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Some Incentives for Predatory Lending that are Built into Securitisation Process

Posted by on in RMBS SECURITISATION
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The other day, as a matter of my own interest, I began to list incentives for Predatory Lending that are built into the Securitisation process.  I finished it today, then decided to post it for anyone interested.   I've made little change to my notes, so hope it makes sense.  If anyone knows any other incentives, let's add them to the list.



We know that the banks wanted more securitisation profits. To achieve that they wanted more loans secured with mortgages.   This lead to the 'Originate to Distribute' model.   Enter Lo Doc and No Doc loans.



Incentives

  • 

The banks preferred to securitise at risk loans secured by mortgages, so created incentives for brokers to promote Lo Doc loans over traditional loans by making the Lo Doc loans more profitable for brokers.
  • The original mortgagee was NOT at risk if there was a failure to pay so didn't care how risky the loan for the borrower.  All risk was (is) passed to the end investors.
  • The Investment Banks preferred the sub-prime loans as they carried higher interest rates.
  • The Trust my mortgage was placed in was fully subscribed with LO DOC loans.    From the Prospectus of that Securitisation Trust:  "It is a condition to the issuance of the Notes that the Class A Notes be rated Aaa by Moody's and AAA by Standard & Poor's and that the Class B Notes be rated at least AA by Standard & Poor's and Aa2 by Moody's."

Such ratings guarantee investors..  

Note this Lo Doc securitisation trust got top 'risk free' ratings for its Notes - equal to 'safe' Government Bonds. 



How are they gonna get top rating for lo doc loans and mortgages???



Never fear, the Ratings Agencies are here - and ready to oblige.

  • 

"None of these securities got issued without the imprimatur, you know, the Good Housekeeping Seal of Approval, of the rating agencies." (Bill Ackman, Hedge Fund Manager)
  • Ratings are, 'an opinion', admitted one Moodys' man during a US Govt enquiry.
  • The 'opinion' of the Ratings Agencies was influenced by the fact that "the more structured securities they gave a AAA rating to, the higher their earnings were gonna be for the quarter." (Bill Ackman, Hedge Fund Manager).  


I'd call that 'Conflict of Interest' - and the money won.   Surprise!?



  • In fact, "The three rating agencies — Moody's, S&P, and Fitch — made billions of dollars giving high ratings to risky [read 'subprime'; 'lo doc'] securities .  Moody's, the largest rating agency, quadrupled its profits between 2000 and 2007."  
    ('Inside Job' Documentary)
  • 

"This system was a ticking time bomb.  Lenders didn't care anymore about whether a borrower could repay, so they started making riskier loans.  The investment banks didn't care, either; the more CDOs [Credit Default Swaps]they sold, the higher their profits.  And the rating agencies, which were paid by the investment banks, had no liability if their ratings of CDOs proved wrong."
    "Inside Job" documentary.


  • If there's 'an event of default' WITHIN the Trust itself, the Trust has built into its terms that the consequences of that default pass onto borrowers in that the Trust can call on mortgages and loans to get it out of trouble.  
So the unwitting borrowers provide the 'in' for the banks to enter the securitisation market, and also are an 'out' when the Trust gets into difficulties.  Once again, no risk to the lender, the mortgagee or the Trust.
  • 

The banks sell legal title to the mortgages and loans, don't notify the Titles' Office of the change in ownership, then pretend to have legal title and get possession of people's properties.  They have their cake and get to eat it too.
  • 
The Trust is 100% insured for the principal balance plus any unpaid interest on the loan - once again ensuring no risk to the Trust.
  • 

They make MORE out of defaults than by loans that are repaid.     One property law attorney in the USA says that banks earn up to 40 times what they could earn on a paying loan, using credit default swaps in which they bet the loan would go into default.


  • ??   Any more   ??

 

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  • Denise
    Denise Thursday, 23 August 2012

    Excellent work Susan. Mindbogglingly revelations re securitiisation. So what happens when we empower people to take control fo their own situation and hit back hard! So proud of you all.

