COLLATERAL BENEFIT: WHO GETS IT? PRETENDERS OR BORROWERS?

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FROM MARKET TICKER
Mish Is Again Off The Rails (Foreclosuregate)

Sigh…..

State attorneys general are not happy with a $5 billion offer by major banks to settle lawsuits regarding robo-foreclosures and other alleged grievances. Some officials want as much as $20 billion. The compromise threat is on the high end.

He then goes on to try to make the case with:

This is what I want to know:

  1. How many people lost their home to foreclosure out of an error? By error I mean the wrong person, a home with no mortgage, or a major procedural error.
  2. How many people think they deserve a free house and clear or a principal reduction over “show me the note” nonsense or other problems including unemployment?
  3. How many people did banks string along for many months with promises of work-outs, where the person paid their mortgage for months, then lost their home.

Dismissing #2 right up front, of course.

There’s a problem with this: The UCC, along with the contracts in question, do not support his liberal interpretation of “Show me the Note.”

Bluntly, you only owe the person who actually owns your note money.  The UCC is very specific on what has to happen for two events to take place:

  • The security interest (the right to toss you in a foreclosure, as opposed to simply suing for money which you may not have)

    and

  • The owner of the paper having holder in due course status.

Neither of these are “technicalities.”

First, if someone sues for foreclosure who doesn’t actually own the loan the person who does own it still has an enforceable claim against you.  That means you could get foreclosed upon and then sued by the actual owner for the money, effectively being forced to pay twice – once by ejectment from the property and then again by being financially destroyed a second time through a lawsuit for money damages.  The UCC and general contract law, along with the PSAs, are structured in a form and fashion to prevent this.  Ignoring these very real legal requirements is not a “formality”, it is part and parcel of the rule of law.

Second, the “Holder in Due Course” status is extremely important and germane.  One of the sordid facts of the “aughts” (the 2000s) is that many people were sold money under false pretense of some sort.  There were myriad frauds, including floating-rate loans sold as fixed, “riders” in middle of paperwork that was slipped in un-noticed and in violation of the good-faith estimates and claims given to borrowers before closing along with all sorts of chicanery and outright fraud.  Lending officers held themselves out not only as sellers of money but as qualifiers of a person’s capacity to pay, an expert opinion proffered based upon ratios and program claims given to homeowners.

There is a fair issue triable at law as to whether active frauds occurred in these areas.  Some of the cases are black-letter, where borrowers had their own submitted figures and papers altered by lending officers through multiple iterations through computer-based underwriting without their knowledge.  Others are more nebulous and may have (or may not have) involved active deception by the borrower himself.  These are issues to be tried in a court of law and examined by a trier of fact. 

If holder in due course status does not apply to the current “owner” of the debt the remedies available to the buyer extend to the current holder of the paperIt is only through establishment of that holder in due course status that the paper’s owner escapes successor liability for these actions.

This isn’t academic in these situations by any means.  The majority of borrowers in “risky” loans such as 2/28s, 3/27s and Option ARMs have reasonable assertions to make in these situations.  You cannot try these cases “en-masse” and dismiss the claims by fiat; you must look at them individually, in each case, and try them on the facts.  If in point of fact the trust never got the paper as required by the PSA then the trust has no “holder in due course” status at best as a late transfer now takes place with knowledge of the fraud claim existing against its origination, which negates that status.

In many of these cases it appears that the PSA was in fact not complied with and in many of those situations the conundrum becomes even worse, because the originator, securitizer or depositor, whoever they may be, is out of business and has no successor organization.  In some (but not all) of these cases the corporate estate is in bankruptcy and the asset in question is properly an asset of the bankrupt estate.  The Trustee of the bankruptcy is the only one legally empowered to transfer an asset out of a bankrupt estate prior to its final disposition at law and your assertion of a contractual right to that asset is immaterial as you are subject to the priority of claims in a bankruptcy action.

I have seen many examples of exactly this sort of apparent fraud, where an “assignment” takes place on a day during which the organization allegedly performing the assignment literally does not exist as a matter of fact or law.  Even worse there are assignments that appear to have been initiated by the grantee, which is exactly backwards and is effectively identical to me assigning myself title to your house – without your signature anywhere to be found!

