“Conversion” of the Note to a Bond Leaves Confusion in the Courts

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The selection of an attorney is an important decision  and should only be made after you have interviewed licensed attorneys familiar with investment banking, securities, property law, consumer law, mortgages, foreclosures, and collection procedures. This site is dedicated to providing those services directly or indirectly through attorneys seeking guidance or assistance in representing consumers and homeowners. We are available to any lawyer seeking assistance anywhere in the country, U.S. possessions and territories. Neil Garfield is a licensed member of the Florida Bar and is qualified to appear as an expert witness or litigator in in several states including the district of Columbia. The information on this blog is general information and should NEVER be considered to be advice on one specific case. Consultation with a licensed attorney is required in this highly complex field.

Brent Bentrim, a regular contributor to the dialogue, posed a question.

I am having some trouble following this.  The note cannot be converted any more than when a stock is purchased by a mutual fund (trust) it becomes a mutual fund share.

You’re close and I understand where you seem to be going…ie, the loans were serviced not based on the note and closing documents, but on the PSA.  What I do not understand is the assumption that the note was converted.  From a security standpoint, it cannot.

You are right. When I say it was “converted” I mean in the lay sense rather a legal one. Of course it cannot be converted without the borrower signing. That is the point. But the treatment of the debt was as if it had been converted and that is where the problem lies for the Courts — hence the diametrically opposed appellate decisions in GA and MA. Once you have pinned down the opposing side to say they are relying on the PSA for their authority to bring the foreclosure action, and relying on the “assignment” without value, the issue shifts —- because the PSA and prospectus have vastly different terms for repayment of interest and principal than the note signed by the borrower.There are also different parties. The investor gets a bond from a special purpose vehicle under the assumption that the money deposited with the investment bank goes to the SPV and the SPV then buys the mortgage or funds the origination. In that scenario the payee on the note would either be the SPV or the originator. But it can’t be the originator if the originator did not fulfill its part of the bargain by funding the loan. And there is no disclosure as to the presence of other parties in the securitization chain much less the compensation they received contrary to Federal Law. (TILA).

Under the terms of the PSA and prospectus the expectation of the investor was that the investment was insured and hedged. That is one of the places where there is a break in the chain — the insurance is not made payable to either the SPV or the investors. Instead it is paid to the investment bank that merely created the entities and served as a depository institution or intermediary for the funds. The investment bank takes the position that such money is payable to them as profit in proprietary trading, which is ridiculous. They cannot take the position that they are agents of the creditor for purposes of foreclosure and then take the position that they were not agents of the investors when the money came in from insurance and credit default swaps.

Even under the actual money trail scenario the same holds true — they were acting as agents of the principal, albeit violating the terms of the “lender” agreement with the investors. Here is where another break occurred. Instead of funding the SPV, the investment bank held all investor money in a commingled undifferentiated mega account and the SPV never even had any account or signatory on any account in which money was placed.

Hence the SPV cannot be said to have purchased the loan because it lacked the funding to do it. The banks want to say that when they funded the origination or acquisition of the loan they were doing so under the PSA and prospectus. But that would only be true if they were following the provisions and terms of those instruments, which they were not. The banks funded the acquisition of loans directly with investor money instead of through the SPV, hence the tax exempt claims of the SPV’s are false and the tax effects on the investors could be far different — especially when you consider the fact that the mega suspense account in the investment bank had funds from many other investors who also thought they were investing in many different SPVs.

The reality of the money trail scenario is that the SPV can’t be the owner of the note or the owner of the mortgage because there simply was no transaction in which money or other consideration changed hands between the SPV and any other party. The same holds true for all the parties is the false securitization trail — no money was involved in the assignments. Thus it was not a commercial transaction creating a negotiable instrument.

In both scenarios the debt was created merely by the receipt of money that is presumed not to be gift. The question is whether the note, the bond or both should be used to re-structure the loan and determine the amount of interest, principal, if any that is left to pay.

