More on Default Trap Door

There is a trap door that a lot of people are falling through. In a securitized loan the investor is the lender. In order for there to be a default, it is the investor who has lost money through non-payment. The investor has not lost money through non-payment if a payment was made through the government or insurance or cross collateralization that satisfies the obligation in whole or in part. If in part, then the question becomes whether the payments should be credited or the principal balance. Servicing banks will usually credit an extra payment to the monthly payments due and not to the principal unless specifically instructed to do so.

Now none of this takes away from the fact that it is dubious at best that the “borrower” (who is actually an investor first, an issuer second and then perhaps a borrower) is not a party to the bond transaction or any preceding transactions in the securitization chain which means that the unconditional promise to pay the “borrower” signed was instantly, at the time of closing, converted to a conditional promise to pay. That means because of the addition of terms and parties including co-obligors, that a new contract was created purporting to use the transaction between the named payee on the note and the “borrower” as the base transaction. The problem is that the borrower never agreed and never would agree as a reasonable person to have his identity used for the purpose of securing loans to other people nor to have his payments applied to defaults of other “borrowers.” Nor would the borrower agree as a reasonable person to keep paying after the obligation was paid. Thus we are left with a NEW CONTRACT and a series of NEW CONTRACTS going up the securitization chain as terms, conditions, insurance, parties were added.

The substance of the transaction is that the investor purchased a bond to which the “borrower” was not a party nor an obligor. The borrower signed a note to a party who was paid in full at closing satisfying the note at the same moment (or even before) the borrower’s “loan” closing — a transaction to which the investor was not a party. So we have two transactions in which the real parties in interest were kept separate and the real information regarding the entire single transaction was withheld from both sides. Either the investor transaction and the borrower transaction are linked or they are not. If they are linked as seems to be obviously the case, then the borrower has some liability on part of the obligation owed to the investor, along with all the other people (co-obligors) who fed out of that trough calling their withdrawal “fees,” “profits” etc. If they were not linked then there is nothing to talk about — no collection, no foreclosure —- because the obligation down the securitization chain, regardless of what level you stop at, has been satisfied in full plus exorbitant fees.

It seems stupid to even be required to state something this obvious — you cannot sue and collect on a loss that does not exist. To do so would be to create a windfall to perpetrators of fraud. While a windfall is not the object of this “game”, if it happens it clearly ought to go to the most innocent party — the one with the least access to information and who knew the least amount about the entire securitized chain of events (the “borrower”). However, to repeat my mantra, the investors were defrauded in virtually the same way as the “borrowers”. Thus a remedy that places everyone back in the position they were in before the fraud, would be to get as close as possible by funding a new mortgage that pays off the investor part of his investment, brings the balance of the note down to 80% of true loan to value, with affordable terms and perhaps an equity kicker for the investor. That would include BOTH borrowers and investors. The pretender lenders would be eliminated as they should be because they have no losses from these loans. Some of them may have losses stemming from selling multiple futures contracts on the same loan but that is simply a bad bet, a poor investment decision by a party who should and did know better.


6 Responses

  1. I believe it will be a battle to bring forth the John Doe argument as the base of your dispute. The cases being won are the basic black letter law cases, where the Plaintiff lacks standing as a matter of law, is not the injured party…the Defendant needs to raise this argument from the beginning with the Answer and then a good in depth Reply to the Motion for Summary Judgment complete with the Affidavit of denial. In securitized loans, the moving party for foreclosure is almost always the Servicer with no lawful claim, they cannot send NOD, they do not have lawful possession of the Note, did not get mortgage assigned in time. More Foreclosure Complaints are being brought forward by a Pass Through Security, as we’ve discussed these entities cannot hold the Note either as a matter of definitive fact because they are conduits. Move for Discovery, send a notarized QWR from the get go….do everything you can to survive summary judgment ….which should not be impossible as long as you are able to raise at least a genuine issue of material fact. Do not accept any document as Prima Facie evidence and Deny Deny Deny….push the burden of proof on the Plaintiff and get them into a position where they make certifications and affidavits based on lies. This is where the Court may find fraud. Its just my opinion, but once you survive summary judgement hearing and go to a full trial….the moment you can send interogatories, compel discovery and ask for witnesses….the gig would be up for the Pretender.

  2. Well like I said or Icetea & I so much for the investors being innocent
    in which which Federal Reserve Bank of Boston report’s credulity straining conclusion is stated as:
    The study, coauthored by Manuel Adelino and Kristopher Gerardi, also rebuts a widely held suspicion that the holdup in modifying loans is because of investors who control them through mortgage-backed securities. The Fed found no difference in the rate of aid between investor-controlled loans and those that lenders own directly.