In still other cases where transfers did not happen the REMIC sections of IRS code prohibit the transfer without destroying the trust’s tax preference.  In some cases that late transfer might actually have negative value when one considers the tax implications on a lookback basis.  In all cases where a legal bar exists to that late transfer the choice has to be taken – either perform it late, take the tax hit and have the certificate holders sue the hell out of the Trustee for not performing their duties faithfully (and exposing them to a huge retroactive tax hit) or take the hit of not having the security and losing the principle they allegedly “loaned” but in fact paid for nothing.   It is manifestly unjust to simply pretend these violations of the law never happened.

Finally, some of these circumstances have irrevocably severed the security interest.  Such an event is a disaster for the noteholder, but again, that’s not the buyer’s problem.  He is not “unjustly enriched” by such an event, as he still owes the money – he just can’t be foreclosed upon.  The holder of the note in these cases may still sue and recover to their ability (which may, admittedly, be quite limited.)

What’s happening here is a mass delusion.  We have a bunch of institutions that through their own hand violated not only black-letter law but the contractual provisions they entered into with investors around the world.  When this failure was first discovered they tried to cover it up with bogus affidavits that nobody had even read, say much less verified – if they had verified them they would have known that the paperwork wasn’t done and the alleged transfers were not made.  When they got caught doing that the next response was to claim that the homeowner was a deadbeat anyway, and thus “deserved it”, which is identical to the rapist claiming that his victim “deserved” to be raped because she had a short skirt on and no panties, and he could “clearly see” the target of his assault.

We properly dismiss that sort of defense these days when it comes to rape, although that same delusional process used to work once in a while in those cases.

If I “lend” you money but fail to protect my own interests by my own hand, uncolored by anything you do, that I have reduced or eliminated my rights of recourse is not your problem.  It’s mine.  It is not unjust for a debtor to demand that his creditor prove that he followed the law and that he really is the creditor, especially when there is very reasonable doubt as to whether or not he is.

Finally, it is never excusable to say “well that apparent felony (perjury) is just fine because the deadbeat over there didn’t pay his mortgage.”

Nope.

Bankers for the last thousand years have existed entirely on the back of the storage and keeping of physical documents.  Your passbook savings account from your childhood is just one example.  So were the common ledgers going all the way back to the Depression and beyond.

These “record keeping” lapses are not an occasional error or problem; they’re systemic and intentional.  Now, having been caught, the excuses have become manifest and outrageous.

The borrower does not deserve to be raped simply because she wore a short skirt.

16 Responses

  1. @marie, insults are not necessary.

  2. best to weigh the pig before accepting it. Reliance on reps must be justifiable. You might get your money back and then again, you might be forced to accept the consequences of stupidity.

  3. I remember when I made an analogy with requiring tender before rescission and rape. I GOT BARKED AT BY A BUNCH OF READERS. Now someone else makes a similar analogy … and no barking.

    ANONYMOUS,
    Are you talking about Title Insurance? If you are I know exactly what your talking about and brought that up a long time ago (before you showed up).

  4. @Mike or anyone. What is the real ramification to the economy of homeowners getting ‘free’ houses?
    How bad is it? Won’t those funds not spent on p & i payments make their way into general circulation?
    Who does this hurt, exactly?
    It’s just moving the beneficiaries of those dollars, to me. And as I said below, the actual people who might suffer as a result (pensions, etc.) have a remedy – they can bring suit against the people who caused their problem.
    What a sad and sorry system it is which causes the weakest to bear the ultimate burden of such a foul scheme, first by loss of our single largest asset and self-esteem, and then the taxes we will pay for the rat-bastard’s crimes.

    And while I’m at it – what is with this fining or whatever of banksters? I hope the government doesn’t think this is a settlement of MY rights and claims. I hope this isn’t a situation we have nothing to say about – that some AG can settle our claims. It better be
    non-inclusive and merely something like punative.

    Now back to those hidc issues – the , or a, path to keeping our homes, imho.

  5. I have alleged some kind of infraction against third parties for 86ing ones right to give notice to a hidc.
    But now that I think about it some more, why isn’t the noteowner culpable for keeping its identity hidden? It doesn’t matter if the note is securitized and that ‘derivative’ owners aren’t / haven’t been public. What’s that got to do with anything? If I have a right to give notice and to do so, I necessarily must know who you are, it’s not my deal that your identity is ” insulated.” Yes, I agreed in the note that the note might be transfered, but show me where I agreed it would be a secret or that I should spend
    megabucks and time in a maybe-successful effort to track the transferee down.

