Mortgage Crisis Simplified-but Not For Dummies

Posted by admin on Feb 22, 2011 in Uncategorized | 0 comments

First, here is how it is supposed to work. When you mortgage your home, you and your bank (let’s say Bank “A”) agree to two separate documents, a mortgage Note and a mortgage.  These are reciprocal obligations: the two halves of a partnership between you and your bank.  In the mortgage Note, you promise to pay back X dollars plus Y interest on Z dates.  (That Note is a negotiable instrument, like a check, and can be assigned to a third party just as can a check.)  In the mortgage itself, in case you default on the Note, Bank A promises to do Q, R, and S before it takes your home, the collateral for the loan.  Neither document makes any sense by itself.  They are supposed to stay together.  If they are assigned, the two documents usually do stay  together.   If Bank A sells the mortgage and Note to Bank B, Bank A has to endorse the Note over to Bank B.  If Bank B then sells the mortgage and Note to Bank C, then Bank B has to sign them over to Bank C.  It is like a third-party check.  If the check is signed by Bank A to Bank B but is held by Bank C, with no endorsement by Bank B to Bank C, then the chain of title is “broken” and Bank C is not the “holder.”  The check may have been stolen and cannot be cashed.  Bank C can demand your money, but it cannot foreclose.

Although the debt (the mortgage Note) and the right to enforce it (the mortgage) usually stay together, they can be separated.  In that case, the mortgage is said to be “bifurcated.”  In that case, the holder of the Note has a right to be paid by you and can sue you, the maker of the Note, if you default, in equity for whatever amount Bank B paid for the Note.  However, the holder of the Note in a bifurcated mortgage does not have the mortgage and cannot foreclose the collateral.  Only the party who has the Note can know for sure how much is due under the Note, and only the party who has the mortgage can know what are the obligations of the bank.

The problem arose when the banks decided to securitize most mortgages starting about 2002.  No longer were the mortgage and the Note held by your local bank.  Instead, the large national banks bought up the mortgages and sold them to groups of investors on Wall Street.  These Mortgage Backed Securities (MBS) were designed to appeal to different investors with different appetites for risk.  Some MBS customers wanted super-safe securities with low returns, while others wanted riskier bonds with therefore higher rates of return.  Therefore, the loans and the investors were bundled into “Real-Estate Mortgage Investment Conduits” (REMIC’s) and then “sliced and diced”—split up and put into tranches, according to their likelihood of default, their interest rates, and other characteristics.

This slicing and dicing made “senior tranches,” where the loans would be paid in full, if past history of mortgage-loan statistics were to be believed.  And it also created “junior tranches,” where the loans might well default, again according to past history and statistics. These various tranches were sold to different investors, according to their appetite for risk.  Some of the MBS bonds were rated as safe a Treasury bond, and others were rated by the rating agencies as risky as junk bonds.

This slicing and dicing means that it is impossible to assign a mortgage or Note to any one purchaser of the MBS’s issued by the REMIC‘s.  When the REMIC’S were first made, all the mortgages were pristine—none had defaulted yet, because they were all brand new loans.  Statistically, some would default and some others would be paid back in full—–but which one specifically would default, no one knew.  If you toss a coin 1000 times, then 500 times it will come up heads.  But what will it do on the 439^th toss?  No one knows.  It was not simply that the riskiest loans were owned by the junior tranches and the safest loans were owned by the senior tranches.  Rather, all the loans were in all the tranches, and if a mortgage in a given bundle of mortgages were to default, then the most junior tranche holder would take the loss first, and the most senior tranche holder would take the loss last.

Therefore, the mortgage Note was not assigned over to any bondholder.  In fact, it could not be signed over, since no one knew which mortgage would default first.

The problem then is to make sure that the safe mortgage loan stays with the safe REMIC tranche, and the defaulting mortgage goes to the riskier REMIC tranche.  The banks’ solution to this problem was to build the “Mortgage Electronic Registration System” (MERS).  MERS directed defaulting mortgages to the appropriate tranches of the REMIC’s.  It was, in effect, Dr. Frankenstein’s operating table where the digitized mortgage Notes were sliced and diced and rearranged so as to create the MBS’s.   The essential point legally is that MERS does not hold any mortgage Note.  The true owner of the mortgage Notes should have been the REMIC’s. 

