Alternate View: Commercial Loans Sold to Home Owners

The signature comes from people who  justifiably relied upon hundreds of years of banking tradition that identified lenders as risk averse. Unknown to the homeowner is that these parties were not risk averse. They were risk indifferent because the capital to fund the loan came from the other side of the securitization chain from institutional investors.

I was reading an article in The Atlantic about the upcoming crash of commercial loans and realized that, in effect, Wall Street sold commercial loans to consumers. The potential impact of this, if taken as true, is extremely important to whether non-judicial sales can go forward in addition to the other obvious claims that the consumer was a victim of fraud.

The article said that “price declines are a bigger problem for landlords than for homeowners. Unless forced to move, homeowners with long term mortgages who make enough to cover their payments can sit tight and hope the market recovers. Landlords, however typically take out commercial loans for shorter terms of 3-10 years…. Landlords coming to the end of a mortgage simply roll the debt over a new loan. But collapsing asset values have wreaked havoc on this process.”

Hmmmm. The most significant attribute of a commercial loan is (a) the shorter term and (b) the ability to refinance. The assumption is that landlords are producing income directly with their investment in the property. These landlords tend to be fairly sophisticated as to understanding the terms of mortgages as well. On the other hand, the financial products sold to unsophisticated homeowners were predominantly based also on short-term assumptions about the life of the loan. Terms would reset far earlier than the stated or nominal life of the loan, necessitating the refinancing of the loan, which would be “easy” because the value of the asset would continue upward.

In the literature describing the differences between commercial loans and Consumer residential home loans, the financial products sold to homeowners do not meet the “consumer residential loan” criteria. They DO squarely meet the the criteria for describing a commercial loan.

In Arizona and many other non-judicial states, the ONLY process available in foreclosing a commercial loan is judicial, which means they must file a  lawsuit, serve the owner with legal process along with anyone else that might have an interest. Thus what emerges from this is the argument that even if the financial product involved a home, it was a commercial loan product.

Before you scoff at this idea keep in mind that a commercial loan INCLUDES residential property if the the property is rental property and the business of the owner is renting it out. So it is not the character of the property but the intention of the parties that determines whether it is a commercial loan or a consumer residential loan.

Virtually all loans over the last decade were securitized and sold to homeowners under the assumption of a passive increase in their wealth merely by continued climb in asset values. The passivity of the investment is why I think the sale of the loan product was the sale of an unregistered security by unregistered salespeople who were operating within the scope of the jurisdiction of the Securities and Exchange Commission.

The actual intent of the parties evidenced by the inducements for the consumer to sign the papers (thus completing the securitization chain on mortgage backed bonds that were already “sold forward”) was for the product to be replaced by another financial product in months or at most a few years. The upward climb in asset values though was a fiction created by pumping artificial money (derivatives) into the marketplace and pressuring and inducing even the most honest mortgage broker or mortgage originator to bend the truth — because it was understood that nobody would be held accountable for the failure of the loan to perform. The goal was to originate the loan and then take the property.

The method was really very simple. Employ high pressure sales tactics using people of dubious integrity to make statements that were either patently false or at least questionable. Create the appearance that a formal underwriting process by experts had taken place and had concluded the loan was viable, the appraisal price was correct and that everything was in order. Withhold information from the homeowner regarding the manner in which the appraisal was done, the instructions given to the appraiser, the increased compensation to the appraiser and all other parties involved in the origination and securitization of the loan and you get the prize: the homeowners signature.

The signature comes from people who  justifiably relied upon hundreds of years of banking tradition that identified lenders as risk averse. Unknown to the homeowner is that these parties were not risk averse. They were risk indifferent because the capital to fund the loan came from the other side of the securitization chain from institutional investors.

