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.

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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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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!

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What Difference Does It Make?

It is in court that the “loan contract” is actually created even though it is a defective illusion. In truth and at law, placing the name of the originator on the note and/or mortgage was an act of deceit.

In a singular sweep of making public policy as opposed to following it, the Courts have been hell bent on letting strangers achieve massive windfalls through the illegal and improper use of state laws on foreclosure while ignoring Federal laws on TILA rescission, FDCPA and RESPA. The courts have a clear bias based upon the policy of allowing the financial industry to prosper while at the same time deeming individual consumers and homeowners worthy of sacrifice for the greater good.

This is evident in the ever popular questions from the bench — “what difference does it make, you got the loan, didn’t you.”

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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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In response to the question posed above most lawyers and pro se litigants readily admit they received “the loan.” The admission is wrong in most cases, but it gives the judge great clarity on what he/she must do next.

 

Having established that there was a loan and that the homeowner received it as admitted by the the lawyer or pro se litigant, there is no longer any question that the note and mortgage are void instruments as are the assignments, endorsements and powers of attorney that are proffered in evidence by complete strangers to the transaction.

 

The purpose of this article is to suggest that a different answer than “Yes, but” should be employed. In discussions with our senior forensic analyst, Dan Edstrom, he suggested an alternative answer that I think has merit and which avoids the deadly “Yes, but” answer.
 

 

We start from the presumption that the originator did not fund any transaction with the homeowner and in most cases didn’t have anything to with underwriting. The originator’s job was to sell financial products that were dubbed “loans.” “The loan” does not exist. Period.

 

Then we can assume that the first defect in the documents of the purported loan is that the the originator who unfortunately appears on the note as payee and on the mortgage (or deed of trust) as mortgagee or beneficiary was NOT the “lender.”

 

Hence placement of the name of the originator had no more foundation to it than placing the name of a closing agent or title agent or an attorney.

 

None of them are lenders or creditors. They are all vendors paid a fee for doing what they did.  And neither is the “originator” (a term with various inconsistent meanings).

 

Admission to the existence of “the loan” contract is an admission contrary to (a) the truth and (b) your defense. Once you have admitted that you received the loan you are implicitly admitting that you were party to a valid loan contract, consisting of the defective note and mortgage.

 

As a matter of law that means that you have admitted the note and mortgage were not void or even voidable but instead you have presented a closed cage in which the Judge has no choice but to proceed on “the law of the case,” to wit: the assumption that there was a valid loan, that the originator made the loan, and that the note and mortgage are valid instruments that are both evidence of the loan and instruments that set forth the duties of the homeowner who has admitted to being a borrower under that “loan contract.”

 

So it is in court that the “loan contract” is actually created even though it is a defective illusion. In truth and at law, placing the name of the originator on the note and/or mortgage was an act of deceit.

 

In MERS cases, being the “nominee” of the “lender”(who was incorrectly described as the lender), means nothing. And THAT is why when my deposition was taken in Phoenix AZ for 6 straight days by 16 banks (9am-5pm) I told them what I have consistently maintained for the past 10 years: “You might just as well have placed the name of Donald Duck or some other fictional character on the note and mortgage.”

 

ALL of the named players were in fact fictional characters for purposes of being represented in a nonexistent transaction (between the originator/”lender” and the homeowner/”borrower.”) Hence the term “pretender lender.” And the actions undertaken after the homeowner was induced (a) to avoid lawyers and (b) to sign the note and mortgage as though the originator had in fact loaned them money were all lies. Hence the title of this blog “Livinglies.”

Bottom Line: WATCH YOUR LANGUAGE! Don’t admit anything. Don’t admit that the loan was assigned (say instead that a party executed a document entitled “assignment” which contained no warranties of title or interest.

Here is what Dan Edstrom wrote:
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What difference does it make?

By Daniel Edstrom
DTC Systems, Inc.

What difference does it make, you got the loan didn’t you?

No, I did not get a loan, no I did not authorize “the loan,” no I did not mean to enter into a contract with anyone other than the party who was lending me money and no I did not receive money from the party claiming to be a lender. [Editor’s note: fraud in the inducement and fraud in the execution — or best, a mistake].

Yvanova v. New Century Mortgage Corp., 365 P.3d 845, 62 Cal. 4th 919, 199 Cal. Rptr. 3d 66 (2016). laid this out (without an in depth review) when the court said (emphasis added):

Nor is it correct that the borrower has no cognizable interest in the identity of the party enforcing his or her debt. Though the borrower is not entitled to 938*938 object to an assignment of the promissory note, he or she is obligated to pay the debt, or suffer loss of the security, only to a person or entity that has actually been assigned the debt. (See Cockerell v. Title Ins. & Trust Co., supra, 42 Cal.2d at p. 292 [party claiming under an assignment must prove fact of assignment].) The borrower owes money not to the world at large but to a particular person or institution, and only the person or institution entitled to payment may enforce the debt by foreclosing on the security.

Here is more, much more:

Identification of Parties

The following is from: Jackson v. Grant, 890 F.2d 118 (9th Cir. 1989).

If an essential element of the contract is reserved for the future agreement of both parties, there is generally no legal obligation created until such an agreement is entered into. Transamerica Equip. Leasing Corp. v. Union Bank, 426 F.2d 273, 274 (9th Cir.1970); Ablett v. Clauson, 43 Cal.2d 280, 272 P.2d 753, 756 (1954); 1 Witkin Summary of California Law, Contracts §§ 142, 156 (9th ed. 1987). It is essential not only that the parties to the contract exist, but that it is possible to identify them. Cal.Civ.Code § 1558. See San Francisco Hotel Co. v. Baior, 189 Cal.App.2d 206, 11 Cal.Rptr. 32, 36 (1961) (names of seller and buyer are essential factors in considering whether contract is sufficiently certain to be specifically enforced); Cisco v. Van Lew, 60 Cal.App.2d 575, 141 P.2d 433, 437 (1943) (contract for sale of land must identify the parties to the transaction); Losson v. Blodgett, 1 Cal.App.2d 13, 36 P.2d 147, 149 (1934) (valid real property lease must contain names of parties).