    The FRBB report supported notion that securitization is not culpable for lack of mortgage modifications. This report has received far more coverage than it deserves, particularly since its ill conceived conclusions are based on a data set from Lender Processing Servicers f/k/a Fidelity, widely known for fabricating loan data.
    Yes, none other than LPS, subject of DOJ investigation:
    and CT AG investigation: y

  3. The real challenge -and one with the largest payoff- would be to show:
    1) that my payments to the pretenders were never credited to the Note balance as held by the Note holder
    2) that the Note holder received payments (from AIG and TARP) that they applied against my Note balance that were never credited to me.

    Any help on finding someone who can help prove those things out?

  4. I will hit facts only. July 2001 I closed on a home were my name was not on the note; however the note holder and my namewas on every other document prepared for closing Deed of Trust, Seller contract, itimized financing etc. After making mortage payments to bank myself for a year. The note holder filed a suite staing my name was placed on the title & deed in error. The bank then stopped me from making payments on the loan per their customer instructions the” note holder”. Oct 2004 District court determined the the true intent of the loan was for the benifit of purchasing my home; alone. And the deed of trust and title did not show the intent of the transaction. A Judgement in my favor court orderd reformation of title & deed of trust, effective date of closing to remove note holders name and reflect my name only has the true owner of the home. However i was oredered to continue all obligation & covenants the note holder was responsible for with note. Bank was provide judgement but stated they were obligated to honor judgement and still could not except payments from me per their customers instructions. However 8 months latter I received a certified letter indicating home was in default and scheduled for foreclosure and I had 30 days to come up with $9,000.00 to reinstate the note. I paid the money with belief I was now being acknowledged as a person responsible to pay loan. Bank again did note except my payment nor would te cash my checks per their customers instructions. I filled another lawsuite in court a few years later then FDIC took over the bank ” Indy Mc” Indy mc responded to discovery and a court date was scheduled March 2009. Two days before court FDIC stopped court date stating Indy Mc had not informed them of the pending court date and filled to have case done in Federal court. During the 90 day time frame awaiting a new court date I received a foreclosure notice. I then filled a Lis pendens in the clerks office. Before the required 90 day waiting period FDIC auction my home. The bank bought my home at auction and has transferred it to Fannie Mae. Where do I go from here? Remeber they denied payments I havemany correspondence were I pleaed that they take payments from me and letters stating the could not before the court order and after the judgemnt in my favor. I have certified letter from their attorneys demanding pay loan that I have defaulted addresed to me. P.S. the deed of trust used to foreclose with still had note holders name, despite Court order to reformation Deed of trust & titles.

  5. As I have said before these investors are not innocent, think about it if the securities transaction took place before the loans were secured, then they had plenty of knowledge as to what they were gambling their money on & what the risks were as well as the potential benefit was. Neil you know that the investors were/havebeen hiding behind multiple “Conduits” to avoid negative publicity & litigation. Just look at the closing docs I sentyou a while back the ones with emerald financial. Emerald was on the 3 day ROR but they were the broker, the HUD-1 stated Frank livacich as the lender, & the trust deed had lenders t.d. as trustee & frank as beneficiary as well as him as joint tenent(he/they also violated tila hoepa rico respa & did NOT comply with my extended rescission demand). So how can you say the investors are innocent when they knew this whole gamble was just that from the beginning a “GAMBLE” with the extra doe that they obviously could just throw away vs. the homeowner’s house that he/she/they have spent their life working hard to pay off only to become the subject of immoral greed driven by INVESTORS!

  6. Neil,

    The past few posts you have written are absolutely magnificent !

    However … 🙂

    I have to take a bit of an issue on your stance with this particular default trap door analysis.

    While investors may have been defrauded, they did at least have access to a prospectus for the investment. That document does have quite a bit of detail on what will happen with the investment. The investors also qualify as sophisticated investors so that they should have run their own legal due diligence on the investment.

    I would agree that the investors were defrauded to some extent about the investment, but they were notified of most of the steps in the securitization (although not the entire single transaction). The prospectus does show that the claim that the Investors will receive the benefits of loan ownership without the legal liabilities of ownership.

    In contrast, the borrower had zero information about the nature of the transaction and what documents they did see were fraudulent.

    I know you are trying to come up with a fair settlement scenario with 80% etc. for the entire nationwide mess.. However, as you taught us before, the borrowers do have offsetting claims. So at least for me (pro se), I think I can document more claims than a 20% reduction*.

    * I’m in an area without huge drops in housing values.

    Just trying to apply your earlier principles of offsetting claims to the current analysis.

    Thanks for your hard work in this area!

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