Beware of the new lending bubble

What is clear to me is that nothing has changed except the government complicity in predatory lending practices is increasing despite the passage of Dodd Frank. A fact that keeps getting buried here is that Federal Law (Truth in Lending Act) puts the burden of determining affordability of an alleged loan product on the lender, not the borrower. That is the whole point of the Act — to avoid mistakes that borrowers might make with sales pitches that will result in financial ruin for borrowers and extreme wealth for underwriters on Wall Street.

When you see “CashCall” offering loans to people who have a FICO score of 585, we all should ask “how can they make money on alleged loans that are going to fail.” Legally the question becomes one that scares the hell out of the banks: having given a loan to someone who needed their help in making the down payment and who have a bad credit history, is the defense to the foreclosure action properly stated if “assumption of risk” or some other related defense is asserted?

The additional question is who is putting up the money for national advertisements on TV, radio and written media to get as many people as possible to take a loan they cannot pay. This is especially true when an alleged adjustable rate mortgage is involved with negative amortization and a teaser payment.

If the burden of affordability is on the lender and not the borrower and the loan resets to a payment higher than the entire household income the outcome is guaranteed to produce a “loss” that will be covered by multiple levels of derivative and hedge products that will turn the loss into a windfall for the intermediaries.

The effect of the foreclosure is that it rubber stamps plainly illegal behavior. The good faith estimate is completely  fictitious. The term of the loan is not 30 years; it is 3 years or whenever the loan resets. That means whatever fees are amortized over the life of the loan should be amortized over 3 years, not 30. So the cost of credit is falsely stated.

And of course the primary directive of TILA that the lender be disclosed is being completely overlooked. CashCall is not lending the money in the sense that they have no risk of loss. The value of the loan to CashCall must be in the fees it receives for acting as a sham conduit.

I also doubt if the promissory notes executed by borrowers in such a situation are negotiable instruments, especially when you consider the possibility of TILA rescission, which is a condition not stated on the face of the note.Shows how securitization worked. Partially correct. BEST IN CLASS

I give the following video a 90%+ rating. It doesn’t cover the sham conduit originator but otherwise it appears totally correct.

Shows how securitization worked. Partially correct. BEST IN CLASS

Check this out:

No Savings? No Problem. These Companies Are Helping Home Buyers With Down Payments
The Wall Street Journal

Lenders are coming up with novel ways for buyers to cobble together down payments. Read the full story

Rocket Dockets Undermine Faith In Judicial System

Having now personally participated in the “expedited” processes that are now invoked in many states, it has become apparent that they are all deficient. Citizens who find themselves in the court system are fast losing faith that it is a rubber stamping system if they are accused of anything, and an obstacle to justice if they are seeking compensation for damages sustained as a result of breach of duty or obligation. My main observation is that in the civil dockets, equal protection is intentionally thrown out the window. If the opposing parties are on equal footing on a socio-economic scale, they might have a better chance of being “heard”, which is the essence of due process; but if there is a disparity in their perceived position in our society, they are more likely to see undue process — which is to say there is a presumption of guilt of the person on the lower scale and a presumption that the larger, higher party is more credible.

The credibility of banks and their attorneys ought to be greeted with a healthy dose of skepticism from the start. They have been accused of the most heinous economic crimes of their own doing and accessory to the crimes of others, found guilty in many cases by administrative agencies, and yet are treated with deference by judges in contested actions. So far they have paid collectively around $200 Billion in fines and settlements for conduct that is illegal, improper and outside the bounds of anything that could be called accepted industry standards. And that total represents what we know about. The amount of private settlements with the real parties to mortgage loans — homeowners and investors — is presumably much higher, but sealed under confidentiality.

The result of all this is that the banks are getting exactly what they want — keeping their ill-gotten gains and getting still more money called “profit” with their payments of fines, damages and penalties being pennies on the dollar. And they get an added bonus. Homeowners could avoid foreclosure if they raised the right defenses in the right way. But they are still giving up and leaving their keys on the kitchen counter. So far 15 Million people have been displaced by the foreclosure process. The very people who should be an army of revolt in the Courts are so intimidated by their opposition and what they see happening in the courts that they give up their largest investment, their lifestyle, their neighborhood because they are demoralized by a rigged legal system.

The rigging comes from the starting position that the origination and acquisition of loans actually occurred and therefore, no matter how you cut it, the homeowner is a borrower and the bank that sued them or put their home up for sale is accordingly entitled to do so, because the borrower stopped paying “the debt”. And in most cases that is true, the record of payments shows that the borrower was making payments to some Servicer and then stopped. The conclusion is that foreclosure is inevitable and that due process is due in name only and not in substance — even where the creditor named as such in the foreclosure process is receiving and accepting full payments from third parties, which is to say that homes are foreclosed and sold without any default on the books of the creditor.