However, for some reason, the mortgages were never assigned to the REMIC’s.  One possible reason for this is that, if the bonds sold by the REMIC’s are to fetch top dollar, the REMIC must be judged by a rating agency to be “bankruptcy remote,” so it is better for the REMIC to be a conduit than for it to own assets.  A second possible reason is to prevent audits by the bondholders.  A third possible reason is so the banks can sell the same mortgage to multiple REMIC’s at the same time.

Therefore, between MERS and the REMIC’s, the chain of title was broken, and the mortgages were bifurcated.  No party involved in the process can legally foreclose.  The banks are not owners of the mortgages because they sold them to the investors in the REMIC’s.  The investors cannot own them because of the structure of the REMIC’s.  The REMIC’s for some reason do not own them.  MERS cannot own them because it is just a computer or operating table.  And the banks’ servicing companies are just the banks’ accountants and do not own anything.   Therefore, the debt is unsecured.

However, the banks did not accept this legal result.  If the MBS’s were unsecured, the banks could not sell them for a high price to investors.  (And a bank must sell the mortgages, because one cannot earn much profit lending money at 5.0% simple interest and then paying salaries and losing money on foreclosures.)  So the banks decided that they would not follow the law.  They were “less than frank” with the investors and told them that the underlying mortgages were fully secured.  And when defaults occurred, the banks foreclosed on the mortgages and took the collateral without holding the Notes and without telling the investors.  This way, the banks are paid multiple times for each loan: once when they sell it to the investors in the first REMIC, probably a second time when they sell it to the investors in a second REMIC, and a third time when they foreclose on the collateral and take it.  This gives the banks plenty of funds to continue making payments to the investors, as they have done.  It is essentially a Ponzi scheme.  (It is precisely to prevent this sort of things that the law retains the old-fashioned requirement that a negotiable instrument may be enforced only if its holder has an uninterrupted chain of title to it.)

In addition, since they all shared the same risk and the same need, the banks formed an association-in-fact and set up a few servicing companies (such as Select Portfolio Servicing, Ocwen and many others, see Co-Conspirator Section at ) which collect your monthly mortgage payments and divide them among their client banks, not with regard to who owns the Notes, because none of the banks own the Notes, but rather with regard to which bank has contributed the most into the association-in-fact, according to which bank needs to avoid tax liability, and according to which bank needs to avoid legal liability. After all, if none of the member banks owns the Note, it is essentially arbitrary who gets the profit from a foreclosure.  In other words, the straw-man entities that foreclose on your mortgage usually have no legal interest in your home.  If nothing has been assigned on paper to the plaintiff in your foreclosure case, it has no right to foreclose.www.foreclosureself-defense.com/2010/11/robo-signer/

This massive fraud on the courts requires forged documents.  So the association-in-fact of banks hires lawyers with less-than-sterling reputations, such as David J. Stern, the “Florida foreclosure king,” and Codillis & Assocs. in Illinois.   These lawyers in turn hire fly-by-night “robo-signer” companies such as DocX and Fidelity National Foreclosure that simply fabricate entire foreclosure files (for $95 a file) and forge the necessary summary-judgment affidavits ($12.50 a case).  The affidavits are supposed to prove to the court that there is no genuine issue of material fact and are supposed to be make under oath, stating that the affiant has the file in hand, including records of all payments, and has personally calculated the correct amount due.  Instead the “robo-signers” manufacture the files, and then each “robo-signer” signs up to 18,000 forged “affidavits” each month, without any knowledge of the correct amount due or even who the straw-man plaintiff is in that case. In one Florida case, a man’s home was taken through foreclosure even though he had no mortgage on his home. That cannot happen without title fraud.  Millions of homeowners certainly are being charged the wrong amounts.  And millions more are losing their homes, losing the equity in their homes, and losing their ability to repay their loans—because their credit is ruined by illegal seizures of their principal asset.  Meanwhile, the (illegal) foreclosures put downward pressure on real-estate values, which prevents refinancing, which causes more (illegal) foreclosures, which decrease property-tax revenues, which raises taxes, which causes more (illegal) foreclosures.

Source: http://beforeitsnews.com/