And looking further at what Cisco v. Van Lew, 60 Cal. App. 2d 575, 141 P.2d 433 (Ct. App. 1943) actually says:

“There is a settled rule of law that a note or memorandum of a contract for a sale of land must identify by name or description the parties to the transaction, a seller and a buyer.” (Citing cases.)9

The statute of frauds, section 1624 of the Civil Code, provides that the following contracts are invalid unless the same or some note or memorandum thereof is in writing and subscribed by the party to be charged or by his agent:

“… 4. An agreement … for the sale of real property, or of an interest therein; …” In 23 Cal.Jur. page 433, section 13, it is said: “Matters as to Which Certainty Required.–The requirement of certainty as to the agreement made in order that it may be specifically enforced extends not only to its subject matter and purpose, but to the parties, to the consideration and even to the place and time of performance, where these are essential.” (Citing Breckenridge v. Crocker, 78 Cal. 529 [21 P. 179].) In that case it was held that when a contract of sale of real estate is evidenced by three telegrams, one from the agent of the owner of the property communicating a verbal offer, without naming the proposed purchaser; and second, from the owner to his agent, telling him to accept the offer; and a third from the agent addressed to the proposed purchaser by name, simply notifying him of the contents of the telegram from the owner, but not otherwise indicating who the purchaser was, the contract is too uncertain as to the purchaser to be enforced, or to sustain an action for damages for its breach. In that case it was held that the judgment granting a nonsuit was proper.(e.s.)

[2] The general rule stated in 25 Cal.Jur. page 506, section 34, is that

“a contract for the purchase and sale of real property must be mutual and reciprocal in its obligations. Otherwise, it is not obligatory upon either party. Hence, an agreement to convey property to another upon his making payment at a certain time of a named amount, without a reciprocal agreement of the latter to purchase and pay the amount specified, is unenforceable.” (See, also, 25 Cal.Jur. p. 503, sec. 32, and cases cited.)

This brings up many issues between a so called promissory note, which may or may not be a negotiable instrument, and a security instrument, which appears to be a transfer of an interest in real property.

The first question is: how can an endorsement in blank without an assignment EVER transfer an interest in real property? How can the security interest be enforced from a party that has not been identified?

– We know what the Supreme Court said in Carpenter v. Longan, 83 U.S. 271, 21 L. Ed. 313, 1873 U.S.L.E.X.I.S. 1157 (1873), but does that take the above into account? Does it need to? Does it conflict?

And then we have the issues of who advanced the money to fund the alleged loan closing, who are the parties to table funding, and what security interests or encumbrances were authorized by the homeowner PRIOR to delivery of the signed note and security instrument?

And further, the parties must exist and be identifiable. It is NOT ok if they existed in the past but do not exist now (at the time of the agreement or contract or assignment).

So the originator goes into bankruptcy and is dissolved, and then a year or more later they (somehow) record an assignment to another entity.

And in many cases the assignment from the originator comes after the originator already executed an assignment to one or more parties previously.

What really happens to a security interest when a company is dissolved or shutdown and they haven’t assigned it to another party or released the security interest? (and this is an interest in real property where the release or assignment has to be in writing).

What really happens if it is a person and they die? And then a year later the deceased assigns the security interest to somebody else?

In CA. the procedure for real property transactions is to comply with CA. Civ. Code 1096, which provides the following:

  1. Civ. Code 1096

Any person in whom the title of real estate is vested, who shall afterwards, from any cause, have his or her name changed, must, in any conveyance of said real estate so held, set forth the name in which he or she derived title to said real estate. Any conveyance, though recorded as provided by law, which does not comply with the foregoing provision shall not impart constructive notice of the contents thereof to subsequent purchasers and encumbrancers, but such conveyance is valid as between the parties thereto and those who have notice thereof.

See: Puccetti v. Girola, 20 Cal. 2d 574, 128 P.2d 13 (1942).

All of Prince’s property (real and personal) went into probate after he died. When they finally sell his real property, it won’t (or shouldn’t) be from Prince to John Doe, it should be something like Jerry Brown, executor of the estate of Prince to John Doe.

The difference between paper instruments and real money

There is a difference between the note contract and the mortgage contract. They each have different terms. And there is a difference between those two contracts and the “loan contract,” which is made up of the note, mortgage and required disclosures.Yet both lawyers and judges overlook those differences and come up with bad decisions or arguments that are not quite clever.

There is a difference between what a paper document says and the truth. To bridge that difference federal and state statutes simply define terms to be used in the resolution of any controversy in which a paper instrument is involved. These statutes, which are quite clear, specifically define various terms as they must be used in a court of law.

The history of the law of “Bills and Notes” or “Negotiable Instruments” is rather easy to follow as centuries of common law experience developed an understanding of the problems and solutions.

The terms have been defined and they are the law not only statewide, but throughout the country, with the governing elements clearly set forth in each state’s adoption of the UCC (Uniform Commercial Code) as the template for laws passed in their state.

The problem now is that most judges and lawyers are using those terms that have their own legal meaning without differentiating them; thus the meaning of those “terms of art” are being used interchangeably. This reverses centuries of common law and statutory laws designed to prevent conflicting results. Those laws constrain a judge to follow them, not re-write them. Ignoring the true meaning of those terms results in an effective policy of straying further and further from the truth.

