The growing cost of MBS litigation and the need for securitization charges

Written by Biloxi

I have often said that securitization is a major part of the piece of the puzzle when looking at the causes of the housing crisis. One of the reason what the banks have been illegally foreclosing on property and recording fraudulent document in the county recorder's office in such an aggressive way is because much of the loans were either toxic loans and/or not transferred properly into the securitization trust in the Pooling and Servicing Agreement. Many homeowners are faced with a clouded title on their property, and a loan modification or principal reduction wn't ever change that. No wonder bank CEOs like JP Morgan Chase Jamie Dimon and Bank of America Brian Moynihan are fighting the investors' lawsuits regarding mortgage-backed securities. In fact, JP Morgan Chase released their first quarterly earnings for 2012. Although, JP Morgan Chase released decent earnings, the bank still faces the growing cost of mortgage-backed securities litigation. From Housingwire website:

Looking at the letter to investors, litigation regarding legacy securities remains a large concern (that includes Bear Stearns and Washington Mutual for those of you keeping score). Securities claims continue to come at the bank from soured investors. The $2.7 billion in litigation cost realized this quarter is more than double what was seen this time last year.

CEO Jamie Dimon appears nonplussed. "These plaintiffs face a long and difficult road, and, as a result, litigation over these issues could take many years," the investor letter states. "Nonetheless, we have set aside significant reserves to handle these exposures."

Let's look at the chain of transfer into the securitization progress in the Pooling and Servicing Agreement. It is important to note that the chain of transfer must be properly and the mortgage note and deed of trust have to travel as one unit in the securitization:

A. Originator----> B. Sponsor---->C. Depositor---->D. Issuing Entity

Originator is the bank or mortgage company that sold you your mortgage loan. Sponsor is the one who hold the loans originated by the "originator." Depositor transfers the mortgage assets ino the securitization trust. Issuing Entity is a special vehicle entity and a sub-corporation formed by the financial institution creating the securitized trust that is formed on the "closing date" pursuant to the "pooling and servicing agreement." On a side note: If any Pooling and Servicing Agreement violation of improper transfer into the securitization trust, the problem lies upon the issuing entity since securitization trust receives a special tax code treatment called REMIC (stands for Real Estate Mortgage Investment Conduits). And the IRS can take away their REMIC status. If there is a violation, the issuing entity will be responsible for the taxes and will be in deep trouble with IRS. Other parties' role in the securitization trust such as Custodian who is the person who handles paperwork or where the note would be, Master Servicer who is responsible for the billing, maintenance, and foreclosing of the mortgage loan pool contained within the trust and Trustee  represents the interest of the securitized trust investors of the specific trusts.

The pooling and servicing agreement date represents the cut-off date for the mortgage pool assets to have been identified to the specific trust. And there is a big difference between the cut-off date and closing date in the pooling servicing agreement. The cutoff date will allow loans to come in during the cut-off date. However, the closing date will not allow more loans to come in and out of the trust.  And this why banks are fearful on the Securitization Fraud Task Force's probe the securitization process and investors who are demanding their money back from buying the toxic mortgage-backed securities. Here is an example screen shot of a mortgage loan in the securitization trust from the Bloomberg Report by Certified Forensic Loan Auditors . In this securitization trust sample, it identifies the current ratings, current amount of the class, CUSIP number, and the Trustee and Lead Manager:

You can read more from the Certified Forensic Loan Auditors website. Click here. Or you can download to read CFLA's sample mortgage backed securities analysis, click here. When homeowners and attorneys questioning the banks in a foreclosure notice, the question should not be "show me the mortgage note" or "show me the deed." The question should be to the banks: Show me the transfer of the note in the securitization trust according to the Pooling and Servicing Agreement that proves that: (1) the note that has been properly transferred and (2) the party issuing the foreclosure action has the right to foreclose on the home. A securitization charges both civil and criminal are what most of the public are hoping for the major banks that are held responsible for the housing crisis. If the Securization Fraud Task Force do not start looking into the big banks' violation of IRS laws on REMIC trust under the Pooling and Servicing Agreement, then the banks will never be held accountable for their actions, the banks will continue to commit fraud, and the lessons in the housing crisis will never be learned.