The further question is if the originator did not loan any money, how can the recording of a mortgage have been proper to secure a debt that did not exist in favor of the secured party named on the mortgage or deed of trust?
And if the lender is determined by the actual money trail then the lenders consist of a group of investors, all of whom had money deposited in the account from which the acquisition of the loan was funded. And despite investment bank claims to the contrary, there is no evidence that there was any attempt to actually segregate funds based upon the PSA and prospectus. So the pool of investors consists of all investors in all SPVs rather just one — a factor that changes the income and tax status of each investor because now they are in a common law general partnership.

Thus the “conversion” language I have used, is merely shorthand to describe a far more complex process in which the written instruments were ignored, more written instruments were fabricated based upon nonexistent transactions, and no documentation was provided to the investors who were the real lenders. That leaves a common law debt that is undocumented by any promissory note or any secured interest in the property because the recorded mortgage or deed of trust was filed under false pretenses and hence was never perfected.

The conversion factor comes back in when you think about what a Judge might be able to do with this. Having none of the documentation naming and protecting the investors to document or secure the loan, the Judge must enter judgment either for the whole amount due, if any (after deductions for insurance and credit default swap proceeds) or in some payment plan.

If the Judge refers to the flawed documentation, he or she must consider the interests and expectation s of both the lender (investors) and the borrower, which means by definition that he must refer back to the prospectus and PSA as well as the promissory note.
The interesting thing about all this is that homeowners are of course willing to sign new mortgages that reflect the economic reality of the value of their homes, and the principal balance due, as well as money that continued to be paid to the creditor by the same same servicer that declared the default (and was therefore curing the default with each payment to the creditor).
The only question left is where did the money come from that was paid to the creditor after the homeowner stopped making payments and does that further complicate the matter by adding parties who might have an unsecured right of contribution against the borrower for money  advanced advanced by an intermediary sub servicer thereby converting the debt (or that part that was paid by the subservicer from funds other than the borrower) from any claim to being secured to a potential unsecured right of contribution from the borrower.
To that extent the servicer should admit that it is suing on its behalf for the unsecured portion of the loan on which it advanced payments, and for the secured portion they claim is due to other parties. They obviously don’t want to do that because it would focus attention on the actual accounting, posting and bookkeeping for actual transfers or payments of money. The focus on reality could be devastating to the banks and reveal liabilities and reduction of claimed assets on their balance sheets that would cause them to be broken up. They are counting on the fact that not too many people will understand enough of what is contained in this post. So far it seems to be working for them.Remember that as to the insurance and credit default swaps there are express waivers of subrogation or any right to seek collection from the borrowers in the mortgages. The issue arises because the bonds were insured and thus the underlying mortgage payments were insured — a fact that played out in the real world where payments continued being made to creditors who were advancing money for “investment” in bogus mortgage bonds. This leaves only the equitable powers of the court to fashion a remedy, perhaps by agreement between the parties by which the lenders are made parties to the action and the borrowers are of course parties to the action but he servicers are left out of the mix because they have an interest in continuing the farce rather than seeing it settled, because they are receiving fees and picking up property for free (credit bids from non-creditors).

This is precisely the point that the courts are missing. By looking at the paperwork first and disregarding the actual money trail they are going down a rabbit hole neatly prepared for them by the banks. If there was no commercial transaction then the UCC doesn’t apply and neither do any presumptions of ownership, right to enforce etc.

The question of “ownership” of the note and mortgage are a distraction from the fact that neither the note or the mortgage tells the whole story of the transaction. The actions of the participants and the real movement of money governs every transaction.

Whether the courts will recognize the conversion factor or something similar remains to be seen. But it is obvious that the confusion in the courts relates directly to their ignorance of the the fact that the actual money transaction is not brought to their attention or they are ignoring it out of pure confusion as to what law to apply.

Now UCC Me, Now You Don’t: The Massachusetts Supreme Judicial Court Ignores the UCC in Requiring Unity of Note and Mortgage for Foreclosure in Eaton v. Fannie Mae

High court rules in favor of bank in Suwanee foreclosure case

Wells Fargo slows foreclosure sales, BofA not so much

39 Responses

  1. neil I just saw this article. could you re-post this? this is extremely relevant. thank you. you have my email. you responded to two of my questions several years ago when it was just me, ANONYMOUS, Dan Edstrom, Maher Soli
    man, Ukg and a few others making meaningful contributions.