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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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So an interesting case came up in which it is obvious that neither the judge nor the bank attorneys are paying any attention to the law and instead devoting their attention to making sure the bank wins — even at the cost of overturning hundreds of years of precedent.
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The case involves a husband who “signed the note,” and a wife who didn’t sign the note. However the wife signed the mortgage. The Husband died and a probate estate was opened and closed, in which the Wife received full title to the property from the estate of her Husband in addition to her own title on the deed as Husband and Wife (tenancy by the entireties).
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Under state law claims against the estate are barred when the probate case ends; however state law also provides that the lien (from a mortgage or otherwise) survives the probate. That means there is no claim to receive money in existence. Neither the debt nor the note can be enforced. The aim of being a nation of laws is to create a path toward finality, whether the result be just or unjust.
 *

There is an interesting point here. Husband owed the money and Wife did not and still doesn’t. If foreclosure of the mortgage lien is triggered by nonpayment on the note, it would appear that the mortgage lien is presently unenforceable by foreclosure except as to OTHER duties to maintain, pay taxes, insurance etc. (as stated in the mortgage).

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The “bank” could have entered the probate action as a claimant or it could have opened up the estate on their own and preserved their right to claim damages on the debt or the note (assuming they could allege AND prove legal standing). Notice my use of the terms “Debt” (which arises without any documentation) and “note,” which is a document that makes several statements that may or may not be true. The debt is one thing. The note is quite a different animal.
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It does not seem logical to sue the Wife for a default on an obligation she never had (i.e., the debt or the note). This is the quintessential circumstance where the Plaintiff has no standing because the Plaintiff has no claim against the Wife. She has no obligation on the promissory note because she never signed it.
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She might have a liability for the debt (not the obligation stated on the promissory note which is now barred by (a) she never signed it and (b) the closing of probate. The relief, if available, would probably come from causes of action lying in equity rather than “at law.” In any event she did not get the “loan” money and she was already vested with title ownership to the house, which is why demand was made for her signature on the mortgage.
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She should neither be sued for a nonexistent default on a nonexistent obligation nor should she logically be subject to losing money or property based upon such a suit. But the lien survives. What does that mean? The lien is one thing whereas the right to foreclose is another. The right to foreclose for nonpayment of the debt or the note has vanished.

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Since title is now entirely vested in the Wife by the deed and by operation of law in Probate it would seem logical that the “bank” should have either sued the Husband’s estate on the note or brought claims within the Probate action. If they wanted to sue for foreclosure then they should have done so when the estate was open and claims were not barred, which leads me to the next thought.

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The law and concurrent rules plainly state that claims are barred but perfected liens survive the Probate action. In this case they left off the legal description which means they never perfected their lien. The probate action does not eliminate the lien. But the claims for enforcement of the lien are effected, if the enforcement is based upon default in payment alone. The action on the note became barred with the closing of probate, but that left the lien intact, by operation of law.

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Hence when the house is sold and someone wants clear title for the sale or refinance of the home the “creditor” can demand payment of anything they want — probably up to the amount of the “loan ” plus contractual or statutory interest plus fees and costs (if there was an actual loan contract). The only catch is that whoever is making the claim must actually be either the “person” entitled to enforce the mortgage, to wit: the creditor who could prove payment for either the origination or purchase of the loan.
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The “free house” mythology has polluted judicial thinking. The mortgage remains as a valid encumbrance upon the land.

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This is akin to an IRS income tax lien on property that is protected by homestead. They can’t foreclose on the lien because it is homestead, BUT they do have a valid lien.

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In this case the mortgage remains a valid lien BUT the Wife cannot be sued for a default UNLESS she defaults in one or more of the terms of the mortgage (not the note and not the debt). She did not become a co-borrower when she signed the mortgage. But she did sign the mortgage and so SOME of the terms of the mortgage contract, other than payment of the loan contract, are enforceable by foreclosure.

*

So if she fails to comply with zoning, or fails to maintain the property, or fails to comply with the provisions requiring her to pay property taxes and insurance, THEN they could foreclose on the mortgage against her. The promissory note contained no such provisions for those extra duties. The only obligation under the note was a clear statement as to the amounts due and when they were due.  There are no duties imposed by the Note other than payment of the debt. And THAT duty does not apply to the Wife.

The thing that most judges and most lawyers screw up is that there is a difference between each legal term, and those differences are important or they would not be used. Looking back at AMJUR (I still have the book award on Bills and Notes) the following rules are true in every state:

  1. The debt arises from the circumstances — e.g., a loan of money from A to B.
  2. The liability to pay the debt arises as a matter of law. So the debt becomes, by operation of law, a demand obligation. No documentation is necessary.
  3. The note is not the debt. Execution of the note creates an independent obligation. Thus a borrower may have two liabilities based upon (a) the loan of money in real life and (b) the execution of ANY promissory note.
  4. MERGER DOCTRINE: Under state law, if the borrower executes a promissory note to the party who gave him the loan then the debt becomes merged into the note and the note is evidence of the obligation. This shuts off the possibility that a borrower could be successfully attacked both for payment of the loan of money in real life AND for the independent obligation under the promissory note.
  5. Two liabilities, both of which can be enforced for the same loan. If the borrower executes a note to a third person who was not the party who loaned him/her money, then it is possible for the same borrower to be required, under law, to pay twice. First on the original obligation arising from the loan, (which can be defended with a valid defense such as that the obligation was paid) and second in the event that a third party purchased the note while it was not in default, in good faith and without knowledge of the borrower’s defenses. The borrower cannot defend against the latter because the state statute says that a holder in due course can enforce the note even if the borrower has valid defenses against the original parties who arranged the loan. In the first case (obligation arising from an actual loan of money) a failure to defend will result in a judgment and in the second case the defenses cannot be raised and a judgment will issue. Bottom Line: Signing a promissory note does not mean the maker actual received value or a loan of money, but if that note gets into the hands of a holder in due course, the maker is liable even if there was no actual transaction in real life.
  6. The obligor under the note (i.e., the maker) is not necessarily the same as the debtor. It depends upon who signed the note as the “maker” of the instrument. An obligor would include a guarantor who merely signed either the note or a separate instrument guaranteeing payment.
  7. The obligee under the note (i.e., the payee) is not necessarily the lender. It depends upon who made the loan.
  8. The note is evidence of the debt  — but that doesn’t “foreclose” the issue of whether someone might also sue on the debt — if the Payee on the note is different from the party who loaned the money, if any.
  9. In most instances with nearly all loans over the past 20 years, the payee on the note is not the same as the lender who originated the actual loan.

