At some point the Courts will need to accept some of the responsibility for the damage caused by this scheme.
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INVESTOR ALERT! — USING THE COURTS, the foreclosing entity successfully transferred a bad loan to your portfolio, forced you to take the loss, prevented you from mitigating damages and imposing a tax burden that is directly contrary to the terms of the REMIC trust.
I know this goes headlong against established “theory” that the debt, the note and the mortgage are inseparable, but that is the point. When the Wall Street banks got involved, the debt, the note and the mortgage were all separated causing chaos and confusion from which the Wall Street profited beyond imagination. — Neil F Garfield, livinglies.me
So what exactly is that “assignment” that everyone is talking about and litigating?
BOTTOM LINE: The “contract” contained an offer but is missing acceptance and consideration. The loan is not in any trust. I think the “assignment” is an “offer” that was not accepted and not paid by the Trustee of the Trust — and that is the reason why you see a Trustee named as plaintiff when they are willing to sign anything including a rogue “power of attorney” or if they are not willing, then the action is brought by a newly minted servicer who allegedly knows nothing about past behavior that has resulted in hundreds of billions of dollars in settlements, fines and sanctions against the predecessors of the “new” servicer.— Neil F Garfield, livinglies.me
As I wade through the hundreds of court dockets, getting information on process and due process, I am struck by the absence of common sense and equal protection under existing laws. For 7 years, I have said that no new law will cure the mortgage crisis and foreclosure tragedy. The existing laws, rules of civil procedure and rules of evidence are sufficient to dispose of most claims for foreclosure — even if the claim on the note is “assumed” or “presumed” valid. But these precepts are being applying in a twisted in a disjointed way to achieve an unjust result — the courts are causing homeowners to forfeit their homes because of errors originating on Wall Street. The courts are starting off with the premise that the debt at issue is valid when it is not. And they are allowing and promoting presumptions of fact that are in direct conflict with the facts that are presumed to be true.
Legal presumptions are used when it is obvious that the assertion is most likely true. Judges are assuming that the claim that the borrower owes money to the party pursuing foreclosure. That assumption stems from prior experience when it WAS true that nobody was going into court claiming the right to collect on a debt or to foreclose on collateral unless the debt, note and security agreement (mortgage) were all true and valid. What is NOW obvious is that the facts in most cases show that there is no debt and thus there is no valid note and hence there can be no enforcement of either the note or mortgage even if they were signed by the homeowner — nor should they be enforced by the parties seeking to enforce them. It would possibly be different if the Trusts were holders in due course or if anyone had that status. But that is clearly and indisputably neither alleged nor true.
In processing foreclosure cases the courts are forcing higher and higher losses onto investors who thought they were buying safe mortgage bonds. And the chicanery of the intermediaries in churning out absurd lending products is being paid for by the victims of their chicanery! Investors are seeing their investments eroded by foreclosures that should have been worked out in settlements and modifications. And to add insult to injury, the investors are seeing their money used to pay fines and damages that the investment banks caused intentionally and without knowledge, consent or authority from the investors. Homeowners cry out that none of this makes sense and they are right. And it is plain to see to any experienced member of the judiciary, if they approach the cases with an open mind.
From my reading of the law, only a holder in due course is entitled to the presumption that they can enforce free and clear of the borrower’s defenses. The Holder in Due Course doctrine, existing in some form for centuries, is that the innocent buyer of bad commercial paper does NOT assume the risk of defects in the creation of the paper. Even if there is fraud, the suit will generally be decided in favor of the HDC as long as they paid value in good faith without knowledge of the borrower’s defenses. The person who signed a note and mortgage (and who never received a loan from the “lender” on the note and mortgage) may go after the originator of the deal but they are probably going to find that the originator is bankrupt or otherwise out of business. This is what happens in many PONZI schemes — and make no mistake about it, securitization was a PONZI scheme layered over at many levels such that it is difficult to understand unless considerable time is expended analyzing and exploring what really occurred.
The HDC is in a special position when it comes to presumptions. It basically says to the world, that if anyone puts their signature on a note or mortgage they do so at their own peril — with only the right to sue the party who violated law and procedure when the loan was originated or acquired. The correct presumption for an HDC is that the debt, note, mortgage are all valid and enforceable and basically leaves the borrower in the position of a single defense — payment.
