SIT — SAW — SAP: 2 Minute Primer on Securitization

Almost everyone thinks they have a basic understanding of the securitization of residential debt. They don’t. Here is a basic primer to organize your thinking on the subject. Remember this only applies to securitization of residential debt and not to other things like stock IPOs etc.

• SIT: Securitization in Theory. Simple: Asset is owned by issuer. Issuer divides ownership into shares. Shares are sold to investors. Perfectly legal, moral and good economic sense as the foundation of capitalism which for all its flaws (and there are many) is the best economic system yet devised by human beings for commerce. As long as the shares are adequately described according to regulation there is no foul. But this is not what happened in residential mortgages.
• SAW: Securitization as Written. This is the foundation of a criminal enterprise. The atom was smashed (i.e., the debt and ownership of the debt were separated) and the paperwork was entirely designed to cover that up. Every document had to contain false statements or false implications and every document had to be executed through layers of people and companies so that nobody could be blamed for what happened. Documentation bears no resemblance to what happened to the money in the real world. Reliance on the documentation allows the banks to control the narrative.
• SAP: Securitization in Practice. Investment banks sold their own discretionary promise to pay money to investors in the form of a certificate (“mortgage bond”. Investors who bought the certificates received no right, title or interest to any debt, note or mortgage from borrowers. The promise was unsecured. So investors paid value and did not receive ownership of any debt — something that is impossible under modern law and for good reason. Though many layers of intermediaries, conduits and sham entities documents were fabricated for various purposes including foreclosure on behalf of a non- existent entity with no right, title or interest in the debt, note or mortgage.

Separating the debt from ownership of the debt is a legal nullity in all jurisdictions. Current documentation claiming ownership of residential debt is all false. The prevailing assumption that a foreclosure will result in proceeds paid to the investors is false.

As for the named “trustee” of a “REMIC Trust” the hidden trust agreement reveals that the trustee is a nominee for the investment bank, not the investors — and that the investors who bought certificates from the investment bank issued in the name of the named trust are neither beneficiaries under the trust nor are they parties to any agreement giving any rights to the named trustee to represent them.

As nominee, under the oft-hidden trust agreement the named trustee does not acquire any right, title or interest to any debt, note or mortgage. Hence there is no right of the Trustee to enforce any debt, note or mortgage. Delivery of the note to the trust never occurs — the named Trustee wants nothing to do with it. Documentation to the contrary is false.

Money proceeds of foreclosure sales is distributed to the investment banks and to the parties who participated in the foreclosure but none of them are carrying the debt as an asset and none of them would have any loss from nonpayment. In accounting terms this translates as revenue. Foreclosure is a remedy based solely on the need to give restitution to a creditor for an unpaid debt. In securitized loans this never happens. It can’t.

Investors do not receive the proceeds because they don’t own the debt. The investment bank paid value for the debt but didn’t receive ownership — nor does it carry the debt as an asset on its own books of account beyond 30 days after funding.

While the investment bank is repaid the principal several times over by reselling the debt or attributes of the loan it does not label incoming funds as repayment even though it treats the cash flow as payment thus removing the risk of loss on the loans from its books. The trust never owns any debt, note or mortgage and neither do the investors or the named trustee.

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