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Don’t Admit the Default

Kudos again to Jim Macklin for sitting in for me last night. Excellent job — but don’t get too comfortable in my chair :). Lots of stuff in another mini-seminar packed into 28 minutes of talk.

A big point made by the attorney guest Charles Marshall, with which I obviously agree, is don’t admit the default in a foreclosure unless that is really what you mean to do. I have been saying for 8 years that lawyers and pro se litigants and Petitioners in bankruptcy proceedings have been cutting their own throats by stating outright or implying that the default exists. It probably doesn’t exist, even though it SEEMS like it MUST exist since the borrower stopped paying.

There is not a default just because a borrower stops paying. The default occurs when the CREDITOR DOESN’T GET PAID. Until the false game of “securitization started” there was no difference between the two — i.e., when the borrower stopped paying the creditor didn’t get paid. But that is not the case in 96% of all residential loan transactions between 2001 and the present. Today there are multiple ways for the creditor to get paid besides the servicer receiving the borrower’s payment. the Courts are applying yesterday’s law without realizing that today’s facts are different.

Whether the creditor got paid and is still being paid is a question of fact that must be determined in a hearing where evidence is presented. All indications from the Pooling and Servicing Agreements, Distribution Reports, existing lawsuits from investors, insurers, counterparties in other hedge contracts like credit default swaps — they all indicate that there were multiple channels for payment that had little if anything to do with an individual borrower making payments to the servicer. Most Trust beneficiaries get paid regardless of whether the borrower makes payment, under provisions of the PSA for servicer advances, Trustee advances or some combination of those two plus the other co-obligors mentioned above.

Why would you admit a default on the part of the creditor’s account when you don’t have access to the money trail to identify the creditor? Why would you implicitly admit that the creditor has even been identified? Why would you admit a payment was due under a note and mortgage (or deed of trust) that were void front the start?

The banks have done a good job of getting courts to infer that the payment was due, to infer that the creditor is identified, to infer that the payment to the creditor wasn’t received by the creditor, and to infer that the balance shown by the servicer and the history of the creditor’s account can be shown by reference only to the servicer’s account. But that isn’t true. So why would you admit to something that isn’t true and why would you admit to something you know nothing about.

You don’t know because only the closing agent, originator and all the other “securitization” parties have any idea about the trail of money — the real transactions — and how the money was handled. And they are all suing the broker dealers and each other stating that fraud was committed and mismanagement of the multiple channels of payments received for, or on behalf of the trust or trust beneficiaries.

In the end it is exactly that point that will reach critical mass in the courts, when judges realize that the creditor has no default in its business records because it got paid — and the foreclosure by intermediaries in the false securitization scheme is a sham.

In California the issue they discussed last night about choice of remedies is also what I have been discussing for the last 8 years, but I must admit they said it better than I ever did. Either go for the money or go for the property — you can’t do both. And if you  elected a remedy or assumed a risk, you can’t back out of it later — which is why the point was made last night that the borrower was a third party beneficiary of the transaction with investors which is why it is a single transaction — if there is no borrower, there wold be no investment. If there was no investment, there would have been no borrower. The transaction could not exist without both the investor and the borrower.

Bravo to Jim Macklin, Dan Edstrom and Charles Marshall, Esq. And remember don’t act on these insights without consulting with a licensed attorney who knows about this area of the law.

Listen in to the Neil Garfield Show 6pm EST Tonight

Click in tonite— tune in at The Neil Garfield Show
Or call in at (347) 850-1260, 6pm EST Thursdays
Guest Host Tonight is Jim Macklin, Managing Director, Secure Document Research located in Nevada. He has been a guest speaker on the show before. A dynamic speaker and presenter, he has assisted me in presenting seminars for CLE credit for lawyers. His guest Charles Marshall is a California licensed attorney.  His guest is Dan Edstrom, senior forensic analyst for the Livinglies Team.
His Topic today will be a follow-up to last week’s topic how tax law determines ownership interests in REMIC assets and the Single Transaction / Step Transaction Doctrine. 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.
Thanks to everyone for your good wishes. I have my medical procedure scheduled for tomorrow. The doctors say my recovery will be easy and swift.

 

Official Transcript Reveals All

Official Transcript Case Number 40-0918273 CA

Mr. Smith: Your Honor this foreclosure suit was filed over 5 years ago. It is time for judgment to be entered. We have never loaned the Defendant any money, so we can’t be held to have violated any lending laws as the Defendant asserts. We never purchased the loan so we can’t be held for having defrauded anyone as the defendant asserts. We are here on the plaintiff’s motion for summary judgment. Attached to the motion is a nondescript business record showing the payment history of the Defendant, and the date he stopped making payments. The Defendant does not deny he stopped making payments. We left out the trial payments the Defendant made to us for 14 months because we decided not to offer a permanent modification. So we know the Defendant defaulted on the loan. Also attached to the complaint as alleged in the motion is a promissory note that was fabricated in my office, so we know it is the genuine article, contrary to the assertions made by the Defendant. Also attached to the complaint is a mortgage signed by the Defendant. The Defendant does not deny that he signed a note and mortgage at closing. The note and mortgage named the originator of the loan, who also did not loan any money to the Defendant. We have a facially valid allonge, endorsement and assignment that were fabricated in the offices of our vendor in Jacksonville. Each instrument is facially valid, showing a forged signature without authority, two false witnesses and a notary in proper form by virtue of a notary stamp we borrowed from someone in Texas. The signature of the Notary was properly affixed with permission of the Notary in Minnesota by a signatory whose title is that of an official signatory and assistant secretary. Attached to the motion for summary judgment we have an affidavit signed by another assistant secretary of the servicer of the Plaintiff who attests to having familiarity with the records of this loan and affirming that all statements made in the affidavit are true. If Judgment is not entered in favor of the Plaintiff, the entire financial system of this country will collapse because of the many people who bought the loan papers from the originator and still more parties who bought the same loan from the broker dealer who fabricated the deal. It’s a real mess your Honor, and we need to sort it out, starting with the entry of Judgment in this foreclosure. And, oh yes, Your Honor, the servicer presents these facts as agent for the broker dealer who sold bonds to investors who were paid, but they were paid out of their own money that they advanced into the pool. So the amount from the borrower is still due, even thought the proceeds will first go to the servicer, who never made any payments under the servicer advances.

The Court: Mr. Jones?

Mr. Jones: Your Honor, they just admitted to the whole thing being faked, forged, and perjured. You must enter judgment for the Defendant.

Mr. Smith: We never said we faked it. We said we fabricated it. Just because the document was created for the purpose of foreclosing the mortgage doesn’t mean it isn’t valid. It is entitled to a presumption of validity, especially where it has been recorded, which makes it self authenticated even if it is wrong and contains terms, facts and conditions that were plainly untrue.

The Court: I’m afraid he has you there, Mr. Jones, and so I am going to enter Judgment for the Plaintiff, who has been living rent free for 6 years. The creditor, whoever they might be, is entitled to have this house forfeited to recover their damages. No debt should go unpaid simply because of complex transactions on Wall Street. But I am cutting out $29 in inspection fees because they are too high. Judgment is entered for the Plaintiff with a sale date in 90 days, because we have so many of these damn things.

EDITOR’S NOTE: OK I admit it. I made the whole thing up. There is no such case.

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.
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