The Step Transaction and Single Transaction Doctrine

Jim Macklin and Dan Edstrom did a great job of packing a great deal of information into 28 minutes of talk time on the Neil Garfield Show last night. I am taking a couple of weeks off the show to do some common follow-up procedures to my heart surgery two years ago. Jim Macklin stepped in and did a great job of getting information into the hands of lawyers and other listeners in what turned out to be a mini-seminar on how to apply Federal tax law to the issue of ownership of the the loan. It should be heard more than once to get all the nuances they presented.

Their point was that all the binding commitments were in place before the mortgage bonds were sold and before any loans were even considered for approval. The bottom line is that the customary practice in the finance industry was to sell forward — i.e., sell the bonds based upon loans that either did not exist or had not yet been acquired by the REMIC trusts. THEN they went out originating loans and acquiring loans.

As we have previously discussed here and elsewhere, the trusts and the trustee never even had a bank account through which the “pass through” assets and income would be funneled to investors. But that only adds fuel to the fire that Edstrom and Macklin were talking about. From a federal tax law perspective, which should pre-empt any state interpretation, the loans belonged to the investors from the start — not the trusts.

The trusts could only be used as a representative entity in litigation if they were funded with the investors’ money. Our research strongly supports the conclusion that no such funding took place. In fact, our research indicates the funding of the trust with the investors money was impossible because no trust accounts were ever created.

Thus you have the “straight line” that goes from the investors to the borrower. This goes directly to the issue of standing. Because once it is established that the consideration for the only real single transaction flowed from the investors to the borrower, no transaction between intermediaries were true.

They were false transactions supported by fabricated documents with no payment of consideration. Article 9 of the UCC completely supports this interpretation along with decisions interpreting federal tax law as to the real parties in interest. As a result the issue of standing is resolved — only the investors have standing to collect on the loans for which borrowers concede they received the money or the benefit.

The assignments shown in court are between intermediary parties who had no actual transaction with no actual payment or consideration because the payment or consideration had already passed through binding commitments set up by the so-called securitization scheme. By not funding the trusts, the broker dealers were free to use the money as they wished and they did.

They broke every rule in the underwriting book because they were traveling under a different set of rules than the investors or the borrowers thought. Because they had promised to make the payments due under the trust document — the pooling and servicing agreement — and because their binding commitments to make the payments for principal, interest, taxes and insurance already existed prior to the sale the mortgage bonds and prior to the loan to the borrower (see servicer advances, trust advances etc.).

As a result, the investors who should have been on the notes and mortgages were deprived of the documentation they were promised in the PSA. In plain language the mortgage documents and the bond documentation were pure fabrications without any underlying transaction between the parties to those transactions. No transaction between the investor and the trust. And no transaction between the “lender” on the note and mortgage and the borrower.

Hence the allegation of investors in their claims against the broker dealers that the note and mortgage is unenforceable to the detriment of the investors, who are left with common law claims for recovery of damages without any security instrument to protect them. hence the claim that borrowers are being sued by intermediaries who were strangers to the ACTUAL transaction with REAL consideration and terms to which both lender and borrower were bound. The terms agreed by the lenders were vastly different than the terms disclosed to borrowers. There was no meeting of the minds.

GUEST HOST TONITE JAMES MACKLIN

Click in tonite— tune in at The Neil Garfield Show

Or call in at (347) 850-1260, 6pm Thursdays

Guest Host Tonight is Jim Macklin, Managing Director, Secure Document Research located in Nevada. He has been a guest on the show before. A dynamic speaker and presenter, he has assisted me in presenting seminars for CLE credit for lawyers. His guest is Dan Edstrom, senior forensic analyst for the Livinglies Team.

His Topic today will be how tax law determines ownership interests in REMIC assets. For you newcomers, REMIC means Real Estate Mortgage Investment Conduit — it is the trust (usually under New York Law) that supposedly was funded by investors through the broker-dealer that sold the alleged mortgage bonds to pension funds and other stable managed funds.

For those of you who have pondered how a stable managed fund got involved despite restrictions as to what risks are acceptable in investment strategies the answer is simple — they had a guarantee from the servicer and/or the trust and/or the trustee that they would receive the money each month including principal, interest, taxes and insurance REGARDLESS OF WHETHER THE BORROWER PAID. Dan Edstrom and Jim Macklin were the first ones to bring this to my attention. It affects the alleged existence of a default when the creditor is getting paid, the terms of the alleged loan contract, and the alleged balance claimed as owed under the mortgage loan.

