Foreclosures: The Lie We Are Living

Most people, including homeowners, believe that the homeowners do owe the money and that the entities that are attempting to foreclose should win. That is why the free house myth is so pervasive.

The result is that foreclosures are being granted to entities that (a) do not exist or (b) have nothing to do with the loan, debt, note or mortgage or both. The benefits of foreclosure all run in favor of the megabanks and against the real parties in interest, the investors. These banks have managed to separate the debt from the paperwork in a highly effective way that can be, but usually isn’t, challenged on cross examination and well-founded objections.

The truth is that the homeowners do not owe any money to the people who are collecting or enforcing the loan. End of story. The rest is a lie.

Let us help you plan for trial and draft your foreclosure defense strategy, discovery requests and defense narrative: 202-838-6345. Ask for a Consult.

I provide advice and consultation to many people and lawyers so they can spot the key required elements of a scam — in and out of court. If you have a deal you want skimmed for red flags order the Consult and fill out the REGISTRATION FORM. A few hundred dollars well spent is worth a lifetime of financial ruin.

PLEASE FILL OUT AND SUBMIT OUR FREE REGISTRATION FORM WITHOUT ANY OBLIGATION. OUR PRIVACY POLICY IS THAT WE DON’T USE THE FORM EXCEPT TO SPEAK WITH YOU OR PERFORM WORK FOR YOU. THE INFORMATION ON THE FORMS ARE NOT SOLD NOR LICENSED IN ANY MANNER, SHAPE OR FORM. NO EXCEPTIONS.

Get a Consult and TERA (Title & Encumbrances Analysis and & Report) 202-838-6345 or 954-451-1230. The TERA replaces and greatly enhances the former COTA (Chain of Title Analysis, including a one page summary of Title History and Gaps).

THIS ARTICLE IS NOT A LEGAL OPINION UPON WHICH YOU CAN RELY IN ANY INDIVIDUAL CASE. HIRE A LAWYER.

===========================

see tps-third-party-strangers-in-mortgage-cases/

One of my favorite lawyers is getting discouraged. He says that it is virtually impossible for a homeowner to successfully defend a foreclosure action especially if it involves a blank endorsement (bearer paper). Foreclosure defense is indeed an uphill battle but it is one in which the homeowner can — and should — prevail.

I don’t agree with the premise that homeowners will and should lose foreclosure cases. I think most of the foreclosures are built on an illusion created and fabricated by the megabanks. I think we would have won the cases we won even without the standing issue, with or without blank or special indorsements.

*
The compounding error that keeps recurring is the difference between enforcement of the note and enforcement of the mortgage. You can enforce the note without owning the debt but you can’t enforce the mortgage without owning the debt. But in court they are conflated because few people draw the distinction.
*
Possession of bearer paper (the note) raises a presumption that the debt was transferred. But that is a rebuttable presumption and proof at trial should be required as to the transfer (purchase) of the debt for value. But if the debt was actually transferred that would mean it was purchased for value. And if it was purchased for value then any transferee with half a brain would assert status of a holder in due course. They don’t assert HDC status because they didn’t pay value for the debt because the debt was never transferred and the fictitious delivery of the original note was intended to deceive the homeowner, his/her lawyer and the court.
*
If a trust is involved, the existence of the trust should be pled and proven. Nobody is raising that issue even though it is a winner.
*
It is an uphill battle and many judges will disregard the appropriate arguments because they don’t see or don’t want to see the consequences of their assumptions and bias.
*
As a result we have a name being used as a DBA by multiple layers of conduits that don’t lead back to the actual owner of the debt. Homeowners did not create this problem nor should they suffer the consequences of bank chicanery. Banks did it because the big lie was extremely overwhelmingly and pornographically profitable. Banks have already made windfall profits on the loan whether the borrower pays or not. They then get an extra windfall by foreclosing because they can. At the same time the foreclosure sale raises yet another false presumption that everything that went before the sale was valid and authorized.
*
This all happens under the cover of why should homeowners get a windfall free house? Most people don’t believe that the banks are getting a windfall for an investment that has been paid off multiple times. They believe the lie that the homeowner’s debt is still out there and belongs to someone who ultimately is connected to the entities that seek foreclosure or collection. It is a lie. Windfall results are more common than most people realize. It frequently happens that one litigant, because of a decision or the wording some legislation will get a windfall. In many cases the question is which party should get the windfall?
*
The real question is who should get the windfall that has been created by the banks? Should it be the banks who have already profited in multiples of the loan amount or the homeowner whose signature and credit reputation was used as the foundation for the multiple sales of his loan? On a level playing field, the courts ought to tilt toward the homeowners who have mostly been lured into loans based upon wildly false appraisals on terms that they could not afford — and remember that under law the affordability of the loan is the responsibility of the lender, not the borrower.
*
Finding excuses to rule in favor of a foreclosing party that usually doesn’t even exist much less own the debt, note and mortgage is simply the wrong way to go. This is not a matter of policy for the legislature although the legislatures could intervene. It is a matter of equity and foreclosures are in a court of equity not at law. The party who caused the mess and who brought the country to its knees should not be the party who is rewarded with a foreclosure to cover a nonexisting loss.
*
If the investors were included I could see why both investors and homeowners would be considered victims and how the court could rule in favor of the investors. But the investors are decidedly NOT involved. They are unaffected by foreclosure of the loans because in reality they have only received a promise to pay from one of the megabanks doing business as “XYZ Trust”. They are completely uninformed about the debt or its enforcement and do not get the proceeds of a foreclosure sale.
*
The underwriting is done by the megabank but the loan comes from investors who believe they are investing in a trust when in fact they are merely making a deposit with the underwriting investment bank.
*
The whole reason why these banks were converted from investment banks to commercial banks over a weekend was not just to gain access to the Fed window to sell worthless mortgage bonds. It was because they had already been acting as though they were commercial banks by taking money from investors and merely starting an “account” for each of the investors wherein the only party who could draw money out of it was the “bank.”
*
So after our experience in the courts, it is unfair to homeowners and unfair to us as the attorneys who made it happen, to say that it is impossible for homeowners to win foreclosure cases. Good cross examination, and trial practice including the use of well-founded objections still wins the day more often than not. 

