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Securitization Explanation

Securitization is a financial term describing the process used to pool, trade and sell financial paper – in this case, mortgage loans. This process is complicated and contains a massive amount of information that can seem daunting at first. However, this method is used by almost every financial institution, so it’s important for you as a consumer to understand it so that you can protect yourself. (Note: While the general concept of securitization is pretty consistent, the actual details are highly dependent on the jurisdiction within which the process is conducted.)

Author: Bloomberg Securitization Audit
Date: Jun 20, 2012 - 6:57:28 PM

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Securitization is a financial term describing the process used to pool, trade and sell financial paper – in this case, mortgage loans. This process is complicated and contains a massive amount of information that can seem daunting at first. However, this method is used by almost every financial institution, so it’s important for you as a consumer to understand it so that you can protect yourself. (Note: While the general concept of securitization is pretty consistent, the actual details are highly dependent on the jurisdiction within which the process is conducted.)

The basics are:

1. Mortgage loans (mortgage notes) are purchased from banks and other lenders and assigned to a trust. (Approximately 89% of mortgage loans taken out between 2000 and 2009 have been put into securitized trusts.)

2. The trust assembles these loans into collections, or “pools”. (Most trust accounts are valued in the $Millions or even $Billions.)

3. The trust securitizes the pools by issuing mortgage-backed securities that can be purchased by mutual funds, pension funds and retirement funds.

4. It is vitally important that you determine who is actually the interested party/parties on your mortgage. Therefore, you need a report to show all pertinent parties and their respective financial stakes in your property. In order to generate a complaint against all interested parties – especially the foreclosing trustee – a homeowner will need to have sufficient evidence that shows the specific roles of each party from origination of the loan to the current status of the loan (whether the homeowner is current or in foreclosure status).

A Typical Securitization Include The Following Elements:

Issuer - A bankruptcy-remote special purpose entity (SPE) formed to facilitate a securitization and to issue securities to investors.

Lender - An entity that underwrites and funds loans that are eventually sold to the SPE for inclusion in the securitization. Lenders are compensated by cash for the purchase of the loan and by fees. In some cases, the lender might contract with mortgage brokers. Lenders can be banks or non-banks.

Mortgage Broker - Acts as a facilitator between a borrower and the lender. The mortgage broker receives fee income upon the loan’s closing.

Servicer - The entity responsible for collecting loan payments from borrowers and for remitting these payments to the issuer for distribution to the investors. The servicer is typically compensated with fees based on the volume of loans serviced. The servicer is generally obligated to maximize the payments from the borrowers to the issuer, and is responsible for handling delinquent loans and foreclosures.

Investors - The purchasers of the various securities issued by a securitization. Investors provide funding for the loans and assume varying degrees of credit risk, based on the terms of the securities they purchase.

Rating Agency - Assigns initial ratings to the various securities issued by the issuer and update these ratings based on subsequent performance and perceived risk. Rating agency criteria influence the initial structure of the securities.

Trustee - A third party appointed to represent the investors’ interests in a securitization. The trustee ensures that the securitization operates as set forth in the securitization documents, which may include determinations about the servicer’s compliance with established servicing criteria.

Underwriter - Administers the issuance of the securities to investors.

Credit Enhancement Provider - Securitization transactions may include credit enhancement (designed to decrease the credit risk of the structure) provided by an independent third party in the form of letters of credit or guarantees.



History of Securitization

For traditional lending (prior to the concept of securitization), the original recording was usually the only recorded document in the chain of Title. That is because banks kept the loans and did not sell them, hence only the original recording being present in the bank’s name.

The advent of securitization in the late 1970s, especially through “Private Investors” and not Fannie Mae or Freddie Mac, involved an entirely new process in mortgage lending. With securitization, the Notes and Deeds/Mortgages were sold once, twice, three times or more. (The transfer and selling of the Note is not to be confused with the selling of Servicing Rights, which is simply the right to collect the payment of the Note, and keep a small portion of the payment for Servicing Fees. Usually, when a homeowner states that their loan was sold, they are referring to the Servicing Rights.) Using the traditional model would involve recording new Assignments of the Deed/Mortgage and Note as each transfer of the Note or Deed of Trust/Mortgage occurred. Obviously, this required time and money for each recording…

So banks started to brainstorm on how they could avoid these ‘burdensome’ County recordings while still selling millions of mortgages. Led mainly by Countrywide’s Anthony Mozillo and Fannie Mae’s James Johnson [1], they came up with the idea of a third-party ‘company’ that would be collectively shared by many banks, so that the first set of documents could be put in that company’s name, and every future mortgage transfer could simply reference that company and purport to be associated with them. This ‘company’ was founded in 1995 as Mortgage Electronic Registration System, or MERS.