My review of thousands of closings leads me to an avoidable, inescapable conclusion that the premise behind rocket dockets is untrue and can never be proven otherwise. The “debt” was the product of absolute fraud deserving of punitive damages and I intend to push that point until I get it — hopefully in a verdict instead of the thousands of sealed settlements I know about. The fraud started with theft of pension fund money by the investment banks and conversion of pension fund assets (the note and mortgage or deed of trust) by the investment banks.

The money loaned to homeowners was not originated or acquired by a REMIC trust. It came from stolen money — money that was never deposited into the trust account of the REMIC trust). The homeowner was further fraudulently induced to sign documents that converted investor money and documents to the broker dealers (investment banks). The property was never encumbered by a valid mortgage or the encumbrance became unenforceable when the loan was supposedly “acquired” in a fictitious transaction. The missing or late assignment of the “debt” was fictitious (note there was no debt because none of the parties had ever loaned any money nor paid any value to acquire it — but the real debt still existed without documentation and without any collateral). But the pile of paper, ever growing, is taken by judges to mean that the greater “weight” of the pile of meaningless documents creates a presumption in favor of the fraudulent allegations of the co-conspirators.

The answer is simple. The real debt was created by the lending of real money by a real lender to a real borrower. That is what the laws says and that is what common sense will tell you. THAT loan really happened, but because of the interference of the banks and servicers, the money of the lender investor (pension fund) and the paperwork documenting the transaction were hijacked. And that is why investors are getting settlements, agencies are getting verdicts, and the banks are continuing to pay hundreds of billions of dollars to protect TRILLIONS of dollars in ill-gotten gains.

Back in 2007 I proposed a way of settling this with amnesty for all and a share of the risk of loss by everyone. I will soon write about the doctrine of ASSUMPTION OF RISK which is a way of apportioning the real risks at the time of the defective mortgage originations and acquisitions. It is like the old doctrine of comparative negligence and it is good law aimed at a just result.

Assumption of Risk is an affirmative defense that arises by operation of law. It is based upon facts that show that the projected loss of the Plaintiff occurred, at least in part, because they impliedly agreed to assume the risk of loss upon certain events. For example, if the household income was $50,000 at the time was originated, then by most standards the maximum total payment of PITI should have been between $15,000 and $20,000 per year (or around $1250-$1600 per month). Any loan calling for payments above that level triggers the Assumption of Risk defense to the extent that the payment exceeds the level set by industry standards. The simple reality is that the “lender” (whether real or fictitious) accepted the probability that the loan would default at the moment the payment reset to an amount that was known to be impossible.

So if you look at those “pick a payment” or teaser payment loans, you can see how this would apply. The initial payment might have been $500 per month, but the payment eventually resets to $4,000 per month. Since the payment resets to an amount equal to the entire household income, it is impossible for the loan to succeed. And in fact the the new rules that went into effect this month from the Consumer Financial Protection Board are considered to be merely “back to basics” where such a loan would never be allowed. If we use Assumption of Risk as an affirmative defense, then the “blame” gets shared. A jury or judge would decide the comparative risks assumed or agreed by the parties regardless of what was in the written agreements. In this case the decision might be that the maximum payment to be assessed against the homeowner would be $1,600. The other $2,400 per month supposedly due under the note would be offset. The offset might result in the reformation or modification of the loan.

There are dozens of ways and hundreds of case scenarios in which assumption of risk could be used. Of course this would mean taking cases off the rocket docket and putting them into general civil or complex litigation dockets.

Inflated Appraisals as Assumption of Risk and Joint Venture with the Pretender Lender

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Editor’s Comment:  

The allegation of an intentionally inflated appraisal of the property supports many claims, defenses, affirmative defenses and positions. A property that is appraised at $300,000 was usually coming in at precisely $20,000 more than the target value used for the contract for purchase or the commitment for funding a refi. The appraiser was selected, directly or indirectly by the so-called lender whom I have dubbed the “pretender lender,” so named because the borrower is deceived into thinking that he/she is entering into a financial transaction with one party — the one named on the promissory note as payee or named as the mortgagee, beneficiary or lender on the mortgage or deed of trust. In fact, however, the financial transaction took place between the  borrower and an undisclosed party while the paperwork revealed no such dichotomy in violation of federal and state lending laws).

But in addition to the documents smelling like 3 day-old fish based upon the failure of the documents to describe an actual financial transaction between the pretender lender and the borrower, the terms of the loan are different than the ones stated in the note and mortgage.

The pretender lender is merely an originator whose name is “rented” for the purpose of creating a bankruptcy remote vehicle (so-named by the banking industry) that could commit every violation of lending laws under the sun. When the homeowner seeks redress he/she finds himself confronting a non-existent entity that was never legally formed, and/or a bankrupt entity, or a dissolved entity that in any event never supplied the credit or cash for the transaction recited in the mortgage documents.