    [email protected]

  • doyla66
    doyla66 Thursday, 23 August 2012

    Agree :)

  • doyla66
    doyla66 Thursday, 23 August 2012

    Agree :)

  • doyla66
    doyla66 Thursday, 23 August 2012

    Good information, Susan, and thankyou for posting it.

    I can't think of any more incentives straight up.
    I've been looking at the behaviours that have resulted, beyond the economic rationalism...

    What you've written certainly begins to explain bank behaviour which could otherwise appear unconscionable. Banks deserve the criticism that they are unAustralian in their conduct. What they have demonstrated is an aspect of human behaviour Australians would prefer wasn't associated with us. Banking behaviour is the shadow side of our enjoyment of our illusionary national prosperity... and banks know it. This produces considerable anxiety in the human psyche - cognitive dissonance and inner conflict.
    I'm wondering, does this give rise to the intensity and vindictiveness of some banks' conduct toward borrowers who default?
    Is it theatrics or truly sociopathic/psychopathic behaviour?
    Why do they get upset at all, following the lender insurance model?
    Surely they should just put up a token effort, if that, and then just write off a bad loan?
    What is affected by their failed loans?
    Their image, profit, rating, ego, acceptance into the RMBS...?
    Why do banks do secret deals with borrowers for compensation when the number of failed loans are going to have such a tiny impact, if any, on their bottom line (according to RBA)?
    Propped up by government, protected by lawyers, bigger than Ben Hur, delusional into the bargain ... why would they bother evicting anyone? The marketing costs of offsetting adverse publicity and other demarketing foot shooting isn't worth it!
    It is sheer bloody minded knuckle headed lunacy.
    Or is there more to it... something we can't see yet?
    Or am I trying to be logical and rational about an industry sector that is so driven and competitive about winning that they've lost sight of the bigger picture?
    There is no honour in defeating an unworthy opponent. In that context of a defenseless impoverished family is "unworthy" for the likes of NAB, Gadens and other legendary bullies.
    Clearly they do not subscribe to the honour code of higher order adults.
    And now, winning at all costs is going to lose banks their freedom to self-regulate and be respected pillars of society.
    It makes sense and no sense.

    RMBSs may have good ratings, but do they show profit or loss for government across the portfolio? I have the impression from reading previous posts on AOFM that they show losses. Thus Government investment is actually subsidising mortgage industry/interest rates? Back door drip feed bailout for lenders with Lo Docs? Just thoughts on a complex subject ...

    Finally ... Banks seem to be working with outmoded values for their advertising, for example. "Authenticity" replaced "image" marketing a couple of years' ago... I wonder if anyone has told the fuddy-duddy stuffy banks that yet? Certainly not their excessively well paid advertising companies! I notice the "honest" NAB ad has been dropped from their home page ... reality bites and we're getting through...

  • doyla66
    doyla66 Wednesday, 14 November 2012

    I think that the CBA have just sent me confirmation that my loan has also been securitised. It was just a single 1 page sheet, buried amongst a whole load of other documents, that reads : SECURITISATION DOCUMENT & File Checklist.
    It has the name of the CONVEYANCER (BLACKED OUT by the CBA.)
    It also has the name of the DOCUMENT CUSTODIAN (BLACKED OUT by the CBA.)
    Any idea's how we can confirm this?

  • doyla66
    doyla66 Friday, 24 August 2012

    > hiding "Systemic Issues(numbers)"so Banks "Assassinate" ASAP,lest saved by Denise = "further evidence in numbers" of Systemic Parent Bank / Broker Chain of Fraud + lawyers get their nice "Legal Kick-backs" by "Winding-up" innocent people in this Bank Grand Plan of Consumer Fraud.

  • doyla66
    doyla66 Friday, 21 September 2012

    Thanks for your fantastic information. Can you advise on how we, the people, can check out our mortgages and how they have been securitised. Basically, how do we find out where our mortgage documents have gone. The note and the documents? That is key to our proving that an assignment has occured.

