Introduction to Derivatives

From Garfield’s Guide to Foreclosure Litigation Copyright 2017 GTC Honors, Inc. and Neil F Garfield, publication date TBA

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We start with derivatives because that is the origin of the mortgage crisis. An understanding of derivatives and how they were used in the marketplace is the key to understanding how to litigate on behalf of of victims of wrongful foreclosure. Basic black letter law applies to derivatives, claims of securitization, assignments and endorsements.
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Any document that purportedly asserts an interest or ownership in property could be classified as a derivative. A derivative is any document that derives its value from something else. In other words, the  document is not worth the paper it is written on unless there is a reference to  something real in the world of commerce.
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Hence the title to your car is a derivative instrument in that the document itself is only as good as the existence of the car, assuming the description of the car is sufficiently worded so that the identification of the car can be corroborated. If there is no car then the title document is worthless and derives no value from anything else. The sale of the title document conveys no greater interest or value by virtue of any endorsement or assignment of the title to a nonexistent car.
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In litigation practitioners should resist the temptation to make allegations they cannot prove. Once the allegation is made, the burden is on the party making the assertion of fact. If you say it, you own it. In simple litigation the distinction might not matter; but in the convoluted world of false claims of securitization, fabrication of documents, forgeries, robo-signing it makes a big difference.
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Thus if the title to a nonexistent car is signed over to a third party for value the third party has no right to make a claim on any random car once it is discovered that the original “car” did not exist. In foreclosure litigation this obvious rule is blurred by the Uniform Commercial Code (UCC). If the paper is negotiable then UCC laws provide that a third party purchaser for value without knowledge of the borrower’s default and who entered the transaction in good faith may enforce a note based upon a nonexistent transaction. The risk falls on the maker of the note who never received the loan from the Payee on the note.
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The strategy of the banks  speaks volumes on this score, to wit: why do they not cause foreclosure actions to be filed on behalf of an entity who is alleged to be a holder in due course? The obvious strategy for the banks would be to do just that and end virtually all defenses by the alleged borrower. The only logical reason is that the foreclosure entities are not holders in due course because (a) they never paid value or (b) they knew of the borrower’s defenses or (c) they were not acting in good faith.
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It is virtually impossible to assume that a special purpose vehicle (SPV) that was formed with express intent to keep it remote from the originating transactions would not be acting in good faith or would know of the borrower’s defenses. Hence the only thing left, however improbable, is that the SPV (e.g., a REMIC Trust) never paid value. If they never paid for it then they don’t own it. It follows that any document says otherwise is a false utterance, fabrication or forgery.
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Thus successors to the paper “title” receive nothing of value even if they paid substantial consideration for the paper document. The current and continuing assumptions and presumptions applied by courts and law enforcement are misguided and eventually end up issuing a legal document that is the first legal document in the chain of “title.”
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The foreclosure judgment and sale is the first instance of an actual paper document that means something even if it is based upon wrongly applied assumptions and presumptions. Those events raise the presumption (hard to overcome) that everything preceding was legal and valid and every document was authentic and enforceable. This fact drives the business plans of the banks and servicers. With a foreclosure judgment and sale, they can claim anything and defend against the accusations of investors who say their money was misused and diverted from the SPV (REMIC Trust). The “SPV” is a “Special Purpose Vehicle” that comes in all sizes and shapes but whose main point is to create a layer between the investors who thought their money was going into the SPV and the investment banker who knew they were going to use the investor money as their own.
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Essentially then, no derivative document has any value or legal existence in the absence of tangible or intangible property from which the derivative instrument could derive its value or legal existence. And no successor to a document making false claims of derivative value receives anything more than the paper on which false claims are made. An empty trust can issue certificates promising to pay money to investors and asserting the certificates convey an interest in loans acquired by the trust; but if the trust is never funded and never engaged in any business activity, with no balance sheet and no income statement then the certificates are worthless of no legal significance since they derive their perceived value from nonexistent loans “owned” by the Trust.
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The use of the term “derivative” in the world of finance would mean the creation of a document that relates to an actual transaction between two clearly identified parties. Like the car in the transaction described above, derivative instruments only have value insofar as the actual existence of an original transaction and the actual existence of subsequent transactions in which the benefits from the original transaction are purchased and sold in a real transaction in which consideration has been paid.
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As we shall see in this book there is an absence of an original transaction and an absence of any subsequent transactions in which title to anything was purchased or sold. No money exchanged hands. The alleged “successors” were merely transferees of the title document which in turn derived its perceived value from a nonexistent transaction. Sometimes they took delivery too but most often the original Promissory Notes were intentionally destroyed and later claimed to be lost, and still later declared “found” when the “original” note was reproduced through technological means. There exists equipment that one can purchase off the internet or in stores that will create any original looking document you want.
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The typical strategy employing this basic information has been to allege the failure of consideration and therefore the nonexistence of the loan contract. But as we have seen this strategy requires the homeowner to make allegations based upon facts that are only known by players who operate behind the scenes and are pulling the strings in foreclosure actions in which the foreclosing party is a complete stranger to the original transaction (the loan) and a complete stranger to any subsequent transfers. The foreclosing party is either renting its name for the purpose of the foreclosure action or actually seeking a foreclosure judgment or foreclosure sale for the purpose of collecting on false claims of servicer advances.
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These gyrations have forced the successful foreclosure defense lawyer into piercing the curtains in discovery. In such cases where the Judge agrees that the homeowner should be able to review the background supporting paperwork, IT reports and data maintenance, etc. the case is settled quickly, sometimes within hours of the rendition of the court order allowing discovery. In cases where the Judge refuses to allow such discovery, the homeowner nearly always loses — except where the attorney for the homeowner persists in hammering at the absence of evidence of anything real in the trust or in any entity before it.
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And the proof is right there for everyone to see, to wit: starting anywhere in the alleged chain of “title” to the note and mortgage the record is devoid of any transaction in which the loan was purchased for value — a  key component for enforcement of a security instrument under Article 9 of the UCC. This begs the essential question: why would any transferor of a note and/or mortgage transfer and/or deliver the note without being paid for it unless the note was worthless?
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The successful appeals generally turn on the fact that there was insufficient evidence of standing. Such appellate courts stay away from the third rail of derivatives — that all transactions based upon derivatives in the mortgage market are far more likely than not to be nonexistent. The reason for this is panic. All three branches of government are terrified of the prospect of poking a hole in the bubble that is now 1 quadrillion dollars (some 15 times all the actual money in the world) contained within what is referred to as the shadow banking markets. In so doing central bankers all over the world have ceded authority to print money or expand currency; where it was once the sole discretion of central bankers and treasury officials it is now within the virtually sole discretion of commercial bankers and investment bankers. Central bankers can only influence around 6% of real money and shadow money whereas private bankers control the rest (94%).