The inflated appraisal is performed by appraisers with the full knowledge that they are doing the equivalent of appraising a car’s value as being 40% above the retail sticker on the showroom  floor.  Industry standard appraisals withstand the test of time. A reasonable period of time for an appraisal to stand on its own legs is expressed in years not months. In most cases the homeowner  quickly found out in days, weeks or at most months, that the fair market value of the property was at least vastly over-stated in order to make the loan as large as possible, and, as we have seen, the inflation of the appraisal ranged from 30% to 75% in those areas that were targeted by Wall Street — with the worst offenses occurring in areas of low financial sophistication or people with language issues because they had recently moved to the U.S.

The appraiser is selected by the lender and, as stated by the 8,000 appraisers who signed petitions in protest in 2005, threatened with no employment if they didn’t come back with an appraisal at least $20,000 over the target contract price (the contract being given to them, which is a violation in itself of industry standards. Many appraisers refused and went to work only for small banks who were making loans with their own money and credit. The pretender lenders were not worried about risk of loss because the originator whose name was loaned to the Wall Street bank for a price above rubies, was not using its own money and credit. In fact, the originator usually had not money or credit, with some notable exceptions where a major institution originated the loan, but was not bankruptcy remote (thinly capitalized). None the less they were not the source of funds, not using their own money or credit and thus assumed no risk of loss for the “decline” in the value of the property after closing —a decline precipitated by the free market providing a value range that is in line with median income.

This article is meant to provoke discussion amongst both bankruptcy lawyers and civil litigators as to whether a known inflated value places part of the risk of loss on all loans, not just those that went into default. By inserting a false value into the equation, the borrower reasonably relied upon the appraiser as supposedly confirmed by the “lender” under OCC regulations. That risk can be quantified — i.e., an appraisal at $300,000 for property worth only $200,000 created an immediate risk of loss not assumed by the borrower but rather assumed by the lender named in the documents.

Thus when the loss is realized in the conventional sense, it should  be “realized” in the accounting sense and applied against the lender, thus reducing the allowable claim to the value of the property. This isn’t lien-stripping. This is contract law and assumption of risk. The borrower did not come up with the appriser or the appraisal. It was the lender and under industry standards the appraisal was presumed to be confirmed through due diligence by the lender. In the old days, the bank officers would go out and visit the property a few times and check on the work done by the apprisers. Some form of that due diligence is required under current regulations (see OCC regulations) and industry standards.

The latest time that the loss attributable to the inflated appraisal should be applied is at the time the loan is subject to foreclosure. At that time, I would argue, the amount demanded in wrong and therefore an illegal impediment to reinstatement, redemption, settlement or modification. Since the borrower was the victim of the new standards for underwriting mortgages without any announcements of new standards, the borrower can hardly be held responsible for the inflated appraisal regardless of what they did with the money from the loan and regardless of the source of funding (the real party who transacted business with the borrower where money exchanged hands).

The terms of repayment are changed by the inflated appraisal. Since the inflation of the value of the property was not only known but caused by the pretender lender, the transaction converts from a standard mortgage deal to a joint venture in which if the property value continues to go up, the lender gets its money but if the property value goes down, the lender has assumed the risk of loss to the extent that the value of the property declined — or at least that portion of the decline attributable to the inflated appraisal.

This supports fraud accusations, slander of title and a variety of other causes of action. But just a importantly it makes the pretender lender a partner of the borrower and raises an issue of fact that must be resolved by the court before allowing any foreclosure to proceed or before any attempt can be made to modify the mortgage under HAMP or redeem the property under state law. The successor lenders in the securitization chain are alleging in one form or another that the amount due is strictly computed from the amount stated on the note. But in fact, the co-obligor in the securitization chain is the pretender lender who assumed part of the risk of the loss. Any notice default or attempt to foreclose in which an inflated appraisal was part of the original transaction, regardless of the identity of the real lender, is plainly  wrong or even a misrepresentation to the borrower and the court. hence the notice provisions in all states, judicial or non-judicial, are violated in virtually all foreclosures.

But wait there is more. Foreclosures already completed can be more easily overturned by these allegations with the assistance of an honest appraiser. And for those foreclosures, whether overturned or not, the borrower can seek contribution from the co-obligor(s) pretender lender or those who used the originator as a vehicle to shield them against predatory lending claims. In our example above, this would mean that the homeowner might have a clear cause of action against the  pretender lender and its successors for the $100,000 loss in value. It would also pull the rug out from “credit bids” based upon documentation allegedly from the originating lender. If the credit bid lieu of cash was higher than the amount due, this created a barrier for others to bid cash on the property making the loan paid in full and the excess proceeds payable to the borrower.

By denying that the pretender lender used an honest appraisal and  denying that the borrower is the only obligor, and denying the debt to at least to the extent of the inflation of the appraisal the borrower puts in issue a material fact in dispute and the amount of the bifurcation of risk of loss between the borrower and the amount to be attributed to the originating lender opens the hallowed doors of discovery. affirmatively alleging that the appraisal was inflated puts the burden on the borrower, so it should be avoided if possible.


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