Servicer Advances, Modification of Loans and Sundry Matters

I appear to have sparked some controversy over my comments that were directed at modifications and servicer advances — subjects that are not necessarily related. But they could be related — as where the homeowner seeks a modification on which there have been servicer advances.

So to answer some questions about Modifications, I will first state that no article on any subject on this blog is intended to be a complete exposition of an issue — if it was, each post would equivalent to a treatise several hundred pages long. That is why we say don’t use any one article as the authority for your situation and to get advice from competent licensed professionals who can service your needs based upon your information.

That said, there have been numerous comments about modifications, some of which have correct information in them. Like anything else found here, you should check with knowledgeable licensed professionals before you act on anything — especially the comments posted by people who have their own axe to grind. One thing is true — modification has a lot of moving parts and it isn’t as simple as anyone would like it to be. There are also tax issues that effect the calculations which I have not yet explored on these pages.

Modification is a sub-specialty of law in which I do not claim any rights. But that is the point. Most of the people who are giving opinions on modification are not lawyers, nor accountants, nor trained, licensed individuals in any area of any discipline. They have some experience, and that experience has molded their perceptions but they don’t know enough to conceive of solutions outside the box in which they operate. And some of them are on the payroll of banks who are waging a PR campaign in which they are spending billions, in one form or another, to make it look like the loans are real and the modification of them is the right way to go.

Modification IS a real option as long as you get something real. Qualifying for a modification takes time, expertise and the ability to present a credible threat in litigation, which is why I favor lawyers over anyone else doing modifications. The cost-benefit analysis should be done by someone who does this all day long and who is constantly researching options.

I write about bits and pieces. Attorneys who have well defined departments that handle modifications, short-sales, hardest hit programs, and other programs that offer assistance are miles ahead of me and any of the comments I have seen on my writing about modification.

As to servicer advances there is a small debate going on but I stick with my analysis. If the creditor has indeed received payment on the account of the loan that is being collected or foreclosed then there is either no default or the notice of default, notice of acceleration and/or the lawsuit itself and the evidence submitted are wrong as to amount.

The fact that there COULD be a claim against the borrower for unjust enrichment is irrelevant. First, even if the claim exists, it is not secured by the mortgage nor described by the note. Second, it is not likely that those claims will ever be brought.

And lastly — and I do mean lastly — thank you for your various invitations for a debate. My answer is no, I will save that for court or a seminar in which we cover the four corners of the issues. I will not “debate” issues of law with non-lawyers, or anyone else that lacks credentials to challenge anything I have said. And if you have reading this blog for years you can see how I have evolved in my own thinking and analysis causing me to reverse some prior strategies that I had suggested.

But the basic information about securitization presented here is, to the best of my knowledge and belief (see about Neil Garfield), still completely correct and facts and decisions on the ground have proven me right in each case. At first everyone scoffs, then  they end up arguing for it. They scoff because some of these things are counter-intuitive — i.e., they seem impossible. That doesn’t make them any less true. I was right about everything, factually in 2007, legally in 2008 and I believe I remain so. It is taking the judicial system a long time to catch up because of the intense complexity and opacity of the “securitization” game.

Modifications: Interest reduction, Principal reduction, Payment reduction, and Term increase

In the financial world we don’t measure just the amount of principal. For example if I increased your mortgage principal by $100,000 and gave you 100 years to pay without interest it would be nearly equivalent to zero principal too (especially factoring in inflation). A reduction in the interest rate has an effect on the overall amount of money due from the borrower if (and this is an important if) the borrower is given 40 years to pay AND they intend to live in the house for that period of time. To the borrower the reduction in interest rate and the extension of the period in which it is due lowers the monthly payment which is all that he or she normally cares about.

Nonetheless you are generally correct. And THAT is because the average time anyone lives in a house is 5-7 years, during which an interest reduction would not equate to much of a principal reduction even with inflation factored in. Unsophisticated borrowers get caught in exactly that trap when they do a modification where the monthly payments decline. But when they want to refinance or sell the home they find themselves in a new bind — having to come to the table with cash to sell their home because the mortgage is upside down.

So the question that must be answered is what are the intentions of the homeowner. The only heuristic guide (rule of thumb) that seems to hold true is that if the house has been in the family for generations, it is indeed likely that they will continue to own the property. In that event calculations of interest and inflation, present value etc. make a big difference. But for most people, the only thing that cures their position of being upside down (ignoring the fact that they probably don’t owe the full amount demanded anyway) is by a direct principal reduction.