  6. I’m taking this as an invitation to discuss the fact and ramifications of the noteowner NOT being a holder in due course (one who takes a note, for instance, with notice of its dishonor, i.e., it’s in default ) is not a holder in due course. This is no small matter. It means that the noteowner is subject to any number of ‘affirmative defenses” to the enforcement of the note. I think we might spend some time identifying these affirmative defenses and the tenets of hidc,, as ongoing discussion will bring to light “winners”….?

    Acc to Article 3-302, for instance,

    U.C.C. – ARTICLE 3 – NEGOTIABLE INSTRUMENTS
    ..PART 3. ENFORCEMENT OF INSTRUMENTS

    3-302. HOLDER IN DUE COURSE.
    •(a) Subject to subsection (c) and Section 3-106
    (d), “holder in due course” means the holder of an instrument if:

    (1) the instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity; AND

    (2) the holder took the instrument (i) for value, (ii) in good faith, (iii) without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series, (iv) without notice that the instrument contains an unauthorized signature or has been altered, (v) without notice of any claim to the instrument described in Section 3-306, and (vi) without notice that any party has a defense or claim in recoupment described in Section 3-305(a).

    (b) Notice of discharge of a party, other than discharge in an insolvency proceeding, is not notice of a defense under subsection (a), but discharge is effective against a person who became a holder in due course with notice of the discharge. Public filing or recording of a document does not of itself constitute notice of a defense, claim in recoupment, or claim to the instrument.

    (c) Except to the extent a transferor or predecessor in interest has rights as a holder in due course, a person does not acquire rights of a holder in due course of an instrument taken (i) by legal process or by purchase in an execution, bankruptcy, or creditor’s sale or similar proceeding, (ii) by purchase as part of a bulk transaction not in ordinary course of business of the transferor, or (iii) as the successor in interest to an estate or other organization.

    (d) If, under Section 3-303(a)(1), the promise of performance that is the consideration for an instrument has been partially performed, the holder may assert rights as a holder in due course of the instrument only to the fraction of the amount payable under the instrument equal to the value of the partial performance divided by the value of the promised performance.

    (e) If (i) the person entitled to enforce an instrument has only a security interest in the instrument and (ii) the person obliged to pay the instrument has a defense, claim in recoupment, or claim to the instrument that may be asserted against the person who granted the security interest, the person entitled to enforce the instrument may assert rights as a holder in due course only to an amount payable under the instrument which, at the time of enforcement of the instrument, does not exceed the amount of the unpaid obligation secured.

    (f) To be effective, notice must be received at a time and in a manner that gives a reasonable opportunity to act on it.

    (g) This section is subject to any law limiting status as a holder in due course in particular classes of transactions. ”

    1) Shouldn’t it be reasonable to force ABC to prove what if anyting was paid (d – “performance) for the note it seeks to enforce? My take on( d) is if ABC only paid 10k of a promise to pay 100k for a note, ABC is only entitled to enforcement of the 10k actually paid. But how might this interplay with
    ‘mere’ holder status?

    2) Hasn’t the shell game made it impossible for one to give notice of a defense to the note to an alleged hidc? How do you notice a hidc when you don’t know who the hey it is? Isn’t this a violation of due process or some common right? Would notice of your defense to the servicer cut it? I doubt it. Don’t know. Is it reasonable to expect a homeowner to engage in forensic sleuthing $$$$ to determine (good luck) the owner of the note for the purpose of notice of your defense to the note? These questions may depend on the interpretation / meaning of the first line of (e). Is this reference to some kind of benefit in a cdo
    or form of hypothecation? (got me)
    There is a right to defeat hidc status (or notice wouldn’t be cited in this section), and it has been violated by third parties by the intentional hiding of the identity of the noteowner to whom the notice must be given. What does one call this infraction?
    Violation of what right, what rule? This one? Due process?

    So what are affirmative defenses available against a ‘mere’ holder of a note?
    Fraud, set-off, duress, failure of consideration, payment before maturity. It seems to me the latter would include any kind of ‘insurance’, by any other name, payment on the debt by 3rd parties. (This should apply even in he case of hidc, would it not?)

    Fraud in the inducement to sign the note in the first place?
    A note is a contract, probably subject to the “meeting of the minds” provision. Was there a meeting of the minds? Were the maker and the payee agreeing to the same thing? (And for those of you who argue the payee is not the lender, there’s that)

    So, as one judge so aptly put it, “What the court needs to know is a fact.” I say the court needs to first know the fact of whether the alleged claimant is a holder at all, and then is the alleged claimant a hdic – or not.

