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Foreclosure Fraud: It’s the Tranches, Stupid

If your loan is in a Residential Mortgage Backed Security (RMBS), nobody owns your loan.  Further, nobody can own your loan until the term of the security expires.

I know this is hard to wrap you head around, but what I am about to tell you will likely make your head explode, so read on at your own peril.

When the RMBS is created, all of the mortgages are put into a single pool together. This pool creates a revenue stream.  The promissory note (if it was ever properly conveyed, which I will discuss this in my next post) is held by the “trustee” for the pool and is serviced by the “servicer."  The “investor” didn’t buy your mortgage when it bought the RMBS, what the investor in a particular tranche bought was the right to receive a revenue stream paid out of this communal pot, subject to superior claims upon the revenue stream by the investors in tranches above it.  . . .

The servicer collects all the payments from all the homeowners for this month and puts that money in a big pot. From that pot, after the servicer takes its own fees, the highest tranche is paid first, then the second tranche, and so on until you get to the bottom tranche. If the pot runs out of money before all the tranches have been paid in full, that means the bottom tranche take the hit.

If collections are better next month, there might be a little more money in the pot and maybe the bottom most tranche might see a sheckle or two. If collections are worse, perhaps a higher tranche will get less or even nothing.

This is important: no individual mortgage is actually in any tranche. If different tranches were sold to different investors, no one investor actually owns any mortgage. The only way that the investor could own the mortgage is if a single investor bought every single tranche of that particular RMBS. Since RMBSs were usually billion dollar deals, what is the likelihood that any single investor bought the whole position?

The trustee doesn’t own the mortgages in the sense of having paid to purchase them, the trustee merely holds the mortgage as a bailee for the benefit of the investors.

The servicer doesn’t own them, the servicer is merely a collection agent for the owner.

It is not until the expiration date of the security that it would be possible to assign a particular mortgage to a particular tranche, with the worst performing mortgages assigned to the lowest tranche and the best performing mortgages assigned to the highest tranche. That means, for a 30-year mortgage taken out in 2006, you have 24 more years to wait to find out who is going to own your mortgage.

Right now, nobody does.

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Cynthia Kouril

Cynthia Kouril

Cynthia Kouril is a former Special Assistant United States Attorney in the Southern District of New York under several different U.S. Attorneys, former counsel to the Inspector General for the N.Y.C. Department of Environmental Protection where she investigated threats to the New York City water supply and other environmental crimes, as well as public corruption and fraud against the government, former Examining Attorney at the N.Y.C. Department of Investigation and former Capital Construction Counsel at New York City Parks and Recreation.
She is now in private practice with a colleague whom she met while at the USA Attorney's Office. Ms. Kouril is a member of the Steering Committee, National Committeewoman and Regional Coordinator for the New York Democratic Lawyers Council, a member of the Program Committee of the Federal Bar Council and a member of the Election Law Committee at the Association of the Bar of the City of New York. She is active in several other Bar Associations.
Most important of all, she is a soccer mom.