The Perils of Payoff
On the road again: I met a fellow on the Red Coach from Tallahassee to Fort Lauderdale who is pursuing a case that proves the central point of this blog: Whether you are selling, refinancing, Short-Selling, or otherwise paying off your supposed loan balance, the institution that receives the payoff (a) has no right to the money and (b) has no authority to execute a satisfaction of the note and mortgage even upon receipt of the money. And the reason is that in most cases they don’t have the note, which means it is still in circulation somewhere supporting as much as 42 times the face value of the note in hedges and derivatives. When confronted with a payoff of the loan, the institution is more than happy to take your money but will lie and cheat to avoid providing you with a real non-photo-shopped original note.
Unfortunately, most people are still taking it on FAITH that the note is indeed satisfied and that the mortgage is released and satisfied at the time of the payoff but they are very wrong if they don’t get the original note at closing, since THAT is what is presumptively the cash equivalent instrument that is traded in the secondary market, and since the mortgage usually is presumed to follow the note, that gives the actual owner of the note the opportunity to make a claim — something that is already happening and will occur with increasing frequency.
So whether you are buying property, selling property or paying off the “old” mortgage for any reason you are not only creating a title mess, you have no proof that the original note has been canceled. Which led me to suggest in a few articles that for those able to do it, call the bluff of the pretender lender. And for those investors looking to make an infinite return on their money, they should be helping homeowners do this in or out of court: OFFER TO PAY THE BALANCE IN FULL AS DEMANDED BY THE PRETENDER LENDER ON THREE CONDITIONS: (A) PRODUCTION OF THE ORIGINAL NOTE AND THE RIGHT TO INSPECT IT FOR AUTHENTICITY (B) PRODUCTION OF PROOF OF PAYMENT AT ORIGINATION AND ALL TRANSFERS UPON WHICH THE PRETENDER LENDER RELIES FOR ITS AUTHORITY TO COLLECT THE MONEY AND (C) PROOF OF LOSS BY ACCESS TO THOSE PEOPLE WHO MIGHT HAVE RECEIVED AN ASSIGNMENT OF THE LOAN OR WHO HAVE A BACK-DOOR OWNERSHIP INTEREST IN THE LOAN THROUGH OWNERSHIP OF A DERIVATIVE OR CREDIT DEFAULT SWAP.
This is not for the feint of heart nor the people who don’t have access to actual funds that can be tendered in full payment. It is possible for the occasional real note to pop up and perhaps even sufficient proof that the Judge would rule it is sufficient to close the deal in which case you will have paid 100 cents on the dollars demanded in exchange for a loan valued at perhaps half that amount. But most of the time it will look like the following case described to me last night. I’ve changed facts (identities and figures) to protect the privacy of the individuals involved. But the foundation of the case is accurately described.
Owner Schwartenheimer has a mortgage claimed by Bank of America. It is for $3 million on a private residence in the State of Florida. He has a buyer at $2 million which leaves him $1 million short of the amount demanded by the “bank” claiming to own and service his mortgage. An estoppel letter is issued by BofA indicating the payoff amount and the dates that the estoppel letters is effective and may be relied upon.
The closing is in 5 weeks. And the Owner has elected to payoff the extra $1 million rather than attempt a short-sale. So the Bank is going to get full payment at closing — $2 million from the buyer and $1 million from the seller.
But the Owner’s daughter, an astute business woman who happens to be an avid reader of this blog intervenes with the demand that the original note be produced at closing. BofA assures her that the original note will be produced. At closing without the daughter in attendance, the father, as instructed by his daughter, demands to see a copy of the original note before he turns over the money to BofA. His buyer is there with the money and he has a bank check ready and payable to BofA for $1 million.
The curious answer from BofA is that they have the note but were unable to get it to the closing agent in time for the morning closing, but that it would be available for delivery at 4PM that afternoon. The proper thing would have been to wait until they produce the note. The Owner asks his lawyer, who is also a title agent, for advice on what to do. The lawyer thinks that the daughter is nuts and so is Neil Garfield with his livinglies conspiracy blog.
The lawyer advises the client to proceed with the closing under the belief that BofA obviously MUST have the original note or else they would not have issued an estoppel letter and signed the papers to satisfy and discharge the mortgage in recordable form. Whether that advice will further be the subject of a malpractice case against the lawyer is another matter to consider at a later time. And the repercussions of that could extend to all sorts of situations where a “mortgage” and “note” are involved —even to the far reaches of family law.
As you have no doubt guessed, at 4pm the Owner and his daughter show up at 4pm to get the original note and of course it is not there, despite having been informed that it WAS there. The daughter although not a lawyer, is far from amused. She writes a bristling letter to BofA demanding that either they produce the original note or give the money back — and she demands not only the $3 million paid at “closing” but all the interest and principal paid before that for a total demand of $5 million.