    Thanks

  • doyla66
    doyla66 Saturday, 22 September 2012

    Reply to S Watson re securitisation

    At this point, getting proof of securitisation of loans and mortgages is proving very difficult in Australia. In the USA, the evidence is more readily available, but here, the banks have made sure it is more hidden.

    Remember though, the tide is turning and I expect we will soon see banks being forced to produce via Admissions, Interrogatories, Discovery etc.

    I haven't been able to find the proof of securitisation of my loan and mortgage via their Trust documents, but I did get the proof another way - which I will mention in Points C and D below.

    If you are interested to do some research that heads in the direction you want to go but which may not (yet) leave the smoking gun in the hands of the bank, read my points A and B below.
    Point C may be helpful for people whose properties are already in the hands of the bank, or who have already had their property sold.
    Point D is something for everyone to check out.
    Point E is a question re the Pooling and Servicing Agreement, which I am putting 'out there' just in case someone can help.

    A.
    I began my research a few years ago by doing what I COULD do. I found out:
    1. who the 'Lender of Record' is (from the contract). In my case, it is Perpetual Ltd.
    2. who the 'Mortgagee' is (from the Titles' Office Search Statement and/or the Mortgage document). In my case it is Perpetual Ltd.
    3. which bank is involved (probably the one you THOUGHT was the actual lender - eg NAB, ANZ etc). In my case it is Macquarie Bank.
    4. the TYPE of loan (from the contract). In my case, the NAME of the loan was stated and further research told me that it was a 'lo doc' loan.
    5. the DATE of settlement - that is, the date from which you began to make payments.

    From those 5 pieces of information, I did Google searches. I searched 'Macquarie +Perpetual', 'Macquarie Securitisation', 'Perpetual securitisation', 'Macquarie +Perpetual +securitisation' etc. You get the picture.

    Through this, I found that Macquarie and Perpetual have an umbrella fund called 'PUMA fund' under which there are a whole lot of sub-funds. I looked for any PUMA sub-funds that were released within six months AFTER my settlement date. I came up with two. One was for 'Prime' loans, and the other was a fully subscribed Lo Doc issue.

    From there, I ASSUMED that my mortgage had been placed into the Lo Doc sub-fund called PUMA S-2.

    B. Once you have your 'best guess' fund, you can find some of their documents on the ASX site. I have read all those documents for PUMA S-2 and summarised points out of them. In my case, there is a document called the 'Consolidated Trust Deed' which covers all PUMA releases since PUMA began in about 1993. Amongst other things, I gleaned what is probably the name of the document that will have a list of all the mortgages in each of the sub-funds. Another document - I think it's the Security Trust Deed - reveals the undisclosed risk of third party claims I was placed under when they securitised my mortgage - which risk I am still under even though the bank sold my property.
    It's hard work, tedious, sometimes boring, but it's amazing what you can pick up from their own documents that, when put together with other stuff will, I believe, help bring the banks to account. I learned to stop once I got tired though, because sometimes it's just a few words, or one line - which is so easy to miss if you're getting sleepy.

    C.
    For those who have had their properties sold up by the bank, or those who the bank is threatening to sell up, GET HOLD OF THE CONTRACT OF SALE. If it is like the Contract of Sale used when the bank sold our property, it will have the evidence that your mortgage was securitised. In our case, Perpetual Ltd was said to be the 'mortgagee', and a bit later in the document, it said that the "mortgagee was acting only in the capacity of Trustee for PUMA (fund)". Bingo!

    D.
    Take a look at your Loan Statements just in case there is a 'giveaway' entry there regarding the securitisation of the LOAN. For instance, in my case, we got a loan in 2004, then got an extension on the loan in 2006. There were no entries re the 2004 loan that indicated securitisation of the loan (though I believe it happened), but the extension, which was for $48,000, shows an entry in our loan statement to 'Macquarie Securitisation' for $47,600, and 'fees' of $400.

