Comprehensive Reporting

presents

TheCOMPREHENSIVE

SECURITIZATION AUDIT REPORT

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TheCOMPREHENSIVE


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.



TheCOMPREHENSIVE


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.

TheCOMPREHENSIVE


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.


TheCOMPREHENSIVE


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.


The Documents Presented for Examination


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.

Loan Granting, Execution of Deed, & Servicing


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

The Borrowerexecutes the Noteand the Mortgage

Borrower

to the Lender.

Note

In more than half of instances like thesethe Mortgage has a third party.

That party is MERS.

If MERS is a party it is namedas Nominee for the Lender and Mortgagee.

Lender

Mortgage

Mortgage

See section on The Role of MERS.



Borrower NoteMortgage

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.

Securitization


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.

Securitization


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.

Securitization in General


Loan POOL

Securitization involves the accumulation of loans from one or more lenders into a loan pool.

LoanLoanLoanLoanLoan

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.



The loans are used to guarantee the certificates that are sold to the investing public.

LoanLoanLoanLoanPOOL

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.

Next came private lenders which securitized loans that did not qualify for funding by the GSEs. These are called private-label securitizations.

The proceeds from the sale of the certificates are used to buy the loans from the lenders.

CERTIFICATESCERTIFICATES TRUSTPOOL



TRUST

LoanLoanLoanLoanPOOL

CERTIFICATESCERTIFICATES

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 Organization


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 Organization


DEPOSITOR

SELLER

ORIGINATOR

The Trustee performs fiduciary functions for the Trust.

The Custodian keeps the assets and records of the Trust.

CUSTODIAN

TRUST SERVICER

The Servicer services the loans on behalf of the Trust.

TRUSTEE

Trust Organization


DEPOSITOR

SELLER

ORIGINATOR

Usually the Originator, Seller, Depositor, Servicer, and even the Custodian are affiliated companies. Only the Trustee is independent.

CUSTODIAN

TRUST SERVICER

TRUSTEE

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.

Transfer of the Loan to the Trust


The Note is supposed to be endorsed by the Originator to the Seller,

The Mortgage is supposed to be assigned following the same route.

In most securitizations however, no such chains of endorsements and assignments take place.

by the Seller to the Depositor,and by the Depositor to the Trustee.

TRUSTEE

ORIGINATOR

SELLER

DEPOSITOR



In most securitizations, the Note would remain unendorsed

SELLER

DEPOSITOR

or endorsed only to the Seller.

The Mortgage would also remain unassigned

TRUSTEE

ORIGINATOR MERS

If MERS is a party in the Mortgage, it would execute the assignment as nominee for the lender. This assignment is voidable.

or assigned by the Originator directly to the Trustee.



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.

ORIGINATOR

SELLER

DEPOSITOR



TRUSTEE

MERSORIGINATOR

SELLER

DEPOSITOR

More often, what we see are an endorsement of the Note by the Originator to the Sellerand an assignment of the Mortgage to the Trustee by the Originatoror by MERS.

From the diagram at left it would seem that the loan was never validly transferred to the trust at alland worse, the transactions have caused the mortgage to be separated from the note.

See section on The Chainof Title.

Profit on the Securitized Loan


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

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.

creates a pool of Loans

but earns Interest at 7% p.a. on the Loans.

TRUST



LOANS CERTIFICATES

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

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

TRUST



LOANS CERTIFICATES

$5,000

$15,000

X 3

TRUST

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.

Recovery of the Loaned Amount


The loan is granted in Month 1,

MONTH 1 MONTH 2 MONTH 3 MONTH 4

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 5

MONTH 9

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,




A new Loan is granted in Month 9,


Recovery of the Loaned Amount


MONTH 1 MONTH 2 MONTH 3 MONTH 4

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 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.

Summary – Profitability & Recovery

LOANS

To summarize, the Trust creates an asset base made up of a pool of loans.

In order to pay for these loans the Trust borrows money by issuing certificates.

In short, what the Trust owns. . .

TRUST

. . . it owes.

Or it owns nothing. . . . . . and owes nothing.

CERTIFICATES

Yet the Trust stands to earn $5,000 a year for every $500,000 being securitized only oncewhile providing the Lender with another $500,000 in fresh funds for new lending within a span of four months.


Summary – Profitability & Recovery

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

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.


MERS as Nominee

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.


MERS as Nominee

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.


The MERS System


MERS

The MERS System has numerous lending institutions as members. MERS claims to hold legal title to their mortgages.

MemberMember

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.

MemberMember MemberMemberMortgageNoteMember

The MERS System


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.

MemberMember MemberMemberMortgageNote

MERS

The Role of MERS


The Lender holds the Note.

Mortgage

MERSMERS 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 transferMERS transfers the Mortgage to the transferee of the Note.

Lender

The Role of MERS


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.

MERSMERS

If at all the MERS assignment is to be considered valid

Note

See section on The Chain of Title

Robo-Signing

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.


Robo-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.


Robo-Signing


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.

Robo-Signing


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).

Chain of Title

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.


Chain of Title

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.


Chain of Title

A sample of a sequence of transactions runs as follows:


Seq. No. Date Debt Instrument Security Instrument

1 May 10, 2007 Loan GrantingJames S. Johnson, BorrowerUnion Federal Mortgage Corp.Originating Lender

Execution of DeedJames S. Johnson, BorrowerUnion Federal Mortgage Corp.Originating LenderMERS, 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, SecuritizationUnion Federal Mortgage Corp.as Originating Lender, EndorserCountrywide Home Loans, Inc. as Seller, Endorsee

Assignment, SecuritizationUnion Federal Mortgage Corp.as Originating Lender, AssignorCountrywide Home Loans, Inc. as Seller, Assignee

Chain of Title




3 June 22, 2007 Endorsement, SecuritizationCountrywide Home Loans, Inc. as Seller, EndorserCWABS, Inc. as Depositor Endorsee

Assignment, SecuritizationCountrywide Home Loans, Inc. as Seller, EndorserCWABS, Inc. as DepositorEndorsee


Continued

4 June 22, 2007 Endorsement, SecuritizationCWABS, Inc. as Depositor EndorserThe Bank of New York as Trustee Endorsee

Assignment, SecuritizationCWABS, Inc. as Depositor AssignorThe Bank of New York as Trustee Assignee

Chain of Title




5 Aug 29, 2011 Assignment of MortgageMERS as Nominee, AssignorThe Bank of New York as TrusteeAssignee


Continued


DEPOSITOR

SELLER

The foregoing sequence of transactions is analyzed and explained as follows:

TRUSTEE

Chain of Title

LENDER

1

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.

The Mortgage should have been assigned in the same sequence. These chains may also be referred to as the A-B-C-D sequence.


DEPOSITOR

SELLER

TRUSTEE

Chain of Title

LENDER

MERS

Based on the documents presented

and if the MERS assignment is rendered valid, then

the Mortgage has been separated from the Note.

and if the MERS assignment is rendered null and void, then

it appears that the loan was never transferred to the Trust at all.

MERS


DEPOSITOR

SELLER

TRUSTEE

Chain of Title

LENDER

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.

Foreclosure

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.


Foreclosure

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.



Foreclosure

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

Mortgage

TRUSTEE


Foreclosure

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

Mortgage

TRUSTEE


Foreclosure

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.

Mortgage

Note

TRUSTEE

Conclusion

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.


TheCOMPREHENSIVE



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