Many of us just assume that mortgages are owned by banks. Upon closer investigation, the true ownership of home mortgage may come as a surprise to homeowners. What may be even more surprising is that many industry practices violate federal and state laws. A recent filing in the US District Court of Hawaii looks to shed light on the subject. With big players involved like Deutsche Bank, OneWest Bank, CIT Bank, MERSCORP Holdings, and Ocwen Financial Corporation,the case promises to be illuminating.
Real Estate Mortgage Investment Conduit (REMIC) also known as Collateralized mortgage obligations (CMOs), are mortgage pass-through securities that are pooled together to create collateral, as well as provide tax advantages to both the issuers of these loans and the investors. When the Tax Reform Act of 1986 passed, CMOs were now alternatively created under the name of REMICs.
Typically REMICs are long term investments that provide for monthly payments to be procured from borrowers of the loan pool. This money is then paid monthly to investors. There are several key players in REMICs including the Master Servicer, the Special Servicer, and the Trustee. The duties and obligations of each of these players is created in a Pool & Servicing Agreement (PSA) amongst the parties. With this, the Controlling Class Representative (CCR), has the final authority to make decisions on behalf of the certificate holders. The problem herein is that once the borrower’s loan is securitized, the original banker that the borrower dealt with is no longer working with the borrower. The loan is pooled into the REMIC which is a trust and has no lender. Trusts have fiduciaries that hold certificates to the pooled loan interest, but no direct interest in the actual loan as that has been converted into a passive money making scheme.
If by chance the borrower falls on hard times, this is when the scheme begins to unravel. The borrower may wish to speak to the lender to work out a solution, but because the loan has been converted into a trust, that lender no longer exists. Instead, the borrower’s only source of contact is the Master Servicer who does not have the authority to amend the existing loan. This entire time, unbeknownst to the borrower, he or she has actually been paying the Master Servicer. In the event that the borrower misses payment(s), it is the initial responsibility of the Master Servicer to pay the first several payments to the certificate holders. If the borrower is able to resolve the delinquent situation quickly, the certificate holders will continue to get their payouts without interruption.
However, if the borrower is unable to make payments after 60 days, the Special Servicer will now intervene and offer options to the borrower in an attempt to avoid foreclosure. Because a trust has fiduciaries, the terms to the new agreement must be in the best interest of all of the certificate holders. The terms of this new contract may include, but are not limited to, modifying a loan, extending maturity date of the loan, deferring interest, etc. The Special Servicer will often refuse to engage in any discussions with the borrower until an appraisal of the property has been made and the borrower, who is now in default, has exhausted all options of financing. It would seem reasonable for the Special Servicer to try to work out an agreement to avoid foreclosure on the property, but the reality is that any terms modified must be in the best interests of all members of the trust. As such, Special Servicers are often unwilling and unethically permitted to bring the property out of default. Instead, it is quite common for the Special Servicer to cut the loss, foreclose on the property and sell the asset.
This deceptive lending scheme takes borrowers by surprise and puts them in a precarious position. The borrower is unaware of the escalated consequences of default on this type of lending. The average lay person does not understand the sophisticated language of REMICs and is under the belief that they have a typical bank loan. Generally, loans are owned by the originator of the loan, a REMIC, Fannie Mae, or Freddie Mac. Trusts have different rules, requirements, and obligations. The purpose of creating a trust out of the mortgage is to exploit the ignorance of the borrower and circumvent the tax code.
When the borrower is served with a notice of foreclosure, the plaintiff is named as the servicer with no actual owner named in the pleadings. It is of critical importance for the borrower to determine who the lender of the loan is because if it is not Fannie Mae or Freddie Mac, both of which are quasi-government regulated and have to follow protocol, the loan most definitely is a REMIC. If the loan is a REMIC, the deadline date for which the loan must be transferred from the originator to the trust most likely never even happened as the requirement is typically within three months time. As a result, the REMIC status, only in name, is being used to manipulate the IRS Tax Code in order to receive preferential tax status as no real property interest has truly been created.
By failing to properly execute the transfer, the trust requirements necessary to qualify for a REMIC status similarly fails. As such, there is no real property secured by the interests. Further, when and if these transfers take place, the documents are robo-signed under MERS (Mortgage Electronic Registration System), a non-public recording system. Without securing a true signature of the party to be charged, determining the ownership of a negotiable instrument becomes a factual impossibility.
Most property owners are unaware that this type of transfer of the mortgage is unlawful as it disregards tax law, securities law, and foreclosure laws at the federal, state and local levels. The unscrupulous tactics in the mortgage lending industry must be exposed so that homeowners are able to properly protect and secure property interests.