Securitization: What is it?

The idea behind securitization is that a lender can make a loan and immediately sell the loan so that their capital is not tied up for 30 years. In reality it doesn’t quite work this way.

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The idea behind securitization is that a lender can make a loan and immediately sell the loan so that their capital is not tied up for 30 years.  In reality it doesn’t quite work this way.

In the classic securitization example, a company that originates loans sets up an agreement with a warehouse lender (GMAC, Morgan Stanley, Bank of America, Wells Fargo, etc).  The agreement typically provides that the warehouse lender will provide the capital for the loan to the originator and the originator will provide the loan to the warehouse lender for securitization.

In this scenario the originator does not loan any money, but is provided a fee of 1.5% to 2.5%.  The warehouse lender is sometimes the sponsor and seller of the loans.  This means they create a subsidiary and use the subsidiary to create a trust.  The loans are transferred to the subsidiary and on into the trust.  The trust issues unregistered securities that are sold to investors  The investors have an undivided ownership interest in the trust.

In this scenario the investors are the creditor who provide the capital used to fund the loans.  The funds provided are the proceeds of the sales of securities to the investors.  All other parties are merely intermediaries.  According to the Office of the Comptroller of the Currency, the substance of this type of transaction is that the investors own the loans.

What should happen in this type of securitization is the following:

  1. The note and mortgage are issued naming the appropriate parties
  2. The note is indorsed and conveyed to the warehouse lender (who in this scenario is also the sponsor and seller)
  3. The mortgage is assigned to the warehouse lender / sponsor / seller
  4. The assignment is recorded
  5. The note is indorsed and conveyed from the warehouse lender / sponsor / seller to the depositor (as subsidiary of the warehouse lender / sponsor / seller)
  6. The mortgage is assigned to the depositor
  7. The assignment is recorded
  8. The note is indorsed and conveyed from the depositor to the trust and/or trustee of the trust
  9. The mortgage is assigned to the trust and/or trustee of the trust
  10. The assignment is recorded

We will leave it at that to keep it simplified. We will not get into discussions at this point of what is right or wrong with any of this.

Remember that we are providing the above based on what theoretically should have been done, but in fact was never done (as far as we know).

We are starting out slow but we will get into the meat in future articles.

There are many who are just now starting to learn what securitization means.

Author: dmedstrom

Reverse Engineering and Failure Analysis - Reverse Engineering Wall Street

5 thoughts on “Securitization: What is it?”

  1. I had provided this very same information to a client who spelled out three different times in his brief when he was the Plaintiff and the lenders/trust were the Defendants. The Judge did not have a clue and we understand how complex it can be for those without mortgage backgrounds, specifically in the buying and selling of loans and portfolios. All the Judge wanted to know was did the Defendants (the lenders) have the original note endorsed to them. After 3-1/2 years they finally coughed it up for the judge and he awarded them the motion for summary judgment. The case is now in appeals and we believe that with the current events which came about publicly in October, that the three judges on the Appeals Court will have a much better understanding. Even when the Court allowed me to give a ten minute dissertation about the missing endorsements on the note and the lack of assignments, he wasn’t going to have any part of it. I do expect the Appeals Court to overturn the judges decision. So glad others are now getting the word out because the homeowners just cannot deal with all of this and someone has to defend them. That is what we do and we do not charge nor take money from the government, attorneys or anyone else as we want to remain objective. What a tragedy that so many have already lost their homes due to the type of loan, the servicing of the loan and now of course the foreclosure mills working in tandem with the trust. Thanks again.

    1. Joyce,
      Seems par for the course. The truth needs to get out there but it has been a long slow process. But this year we have seen incredible gains. But that does not necessarily tranlate into courtroom “wins”. Upcoming posts and our workshops will address some of the salient issues in much more detail.

      -Dan

  2. Good start to a complex problem. Since, as you mention above, some viewing are completely in the dark about the process, if I could be so bold as to make a suggestion, a place where the homeowner shows up in the above chart might add clarity. Otherwise, i can hardly wait to see the whole series.

    John R.

    1. John,
      No problem, the homeowner is the Mortgagor in the diagram. Other terms would be trustor, borrower, etc. You are correct this is not clear to most who are not familiar with these terms. I usually list this box as the borrower, but this is not my diagram. This came right out of the SEC Filings for one of the trusts (pools). This diagram is basically a disclosure to investors purchasing securities.

      -Dan

  3. This is fantastic! But I’m trying to figure out how a subsidiary of an FSB fits in as they were my “lender” on my docs. The FSB was a correspondent to the trust. I also don’t understand where that fits in. If anyone can’t shed some light, I’s truly appreciate it!

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