Securitization is the conversion of an asset, particularly a loan into marketable securities mainly with the objective of raising cash by selling the securitized asset to investors. Securitization is essentially financial engineering. It is the process of taking an illiquid asset and turning it into a security that can be sold on to investors. Mortgage backed securities are typical examples of securitized assets.
Securitization Food Chain
This phrase was made popular by a movie “Inside Job” that was based on the financial fraud that led to the financial crisis of 2008. It is therefore appropriate to use this phrase to refer to the process of securitization.
It begins with the perfectly legal process of potential home owners applying for a mortgage. The lending institution approves the mortgage and the property for which the mortgage has been applied is secured or collateralized against the mortgage. A mortgage note is generated when the mortgage is created, the mortgage note is a promissory note where the borrower “promises to pay” the agreed sum to the lender in the specified time. The mortgage notes are simply claims on the future payments by the borrowers. Thus, mortgage notes are assets for lenders because lenders can drive economic benefit from these notes in future, there is however counterparty risk attached with mortgage notes, in case the borrower fails to pay in time. Therefore, in order to mitigate the counter party risks, banks usually sell mortgage notes for cash. This completes the first step of the securitization food chain. Important to remember here that mortgage notes can only be sold by banks if they are created as negotiable instruments, which happens in most of the cases. Securitization cannot happen if the notes are created as non negotiable instruments. Banks however call the shots and there is little that the borrowers can do.
Keep the point in your mind that the bank negotiated or sold your mortgage loan in order to generate cash to remove counter party risk. We will come back to this point later.
The second step involves pooling all the different individual mortgages, this pool of mortgages is held in a trust held by a bank acting as a trustee. The pool of mortgages serves as collateral for the mortgage backed security. Why create a trust? One may ask this question. The trust is created and held by a separate bank in order to completely separate the assets and liabilities related to the mortgage from the originating bank or lending institution in case the originating institution goes into liquidation.
Another reason to completely separate the assets and liabilities through a trust is to transfer the right of ownership, as without this transfer the new security would be a secured loan instead of an asset.
So it follows that the mortgages bundled up in a pool, act as collateral for the securitized asset that is going to be created. The mortgage backed security can now be issued by any third party financial company or by any aggregator.
A new security is thus created in this manner. This mortgage backed security, is backed by the pool of mortgages or in other words, the new security is backed up by the assets acting as collateral for the original mortgages. To put this more simply, the borrowers who took the mortgage and placed their property as collateral, have no idea that their homes have been collateralized for a second time.
The shares of the new security can now be sold to investors in the secondary mortgage market with significant amount of liquidity. The security is issued in the form of certificates; each certificate carries a claim to the principal and interest payments done by the initial individual borrowers who took the mortgage in the first place.
So the investors who invest in mortgage backed securities, have a claim on the mortgage payments made by the borrowers who took the mortgage from any bank or lending institution.
If you have mortgaged your home, chances are that your mortgage has been securitized but it will not really affect you, as long as you continue to make the mortgage payments on time. Because, the whole idea of securitization of debt depends on the cash flow arising from the debt, in this case mortgage payments. However, if and when you fail to make your mortgage payments, the real trouble starts and the concept of foreclosure comes into view.
Foreclosure – An illegal practice
Foreclosing a mortgage backed security is a legal mess. Why? Because at this point, the mortgage backed security has been sold as an asset and many different investors now have a share in it. These investors do not necessarily have to be in one place, they can be anywhere in the world and therefore foreclosure originating from multiple investors is not really possible, although legally the investors own the certificates through a clearinghouse and thus they can be represented by the nominee of the clearinghouse.
Instead, it makes more sense and logic for the trustee bank to initiate foreclosure. But there is only one problem with this idea, the trustee bank doesn`t really own the debt to initiate foreclosure. The mortgage is owned by the original lender. Is it?
In order to circumvent around these legalities the industry came up with a unique solution to disregard the whole process of securitization completely. Why? Because the process to begin with was illegal and thus cannot stand its ground in the court of law, therefore the trustee simply produces the assignment of original mortgage from the lender, thus making it appear as if the trust owns the mortgage and thus has the constructive right of foreclosure.
This too is fraudulent because legally the ownership of the mortgage cannot be traced to the trust. The legally binding contract occurred between the original borrower and the lending institution, the trustee does not have any right whatsoever. This is substantiated by the fact that the land registry only shows that the mortgage is between the borrower and the lending institution. Land registry documents do not show any sort of link with the trustee bank or institution that came into the equation when the mortgage was securitized.
So how can foreclosure be legal if there is no contractual obligation between the borrower and the trust?
How can banks and institutions avoid fraud if securitization to begin with, is illegal? The banks and all involved can only get away with it as long as the borrowers, the victims are ignorant of the whole process. Ignorance is the basic premise upon which this whole ploy is based. Ignorance in this case is not bliss, it is a curse.
Victims of foreclosure and securitization fraud have to understand that when they sign the mortgage note, the bank sells that mortgage or promissory note for cash. Thus, the banks take the money from the sale of your mortgage loan and close the account but of course the banks never inform the borrowers that they no longer have to pay their mortgage. This is where the superstructure of securitization and foreclosure begins to fall upon itself. The moment the bank sold the mortgage note for cash, it closed the accounts receivable account as the promissory note was negotiated.
Now do you begin to see the level of fraud that is being committed? Over the mortgage term, you the borrower will repay your mortgage back to the bank and the bank will collect your money. But, the bank had already cleared your debt when it sold off your mortgage note. The payments that the borrowers make are treated as cash flow for the party that holds the mortgage note.
Mortgage Note is a Promise to Pay
If you look at it from another perspective, mortgage repayments are in a way expanding the money supply. The mortgage note you send to the bank, is a promissory note that means that you will pay the specified sum over the specified period. It is a promise to pay. It is important to remember that the constitution does not give the government the power to create money instead this power rests with the people. So when you send the promissory note you have essentially promised to create money. You, the borrower will then work to generate economic activity and then repay the mortgage note.
Meanwhile the bank has already sold the note and got its value in worth. The bank has already settled the debt, whatever you repay, is now over and above the debt and thus adding to the money supply.
Yet another point to consider is that once the bank has received the money for the note after selling it, in what capacity is the bank then taking your mortgage payments? Technically, according to state laws and GAAP rules the accounts receivable was closed when the mortgage note was paid. So once again in what capacity is the bank then taking your mortgage payments? Or let`s put it another way, how is the bank treating your repayments from an accounting perspective?
It doesn't require much thinking. If the original debt was treated as settled when the note was sold then this means that whatever you paid from that moment, was recorded as a liability in the books of the bank. This means that the banks recorded the mortgage payments as a liability in their books.
Once again, let me reiterate that the moment your promissory note is sold, that means that it has been negotiated. Furthermore the moment the trust converts the note into a stock certificate for the mortgage backed security that means that the promissory note no longer exists according to Federal law and thus the mortgage doesn't exist.
This is an essential point for those who legally challenge foreclosures. People do not understand how the system works and for this reason end up losing their homes. Those who know how the system works, challenge the whole process by claiming for recoupment. Securitization and foreclosure are fraudulent practices but they are only carried out because the system works as long as the borrowers and mortgage holders are ignorant of the fraud.
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