In no foreclosure case ever reviewed (2004-present era) by my office has anyone ever claimed that they were a holder in due course — thus corroborating the suspicion that they neither paid for the loan origination nor did they pay for the purchase of the loan.

If they had paid for it they would have asserted they were either the “lender” (i.e., the party who loaned money to the party from whom they are seeking collection) or the holder in due course i.e., a  third party who purchased the original note and mortgage for good value, in good faith and without any knowledge of the maker’s defenses). Notice I didn’t use the word “borrower” for that. The maker is liable to a party with HDC status regardless fo whether or not the maker was or was not a borrower.

“Banks” don’t claim to be the lender because that would entitle the “borrower” to raise defenses. They don’t claim HDC status because they would need to prove payment for the purchase of the paper instrument (i.e., the note). But the banks have succeeded in getting most courts to ERRONEOUSLY treat the “banks” as having HDC status, thus blocking the borrower’s defenses entirely. Thus the maker is left liable to non-creditors even if the same person as borrower also remains liable to whoever actually gave him/her the loan of money. And in the course of those actions most homeowners lose their home to imposters.

All of this is true, as I said, in every state including Florida. It is true not because I say it is true or even that it is entirely logical. It is true because of current state statutes in which the UCC was used as a template. And it is true because of centuries of common law in which the current law was refined and molded for an efficient marketplace. But what is also true is that law judges are the product of law school, in which they either skipped or slept through the class on Bills and Notes.

Bank Fraud From the Top Down

MERS is not, as its proponents claim, a device for eliminating the recording charges on legitimate purchases and sales of mortgage loans; instead it is a “layering” device (another Wall Street term) for creating the illusion of such transfers even though no transaction actually took place.

Get a consult! 202-838-6345

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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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I recently had the occasion to ghost write something for a customer in relation to claims based upon fraud, MERS, and “Successors.” Here is what I drafted, with references to actual people and entities deleted:

  •  MERS was created in 1996 as a means for private traders to create the illusion of loan transfers. On its website MERS states emphatically that it specifically disclaims any interest in any debt and disclaims any interest in any documentation of debt (i.e., a promissory note) and specifically disclaims any interest in any agreement for collateralizing the obligations stated on the note.
  • There is no agreement in which MERS is authorized as an agent of any creditor. The statement on the note and/or mortgage that it is named as nominee for a “lender” is false. No agreement exists that sets forth the terms or standards of agency relationship between the Payee on the subject “note” or the mortgagee on the subject mortgage. MERS is merely named on instruments without any powers to exercise on behalf of any party who would qualify as a bona fide mortgagee or beneficiary.
  • No person in MERS actually performs ANY action in connection with loans and no officer or employee of MERS did perform any banking activity in relation tot he subject loan. MERS is a passive database for which access is freely given to anyone who wants to make an entry, regardless of the truth or falsity of that entry. It is a platform where the person accessing the MERS IT system appoints themselves as “assistant secretary” or some other false status in relation to MERS. MERS is not, as its proponents claim, a device for eliminating the recording charges on legitimate purchases and sales of mortgage loans; instead it is a “layering” device (another wall Street term) for creating the illusion of such transfers even though no transaction actually took place.
  • Hence there is no basis under existing law under which MERS, in this case, was either a nominee for a real creditor and no basis under existing law under which MERS, in this case, could possibly claim that it was either a mortgagee or beneficiary under a deed of trust.
  • MERS has not claimed and never will claim that it is a mortgagee or beneficiary.
  • The lender, under the alleged “closing documents” was also a sham nominee. None of the parties in the alleged “chain” were at any times a creditor, lender, purchaser, mortgagee, beneficiary, or holder of any note. None of them have any financial interest or risk of loss in the performance of the alleged “loan” obligations.
  • Plaintiff reasonably relied upon the representations at the “Closing” that the originator who was named as Payee on the note was lending her money. But in fact the originator was merely acting as a broker, conduit or sales agent whose job was to get the Plaintiff to sign papers — an event that triggered windfall compensation to all the participants (except the Plaintiff), equal to or even greater than the amount of principal supposedly due from the “loan.”
  • In fact, the originator and multiple other parties had entered into a scheme that was memorialized in an illegal contract violating public policy regarding the disclosure of the identity of the “lender” and the compensation by all parties who received any remuneration of any type arising out the “Closing of the transaction.” The name of the contract is probably a “Purchase and Assumption Agreement” — a standard agreement that is used in the banking industry after the loan has been underwritten, approved and funded. In the case at bar those parties entered into the Purchase and Assumption Agreement before the subject “loan” was closed”, before the Plaintiff even applied for a loan.
  • The source of the money for the alleged “loan” was a “dark pool” (a term used by investment bankers) consisting of the money advanced by investors who thought they were buying mortgage bonds issued by a Trust, in which their money would be managed by the Trustee. In fact, the Trust is either nonexistent or inchoate having never been funded with the investors’ money. The dark pool contains money commingled from hundreds of investors in thousands of trusts.
  • The investors were generally stable managed funds including pension, retirement, 401K money for people relying upon said money for their living expenses after retirement. They are the unwitting, unknowing source of funds for the transaction described as a “closing.” Hence the loan contract upon which the Defendants rely is based upon fraudulent representations designed to mislead the court and mislead the Plaintiff and the byproduct of a broader scheme to defraud investors in “Mortgage backed securities” that were issued by a nonexistent trust that never owned the assets supposedly “backing” the “security” often described as a mortgage bond.
  • Thus the fraud starts with the misrepresentation to investors that the managed funds would be managed by a trustee and would be used to acquire existing loans rather than originate new loans. Instead their funds were used directly on the “closing” table by presumably unwitting “Closing agents.” The fact that the funds arrived created the illusion that the party named on the note and mortgage was actually funding the loan to the “borrower.” This was a lie. But it explains why the Defendants have continually refused to provide any evidence of the “purchase” of the loan by the parties they claim to form a “Chain.”
  • In the alleged “transfer” of the loan, there was no purchase and no payment of money because at the base of their chain, the originator, there was no right to receive the money that would ordinarily be a requirement for purchase of the loan. There also was no Purchase and Assumption Agreement, which is basic standard banking practice in the acquisition of loans, particularly in pools.
  • As Plaintiff as recently learned, the originator was not entitled to receive any payment from “successors” and not entitled to receive any money from the Plaintiff who was described as a “borrower.” In simple accounting terms there was no debit and so there could be no “corresponding” credit. And in fact, the originator never did receive any money for purchasing the loan nor any payments that were credited to a loan receivable account in its accounting records. Yet the originator executed or allowed instruments to be executed in which the completely fraudulent assertion that the originator had sold the loan was memorialized.
  • The “closing” was completely improper in which Plaintiff was fraudulently induced to execute a promissory note as maker and fraudulently induced to execute a mortgage as collateral for the performance under the note. Plaintiff was unaware that she had just created a second liability because the debt could not be legally merged into an instrument that named a party who was not the lender, not a creditor, and not a proper payee for a note memorializing a loan of money from the “lender” to the Plaintiff.
  • The purpose of the merger rule is to prevent a borrower from creating two liabilities for one transaction. The debt is merged into the note upon execution such that no claim can be made on the debt. None of these fine points of law were known to Plaintiff until recently. The reason she did not know is that the originator and the rest of the parties making claims based upon the fraudulent “loan” memorialized in the note all conspired to withhold information that was required to be disclosed to “borrowers” under Federal and State Law.
  • In the case at bar, the debt arises from the fact that Plaintiff did in fact receive money or the benefit of payments on her behalf — from third parties who have no contractual, constructive or other relationship with the source of funds for the transaction. The note is based upon a transaction that never existed — a loan from the originator to the Plaintiff. The debt is based upon the receipt of money from a party who was clearly not intending to make a gift to Plaintiff. The debt and the note are two different liabilities.
  • Assuming the original note exists, Plaintiff is entitled to its its cancellation and return, along with release and satisfaction of the mortgage that collateralizes the obligation set forth on the sham promissory note.
  • In the interim, as this case clearly shows, the Plaintiff is at risk of a second liability even if she prevails in her claim that the note was a sham, to wit: Under UCC Article 3, if an innocent third party actually purchases the mortgage or deed of trust, the statute shifts the risk of loss onto the maker of the instrument regardless of how serious and egregious the practices of the originator and the background “players” who engineered this scheme.
  • Further the financial identity and reputation of the Plaintiff was fraudulently used without her knowledge and consent to conduct “trades” based upon her execution of the above referenced false instruments in which many undisclosed players were reaping what they called “trading profits” arising from the “closing” and the illegal and unwanted misuse of her signatures on instruments in which she was induced to sign by fraudulent misrepresentations as to the nature and content of the documents.
  • Plaintiff suffered damages in that her title was slandered and emotional distress damages and damage to her financial identity and reputation. Further damages arising from violation of her right to quiet enjoyment of the property was violated by this insidious scheme.

Why the Fed Can’t Get it Right

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Editor’s Analysis and Comments: Bloomberg reports this morning that “Fed Flummoxed by Mortgage Yield Gap Refusing to Shrink.” (see link below)

In normal times lowering the Fed Funds rate and providing other incentives to banks always produced more lending and more economic activity. Bernanke doesn’t seem to understand the answer: these are not normal times and the cancerous fake securitization scheme that served as the platform for the largest PONZI scheme in human history is still metastasizing.

Why wouldn’t banks take advantage of a larger spread in the Fed funds rate versus the mortgage lending rates. Under the old school times that would automatically go to the bottom line of lending banks as increased profits. If we put aside the conspiracy theories that the banks are attempting to take down the country we are left with one inevitable conclusion: in the “new financial system” (sounds like the “new economy” of the 1990’s) the banks have concluded there would be no increase in profit. In fact one would be left to the probable conclusion that somehow they would face a loss or risk of loss that wasn’t present in the good old days.

Using conventional economic theory Bernanke is arriving at the conclusion that the spread is not large enough for banks to take on the business of lending in a dubious economic environment. But that is the point — conventional economic theory doesn’t work in the current financial environment. With housing prices at very low levels and the probability that they probably won’t decline much more, conventional risk management would provide more than enough profit for lending to be robust.

When Bernanke takes off the blinders, he will see that the markets are so interwoven with the false assumptions that the mortgage loans were securitized, that there is nothing the Fed can do in terms of fiscal policy that would even make a dent in our problems. $700 trillion+ in nominal derivatives are “out there” probably having no value at all if one were the legally trace the transactions. The real money in the U.S. (as opposed to these “cash equivalent” derivatives) is less than 5% of the total nominal value of the shadow banking system which out of sheer apparent size dwarfs the world banks including  the Fed.

As early as October of 2007 I said on these pages that this was outside the control of Fed fiscal policy because the amount of money affected by the Fed is a tiny fraction of the amount of apparent money generated by shadow banking.

Oddly the only place where this is going to be addressed is in the court system where people bear down on Deny and Discover and demand an accounting from the Master Servicer, Trustee and all related parties for all transactions affecting the loan receivable due to the investors (pension funds). The banks know full well that many or most of the assets they are reporting for reserve and capital requirements or completely false.

Just look at any investor lawsuit that says you promised us a mortgage backed bond that was triple A rated and insured. What you have given us are lies. We have no bonds that are worth anything because the bonds are not truly mortgage backed. The insurance and hedges you purchased with our money were made payable to you, Mr. Wall Street banker, instead of us. The market values and loan viability were completely false as reported, and even if you gave us the mortgages they are unenforceable.

The Banks are responding with “we are enforcing them, what are you talking about.” But the lawyers for most of the investors and some of the borrowers are beginning to see through this morass of lies. They know the notes and mortgages are not enforceable except by brute force and intimidation in and out of the courtroom.

If the deals were done straight up, the investor would have received a mortgage backed bond. The bond, issued by a pool of assets usually organized into a “trust” would have been the payee on the notes at origination and the secured party in the mortgages and deeds of trust. If the loan was acquired after origination by a real lender (not a table funded loan) then an assignment would have been immediately recorded with notice to the borrower that the pool owned his loan.

In a real securitization deal, the transaction in which the pool funded the origination or purchase of the loan would be able to to show proof of payment very easily — but in court, we find that when the Judge enters an order requiring the Banks to open up their books the cases settle “confidentially” for pennies on the dollar.

The entire TBTF (Too Big to Fail) doctrine is a false doctrine but nonetheless driving fiscal and economic policy in this country. Those banks are only too big if they are continued to be allowed to falsely report their assets as if they owned the bonds or loans.

Reinstate generally accepted accounting principles and the shadow banking assets deflate like a balloon with the air let out of it. $700 trillion becomes more like $13 trillion — and then the crap hits the fan for the big banks who are inundated with claims. 7,000 community banks, savings banks and credit union with the same access to electronic funds transfer and internet banking as any other bank, large or small, stand ready to pick up the pieces.

Homeowner relief through reduction of household debt would provide a gigantic financial stimulus to the economy bring back tax revenue that would completely alter the landscape of the deficit debate. The financial markets would return to free trading markets freed from the corner on “money” and corner on banking that the mega banks achieved only through lies, smoke and mirrors.

The fallout from the great recession will be with us for years to come no matter what we do. But the recovery will be far more robust if we dealt with the truth about the shadow banking system created out of exotic instruments based upon consumer debt that was falsified, illegally closed, deftly covered up with false assignments and endorsements.

While we wait for the shoe to drop when Bernanke and his associates can no longer ignore the short plain facts of this monster storm, we have no choice but to save homes, one home at a time, still fighting a battle in which the borrower is more often the losing party because of bad pleading, bad lawyering and bad judging. If you admit the debt, the note and the mortgage and then admit the default, no  amount of crafty arguments are going to give you the relief you need and to which you are entitled.

Fed Confused by Lack of Response from Banks on Yield Spread Offered

Appraisal Fraud: Triaxx Inching Toward the Truth

Editor’s Comment: At the heart of the entire scam called securitization was the abandonment — in fact the avoidance of repayment of the loans. The idea was to make bigger and bigger loans without due any evidence of due diligence, so that the “lender” could claim plausible deniability and more importantly, make a claim for losses that were insured many times over. It was the perfect storm. Banks were using investor money to make bad loans on which the banks were raking in huge profits through multiple sales or insurance of the same loan portfolio. The only way the plan could fail was if the loans performed and the loan was in fact repaid.

For years, I have been pounding on the fact that the root of the method used was appraisal fraud, which as far as I can tell was present in nearly 100% of all loans subject to securitization, where loans were NOT bundled, and the securitization documents were ignored.

Now ICP Capital managing a vehicle called Triaxx, has countered the mountain of documents with real data sifted through algorithms on computers and they have come to the conclusion that loans were far outside the 80% LTV ratio that was presented to investors, that loans were never paid from the start (not even the first payment) and that probability of repayment was about zero on many loans. Soon, with some tweaking and investigation they will discover that repayment was never in the equation.

Thanks again to the learning curve of Gretchen Morgenson of the New York Times and her excellent investigations and articulation of her findings, we are all catching up with the BIG LIE. Banks made loans to lose money because they the money they were losing was the money of investors — pension funds etc. And at the same time they bet against the loans that were guaranteed to fail and put the money in their own pockets.

In classic PONZI scheme methodology, they used the continuing sales of false mortgage bonds to pay investors until the inevitable collapse.

Once this is established 2 things are inevitable — the investors will prove their case that they the mortgage bonds were fabricated and based upon lies, deceit and cheating.

And the other inevitable conclusion is that the money came from the investors and not from the named payee, lender or secured party on the notes and mortgages that were executed in the tens of millions during the mortgage meltdown decade.

But did the investor money come to the closing through the REMIC? The answer appears to be a big fat “NO” based upon a big fat LIE. And THAT is where the problem is that caused the banks and servicer to fabricate, forge, robo-sign, lie, cheat and steal in court the same way they did when they sold the investors and sold the borrowers on a deal doomed from inception.

Legally and practically all that means that the borrowers were equally defrauded by the false appraisals that are legally the representation of the “lender” not the borrower. But even more importantly it means that Wall Street cannot show that the money for funding or purchase of the loans ever actually came from the investment pools.

It turns out that the Wall Street was telling the truth when it denied the existence of the pools and the switched to a lie which we forced on them because it never occurred to us that they would blatantly cheat huge institutions that could do their own digging and litigating. 

The legal and accounting effect of all this is enormous. The Payees, Lenders and Secured Parties named in the closing were not the source of funding and therefore the documents that were signed must be construed as referring to a transaction that has never been completed because it was never funded.

The deception was complete when Wall Street investment bankers sent money down to closing agents without regard to any pool, REMIC, SPV or other specific collection of investors. The funding arrived from Wall Street a the same time as the papers were signed.

But in order to prevent allegations of false appraisals and predatory and deceptive lending from moving up the ladder, Wall Street made sure that there was NO CONNECTION between the PAYEE, LENDER or SECURED PARTY and either the investment bank or the so-called unfunded pool into which no assets were placed other than the occasional purchase or sale of a credit default swap.

FREE HOUSE?: As Arthur Meyer is fond of pointing out in his history of banking every 5 years, bankers always manage to step on a rake. The banks had severed the connection between the funding and the documents.

If the court follows the documents a windfall goes to someone in the alleged securitization documents WHO HAS ALREADY BEEN PAID.

If he follows the money, the loan is not secured by a perfected mortgage lien, which means that (1) the unsecured debt can be wiped out in its entirety by bankruptcy AND/or (2) with investors slow on the uptake, there might not be a creditor left to make a claim.

THE ULTIMATE AND RIGHT APPROACH TO PRINCIPAL REDUCTION: But as pointed out previously, there is a Tax liability that would put the federal, state and local budgets back in balance due from homeowners who got their “free house.” It would be a small fraction of the balance claimed on the original loan, but it would reflect the real valuation of the house, the real terms that should have applied, and a deduction for the predatory and deceptive lending practices employed.

BOA ET AL DEATHWATCH: The political third rail here is that 5-6 million homeowners might well have a right to return to their old homes with no mortgage — an event that would put our economy on steroids, end joblessness and crush the mega banks whose accounting and reporting to the SEC and shareholders has omitted the huge contingent liability to pay back the ill-gotten funds from reselling the same portfolio AS THEIR OWN  loans dozens of times.

Too Big to Fail may well be amended to “Too Fat to Jail”, a notion with historical traction even in our own society corrupted by money, influence peddling and lying politicians.

See Gretchen Morgenson’s Article at How to Find the Weeds in the Mortgage Pool

How to Find Weeds in a Mortgage Pool
By GRETCHEN MORGENSON, NY Times

IT sounds like the Domesday Book of the housing bust. In fact, it is a computerized compendium of millions of housing transactions — a decade’s worth from across the country — that could finally help us get to the bottom of troubled mortgage investments.

The system is an outgrowth of work done by a New York investment manager, Thomas Priore. In the boom years, his investment firm, ICP Capital, navigated the dangerous waters of collateralized debt obligations via an investment vehicle called Triaxx. Buyers of Triaxx C.D.O.’s did better than most, but Triaxx still incurred losses when the bottom fell out.

Now Triaxx’s database could help its managers and other investors identify bad mortgages and, perhaps, learn who snookered whom when questionable home loans were bundled into investments that later went bad.

Triaxx’s technology came to light only last month, in court documents filed in connection with the bankruptcy of Residential Capital. ResCap was the mortgage lending unit of GMAC, now known as Ally Financial. As an investor in mortgage securities, Triaxx gained access to a lot of information about loans that were pooled, including when those loans were made, where the properties are and how big the mortgage was, relative to the property’s value. After Triaxx fed such details into its system, dubious loans popped out.

Granted, Mr. Priore is no stranger to controversy. He and ICP spent two years defending themselves against a lawsuit by the Securities and Exchange Commission, which accused them of improperly generating “tens of millions of dollars in fees and undisclosed profits at the expense of clients and investors.” On Friday, ICP and Mr. Priore settled the matter. As is typical in such cases, they neither admitted nor denied the accusations. Mr. Priore paid $1.5 million. He declined to discuss the settlement.

But he did say that, looking ahead, he believed that Triaxx’s technology would help its investors recover money they deserved. Many other investors, unable or unwilling to dig through such data, have settled for pennies on the dollar.

“Our hope is that the technology will level the playing field for mortgage-backed investors and provide a superior method to manage residential mortgage risk in the future,” Mr. Priore said.

A step in that direction is Triaxx’s recent objection to a proposed settlement struck last May between ResCap and a group of large mortgage investors. Triaxx, which invested in mortgage loans originated by ResCap, criticized that settlement because it was based in part on estimated losses. Triaxx said the estimates had assumed that all the trusts that invested in ResCap paper were the same. Triaxx argued that a settlement based on estimated losses, rather than one based on an analysis of actual misrepresentations, unfairly rewards investors who bought ResCap’s riskier mortgages.

ResCap replied that it would be a herculean task to examine the loans in the trusts to determine the validity of each investor’s claims. But Triaxx noted that it took only seven weeks or so to do a forensic analysis of the roughly 20,000 loans held by the trusts in which it is an investor. Of its investments in loans with an original balance of $12.8 billion, Triaxx has identified approximately $2.17 billion with likely breaches. A lawyer for ResCap did not return a phone call on Friday seeking comment about problem loans.

John G. Moon, a lawyer at Miller & Wrubel who represents Mr. Priore’s firm, said: “Large institutions have been able to hide behind the expense of loan file review to evade responsibility for this very important national problem that we now have. Using years of data and cross-referencing it, Triaxx has figured out where the bad loans are.”

Triaxx, for example, said it had found loans that probably involved inflated appraisals. Those appraisals led to mortgages far exceeding the values of the underlying properties. As a result, investors who thought they were buying mortgages that didn’t exceed 80 percent of the properties’ value were instead buying highly risky loans that totaled well over 100 percent of the value.