THAT is the reason why I push so hard on getting credit for receipt of insurance and other loss sharing arrangements, including FDIC, servicer advances etc. Get credit for those and you have a principal CORRECTION (i.e., you get to the truth) instead of a principal REDUCTION, which presumes the old balance was actually due. It isn’t due and it is probable that there is nothing due on the debt, in addition to the fact that it is not secured by the property because the mortgage and note do NOT describe any actual transaction that took place between the parties to the note and the mortgage.

Foreclosures on Nonexistent Mortgages

I have frequently commented that one of the first things I learned on Wall Street was the maxim that the more complicated the “product” the more the buyer is forced to rely on the seller for information. Michael Lewis, in his new book, focuses on high frequency trading — a term that is not understood by most people, even if they work on Wall Street. The way it works is that the computers are able to sort out buy or sell orders, aggregate them and very accurately predict an uptick or down-tick in a stock or bond.

Then the same investment bank that is taking your order to buy or sell submits its own order ahead of yours. They are virtually guaranteed a profit, at your expense, although the impact on individual investors is small. Aggregating those profits amounts to a private tax on large and small investors amounting to billions of dollars, according to Lewis and I agree.

As Lewis points out, the trader knows nothing about what happens after they place an order. And it is the complexity of technology and practices that makes Wall Street behavior so opaque — clouded in a veil of secrecy that is virtually impenetrable to even the regulators. That opacity first showed up decades ago as Wall Street started promoting increasing complex investments. Eventually they evolved to collateralized debt obligations (CDO’s) and those evolved into what became known as the mortgage crisis.

in the case of mortgage CDO’s, once again the investors knew nothing about what happened after they placed their order and paid for it. Once again, the Wall Street firms were one step ahead of them, claiming ownership of (1) the money that investors paid, (2) the mortgage bonds the investors thought they were buying and (3) the loans the investors thought were being financed through REMIC trusts that issued the mortgage bonds.

Like high frequency trading, the investor receives a report that is devoid of any of the details of what the investment bank actually did with their money, when they bought or originated a mortgage, through what entity,  for how much and what terms. The blending of millions of mortgages enabled the investment banks to create reports that looked good but completely hid the vulnerability of the investors, who were continuing to buy mortgage bonds based upon those reports.

The truth is that in most cases the investment banks took the investors money and didn’t follow any of the rules set forth in the CDO documents — but used those documents when it suited them to make even more money, creating the illusion that loans had been securitized when in fact the securitization vehicle (REMIC Trust) had been completely ignored.

There were several scenarios under which property and homeowners were made vulnerable to foreclosure even if they had no mortgage on their property. A recent story about an elderly couple coming “home” to find their door padlocked, possessions removed and then the devastating news that their home had been sold at foreclosure auction is an example of the extreme risk of this system to ALL homeowners, whether they have or had a mortgage or not. This particular couple had paid off their mortgage 15 years ago. The bank who foreclosed on the nonexistent mortgage and the recovery company that invaded their home said it was a mistake. Their will be a confidential settlement where once again the veil of secrecy will be raised.

That type of “mistake” was a once in a million possibility before Wall Street directly entered the mortgage loan business. So why have we read so many stories about foreclosures where there was no mortgage, or was no default, or where the mortgage loan was with someone other than the party who foreclosed?

The answer lies in how these properties enter the system. When a bank sells its portfolio of loans into the system of aggregation of loans, they might accidentally or intentionally include loans for which they had already received full payment. Maybe they issued a satisfaction maybe they didn’t. It might also include loans where life insurance or PMI paid off the loan.

Or, as is frequently the case, the “loan” was sold after the homeowner was merely investigating the possibility of a mortgage or reverse mortgage. As soon as they made application, since approval was certain, the “originator” entered the data into a platform maintained by the aggregator, like Countrywide, where it was included in some “securitization package.

If the loan closed then it was frequently sold again with the new dates and data, so it would like like a different loan. Then the investment banks, posing as the lenders, obtained insurance, TARP, guarantee proceeds and other payments from “co-obligors” on each version of the loan that was sold, thus essentially creating the equivalent of new sales on loans that were guaranteed to be foreclosed either because there was no mortgage or because the terms were impossible for the borrower to satisfy.

The LPS roulette wheel in Jacksonville is the hub where it is decided WHO will be the foreclosing party and for HOW MUCH they will claim is owed, without any allowance for the multiple sales, proceeds of insurance, FDIC loss sharing, actual ownership of the loans or anything else. Despite numerous studies by those in charge of property records and academic studies, the beat goes on, foreclosing by entities who are “strangers to the transaction” (San Francisco study), on documents that were intentionally destroyed (Catherine Ann Porter study at University of Iowa), against homeowners who had no idea what was going on, using the money of investors who had no idea what was going on, and all based upon a triple tiered documentary system where the contractual meeting of the minds could never occur.

