The essential reality is that the transfers required by law and the PSA in each deal were never made. The darker reality is that they couldn’t be made because the obligation was between the borrower and the investors as a group and not with the REMIC which by definition is a conduit.
Since the borrower received the loan from the investors, the obligation arises by operation of law to the investors. But the paperwork with the borrower says otherwise. And the paperwork with the investor sets forth the blueprint for transfer of the loans by “sale” from entities that could never own the obligations because the investors already owned the obligation. Transfers between intermediaries were meaningless and the marketplace is realizing this and refusing to put a “value” on this procedure.
And the reason for the defects in the paperwork is simply that if that the investors were properly identified as creditors from the beginning, the intermediaries would not have had the “opportunity” to claim the loans, sell and trade them under exotic instruments and put the MBS in their balance sheets as though they owned those assets when in fact they never did. And of course they never had a dime in the deal — they didn’t loan the money, they never bought the loan.
Actually the only intermediary that has any money in the deal is the servicer that was making payments even if it did not receive payments from the borrower.
The legal consequence of this mess is uncertain, not as to what the law requires, but whether the law will be applied. It is clear that the Fed is claiming ownership or control over the mortgage bonds and just as clear that without legal transfers of the loans, the bonds were backed by nothing.
That leaves the mortgage originator with the security and the obligation and possibly the note running to other entities. hence the obligation is owed to the investors, the note may be invalid because it was never made payable to any legal creditor and the security instruments secures a debt to the originator that does not exist.
And now from Zerohedge …
Today, we saw the first glimmerings of the same concerns as chatter of Goldman’s (and others) interest in some of the lurid loans sent credit reeling. As the WSJ reports, this meant the Fed had to quietly seek confirming bids (BWICs) from other market participants to judge whether Goldman’s bid offered value.
The discreteness of the enquiries sent ABX and CMBX (the credit derivative indices used to hedge many of these mortgage-backed securities) tumbling with ABX having its first down day since before Christmas and its largest drop in almost two months. The knock-on effect of the potential off-market (or perhaps more reality-based) pricing that Goldman is bidding this time can have (just as it did last time when the Fed halted the auction process as the market could not stand the supply) dramatic impacts as dealers seek efficient (and critically liquid) hedges for their worrisome inventories of junk.
The underperformance (and heavy volume) in HYG (the high-yield bond ETF we spend so much time discussing) since the new-year suggests one such hedging program (well timed and hidden by record start-of-year fund inflows from a clueless public which one would have thought would raise prices of the increasingly important bond ETF) as the market’s ramp of late is very reminiscent of the pre-auction-fail-and-crash we saw in late June, early July last year as credit markets awoke to the reality of their own balance sheet holes once again.