May 19, 2024


Mad about real estate

The Mortgage Mess


How can a “tortoise” become an “Easter bunny”? Easy, if you know how to convert mortgage notes into asset based securities, place them into a trust and then sell the certificates of investment into this trust to anyone that can write a check.

Wow, what does all of that mean to me? I have to get up tomorrow morning, check the oil in my truck and go to work. Well, Sammy, here is what it means and this might explain to you what you have been watching on the “tube” lately. You see, when you closed on your home you signed two documents. One was the mortgage which was recorded with the tax collector in your area. The second and most important piece of paper was the note.

It is a promissory note that is a negotiable document that means it is worth a lot of money. Now, if you had a piece of paper that was worth $200,000 will you not take care of it? You darned right you would. Well, when you closed on your mortgage the most important document was the note. The mortgage company needed that in order to get paid… Who paid the seller and where did the money come from. It was all electronic. There was no cash at the table. The title company handled everything. Now, where did the note go to?

Your mortgage company most likely didn’t put up one thin dime. They already had it promised/sold to a bank that does nothing but buy mortgage notes. However, this bank DOES NOT USE MONEY. They use credit and once they have decided which investor group that will buy these long term investments, that is where the cash comes from. This gets very complicated, but if you pay attention, you will learn something in (10) minutes that most folks will never learn in a lifetime.

Now, remember, your mortgage company that closed on your loan did not put any money into the deal. They might have negotiated the job of collecting the monthly payments from you and forwarding them to the investment group. This group is called a TRUST. So, it only stands to reason that as long as they (1st bank) have no money in the deal, then when the foreclosure is resolved, they have no money coming. In legal terms, they have no damages. So, what right do they have to hold their hand out looking to own your home or get paid when it sells on the court house steps?

Okay, on with the magic show. Let’s fast forward to this group of investors. They are identified in the trust as certificate holders. So, when an investor puts up money, they are NOT buying your individual note. They are buying increments of investments. So, it is possible for over (100) certificate holders to have an interest in your note.

Ready for more “hocus pocus”. The investors/certificate holders have their investment insured. Yes, that is true. The companies, like AIG, Bears & Stearns, Barney & Company are the folks that insured these investments. BUT, they were not called insurance certificates, but “credit enhancements” or “swaps”. In, other words, the company would provide the credit swap or funds so that when a loan went bad, the investor was not out anything.

Here is where the rabbit got lost and screwed up the show. What they were doing was NOT ILLEGAL. It was a good business model and perfectly legal under the guidelines of the SEC. But, no one anticipated the volume of foreclosures; hence the “credit enhancements” were causing havoc on the insurance company’s cash flow. That is exactly why some companies went “belly up” and why we (you and I) have to put billions into AIG and others. It is ONLY for the reason to keep investors from taking these folks to court for fraud.

There is a violent undertow going on in the halls of Wall St as we speak. Many disgruntled investors are raising their voices. Congress is listening and the bankers are jumping to whatever music comes out of Washington.

Now, let’s move on into the final curtain of this magic show. IF, the investor loses nothing and is made whole by the insurance carrier, where is the damage? BUT, yet these “blood thirsty” banks are still taking peoples homes and pocketing the money. Yes, when average people are not defended with the professional representation, they lose and the banks have a windfall. Unfortunately, there are not enough attorneys that fully understand this. As a result, Joe Citizen loses.

What happens when the insurance company cannot pay the investor? The investor has NO claims for damage against the consumer because he had NO contract with the consumer. Remember, in this magic act the investor bought pieces and the homeowner agreed to pay someone that was identifiable. Under Federal Law, the homeowner has the right to know who to pay.

Regis Sauger