And on that score, even if the borrower alleges payment from a third party source, the burden is squarely on the borrower to prove that the payment was not a loan or advance subject to subrogation. If it was not subject to subrogation then the credit should be applied. It is possible that the third party (servicer advances for example) might have a right of action against the borrower for unjust enrichment, but we know that such actions would run into trouble because (a) the advances didn’t come from the servicer and (b) there were other business reasons (value received) for making the advances.
I doubt if many people would attempt to contradict my analysis of a holder in due course. So if alleging you are a holder in due course would prevent all this litigation, why are parties pursuing foreclosure under the premise that they are simply the holder and even representing that they are not claiming the status of holder in due course? Why would the banks fail to allege something that would put down any realistic defense of the borrower? What issues are they raising, and why isn’t the hair on the back of the Judge’s neck raising when they see “holder” and not “holder in due course?”
There are three elements to being a holder in due course:
- Bona fide payment of value
- Acting in good faith
- No knowledge of borrower’s defenses
Unless the Trustee in fact DID know what was going out in the marketplace, the distance of the REMIC trust from the origination or acquisition of the loan documents leads to a fairly assumption that the Trustee, in accepting the loans into the pool owned by the trust, probably had no direct knowledge of the borrower’s defenses. BUT, as we shall see, their acceptance was not based upon a transaction in which value was paid; this in turn can only mean that the Trustee and therefore the Trust was not acting in good faith when it accepted the loans, all as stated in the pooling and servicing agreement. And if the Trustee knew that the loan documents were not being delivered to the designated depository shown in the PSA — that would also indicate they were (a) not dealing in good faith and (b) had unclean hands.
In short, if the Trustee was covering up and participating in a fraudulent scheme, it was not acting in good faith, and therefore cannot achieve the exalted and powerful status of being a holder in due course. And if the Trustee did not issue payment for the loan, then the transaction which is presumed in virtually all courts across the country, never occurred. And that makes the loan documents less and less sounding like commercial paper and more like conditional promises and cross promises that were never intended to be covered by the UCC.
But even if the UCC is used as a reference point you arrive at the same conclusion. Article 3, as adopted by all states (possible with the exception of Louisiana) governs the creation and enforcement of certain promises in the form of “notes.” If it is an unconditional promise to pay a definite sum on a definite day to a definite person with no conditions, then it probably is commercial paper that can be transferred pursuant to the UCC and can be enforced, using the laws adopted by each state with respect to Uniform Commercial Code. If conditions for payment are attached to the promise in any way it is not commercial paper, it is not a negotiable instrument under the UCC.
If it meets the criteria of being commercial paper then the loan contract is presumed to exist, but that is a rebuttable presumption. The borrower may assert defenses, such as lack of consideration, which the borrower must prove. In this case the lack of consideration is especially counter-intuitive.
A mortgage is not commercial paper. It has lots of terms and conditions that are not obvious and cannot computed from the face of the instrument. But in any event Article 9 of the UCC requires the same HDC status in order to enforce the mortgage — i.e., that value was paid for the mortgage. It may be that a holder without payment can enforce a note but a holder without payment cannot enforce a mortgage. This might lead eventually to bifurcation of the case in which judgment is entered for Plaintiff on the note and for Defendant on the mortgage.
In order to prove that the loan contract was never completed and therefore cannot be enforced, the borrower must show that the party on the note did not lend the borrower any money. In order to prove that, the borrower must allege it, and then obtain the necessary information to produce in court evidence that the “lender” was a naked nominee representing another naked nominee and that the the source of the loan is nowhere in the chain of monetary transactions leading up to the origination or acquisition of the loan.
And in order to get that, the borrower’s requests for discovery must be aggressively pursued, because only the foreclosing party and other third parties have the information that proves that the loan closing or loan transfer was a sham. Absent that proof from the borrower on a note that is facially valid according to state law, the judgment on the note will almost always occur. But on the mortgage, the foreclosure is an action in equity and given the “unclean hands” doctrine and UCC law, enforcement of the mortgage through foreclosure is problematic in these “securitized” loans, which brings me to the point of this article.
But first a word on procedure. I think there is an genuine issue of law and procedure as to whether a Final Judgment might be available on the debt (if the borrower fails to successfully defend the obligation claiming lack of consideration or violations of statute) BUT that the mortgage cannot be used to force the homeowner to forfeit the homestead. I know this goes headlong against established “theory” that the debt, the note and the mortgage are inseparable, but that is the point. When the Wall Street banks got involved, the debt, the note and the mortgage were all separated causing chaos and confusion from which the Wall Street profited beyond imagination.
