Is a Neg-AM Note a Negotiable Instrument?

The UCC is not ambivalent about protecting both the maker of a negotiable instrument and the party seeking to enforce it. The maker does not assume the risk of double liability except for instances where the note is purchased for value in good faith and without knowledge of the borrower’s defenses. In all other circumstances the object is to prevent the maker from being exposed to double liability.

The fact that a note is not a negotiable instrument does not mean that it cannot be enforced, or that it is void or whatever else people are saying on the internet. If the note does not meet the definition of a negotiable instrument then it is simply not entitled to the legal presumptions that are given to a negotiable instrument to ease its trading and enforcement. Any other approach would be equivalent to propelling parties who seek to enforce a note being vaulted into the elevated class of holder in due course.

In other words, if the note is not a negotiable instrument then enforcement can only be achieved by pleading and proving the facts needed to enforce without the benefit of legal presumptions that each State adopted as a a statute when the Uniform Commercial Code was made law.

In cases where a negative amortization is involved, the courts have blurred the issues. Such a loan has many extrinsic factors that should disqualify the note from being treated as a negotiable instrument.

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

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We must always remember that the purpose of the UCC is not to provide a vehicle for tricking anyone. The purpose is to allow for free flow of commerce and enabling the passing of paper instruments is essential to that function. Like many statutes creating legal presumptions, perhaps all of them, the point is simply to take what is almost always true in fact and simply create a legal presumption that the matter asserted is in fact true, until proven otherwise. Lest the use of such presumptions tip the due process scales, the definitions and rules regarding the use of legal presumptions must be strictly construed.

The issue of negative amortization is highly relevant on many levels including the one frequently mentioned — negotiability. The courts are probably confusing the ability to negotiate an instrument with BEING a negotiable instrument. The words of art are important. A marketable instrument is not the same as a negotiable one. The fact that someone is willing to buy a note does not make the note negotiable. A note featuring negative amortization should not be considered a negotiable instrument even though it might be marketable.

One of the problems with consumer loans is that they are subject to TILA Rescission. That means that they are potentially enforceable if no notice of rescission has been mailed. Certainty is gone from that scenario. You cannot determine whether the note is an asset or a liability. It is practically the opposite of a negotiable instrument since it might well be worthless, and the even the purchaser of the note might suffer a total loss unless the purchaser had paid value for the debt in a transaction in which the seller owned the debt.

Most Neg-AM loans allow the borrower (or can’t stop the borrower) from switching from one payment plan to another, e.g. paying full amortization none of which changes are reflected on the face of the note. This creates relevant events that occur off the face of the note, making the actual amount of principal due (and interest on the changing principal) at any time subject to calculation, not just from the face of the note but from the face of extrinsic or parole records.

An interesting characteristic of most Neg-AM notes is that they contain provisions that require conversion or reset when the accrued interest is added to principal in such amount as to require the reset — i.e., usually at 115% of the original loan amount. But none of these features necessarily extrinsically change the terms on the face of the note. Modifications do that, but not Neg-AM loans. It is in the calculation of the principal and interest thereon that one must go to “business records.”

If Neg-AM notes can be negotiable instruments then buyers of the notes are expected to rely upon the legal presumptions that the note is what it appears to be. Such buyers, much like the borrowers, are in for a surprise when the loan resets, based upon an extrinsic calculation of when 115% of principal has been exceeded, and if exceeded, by how much. Certainty is gone. If certainty is gone then facts are necessary. No legal presumptions should apply.

There are very simple elements required in order to gain the legal presumptions that would apply to a negotiable instrument.

The main one is that the instrument must be payable in an amount that can be computed based upon the information on the face of the note. On the face of a Neg-AM note, there are terms and conditions that can easily be used to compute the total indebtedness, assuming that extrinsic factors have not come into play. All notes change every day in terms of the amount of interest due and, in the case of Neg-AM notes, the amount of principal, which goes up automatically by underpayment of interest.

It is generally agreed that a note on which there is a known or declared default is NOT a negotiable instrument for purposes of Article 3. You can’t know with certainty the amount due because you don’t know when the borrower defaulted. A DOT or Mortgage is not a negotiable instrument, and to enforce a DOT/Mortgage you must have paid value for the mortgage (Article 9), regardless of whether the note that is secured is a negotiable instrument or not. These are protections to be sure, but they are also insurance that the legal presumptions lead correctly to the truth of the matter.

A second element is that the payment must be due as of a date certain. A mortgage/DOT can’t be a negotiable instrument and cannot invoke the presumptions that a “holder” of a note can invoke, based upon possession and endorsement.

With Neg-AM notes the problem comes into high relief — when the “lender” knows that the reset will be in excess of the entire household income thus creating a virtual guarantee that the alleged loan contract will terminate in 3 years rather than 30 years. Hence the supposed indorsee of such a note is buying into a foreclosure situation, if he/she/it has done due diligence. If not, then here is a second situation where the note might be worthless and the buyer loses, unless the buyer bought the debt from a seller who owned the debt.

