the SEC laws and rules and that neither one was exempt. The “mortgage bonds” were not backed by mortgages and thus did not qualify for either preferred REMIC treatment under the Internal Revenue Code nor for exemption from SEC regulation. If the definition of security is a transaction in which one party pays money in exchange for receiving a passive income or gain then both the bonds and the notes are securities. If the notes were not the product of merger with the debt, then the notes became a highly speculative instrument. If the bonds were not backed by mortgages then they too became highly speculative investments.