So what exactly is that “assignment” that everyone is talking about and litigating?
BOTTOM LINE: The “contract” contained an offer but is missing acceptance and consideration. I think the “assignment” is an “offer” that was not accepted and not paid by the Trustee of the Trust. The loan does not exist in the pool. That is the reason why you see a Trustee named as plaintiff when they are willing to sign anything including a rogue “power of attorney” or if they are not willing, then the action is brought by a newly minted servicer who allegedly knows nothing about past behavior that has resulted in hundreds of billions of dollars in settlements, fines and sanctions against the predecessors of the “new” servicer.
As an aside, this discussion is preempted in situations where the the “originator” of the alleged loan did not exist. Names like “American Brokers Conduit” appears on the note and mortgage in many cases. No such entity exists that ever acted as a lender, originator or even broker of a loan; it is impossible for a nonexistent entity, unregistered as an entity, unregistered as a lender, unregistered as a broker, and unregistered as the business name (d/b/a) of a real entity. Such an entity can get nothing, do nothing and convey nothing because it is a not a “person” under the law, and as such could not and did not have a bank account or any other business operation.
The “assignment” from such an entity is simply void — a sham that results in the delivery of a void and otherwise defective note and the delivery and recording of a void or otherwise defective mortgage. Anyone who takes such an “assignment” (with or without value) gets nothing. The assignment is often treated as creating rights that did not exist in the name of the assignor. This is incorrect by operation of law. There is no successor that can claim any rights to the loan.
ACCEPTANCE BY THE TRUSTEE FOR THE TRUST
To make the situation as stark as I see it, consider this example and analogy: Over the years Greenacre was owned by a tannery in which toxic chemicals created what is known as a Superfund site — all people in the line of title are liable for the cleanup. John Jones owns Greenacre. He has a hatred for Sam Smith, a competitor of his. So he executes and records a Quitclaim deed that conveys all right, title and interest in the property to Sam Smith, in order to make his adversary liable for the Superfund cleanup of toxic waste.
Does anyone think that Sam Smith won’t defend the action from the Federal government? Of course he will and he will be successful when he shows that there was no transaction between himself and John Jones, his arch nemesis. Sam Smith will rebut the presumption arising from a recorded instrument by showing that there was no deal between himself and John Jones. He will reject the deed as a wild deed. He will deny that he is the owner and he will state that nobody can force ownership upon him by executing a deed he neither wanted nor even knew about.
BACK TO BASICS: When the REMIC Trust is created by a Trust instrument, it is usually by way of the Pooling and Servicing Agreement that is signed by the Trustee, accepting the loans in the pool. In order to do so, the loans must actually be in the pool, and the Trustee, on behalf of the Trust is required to pay value for the loans in the pool, in good faith and without knowledge of the defenses of any of the borrowers in the pool.
In other words, at the time of creation, the Trust gets to own loans in the pool if (a) the loans are accepted by the Trustee and (b) the trust is a holder in due course. Or, if you don’t want to take it that far, there are specific restrictions on the Trustee’s acceptance of loans and procedures by which loans can be accepted or rejected. Under New York law any violation of those restrictions voids the transaction. It is interesting therefore that the intermediary banks are avoiding the evidence of or allegation regarding payment for the loan and fail to identify the Trust as a holder in due course.
An extremely important restriction is the period of time in which the REMIC business may be conducted — receiving investment capital and using the proceeds to originate or acquire loans. This is a 90 period terminating on the “cutoff date.”
If the loan is attempted to be included in the pool AFTER THE CUTOFF DATE, it is essential that the Trustee accept it. The Trustee may accept it IF the Trustee gets an opinion of counsel stating that the acceptance is legal, and that it will not negatively impact the favorable tax treatment for REMIC trusts, nor will it negatively impact the rights of the “trust beneficiaries” (a/k/a “the investors”). As you will see below, the investment banks have used state foreclosure procedures to force loans that are in default into the Trust causing direct economic loss to the investors and indirect loss from losing the tax benefits from a REMIC trust. That is the basis for the investor lawsuits.
In nearly all cases, the paperwork for transfer into the pool is fabricated AFTER the cutoff date and after the loan is delinquent and frequently AFTER the loan is declared in default. Signatures were forged, robo-signed or created under nonexistent authority.