A third element is that the original note must either be made out to bearer or to a defined party. But it is possible for a note made payable to a non-lender or a fictitious party might be construed as bearer paper — if there was an actual transaction in which someone gave the borrower money, even if the identity of the funding source was concealed. The obviously violations of disclosure requirements are separate matters.

In all the elements the point is that in order for an instrument to be called “Negotiable” under Article 3 you must not need to inquire into parol or extrinsic evidence. All presumptions arise when the note is facially valid and there are no circumstances that the indorsee knows about that would undermine enforcement. With a DOT/mortgage, by definition on the face of the instrument, you must go to extrinsic evidence as to the presumed default on another instrument (the note) and you can only enforce upon proof of value paid for the mortgage/DOT.

A note might be facially valid and enforceable, which means that a party who pleads and proves they are entitled to enforce is entitled to a money judgment but not foreclosure unless they plead and prove they are a holder in due course, which by definition means that value was paid and hence the mortgage or DOT is also enforceable by them.

Other than an HDC, all the other categories of potential enforcement by a party should enable them only to enforce the note. Of course if the owner of the debt shows up, there would be no problems with enforcement of either the note or the mortgage because the owner of the debt is entitled to enforce the obligation to pay the debt.

Under securitization schemes in practice it is possible to own the mortgage but not be able to enforce it without having paid value. Courts that decide cases based upon the “mortgage follows the note” are missing the point of LAW that resides in their State’s adoption of the UCC, to wit: under no circumstances may a party force the sale of homestead property without being the owner of the debt. That is not a proposal. It is the law in all 50 states.

While the encumbrance may not be enforced, this does not invalidate the mortgage or deed of trust. When it comes time to sell or refi the property you will learn that you still must deal with the holder of the mortgage. An action in equity might be decided in your favor or you might have to pay a sum of money to the owner of the mortgage encumbrance even though they paid nothing for it.

People forget that there are three items here, not two. In addition to the note and mortgage, which serve only as evidence as the debt, there is the actual debt. Back before claims of securitization, all three were used interchangeably. Now it is different. If the funding source is not the payee on the note, then the doctrine of merger does not apply, to wit: the note becomes separate from the debt that arises to the person or party who advanced the money. If the Payee is in privity with the funding source then merger does apply. But most Payees were not in privity with the source of funds. The banks boast of how they created remote vehicles and relationships.

The very fact that there are terms allowing the payment to be less than PI for the month suggests that the borrower might very well have made some payments more than the minimum due. In other words, inquiry must be made to determine the debt balance with certainty. There is certainly an argument here that reference is to the payment history rather than just the note. If that is true then the face of the note is inadequate to determine the “certain sum” currently due. This can become an issue in any installment note.

A finding that all these questions are irrelevant would have dire consequences in the marketplace where certain types of predefined paper can be received in the free flow of commerce without uncertainty as to whether the paper can be enforced. This is a two edged sword. Opening the door beyond the strict definitions of the UCC is opening the door for more mischief involving fabrication of documents, forgery and robosigning.

The UCC is not ambivalent about protecting both the maker of a negotiable instrument and the party seeking to enforce it. The maker does not assume the risk of double liability except for instances where the note is purchased for value in good faith and without knowledge of the borrower’s defenses. And the purchaser should not bear the risk of a total loss immediately upon paying for the note — unless the purchaser knew there were problems and was willing to take his chances.

The final point I would make is that the question should be asked: Given the fact that so-called REMIC Trusts are supposedly buying the loan pools aggregated by the likes of Countrywide and its progeny, why do lawyers firmly announce that their clients are “holders” and not “holders in due course”.

The latter designation (HDC) would allow the possessor of the note to enforce both note and mortgage despite lending violations when the alleged loan was “originated.” Being an HDC might also avoid defenses that current abound — that there are breaks in the chain of title. If the would-be enforcers simply included the allegation (and proof) that they were the owners of the debt or a holder in due course it would be game over for borrowers. That they don’t assert that position is a tacit admission that the reason why they don’t is that they can’t.

Thus we continue to be mired in litigation with phantoms, ghosts,  smoke and mirrors.

Foreclosure Defense and Mortgage Meltdown: Worse than you think

Take a look at the article (link below) which highlights the essential issues. It’s a bit choppy in reading but it makes the points you should consider as you plan your strategy for dealing with life over the next 10 years.

Despite assurances from the administration and those on Wall Street who are trying to bolster confidence in U.S. financial markets, the trust level between bankers, the key indicator of our economic future, has never been lower. Even Libor which is the holy grail of indexes has been manipulated during the last 4 years. Moody’s admitted yesterday that a computer “mistake” caused it to miss the “downturn” in the value  and rating of certain securities — the very same ones they overrated in the first place because the analysts were literally given fishing trips and pressured from the top to keep the “client” through “negotiation” of the rating that Moody’s would apply. 

What you have is a picture of obfuscation.

Imagine on the right side,  an opaque cloud of misrepresentations, ratings and false insurance protection on a securities that are so complex the number of variables rose to as high as 125 and it took a modern computer an entire weekend to come up with a price that, like election results from an entirely electronic system, cannot be audited for integrity or credibility.