Does the Debt Need to Transfer with the Mortgage?

The answer is yes but the movement of the debt is often, all too often, presumed to have occurred. After more than a decade of research and analysis I find no support for the informal “doctrine” that the debt, note and mortgage can be used interchangeably. But the human inclination is to treat them the same. In foreclosure defense it is the job of the advocate to establish the separate nature of each of them.

The debt is what arises, regardless of whether it is in writing or not, by virtue of money being paid to the recipient or paid on his/her/their behalf. The only way the debt is extinguished is by payment or a court order (e.g. bankruptcy) declaring that the debt no longer exists. The recipient of the money is the obligor. The party who paid the money is the obligee under the debt. The transaction itself gives rise to the duty to repay the loan. A writing (e.g. note or mortgage or deed of trust) that purports to relate to or memorialize the debt, is separate from the debt.

If the written instrument (note) is made payable to the obligee under the debt, then they both are saying the same thing. That causes the debt and the written instrument (note) to merge. That way the obligor does not subject himself to an additional liability (double liability) when he executes the note. The note is incident to the debt but not the debt itself. The mortgage is incident to the debt and is neither the note nor the debt itself.

The debt is a demand loan if there is no written instrument. The note, where merger has occurred, sets forth the plan of repayment. The mortgage (if merger occurred on the note) sets forth the plan for enforcement of the debt. The mortgage does not set forth the terms of enforcement of the note since the note already contains its own enforcement provisions.

If the debt and the note don’t say the same thing (i.e., if the obligee and the payee are different), the doctrine of merger does not apply. The obligation to repay still exists but not under the terms and conditions of any note nor is it subject to enforcement of the mortgage. The debt (obligation to repay), the note and the mortgage (or deed of trust) can each be transferred; but the transfer of one does not mean the transfer of all three. Transfer of a note or mortgage does not move the debt unless merger has occurred. And transfer of a mortgage without the debt is a nullity.

Let us help you plan for trial and draft your foreclosure defense strategy, discovery requests and defense narrative: 202-838-6345. Ask for a Consult.

I provide advice and consent to many people and lawyers so they can spot the key required elements of a scam — in and out of court. If you have a deal you want skimmed for red flags order the Consult and fill out the REGISTRATION FORM. A few hundred dollars well spent is worth a lifetime of financial ruin.

PLEASE FILL OUT AND SUBMIT OUR FREE REGISTRATION FORM WITHOUT ANY OBLIGATION. OUR PRIVACY POLICY IS THAT WE DON’T USE THE FORM EXCEPT TO SPEAK WITH YOU OR PERFORM WORK FOR YOU. THE INFORMATION ON THE FORMS ARE NOT SOLD NOR LICENSED IN ANY MANNER, SHAPE OR FORM. NO EXCEPTIONS.

Get a Consult and TERA (Title & Encumbrances Analysis and & Report) 202-838-6345 or 954-451-1230. The TERA replaces and greatly enhances the former COTA (Chain of Title Analysis, including a one page summary of Title History and Gaps).

THIS ARTICLE IS NOT A LEGAL OPINION UPON WHICH YOU CAN RELY IN ANY INDIVIDUAL CASE. HIRE A LAWYER.

===========================

NY Case Citation

see NY Court: Transfer of a mortgage without transfer of the debt

Common sense is not necessarily the law or policy. Any number of people can enforce a note even if they don’t own the debt and even if they don’t actually have physical possession of the note (although there is a lot of explaining to do).

BUT nobody can enforce a mortgage unless they are the owner of the debt and the owner of the mortgage or the owner of the beneficial interest under a deed of trust. The assignment of a mortgage or DOT cannot, under any circumstances CREATE an interest in the debt by either party. The assignor must own the debt for the assignment to transfer the debt. All states agree that an assignment means nothing if the assignor had nothing to assign. Such an assignment confers no rights on the assignor and the assignee gets nothing even though the “assignment” document physically exists.

BUT a facially valid note is given many presumptions as to enforcement of the note and those presumptions have led courts to erroneously conclude and presume that the enforcer of the note is the owner of the debt.

The only party who is entitled to claim ownership of the debt (obligation) is the one who paid for it. Any party claiming to represent the owner of the debt must show the agency connection between themselves and the owner of the debt. All other “transfer” documents are fabrications.

The only way the “agent” can prove the “agency” is by disclosing the identity of the owner of the debt, who can corroborate the claim of agency — if the party identified can prove ownership of the debt. Self serving statements are not without some value but if the party proffering self serving statements is unable or unwilling to proffer corroborating evidence at trial or in response to discovery, their self serving statements must be given scant weight.

So in the above link the Court summarized the law in the same way that the courts in all states — when pushed — understand the law. Note the huge difference between alleging standing and proving standing. The allegation makes it through a motion to dismiss. Failure of proof of standing results in denial of summary judgment or any judgment.

“A plaintiff in a mortgage foreclosure action establishes its prima facie entitlement to judgment as a matter of law by producing the mortgage, the unpaid note, and evidence of the defendant’s default (see Loancare v Firshing, 130 AD3d 787, 788 [2015]; Wells Fargo Bank, N.A. v Erobobo, 127 AD3d 1176, 1177 [2015]; Wells Fargo Bank, N.A. v DeSouza, 126 AD3d 965 [2015]; Citimortgage, Inc. v Chow Ming Tung, 126 AD3d 841, 842 [2015]; US Bank N.A. v Weinman, 123 AD3d 1108, 1109 [2014]). Where, as here, a defendant challenges the plaintiff’s standing to maintain the action, the plaintiff must also prove its standing as part of its prima facie showing (e.s.)(see HSBC Bank USA, N.A. v Roumiantseva, 130 AD3d 983 [2015]; HSBC Bank USA, N.A. v Baptiste, 128 AD3d 773, 774 [2015]; Plaza Equities, LLC v Lamberti, 118 AD3d 688, 689 [2014]).” LNV Corp. v Francois, 134 AD3d 1071, 1071—72 [2d Dept 2015].

