WHAT IF THE LOANS WERE NOT ACTUALLY SECURITIZED?

Many questions are coming after yesterday’s post. The main point is that there is no paper trail because nobody wanted it. Up at the top of the “securitization chain” fabricated by the securitization documents, nobody was checking loans at the level of actually looking at the loan documents, so they never asked for the loan documents, much less any assignments, indorsements or evidence of delivery or transfer.

With nobody asking — no demand — for the paper trail, there was no reason to produce one. But there is another reason as well. In order to move the “assets” around into mortgage bonds, CDOs composed of mortgage bonds, credit default swaps (the equivalent of buying the bond if you sold a CDS) and synthetic CDOs composed of credit default swaps, total flexibility was needed to make sure that when called upon to do so, they could produce a clear chain of title.

That is why they used MERS as a cover for constant transfers, resales, and multiple sales. You must remember that MERS is neither the business record of any of the players nor public record. It is worthless as evidence since it is a virtually unsecured proprietary database that owns nothing, transfers nothing, never comes into possession of the documents, and never touches the money as a conduit or otherwise.

Thus the Achilles heal of the would-be foreclosers is that no paper trail exists on any loan. By that I mean, nobody, authorized or not, executed any assignments, endorsements, or transmittals for delivery of the loan documents. Nobody.

This is where the sleight of hand occurs. The securitization structure is established by the pooling and servicing agreement and perhaps the assignment and assumption agreement, and maybe even the prospectus to investors. As near as I can tell they never actually issued bonds except at the very beginning, circa the year 2000.

These were all book entries that were the only evidence of the lender receiving a non-certificated bond or ownership interest in the pool that was completely dependent upon the actual receipt of money arising from payments made in connection with mortgage loans. Those payments were from borrowers, insurers, etc.

So the securitization structure was established — but that is like building the outside of a house and never putting anything on the inside. Like a trust can be established, but if it is not funded — i.e., if nothing is actually put into it —- it might exist in the technical sense but the trust doesn’t own anything and therefore the Trustee has no duties to perform, and the “beneficiaries” actually exist but they don’t get anything.

What I am saying is that the mortgage mess is far simpler than what it appears.

The position of the borrower should be that he/she/they did business with XYZ Mortgage Inc. which for all times material to the life of the loan was the only record holder of an interest (as “LENDER”) in the security instrument (mortgage or deed of trust) and the only payee under the terms of the written evidence of the obligation (the note). That interest was never transferred in any manner, shape or form. And like one creative lender lawyer found out recently, courts will NOT recognize anything even smelling like an “equitable transfer.”

So where does that leave us? In the same place with a different focus than what I have been writing about up until now. The real parties are clearly identified at the closing of the loan. Different parties have flooded the room — substitute trustee, Trustee for the Pool, Servicer, Master Servicer, Trusts, Investors, etc.

Just like the era before securitization, a Bank might lend money to a person, then sell the loan to another bank. The new bank and the originating bank would both send the borrower a notice saying the loan had been assigned.

The assignment of the security instrument (mortgage or deed of trust) would be recorded, and the borrower would start making payments to the second Bank. In foreclosure, the second bank would have the loan documents, would have a  full accounting from both banks, and would simply instruct the trustee to sell the property in non-judicial sale or instruct its attorneys to commence the foreclosure proceedings.

If the borrower challenged a non-judicial sale the second bank would produce the proof that it paid for the loan, and a full accounting, together with all the necessary paperwork including the recorded assignment, the original note etc.

If the second bank commenced a foreclosure suit it would attach as exhibits and plead allegations that the first bank originated the loan, then it was assigned, the assignment was recorded, the borrower was notified, etc. It would all be laid out nice and pretty ready for a Judge to rubber stamp it.

What I am saying is that the would-be forecloser must meet the same standards in the so-called world of securitized mortgages. The fact that they intended to assign and indorse, and deliver does not mean they did it.

If they didn’t do it, then they can’t enforce the debt or foreclose on the property. If they did, then they must produce the documentation and recording. There’s the rub.

They can’t produce the documentation without creating it for purposes of litigation. Each non-performing loan only has a demand for the paper trail if it is claimed to be in default, is in litigation, and the lawyer for the would-be forecloser needs something to show the judge. Each such loan transaction is THEN subject to an assignment that was created, fabricated and forged long after the cutoff date and possessing the single quality (being in alleged default) that makes it ineligible for assignment into a pool or to anyone without changes in the negotiability of the instrument.

So there is no assignment, indorsement or delivery and even if there was, there are provisions in every PSA that a bad loan will be replaced by cash or a “good” loan. This is what has pissed off so many judges now. every time a judge examines the paperwork it doesn’t add up. The Judge feels tricked and sometimes, like in Massachusetts they levy $800,000 fines against both lawyer and client (Wells Fargo) was misrepresenting facts they knew to be false.

So in the end you have two things. A “lender” (at the closing and on record) who isn’t owed anything because they got paid in full and have suffered no loss and a “lender” (the investor who purchased the MBS) who actually funded the loan and suffered a loss.

Of course you also have the borrower who has suffered a major loss through appraisal fraud etc. People forget that the borrower has paid money upon moving into the house or just by going into the closing. The presumption that there are borrowers with nothing invested in the house is dead wrong unless it was a completely fabricated loan using a dead person as the borrower.

The reason the lender/investors are not suing the homeowner is that they don’t actually have the paperwork to back it up. And they can’t get it. So they are suing the investment banks for appraisal fraud, securities fraud etc. The actual lender has elected their remedies, and perhaps they will pursue the borrowers under some equitable theories. But one thing is sure: the original obligation to the lender of record has been extinguished along with the security instrument (mortgage or deed of trust). None of the borrowers did this nor had any hand in the handling, creation or recording of the paperwork.

The fact that the securitization parties chose not to assign, indorse, deliver or record should not be rewarded by title to a house in which they have no investment based upon a non-existent loss. The borrower has money into the house even if there was no down payment. The securitization parties have nothing invested into the house and in fact, quite the reverse, were paid handsomely to create this mass illusion. Thus the only party seeking and getting a free house are those intermediary parties who neither funded nor bought the loan.

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