Sunday, September 11, 2011

CAN YOU STOP PAYING YOUR MORTGAGE?


STRATEGIC DEFAULTS REVISITED: SHOULD YOU STOP PAYING?

Posted on September 11, 2011 by Neil Garfield

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Mark, one of our readers, just pointed out to me that on YOUTUBE I have a video explaining tier 2 yield spread premiums that have been largely overlooked by virtually everyone. The premise of the piece on YouTube is “Are securitized residential notes already paid by tier two yield spread premium ?” Mark’s comment is “Have the notes on residential mortgage backed securities in full or in part ? This may mean that a strategic default does not make sense since the homeowner may very well be giving up on and abandoning a free and clear property that has already been abandoned by the creditor. Maybe it’s time to go on the offense ?”
My answer is that theoretically going on the offensive makes a lot of sense and maybe it is time to try that again. BUT, the track record of taking the banks on before any default has not been very successful except when a default occurs with only one “record holder” of the mortgage in the title registry. On the other hand there is more than one offense, and getting a full accounting for what happened to the money is likely to reveal some very fruitful results, both in terms of TILA violations and in terms of computing the real balance on the original obligation.
Here we have the transcript of my talk on YouTube: Keep in mind that this video was done before we had so much evidence that the securitization of loans was largely a hoax in which the loans were never transferred into any pool and that fact alone changes some of the legal conclusions — but not the factual conclusions regarding the money.
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Today we are going to talk about yield spread premiums. Many of you have heard the term used . I doubt if many people actually understand what it is. So I’m going to start with explaining each term .
First a yield is the amount expressed in either dollars or percentage that comes from an investment so for example if you were to purchase a bond in the market place for a thousand dollars and you were receiving 50 dollars per year as interest on that bond , then the yield on that bond would be fifty dollars and that would be five per cent of one thousand dollars so the yield would be expressed as either five percent or fifty dollars .
A yield spread occurs when there are two different loans . Basically the yield spread premium as you will learn in a moment is a device used in the marketplace and it has been used for quite some time by which the seller of a financial product steers you into a second product which is not as good for you as the first but it is better for somebody else.
So for example to put it in plain language if you have a five per cent loan that you qualified for and your mortgage broker steers you into a seven per cent loan so you are going to be paying higher interest its worse for you , better for the lender , the lender pays the mortgage broker an extra fee usually under the table which is called the yield spread premium.
The spread is two per cent in the example I just gave you. You have a seven per cent loan and a five per cent loan the difference between seven per cent and five per cent is two . That two per cent doesn’t sound like much but when you multiple it times an average of say two hundred thousand dollars that two  percent is four thousand dollars a year which over the life of a thirty year loan is a hundred and twenty thousand dollars .
Therefore the broker gets a commission based upon the present value of that $ 120,000. So this first yield spread premium which has existed for decades is something which the mortgage brokers have feasted on . It is supposed  to be disclosed to you in the good faith estimate and in your final HUD settlement statement at the closing and usually isn’t and is frequently the grounds for clawing back some money from the lender and potentially treble damages or interest and attorneys fees etc.
But there is a second yield spread premium which is largely unknown . It arose during the time that mortgage loans were securitized. Securitizing of a loan simply means that they were converted from just being a loan to being a security. That’s why they call it securitization.
The securitization of the loan causes a second sale to occur before it actually gets to the source of funding. Who is the source of funding on your loan when you’re loan has been securitized ? Well the source of funding is an investor or a group of investors who advanced money and received a bond a mortgage backed security which gave them ownership some percentage ownership in your loan and many others..
When they bought that pool of loans that included your loan they paid a spread but they weren’t told that in other words if they put up a million dollars the investment bankers on wall street for example might have only used $ 500,000 to fund mortgages . And the way they were able to do that was through the yield spread .
The investor thinking that they were getting a triple A rated investment grade security based upon a  Moodys rating or an S&P and insured by our famous AIG friends, was prepared to accept a return of perhaps five or six percent which was one or two percent higher than they could ordinarily get but the loan pool that the investment banker sold to the investors contained many loans that included ninja loans no income no job no assets sometimes resetting to as much as 18 percent .
If you put pen to paper and watch this video perhaps a couple of times that at the very beginning I made a point of saying that you could express the yield in either dollar terms or percentage terms so if the investor parted with one million dollars to buy the bonds and was expecting a five percent return and the investment banker went out and got very poor quality loans with an average of ten per cent interest .
The investment banker only had to use half of the money from the investor to fund the mortgages necessary to get the five per cent that the investor was looking for. Now that sounds confusing  I’m sure but watch the numbers .
If the investor gave a million dollars and he was looking for a five percent return he was looking for fifty thousand dollars. But if the investment banker gave out only five hundred thousand dollars in funding at ten per cent , there’s your fifty thousand dollars ten percent of five hundred thousand .
So the investment banker sells the five hundred thousand dollar loan to the investor for one million dollars and pockets five hundred thousand as a yield spread in that case the yield spread premium is roughly equivalent to the yield spread itself .
In the first instance where the old yield spread premium was paid the bank or lender would have paid the mortgage broker a little kickback or an extra bonus of a few thousand dollars for having steered  you into a higher yielding loan.
In the second instance the second sale itself is unknown to both the borrower and the investor and only the investment banker knows so what the investment banker does is create this spread and while there are some monies that are taken out of that spread in order to cover the investment with credit default swaps , insurance and with reserves, the bulk of the money went to the investment banker and frequently  can be found offshore in a structured investment vehicle.
The point of this that for those of you who get a forensic analysis or a truth in lending audit or whatever they want to call it , that second yield spread premium is not just a few thousand like the first one it is for a securitized loan and especially those that are subprime or alternate funding loans it is frequently a very substantial proportion or even a multiple of the entire funding of the loan. Now the reason that’s important was that it was undisclosed.
And the reason why that’s important is that because it was undisclosed and because the parties were undisclosed there appears to be a remedy in the truth in lending law which allows you to claw back your share of that money as a yield spread on the second level where it was sold to the investors. This may mean that the profit now it depends , loans vary as to quality and so you do need to consult with experts on this but generally speaking for general information purposes it may mean your loan was paid in full or in part or prepaid in part at the very start of your transaction when you first signed the papers .
At the very least it provides you with a reason in discovery or with a qualified written request or a debt validation letter to ask for a full accounting of all monetary transactions that relate to your loan or which relate to the pool in which your loan was located.
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2 Responses