“[A] plaintiff has standing where it is both the holder or assignee of the subject mortgage and the holder or assignee of the underlying note at the time the action is commenced. (Bank of NY v. Silverberg, 86 AD3d 274, 279 [2nd Dept. 2011], U.S. Bank N.A. v. Cange, 96 AD3d 825, [*3]826[2d Dept. 2012]; U.S. Bank, N.A. v. Collymore, 68 AD3d 752-754 [2d 2009]; Countrywide Home Loans, Inc. v. Gress, 68 AD3d 709[2d Dpt. 2009].) Either a written assignment of the underlying note or the physical delivery of the note prior to the commencement of the foreclosure action is sufficient to transfer the obligation, and the mortgage passes with the debt as an inseparable incident (citations omitted). However, a transfer or assignment of only the mortgage without the debt is a nullity and no interest is acquired by it, since a mortgage is merely security for a debt and cannot exist independently of it (citations omitted). Where…the issue of standing is raised by a defendant, a plaintiff must prove its standing in order to be entitled to relief (citations omitted).” (e.s.)Homecomings Fin., LLC v Guldi, 108 AD3d 506-508[2d Dept. 2013].

UCC Hierarchy of Rights to Enforce Note and Mortgage

HAPPY NEW YEAR to readers who celebrate Rosh Hashanah! To all others, have a HAPPY DAY. This is a prescheduled article.

ABOUT LIVINGLIES AND LENDINGLIES

I have assembled a partial list of various possible claimants on the note and various possible claimants on the mortgage. Which one of these scenarios fits with your case? Once you review them you can see why most law students fall asleep when taking a class on bills and notes. Some of these students became practicing attorneys. Some even became judges. All of them think they know, through common sense, who can enforce a note and under what circumstances you can enforce a mortgage.

But common sense does not get you all the way home. It works, once you understand the premises behind the laws that set forth the rights of parties seeking to enforce a note or the parties seeking to enforce a mortgage. The only place to start is (1) knowing the fact pattern alleged as to the note (2) knowing the fact pattern alleged as to the mortgage and (2) looking at the laws of the state in which the foreclosure is pending to see exactly how that state adopted the Uniform Commercial Code as the law of that state.

I don’t pretend that I have covered every base. And it is wise to consider the requirements of law, as applied to the note, and the requirements of equity as applied to the mortgage.

In general, the UCC as adopted by all 50 states makes it fairly easy to enforce a note if you have possession (Article 3).

And in general, the UCC as adopted by all 50 states, increases the hurdles if you wish to enforce a mortgage through foreclosure. (Article 9).

The big one on mortgages is that the foreclosing party must have paid value for the mortgage which means the foreclosing party must have purchased the debt. But that is not the case with notes — except in the case of someone claiming to be a holder of the note in due course. A holder in due course does not step into the lender’s shoes — but all other claimants listed below do step into the lender’s shoes.

The other major issue is that foreclosing on a mortgage invokes the equitable powers of the court whereas suing on the note is simply an action at law. In equity the court takes into consideration whether the outcome of foreclosure is correct in the circumstances. In suits on notes the court disregards such concerns.

Knowing the differences means either winning or losing.

Let us help you plan for trial and draft your foreclosure defense strategy, discovery requests and defense narrative: 202-838-6345. Ask for a Consult.

I provide advice and consent to many people and lawyers so they can spot the key required elements of a scam — in and out of court. If you have a deal you want skimmed for red flags order the Consult and fill out the REGISTRATION FORM. A few hundred dollars well spent is worth a lifetime of financial ruin.

PLEASE FILL OUT AND SUBMIT OUR FREE REGISTRATION FORMWITHOUT ANY OBLIGATION. OUR PRIVACY POLICY IS THAT WE DON’T USE THE FORM EXCEPT TO SPEAK WITH YOU OR PERFORM WORK FOR YOU. THE INFORMATION ON THE FORMS ARE NOT SOLD NOR LICENSED IN ANY MANNER, SHAPE OR FORM. NO EXCEPTIONS.

Get a Consult and TERA (Title & Encumbrances Analysis and & Report) 202-838-6345 or 954-451-1230. The TERA replaces and greatly enhances the former COTA (Chain of Title Analysis, including a one page summary of Title History and Gaps).

THIS ARTICLE IS NOT A LEGAL OPINION UPON WHICH YOU CAN RELY IN ANY INDIVIDUAL CASE. HIRE A LAWYER.

===========================

UCC Hierarchy 18-step Program – Notes and Mortgages

The following is a list of attributes wherein a party can seek to enforce the note and mortgage if they plead and prove their status:

  1. Payee with possession of original note and mortgage.
  2. Payee with lost or destroyed original note but has original mortgage.
  3. Payee with lost or destroyed original note and lost or destroyed original mortgage.
  4. Holder in Due Course with original note endorsed by payee and original mortgage and assignment of mortgage by mortgagee.
  5. Holder in due course with lost or destroyed note but has original mortgage.
  6. Holder in due course with lost or destroyed original note and lost or destroyed original mortgage.
  7. Holder with rights to enforce with possession of original note and original mortgage.
  8. Holder with rights to enforce with lost or destroyed original note but has original mortgage.
  9. Holder with rights to enforce with lost or destroyed original note but does not have original mortgage.
  10. Possessor with rights to enforce original note and original mortgage
  11. Former Possessor with rights to enforce lost or destroyed note and original mortgage
  12. Former Possessor with rights to enforce lost or destroyed note but does not have original mortgage.
  13. Non-possessor with rights to enforce original note and original mortgage (3rd party agency)
  14. Non-possessor with rights to enforce lost or destroyed note (3rd party agency) and rights to enforce original mortgage
  15. Non-Possessor with rights to enforce lost or destroyed note (3rd party agency) but does not have the original mortgage.
  16. Assignee of purchased original mortgage with possession of original mortgage but no rights to enforce note.
  17. Assignee of purchased original mortgage without possession of original mortgage and no rights to enforce note.
  18. Purchaser of debt but lacking assignment of mortgage, endorsement on the note, and now has learned that the loan was purchased in the name of a third party and lacking privity with said third party. [This category is not directly addressed in the UCC. It is new, in the world of claims of securitization]

Facts matter. It is only by careful examination of the fact pattern and comparing the facts with the attributes listed in the UCC that you can determine the strategy for a successful foreclosure defense strategy. For example if the XYZ Trust is named as the foreclosing party and 123 Servicing is holding the original note and perhaps even the original mortgage, who has the right to foreclose and under what lawful scenario — and why?

