Posts Tagged Securitization
Robo-signing has been in the news for many, many months. The collapse of Bear Stearns and Lehman Brothers, and the near implosion of the entire financial system is coming up on 4 years removed. Yet here we still sit, supposedly coming out of the Great Recession, in the midst of continued rampant foreclosure abuse, as reported by Reuters.
A recent audit of 400 foreclosures in San Francisco showed that 84 percent of them appeared to be illegal. A separate study in North Carolina of 6,100 mortgage documents filed with the local county clerk concluded that about 4,500 of them showed signs of “signature irregularities.” Robo-signing, as the rest of the world knows this fraudulent practice.
One reason cited by the Reuters report for the high number of wrongful foreclosures in San Francisco was that California is a non-judicial foreclosure state. That means that there is no court oversight of foreclosures. In nonjudicial foreclosure states, which includes my home state of Texas, all a person has to do is file a notice of foreclosure sale with the county clerk, pay a nominal filing fee (usually in the $20-30 range), mail a few letters, and PRESTO!…you can foreclose on a house. It’s literally that simple. Believe it or not, having actual proof that you are legally entitled to foreclose is NOT a requirement!
The ease of nonjudicial foreclosures is absolutely terrifying. I understand the reason these laws were set up. Lenders wanted a relatively simple, low cost way to resolve a bad debt (which is a secured debt). When the foreclosure laws were written, this made more sense. The most relevant portions of the current Texas foreclosure laws go back at least 30 years, when residential lending was much simpler. You went down to your local bank, you got a loan, and then you paid them back for the next 30 years. If you didn’t make a payment, you knew what company wasn’t getting their money back (and the bank probably knew you by name as well).
Today, however, residential mortgages are sold, packaged, and re-sold to investors through the process known as securitization. Determining who actually owns your loan is much more complex than it used to be. Because of this, declaring a default and foreclosing on a home is a much riskier proposition than it used to be as well. It’s easy for a bank to get it wrong. What are the consequences for them? Practically none. What are the consequences for homeowners? Losing their home. The deck is clearly stacked in one direction.
Well, the deck isn’t totally stacked in favor of the banks. Part of my job is to make sure banks have consequences for getting it wrong. I’ve stopped foreclosures and evictions dead in their tracks with a temporary restraining order/TRO and injunctions. If you think you’re being illegally foreclosed on like the many, many cases in San Francisco and North Carolina that the Reuters report identified, you need to make sure the banks face consequences as well.
In the practice of foreclosure defense, one of the issues I frequently run into is securitization of mortgages. We’ve talked about securitization on this site numerous times. There is also plenty of internet chatter about securitization–some of it legit, some of it little more than crazy talk out of people with way too much time on their hands.
I’ve explained the concept of securitization to many, many people–clients, other attorneys, and judges. After a thorough discussion, most have a basic understanding of the principles behind it. But I’ve often wondered what people would think if they saw it in action.
Well, here is your chance. You want to take on the bank? Good for you. Here’s a prospectus for an asset-backed trust (this one happens to be a Bear Stearns trust). The prospectus describes the trust, and is essentially the sales “brochure” to potential investors. Want to know how that trust was formed and operated? Here you go–the Pooling and Servicing Agreement. The Pooling and Servicing Agreement is basically the the operating manual for the trust. The posted links take you directly to the documents posted on SEC’s EDGAR website (which lets you search the filings for all publicly traded companies from the comfort of your computer).
You still want to take on the bank? Then you’d better understand every word of those documents (or similar ones) so you know exactly how the trust was supposed to have handled your mortgage. After all, you can’t know whether they did something wrong if you don’t know what they needed to do to be in the right. And then you’d better be able to explain it in terms that are understandable to your mother or grandmother, who has no understanding of Wall Street structured finance. Why? Because ultimately, that’s who’s going to be on a jury (if you make it that far) deciding your fate.
If this post seems a little snarky, I promise that’s not the intent. But I firmly believe that homeowners need to know what they’re up against, particularly if they have any inclination of doing it alone. It’s simply not enough to read Neil Garfield’s Living Lies blog, 4closurefraud.org, or nakedcapitalism.com. Those are great websites, don’t get me wrong, but there’s a big difference between reading commentary and analyzing the building blocks of securitization on your own. You need to be able to find, read, analyze, and comprehend the primary sources concerning your mortgage–the trusts’ prospectuses and pooling and servicing agreement.
Taking on the big banks in defense of a foreclosure is serious business, and homeowners should be prepared for the fight. Generalization about some case three states over isn’t going to convince any judge. You need solid evidence about YOUR mortgage, and that includes an analysis of the asset-backed trust that may, allegedly, hold your note. Just like the old saying, don’t go into a gun battle with a knife.
