Comprehensive Reporting

presents
www.mortgageauditsonline.com

The Comprehensive Securitization Audit Report
was created in order to serve the various
purposes of securitization audit – from seeking
the most favorable terms in a loan modification
to supporting legal action to delay or defend
against foreclosure or to seek relief from unfair
or unlawful practices by lenders, servicers, and
related institutions.

This report is different because it includes a section
that discusses the contemplated profit that was to
be made by the participants from securitizing a loan.
The figures used in the computations are gathered
from actual documents. It also states how soon the
lender recovered the full amount it originally lent to
the borrower instead of the 30 years it usually takes
for the loan to be fully paid from the agreed monthly
amortizations.

This presentation discusses the features of the
Comprehensive Securitization Audit Report. It is
rendered highly credible with the use of
irrefutable evidence gathered from very reliable
sources supported with expert independent
opinion and analyzed and presented in a highly
professional manner. The examiners have no
interest in the outcome of the examination.

The findings in this type of examination are
factual although they are provided for
informational purposes only and are not to be
construed as legal advice. The borrower shall be
strongly advised to consult a competent legal
professional in connection with the contents of
this report and its proper use.

This section lists the documents that are
presented in the examination sorted, arranged,
and labelled as exhibits. The exhibit numbers are
cited throughout the report where necessary.
The usual order is as follows: Promissory Note,
Security Instrument, Voluntary Liens Report or
Title Report, MERS servicer inquiry screenshot,
assignments, foreclosure documents, loan
statements, and various correspondence.

This section establishes the existence of the debt
and the underlying security as agreed upon and
acknowledged by the parties based on the
documents that were presented, identifies the
mortgaged property, and determines the terms
and conditions that are relevant to the overall
purpose of this examination.

The procedures involve a review of the promissory
note and mortgage in order to verify if the note had
been endorsed and if the mortgage had been
recorded, to determine if MERS is a party or not and if
it is, to ascertain what rights has been bestowed upon
it, to identify the current servicer, and to inquire into
the present status of the originating lender.
The following slides present a run-through of the
typical transactions that give rise to the debt and the
security.

MERS
Borrower
The Borrower
executes the Note
and the Mortgage
to the Lender.
Note
In more than half of
instances like these
the Mortgage has a
third party.
That party is MERS.
If MERS is a party it is named
as Nominee for the Lender and
Mortgagee.
Lender
Mortgage
Mortgage
See section on The Role of MERS.

Mortgage
Borrower Note
The Lender may
service the loan
itself
The Servicer collects
the payments from
the Borrower on
behalf of the
Lender.
or may engage the
services of a
Servicer.
Lender
Servicer
The Borrower is
informed of any
change of the
Servicer.

This section determines if the subject loan has been
securitized and if it was, it identifies the securitizing
entity and the parties thereto, verifies if the required
chains of endorsements of the note and assignments
of the mortgage have been fully complied, assesses
the effect of securitization on the subject loan,
determines its present status as a securitized loan,
and identifies the entity who has possession of the
loan and security instruments.

The procedures involve a search of the exact securitization
trust, a verification of the documents on file with the SEC that
establishes its identity and existence, an identification of the
participating entities, a determination of the stated size of its
loan pool and certificates issued as well as the rules and
procedures governing its operations and whether or not these
have been implemented as far as the examined loan is
concerned.
The following slides present a brief background of
securitization in general, a run-through of the typical flow of
transactions, and a discussion of the most common violations.

Loan POOL
Securitization involves
the accumulation of
loans from one or more
lenders into a loan pool.
Loan
Loan
Loan
Loan
Loan
Trust organizers not only
sourced loans from their
own affiliates and
correspondents; they
also acted as warehouse
lenders, buying loans
from small independent
lenders.
The MERS System
shortcut documentation
and even bypassed
recording requirements
thus helping to speed up
the whole process.
There could be as many
as 10,000 loans in one
pool alone amounting to
as much as $4 billion or
more. Loans were
sourced in all 50 states
and Puerto Rico.
Thousands of trusts were
established between
2001 and 2007.

