Here, the first in a series of posts explaining the hows and whys of ForeclosureGate and the Florida Home Loan Fraud crisis:
Part 1. How It All Began, Remembering Traditional Mortgage Practices and that First Smell of More Profit
Long before ForeclosureGate, when the economy was running smoothly and banks were not operating outside the box, a potential home buyer would go to the bank and ask for a home loan. His credit would be checked, his income verified, and if set standards were met, then the loan would be approved – if the property passed the bank’s test, too.
A title company or Title Insurance Attorney would investigate the real property to insure that there was clear title to pass (that the seller had legal title to sell in the transaction). Then, a Title insurance Policy would be issued to protect against title losses.
An appraiser would check the property to insure that it was indeed of sufficient value to cover the amount of the note: the bank would need to know that the home was valuable enough to cover the loan amount in case the borrower did not pay as agreed.
If things went well, and both the borrower and the property got passing grades with the bank, there would be a “closing” where the buyer would sign lots of paperwork, including a note and a mortgage. The note was the promise to pay the money back. The mortgage was the okay that the bank could take the house to cover the loan if the borrower failed to pay the money back.
The bank would secure these documents in a bank vault. Documentation would be filed in the real property records to confirm the purchase of the real property.
Then, things began to change. Things stopped being so traditional.
The mortgage industry got bigger and more ways to make money began to be offered to banks. For example, banks started to secure the home loan notes in “mortgage-backed securities.” Mortgage-backed securities (MBS) are a collection of notes, a pool, secured by mortgages. These pools of notes backed by mortgages could involve lots and lots of money. Billions of dollars are involved in most mortgage-backed securities, if you totaled up the notes in the pool.
Seeing these pools, as something that could be securitized and sold, the mortgage industry did just that: the collections were sold to investors. They were called Residential Mortgage-Backed Securities (“RMBS”). The investors bought them through trusts, just like people buy other investment vehicles. The loans were sold to trusts and who then issued RMBS to the investors. The loans are then serviced by the Trusts in accordance with the loan documents and the Pooling and Servicing Agreement (PSA). The PSA governs, for example, the allocation and distribution of loan proceeds and losses to the investors.
Did the home owner who was paying his mortgage payment every month know all this was going on? No. Perhaps he received a notice that his note would be serviced by another bank or lender or “mortgage servicer” and he would be instructed to make his monthly payment out to another name. The owner of the home was not told about the RMBS, the trust or the Pooling and Servicing Contracts. Banks didn’t see it as any of the home owner’s business: they considered the mortgage-backed loans their assets – their property to do with as they wished.
And they wished to make more money. Which, was the end of the traditional home mortgage scenario and the beginning of ForeclosureGate.