100
INTRODUCTORY FACTS ABOUT MORTGAGE SECURITIZATION
4closureFraud
Post date:
02/24/2012
And
I thought securitization ment they where going to
keep the loan docs in a safe place in some bank vault some where... { yeah … somewhere over the rainbow! }
By LYNN E. SZYMONIAK, ESQ., ED., Fraud
Digest (www.frauddigest.com) LISA EPSTEIN, www.foreclosurehamlet.org
1. Most
mortgages in the
2. The trusts are often
referred to as “RMBS” trusts, an acronym standing for “residential
mortgage-backed securities.”
3. The total
_____
Why is it important to
learn about mortgage securitization?
Reason #1: Most of the foreclosures
filed in the
_____
4. The trusts are made up
of a bundle or pool of mortgages (often 5,000 – 8,000 mortgages per trust). The
loans are almost always subprime loans. The value of the mortgages in each
trust is usually between $500,000 and $2 billion.
5. Individual mortgages got
packaged into RMBS Trusts; these RMBS trusts got bundled, sliced and sold as CDOs – collateralized debt obligations.
6. The mortgage loans in
each pool – or RMBS Trust – usually include both first lien and second lien
loans, and fixed-rate and adjustable rate loans.
7. There are different
“layers” within each pile of loans, representing different qualities of loans.
It is not unusual for each pile to have as many as 20 different layers – these
layers are sometimes called classes or “tranches.”
8. Certificates are issued
to investors to represent the purchase – so investors are often called
“certificate holders.”
9. There are often minimum
investment requirements – such as “Offered certificates must be purchased in
minimum total investments of $100,000 per class.”
10. The
loans are selected for each pool by a particular date, often called the
“closing date” of the trust. Some trusts include a schedule or listing of all
of the loans in the trust by the closing date. While a trust may substitute
loans into the pool after the closing date, there are restrictions on such
substitutions.
11. The pool of loans is
described in a “prospectus” – a printed document that describes the business
enterprise that is distributed to prospective buyers, investors and
participants (similar to the glossy brochure distributed by new car dealers
describing the features of the car.”
12. Many representations
(promises) are made to the potential buyers regarding the loans in each pool in
both the prospectus and the Pooling and Servicing Agreement (described more
fully below). The following, for example, are taken from the prospectus for Soundview Home Loan Trust 2006-OPT2:
Mortgage Loans with
Prepayment Charges:
74.60%
Fixed-Rate Mortgage Loans:
15.61%
Second lien Mortgage Loans:
4.18%
Interest Only Mortgage
Loans:
16.94%
Range of Remaining Term to
Stated Maturities:
116–360 Months
Weighted Average Remaining
Term to Stated Maturity:
357 Months
$15,000–$1,620,000
Average Original Principal
Balance:
$201,215
5.350%–14.30%
Weighted Average Credit
Score of the Mortgage Loans:
622
Weighted Average Current
Mortgage Rate:
8.49%
Weighted Average Gross
Margin of the Adjustable-Rate Mortgage Loans:
6.50%
Weighted Average Maximum
Mortgage Rate of the Adjustable-Rate Mortgage Loans:
14.43%
Weighted Average Minimum
Mortgage Rate of the Adjustable-Rate Mortgage Loans:
8.42%
Weighted Average Initial
Rate Adjustment Cap of the Adjustable-Rate Mortgage Loans:
2.99%
Weighted Average Periodic
Rate Adjustment Cap of the Adjustable-Rate Mortgage Loans:
1.00%
Weighted Average Months
Until Next Adjustment Date for the Adjustable-Rate Mortgage Loans:
25 Months
Geographic Concentration in Excess of 5%:
26.02%
11.81%
10.90%
5.80%
5.10%
SOME OF THE LAWS INVOLVED
IN RMBS TRUSTS
13. In 1960 the government
enacted the Real Estate Investment Trust Act of 1960. This act allowed the
creation of the real estate investment trusts (REIT) to encourage real estate
investment.
14. In 1984 the government
passed the Secondary Mortgage Market Enhancement Act (SMMEA) to improve the
marketability of REITS.