  1. Nancy Drewe, on September 11, 2011 at 7:58 am said:
    Consider COMBO’s.
    Typical reason for a combo, the existing mortgage being refinanced higher than the 1st mortgage. The 2nd mortgage closed first with a debtor like Real Estate Owned Lender – REO Lender/Underwriter, third party retail transaction combo loan assigned MIN#. Combo loans, the first mortgage will be conventional and the 2nd mortgage will be non-conforming, the closing occurs under resale already to non-conforming third obligor added. During default, processof foreclosure, the Lenders Policy used to secure cash to write off RETAIL 2nd of Combo and reasonthey always firle the combo 2nd loan first on thehomeowners policy.
    The COMBO, 2nd, an inflated 2nd at Retail, will lead back to two loan numbers consumer was paying Mortgage Servicer of a national bank on 2 different loan numbers, and the MIN# contains the 10 Digit Sales Agreement number recorded in MERS and recorded in Register of DEEDS. But when the payoff occurs the writeoff that appears on consumer credit report is not recorded with Register of Deeds.
    HAMP ‘somebody’ playing REO LENDER taking cash which is not applied to P&I. Is given to third party – who? Trial payments ensure foreclosure imminient. During HAMP is another Lender’s policy issued to protect the new debtor who gets the cash,P&I still accured as default debt, servied by sub-servicer GMAC Mortgage Corp is Servicer Wells Fargo or Chase. HAMP sold as ‘shortterm’ investments? To who?
    Back to consumer credit report. The 3rd Party Retail Transactions -debtor – paid off during foreclosure per credit report. We need to say ‘paid off’ cause the consumer credit bureau reflects payable and receivable history.
    The Third Pary Retail MIN# we know Sales Agreement is between 2 parties, the REO Lender/Underwriter Servicer. That is the Servicer is the one who is listed on the homeowners policy in the first position as a lien holder and an insurance payment of ‘cash’ went to the subservicer GMAC Finance and what happens? Like in a Sheriff Sale, HAMP, there is a tempoary lender who would that be? That is the third party you mean? Right. What happened to the money?
    Consumer in MD right now, sits wtih bankruptcy auditor’s report that is incorrect and ‘double’ the amount due, the bankrtuptcy auditor of the court did not file the report — making fraud possible — if the report not filed no one will know about the two amounts. Luckily the consumer is a smart one and appealed and brining back into court before judge in an hour meeting all of the parties who will face frauds if the judge who was an alcoholic remanded from the case does not come back and the lawful judge looks at the evidence.
    Does consumer report reveal debt written off?
    The REO/Lender ‘WHO’ approved sale for what amount 2 days before closing at some value generated by a computer a year ago, REO LENDER’s ‘local robo-firm’ purchased the property as another debtor obligor during forced sheriff sale in a nonj-judicial foreclosure, the consumer seeks protection of bankruptcy court … meanwhile the appeal, the district courts ‘contractor’ who is that masked accounting auditor KPG? And why is the amount owed double placed in front of the court but is not ‘double’ inside CTS Link? And these additional debtors conjoined to the existing ‘debt’ makes for a very interesting 3 dimensional relationship of overcharging in a mechanized fashion during non-judicial foreclosures – bankruptcies being the standard route consumer will take to try and protect selves from ‘unlawful seizure.’
  2. Nancy Drewe, on September 11, 2011 at 7:40 am said:
    Interesting. Consider ‘sheriff sales’ property already purchased by REO Lender/Underwriter Agreement where purchase price generated by ‘Bloomberg’ system $xxx,xxx.02 the cents a regulation of computer generated payments transactions executed through LPS,etc.


































































































































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