CERTIFICATES TPROUOSLT
Next came private
lenders which securitized
loans that did not qualify
for funding by the GSEs.
These are called private-label
securitizations.
The loans are used to
guarantee the
certificates that are sold
to the investing public.
POOL
Loan
Loan
Loan
Loan
The certificates are
issued in classes
corresponding to the
types of loans in the
pool.
The first securitizers were
the GSEs Fannie Mae,
Freddie Mac, and Ginnie
Mae.
Loan
In the United States
private-label
securitizations are
managed by trusts.
The proceeds from the
sale of the certificates
are used to buy the loans
from the lenders.
CERTIFICATES

TRUST
POOL
Loan
Loan
Loan
Loan
CERTIFICATES
CERTIFICATES
Collections on the loans
are used to buy back the
certificates and pay for
their interest over a
period of time according
to their scheduled
redemption dates.
Class A
Class B
Class C
Class D
Class E
The certificates are
issued in tranches. Each
tranche has a scheduled
redemption period. The
first tranches are given
priority over the others.

TRUST
The process of pooling
loans begins with the
Originator which might
be the lender or the
entity that acquired the
loan from another
lender.
The Originator sells the
loan to the Seller.
DEPOSITOR
SELLER
ORIGINATOR
The Seller sells the loan to
the Depositor.
The Depositor the sells the
loan to the Trust.

TRUST SERVICER
DEPOSITOR
SELLER
ORIGINATOR
The Trustee performs
fiduciary functions for the
Trust.
The Custodian keeps the
assets and records of the
Trust.
CUSTODIAN
The Servicer services the
loans on behalf of the
Trust.
TRUSTEE

TRUST SERVICER
TRUSTEE
DEPOSITOR
SELLER
ORIGINATOR
Usually the Originator,
Seller, Depositor, Servicer,
and even the Custodian are
affiliated companies. Only
the Trustee is independent.
CUSTODIAN
In the Countrywide model,
Countrywide Home Loans is
the originator and seller,
Countrywide Home Loans
Servicing is the servicer,
CWABS, Inc. is the depositor,
and The Bank of New York is
the Trustee and Custodian.

The Note is supposed to be
endorsed by the Originator
to the Seller,
by the Seller to the
Depositor,
and by the Depositor to
the Trustee.
The Mortgage is supposed
to be assigned following
the same route.
In most securitizations
however, no such chains of
endorsements and
assignments take place.
TRUSTEE
DEPOSITOR
SELLER
ORIGINATOR

In most securitizations, the
Note would remain
unendorsed
DEPOSITOR
SELLER
or endorsed only to the
Seller.
The Mortgage would also
remain unassigned
TRUSTEE
ORIGINATOR MERS
or assigned by the
Originator directly to the
Trustee.
If MERS is a party in the
Mortgage, it would execute
the assignment as nominee
for the lender. This
assignment is voidable.

These chains of
endorsements and
assignments are required by
the Pooling and Servicing
Agreement of the Trust
TRUSTEE
MERS
and must also be complied
within 90 days of the
Trust’s closing date in order
to qualify the Trust as a
Real Estate Mortgage
Investment Conduit, which
is exempt from tax.
DEPOSITOR
SELLER
ORIGINATOR

TRUSTEE
DEPOSITOR
ORIGINATOR MERS
SELLER
More often, what we see are
an endorsement of the Note
by the Originator to the
Seller
and an assignment of the
Mortgage to the Trustee by
the Originator
or by MERS.
From the diagram at left it
would seem that the loan
was never validly transferred
to the trust at all
and worse, the transactions
have caused the mortgage to
be separated from the note.
See section on The Chain
of Title.

This section determines, albeit in theoretical terms,
the potential income that the securitizing entity will
have derived from the securitization of the subject
loan as well as the period of time it will have taken for
the originating lender to recover from the
securitization trust the amount it loaned to the
borrower from the proceeds of the sale of the
certificates.

For profitability, the procedures include determining how much
interest the borrower is paying on the loan, into what group the
loan belongs, and the interest that the trust is paying on the
certificates that are secured by the loans in that group.
For recovery, the procedures include determining when the trust
started to distribute payments to its certificate holders and if all
of the certificates guaranteed by the loans in that group has been
sold.
The following slides present a brief demonstration of how the
procedures are applied in the examination.

