How do you recreate the original note if you don't have it? And all for a flat fee, regardless of the particular facts or the supposed difficulty of digging them up.
All of the mortgages in question were "securitized" turned into Mortgage Backed Securities (MBS) and sold off to investors. MBS are typically pooled through a type of "special purpose vehicle" called a Real Estate Mortgage Investment Conduit or "REMIC", which has strict requirements defined under the U.S. Internal Revenue Code (the Tax Reform Act of 1986). The REMIC holds the mortgages in trust and issues securities representing an undivided interest in them.
Denninger explains that mortgages are pooled into REMIC Trusts as a tax avoidance measure, and that to qualify, the properties must be properly conveyed to the trustee of the REMIC in the year the MBS is set up, with all the paperwork necessary to show a complete chain of title. For some reason, however, that was not done; and there is no legitimate way to create those conveyances now, because the time limit allowed under the Tax Code has passed.
The question is, why weren't they done properly in the first place? Was it just haste and sloppiness as alleged? Or was there some reason that these mortgages could NOT be assigned when the MBS were formed?
Denninger argues that it would not have been difficult to do it right from the beginning. His theory is that documents were "lost" to avoid an audit, which would have revealed to investors that they had been sold a bill of goods -- a package of toxic subprime loans very prone to default.
The Tranche Problem
Here is another possible explanation, constructed from an illuminating CNBC clip dated June 29, 2007. In it, Steve Liesman describes how Wall Street turned bundles of subprime mortgages into triple-A investments, using the device called "tranches." It's easier to follow if you watch the clip (here), but this is an excerpt:
"How do you create a subprime derivative? . . . You take a bunch of mortgages . . . and put them into one big thing. We call it a Mortgage Backed Security. Say it's $50 million worth. . . . Now you take a bunch of these Mortgage Backed Securities and you put them into one very big thing. . . . The one thing about all these guys here [in the one very big thing] is that they're all subprime borrowers, their credit is bad or there's something about them that doesn't make it prime. . . .
"Watch, we're going to make some triple A paper out of this. . . Now we have a $1 billion vehicle here. We're going to slice it up into five different pieces. Call them tranches. . . . The key is, they're not divided by "Jane's is here" and "Joe's is here." Jane is actually in all five pieces here. Because what we're doing is, the BBB tranche, they're going to take the first losses for whoever is in the pool, all the way up to about 8% of the losses. What we're saying is, you've got losses in the thing, I'm going to take them and in return you're going to pay me a relatively high interest rate. . . . All the way up to triple A, where 24% of the losses are below that. Twenty-four percent have to go bad before they see any losses. Here's the magic as far as Wall Street's concerned. We have taken subprime paper and created GE quality paper out of it. We have a triple A tranche here."
The top tranche is triple A because it includes the mortgages that did NOT default; but no one could know which those were until the defaults occurred, when the defaulting mortgages got assigned to the lower tranches and foreclosure went forward. That could explain why the mortgages could not be assigned to the proper group of investors immediately: the homes only fell into their designated tranches when they went into default. The clever designers of these vehicles tried to have it both ways by conveying the properties to an electronic dummy conduit called MERS (an acronym for Mortgage Electronic Registration Systems), which would hold them in the meantime. MERS would then assign them to the proper tranche as the defaults occurred. But the rating agencies required that the conduit be "bankruptcy remote," which meant it could hold title to nothing; and courts have started to take notice of this defect. They are concluding that if MERS owns nothing, it can assign nothing, and the chain of title has been irretrievably broken. As foreclosure expert Neil Garfield traces these developments:
"First they said it was MERS who was the lender. That clearly didn't work because MERS lent nothing, collected nothing and never had anything to do with the cash involved in the transaction. Then they started with the servicers who essentially met with the same problem. Then they got cute and produced either the actual note, a copy of the note or a forged note, or an assignment or a fabricated assignment from a party who at best had dubious rights to ownership of the loan to another party who had equally dubious rights, neither of whom parted with any cash to fund either the loan or the transfer of the obligation. . . . Now the pretender lenders have come up with the idea that the "Trust" is the owner of the loan . . . even though it is just a nominee (just like MERS) . . . . They can't have it both ways.
"My answer is really simple. The lender/creditor is the one who advanced cash to the borrower. . . . The use of nominees or straw men doesn't mean they can be considered principals in the transaction any more than your depository bank is a principal to a transaction in which you buy and pay for something with a check."
So What's to Be Done?
(Note: You can view every article as one long page if you sign up as an Advocate Member, or higher).
8
4
3