  2. someone here mentioned that short sales are showing up as foreclosures on credit reports, ostensibly because credit default swaps only pay out on foreclosures. Any links to this topic? thx

  3. Mention you want to see the prima facie evidence of this supposed debt. You will know it is a bad judge by the way they get that glazed over look as if they can look right through you like you are invisible. If you ever asked for particular things…physical evidence like legal docs, you may have witnessed that look. It’s almost like some of these judges, not all, but some of these judges are programmed to ignore us.

  4. Help…..there is no discovery, there are no trusts or trustees. That came right from a bank attorney’s mouth.

    Foreclosure is a scam. There is a massive coverup going on for the fraud of the banksters and this was the biggest robbery of our wealth & property in history by these communists and it is still going on to this day. Everything they say is b.s. and everything they are doing is illegal.


  6. The judges certainly know the PSA’s were ignored, the trusts were never set up and the Prospectus that governs the servicers and the servicing of the contracts is a fraud because the notes and contracts were destroyed.

    I mentioned the PSA & the Prospectus and the missing Legal Assignment in one of my motions. The bank attorney acted arrogant and told the Judge…”They are asking for the PSA, the Prospectus and all kinds of things.” The judge seemed incensed and sided with the bank attorney. That judge was recently switched out to that bank attorney’s surprise.

    What in the hell did they think that everyone was going to buy their b.s.? Too many are going along with their communist agenda but thankfully, not everyone. There are some patriots who are FED UP. WITH THEIR B.S.

  7. @Help

    It SHOULD matter, but it doesn’t. The courts don’t care about the PSA. They only care if you signed some BS paper that says I will pay back something. The judges refuse to get to the truth in their courtrooms, because they are afraid of losing their pensions. Cowards, all of them.

  8. @Hman

    “Deutsche (the trustee) is the owner” HA HA, that’s a good one.

    The servicers are listing themselves as the lender on the 1099A tax forms—saying it is their loss…seems like IRS fraud to me.

    Deutsche has stated publicly they have no ownership stake in any of the loans. Securities investors and Trustees can NEVER be “owners”. Period.

    The servicers lie like the dogs they are…wait a minute, I love dogs—I mean the servicers tell you the lies they are told to tell you. I guarantee if you get them on the phone and ask them point blank ‘who is real creditor’ they will either lie and make something up, or say (like they said to me) “We don’t have to tell you that because of privacy laws”.

    It’s all a load of crock because no one owns any loans. Because they were never funded loans—just collection rights to manufactured false-default debt. Not real notes. Not real “mortgages”. That’s why some people have multiple companies trying to collect…it’s just like unsecured credit card debt that has been sold over and over to junk debt buyers. ‘Round and ’round we go—where we’ll stop, nobody knows…

  9. So, if the Servicer or TRUST states that the Loan was/is governed pursuant the PSA, and the assignment and then the TRUST accepts assignment of the NOTE and loan in 2012, when the PSA states the REMIC TRUST closed in 2005, then is that the SILVER BULLET that the assignment of the loan could not have happened pursuant their own admission the PSA governs all and the assignment had to be before the REMIC TRUST closing date.???

  10. Neil

    I’m not buying a lot of your argument here..

    Show us in any PSA and Prospectus where it says that the mortgages or that the certificates—other than the NIM certificates not offered to the public investors—are insured. The NIM certificates were bankster owned certificates. These were insured with credit default swaps, not all the investor certificates. This is why the monoline insurers went belly up and sued the banksters, because they lost billions not trillions. If all the certificates were insured, then the insurers would have lost trillions, but they didn’t. The PSAs and Prospectuses clearly stated that the investors’ investments were not insured or hedged. The only insurance was waterfall insurance for the senior certificates. The risks to all investors were clearly spelled out, with the exception of the mortgage loan qualities and associated appraisals which violating industry wide underwriting standards.