My point? In filing lawsuits in connection with non-judicial foreclosures, it might be interesting to raise the factual issue of whether this was a commercial or residential loan product. The factual issues being the intent of the parties to determine if there was a commercial intent. Since the character of the property itself as being used for residential purposes does not determine whether it is a consumer residential home loan or a commercial loan, the facts in each closing could be put in dispute as to what kind of transaction this was — a securities transaction, a commercial loan transaction or something else. This in turn would entitle you to use the discovery process to ask all the same questions (and more) that were asked in that qualified written request that has routinely been ignored.

7 Responses

  1. You are one straightforward writer. I enjoyed reading your article and taking in all the interesting information. I share your thoughts on many points in this content. This is great.

  2. Neil,
    I like the part about, “The goal was to originate the loan and then take the property.”
    If you can check recents comment I’ve left on two other post, (EXCELLENT MERS ANALYSIS: ILLEGAL SCHEME TO AVOID/EVADE STATE LAW, TAXES, FEES, FINES, PENALTIES, and Letters and Notices)
    I’m hoping somebody will come to my aid, a.s.a.p. Because that is clearly what happened with my house.
    In my case I have all the proof, of the theft, as well as now I’ve proof of a fraudulant Proof of Claim (filed by the Servicer’s Attorneys in my prior Pro-se BK).
    The Trustee and TRUE Lender (not the servicer) STOLE MY HOUSE. By listing the auction date as 1/4/10 10am then at that time, they postponed the auction to 1/6/10 10am, after I gave them a letter to Trustee (found here). Next the held the sale on 1/5/10 10am instead and w/o notice. Of course since no parties of interest came to bid (being that they were unaware of the sale), the Foreclosing Beneficiary (The Real Lender, right?) won the auction and received a Trustee Deed to my house a day before the new sale date of 1/6/10.

    NOW I WANT FULL JUSTICE.
    The sale voided, and the penalties sanctioned for the fraudulant Proof of Claims that was filed 4 times in the last 1 1/2 years (1 in ch 7, 3 in ch 13. All were pro-se and dissmissed by the BK Trustee regardless of any motions I had filed with the court).

    Anybody willing to help? I believe, I have everything needed to easily win it all. Except a GOOD Attorney (preferably on a contingency basis)

    Kevin,
    LV, NV. 702.
    762_ 0876.

  3. It depends upon what YOU mean by a mezzanine loan. Most of it is semantic interpretation. I would take any credible position alleging that it was a commercial loan disguised as a residential home loan if you have any basis for saying so. Your purpose is not to prove that it is commercial but to allege issues that raise questions of fact that requires the Judge to allow discovery. The Judge may or may not issue a status quo order or TRO, but the quicker you conduct discovery the faster you will be able to turn the head of the Judge on stopping the foreclosure, preventing eviction or even having the property sold or re-sold.

  4. I have a question. If a residential loan, (primary residential) is a Mezzanine Loan, is this considered a commercial loan?

  5. Damn Neil I swear both of our minds are so close to being on the same page it scares me. Two days ago skimming through loan closing paperwork I came across one titled Loan Transaction Fees the second sentance states “Some of these fees are charged by [Fremont Investment & Loan or FGC Commercial Mortgage Finance, DBA Fremont Mortgage] (the “lender”)”. But you know what I don’t think the courts are going to even care, they seem to be dispositive to our rights and claims even when we have been defrauded.

  6. Neil..
    It may have been slightly less nauseating if the Banking industry or lending institutions were ” risk indifferent ” we all know they were hedging the betts on “loss” or default, or add your own term for the “con”. The elephant is in the room very similar to building the boat in the basement. There is no denying this. There are few [like zero] resolutions to this in the “cold light of day” that does not create an implicit Group who “Knew” full well “what” was taking place “while” it was taking place .I am truly saddened & outraged by these facts.
    Those who have sworn to uphold the Constitution and have then ignored their oaths of office are guilty of perjury and malfeasance in office.” such actions or lack of action taken against the People Of These United States is ” TREASON”

  7. This is a great argument! Thanks!

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