Foreclosure
Facing Foreclosure - Understanding the Securitization Process
By
Apr 4, 2012, 21:31

You are facing foreclosure. You don’t have a lot of money or a lot of time and you can’t afford to hire a lawyer. And even if you could afford one, it is very hard to find a lawyer who knows enough about bank fraud to help you.

This is where we begin our journey. Before we delve into the nuts and bolts about your options, we first need to understand how the fraud is being committed. Once we expose the fraud, then you will know who to articulate a viable foreclosure defense.

Background and Introduction

In 1933, the Glass-Steagall Act was enacted to regulate the FDIC and banking. Specifically, it governed the protection of depositors’ monies so that banks were not allowed to gamble with the money in their safekeeping. This means banks could not trade their assets on Wall Street.

In 1999, the Glass-Steagall Act was repealed and another bill was introduced; known as Gramm-Leach-Bliley Act. This effectively allowed banks to package and securitize their loans onto Wall Street.

This means that suddenly the trillions of dollars from Wall Street could be used to fund loans. (This is a good thing). This means that more loans were available to more people.

This means that Retirement Funds, Hedge Funds, and all sorts of institutional investors had a “safe” place to park their money … these safe places would come to be known as mortgage backed securities (MBS). (This is also a good thing).

These institutions demanded banks make these mortgage backed securities packages available to them. These institutions relied on the following:

1. The bank’s banking license
2. The bank’s underwriting process
3. The bank’s collections infrastructure

Things started to break down when banks realized that since they were not required to be left holding the bag at the end of the day, they could simply underwrite any old loan from any idiot who can sign their name to paper. Banks decided to change their underwriting guidelines around 2001-2002 (Bush ear). (This is where things started to go downhill).

This means any McDonald’s burger flipper could go down to the bank and get a loan for $1,000,000 with “no money down”. (No offense to those working in the fast food industry). These were commonly known as liar loans in the mortgage industries. This is great for low income earners as long as the housing market is in a boom growth curve. This gets really bad in a housing bubble where the price of housing is way beyond the affordability index of most households’ median income.

Incentive and Motivation of Securitization

When a bank lends you money, they traditionally get 2.5 times the face value of the loan over 30 years. Not bad, considering that they did not use a single red cent of their own money. It is all digitally created through the Federal Reserve System (read Modern Money Mechanics published by the Federal Reserve).

For example, if you borrowed $100,000 … over 30 years, you will have paid around $350,000 to the bank. Look at the Truth in Lending disclosure statement from your loan documents.

Because of the Gramm-Leach – Bliley Act, banks are now able to sell mortgage backed securities. Some bright people at the financial industry came to the conclusion that they could make even more money if they could sell loans on Wall Street, and so they did.

Instead of making 2.5 times over 30 years from money they did not put up, banks decided they could make up to 1.5 times the face value of the loan immediately. Just package these loans and sell them on Wall Street. As the market grew, they not only made money from the sale … but also from the appreciation of the stock (they are allowed to hold up to 10% of the security to qualify as a sale under Financial Accounting Standards).

The Game of Greed

Under the Fractional Reserve System, a bank can lend up to 9 times the face value of their depositors’ money or cash reserves. Instead of receiving 2.5 times over 30 years for a loan, banks suddenly realized that they could make even more money if they sold the loan and received the CASH NOW. So, from that $100,000 loan, they receive $150,000 cash. This is treated as a deposit, which means they can now lend out $1.35 million (9 times $150,000). And do it again, and again. Lather, rinse and repeat. (This is really good for the bank. This is really good for borrowers as there is a sudden glut of unlimited money to borrow from. This is really bad for the economy in the long run).

If you study basic Economics 101 in high school, you will know that if you have too much money chasing limited goods, it leads to an increase in prices. Well, this is exactly what happened.

The banks threw their underwriting guidelines out the window. They had what’s called a fiduciary responsibility to ensure that the loans were properly underwritten. This means that they were supposed to make sure loans they underwrote were backed by people who could actually afford to pay it back. Instead, they just ignored these underwriting guidelines in the name of greed.

The banks knew that these loans were destined for Wall Street, and that they were not going to keep the loans … so it suddenly became a game of hot potato, as “it became someone else’s problem”.

They basically stuck it to Wall Street.

This means they stuck it to your retirement fund, your stock portfolio and your life insurance portfolio.

It was the perfect set up for the biggest financial meltdown in the history of mankind. It was the perfect storm.