    Also, the CDS were side bets to the extent that the banksters used their own money, and not investor or mortgagor funds. So any profits they made they made with their own funds (presumably) and there was no collateral source of payment made against the mortgages to reduce their balances as you are fond of alleging. Does this CDS thing as posited above stink? You bet it does, but that’s another matter.

    The express subrogation waivers against borrowers tells you everything you need to know about this matter. The insurers weren’t insuring the mortgages. Read the PSAs. There is no such provision in them for mortgage insurance. The only mortgage insurance mentioned is homeowners casualty and liability insurance.

    Your assertion that “The banksters cannot take the position that they are agents of the creditor for purposes of foreclosure and then take the position that they were not agents of the investors when the money came in from insurance and credit default swaps” is a nonsequiter. CDS money didn’t come into the trust for the benefit of all investors.

    The rest of your post, Neil, raises some very interesting and intriguing issues; but unfortunately there is a plethora of conclusory allegations that are not backed up with facts. I’m not saying that you don’t have the facts, just that I see mostly conclusory assertions devoid of those facts.

  11. The Banks/Servicers are paying on the debt once the borrower goes into default from proceeds obtained for selling the same Note over and over until the borrower went into default. At this point the game is over.

  12. Howdy folks,

    I hope that all are doing well (especially the Home Owner’s)… I do not want to take up too much, unnecessary time, space and place but… I had already given you guys the answer on, the question @ hand (fig.&lit.;)

    … please try to follow me here… … … i (small ‘I’ intended) was personally in Court, in attendance and ‘participation’ WHEN… defense-Counsel, admitted in open Court that, “THE NOTE IS BEARER-PAPER…” and… (here’s the kicker) “IS IN BEARER-PAPER FORM…”(unquote;)…

    Here’s the reason why the defense thought it to be, beneficial to his Client’s Case… In a nutshell, the defense wanted to more or less, or or not that…
    1. the transaction itself, is complex
    2. the new security(ies) could be/have been sold, via open-market
    3. it would be near impossible to, gather and present any and all documents relating to any and all transfers for a number of relevant practical logistical reasons… as a result of open-market
    4. the purpose of the note itself and it’s design for simpler transference, on open-market…

    5. this Court, lacked the depth of complex understanding and authority to even entertain requests for discovery

    Unfortunately, good people… the defense-Counsel was absolutely… spot-ON… CORRECT (don’t listen to me, do the homework/research and it will stand out, plain-as-day)… he just wasn’t, supposed to have said, what he said, in an open State Court

    WE WON… and… that Case was sealed but, I could sure tell you, which one it was;)

    if the ‘servicers’ are going to play by big boy rules (international), then that, is WHERE you have to beat them…

    …we might be able to assist you; if possible (no tugging @ the heart strings, no-arm pulling and no pressure sales pitches because that’s what got most into, thier respective predicaments)…

    we give solid and practical advice; based on experience but, no guarantees…

    Let’s talk and try to figure out, which way is up…

    send us an email:

    have a good week…


    ps… one of our Clients is very close to a Chapter 13 WIN… using of all things… the nardi depositions… will keep all posted;)

  13. I was able to obtain a statement from the EX president of my “broker”. It states that the broker funded the loan and sold it approx. a week later to Rescap. I have underwriting paperwork being submitted to GMAC/Rescap the day the loan closed. Does this mean that the broker used their credit to fund the loan from a warehouse line and then sold it to Rescap. Sorry this is somewhat confusing. I was under the assumption that often the broker usual just in a sense “leases” their name and the funding was done by the banks to hide liability for horrible names. The banks could always cry the broker sold me this crappy loan.

    Also, I have 2 servicers stating that Deutsche (the trustee) is the owner but in the ResCap bankruptcy proceeding they list my trust as an asset. So how can it be an asset of GMAC and Deutsche? Such BS. Any thoughts would be much appreciated.


