The Best and Easiest Explanation of Foreclosure Fraud

This is absolutely the best and easiest to understand explanation of the foreclosure fraud I’ve found! This will definitely get you to not only understand what the banks & mortgage companies have done to you, but also will be able to help you articulate it for your court case so the judge will know that YOU know what has happened as well!
This was written by rondaben on “The Tree of Liberty” site.

“With the Massachusetts Supreme Court ruling on the securitized mortgage/foreclosure cases I thought it would be helpful to lay out in an easy to understand way what happens when you get a mortgage. Most of the mortgages taken over the last decade in particular were formed by this method. It is intentionally complex for a very good reason. You will be able to see the clear fraud that is inherent in the system and the legal underpinnings of the “produce the note” movement.
First, let’s look s how mortgages have been handled for forever.

Bank A issues a mortgage to a Joe to purchase a house. Two documents are produced, a promissory note and a trust deed. The trust deed is essentially the title of the property that is held in trust until the promise to repay the loan (promissory note) is satisfied. Once the loan is paid in full Bank A releases its claim on the Trust deed and ownership passes in full to Joe.

That is what most of us believe happens in mortgages because you are not informed as to what happens after the paperwork is signed and how it impacts the title and promissory note you are obligated to. This is intentional, and represents the entire scheme that allows securitization occur. If the process that is now used is too complex it can be used as a justification to allow the shenanigans that occur during a foreclosure process to happen while the judges and juries believe that the process described above is what is actually happening. Lets look next at the basics of securitization.
Banks became aware that though profitable, mortgages were less than ideal in the ability to generate revenue. A large amount of money was tied up for 15-30 years and converted to a stream of monthly payments of principle and interest. Fees were only a minor portion of the entire profitability of mortgages. The idea then arose that more money could be made if mortgages that were illiquid (tied up for 30 years inside a mortgage) could be made liquid and tradeable. This would allow the bank to make the mortgage and then sell off interest in the mortgage and recoup the investment immediately. This allowed for the bank to then take that money and fund new mortgages right away. Fees became a key source of revenue as mortgages were no longer a long term relationship with a borrower but were in fact a new volume business. The idea of securitization was born.

The problem initially was the IRS. When interest in a mortgage was sold into a trust taxes had to be paid. When certificates (stock or bonds) in the mortgage were sold by the trust to investors THEY had to pay taxes. All of these taxes ate into profit and made securitization less attractive. The 1986 tax reform allowed for a new possibility called a REMIC (Real Estate Mortgage Investment Conduit). This removed many of the tax liabilities and allowed for full blown securitization to proceed. Here is how it works:

Once the mortgage has been formed between Joe and Bank A, Bank A wants to get rid of it as fast as possible and recoup its funds. To take advantage of this and the tax benefits of securitization it has to form what is called a SPV, a special purpose vehicle. Think of it as a shell company. This protects the mortgage if something happened and Bank A went out of business. The mortgage would still exist. It also theoretically reduces the liability of Bank A to the mortgage default.
It is important to realize one important thing here…the two documents that Joe signed (the promissory note and the title deed) are now SEPARATED. The trust deed remains with its trustee. The promissory note—the asset that pays money—is SOLD to the SPV. The original note is paid off by the SPV and the stream of payments becomes the property of the SPV. Bank A has its money in full and no longer has ANY interest in the mortgage.

Now, the SPV forms a new trust entity. This trust entity is defined by the IRS as a REMIC and must adhere to the laws regarding such a trust. The benefit of doing this is that when the SPV transfers the mortgages into the Trust NO TAXES MUST BE PAID ON THE TRANSFER. This makes the trust a much more efficient and profitable vehicle for investors. REMICs, in turn, CAN NOT retain any ownership interest in any of the underlying mortgages. The Trust, then, is as its name states a Conduit where money flows in from the person who pays their mortgage and out to the investor as a payment. The right to receive those payments was purchased when the security (stock or bond) to the trust was purchased. Proceeds from that went back to the SPV who used them to purchase the mortgages from Bank A. It is a giant figure 8 circular flow of money with the Trustee coordinating it all.

This is all well in good, but how does it effect you, the person paying the mortgage?

Lets see who OWNS the mortgage then.