Think about it. You are an investor who thought you bought a fine portfolio of loans that were mostly conventional, and on the whole presented low risk, with a Triple AAA rating from a rating agency and insured by AIG, AMBAC et al. You are going to get favorable tax treatment for your investment. So you give an investment bank $100 Million to buy mortgage backed securities (MBS) ISSUED BY THE TRUST. As with any IPO, the broker dealer (investment bank) is required to turn over the net funds from the offering to the issuer (in this case, the Trust). And you think you have the protection of New York law that makes any act that is not authorized by the common law trust VOID (not voidable, in which the investor must take action to get rid of the consequences of the “act”).
You made your investment in March 2007. So the cutoff date is 90 days later and you can now breathe easy — your investment is set in stone and you start collecting your great returns on investment that were promised. What you don’t know is that the Trust never received the money from the broker dealer who sold the MBS to you. You have purchased worthless paper issued by an unfunded trust. Normally the broker dealer would be required to disclose that the trust was never successfully created and funded during the cutoff period and that no loans were purchased or acquired. You would demand and receive every penny you advanced for the purchase of the securities issued by the Trust. But that isn’t what happened.
Flash forward to 2014. You have been receiving payments from the loans distributed by the servicer, so you have no idea that the trust was never funded, that the loans were never originated by the Trust and that the loans were never purchased by the Trust. You don’t know that the loans were never delivered to the Depository designated to receive the loan documents. The distribution reports you are receiving are the same as the monthly statements sent out by Madoff — all lies.
The distributions have been consistently coming from the servicer, the Master Servicer and the broker dealer derived from a variety of sources including your own money, part of which was “reserved” to make payments to trust beneficiaries and some of which was supported by borrower payments. Since you are getting regular payments just as set forth in the Trust document, you have no reason to believe or know that the “borrowers” never received a loan from the Trust nor anyone in the “chain of title” starting with the originator of the loan. You don’t know that Harry Hapless stopped making payments. You don’t know that the Hapless loan was not among those accepted by the REMIC Trust. To the contrary, you have been receiving payments on the Hapless loan as though it was in the pool and fully performing. And THAT is the reason you continued to buy MORE MBS issued from other trusts.
And unknown to you, someone has filed suit against Hapless seeking to foreclose on his property. They have named the trust and the trust beneficiaries as the “creditor.” You are one of those trust beneficiaries, but you are neither named nor given notice that the foreclosure exists.
The party who is foreclosing has made a lot of money pretending to own the loan, and even pretending the own the bonds that you own. Now they create an “assignment” which they say makes the loan part of the Trust pool in 2014. The cutoff was 7 years ago. And the loan was never included in the pool accepted by the Trustee in the Pooling and Servicing Agreement. Nor has the loan been accepted by the Trustee in 2014. No document has been executed by the Trustee accepting the loan.
The PSA provides that the Trustee cannot accept such a loan unless it won’t affect the tax preferred status of a REMIC trust and will not result in impairment or dilution of the investment you made. And the only way the Trustee can decide that, according to the PSA, is if the Trustee receives an opinion letter from qualified counsel that acceptance of the loan into the pool won’t affect the tax preferred status of a REMIC trust and will not result in impairment or dilution of the investment you made.
Final Judgment of foreclosure is entered with a sale date 60 days following the date of the judgment. The sale occurs and the property is liquidated as an REO sale, all without your knowledge, consent or notice. You have no opportunity to object. Challenges from the borrower are met with an “assignment” that appears to transfer the Hapless loan to the trust.
The effect of the Final Judgment and sale is that a state court judge in a far away state has declared that the REMIC trust did in fact get ownership of the loan, even though such a transaction would be void under New York State law, and even though the favorable tax treatment you were getting is now gone. And of course you get the dubious honor of absorbing a loan that you never owned until the foreclosure judge said so without notice to you.
USING THE COURTS, the foreclosing entity successfully transferred a bad loan to your portfolio, forced you to take the loss, prevented you from mitigating damages and imposing a tax burden that is directly contrary to the terms of the REMIC trust.
The courts have been bored by these arguments — unless they are brought by investors. For a Judge sitting on the bench with crowded foreclosure docket, it is indisputable that the investors did advance money and that the borrower did get loans. The complex paperwork in between is sliced through with the usual questions about whether the borrower received a loan and stopped making payments. The borrower’s arguments seem like hairsplitting and merely an excuse to get out from under a bad deal. After all, if NONE of the parties in the chain of title ever had any interest in the loan, then the first question is where did the money come from? Even proof that the trust beneficiaries were paid in full by the servicer up through and including the date of the foreclosure judgment have been met with stiff resistance by the courts.