The first tier was the Prospectus and Pooling and Servicing Agreement that was used to obtain money from investors under false pretenses.

The second tier consisted of a whole subset of agreements, contracts, insurance, guarantees all payable to the investment banks instead of the investors.

And the third tier was the “closing documents” in which the borrower, contrary to Federal (TILA), state and common law was as clueless as the investors as to what was really happening, the compensation to intermediaries and the claims of ownership that would later be revealed despite the borrower’s receipt of “disclosure” of the identity of his lender and the terms of compensation by all people associated with the origination of the loan.

The beauty of this plan for Wall Street is that nobody from any of the tiers could make direct claims to the benefits of any of the contracts. It has also enabled then to foreclose more than once on the same home in the name of different creditors, making double claims for guarantee from Fannie Mae, Freddie Mac, FDIC loss sharing, insurance and credit default swaps.

The ugly side of the plan is still veiled, for the most part in secrecy. even when the homeowner gets close in court, there is a confidential settlement, sometimes for millions of dollars to keep the lawyer and the homeowner from disclosing the terms or the reasons why millions of dollars was paid to a homeowner to keep his mouth shut on a loan that was only $200,000 at origination.

This is exactly why I tell people that most of the time their case will be settled either in discovery where a Judge agrees you are entitled to peak behind the curtain, or at trial where it becomes apparent that the witness who is “familiar” with the corporate records really knows nothing and ahs nothing about the the real history of the loan transaction.

Servicer Advances: More Smoke and Mirrors

Several people are issuing statements about servicer advances, now that they are known. They fall into the category of payments made to the creditor-investors, which means that the creditor on the original loan, or its successor is getting paid regardless of whether the borrower has paid or not. The Steinberger decision in Arizona and other decisions around the country clearly state that if the creditor has been paid, the amount of the payment must be deducted from the amount allegedly owed by the “borrower” (even if the the borrower doesn’t know the identity of the creditor).

The significance of servicer advances has not escaped Judges and lawyers. If the payment has been made and continues to be made, how can anyone declare a default on the part of the creditor? They can’t. And if the payment has been made, then the notice of default, the end of month statements, the notice of acceleration and the amount demanded in foreclosure are all wrong by definition. The tricky part is that the banks are once again lying to everyone about this.

One writer opined either innocently or at the behest of the banks that the servicers were incentivized to modify the loans to get out of the requirement of making servicer advances. He ignores the fact that the provision in the pooling and servicing agreement is voluntary. And he ignores the fact that even if there is a claim for having made the payment instead of the borrower, it is the servicer’s claim not the lender’s claim. That means the servicer must bring a claim for contribution or unjust enrichment or some other legal theory in its own name. But they can’t because they didn’t really advance the money. Anyone who has experience with modification knows that the servicers make it very difficult even to apply for a modification.

Once again the propaganda is presumed to be true. What the author is missing is that there is no incentive for the Servicer to agree to make the payments in the first place. And they don’t. You can call them Servicer advances but that does not mean the money came from the Servicer. The prospectus clearly states that a reserve pool will be established. Usually they ignore the existence of the REMIC trust on this provision like they do with everything else. The broker dealer (investment banker) is always the one party who directly or indirectly is in complete control over the funds of investors.
Like the loan closing the source of funds is concealed. The Servicer issues a distribution report with disclaimers as to authenticity, accuracy etc. That report gets to the investor probably through an investment bank. The actual payment of money comes from the reserve pool made out of investor’s funds. The prospectus says that the investor can be paid out of his own funds. And that is exactly what they do. If the Servicer was actually taking its own money to make payments under the category of Servicer advances, the author would be correct.
The Servicer is incentivized by two factors — its allegiance to the broker dealer and the receipt of fees. They get paid for everything they do, including their role of deception as to Servicer advances.
When you are dealing with smoke and mirrors, look away from the mirror and walk through the smoke. There, in all its glory, is the truth. The only reason Servicer advances are phrased as voluntary is because the broker dealer wants to make the payments every month in order to convince the fund manager that they should buy more mortgage bonds. They want to be able to stop when the house of cards falls down.

Carol Molloy Guest Tonite – Lawyer From Tennessee and Massachusetts!

Carol Molloy is our guest tonite. She is a foreclosure defense litigator who is a member of the Bar in Tennessee and she used to practice in Massachusetts. We are going to be talking about non-judicial foreclosures, due process and the facts on the ground.

Tune in The Neil Garfield Show,  which airs on Thursday nights at 6 PM for 30 minutes or call in at (347) 850-1260, 6pm Thursdays

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