15. The Tax Reform Act of
1986 allowed the creation of the tax-free Real Estate Mortgage Investment
Conduit (REMIC) special purpose vehicle for the express purpose of issuing
pass-through investments.
16. The Tax Reform Act
significantly contributed to the savings and loan crisis of the 1980s and 1990s
that resulted in the Financial Institutions Reform, Recovery and Enforcement
Act of 1989 (FIRREA), which changed the regulation of the savings and loan
industry and encouraged loan origination.
17. Investors invest in a
pool of mortgage loans. As homeowners pay of the underlying mortgage loans, the
investors receive payments of interest and principal. These payments are
usually made monthly or quarterly.
18. There are special tax
rules that apply to these trusts. Because the money coming in to the trusts is
passed through to investors, the trusts are not required to pay tax on the money
that flows into the trusts (the mortgage payments from homeowners). Investors
pay tax when they receive their return on the investments.
19. RMBS Trusts are
securities; the Securities and Exchange Commission regulate
mortgage-backed trusts.
20. On January 7, 2005, the
SEC published Regulation AB, a final rule to codify requirements for the
registration, disclosure and reporting for all publicly registered asset-backed
securities including mortgage-backed securities. Regulation AB consists of 24
“Items” relating to the operation and reporting requirements for
mortgage-backed trusts. There have been numerous revisions to Regulation AB.
21. RMBS Trusts also have
special tax consequences; the IRS also regulates RMBS Trusts.
22. The majority of
mortgage securities were issued by the U.S. government, by the Government
National Mortgage Association (Ginnie Mae) or by
government-sponsored entities (GSEs) such as the
Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan
Mortgage Corporation (Freddie Mac). These entities also very often guarantee
some or all of the loans in RMBS trusts.
23. The vast majority of
the RMBS trusts were created between 2004 and 2008.
24. The revenue from the
trusts are predicted (but not guaranteed) to last for 25 – 30 years.
25. Servicers are paid by
monthly fees from the trusts usually by a formula – for example: “Servicer will
be paid a monthly fee equal to one-twelfth of 0.30% multiplied by the Aggregate
Principal Balance of the mortgage loans as of the first day of the related due
period for the first 10 due periods…0.65% for all due periods thereafter.”
26. The Servicer may
purchase all of the loans and any REO properties and “retire the certificates”
(end the payments) when the total loan balance equal or is less than 10% of the
original loan balance.
27. Typical representations
made to investors:
28. Servicers also are
responsible for issuing periodic reports to investors advising of the
performance of the loans in the trust (investor reports).
29. Mortgage loans were
classified as follows:
1. full documentation;
2. stated income documentation;
3. no documentation;
4. lite
documentation;
5. business bank
statements.
30. Some of the major
producers of RMBS Trusts from 2004-2007 included:
31. The names of trusts
often contain short-hand information regarding that particular trust. GSAMP
Trust 2006-S3, for example, stands for Goldman Sachs Alternative Mortgage
Products Trust, created in 2006. Other examples:
CWALT is shorthand for
Countrywide Alternative Loan Trust.
CWABS is shorthand for
Countrywide Asset-Backed Securities.
Other trusts have friendly
names such as Harborview or Soundview.
32. The three biggest
mortgage companies in the
Almost all of these loans
were bundled into RMBS trusts. Other mortgage companies that were major
producers of mortgages for RMBS trusts included:
This is a very short list –
there were many, many other big lenders.
33. There are 5 major
groups involved in securitization: originators, depositors, sponsors, master
servicers and trustees.
34. The
companies that make the loans, the mortgagee, are known as the ORIGINATORS in
the securitization process.
35. Loan originators often
sold the loans to depositors the very same day that these loans were made or
within just a few days of the closing date of the loan.
36. Loan originators very
often did not lend their own money to the homeowner/borrower. The originators
were often financed by “warehouse lenders.” These warehouse lenders were
financial institution that extended a line of credit to the originator to fund
a mortgage. The loan typically lasted from the time it was originated until it
was sold into the securitization market.
