The Law Office of Carol A. Molloy

Tennessee Foreclosure Defense

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Mortgage Securitization Process

15 October, 2010 (20:50) | Uncategorized | By: Carol

The Process

While most people just view taking out a mortgage as a simple credit transaction, nothing could be further from the truth. If your mortgage has been securitized, technically you are actually an issuer of an unregulated security in a highly complex structured financial transaction

In fact, it is my theory that during the period of time roughly covering 2002 – 2007, originating lenders (as well as everyone else in the chain of the securitization process) bet against the borrower to be able to fulfill their obligation. The strategy can be compared to a situation whereby the lender deposited a single dollar bill into a slot machine, the dollar bill would be gone forever, but the slot machine was guaranteed to payoff every single time and return 2, 3 or even 5 dollars . The mechanism for this process was what is known as “credit default swaps” Credit default swaps were (and amazingly still are allowed) a way for entities to bet against (or for) borrowers of home mortgages to be able to continue making payments on loans that were rigged to fail.  This fact means that as a result of these “bets”, your loan has already been paid off.

Additionally, investors in these securitized trusts that are mortgage backed securities, or collateral debt obligations, were covered by monoline, multiline, or other form of “pool insurance” or mortgage guarantee insurance, which has already indeminfied the securitized trust for a borrower’s default. Moreover, these trusts also “overcollateralized” and/or “cross collateralized” certain “tranches” within these securitized trusts that subrogated losses from borrower defaults to other tranches (thus different investors than the ones trying to foreclose on your home), and therefore the investor on your loan may have in fact already been indemnified for any loss from default on your loan.

Even in light of the above, the servicer, and other parties that engineered the securitization that includes your mortgage, seek to collect yet again, by foreclosing on your home. I have credible evidence that suggests that mortgage servicers may be auctioning these homes and not turning the proceeds over to the securitized trust and its investors. Thus the mortgage servicer is keeping the proceeds of these foreclosure auction sales as a financial windfall (another reason why your servicer has absolutely no incentive to work with you on a loan modification).

This issue is now surfacing when homeowners who are attempting to be approved by their mortgage servicer for President Obama’s Home Affordable Mortgage Program (“HAMP”). Some applicants are being told that, while technically their loan meets the qualifying criteria of the program, they are being denied because their loan is covered by “pool insurance”. Additionally,borrowers generally get the runaround when trying to get their mortgage payments modified. This is so for a number of reasons, but mainly because the mortgage serivcer receives more money for keeping you in foreclosure. Default servicing pays more money. The trust has an escrow account to pay litigation fees to servicers, and the servicer gets to keep all late fees and junk fees paid by the homeowner. This means the servicer is incentivized to default a home loan and its motivation is at odds with its client, the securitized trust. The largest default servicer in the country is based in Jacksonville – Fidelity National Default Solutions (now known as LPS Default Title and Closing). This is essentially a shadow company that makes it’s money through both legitimate and nefarious methods. It has been known to fabricate loan data, create falsified court documents and charge illegal fees to homeowners. FNDS hires the foreclosure lawyers on behalf of the securitized trust and does not permit the lawyers to directly communicate with the trust, even though the trust is the actual plaintiff in the case.

This begs the question, “if my loan is covered by pool insurance” (and has been indemnified), where is the loss to the investor bringing the foreclosure action? And more importantly “why the heck am I still making mortgage payments to an entity that has already been paid off on my obligation, and has no legal right to foreclose on my home?”