    On Tue, May 21, 2013 at 9:59 AM, Livinglies’s Weblog wrote:

    > ** > Neil Garfield posted: “If you are seeking legal representation or other > services call our South Florida customer service number at 954-495-9867and for the West coast the number remains > 520-405-1688. In Northern Florida and the Panhandle call 850-765-1236. > Customer service for “

  15. The Federal Reserve has given FOREIGN banks over $1Trillion of our money !!!

  16. my mis-spell, usedkarguy

  17. By bank balance sheet recession I mean….there is nothing on their balance sheets that backs a quadrillion dollars in fraud. The investors are simply robbing us. There is a reason why there were no audits of TOO BIG TO FAIL….THIS IS ALL ABOUT THE ROBBERY OF US BY THE BANKSTERS TO FRAUDULENTLY CONTROL US.

  18. Pleading conversion… That’s what Jan Van Eyck has been advocating all along. And that’s where people do prevail.

  19. As long is we keep sending the investors our money, things are never going to improve.


  21. If the link is “not working” you can google the link or the word CONSERVATORSHIP.

  22. In other words CONSERVATORSHIP means the inmates are running the asylum they created…


  24. what/where is the fourth circ?

  25. This is a bank balance sheet recession as many financial experts have stated. The day the banksters couldn’t pay their bills they should have been shut down and audited and put into receivership to the U.S. TREASURY DEPT…..instead the FED was allowed to hijack our TREASURY ….. and they were rewarded for robbing all of us and destroying our Securities by being allowed to rob ALL OF US into oblivion……the banksters were rewarded $60.4 trillion more U.S. TAXPAYER DOLLARS REPORTED CNBC SINCE 2008 BACKED BY $12 TRILLION DOLLARS IN U.S. TAXPAYERS PROPERTY … IT IS OUTRIGHT ROBBERY under the guises of THE FEDERAL BANK being put into CONSERVATORSHIP OF THEIR OWN FRAUD……THE CROOKED POLITICIANS LET THE CROOKS POLICE THEMSELVES & NATIONALIZATION …COMMUNIZATION OF THE FED TO THE U.S. TREASURY DEPARTMENT.

  26. T

    The fourth circ says mortgage follows the note: AUTOMATICALLY. no such thing as separating the two

    Its called a legal fiction

  27. Bank Draft…..definition….A check drawn by a bank on its own funds in another bank.

    No bank draft is redeemable because of the Origination Fraud.

  28. “…The focus on reality could be devastating to the banks and reveal liabilities and reduction of claimed assets on their balance sheets that would cause them to be broken up…”

    Exactly. That’s why the “rabbit hole” is never ending…the accounting/balance sheets are hidden—or destroyed—and will never see the light of day…because the fact that it’s all unsecured, (fraudulently manufactured) debt would be revealed.

    So—the judges literally say: “I don’t care who the ‘real creditor’ is—I don’t care about a ‘balance sheet’—you have to pay SOMEBODY to stay in that house…period!”

    No justice anytime soon. Hell, Senator Warren can’t even get the bogus IFR information!!

  29. (810 ILCS 5/3-104) (from Ch. 26, par. 3-104) (d.) A promise or order other than a check is not an instrument if, at the time it is issued or first comes into possession of a holder, it contains a conspicuous statement, however expressed, to the effect that the promise or order is not negotiable or is not an instrument governed by this article.

    (e.) An instrument is a “note” if it is a promise and is a ‘draft’ if it is an order. If an instrument falls withing the defintion of both ‘note’ and ‘draft’, a person entitled to enforce the instrument my treat it as either.