LOANS CERTIFICATES
The Trust may pay
interest at 5% p.a. on the
certificates
As has been discussed,
the Trust
creates a pool of Loans
The Trust pays Interest
on the Certificates but
earns more Interest on
the Loans.
Thus the Trust stands to
earn a Gross Income of
2% p.a.
and uses it to guarantee
the issuance of
Certificates.
but earns Interest at 7%
p.a. on the Loans.
TRUST

LOANS TRUST
CERTIFICATES
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
If the Trust spends
$5,000 a year for
servicing, trustee fees,
and other expenses, it
still earns a Net Income
of $5,000 a year for
every $500,000 loan that
has been securitized.
Given these rates, the
Trust earns Interest of
$35,000 a year for every
$500,000 loan that has
been securitized.
On the other hand, the
Trust pays Interest of
$25,000 a year for every
$500,000 worth of
Certificates, leaving a
Gross Income of $10,000.
$5,000

LOANS TRUST
CERTIFICATES
$5,000
X 3
$15,000
In the previous example,
it has been estimated
that the Trust stood to
earn a Tax-Free Net
Income of $5,000 a year
for every $500,000 of
loan that has been
securitized.
This means that if the
securitization process
was repeated three
times,
the Trust will have
earned $15,000 for every
$500,000 of loans that
have been securitized.
It is reported that the total
loans securitized as of the
end of the year 2010 is $3
trillion.
$15,000 out of $500,000
may be a small amount
but it was earned
without using capital.

This layered timeline shows the speed and frequency in which a loan Originator can
recover through the Trust the amount it loaned to the Borrower thereby making the
funds available for fresh lending. The process is repeated twice more in this timeline.
MONTH 1 MONTH 2 MONTH 3 MONTH 4
MONTH 5
MONTH 9
The loan is granted in
Month 1,
MONTH 6
MONTH 10
MONTH 7
MONTH 11
MONTH 8
MONTH 12
and is securitized in Month 3. The certificates
are sold in one month and the loaned amount
is fully recovered in
Month 4.
A new Loan is granted
in Month 5,
Month 8.
A new Loan is granted
in Month 9,
Month 12.

This timeline shows that during a period of one year, the whole Lending-
Securitization-Recovery cycle can be repeated three times and the Lender will
still be able to lend again at the start of Month 1 of the following year.
MONTH 1 MONTH 2 MONTH 3 MONTH 4
MONTH 5
MONTH 9
MONTH 6
MONTH 10
MONTH 7
MONTH 11
MONTH 8
MONTH 12
Following the assumption on the previous
slides, this is the same $500,000 being
recycled over and over again. It also proves
that the period it takes to securitize
$500,000 to earn $15,000 per annum is
one year – without the need of capital.
Securitizers like Countrywide, Wells Fargo,
JP Morgan Chase, Lehman Brothers,
IndyMac, and Washington Mutual
established well within or over 50
securitization trusts a year during the years
2001 and 2007.

LOANS
To summarize, the Trust
creates an asset base
made up of a pool of
loans.
CERTIFICATES
In order to pay for these
loans the Trust borrows
money by issuing
certificates.
In short, what the Trust
owns. . .
TRUST
. . . it owes.
Yet the Trust stands to
earn $5,000 a year for
every $500,000 being
securitized only once
while providing the
Lender with another
$500,000 in fresh funds
for new lending within a
span of four months.
Or it owns nothing. . . . . . and owes nothing.

The table below compares a non-securitized $500,000 loan (Column 2) earning a net income
of 4% p.a. Its Average Daily Balance (ADB) will be steady and its yearly income (Column 4)
will accumulate at a uniform rate. Column 5 is the ADB of a $500,000 loan securitized three
times a year. Its assumed net income is only 1% p.a. Column 7 shows its accumulated
income. Row 7 compares their accumulated net incomes at the end of the seventh year.
1 $500,000 4% $20,000 $1,000,000 1% $10,000
2 $500,000 4% $40,000 $2,500,000 1% $35,000
3 $500,000 4% $60,000 $4,000,000 1% $75,000
4 $500,000 4% $80,000 $5,500,000 1% $130,000
5 $500,000 4% $100,000 $7,000,000 1% $200,000
6 $500,000 4% $120,000 $8,500,000 1% $285,000
7 $500,000 4% $140,000 $10,000,000 1% $385,000

This section applies if Mortgage Electronic
Registration Systems, Inc. (MERS) is a party in the
debt and/or the security instruments. It aims to
determine what authority or capacity has been
granted to MERS and by whom, and if MERS did
perform any act under that capacity, to determine if
this act was performed in accordance with law and
the terms and conditions under which they were
bestowed.