This anomaly results in unequal protection under the law. The question of where the money came from is never answered. In all other cases, that question is key to the case. In foreclosures, it is not only ignored — it is routinely dismissed as even a basis for discovery.
Since we know the investors advanced money to the broker dealers, the second question is where did the money go?
The answer to both questions is obvious if you are familiar with finance and in particular, investment banking. The money came from investors whose money was used in ways they never approved and actually in many cases were legally prohibited from approving (see stable managed funds). The broker dealers (investment banks) interposed themselves as the apparent investors, traded on both the loans and the bonds for their own benefit and excluded both the investors and borrowers from the benefits of “proprietary profits” declared by the proprietary trading desk of the broker dealer.
At the apparent “closing” with the borrower, the money came in by wire transfer with insufficient wire transfer information. The money came from investors but that was not apparent to the closing agent. While there were clues to the existence of something that went much further than predatory table funding loans (see Reg Z), the closing agent obeyed instructions to apply the money to the loan closing and then give the promissory note and the mortgage to a party who never originated the funding of the loan.
The investors were stuck with a loan that existed only by operation of law, that was undocumented, and not favored by the execution of a note or mortgage as stated in the PSA. And the reason for all this is that the Trust was never involved in either the origination nor acquisition of the loan. If the Trust had been involved, the investors might have received the protection of a note and mortgage. Without, it, they were left out in the cold. And so they sued alleging exactly what the borrowers are alleging in their denials and defenses. But Judges won’t listen because they don’t have time to listen on a rocket docket.
Since servicers and nominees and substitute parties and “successors” by way of alleged mergers and powers of attorney are inserted, it looks like a large infrastructure that while perhaps defective, is firmly in place and reflecting reality rather than fraud. The issues of agency and authority are routinely ignored in the courts who have little time to actually allow inquiry. Courts routinely ignore the fact that the servicer cannot be acting as authorized servicer for the Trust because the Trust is not a party to to the loan. The only document giving them the power to act as servicer is the Trust document (PSA). Perception is everything.
The pattern of conduct by the investors in accepting payment from the “servicer” and the pattern of conduct of the borrowers in making payments to the “servicer” are taken as admissions that the Courts transform into actual authority despite the fact that all such power could only come from the Pooling and servicing Agreement for an empty trust that has no interest in the loan. Apparent authority is thus morphed into a legal finding of actual authority based upon assumptions and presumptions that are unsupported and contradicted by actual facts.
The only way for the intermediaries to complete their complex fraudulent scheme is to get an unsuspecting judge to give it his or her stamp of approval. When that foreclosure judgment is entered, it constitutes a finding by the court that the trust is the owner, even if that means adjudicating the rights of investors to protections under the internal revenue code, protections under New York State law, and protections under Securities Laws.
By including Trusts as Plaintiffs, the intermediaries take the risk that some judges might allow discovery into the existence and operations of the trust, the trustee and the alleged Master Servicer, et al.. But the risk is worth it. Most Judges will enter orders and either declare directly or otherwise assume that the scheme was not fraudulent. They have no idea that they are rewarding the fraudster with additional unearned bounty and blocking the opportunity for direct settlement between the investors and the borrowers — the only two real parties in interest.
Worst of all, the state Judges and some Federal judges do not understand that they adjudicating rights of investors who have no notice of the proceeding because their money was never given to the Trust, they lost their REMIC protection and are saddled with accepting defaulted loans. In so doing they are barring the opportunity and preventing the borrowers and investors from complying with HAMP and other Federal requirements to settle and modify loans.
Once the Foreclosure Judgment is entered, the exposure of the broker dealers is vastly reduced. Where they had effectively sold the loan perhaps as many as 42 times (Bear Stearns) they could afford a few settlements and still keep a multiple of the original loan amount. Meanwhile, the worst burden falls on unsophisticated borrowers and their lawyers who know very little about finance and investment banking, structured finance or anything else that would give them insight into the details of the loan they are litigating.
In the end, if it is a foreclosure case, Sam Smith is required to pay with money, his home and his life for a scheme that was fraudulent from beginning to end. John Jones who did it out of spite and greed, gets away with it. The storybook ending where Sam didn’t get hit with Superfund liability, is reversed if the case is dubbed a foreclosure case on a “rocket docket.”
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