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Securitization Claims Are a Matter of Facts and Reality, Not Opinion

livinglies.me | April 20, 2020

I am in constant contact with several very supportive readers who, understanding part of the process of securitization, have then launched their own version of what happened. So this article is intended to give those who are interested a peak at reality and facts instead of internet speculation and opinion. If someone hits you over the head with a sledge hammer it is a fact, not an opinion. Not everything is up for discussion when it comes to history.
The primary error most people are making is assuming that some part of what the banks were doing was functioning in conventional mode, to wit: as intermediary in the processing of financial transactions. Nothing could be further from the truth. Just as Bernie Madoff was not acting as an intermediary in real transactions (because they were not real), neither were the Wall Street banks. They were acting as principals under the guise of acting as intermediaries.
So to those who think that the banks are holding loans or securities I say the following:
Your description is very close to reality, but not quite. Show this to any person with actual knowledge, education and direct experience in investment banking this email and I'm sure he/she will agree with what I am describing. The problem is probably in semantics because each word is a term of art.
I am functioning not from theory but from actual first hand knowledge of how this works because I was part of it. Like Coronavirus this is no longer a matter of opinion. It is reality.
So I am giving you a summary of reality as I know it not as I "believe" it. This is not theory.
Let's take a pension fund as an example. Some worker is contributing to his retirement plan perhaps with contributions from his employer. This money goes to a bank account. The bank account is controlled by a separate legal entity. The legal entity (Pension Fund X) starts additional financial accounts with securities brokers. In doing so it moves money from the bank account to the bank account of the securities broker. The pension fund has a person in charge of investing the money to gain the greatest possible return with the least amount of risk to protect the retirement benefits for the worker. This is called a "Stable Managed Fund."
The worker owns nothing except rights as a vested beneficiary of the pension funds subject to the terms of the pension fund.
The fund manager places orders for the purchase of securities. The securities that are purchased are generally held in street name which is to say that the broker is named as the owner of the securities, but the legal owner is the pension fund. All rights of the securities are exercised by the broker "on behalf of" the investor. But if there is a loss caused by devaluation of the investment, the investor bears 100% of that loss and any other risk of loss.
So if the pension fund purchases certificates that are issued in the name of a trust, those certificates are held in the name of the broker, who does not own them and who has no liability in relation to them, except to make good at such time as the Securities are sold or there is a distribution of income to the owner of the securities. That distribution is received by the broker who then passes it on to the pension fund.
This causes confusion for people who don't understand practices on Wall Street. They see the broker's name on securities and assume the broker actually owns those securities and possesses the right to gain from fluctuations in the market or declared value of the certificates or lose money if the investment goes south. This is not true.
When the pension fund purchases the certificates it pays the broker who represents the pension fund in the purchase transaction. The pension fund broker pays the broker for the seller. This is called the money trail.
This is where securitization breaks down into a Ponzi scheme.
The certificates are issued in the name of a trust as "issuer." The existence of the trust is debatable in terms of legal argument. Since it is not registered anywhere it could be a common law Trust. But it can't be a common law trust if there are no assets entrusted to a trustee to hold for beneficiaries. Ask any estate planner. If you don't move assets into the trust name then there is no trust.
Normally when a selling broker sells the securities of a new entity (i.e., an IPO) it receives the money into the broker's account. It then deducts selling commissions and other expenses and turns over the balance to the issuer. In this case the issuer is a trust whose existence is debatable. But in all events, the balance of the proceeds of the sales of certificates is never deposited into a trust account anywhere and never conveyed to the named trustee to hold in Trust for anyone. It stays with the selling broker.
Note that the pension fund is merely a creditor in this transaction. It is not a beneficiary, and the named Trustee of the trust has no fiduciary obligations in favor of the pension fund. [See every unsuccessful lawsuit where pension funds sued the named trustee for not doing something about the deterioration in the value of the certificates].
Note also let the actual trust agreement (not the pooling and servicing agreement) says that the named trustee is merely a conduit holding bare naked paper title to notes and mortgages on behalf of the master servicer. Of course it turns out that the master servicer is the underwriter who also served as the selling broker.
If you think about this you'll see that the offering of the certificates was actually a plan for the underwriter to retain all of the proceeds of the sale of the certificates. So their plan was obviously to sell as many certificates as possible.
This of course is not what was told to investors. All of the documents contained in the offering to the Pension funds implied but did not actually state that the money was going for the purchase Residential Mortgage Loans. The further implication was that payments from those mortgage loans would be forwarded to owners of the certificates in accordance with formulas set forth in the prospectus and the pooling and servicing agreement.
But a close reading of both shows clearly that the pension fund simply received a promise of periodic payments from the underwriter and selling broker doing business under the name of the debatable Trust.
The actual use of the proceeds of the sale of the certificates was completely discretionary on the part of the underwriting and selling broker, since the money of the investors was simply converted to money of the broker by the sale of the certificates, which conveyed no interest in any assets nor any guarantee of payment. And while the pension fund could suffer a loss, it would be caused solely by the unwillingness of the broker, in its sole discretion to make the payments --- not from the lack of any payments from any homeowner(s).
The business of Securities Brokers is to make money on the movement of money. While they may maintain trading accounts, their primary business is to generate fees from transactions involving the purchase and sale of securities. The Securities Brokers are not investment funds. The investment Fund in our example is the pension fund. The securities broker is supposed to be an intermediary. instead it turned out to be something else.