37. The companies that
select the loans from the various mortgage companies and sell the loans to the
trusts are called the Depositors.
38. The companies that
direct the creation of the trusts are called the Sponsors.
39. The companies that are
responsible for continuing to collect payments on the loans, notifying
delinquent mortgagees, foreclosing on collateral (if any), performing data
processing functions, preparing periodic reports to investors and Rating
Agencies and taking other actions are called the servicers. The Servicer is
often also an affiliate of the Originator. Servicing is often the most
lucrative role in securitization.
40. The companies (banks)
that operate the trust after it is created are called the Trustees. Duties of
the trustee for an ABS transaction typically include:
Trustees have the authority
- but typically are not required - to take action to enforce breaches of
representations and warranties.
41. Approximately eight big
banks serve or served as Trustees for the majority of trusts: Bank of America,
Bank of New York Mellon, Citibank, Deutsche Bank National Trust Company,
GMAC/Ally, HSBC Bank, JP Morgan Chase and Wells Fargo.
42. Bank of New York Mellon
is the world’s largest custody bank, with $26 Trillion in assets under custody
and administration. (Reuters, February 16, 2012, “
43. Trustees do not keep
the mortgage documents themselves – they hire other banks to serve as Document
Custodians. Example: Wells
44. In
most trusts, a bank other than the Trustee Bank or the Document Custodian Bank,
serves as Master Servicer. The operation of most trusts, therefore, involves
three banks, serving in different roles.
45. Trustees frequently
change, in part due to bank failures and mergers.
46. Each trust has a set of
rules, set forth in a document called the Pooling and Servicing Agreement or
PSA. A PSA, or similar agreement, is the governing document of a securitization
transaction. Such an agreement sets forth the relationship among the parties
and the assets, including, for example, the capital structure of the
transaction, the eligibility criteria for the assets, the manner in which cash
flows from those assets are to be distributed to note holders, and the
definitions for an event of default.
_____
Why is it important to
learn about mortgage securitization?
Reason #2: The major investors in
RMBS Trusts are pension funds, banks, insurance companies and state and local
governments. The fate of the economy is inextricably tied to the fate of
mortgage-backed trusts.
_____
47. The PSA for every trust
includes many provisions regarding the loan documents that the trust must
obtain and safeguard in a “mortgage file.” These documents almost always
include the promissory note, endorsed in blank or to the trust, the mortgage,
an assignment of mortgage to the trust and a title insurance policy.
48. Mortgage-backed trusts
include the following or equivalent language regarding Assignments: “Assignments
of the Mortgage Loans to the Trustee (or its nominee) will not be recorded in
any jurisdiction, but will be delivered to the Trustee in recordable form, so that
they can be recorded in the event recordation is necessary in connection with
the servicing of a Mortgage Loan.”
49. The SEC is the major
source of information about a particular trust. Information usually available
from the SEC about each trust includes the Prospectus, the Pooling and
Servicing Agreement, and Annual Reports.
50. Each Prospectus and PSA
includes promises to investors about the quality of the loans and the loan
documentation. These promises are called Representations and Warranties.
51. Key
representations and warranties concern origination, servicing, underwriting
standards, due diligence, and related documentation. The PSA usually limits the rights of investors to sue for
breaches of these representations and warranties. The Depositor typically makes
representations and warranties to
the Trustee in the PSA in which mortgage loans are conveyed.
52. Investors and insurance
companies began to file major lawsuits against trust creators in 2009.
53. The
most common claims against the creators of trusts include the following:
Failure to disclose risks such as
failure to disclose loans in default at time of closing;
Disregard of underwriting guidelines such as disregard of LTV guidelines, or debt-to-income ratios;
and
Failure to conduct due diligence such as representing that due diligence was performed when it
was not.
54. The PSAs
usually include anti-lawsuit provisions that limit the circumstances under
which a lawsuit may be filed against the trust creators. Example:
Complaint was dismissed
because plaintiffs did not comply with anti-suit provision that required
certificate-holders to (1) make a demand upon the Trustee on behalf of 25
percent of the certificate holders,
(2) offer Trustee proper indemnity, and (3) wait 60 days for
Trustee to commence lawsuit.