    Ask the alleged bankster for a more definitive statement as to its alleged position if you plan to fight. I have yet to see one of these yeahhoos alleges hidc status. That’s because they’re not.

    Since it is absolutely true, as I have maintained and Mr. Garfield confirmed, that paying a wrong party is no defense to a hidc, why in the world are people not bringing up this very real issue in pleadings? It’s a form of double jeopardy. If nothing else, banksters should be made to indemnify the homeowner against a claim by the real noteowner down the road. The only time I see that as a viable ‘alternative’ to the rules of evidence is when a court has ruled in favor of a bankster alleging possession of a bearer note. The bankster isn’t going to want to make the indemnification, that’s for sure.

    Rule 17 demands than an action be prosecuted in the name of or by the real party in interest. How is a holder of a note it doesn’t own a real party in interest? It isn’t. So, as I’ve probably already said,
    possession of a bearer note is not singularly dispositive of enforcement.

    If a note endorsed in blank (anyone) or to a trust (trustee) could not have made it into a trust, may a bearer of that note nonetheless enforce? Who’s the real party? Not the trust – the note didn’t make it.
    Not the depositor – it’s prohibited from double pymt.
    Note is unenforceable? Windfall to homeowner?
    Tough – homeowner didn’t do it. AND, trust has recourse against the depositor for non-delivery, so the trust is not without remedy. The one without the remedy is the one who caused the problem.

    Real people need real strategies while the
    securitization unfolds. So while MS is busy destroying Wall Street (and please get back to us on that one), we need arguments a judge can get his head around NOW.

  7. from the Mortgage Daily 12/28/2010
    Ally Settles Repurchase Obligations on $84 billion in loans. (for $462 milion). Not a bad deal, but look
    at all those investors who must have been royally
    (well you know what I mean).
    Obviously this could not have been caused by
    borrowers defaulting. Something else is at play here: COUNTERFEIT NOTES SOLD TO GULLIBLE
    INVESTORS ON THE SECONDARY MORTGAGE MARKET!
    Meanwhile some commentators are afraid that
    too many homeowners might get a free house if
    too much pressure is put on the servicers to stop
    unlawful foreclosures.
    Mortgage defaults are a drop in the bucket compared to how the investors were defrauded with
    phony, non existent mortgages. Is it any wonder why
    the Fed must create so much new money? They
    must replace all the money that was stolen from
    the pensions, insurance and money market funds
    using bogus mortgage backed securities. If they didn’t, the whole economy would crash into a deflationary death spiral. It was the most massive
    heist in the history of the world.
    All the originators using the MERS scam were
    paid multiple times on the Notes they originated
    by selling the same Notes multiple times to different investors. The servicers bought the servicing rights for a pittance (ie the right to foreclose). Every time they foreclose, it is one more “free house” for the servicers who never had
    any equity in the properties they steal. But God forbid a borrower should get a “free house”. That would create “moral hazard”. The fact is, most of these houses in foreclosure were paid for many times over by the TARP funds and the FED’s quantitative easing.

  8. Let’s get more into insurance. Insurance before a refinance.

    Talk about getting rich — deep pockets.

  9. Speaking of HUGE PIGS, check out Gretchen Morgenson and Joshua Rosners’ new book (Reckless Endangerment), about the pigs that got rich while helping to escalate the financial crisis—that are still in power—:

    http://www.huffingtonpost.com/2011/05/23/gretchen-morgenson-reckless-endangerment_n_864841.html?page=3

  10. If you bought a pig with a contract, and the contract said the pig weighed in at 800 lbs–it is important for pigs to weigh a lot. Then, you got the pig home, and it only weighed 400 lbs, that is fraud and the contract is void because of its illegal contents. Same for the notes and mortgages/deeds of trust.

  11. If the proper negotiations and endorsements of the Note and Mortgages did not happen and you have proof that those transactions did not occur … that is SECURITIES FRAUD. Can’t go and try to put it into the Trust now… It’s just a little too Late to do the right thing Now”

  12. ” as a late transfer now takes place with knowledge of the fraud claim existing against its origination, which negates that status .”

    That can not happen the trust are closed.

  13. Thanks…nice to see it broken down more so that even a “pro se idiiot”, such as myself, can get a bit better grasp of it.

  14. Ab-so-f@&$in’-lute-ly! Right on the money (pun intended)!

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