Part One talked about what a quality squatter is (he improves the home, thus improving the neighborhood), how to find the right house, and ideas on how to stay long term. Part Two continues the discussion, going into detail of how/why the mortgage mess happened and how the legal system is beginning to understand who the bad guy really is.
The Magician
He is a splendid magician, complete with white tux and all the trappings. He borrows a hat, ministers over it with a stunning sparkling magic wand, and pulls out a live rabbit. Again the magic wand does its thing and the hat produces another rabbit. A third time, and a fourth, and a fifth, each time another rabbit joins the group. The kids look on in wonderment, eyes wide with the magic actually happening before them. The hat is returned to its owner, unscathed and intact. Wonderful magic.
But the adults know that it’s a trick. Well done, but a trick nonetheless. They cannot see how it was actually accomplished, certainly the magician is skilled, but there is no doubt that the “magic” is just an illusion.
The Middleman
He too is splendid, with limousine and fancy office with bustling assistants and bountiful receptionists. Having no wealth of his own, the middleman borrows two hundred million dollars from his very rich uncle. That is the hat.
This talented middleman then goes to banks and mortgage companies and purchases 2000 mortgages, each worth $100,000. Total of $200,000,000. Now all of uncle’s money is gone. Middleman then creates securitization by bundling the 2000 mortgages into a bunch (called a “deal”), dividing the deal into many little parts, and selling those parts to private investors, pension funds, and the like. What the investors are buying is the right to the proceeds of the mortgages, that is, the interest and principal payments the homeowners are making each month. The middleman has produced a rabbit.
At this point, and assuming the middleman hasn’t made any markup (stupid middleman to let that lucrative opportunity get away) the middleman has recouped the $200 million. Since he has the money back, he goes into the market again and buys another 2000 mortgages and securitizes them them into another “deal”. A second rabbit. Again he sells to investors and gets his $200 million back.
For the third, fourth, and fifth time he performs the same trick. He then returns the $200 million (the hat) to his uncle, who is happy to get it back unscathed and intact.
And now the middleman “owns” 2000 mortgages from each of the five deals, or 10,000 mortgages in all. Remember that he began with no money and no mortgages and after waving the magic wand he now has a billion dollars worth of mortgages on perfectly good homes. And the children look on in wonderment, eyes wide with the magic happening before them.
But the adults, and an increasing number of judges, know it is only a trick. Skillfully done with flourish and pizzazz , but still just a trick.
The Forest and the Trees
When he has to go to court, the middleman will lead the judge into the forest called securitization. In that forest are wondrous trees never before seen. Immense trees that bend and bow and tangle and intertwine. Hollow trees through which other trees grow, entering as one species and emerging as a totally different sort of tree. Having never been seen, these trees have no legal history, no statutory law nor case law to define how they behave. At one side of the forest the gnarly trees commence and at the other the trees emerge, straight as giant telephone poles stacked in neat rows. The kids are amazed but, increasingly, the judges are not.
Viewed from afar, those forests are just forests, in this case there are five such plots, each individual and distinct but each containing the same sort of trees that have no legal precedent. The middleman, who began with no money and no trees, now owns five whole forests. Or does he? If he bought the “deal” and then sold it to investors and got all his money back, how can he claim he still owns anything?
Rot and Decay
Time passes. The economy softens. Homeowners find it increasingly difficult to make their mortgage payments, particularly the owners who were fooled into purchasing a bigger home at a higher price than they could truly afford. Jobs are downsized, income is downsized, and mortgages are not getting paid on time, or at all.
The investors are seeing their cash income diminish as more owners cannot make payments. But they cannot foreclose because they never bought the mortgages, they only bought “rights” to the money flow. So the middleman begins foreclosing, throwing families out of their homes into the street. After all, this is just a financial transaction, not human misery.
But since the middleman has already received his money back, it is arguable that he has no recourse to get it back again. Once is enough. So, if the investors do not own the house, and the middleman does not own the house, how can anyone kick the residents out? Well, it happens because the judges have traditionally believed the middlemen who had lots of attorneys and lots of paperwork (some real and some created out of thin air), while the penniless homeowner had nobody. But, as the song goes, the times they are a-changin….
Explanation of Securitization
Attorney Richard Kessler has written a lucid and persuasive 15-page article by that title. I hope he will forgive me for quoting a page here:
“Securitization consists of a four way amalgamation. It is partly 1) a refinancing with a pledge of assets, 2) a sale of assets, 3) an issuance and sale of registered securities which can be traded publicly, and 4) the establishment of a trust managed by third party managers. Enacted law and case law apply to each component of securitization. However, specific enabling legislation to authorize the organization of a securitization and to harmonize the operation of these diverse components does not exist.
Why would anyone issue securities collateralized by mortgages using the structure of a
securitization? Consider the following benefits. Those who engage in this practice are able to…
1. Immediately liquidate an illiquid asset such as a 30 year mortgage.
2. Maximize the amount obtained from a transfer of the mortgages and immediately realize the profits now.
3. Use the liquid funds to enter into new transactions and to earn profits that are immediately realized… again and again (as well as the fees and charges associated with the new transactions, and the profits associated with the new transactions... and so on).
4. Maximize earnings by transferring the assets so that the assets cannot be reached by the creditors of the transferor institution or by the trustee in the event of bankruptcy. (By being “bankruptcy-remote” the value to investors of the illiquid assets is increased and investors are willing to pay more.)
5. Control management of the illiquid asset in the hands of the transferee by appointing managers who earn service fees and may be affiliated with the transferor.
6. Be able to empower the transferor by financially supporting the transferred asset by taking a portion of the first losses experienced, if any, from default, and entering into agreements to redeem or replace mortgages in default and to commit to providing capital contributions, if needed, in order to support the financial condition of the transferee [In other words, provide a 100% insured protection against losses].
7. Carry the reserves and contingent liability (for the support provided in paragraph 6) off the balance sheet of the transferor, thereby escaping any reserve requirements imposed upon contingent liabilities that would otherwise be carried on the books.
8. Avoid the effect of double taxation of, first, the trust to which the assets have allegedly been transferred and, second, the investor who receives income from the trust.
9. Insulate the transferor from liability and moves the liability to the investors.
10. Leverage the mortgage transaction by creating a mortgage backed certificate that can be pledged as an asset which can be re-securitized and re-pledged to create a financial pyramid.
11. Create a new financial vehicle so mind numbingly complicated that almost no one understands what is going on.
The obvious benefit of the above #11 is that courts are predisposed to disbelieve the allegation that a securitized note is no longer enforceable. To a reasonable person, the claim that a mortgage note is unenforceable merely because it has been securitized does sound somewhat outlandish. And frankly, the more complex and difficult the securitized arrangement is to explain and perceive, the more likely a judgment in favor of the “lender” will be in litigation.” [ http://www.msfraud.org/... ]
This is only a sample, there is no way to adequately summarize Mr. Kessler’s work, you have to read it – and have your lawyer read it – several times to gain a full understanding of how tax law and land law have been warped into the monstrous and malicious securitization mess.
What about the Quality Squatter?
The above is mainly addressed to foreclosure, stopping the middlemen from kicking the homeowner out in the street. Now the owner can fight back successfully. But the same idea applies to the quality squatter, if no one can prove ownership, no one is in a position to kick you out.
The middlemen thought they had invented a way to have their cake and eat it too. Well, they ate their cake and now it is becoming clear that once the cake is gone it is gone, and the judges are starting to understand where that cake went. And while the cake may be gone, the house is still there and should be joyously lived in. So go for it, quality squatter. You are on the side of the angels, sleep well.