  • Imagine the AAA ratings that investors believed, because the rating agencies were reasonably trustworthy and accurate in the past. Imagine insurers putting their stamp of approval based upon negotiation and the false credit ratings. 
  • And know that the entire class of securities that are “asset-backed” consists of extremely high risk predatory lending practices including but not limited to originating loans to people with interest only negative amortization for sometimes over a million dollars where the borrower is out of work and disabled.
  • These are the “cash equivalent” securities that unsuspecting managers of pension funds, government funds, mutual funds, hedge funds and others were buying. 
  • Imagine them buying derivatives on derivatives thinking they were hedging their losses when in fact they were multiplying them.
  • And now imagine that investors bought $62 trillion dollars (yes that IS the figure — 4 times our GDP) of this garbage backed by unpayable mortgages, auto loans, credit cards, student loans, and other consumer and small business debt.

Now on the left side imagine the same kind of opaque cloud of misrepresentations, pressure tactics to close, and outright fraudulent misrepresentation of “appraised” value (just like the rating agencies on securities), only less regulated and more decentralized). A subsequent TILA audit reflects the following facts:

  • Imagine a person who speaks no English, or a person who is totally unsophisticated in finance.
  • A builder with a criminal record makes deals with people at the local fronts for bigger players like Countrywide, Barclays, Wells Fargo etc. The people at these front organizations are now in prison, fired or both — a very typical story.
  • The builder finds our unsuspecting buyer and tells them that for only $2,000 per month they can get a 5 acre piece of land and build a $400,000 house on it. 
  • He gets them to pony up all the money they have — $250,000.
  • They even pony up another $150,000 borrowed from the trust fund for their disabled child, injured in an accident. Nobody cares about the personal stories here because they were all out to make a buck.
  • When the prospective borrowers start asking questions about how this could possibly work they are told: “Look, it is true you are not making the whole payment. But the way things work, housing prices always go up and down the road you either refinance and get money out of the house or you can sell at a handsome profit. Housing prices have never been steadier, growth is enormous. The lender has approved this and you know it is their money they are risking and they know a lot more then either of us, so if they are willing to take the risk, why wouldn’t you?”
  • NOT DISCLOSED: (1) the lender had no stake in the outcome of the loan except to close it and collect pass through fees. (2) The mortgage and note and servicing rights were all transferred around to mortgage aggregators, and investment banks who in turn sold derivative securities based upon this garbage loan. (3) Thus the lender was not taking on a risk and neither was anyone who handled this hot potato until it landed in the hands of an unsuspecting investor. (4) And the appraiser, eager to do more appraisals and earn more fees is allowed to know the amount of the mortgage and the contract price and conveniently and always comes in with an appraisal a few percentage points higher than the contract, so it looks good to the borrowers, and even to auditors at least at the beginning of this wild free money lending cycle. Unknown tot he borrower the “bank” is actually an unscrupulous mortgage broker steering the borrower to the worst possible deal because it nets him the highest fees, and submitting falsified income information sometimes without even the knowledge of the borrower, and sometimes with a statement to the borrower (“don’t worry” this is a no-doc loan, nothing will be checked and you won’t get into trouble because everyone wants this loan to close. (the only true statement in the entire affair). 
  • LATER THE LENDER WILL TAKE THE POSITION WITH THE FBI AND OTHER LAW ENFORCEMENT THAT IT WAS DEFRAUDED EVEN THOUGH IT DEFRAUDED ITSELF” BY HAVING ITS OWN AGENTS FALSIFY THE INCOME AND APPRAISAL INFORMATION.

NOW IMAGINE BETWEEN THE OPAQUE CLOUD ON THE LEFT (defrauding the borrower) AND THE OPAQUE CLOUD ON THE RIGHT (defrauding the investor) GOSSAMER THREADS REPRESENTING PLAUSIBLE DENIABILITY. All the people that were represented as principals and were in fact just sales people earning a commission on a sale. 

With nobody at risk but the least suspecting people who heard and read representations that were outright lies, misleading or only partial truths, lending standards when down the toilet. Nobody cared or had a stake in the outcome of the loan transaction except the borrower and the investor. The name of the game was “close as many loans as possible” because these investors are being offered just enough yield to be a little higher than other investments and were convinced by fraud that the perceived risk was much lower than the actual risk — after all Moody’s rated it AAA. 

The standard relationship between borrower and lender in which BOTH had  stake in a successful transaction was gone, but the borrower didn’t know it. How many people would have closed on their loans if they had known the truth? How many people would have bought these securities if they had known the truth. The answer is that the mortgage meltdown and general credit crisis would never have happened. Inflation would not be rising out of control.

Confidence in the the U.S. dollar and U.S. financial markets would not have sunk below zero. Borrowers and investors would still have their money and their lives and their credit ratings. Money managers would still have their jobs and the performance of the funds they managed would still be within acceptable bounds. And banks and investment banks would not be threatened with failure.

1,300,000 people would not be in foreclosure and 9 million people would not be “upside down” on the equity-loan ratio of their homes. 

Now  you can read the article I found on op-ed.

http://www.opednews.com/articles/1/opedne_stephen__080522__22immoral_hazard_22.htm

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