The first owner was Bank A who took interest in the property as collateral on its loan to Joe. Simple enough.
When Bank A sold the mortgage to the SPV it’s interest was extinguished. Ownership of the promissory note should have been transferred (the note passed to the SPV) who would then be interest holder in the property. The VAST amount of the time this was NEVER DONE because taxes would have had to been paid on the transfer of the asset. Many states are attacking this from the point of tax avoidance at this and subsequent stages. In any event, if the note WAS transferred lets assume the SPV is now the note holder.

When the SPV forms the REMIC trust and transfers the note into the trust it irrevocably changes the nature of Joe’s mortgage. Once again, the SPV must transfer the note and pay taxes on the transfer. The mortgage now in the trust becomes for all purposes a blended group of monthly payments. These payment streams become the source of funds that the trustee pays out to investors. In essence the trustee—when certificates, stocks or bonds to the trust are sold—sells a beneficial interest in the mortgage. That is not ownership of any portion or any segment of the revenue stream but rather is simply a security—just like a share of IBM or Google doesn’t entitle you to any of the assets of the company. But who owns the note?

Because of the tax exemption of the REMIC it is PROHIBITED from retaining any ownership of the underlying assets it no longer holds any ownership to the note on the day it is formed. The investors in the trust do not hold any interest in the note either, they only hold the security which was sold to them.
So what happened to ownership of the note? It was EXTINGUISHED when it entered into the trust in order to obtain the flow of cash back to the original lender and the tax-preferred investment proceeds to the investors. The REMIC, in essence, is a black whole from which money spits forth.
So, who does Joe owe the money to? Who has authority to release the deed to Joe when his ‘mortgage’ has been satisfied? The answer? No one.
The trust is set up and cannot take an active role in the collection of the funds. It is a shell entity ONLY. Therefore it appoints a servicer to collect the payments every month, contact Joe if he is late and serve as its agent should the ‘mortgage’ go into default.

This servicer is a hired agent of the trustee and receives a small cut from each mortgage payment it collects as well as any fees that it can generate from servicing the mortgage (late fees, fees for lost payments, fees for records, etc.) To Joe, all representations are made and he is explicitly told that the servicer ‘owns’ his mortgage. This is not only incorrect but is impossible under the law.

So what happens when Joe defaults? How is his property foreclosed upon?

First, the servicer will enter into a collections mode with Joe. This is typically a way to generate MASSIVE fees and fines on the payment of the mortgage. Eventually the servicer will start a foreclosing proceeding.

In this proceeding the servicer presents documents to the court (or the trustee of the deed in a non-judicial foreclosure state) that state that THEY are the owner of the note and have a legal standing to foreclose. THIS IS NOT TRUE, IS NOT LEGALLY POSSIBLE, AND IS FRAUDULENT. The servicer is the agent of the Trust and will use that to claim that they are foreclosing on behalf of the trust. The problem? The TRUST ITSELF CANNOT HOLD OWNERSHIP OF THE NOTE because of its tax-preferred REMIC status! What about if they state that they are representatives of the investors? THE INVESTORS HAVE NO OWNERSHIP INTEREST IN THE UNDERLYING MORTGAGES, they only have ownership interest in the securities that were issued to fund the trust!

This is crux…no one has an ownership interest in the trust. No one has a standing to initiate a foreclosure proceeding. And worse, no one has the standing to extinguish the lein placed on the property from the initial mortgage.

That’s it from Joe’s perspective. But lets see how that effects the broader market.

Investors who purchased the securities are seeing losses from the sheer number of defaults in the underlying revenue streams stopping. The trustee has no funds so these are realized losses to the investor. They will scream that the security they sold was fraudulent because it was not made up of what was stated in the prospectus. They will push for a refund of their investment, effectively stuffing the securities back onto the trust.

This will destroy the securitization instrument and the SPV that was created to manage the whole scheme.

The banks feel that they will be insulated from this because the mortgages were sold into the SPV as a method of controlling their liability. The problem was that because they never actually transferred the note (and if they did, why didn’t they pay taxes, hmmm?) so the whole creation of the SPV was fraudulent. Bank A is now looking at the choice of either tanking the entire portfolio back onto their books at MASSIVE losses (it would break the bank) or explaining to the states and IRS why trillions of dollars of taxes were not paid. Bankruptcy or jail? “

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