BofA immediately responds with apologies and assures her and her father that the note will be provided.
[A word of context here: if BofA wanted to take the position that the note was lost or destroyed they could have filed an appropriate action to reconstitute the note and mortgage. But they didn't do that, for good reason --- the mortgage loan was supporting $60 million in credit derivatives, insurance and credit default swaps upon which BofA had already been paid. If they admit they don't have the note and they can't account for where it was last seen, and when it disappeared in the manner required to re-establish the note with assurance to the court that the real original won't show up at a later time in the hands of a different claimant, in that event they might be subject to claims from insurance companies and counter-parties of credit default swaps for repayment of $60 million they paid and which was received by BofA. [considerable over-simplification is being used here, but the point remains true].
So BofA and the owner (with the new owner in the background wringing his hands over whether he really received clear title and whether his title policy excluded claims from securitization) go back and forth until BofA counsel informs the owner he doesn’t need the original note because BofA has already signed the satisfaction.
The owner and daughter, unsatisfied with that response (as well they should be) file a lawsuit against BofA for return of all money ever paid to them, plus statutory interest. BofA defends the action with various motions to dismiss and has now delayed discovery 5 times.
Suddenly the senior partner of the prestigious law firm representing BofA calls the daughter and asks what she wants. She replies that she wants her money back and he says “well, without saying we agree to your demand, for settlement purposes what would you take to satisfy your demand for your money back.” He understands that even if they pay the father $5 million or more, they are still saving the client (a) the $60 million payback to insurers who already paid and (b) the prospect of facing a lot more of these lawsuits from people who have the money and the right fact pattern to prosecute the case.
The daughter wants to dig in her heals knowing she has BofA over a barrel.
The lawyer who represented the owner at closing is still clueless and believes the action filed by the father and daughter is totally without merit. His advice, perhaps self-serving, is that they demand nothing.
The daughter wants it all — if BofA can’t produce any evidence that they ever bought the loan, that they ever knew or anyone ever knew where the note was, then she wants all the payments, monthly or otherwise were made to BofA without BofA having any right or authority or even excuse to collect the money.
The father as previous and perhaps still owner of the property would be satisfied with the money paid at closing to BofA — $3 million. BofA’s attorneys are now in process of suggesting a modification to the claim filed by the father in court upon which they will settle — and from the looks of it, the settlement will be for the full amount paid at closing. Thus if the note is still in circulation, the father will have received the full value of it from BofA who accepted it under false pretenses. The case is not settled yet, but is looming on the horizon.
The moral of the story is that this is all about money. And if you can find a way to come up with actual cash you can make the same offer as the owner did above — and in my opinion achieve the same results. And if people pool their money and make the offer to refinance the property at the full value of the demand made by the pretender lender — whether in foreclosure or not — a bona fide actual offer can be made and cannot be ignored by either the court or the pretender lender.
For those with entrepreneurial spirit this is a business plan that I wish to raise money for. Write to email@example.com if you are interested in combining resources with other investors to execute this business plan.
In Summary: The refinance package signed by the present owner provides that if the payment is required to be made, they now owe the money to the hedge fund or whatever entity put up the money and provides modification terms acceptable to the owner — which means a net loss to the investor. But, if the usual case prevails, and the pretender lender is forced to back off, a quiet title action, plus refinance of the property at 1/3 of the amount demanded by the pretender lender results in a windfall note and mortgage to the source of refinancing without ever having paid the “prior note”.
These entrepreneurs, if I am right, will rarely have to pay an actual some of money to discharge the old note and mortgage while at the same time the owner gets the property free and clear except for a new mortgage to the investors for 1/3 of the original principal demanded plus a reasonable fixed interest rate with 40 year amortization, all of which can be sold into the secondary market. It is a virtually infinite return without putting very much money at risk and no risk of a total loss.
And for those without money — check the court file to see whether the original note has been tendered because most states, like Florida want the original note filed and out of circulation before they will allow a foreclosure sale even if it is determined that a foreclosure sale is proper in the circumstances. There is only one party that can submit a credit bid at auction — the party with the original note and proof of loss.
BEFORE EXECUTING ANY SUCH PLAN OR TAKING ANY ACTION BASED UPON THE GENERAL INFORMATION PRESENTED IN THIS ARTICLE YOU SHOULD CONSULT WITH LEGAL COUNSEL LICENSED IN THE JURISDICTION IN WHICH YOUR PROPERTY IS LOCATED.
Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: attorney malpractice, hedge fund, investment opportunity, investors, production of original note, proof of loss, proof of payment, real original note, title defects | 91 Comments »