Head spinning? GET HELP!

Click Here to Donate to LivingLies Blog

Statutory Requirements for Enforcement of Note or Mortgage

For further information please call 954-495-9867 or 520-405-1688

====================

So many people sent me this short white paper that I don’t know who to thank or even who wrote it. Any help would be appreciated so I can edit this article and give attribution to the writer.

The only thing that I would caution is that eventually, perhaps sometime soon, the importance of the Assignment and Assumption Agreement will rise in importance as to these enforcement actions based upon a fictitious closing, debt, note and mortgage. The A&A is an agreement between the “originator” and some other “aggregator conduit”.

The A&A essentially calls for violation of TILA by not disclosing the existence of a third party lender. It also allows for compensation and profits arising from the signature of the borrower on the settlement documents without disclosure of who received that compensation or made those profits and how much they were “earning.”

Whether this is ultimately determined to be a table funded loan or simply not a loan contract at all with the borrower remains to be seen. If it is determined to be a table funded loan with an undisclosed third party lender who is not even the aggregator in the A&A then according to regulations Z it is “predatory per se.” If it is predatory per se then how can anyone seek enforcement in equity (i.e. foreclosure)?

And while I am at it, to answer the question of many judges — “what difference does it make where the money came from? — ASK THE BANKS. They nearly always demand to see the bank account from which the down payment is being made and even going beyond that to require the borrower to prove that the money is the money of the borrower. If normal underwriting requires the borrower to produce proof of funding then why isn’t the bank required to prove that they funded the loan — either by origination or acquisition or both?

If a borrower gets the down payment from his Uncle Joe because he is in fact broke, then the Bank under normal underwriting circumstances won’t approve the loan. If a Bank has no financial stake in the alleged “loan” then why should THEY be allowed to enforce it? Isn’t that highly prejudicial to the real creditors? Isn’t the foreclosure judge making it harder for the real creditors to collect by entering judgment for a party who has no risk, no financial stake and no contractual right (or obligations) to represent the real creditor.

And lastly is the wrong assumption about the chronology of these transactions. The mortgage backed securities were “sold forward,” which is to say there was nothing in the Trust when they were sold — and as it turns out in most cases the Trust never got any loans. Further the notes and mortgages were also sold forward in a cloudy arrangement in which the ownership and balance due was at least in doubt if not unknown. You must remember that the banks were not in the business of loaning money — they were in the business of selling mortgage backed securities for empty trusts and then using the money any way they chose.

All that said the following was received by me from several people and I agree with virtually all of it.

======================

Statutory Requirements For Establishing The Right To Enforce An Instrument

1. Prove status of holder of the instrument. (UCC § 3-301(i)); or

2. Prove status of non-holder in possession of the instrument who has the rights of a holder. (UCC § 3-301(ii)); or

3. Prove status of being entitled to enforce the instrument as a person not in possession of the instrument pursuant to UCC § 3-309 or UCC § 3-418(d). (NOTE is lost, stolen, destroyed).

UCC § 3-309, requirements.

a. Prove possession of the instrument and entitled to enforce it when loss of possession occurred. (UCC § 3-309(a)(1)).

i. If illegality or fraud were involved in the original transaction, it cannot be proved that the person is entitled to enforce the instrument.(See UCC § 3-305. DEFENSES)

b. Prove non-possession of the NOTE is NOT the result of a transfer. (UCC § 3-309(a)(2)).

NOTE: If discovery shows that the instrument was sold by the person claiming the right to enforcement, a transfer occurred, and such person is NOT entitled to enforce the instrument. (See UCC § 3-309(a)(ii)).

c. Prove that the person seeking enforcement cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process. (UCC § 3-309(a)(3)).

NOTE: If discovery shows that the instrument was sold by the person claiming the right to enforcement, a transfer occurred, and such person is NOT entitled to enforce the instrument. (See UCC § 3-309(a)(ii)).

d. A person seeking enforcement of an instrument under subsection (a) must prove the terms of the instrument and the person’s right to enforce the instrument. (UCC § 3-309(b)).

****************

UCC § 3-309 Enforcement Of Lost, Destroyed, Or Stolen Instrument.
(a) A person not in possession of an instrument is entitled to enforce the instrument if

(1) the person seeking to enforce the instrument​
(A) was entitled to enforce the instrument when loss of possession occurred, or
(B) has directly or indirectly acquired ownership of the instrument from a person who was entitled to enforce the instrument when loss of possession occurred; ​
(2) the loss of possession was NOT the result of a transfer by the person or a lawful seizure; and​
(3) the person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process.​

(b) A person seeking enforcement of an instrument under subsection (a) must prove the terms of the instrument and the person’s right to enforce the instrument. If that proof is made, Section 3-308 applies to the case as if the person seeking enforcement had produced the instrument. The court may not enter judgment in favor of the person seeking enforcement unless it finds that the person required to pay the instrument is adequately protected against loss that might occur by reason of a claim by another person to enforce the instrument. Adequate protection may be provided by any reasonable means.

****************

An instrument is transferred when it is delivered by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument. (UCC § 3-203(a)).

If a transferor purports to transfer less than the entire instrument, negotiation of the instrument does not occur. The transferee obtains no rights under this Article and has only the rights of a partial assignee. (UCC 3-203(d)).

****************

If the bank, mortgage company, etc., sold the NOTE, they have no right to enforce the NOTE, through foreclosure or court proceeding pursuant to the fact that the UCC bars such claimant from invoking the court’s subject matter jurisdiction of the case.

****************

Even if the claimant produces the original wet-ink NOTE, there is a defense to the action pursuant to UCC 3-305.

Illegality and false representation (fraud) perpetrated in the transaction.

Did the bankdisclose the SOURCE of the money for the transaction?Did the bank inform the NOTE issuer that the money for the transaction was provided at no cost to the bank?

Did the bank disclose that the NOTE would be sold at the earliest possible convenience, and that such sale and receipt of money from a third party would actually pay off the NOTE? (Satisfaction of Mortgage).​

Many discovery questions to be asked when a claimant initiates foreclosure proceedings.