So the selling broker was issuing a promise to pay based upon an expected rate of return that was advertised in the offering materials for the purchase of the certificates. If that rate of return was 5%, then on each $1,000 invested, the pension fund was expecting a payment of $50 per year. The broker now had an incentive to find assets that would pay more than 5% per year. If they were able to find a transaction in which the counterparty agreed to pay 10%, Then the broker would only need to fund $500 out of the thousand dollars that was invested.
The broker kept the balance, which is equal to 100% of the amount of the transaction with the homeowner. Thus a broker had no incentive to reduce and a risk of loss and have every incentive to increase the risk of loss by making riskier loans that would pay a higher rate of interest. In fact, the broker could bet that a high interest group of loans would have significant defaults, and have the payments on those bets (insurance, credit default, other hedge products) directed to the broker instead of the pension fund whose money was essential to the entire scheme.
The selling broker did not want to be considered a lender under the federal truth in Lending Act or any other law. So it uses a series of conduits, the last of which was designated as an "originator" who actually had nothing to do with the loan. The originator was a third party servicer receiving a fee for posing as a lender. In order to protect itself from vicarious liability for Lending violations, the broker made sure that there was absolutely no contractual privity between itself and the originator who was designated to be named as the payee on a promissory note and the mortgagee on a mortgage.
While the broker was paying for what appeared to be a loan, it did not receive any right, title or interest in any debt, note or mortgage. So at the conclusion of the transaction, the broker had the rights to sell the private data of the homeowner while at the same time making itself invulnerable to liability for lending violations --- because the borrower had already agreed that the designated "lender"/originator was the real lender.
So you can see that while brokers may have been stuck, from time to time, with unsold certificates and may have temporarily recorded an asset receivable for loans that were originated or acquired, they never retained either one since there was no profit in doing so. Instead they sold the Loan Data as many times as they could.
While on their own books this removed any asset receivable and therefore any exposure to loss, the broker continued to issue instructions on administration, collection, enforcement, and foreclosure of property for two reasons: (1) they had to maintain the illusion that the transactions were loans in order to support the derivative infrastructure they had built upon the premise that loans were somehow owned by someone and (2) foreclosure, enforcement and collection represented an additional profit opportunity, in that the broker could receive the proceeds of foreclosure without ever distributing that money to the pension fund.
Every transaction that was labeled as a loan in this scheme was actually based upon a single premise: issuing and trading securities --- a fact not known by homeowners who accepted the label of "borrowers" and accepted the label of "loan', "promissory note" and "mortgage" since that was what they asked for but did not actually receive.
Had homeowners been approached with full disclosure asking for their name, reputation, signature and home as collateral --- so that the broker could make exponentially more than the stated amount of the transaction --- and if brokers were required to do so, the entire mortgage market would have looked different and been different. Brokers would have been competing to offer incentives, fees and payments to homeowners to sign on for participation in the golden goose.
So the idea that the brokers who are acting as "investment Banks" are sitting on loans or certificates in their portfolios on which they have a potential risk of loss is complete nonsense. If you look at the history of the TARP program you will see that as the government penetrated all of the layers described above, the definition of "troubled assets" changed repeatedly along with a description of the program.
First it was to protect the banks from losses attributed to defaults are mortgage loans. Then it became apparent that there were no defaults on mortgage loans that had produced any losses to the banks.
Second they changed the definition to be toxic assets which included the certificates, which is where many people get hung up believing that the banks were buying the certificates that they were selling.
When it became obvious that the banks were not losing any money as a result of loss attributed to devaluation of the certificates (they actually made money through insurance contracts with the lies of AIG), they changed the definition again.
And eventually they simply gave up and simply moved the naked title nonexistent or debatable transactions into the Maiden Lane securitizations which consisted of absolutely nothing.
The Federal Reserve contributed to this illusion. It announced that it would purchase from the banks trillions of dollars of the certificates at face value. Federal Reserve never asked for and never expected any return on that purchase. The window that was opened for the sale of those certificates was merely an excuse for pumping money into the banks under the erroneous belief that the banks wouldn't turn pump the money into the economy through loans. When this didn't happen, the government was forced into a fiscal stimulus in order to get money into the actual economy.
So if anyone has the requisite amount of knowledge as to finance and economics, and he/she has access to sufficient information in order to comment on my description, I invite comment or correction.

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"CFLA was founded by the Nation's Leading Foreclosure Defense Attorneys back in 2007 to serve the Foreclosure Defense Industry and fight pervasive Bank Fraud. Since opening our virtual doors, CFLA has rapidly expanded to become the premier online legal destination for small businesses and consumers. But as the company continues to grow, we're careful to hold true to our original vision. For us, putting the law within reach of millions of people is more than just a novel idea–it's the founding principle, just ask Andrew P. Lehman, J.D.. With convenient locations in Houston and Los Angeles, you can contact Our National Account Specialist and General Manager / Member Damion W. Emholtz at 888-758-CFLA (2352) for a free Mortgage Fraud Analysis or to obtain samples of work product, including cutting edge Bloomberg Securitization Audits, Litigation Support, Quiet Title Packages, and for more information about our Nationally Accredited and U.S. Department of Education Approved "Mortgage Securitization Analyst Training Certification" Classes (3 days) 24 hours for approved CLE & MCLE Credit (Now Available Online)".

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