New Model of Securitization

Now MERS has a very ‘creative’ business model, involving lots of alleged fraud and a recent string of Supreme Court rulings against them, so you may want to read the separate page (linked above) for more information. But this article will continue to focus on securitization in general, so just know that MERS is “an electronic tracking system designed to eliminate Assignments as mortgage servicing rights are transferred from one servicer to another. The basic concept is that MERS will be the mortgagee of record for all mortgages registered with the company.” [2]

While this new financial model – with MERS as the generic mortgagee – made the mortgage transfer business more streamlined and profitable for the banks, it wound up leading to important legal issues…

As you can see from the flowchart image above, the Mortgage Note and the Deed of Trust/Mortgage wind up taking separate paths, simply because that was “easier” for the Banks involved. And this is the big mistake the lenders made. Neither the originating lender nor MERS are the actual owner of the loan. But, legally, only the actual owner of the loan can foreclose. A nominee can’t foreclose on behalf of a corporation, which is what MERS usually tries to do. Because neither the originating lender nor MERS actually own the loan, neither can legally foreclose on you. The process of registering loans in MERS has legally separated the loan from the collateral used to secure the loan, therefore making the loans unsecured.

According to the Missouri case of Bellistri v. Ocwen Loan Servicing LLC, ”Generally, a mortgage loan consists of a promissory note and security instrument, usually a mortgage or a deed of trust, which secures payment on the note by giving the lender the ability to foreclose on the property. Typically, the same person holds both the note and the deed of trust. In the event that the note and the deed of trust are split, the note, as a practical matter becomes unsecured. The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. The mortgage loan became ineffectual when the note holder did not also hold the deed of trust.”

In addition to the Note/Deed separation issue, the new securitization model of trying to sell as many loans as possible in the shortest amount of time (with all administrative/legal processes being considered a second priority) led to many original documents being lost completely… ”Attorneys estimate that the documents belonging to as many as 50% of the mortgages made between 2001-2008 have been lost or destroyed, leading to demands by borrowers that the foreclosing party produce the note as evidence of the debt.” [3] ”It is disturbing to know that National Banks are the trustees of thousands of trusts that may be missing millions of promissory notes. This might explain why, to date, not a single National Bank has publicly disclosed the fact that they are not actually holding what may be millions of promissory notes which evidence ownership of debts supposedly owned by their respective trusts.” [1]

Finally, when the mortgage loan is securitized and essentially turned into a stock, it is often sold to MULTIPLE trust funds. ”Here the investment banks sold the same loan repeatedly using different names and identifying data, which is bad enough. But in addition, they used the yield spread difference between the usual loan with triple-A-rated borrowers and all other borrowers to come up with ‘trading profits’. These trading profits were extracted by way of a sale of the loans to the pool in which a profit emerged because in order to cover the expected interest income expected by the investors they loaned money at twice the anticipated rate, which reduced the amount they needed to lend. Thus a $200,000 loan could be sold as many as 40 times using exotic instruments that masked the ‘sale’ and the money received from the investor might have been as much as $400,000 to fund the $200,000 loan. So the revelations of dirty dealing at the David Stern law office are a mere distraction from the real truth: that not only were the foreclosures faulty for lack of proper documentation, they were unnecessary because the loan had been been paid down far more more than was reported to the court and the investor to whom it was owed had abandoned the claim in favor of going after the investment banker that sold the bogus mortgage bond in the first place.” [4]

Why You Need a Securitization Report

We can research the full history of your loan, and (A) illustrate the separate paths of the Note and the Deed, (B) document any LOST original paperwork, (C) document the LACK of necessary recordings of assignments, and (D) expose the true owners of your loan and the total monetary value of the investment. See Securitization Analysis for more information.

1. http://foreclosuredefensenationwide.com/?p=175
2. http://www.mersinc.org/forum/viewreplies.aspx?id=12&tid=21
3. http://www.huliq.com/2818/77786/produce-note-will-it-save-your-house-foreclosure
4. http://livinglies.wordpress.com/2012/01/10/weidner-stern-revelations-affect-hundreds-of-thousands-of-homeowners/

Mortgage Compliance Investigators (MCI)
U.S.A.
Phone: 888-491-3741
Website: http://www.mortgagecomplianceinvestigators.com/
Email: submit0@gmail.com

About:
MCI seeks to educate and inform homeowners about the avenues of relief that are available to them in reference to their home mortgage. Practices and procedures in the mortgage industry have evolved and taken drastically different avenues over the past twenty years with the introduction of securitization of mortgages and home equity lines of credit.

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