***********

Many assume that the bank/broker/lender that begins the process is actually providing the money for making a “loan,” when in fact, the bank/broker/lender is only making an “exchange,“ of notes, at no cost, and then, coercing the issuer of the promissory note into the comprehension that he is receiving a “loan.” The following was stated in A PRIMER ON MONEY, SUBCOMMITTEE ON DOMESTIC FINANCE, COMMITTEE ON BANKING AND CURRENCY, HOUSE OF REPRESENTATIVES, 88th Congress, 2d Session, AUGUST 5, 1964, CHAPTER VIII, HOW THE FEDERAL RESERVE GIVES AWAY PUBLIC FUNDS TO THE PRIVATE BANKS [44-985 O-65-7, p89]

“In the first place, one of the major functions of the private commercial banks is to create money. A large portion of bank profits come from the fact that the banks do create money. And, as we have pointed out, banks create money without cost to themselves, in the process of lending or investing in securities such as Government bonds.”​

In this instance, the transaction was funded by using the prospective property (collateral) and the signer’s promissory note as if the property and the Note already belonged to the bank/broker/lender. [Editor’s note: Those loans NEVER belonged to the Bank who was selling them before they even existed.]

So, if the bank used the promissory NOTE, as money, to create the cash reserve which was then used to validate the bank check issued on the face amount of the promissory NOTE, at no cost to the bank, without NOTICE to the signer of the promissory NOTE, and without fully disclosing these facts and aspects of the transaction, the bank committed a DECEPTIVE PRACTICE, FRAUD.

Securitization for Lawyers

For more information on foreclosure offense, expert witness consultations and foreclosure defense please call 954-495-9867 or 520-405-1688. We offer litigation support in all 50 states to attorneys. We refer new clients without a referral fee or co-counsel fee unless we are retained for litigation support. Bankruptcy lawyers take note: Don’t be too quick admit the loan exists nor that a default occurred and especially don’t admit the loan is secured. FREE INFORMATION, ARTICLES AND FORMS CAN BE FOUND ON LEFT SIDE OF THE BLOG. Consultations available by appointment in person, by Skype and by phone.

The CONCEPT of securitization does not contemplate an increase in violations of lending laws passed by States or the Federal government. Far from it. The CONCEPT anticipated a decrease in risk, loss and liability for violations of TILA, RESPA or state deceptive lending laws. The assumption was that the strictly regulated stable managed funds (like pensions), insurers, and guarantors would ADD to the protections to investors as lenders and homeowners as borrowers. That it didn’t work that way is the elephant in the living room. It shows that the concept was not followed, the written instruments reveal a sneaky intent to undermine the concept. The practices of the industry violated everything — the lending laws, investment restrictions, and the securitization documents themselves. — Neil F Garfield, Livinglies.me

———————————–

“Securitization” is a word that provokes many emotional reactions ranging from hatred to frustration. Beliefs run the range from the idea that securitization is evil to the idea that it is irrelevant. Taking the “irrelevant” reaction first, I would say that comes from ignorance and frustration. To look at a stack of Documents, each executed with varying formalities, and each being facially valid and then call them all irrelevant is simply burying your head in the sand. On the other hand, calling securitization evil is equivalent to rejecting capitalism. So let’s look at securitization dispassionately.

First of all “securitization” merely refers to a concept that has been in operation for hundreds of years, perhaps thousands of years if you look into the details of commerce and investment. In our recent history it started with “joint stock companies” that financed sailing expeditions for goods and services. Instead of one person or one company taking all the risk that one ship might not come back, or come back with nothing, investors could spread their investment dollars by buying shares in a “joint stock company” that invested their money in multiple sailing ventures. So if some ship came in loaded with goods it would more than offset the ships that sunk, were pirated, or that lost their cargo. Diversifying risk produced more reliable profits and virtually eliminated the possibility of financial ruin because of the tragedies the befell a single cargo ship.

Every stock certificate or corporate or even government bond is the product of securitization. In our capitalist society, securitization is essential to attract investment capital and therefore growth. For investors it is a way of participating in the risk and rewards of companies run by officers and directors who present a believable vision of success. Investors can invest in one company alone, but most, thanks to capitalism and securitization, are able to invest in many companies and many government issued bonds. In all cases, each stock certificate or bond certificate is a “derivative” — i.e., it DERIVES ITS VALUE from the economic value of the company or government that issued that stock certificate or bond certificate.

In other words, securitization is a vehicle for diversification of investment. Instead of one “all or nothing” investment, the investors gets to spread the risk over multiple companies and governments. The investor can do this in one of two ways — either manage his own investments buying and selling stocks and bonds, or investing in one or more managed funds run by professional managers buying and selling stocks and bonds. Securitization of debt has all the elements of diversification and is essential to the free flow of commerce in a capitalistic economy.

Preview Questions:

  • What happens if the money from investors is NOT put in the company or given to the government?
  • What happens if the certificates are NOT delivered back to investors?
  • What happens if the company that issued the stock never existed or were not used as an investment vehicle as promised to investors?
  • What happens to “profits” that are reported by brokers who used investor money in ways never contemplated, expected or accepted by investors?
  • Who is accountable under laws governing the business of the IPO entity (i.e., the REMIC Trust in our context).
  • Who are the victims of misbehavior of intermediaries?
  • Who bears the risk of loss caused by misbehavior of intermediaries?
  • What are the legal questions and issues that arise when the joint stock company is essentially an instrument of fraud? (See Madoff, Drier etc. where the “business” was actually collecting money from lenders and investors which was used to pay prior investors the expected return).

In order to purchase a security deriving its value from mortgage loans, you could diversify by buying fractional shares of specific loans you like (a new and interesting business that is internet driven) or you could go the traditional route — buying fractional shares in multiple companies who are buying loans in bulk. The share certificates you get derive their value from the value of the IPO issuer of the shares (a REMIC Trust, usually). Like any company, the REMIC Trust derives its value from the value of its business. And the REMIC business derives its value from the quality of the loan originations and loan acquisitions. Fulfillment of the perceived value is derived from effective servicing and enforcement of the loans.