55. Examples of major
lawsuits against trust creators include the following:
MBIA v. Morgan Stanley (
MBIA alleged that it was
defrauded into insuring mortgage loans, and presented evidence that 97% of the
loans in a sample did not meet stated underwriting criteria.
The court found that
plaintiff adequately pled “material and pervasive non- compliance with the
Seller’s underwriting Guide and the mortgage loan representations.”
Boilermakers Nat’l Annuity Trust Fund v. WAMU Mortgage
Pass-Through Certificates, Series AR1 (W.D.
Plaintiff alleged that
defendant failed to disclose that mortgage loans were not originated in
accordance with underwriting guidelines, resulting in violations of the
Securities Act of 1933.
The court found that
Plaintiff had adequately pled facts suggesting that underwriting standards were
abandoned.
Syncora Guarantee Inc. v. EMC
Mortgage Corp. (S.D.N.Y. March 25, 2011)
Syncora, which provided a financial guarantee to investors in RMBS,
filed a lawsuit seeking to require EMC (the seller of the mortgages underlying
the RMBS) to repurchase the loans on a pool-wide basis.
Syncora alleged that a sample of 400 mortgage loans had 85% breaches. Syncora also demanded that EMC cure breaches in 1300 loans;
EMC acknowledged only 20 breaching loans.
56. RMBS Trusts have ratings, like many other securities.
57. Allegations have been
made that the trust creators manipulated the ratings.
China Development Industrial Bank v. Morgan
Stanley & Co. (Sup. Ct. N.Y. Feb 25, 2011).
CDIB alleged that Morgan
Stanley manipulated the rating agencies’ models.
In denying Morgan Stanley’s
motion to dismiss, the court noted that the alleged corruption of the ratings
process “could not have been discovered by any degree of due diligence or
analysis performed by the most sophisticated of investors.”
58. Some lawsuits have
focused on the undisclosed involvement of “short” parties in the loan selection
process:
SEC v. Goldman Sachs & Co. (S.D.N.Y. decision June 10,
2011)
The court declined to
dismiss federal securities fraud claims against Goldman employee (Tourre) based on Goldman’s alleged failure to disclose to
CDO investors that a hedge fund strongly influenced collateral selection while
it was it was “shorting” the CDO.
SEC v. J.P. Morgan Securities LLC (S.D.N.Y. complaint June
21, 2011)
The SEC simultaneously sued
and settled with JPM for $153.6 million. The SEC alleged in its complaint that
JPM arranged and sold a CDO to investors while representing “that the
investment portfolio of [the CDO] was selected by the [CDO’s
collateral manger]” but failed to disclose that a hedge fund with a $600
million short interest in the CDO “played a significant role in the portfolio
selection process.”
59. At least one lawsuit by
investors has focused in part upon the trusts’ failure to obtain and keep the
original loan documents as promised to investors.
Oklahoma Police Pension and Retirement System v. U.S. Bank
National Association (S.D.N.Y. complaint Nov., 2008)
60. Courts may pay strict
attention to the many disclaimers in the Prospectuses and the PSAs.
Plumbers’ Union Local No. 12 Pension Fund, et al. v. Nomura
Asset Acceptance Corporation (D.Ma. complaint
Jan. 31, 2008)
With respect to the
plaintiffs’ allegations concerning the mortgage originators’ underwriting
standards, District of Massachusetts Judge Richard G. Stearns found that the
offering documents contained a “fusillade of cautionary statements” that
“abound with warnings about the potential perils.” Judge Stearns noted that
plaintiffs’ contention that they were not “on notice” of those perils “begs
credulity.” (This was reversed, in part, on appeal.)
61. Regulation of RMBS
Trusts by the SEC was done almost solely on the honor system. The trusts
prepared reports and filed these with the SEC, and almost no verification of
these reports was done by the SEC.
62. The trusts were
continually down-graded by the rating agencies.