The procedures include a review of the security
instrument in order to verify if MERS is a party and if
it is, to define its authority, an inquiry on the MERS
website to determine if the instrument is recorded in
the MERS System, and an examination of the
documents that pertain to acts that were executed by
MERS as a party in the security instrument in order to
ascertain if these were done in accordance with the
terms of the instrument and with law and its
implications on the other parties involved therein.

A member who assigns a
note to another by way
of an entry into the
MERS database need not
assign the mortgage.
MERS
The MERS System has
numerous lending
institutions as members.
MERS claims to hold legal
title to their mortgages.
MERS claims it has the
authority to assign the
mortgage to the holder
of the note as reflected
in the MERS database.
Member Member
Member MMoNermotgtbeaegre Member

MERS
The MERS System has
numerous lending
institutions as members.
MERS claims to hold legal
title to their mortgages.
A member who assigns a
note to another by way
of an entry into the
MERS database need not
assign the mortgage.
MERS claims it has the
authority to assign the
mortgage to the holder
of the note as reflected
in the MERS database.
Member MoNrotgteage Member

The Lender holds the
Note.
MERS
Mortgage
MERS
Database
Note Member
MERS holds the
Mortgage.
Instead of endorsing
the Note,
the Lender enters in
the MERS Database
that the Note has
been transferred.
Upon being notified of
the Note’s transfer
MERS transfers the
Mortgage to the
transferee of the
Note.
Lender

The entry by the
Lender in the MERS
database
Mortgage
MERS
Database
Member
MERS’ authority to
assign has already
been contested.
it must have a
corresponding
endorsement of the
Note by the Lender.
Lender
is not a valid
endorsement.
MERS
If at all the MERS
assignment is to be
considered valid
Note
See section on The Chain of Title

This section attempts to establish prima facie
evidence that the persons who are signing on
behalf of the entities who have executed acts
involving the loan and security, the witnesses to
their signing, as well as the notaries public
before whom the instruments have been sworn
to, have been involved in robo-signing or
surrogate signing.

The procedures include a search for information
on the signor’s reported involvement with robo-signing,
the various purported capacities under
which he/she is acting, and a comparison of
his/her signature with available specimens. The
current status of the notary public is also
verified.

Our main source for
information on robo-signers
is the
Massachusetts
Southern Essex
Registry of Deeds.
Other sources include
ProTitleUSA
Timothy M Candless
A X Smith Law
Home Preservation
Network
Foreclosure Hamlet
No Foreclosure
Darrick Services
Free Foreclosure
Lawyer & many more.
The statuses of
notaries are verified
with 123Notary.

Our sources of
specimens are
WhatSignature.com
and our own RS
Database which we
started compiling
from actual examined
documents in the year
2012.
A sample of our signature verification presentation
runs as follows:
This is the signature of Bryan J.
Bly on the subject assignment.
This is the signature of Bryan J.
Bly on another assignment
which he signed as Vice-
President of CitiMortgage, Inc.
on September 27, 2010 (from
the Examiners’ RS Database;
Bly B 01).

This section aims to identify any breaks in the
chain of title or instances wherein the security
instrument has been separated from the debt
instrument in relation to or as the result of the
securitization of the loan, the capacity or lack
thereof, of MERS to perform certain acts, and
the nullity of the documents that have been
signed by forgers or robo-signers or surrogate
signers.

The procedures involve the identification of the
original parties in the loan and the security
instruments and in the endorsements, the
securitization, the assignments, and the
substitutions of trustees and the comparison
between the required transactions and the
complied, and the matching of each assignment
with a corresponding endorsement.

A sample of a sequence of transactions runs as follows:
Seq.
No. Date Debt Instrument Security Instrument
1 May 10, 2007 Loan Granting
James S. Johnson, Borrower
Union Federal Mortgage Corp.
Originating Lender
Execution of Deed
James S. Johnson, Borrower
Originating Lender
MERS, Nominee & Mortgagee
Transactions in light boxes are actual documented transactions. Those in dark boxes are the
transactions required in securitization.
Continued
2 June 22, 2007 Endorsement, Securitization
as Originating Lender, Endorser
Countrywide Home Loans, Inc. as
Seller, Endorsee
Assignment, Securitization
as Originating Lender, Assignor
Seller, Assignee

Seq.
Seller, Endorser
CWABS, Inc. as Depositor
Endorsee
Seller, Endorser
Endorsee
Continued
Endorser
The Bank of New York as Trustee
Endorsee
Assignor
Assignee

Seq.
5 Aug 29, 2011 Assignment of Mortgage
MERS as Nominee, Assignor
Assignee
Continued