All investments in all companies and all government issued bonds or other securities are derivatives simply because they derive their value from something described on the certificate. With a stock certificate, the value is derived from a company whose name appears on the certificate. That tells you which company you invested your money. The number of shares tells you how many shares you get. The indenture to the stock certificate or bond certificate describes the voting rights, rights to  distributions of income, and rights to distribution of the company is sold or liquidated. But this assumes that the company or government entity actually exists and is actually doing business as described in the IPO prospectus and subscription agreement.

The basic element of value and legal rights in such instruments is that there must be a company doing business in the name of the company who is shown on the share certificates — i.e., there must be actual financial transactions by the named parties that produce value for shareholders in the IPO entity, and the holders of certificates must have a right to receive those benefits. The securitization of a company through an IPO that offers securities to investors offer one additional legal fiction that is universally enforced — limited liability. Limited liability refers to the fact that the investment is at risk (if the company or REMIC fails) but the investor can’t lose more than he or she invested.

Translated to securitization of debt, there must be a transaction that is an actual loan of money that is not merely presumed, but which is real. That loan, like a stock certificate, must describe the actual debtor and the actual creditor. An investor does not intentionally buy a share of loans that were purchased from people who did not make any loans or conduct any lending business in which they were the source of lending.

While there are provisions in the law that can make a promissory note payable to anyone who is holding it, there is no allowance for enforcing a non-existent loan except in the event that the purchaser is a “Holder in Due Course.” The HDC can enforce both the note and mortgage because he has satisfied both Article 3 and Article 9 of the Uniform Commercial Code. The Pooling and Servicing Agreements of REMIC Trusts require compliance with the UCC, and other state and federal laws regarding originating or acquiring residential mortgage loans.

In short, the PSA requires that the Trust become a Holder in Due Course in order for the Trustee of the Trust to accept the loan as part of the pool owned by the Trust on behalf of the Trust Beneficiaries who have received a “certificate” of fractional ownership in the Trust. Anything less than HDC status is unacceptable. And if you were the investor you would want nothing less. You would want loans that cannot be defended on the basis of violation of lending laws and practices.

The loan, as described in the origination documents, must actually exist. A stock certificate names the company that is doing business. The loan describes the debtor and creditor. Any failure to describe the the debtor or creditor with precision, results in a failure of the loan contract, and the documents emerging from such a “closing” are worthless. If you want to buy a share of IBM you don’t buy a share of Itty Bitty Machines, Inc., which was just recently incorporated with its assets consisting of a desk and a chair. The name on the certificate or other legal document is extremely important.

In loan documents, the only exception to the “value” proposition in the event of the absence of an actual loan is another legal fiction designed to promote the free flow of commerce. It is called “Holder in Due Course.” The loan IS enforceable in the absence of an actual loan between the parties on the loan documents, if a third party innocent purchases the loan documents for value in good faith and without knowledge of the borrower’s defense of failure of consideration (he didn’t get the loan from the creditor named on the note and mortgage).  This is a legislative decision made by virtually all states — if you sign papers, you are taking the risk that your promises will be enforced against you even if your counterpart breached the loan contract from the start. The risk falls on the maker of the note who can sue the loan originator for misusing his signature but cannot bring all potential defenses to enforcement by the Holder in Due Course.

Florida Example:

673.3021 Holder in due course.

(1) Subject to subsection (3) and s. 673.1061(4), the term “holder in due course” means the holder of an instrument if:

(a) The instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; and
(b) The holder took the instrument:

1. For value;
2. In good faith;
3. Without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series;
4. Without notice that the instrument contains an unauthorized signature or has been altered;
5. Without notice of any claim to the instrument described in s. 673.3061; and
6. Without notice that any party has a defense or claim in recoupment described in s. 673.3051(1).
673.3061 Claims to an instrument.A person taking an instrument, other than a person having rights of a holder in due course, is subject to a claim of a property or possessory right in the instrument or its proceeds, including a claim to rescind a negotiation and to recover the instrument or its proceeds. A person having rights of a holder in due course takes free of the claim to the instrument.
This means that Except for HDC status, the maker of the note has a right to reclaim possession of the note or to rescind the transaction against any party who has no rights to claim it is a creditor or has rights to represent a creditor. The absence of a claim of HDC status tells a long story of fraud and intrigue.
673.3051 Defenses and claims in recoupment.

(1) Except as stated in subsection (2), the right to enforce the obligation of a party to pay an instrument is subject to:

(a) A defense of the obligor based on:

1. Infancy of the obligor to the extent it is a defense to a simple contract;
2. Duress, lack of legal capacity, or illegality of the transaction which, under other law, nullifies the obligation of the obligor;
3. Fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms;
This means that if the “originator” did not loan the money and/or failed to perform underwriting tests for the viability of the loan, and gave the borrower false impressions about the viability of the loan, there is a Florida statutory right of rescission as well as a claim to reclaim the closing documents before they get into the hands of an innocent purchaser for value in good faith with no knowledge of the borrower’s defenses.

 

In the securitization of loans, the object has been to create entities with preferred tax status that are remote from the origination or purchase of the loan transactions. In other words, the REMIC Trusts are intended to be Holders in Due Course. The business of the REMIC Trust is to originate or acquire loans by payment of value, in good faith and without knowledge of the borrower’s defenses. Done correctly, appropriate market forces will apply, risks are reduced for both borrower and lenders, and benefits emerge for both sides of the single transaction between the investors who put up the money and the homeowners who received the benefit of the loan.

It is referred to as a single transaction using doctrines developed in tax law and other commercial cases. Every transaction, when you think about it, is composed of numerous actions, reactions and documents. If we treated each part as a separate transaction with no relationship to the other transactions there would be no connection between even the original lender and the borrower, much less where multiple assignments were involved. In simple terms, the single transaction doctrine basically asks one essential question — if it wasn’t for the investors putting up the money (directly or through an entity that issued an IPO) would the transaction have occurred? And the corollary is but for the borrower, would the investors have been putting up that money?  The answer is obvious in connection with mortgage loans. No business would have been conducted but for the investors advancing money and the homeowners taking it.