63. Current investigations
by the Federal Task Force co-chaired by New York Attorney General Eric Schneiderman are focusing on whether there were criminal
violations in the packaging of these loans, and criminal acts by servicers
relating to foreclosures by the trusts
64. Many of the people now
responsible for investigating the creation and operation of trusts were
previously involved in the creation and operation of these trusts. Example: Robert Khuzami, Director of Enforcement
for the SEC, was previously General Counsel for the Americas for Deutsche Bank
from 2004-2009. Khuzami thus supervised Greg Lippman, a senior trader at Deutsche, who helped create and
fuel the market for mortgage-backed securities.
65. Greg Lippman was perhaps the most famous of all traders who made
tens of millions of dollars betting AGAINST the continued strong performance of
the
_____
Why is it important to
learn about mortgage securitization?
Reason #3: The RMBS Trusts now own
more homes in most counties than any other property owner.
_____
66. The majority of trusts
have less than 40% of performing loans remaining in the trusts. This means that
most trusts will stop producing income for investors about 20 years sooner than
expected.
67. A
study of 37 trusts from three popular series of trusts, American Home Mortgage
Assets Trusts, American Home Mortgage Investment Trusts and Soundview
Home Loan Trusts, showed the following:
Of the 37 trusts, 18 had
25% or less of performing loans remaining.
Of the 37 trusts, 8 had 26%
- 30% of performing loans remaining.
Of the 37 trusts, 11 had
31% - 38% of performing loans remaining.
There were a combined total
of 228,203 loans in these trusts at inception.
As of November, 2011, there
were a combined total of 51,798 (22.7%) performing loans in these trusts.
The combined collateral
value of the loans in these trusts at inception was over $61 Billion:
$61,441,128,225.
Of the 37 trusts, Soundview Home Loan Trust 2007-OPT5 had the highest
percentage of performing loans remaining in the trust: 38%. American Home Mortgage
Assets Trust 2005-2 had the lowest percentage of performing loans remaining in
the trust: 10.5%.
_____
THE INVESTORS IN MORTGAGE-BACKED TRUSTS
68. Investment banks
invested heavily in mortgage-backed securities. Example: Merrill Lynch reported
on January 17, 2008, an $8.6 billion net loss from write-downs on its subprime
investments.
69. Pension fund managers,
public and private, invested heavily in mortgage-backed securities.
70. Insurance companies
were major investors in RMBS trusts. The National Association of Insurance
Commissioners recently estimated that insurance companies have investments of
half a trillion dollars in mortgage-backed securities.
71. Local governments,
counties and municipalities invested heavily in mortgage-backed securities.
_____
LIES TOLD TO INVESTORS
72. The information in the
prospectuses and the PSAs was often false. The
average credit scores of borrowers in the loan pool were much lower than
represented. There were many more “no documentation” or “stated income” loans
than disclosed. There were much fewer “full documentation” loans than
disclosed.
73. The information about
the loan to value ratios was often also falsely stated. Home values were
inflated during appraisals to make it appear that there was a much higher
homeowner investment/equity in the home.
INACCURATE/FALSE INFORMATION IN INVESTOR REPORTS
74. The investor reports
often contain inaccurate and false information about the loans in the trust.
75. The status of the loans
is often wrongly reported in the investor reports. Loans may be reported as
delinquent, in foreclosure, in bankruptcy, or trustee-owned when the records of
the clerk of the court indicate a different status for these same loans.
76. The investor reports
often do not disclose that a loan/home has been sold to a new buyer through
short sale or foreclosure auction.
_____
TRUSTS AND FORECLOSURES
77. Most trustees and trust
servicers refuse to modify trust-owned loans and instead foreclose whenever a
loan is 90-days delinquent.
78. Most trustees use high
volume, low quality law firms (“foreclosure mills”) to foreclose.
79. The law firms used by
the trusts are often dictated by a list of “approved” law firms
selected by FANNIE and FREDDIE.
80. According to a New York
Times report in October, 2011, Fannie Mae learned as early as 2003 of extensive
foreclosure abuses among the law firms it had hired to remove troubled
borrowers from their homes. Fannie Mae did little to correct the firms’
practices.