    E.
    There's another document called the Pooling and Servicing Agreement (P&SA) that is key. However, I haven't been able to find the one for my case. In fact, I think I have only ever found one P&SA - and that may have been a non-Australian issue.
    IF ANYONE OUT THERE KNOWS HOW TO FIND THE POOLING AND SERVICING AGREEMENTS (or equivalent - perhaps they have a different name) FOR AUSTRALIAN ISSUES PLEASE LET ME KNOW.
    Quote: "The P&SA is the FOUNDATION DOCUMENT. If you are in foreclosure, that document is significant in stopping the foreclosure because the entity that is foreclosing on your property simply doesn't have the authority to do it."

  • doyla66
    doyla66 Wednesday, 14 November 2012

    I think that the CBA have just sent me confirmation that my loan has also been securitised. It was just a single 1 page sheet, buried amongst a whole load of other documents, that reads : SECURITISATION DOCUMENT & File Checklist.
    It has the name of the CONVEYANCER (BLACKED OUT by the CBA.)
    It also has the name of the DOCUMENT CUSTODIAN (BLACKED OUT by the CBA.)
    Any idea's how we can confirm this?

  • doyla66
    doyla66 Wednesday, 14 November 2012

    I think that the CBA have just sent me confirmation that my loan has also been securitised. It was just a single 1 page sheet, buried amongst a whole load of other documents, that reads : SECURITISATION DOCUMENT & File Checklist.
    It has the name of the CONVEYANCER (BLACKED OUT by the CBA.)
    It also has the name of the DOCUMENT CUSTODIAN (BLACKED OUT by the CBA.)
    Any idea's how we can confirm this?

  • doyla66
    doyla66 Friday, 21 September 2012

    Thanks for your fantastic information. Can you advise on how we, the people, can check out our mortgages and how they have been securitised. Basically, how do we find out where our mortgage documents have gone. The note and the documents? That is key to our proving that an assignment has occured.

    Thanks

  • doyla66
    doyla66 Saturday, 22 September 2012

    I thank you so much for that information Susan.

  • doyla66
    doyla66 Wednesday, 14 November 2012

    I think that the CBA have just sent me confirmation that my loan has also been securitised. It was just a single 1 page sheet, buried amongst a whole load of other documents, that reads : SECURITISATION DOCUMENT & File Checklist.
    It has the name of the CONVEYANCER (BLACKED OUT by the CBA.)
    It also has the name of the DOCUMENT CUSTODIAN (BLACKED OUT by the CBA.)
    Any idea's how we can confirm this?

  • doyla66
    doyla66 Friday, 21 September 2012

    Thanks for your fantastic information. Can you advise on how we, the people, can check out our mortgages and how they have been securitised. Basically, how do we find out where our mortgage documents have gone. The note and the documents? That is key to our proving that an assignment has occured.

    Thanks

  • doyla66
    doyla66 Friday, 21 September 2012

    Thanks for your fantastic information. Can you advise on how we, the people, can check out our mortgages and how they have been securitised. Basically, how do we find out where our mortgage documents have gone? The note and the documents? That is key to our proving that an assignment has occured.

    Thanks

  • doyla66
    doyla66 Friday, 21 September 2012

    Thanks for your fantastic information. Can you advise on how we, the people, can check out our mortgages and how they have been securitised. Basically, how do we find out where our mortgage documents have gone? The note and the documents? That is key to our proving that an assignment has occured.

    Thanks

  • doyla66
    doyla66 Friday, 21 September 2012

    Thanks for your fantastic information. Can you advise on how we, the people, can check out our mortgages and how they have been securitised. Basically, how do we find out where our mortgage documents have gone? The note and the documents? That is key to our proving that an assignment has occured.

    Thanks

  • doyla66
    doyla66 Friday, 21 September 2012

    Thanks for your fantastic information. Can you advise on how we, the people, can check out our mortgages and how they have been securitised. Basically, how do we find out where our mortgage documents have gone? The note and the documents? That is key to our proving that an assignment has occured.

    Thanks

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