So neither “derivative” nor “securitization” is a dirty word. Nor is it some nefarious scheme from people from the dark side — in theory. Every REMIC Trust is the issuer in an initial public offering known as an “IPO” in investment circles. A company can do an IPO on its own where it takes the money and issues the shares or it can go through a broker who solicits investors, takes the money, delivers the money to the REMIC Trust and then delivers the Trust certificates to the investors.

Done properly, there are great benefits to everyone involved — lenders, borrowers, brokers, mortgage brokers, etc. And if “securitization” of mortgage debt had been done as described above, there would not have been a flood of money that increased prices of real property to more than twice the value of the land and buildings. Securitization of debt is meant to provide greater liquidity and lower risk to lenders based upon appropriate underwriting of each loan. Much of the investment came from stable managed funds which are strictly regulated on the risks they are allowed in managing the funds of pensioners, retirement accounts, etc.

By reducing the risk, the cost of the loans could be reduced to borrowers and the profits in creating loans would be higher. If that was what had been written in the securitization plan written by the major brokers on Wall Street, the mortgage crisis could not have happened. And if the actual practices on Wall Street had conformed at least to what they had written, the impact would have been vastly reduced. Instead, in most cases, securitization was used as the sizzle on a steak that did not exist. Investors advanced money, rating companies offered Triple AAA ratings, insurers offered insurance, guarantors guarantees loans and shares in REMIC trusts that had no possibility of achieving any value.

Today’s article was about the way the IPO securitization of residential loans was conceived and should have worked. Tomorrow we will look at the way the REMIC IPO was actually written and how the concept of securitization necessarily included layers of different companies.

Why They Sue as Holder and Not as Holder in Due Course

Parties claiming a right to foreclose allege they are the “Holder” and do not allege they are the holder in due course (HDC) because they are ducking the issue of consideration required by both Article 3 and Article 9 of the UCC. So far their strategy of confusion is working. They are directly or impliedly claiming they are the holder of the NOTE. They cannot claim they are the holder of the MORTGAGE, because no such status exists — they either own the mortgage encumbrance because they paid for it or they didn’t. If they didn’t pay for it, they cannot enforce it even if they still can enforce the note.

The framers of the Uniform Commercial Code (UCC) had a plan they executed in Article 3 and Article 9 of the UCC, as adopted by 49 states (Louisiana, excepted). They had four (4) problems to solve.

Consider two possible fact patterns, to wit: first the payee (“lender”) did in fact fund the loan putting cash in the hands of the borrower or paying debts on the borrower’s behalf; second, the payee (“originator”) gets the borrower to sign the note but fails or refuses or never intended to fund the loan of money to the borrower. In the first instance the note is evidence of a real debt whereas in the second instance the note is not evidence of a real debt.

This issue has been obscured by the fact that SOMEONE (“investors”) did fund a loan. The questions posed here is whether the investors received the protection of a note and mortgage and if they didn’t, what is the effect of advancing funds for a loan without getting the required evidence of the loan (Promissory Note) and without getting the collateral (Mortgage) that would ordinarily apply.

The Four Goals

First, the UCC framers wanted to encourage the free flow of commerce by making certain instruments the equivalent of cash. The Payee should be able to use such instruments in trading for goods, services, or credit. This is the promissory note — a written instrument containing an unconditional promise to pay a certain amount. The timing of the payments, the amount, the terms, the method of payment must all be obvious from the face of the note without reference to any outside evidence (parol evidence) that could reduce or eliminate the value of the note. If there are questions or conditions apparent from the face of the instrument, it fails the test of a negotiable instrument or cash equivalent. That means that Article 3, UCC doesn’t apply.

Second they wanted to protect the issuer of the note (the payor) from the effects of fraud, improper lending practices and other deprive lending policies and practices from any false claims for payment on the note. If the Payor (homeowner, borrower) received no benefit from the Payee but was somehow induced to sign the note in anticipation of receiving the benefit, then the Payee should not be able to collect from the Payor. This goal conflicts with the first goal only when the note is sold to an innocent third party for value who had no notice of the defective nature of the origins of the note (Holder in Due Course -HDC).

Thus third, in order to maintain the status of cash equivalent paper, they had to provide a mechanism in which an innocent third party was protected when they advanced money for the purchase of the note without having any notice of the borrower’s defenses. This would allow the buyer to sue the payor (borrower, debtor) and collect free of any potential defenses. The burden of the borrower’s claims would then fall on the borrower to collect damages against the original payee for wrongful acts. (Article 3, UCC, Holder in Due Course -HDC).

And in order to allow all such notes to be enforceable regardless of the circumstances of their origin, any party holding the note (“Holder”) can enforce the note if they have physical possession of the note, even if they paid nothing for it, as long as it is endorsed to them. But if they are a HOLDER and not a HOLDER IN DUE COURSE then they sue subject to all of the borrower’s defenses. The central issue is whether the Holder has paid for the note, in which case they would be in HDC status or if they did not pay for the note, in which case they enforce subject to all borrower’s defenses — including the allegation that the original payee never made the loan.

Fourth was the issue of forfeiture of collateral. This is considered the most extreme remedy under commercial law, analogous to the death penalty in criminal cases. (Article 9, UCC — secured transactions). It is one thing to preserve liquidity in the marketplace by protecting the investment of innocent third parties who purchase negotiable instruments from defenses — and quite another to cause forfeiture of home or property. Here again, the language of Article 3 is used for an HDC — i.e., an assignment of the mortgage is enforceable ONLY if the Assignor paid for it and had no notice of borrower’s defenses.

So they devised a structure in which a bona fide purchaser of the paper without notice of the borrower’s defenses would be called a holder in due course. They could sue the borrower despite wrongful behavior by the original payee on the unconditional promise to pay (the note). In the event of fraud in the sale of the note, the new owner of the note could sue both the seller (Assignor, endorser or indorser).

Then they considered the possibility of wrongful behavior: the issuance of such commercial paper would be a claim, but not negotiable paper — but if it was sold anyway it would be subject to the borrower’s defenses. This allows outside evidence (parol evidence) — which is to say that in this fact pattern, the promise to pay was conditional on the value and effect of the borrower’s defenses. The HOLDER of this instrument need not pay for the sale of the note and need not be ignorant of the borrower’s defenses. This holder could sue both the payor (borrower, debtor) and the party who transferred the note — depending upon the agreement that accompanied the transfer of the note by delivery and indorsement.