81. Fannie Mae and Freddie
Mac approved law firms included some of the worst of the worst such as New
York’s Steven Baum law firm (where employees at a firm Halloween party dressed
as homeless people) or Florida’s Law Offices of David Stern where employees
signed tens of thousands of documents to use as proof in their own foreclosure
cases.
82. Fannie Maw and Freddie
Mac gave incentives to law firms for the speed of foreclosures, with a
pervasive disregard for legal requirements and honest practices.
83. Fannie and Freddie
auditors may have themselves received incentives from the law firms they hired
including expensive tickets to sporting events and elaborate restaurant meals
to give law firms advance notice of audits and the files that would be audited.
84. In
hundreds of thousands of other cases, the servicers for trusts used an outside
vendor, Lender Processing Services (LPS), to handle their foreclosures.
85. LPS maintains a network
of lawyers similar to the Fannie Mae and Freddie Mac approved lawyer vendor
list. LPS has been accused by bankruptcy trustees and private litigants of
requiring participating lawyers to kick-back fees to LPS from foreclosures.
86. The servicers often
run-up costs when a loan in a trust goes in to foreclosure by greatly
over-insuring the property, and adding monthly maintenance fees (often for
services not performed) and appraisal fees. All of these fees are subtracted
from any money that eventually goes to the investors after the foreclosure is
complete and the property is resold.
_____
TRUSTS, MORTGAGE LOAN
DOCUMENTATION & OTHER ABUSES
87. In foreclosures, many
trusts use(d) law firms and process servers that have
been discredited because of fraudulent documents.
88. Although all states
require that the homeowner by served with foreclosure documents at the start of
the foreclosure, certain process serving companies often used by trusts engage
in a practice known as “sewer service” where the homeowners are never actually
served with the papers. (The term refers to foreclosure documents left in the
sewers in front of homes.)
89. In
many other foreclosures by trusts, the process server has falsely stated that
the homeowner was not in active duty military service when the homeowner was
actually a service member on active duty service in
90. Renters were also never
told about a pending foreclosure of the home they were renting, although such
notice and opportunity to be heard was required in almost every state. This
home deterioration was so extreme that some municipalities filed lawsuits
against trustees accusing trustees of being slumlords. This widespread failure
to protect the homes (the trust assets) further drove down neighborhood home
values, further deteriorating the value of the loans/homes in the trust.
91. Sales of foreclosed
properties were often held without complying with state laws requiring
advertising such sales so that the maximum price could be obtained for the
homes, lessening any loss to investors.
92. Vacant homes were not
protected or maintained, causing extreme loss of value of the homes as they
were often looted and vandalized.
93. Many trusts never
obtained the mortgage documents that were supposed to have been in the mortgage
file kept by the document custodian. Endorsed notes and mortgage assignments
were often missing from the mortgage files kept by the Document Custodian for
the trusts.
94. In the case of many
loans that were supposed to haven been registered with the Mortgage Electronic
Registration Systems (“MERS”), showing the trust as the owner of the loan and
mortgage, no such registration was made and the loan remained registered in the
name of the loan originator.
95. Where loan documents
were missing, many trusts concealed the missing documents problem, or missing
MERS registration problem, by filing “replacement” documentation with the
county registers of deeds and clerks of the courts.
96. In
possibly thousands of cases, the ownership by the trust is never disclosed. The
foreclosure is brought in the name of the originator even though the loan was
only owned by the originator for a few hours, days or weeks.
97. In the case of MERS,
many trusts changed the ownership of mortgages on the MERS registry to falsely
reflect that the Trust acquired the mortgage at or about the time that the loan
defaulted.
98. In
possibly thousands of cases, the endorsements on notes have been falsified
showing an endorsement in blank or an endorsement to the trusts when no such
endorsement was ever obtained from the loan originator.
99. In hundreds of
thousands of foreclosure cases nationwide, false fraudulent and often forged
mortgage assignments to trusts were prepared and filed solely to give the
trusts a legal advantage in the foreclosure litigation.
100. A major investigation
of the abuses in mortgage securitization was announced in the 2012 State of the
Union address.