Freak
11-20-2007, 11:03 AM
woops I ment foreclosures....
http://www.nytimes.com/2007/11/15/business/15lend.html?ex=1195794000&en=09648beb1e35f1a5&ei=5099&partner=TOPIXNEWS
This is how screwed everything is. This pyramid scheme called derivatives is so simple it is hard to see. It is just obfuscated by complexity.
Lets look at just the first layer. A trust is formed that buys 10,000 mortgages averaging $250, 000. These mortgages are parked by the mortgage company or " warehoused" until the package is ready. One of the caveats is that a mortgage in default must be repurchased by the mortgage company for cash or like kind substitution dollar for dollar. Technically, the trust should never have to foreclose. The trust sells all 10,000 mortgages as a group to 1000 separate investors. The 1/1000 share is a security and may only be sold as a single unit. Like a Bond, the denomination cannot be split. that is what makes it a portable security like a savings bond. These securities are said to be asset backed. That is, they back collectively all 1000 holders of the trust security. This is simplified.
That is not the same as ownership of the mortgage. If you carve out 1 of the 10,000 mortgages you have 1000 pro rata owners of that single mortgage. Obviously, no single security owner owns the note and never will. The security holder owns the RIGHTS to the cash flow of all the mortgages to the tune of 1/1000 including principle repayments. Minus, very small fee to the trustees and the fees paid servicers.
Oh shit, the originator of the 10,000 mortgages , say Countrywide, defaults and does not repurchase the defaulting mortgage. Then what? Their remedy is to sue the originator to compel the repo. Then , as we know a bunch of originators go broke and file for bankruptcy. Happened a few hundred times in the last year. Obviously, the trust issuing the 1000 securities is also now unable to fully pass up the cash flow expected. The trust cannot file bankruptcy because it has no debt, they are usually prohibited from incurring debt other than nominals... the fees.
Stuck in the water. No money, no ownership of a security interest and asset backed is seen for the hollow value it is. No way to foreclose unless someone buys out all 1000 holders of the trusts notes and folds the trust in exchange for the individual 10,000 mortgages.
The Feds might give a judgement but then who evicts and takes possession? Who files to vacate the mortgage to have clear title? The end result is that the contractual product is unsortable. The financial instruments were created in which *nobody* has standing to enforce the terms that define its value…
Now there is a legal person having standing to sue in most cases. It is the trust that owns the mortgage. Here we get a real howl. Almost all of these ownership trusts were designed so that they will never have a foreclosure. Any defaulting mortgage must be bought by the originator or replaced with like kind so that they never own a mortgage to foreclose. To that end, the cash flow rights provide little funds to pursue a foreclosure because they never have one in theory. They also may not incur debt other than incidentals and fees to the trustees. They have no funds provision to pursue a foreclosure. Boom, the originators do not repo the defaulted mortgages so....... there they sit. The trust agreement would need to be approved to enable funds diversion thus killing the cash flow and the price. The owners of these mortgage owning trusts only have rights to the cash flow. They each own their aliquot share of all mortgages in the trust not any individual mortgage. They were direct copies of Credit Card Trusts. Making things impossible , the owners of the mortgage repo trust are trusts that contain other debt owning trusts. These trusts are CDO's. Getting even more dicey, these CDO's are owned by SIV corporate type entities chartered in tax havens financed by the banks to keep the whole mess outside consolidation of the bankcorp or investment house. Asset backed never meant rights to a foreclosure only the rights to the cash flow of the foreclosure. To get rights to foreclose someone must buy the note. if they do that and they own one participation out of 1000, they enrich the other 999. So all the owners get together to actually fund the purchase of these defaulted loans at par to foreclose them and get half back. They are never going to get that kind of participation.
My mind swims thinking about this.....The big boys painted themselfs in a corner on this one. :sqeyes: Then think about all the retirement funds that are also invested in these securitys…….
http://www.nytimes.com/2007/11/15/business/15lend.html?ex=1195794000&en=09648beb1e35f1a5&ei=5099&partner=TOPIXNEWS
This is how screwed everything is. This pyramid scheme called derivatives is so simple it is hard to see. It is just obfuscated by complexity.
Lets look at just the first layer. A trust is formed that buys 10,000 mortgages averaging $250, 000. These mortgages are parked by the mortgage company or " warehoused" until the package is ready. One of the caveats is that a mortgage in default must be repurchased by the mortgage company for cash or like kind substitution dollar for dollar. Technically, the trust should never have to foreclose. The trust sells all 10,000 mortgages as a group to 1000 separate investors. The 1/1000 share is a security and may only be sold as a single unit. Like a Bond, the denomination cannot be split. that is what makes it a portable security like a savings bond. These securities are said to be asset backed. That is, they back collectively all 1000 holders of the trust security. This is simplified.
That is not the same as ownership of the mortgage. If you carve out 1 of the 10,000 mortgages you have 1000 pro rata owners of that single mortgage. Obviously, no single security owner owns the note and never will. The security holder owns the RIGHTS to the cash flow of all the mortgages to the tune of 1/1000 including principle repayments. Minus, very small fee to the trustees and the fees paid servicers.
Oh shit, the originator of the 10,000 mortgages , say Countrywide, defaults and does not repurchase the defaulting mortgage. Then what? Their remedy is to sue the originator to compel the repo. Then , as we know a bunch of originators go broke and file for bankruptcy. Happened a few hundred times in the last year. Obviously, the trust issuing the 1000 securities is also now unable to fully pass up the cash flow expected. The trust cannot file bankruptcy because it has no debt, they are usually prohibited from incurring debt other than nominals... the fees.
Stuck in the water. No money, no ownership of a security interest and asset backed is seen for the hollow value it is. No way to foreclose unless someone buys out all 1000 holders of the trusts notes and folds the trust in exchange for the individual 10,000 mortgages.
The Feds might give a judgement but then who evicts and takes possession? Who files to vacate the mortgage to have clear title? The end result is that the contractual product is unsortable. The financial instruments were created in which *nobody* has standing to enforce the terms that define its value…
Now there is a legal person having standing to sue in most cases. It is the trust that owns the mortgage. Here we get a real howl. Almost all of these ownership trusts were designed so that they will never have a foreclosure. Any defaulting mortgage must be bought by the originator or replaced with like kind so that they never own a mortgage to foreclose. To that end, the cash flow rights provide little funds to pursue a foreclosure because they never have one in theory. They also may not incur debt other than incidentals and fees to the trustees. They have no funds provision to pursue a foreclosure. Boom, the originators do not repo the defaulted mortgages so....... there they sit. The trust agreement would need to be approved to enable funds diversion thus killing the cash flow and the price. The owners of these mortgage owning trusts only have rights to the cash flow. They each own their aliquot share of all mortgages in the trust not any individual mortgage. They were direct copies of Credit Card Trusts. Making things impossible , the owners of the mortgage repo trust are trusts that contain other debt owning trusts. These trusts are CDO's. Getting even more dicey, these CDO's are owned by SIV corporate type entities chartered in tax havens financed by the banks to keep the whole mess outside consolidation of the bankcorp or investment house. Asset backed never meant rights to a foreclosure only the rights to the cash flow of the foreclosure. To get rights to foreclose someone must buy the note. if they do that and they own one participation out of 1000, they enrich the other 999. So all the owners get together to actually fund the purchase of these defaulted loans at par to foreclose them and get half back. They are never going to get that kind of participation.
My mind swims thinking about this.....The big boys painted themselfs in a corner on this one. :sqeyes: Then think about all the retirement funds that are also invested in these securitys…….