The party who accepts indorsement without paying for the note or even knowing of potential borrower defenses can still enforce the note, but unlike the the HOLDER IN DUE COURSE, the Payor (Borrower) could raise all defenses to the original transaction. The UCC Article 3 calls this a holder. A holder need not purchase the note and may have actual knowledge of the borrower’s defenses but can still sue the payor (borrower) for the principal amount due on the unconditional promise to pay.

I have noticed that most judicial foreclosures are either in rem (foreclosures only) or the claim on the note is that the Plaintiff is a “holder.” If they have possession and it is indorsed, they are probably a holder entitled to enforce the note. But the Defendant can raise all available defenses just as he or she would do if the fight was with the originator of the note execution. And nothing is a better defense than the distinction between being the originator of the note execution and the originator of the loan. The confusion over the term “originator” has allowed millions of foreclosures to be completed despite the fact that the “holder” neither paid for the note nor could they claim they were ignorant of the borrower’s defenses.

This confusion has led most courts to look at Article 3, UCC, instead of Article 9, UCC. Neither allow the claimant to sue on either the note or the mortgage without having paid for the assignment of the mortgage or delivery of the note, if the holder has actual notice of borrower’s defenses. In most cases the claimant either has the knowledge of the fraud and predatory practices at closing or is a made to order controlled company of a real party who has such knowledge.

In conclusion, borrowers should prevail in foreclosure litigation in situations where the claimant is unable to prove the identity of the actual lender who advanced funds, or where the claimant has failed to purchase the mortgage.

Based upon vast quantities of information in the public domain including investor lawsuits, insurer lawsuits and government agency lawsuits (all alleging FRAUD and mismanagement of funds) against broker dealers who sold mortgage bonds, it seems highly likely that in the 96% of all loans between 2001-2009 that are subject to claims of securitization three things are true:

(1) the securitization plan was never followed in most cases thus making the investors direct lenders without benefit of a note or mortgage and

(2) none of the parties “holding” paper possess any of the qualities of a party who could have standing to foreclose and

(3) claims still exist on the notes, even though they were not supported by consideration but those claims are unsecured and subject to all defenses that could have been raised against the originator.

Neil F Garfield, Esq.

For further information call 520-405-1688, or 954-495-9867. Do not use the above information without consulting an attorney licensed in the jurisdiction in which your property is located and who knows all the facts of your case. The above article is a general description and may not apply to your case.

Unconscionable and Negligent Conduct in Loan Modification Practices

JOIN US EVERY THURSDAY AT 6PM Eastern time on The Neil Garfield Show. We will discuss the Stenberger decision and other important developments affecting consumers, borrowers and banks. We had 561 listeners so far who were on the air with us or who downloaded the show. Thank you — that is a good start for our first show. And thank you Patrick Giunta, Esq. (Broward County Attorney) as our first guest. For more information call 954-495-9867.

In the case of Wane v. Loan Corp. the 11th Circuit struck down the borrower’s attempt to rescind. The reasoning in that case had to do with whether the originator was the real lender. I think, based upon my review of that and other cases, that the facts were not totally known and perhaps could have been and then included in the pleading. It is one thing to say that you don’t think the originator actually paid for the loan. It is quite another to say that a third party did actually pay for the loan and failed to get the note and mortgage or deed of trust executed properly to protect the real source of funds. In order to do that you might need the copy of the wire transfer receipt and wire transfer instructions and potentially a forensic report showing the path of “securitization” which probably never happened.

The importance of the Steinberger decision (see prior post) is that it reverts back to simple doctrines of law rather the complexity and resistance in the courts to apply the clear wording in the Truth in Lending Act. The act says that any statement indicating the desire to rescind within the time limits set forth in the statute is sufficient to nullify the mortgage or deed of trust by operation of law unless the alleged creditor/lender files an action within the prescribed time limits. It is a good law and it covers a lot of the abuses that we see in the legal battleground. But Judges are refusing to apply it. And that includes Appellate courts including the 9th Circuit that wrote into the statute the requirement that the money be tendered “back to the creditor” in order for the rescission to have any legal effect.

The 9th Circuit obviously is saying the they refuse to abide by the statute. The tender back to the creditor need only be a statement that the homeowner is prepared to execute a note and mortgage in favor of the real lender. To tender the money “back” to the originator is to assume they made the loan, which ordinarily was not the case. The courts are getting educated but they are not at the point where they “get it.”

But with the Steinberger decision we can get similar results without battling the rescission issue that so far is encountering nothing but resistance. That case manifestly agrees that a borrower can challenge the authority of those who are claiming money from him or her and that if there are problems with the mortgage, the foreclosure or the modification program in which the borrower was lured into actions that caused the borrower harm, there are damages for the “lender” to pay. The recent Wells Fargo decision posted a few days ago said the same thing. The logic behind that applies to the closing as well.

So lawyers should start thinking about more basic common law doctrines and use the statutes as corroboration for the common law cause of action rather than the other way around. Predatory practices under TILA can be alleged under doctrines of unconscionability and negligence. Title issues, “real lender” issues can be attacked using common law negligence.

Remember that the common allegation of the “lenders” is that they are “holders” — not that they are holders in due course which would require them to show that they paid value for the note and that they have the right to enforce it and collect because the money is actually owed to them. The “holders” are subject to claims detailed in the Steinberger decision without reference to TILA, RESPA or any of the other claims that the courts are resisting. As holders they are subject to all claims and defenses of the borrower. And remember as well that it is a mistake to assume that the mortgage or deed of trust is governed by Article 3 of the UCC. Security instruments are only governed by Article 9 and they must be purchased for value for a party to be able to enforce them.

All of this is predicated on real facts that you can prove. So you need forensic research and analysis. The more specific you are in your allegations, the more difficult it will be for the trial court to throw your claims and defenses out of court because they are hypothetical or too speculative.

Question: who do we sue? Answer: I think the usual suspects — originator, servicers, broker dealer, etc. but also the closing agent.

%d bloggers like this: