Foreclosure Defense: Losts/Destroyed Note is No Accident




In prior times, the possibility of a note being accidentally lost or destroyed was protected by statutes providing for proving the note and mortgage without the original. These statutes and rules of procedure are now being invoked by nominal lenders and assignees of nominal lenders to escape or navigate around a much deeper problem for them.

It is the opinion of this editor that the original notes were not accidentally destroyed or lost. There either intentionally destroyed or hidden in some trustee’s vault in an off shore structured investment vehicle. The reason is simple: the terms of the note and mortgage do not match the narrative or representations of the parties in the securitization process culminating in the sale of ABS instruments.

The nominal lender or assignee will claim that they did not lose or destroy the note and that might be true. That is why the SINGLE TRANSACTION theory must be invoked in foreclosure defense. Someone in the securitization process was responsible for the fact that between 40%-90% of the notes have vanished, whereas prior to the Mortgage Meltdown era the percentage of lost notes was less than 1/2 of one percent.

Since the promissory note is a thing of value and in fact is considered “money” in many economic models, it is a challenge to come up with reasons why anyone would “rip up a ten dollar bill.” The only reasonable answer is that if someone actually saw the $10 bill they would know it wasn’t a $100 bill, which is what they thought it was when they bought a piece of paper that referred back to the fictional “$100” bill.

The effect of this destruction and the reasons for it add considerable weight to the argument that there is no longer any enforceable mortgage, that the rescission rights of the borrower have been deflected into an abyss for lack of a real party in interest, and that the SINGLE TRANSACTION theory is the only one that accounts for everything that went bad in the Mortgage Meltdown era. In the context of multiple assignments and parsing of the notes and mortgage in the securitization, the lost or destroyed note takes on a whole new meaning.


A conduit or party acting as Mortgage Broker under false pretenses to the borrower giving the impression that it is has performed ordinary due diligence and applied ordinary underwriting standards to the approval of the loan, the appraisal, the borrower’s qualifications and ability to pay and the fees at closing.

The Nominal Lender is the party named on the mortgage as the mortgagee and named on the note secured by the mortgage as the payee. It is usually a front for some larger entity or financial institution. In virtually all cases from 2001-2008 the party so named on the closing documents was a Nominal Lender. The nominal lender abandoned virtually all underwriting standards and assessment of risk of loss or default because the nominal lender was not assuming those risks. In all cases, the nominal lender had already pre-sold the or assigned rights under the mortgage and note before execution of the underlying documents (mortgage and note) or immediately after under the expectation and agreement, tacit or written, that the nominal lender would receive a fee or profit from closing the loan and that the actual funds would come from third parties involved in the securitization process eventually culminating in the issuance of ABS instruments.

Thus the nominal lender lacks legal standing to pursue enforcement of the note or mortgage because the nominal lender has no financial interest in the note or the mortgage. It is equally true, however, that the claim under TILA, RESPA, RICO etc. might not be addressed to the correct party when the mortgage audit is completed and rendered with a proper request under RESPA for resolution.

The nominal lender lacks legal authority to settle anything since it is no longer a holder in due course of the note or mortgage. In addition, the removal of the nominal lender from the actual underwriting and funding process probably extends the time for rescission indefinitely because the real parties in interest are never disclosed to the borrower. similarly it is unlikely that the nominal lender has the authority to negotiate a settlement or even execute a satisfaction of mortgage, since it cannot return the original note (see Lost, Destroyed Note).

Early Amortization Event (EAE) — SEE LOST OR DESTROYED NOTE

A type of credit “enhancement” used in asset backed securities. One or more triggers, defined in the asset backed security’s documentation require the termination of revolving periods, controlled amortization periods and/or accumulation periods.

Once triggered, the early amortization provision requires that the monthly principal payments be distributed to investors as they are received. This “enhancement” was in actuality a massive risk factor and contributed greatly to the Mortgage Meltdown period of 2001-2008. It also may have caused certain parties to be motivated to “lose” or “destroy” the original note.

The most common trigger is a measure of how the portfolio yield net of charge-offs exceeds the base rate of servicing plus the investor coupon rate. Also called a pay-out event. Another event potentially within this category is the actual payoff of the mortgage. An analysis of the the concept of an EAE demonstrates several peculiarities and a possible explanation of the promissory note being lost or destroyed:

Given that an ABS is a derivative instrument and that traders in derivatives are comfortable with the value of these securities being “derived” by “reference” to something else, the traders are accustomed to examining not the actual “asset” or evidence of the asset (e.g. the note and mortgage) but rather a narrative describing the note and mortgage (which from 2003-2008 was, for the most part, at variance with the actual terms expressed in the note — the the existence of the original physical note put the CDO a manager at risk of discovery of having misled, lied or withheld vital information (like actual cash flow based upon negative amortization versus the stated rate on the note or the elimination of escrow for taxes and insurance which degrades the safety of the an investment based upon that mortgage and note).
Hence, the traders in derivatives relied upon summaries or narratives that were not scrutinized by any securities agencies for compliance with disclosure requirements, the most important of which were the risks of the investment in an ABS.

THEY RELIED INSTEAD ON THE RATING “AGENCIES” (ACTUALLY PRIVATE COMPANIES THAT WERE THEMSELVES UNREGULATED BUT ASSUMING THE MANTLE OF PSEUDO-GOVERNMENTAL OBJECTIVITY). And of course the rating agencies, by relying upon narratives prepared by CDO managers rather than examining the underlying documentation (the notes and mortgages) didn’t see the original note or mortgage either, much less analyze, examine or otherwise perform the due diligence that constituted the condition precedent to issuing a rating of “investment grade” on any security. This failure was prompted by monetary incentives and negotiation between the “client” (the issuer of the securities being rated and the rating company (Moody’s, Fitch etc.)
The actual projected charge-off rate was known to anyone who actually saw the loan application of the borrower, and the original note and mortgage. The narrated charge-off rate upon which the ABS derived its value was based upon the opinion of the CDO manager at the investment banking firm who had no expertise in appraising or underwriting loans. Nonetheless it is certainly an arguable position that the CDO manager knew or should have known that underwriting standards at the level of the nominal lender at closing had collapsed into a rubber stamp, since the nominal lender was in actuality playing the role of a conduit or mortgage broker.  See Nominal Lender.
The structure of the SPV (see Special Purpose Vehicle) was a more formal replay of the pattern of misrepresenting the terms, risks and attributes of the note and mortgage. “Tranches” (see TRANCHE) were created within each SPV, wherein each tranche behaved more or less as separate entities providing protection to the tranche above and moving the brunt of the risk of total loss down lower and lower to the lowest tranche which in the parlance of the finance world is called “toxic waste.” (see Toxic Waste). ABS instruments were issued not on the entire SPV “portfolio” but on selected groupings of tranches within the SPV and further complicated by the trading of credit default swaps, the cross guarantees, assurances and liability of other SPVs, other individual SPV tranches, and other third parties, insurers and assurers.
Thus the EAE represented in reality an astonishing array and number of variables that could not be quantified or analyzed by purchasers of ABS instruments except on faith and confidence of the issuers, rating agencies and other parties or by performing their own due diligence (which is now proposed under new SEC rules as of the the date of this entry, June 24, 2008).
At the root of the EAE phenomenon was the conflict between the truth of what was actually presented to the borrower at closing of the loan transaction and what was represented up-line (in the securitization process) eventually to the purchasers of the ABS instruments that provided the capital to fund the alleged “loans” which are editorialized in these pages as securities in actuality that were issued by the nominal lender under false pretenses and without compliance with banking and securities laws, rules and regulations that applied.


The lower tranche levels of an SPV (see Special Purpose Vehicle) whose main characteristic is to take whatever revenue or principal is paid on the high-risk debt obligations contained within that tranche and pay for any short-fall in higher tranches within the same SPV or through credit default swaps effecting other SPVs. It is difficult if not impossible to trace any specific mortgage or note to any specific one or more SPVs, tranches or other cross collateralization agreements and other instruments that distributed and parsed interests in individual loans in multiple parts to multiple parties and joined co-obligors at various levels before and during the securitization process (based upon the clearance procedures and record keeping of those involved in the SINGLE TRANSACTION).

5 Responses

  1. hi!,I love your writing very so much! percentage
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  2. When the lender sells the promissory note, as a negioatable instrument it must be endorsed.The investor thus pays the lender.When the note goes sour , the investor gets paid by AIG. Now the bank wants to keep the payments and property as if it is theirs. Would not the promissory notes endorsements be the prima faci evidence of their fraud, and thus the reason they had to destroy them? The last signotor,since they were paid by AIG could be supeonaed by a court. The bank deliberty destroyed the notes as part of their fraud. Please tell me where I am wrong. I am suing BoA in small claims.When I got their first bill( was Countrywide) I demanded the promissory note by certified mail under U.C.C.1-310. I have been patient, over 7 months I have resent demand three times, with no response.I have sued in small claims for 7500.00( 6 months paid under protest) and to ask for them to go away until they can provide a blue ink promissory note.

  3. Girlie,

    It’s almost 2 months after you posted, so I hope it’s not too late.

    I have a law degree, too. The reason lawyers are telling you to file for bankruptcy is to stop Wells Fargo from foreclosing. You wonder how they can foreclose if they lost the note. That’s exactly the point! You’re confused because it doesn’t make sense! But for a little homeowner to stop a big bank, you should file bankruptcy, preferably Chapter 13. Then you make Wells Fargo prove that you owe them money. Some bankruptcy judges will accept banks’ “lost note” excuse, but at least the laws are changing so that you can work out a modification of the mortgage in bankruptcy.

    I put together a free e-book, “Turning Lemons Into Lemonade”, that can explain things more. You can get the e-book from the website,

    Hope that helps.

  4. I have recieved foreclosure papers from Wells Fargo and I dont have a note with them, they say that the “lost the note” and want the courts to reinstate a note. however my note is with country wide, they said that they have not sold my note. this is very confusing to me and when we try to talk to local lawyers they ask if we want to file for bankruptcy wtf? I’ve even showed them this site and they are either afraid or incompetent they pretty much refuse my case. We have never ever had a note with these people. they showed paper work in the courts showing a transfer of the note from a company who originated our loan in 2004 that company sold our loan to Country Wide and Country Wide has had the note ever since. I dont know why this lawyer is filing false documents, this is very exhausting. He is showing a transfer of the note from 2008. what should I do to try and resolve this?

  5. Nice job on the story and info about the note. or No Note!

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