3 Responses

  1. Happy this is finally being addressed here, and it should be addressed in all the courts. Derivatives as related to credit enhancement for the REMIC trusts are not securities. Assume for a moment, for argument sake, that the trusts were funded. The credit enhancement derivative swaps were purchased by the trusts for risk protection. That is the trustee paid “fees” to debt buyers to insure that the debt buyers would purchase the reported defaults from the trusts (as REMIC trusts can only hold defaults for so long because REMIC were set up as CASH FLOW PASS THROUGH CONDUITS ONLY). Once a loan, or group of loan defaults, they are subordinated from upper tranches to the bottom tranche and SWAPPED OUT of the trust. The derivative credit default swap, by which debt buyers are standing ready to absorb the default, is a CONTRACT — not a security. Thus, although the swap is derived from the original trust (and cannot say asset here as the loans in these trusts were never assets on anyone’s balance sheet), the SWAP is not a security, it is a contract, and no longer has any attachment to the trust. The security trustee is only the trustee for active loans in the “security” trusts. The security trustee has no role in the swap out derivative contract “collection.” . Thus, when foreclosure is the name of the trustee to a REMIC trust, this is false, and a violation of the FDCPA. The debt buyer (credit enhancer) swap contract holder is the new owner of the debt, which is no longer a security, and the servicer continues to service for that undisclosed debt buyer. Default swap contracts are not securities. Have never seen one legal case that addresses this issue.

  2. banks are in so deep in their own S***, they cant get out. the first document that is fake is the mortgage and should be ripped apart and the clause about “no jury” should be removed along with alot of the other fine print.

  3. Reblogged this on Mario Kenny.

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