  30. PS: Carpenter vs Longman has NEVER been stricken down …..

  31. BLACK LETTER LAW: U.S. Supreme Court (1872) Carpenter vs Longman, 83, U.S. 271, at 274, interalia; separate Note from Deed of Trust = nullity, unenforceable. Uniform Commercial Code Art-3 Sect-305c: obligor is NOT obligated to pay instrument if person (corp) seeking enforcement of instrument does not have rights of a holder in due course & obligor proves instrument is lost or stolen instrument ….
    Inform the local judicial, via good attorneys, in court … their job is to follow & enforce laws on the books no matter how old or obscure in recent useage (esp. when they are busy with drunk driving, domestic disputes and petty crimes) … if they ignore or abuse those laws on the books then they are subject to judicial review boards in every state. Use our rights, stand up for our rights, and at this point do not expect the local judges to be staying up late at night to think of ways to assist individuals since it’s easier/quicker for them to simply foreclose and move onto the simple day-to-day minutia. These cases of ours (vs. us) were set into motion by very crafty and devious manipulators who dealt/deal with money everyday and use their eminence-front to come into court w/sophisticated & wealthy attorneys to present appearances of being never wrong about money matters (after all, they’re banker and we’re not … or so it seems, yet each of us is a banker when it comes to our biggest and most important investment ie our homes). And, any/all judges should understand that position from us since they too typically have a/came from a family with a wife & kids whose interests they would naturally protect too if confronted with complex and dubious banker-type/servicer fraud against their own place of residence. Use simple logic, simple argument and in-their-face facts which the other side has no way to prove except by continuing to perpetrate their fraud in-court.

  32. UKG….RE that legislation states…….Mortgages encumbering real estate” would be the key term. Illinois law says a mortgage is not a negotiable instrument (810 ILCS 5/3-104) Chapter 26; par. 3-104….A note or draft is a negotiable instrument, without the perfected lien there is no encumbrance. Illinois Conveyance Law states the lien must be recorded in the county where said real estate is situated. A recorded mortgage is not a legally enforceable lien.

    The banksters split the notes from mortgages and that default cannot be cured. Recorded mortgages are not encumberances without the notes…

    (ILCS 5/4-208) PRESENTMENT WARRANTIES….With respect to the Security Interest of collecting have to be proven by accompanying documents.

    “Nulla Poena Sine Lege”… “no penalty without law”

  33. “To that extent the servicer should admit that it is suing on its behalf for the unsecured portion of the loan on which it advanced payments”

    And yet Ohio’s (I think it was Ohio) Supreme Court just advised the US Federal Court that “servicers” were NOT in privity with homeowners, and so Ohio’s Fair Debt Collection laws did not apply… And so, once again, the “banks” want it (and have it) both ways…

  34. Frankly, I do not see the courts confusion. Ask the Plaintiffs/Defendants how much they forwarded on behalf of the “real” lender and show me the receipt…there you have it. Not fuzzy math. You only get what your loss is, nothing more! No free houses in the court for “perjurers, fraudsters and cheats”…PERIOD.

  35. The courts have already shown they couldnt care less about the real transaction

  36. Delays at all levels in mortgage settlements

    By Jim Kim

    The big picture on the sorry state of restitution for aggrieved mortgage holders is that banks have paid less than half the $5.7 billion in cash owed to troubled homeowners under nearly 30 settlements brokered by the government since 2008, according to a Washington Post analysis.

    The execution of the several high-profile settlements has been marred by delays and sheer incompetence. Rust Consulting, a politically active Washington consulting firm, has found itself in a harsh spotlight after sending checks to mortgage holders that bounced and then for sending checks for the wrong amount.

    The conclusion at this point is that the execution problems aren’t likely to be quickly fixed. In some cases, there still isn’t even a definitive list of victims who are entitled to some form of restitution.

    “Banking industry officials and regulators say the scale and complexity of the settlements have grown over the years, making them difficult to execute quickly. They can involve multiple agencies, banks, lawyers and consultants. In some cases, banks are still identifying people affected or waiting for borrowers to respond to notifications of eligibility. There are also a number of cases in which banks have yet to zero in on how much they will pay out,” the article noted.

    All in all, more frustrations lie ahead. State governments are increasing enforcement actions against banks based on their inability to comply with national settlements.

  37. “To that extent the servicer should admit that it is suing on its behalf for the unsecured portion of the loan on which it advanced payments”

    They should only be allowed to sue for that amount, nothing more. This is where the rubber meets the road…they do not have a loss of the entire mortgage. And should not “legally” be allowed to collect for the full amount, with inflated fees…in any court.

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