The legacy of fraud from Countrywide Financial continues. The Associated Press is reporting that Bank of America will pay $8.5 billion–that’s right, BILLION–to settle claims by purchasers of mortgage-backed securities. Investors had alleged that Countrywide (which was bought by Bank of America) sold them poor mortgage-backed securities that lost a substantial amount of their value.
Now, what exactly are these “mortgage-backed securities” that were the subject of these claims and, perhaps more importantly, how does this impact homeowners? Your mortgage loan has most likely been pooled together with thousands of other mortgage loans into a special entity called an asset-backed trust (which is a type of “special purpose vehicle”). These trusts exist solely to receive income from mortgage payments, and then distribute the proceeds to owners of the trust (i.e. the “certificateholders”). Bank sold “certificates” on the trust, which is kind of like selling shares of stock in it. Investors would buy these certificates as a type of investment, with hopes that they would receive a return in the form a distributions (made from the mortgage loan income the trust received).
The trusts, and the Wall Street banks that set them up, were supposed to follow certain protocol and risk management procedures, as these were investment securities. Insurance companies, pension funds, municipalities, and many other investors bought these certificates, believing they were good investments. After all, the investors were counting on Countrywide loans–and what company was hotter in the mid-2000’s than Countrywide?
Well, hindsight has shown us that Countrywide wasn’t as squeaky clean as they once appeared. They had questionable loan procedures and made thousands upon thousands of bad loans. Which means investors in the pools of these bad loans lost billions and billions of dollars. Not just Wall Street investors, but pension funds, too, that contained the retirement savings of millions of hard-working Americans.
I’m sure one of the terms of this $8.5 BILLION settlement is that Bank of America will deny any culpability or guilt. That’s typical of any settlement–standard lawyer operating procedure. However, no company agrees to pay out that enormous sum of money without some risk of liability.
Now, what does this mean for homeowners? In my opinion, it’s further confirmation of what I’ve already been preaching–you have to take control of your own destiny and don’t rely on the bank to look out for your best interests. No modification or workout is final until it is signed in writing, and you can (and will) be foreclosed on while the process is pending. Countrywide was willing to make loans they knew (or reasonably should have known) borrowers would never be able to repay. Why? Because repayment didn’t matter to them. They packaged up the loan and sold it off to someone else, who eventually bore the risk of homeowners not being able to repay the loan. On the one side, they screwed homeowners by selling them something they couldn’t afford. And on the other side, they screwed investors by packaging up and selling bad securities.
Citi is one of the banks that has found itself caught up in the recent foreclosure mess, could be facing more problems, including litigation. Not only is the bank being hit by homeowners challenging foreclosures, it is also facing possible liability to investors who bought Citi’s mortgages. To understand Citi’s potential problems (as well as other major banks), and also to better understand the current “foreclosure crisis,” it is important to understand just exactly what the big banks did with your mortgage (and the thousands of other mortgages they acquired).
Remember the movie “It’s A Wonderful Life”? Of course you do, it’s a holiday classic. The movie’s main character, George Bailey, had a small savings and loan bank in Bedford Falls. “Bailey Building & Loan” lent money to the citizens of Bedford Falls to build homes, stores, etc. Bailey Building & Loan loaned its actual funds, and when the homeowners of Bedford Falls made their mortgage payments, they sent a check to Bailey B&L (okay, those details weren’t actually in the movie…because who wants to watch a movie about banking).
The banking and mortgage industry today is nothing like what we saw in It’s A Wonderful Life. The company you got your mortgage from (the “originator”) most likely funded it with money from another financial institution. That originator then packaged a number of mortgages together and sold them to a big bank (such as Citi, JP Morgan, Bank of America, or Wells Fargo). The large banks then took thousands of home loans, pooled them together, and put that pool of loans through a process called “securitization.”
Through securitization, the banks would essentially create a corporate entity or trust that held this large pool of loans, then sell off interests in this new entity or trust to investors. This process was similar to setting up a traditional company and selling shares of stock in it. However, instead of owning tractors or equipment, this new entity only owned home loans. Investors would then have the right to revenues that came in as the homeowners repaid the loans.
In short, your mortgage is most likely not owned by the community bank down the street. It was probably sold to a big bank, pooled with thousands of other loans and “securitized,” and then sold off to third party investors (such as pension funds, university endowments, charitable trusts, etc.). This is where banks such as Citi, Bank of America, and Wells Fargo are finding themselves in trouble. These banks made certain representations to potential investors about the securities (generally referred to as “mortgage back securities”). As the deficiencies in the underlying mortgages have come to light in recent months, these mortgage backed securities have also taken a hit. And the investors are now looking at the banks that created and sold them these securities.
So the current mortgage and foreclosure mess that the banks created runs very deep. When they played fast and loose with mortgages, not only are they affecting the homeowners who just want to keep a roof over their family, they’re impacting innocent investors as well.