Triaxx identifies these loans by analyzing 50 property sales in the same vicinity during the same period that the original mortgage was given. Then it compares the specific mortgage to 10 others that are most similar. The comparable transactions must involve the same type of property — a single-family home, for example — of roughly the same size. They must also be within a 5.5-mile radius. If the appraisal appears excessive, the system flags it.

Phony appraisals in its ResCap loans likely resulted in $1.29 billion in breaches, Triaxx told the court. Triaxx cited 50 possible cases; one involved a mortgage written in November 2006 on a home in Miami. It was a 1,036-square-foot single-family residence, and was appraised at $495,000. That appraisal supported a $396,000 mortgage, reflecting a relatively conservative 80 percent loan-to-value ratio.

But an analysis of 10 similar sales around that time suggested that the property was actually worth about $279,000. If that was indeed the case, that $396,000 mortgage represented a 142 percent loan-to-value ratio.

Perhaps the home had gold-plated bathroom fixtures and diamond-encrusted appliances. Probably not.

Triaxx’s system also points to loans on properties that were not owner-occupied, a breach of what investors were told would be in the pool when they bought it, Triaxx’s filing said. Such misrepresentations in loans underwritten by ResCap amounted to $352 million, Triaxx said.

The technology also kicks out mortgages on which borrowers failed to make even their first payments, loans that should never have wound up in the pools to begin with.

Although Triaxx is using its technology to try to recover losses, that system could also help investors looking to buy privately issued mortgage securities. After all, investors’ inability to analyze the loans in these pools during the mania led to enormous losses in the collapse. Now, deeply mistrustful of such securities, investors have pretty much abandoned the market.

Lenders and packagers of mortgage securities will undoubtedly fight the use of any technology like Triaxx’s to identify questionable loans. That battle will be interesting to watch. But investors should certainly welcome anything that brings transparency to this dysfunctional market.

Still Pretending the Servicers Are Legitimate

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Editor’s Comment:

I keep waiting for someone to notice. We all know that the foreclosures were defective. We all know that in many cases independent auditors found that strangers to the transaction submitted credit bids that were accepted by the auctioneer, and that in the non-judicial states where substitutions of trustees are always used to replace an independent trustee with one owned or controlled by the “new creditor” the “credit bid” is accepted by the creditor’s agent even if the trustee has notice from the borrower that neither the substitution of trustee nor the foreclosure are valid, that the borrower denies the debt, denies the default and denies the right of the “new creditor” to do anything.

In the old days when we followed the law, the trustee would have only one option: file an interpleader lawsuit in court claiming two stakeholders and that the trustee is not a stakeholder and should be reimbursed for fees and costs. Today instead of an interpleader, it is a foreclosure because the “creditor” is holding all the cards.

So why is anyone surprised that modifications are rejected when in the past the debtor and borrower always worked things out because foreclosure was not as good as a work-out?

Why do the deeds found to be lacking in consideration with false credit bids still remain on the books? Why hasn’t the homeowner been notified that he still owns the property and has the right to possession?

And why are we so sure that the original mortgage has any more validity than the false documents to support fraudulent foreclosures? Is it because the borrower’s signature is on it? OK. If we are going to look at the borrower’s signature then why do we not look at the rest of the document and the facts alleged to have occurred in those documents. The note says that the payee is the lender. We all know that isn’t true. The mortgage says the property is collateral for payment to the payee on the note. What first year law student would fail to spot that if the note recited a loan transaction that never occurred, then the mortgage securing the payments on the false transaction is no better than the note?

So if the original transaction was defective and the servicer derives its status or power from the origination documents, then who is the servicer and why is he standing in your living room demanding payment and declaring you in default?

If any reader of this blog somehow convinced another reader of the blog to sign a note and mortgage, would the note and mortgage be valid without any actual financial transaction. No. In fact, the attempt to collect on the note where I didn’t make the loan might be considered fraud or even grand theft. And rightfully so. I am told that in some states the Judges say it is the absence of anyone else making an effort to collect on the note that proves the standing of the party seeking to enforce it. Really?

This sounds like a business plan. A lends B money. B signs papers indicating the loan came from C and C gets the mortgage. B is delinquent by a month and having lost his job he abandons the property. D comes in and seeks to enforce the mortgage and note and nobody else is around. The title record is still clear of any foreclosure activity. D says he has an assignment and produces a false forged assignment. Nobody else shows up. THAT is because the parties in the securitization chain are using MERS instead of the public record title registry so they didn’t get any notice. D gets the foreclosure after substituting trustees in a non-judicial state or doing absolutely nothing in a judicial state. The property is auctioned and D submits a credit bid which is accepted by the auctioneer. The clerk or trustee issues D a deed upon foreclosure and D immediately transfers the property to XYZ corporation that he formed the day before. XYZ sells the property to E for $300,000. E pays D $60,000 down payment and gets a mortgage from ABC Lending Corp. for the other $240,000. ABC Lending Corp. sells the note and mortgage into the secondary market where it is sliced and diced into parcels that are allocated into one or more REMIC special purpose vehicles.

Now B comes back and finds out that he was never foreclosed on by his lender. C wakes up and says they never released the mortgage. D took the money and ran, never to be heard from again. The investors in the REMIC trusts are told they bought an invalid mortgage or one in which the mortgage has second priority instead of first priority. E, who bought the property with $60,000 of his own money is now at risk, and when he looks at his title policy and makes a claim he is directed to the schedules of exclusions and exceptions that specifically cover this event. So no title carrier is going to pay. In fact, the title company might concede that B still owns the property and that C has the first mortgage on it, but that leaves E with two mortgages instead of one. The two mortgages together total around $500,000, a price that E’s property will never reach in 20 years. Sound familiar?

Welcome to USA property law as it was summarily ignored, changed and enforced for the past 10 years? Why? Especially when it turns out that the investment broker that sold the mortgage bonds of the REMIC knew about the whole story all along. Why are we letting this happen?


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