The Mortgage should have been assigned in the same
sequence. These chains may also be referred to as the
A-B-C-D sequence.
LENDER
1
SELLER
DEPOSITOR
The foregoing sequence of transactions is analyzed and
explained as follows:
TRUSTEE
2
3
4
MERS
1 The Note should have been endorsed by the Lender to
the Seller, by the Seller to the Depositor, and by the
Depositor to the Trustee.
2 In fact, however, the Note was not endorsed. Thus,
the A-B-C-D sequence of endorsements was not
complied at all.
3 MERS’ authority to assign the Mortgage as Nominee
for the Lender is questionable. It may also have engaged
the services of robo-signers is executing the assignment.
4 MERS did in fact, assign the Mortgage to the Trustee.
Thus, the A-B-C-D sequence of assignments has been cut
short to A-D.

and if the MERS assignment is rendered null
and void, then
LENDER
SELLER
DEPOSITOR
TRUSTEE
Based on the documents presented
and if the MERS assignment is rendered
valid, then
the Mortgage has been separated from the
Note.
it appears that the loan was never
transferred to the Trust at all.
MERS

LENDER
SELLER
DEPOSITOR
TRUSTEE
MERS
Thus, whether or not the MERS assignment
is valid, there is still no full compliance of
the required chains of endorsements and
assignments. This means that:
o The trust could not foreclose because it
is not in possession of the Note and
Mortgage or if it is, it does not have the
documents to support the transfers.
o The trust would not qualify as a REMIC
therefore its net income would not be
tax exempt.
o The trust is not bankruptcy remote and
is not a holder is due course.

This section arranges the loan and security and
foreclosure transactions in sequence, identifies
the foreclosing party, and ascertains if this party
has the authority to initiate the foreclosure
based on the documents presented.

The procedure centers on the flaws in the chain
of title that may have arisen as a result of the
failure to fully comply with the chains of
endorsements and assignments required in
securitization, the capacity of MERS to execute
assignments, and evidence of robo-signing on
the pertinent documents.

The securitization trust Trustee, or any party
initiating the foreclosure will have to prove that it
has in its possession the Note and the Mortgage.
In the case of the Trustee, these instruments will
have come to its possession through the A-B-C-D
chains of endorsements and assignments and it
must be able to show the documents evidencing
their full and timely compliance.
It must be noted that a Note can be transferred
only by endorsement and a Mortgage by
assignment. All such transfers are bound by the
higher legal principle that the Note always follows
the Mortgage.
Note
TRUSTEE
Mortgage

Thus, particularly in the case of MERS, its
assignment may be rendered valid only if the lender
endorsed the Note to the same entity as the MERS
assignee.
By concluding that the Trustee is not the proper
party to initiate the foreclosure, it thus becomes
necessary to identify who this party is.
Going back to the chain of title, the Note has not
been endorsed. Therefore, regardless of who the
holder of the Mortgage is by assignment, it is not
the real party in interest.
Note
TRUSTEE
Mortgage

The Mortgage may have been separated from the
Note but the Note remains secured and the holder
of the Mortgage cannot enforce its rights upon it
without the Note.
Thus, in the instant case, the real party in interest is
still the originating lender. This has to be admitted
without prejudice to the evidence that the loan has
been securitized.
The evidence for securitization, however, does not
grant rights to the Trustee to initiate the
foreclosure.
Note
TRUSTEE
Mortgage

The Comprehensive Audit Report was conceptualized to be what a
real audit should be – independent and unbiased, with the auditor
or examiner free of any interest in its outcome. It neither attempts
to sensationalize its findings nor ignore the present economic
ramifications of the crash of the housing market that securitization
helped to unfold.
The examiners are aware that the homeowner has a purpose for
engaging their services. As in any business environment, they are
working under certain constraints with limited resources. These
limitations may hamper them from getting to the bottom of things,
but however these may affect their work, the examiners are only
bound to make conclusions that are supported by facts and
evidence.

a
Mortgage Audits Online, Inc.
presentation
Created by Alan Petralba Copyright 2014

Comprehensive Reporting

Recommended

Recommended

More Related Content

What's hot

What's hot (19)

Viewers also liked

Viewers also liked (17)

Similar to Comprehensive Reporting

Similar to Comprehensive Reporting (20)

Recently uploaded

Recently uploaded (20)

Comprehensive Reporting