The Devil is in the Details — The Mortgage Cannot Be Enforced, Even If the Note Can Be Enforced

Cashmere v Department of Revenue

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Editor’s Introduction: The REAL truth behind securitization of so-called mortgage loans comes out in tax litigation. There a competent Judge who is familiar with the terms of art used in the world of finance makes judgements based upon real evidence and real comprehension of how each part affects another in the “securitization fail” (Adam Levitin) that took us by surprise. In the beginning (2007) I was saying the loans were securitized and the banks were saying there was no securitization and there was no trust.

Within a short period of time (2008) I deduced that there securitization had failed and that no Trust was getting the money from investors who thought they were buying mortgage backed securities and therefore the Trust could never be a holder in due course. I deduced this from the complete absence of claims that they were holders in due course. Whether they initiated foreclosure as servicer, trustee or trust there was no claim of holder in due course. This was peculiar because all the elements of a holder in due course appeared to be present because that is what was required in the securitization documents — at least in the Pooling and Servicing Agreement and prospectus.

If the foreclosing party was a holder in due course they would merely have to show what the securitization required — a purchase in good faith of the loan documents for value without knowledge of any of borrower’s defenses.  This would bar virtually any defense by the borrower and allow them to get a judgment on the note and a foreclosure based upon the auxiliary contract for collateral — the mortgage. But they didn’t allege that for reasons that I have described in recent articles — they could not, as part of their prima facie case, prove that any party in their “chain” had funded or paid any money for the loan.

After analyzing this case, consider the possibility that there is no party in existence who has the power to foreclose. The Trust beneficiaries clearly don’t have that right. The Trust doesn’t either because they didn’t pay anything for it. The Trustee doesn’t have that right because it can only assert the rights of the Trust and Trust beneficiaries. The servicer doesn’t have that right because it derives its authority from the Pooling and Servicing Agreement which does not apply because the loan never made it into the Trust. The originator doesn’t have the right both because they never loaned the money and now disclaim any interest in the mortgage.

Then consider the fact that it is ONLY the investors who have their money at risk but that they failed to get any documentation securing their “involuntary loans.” They might have actions to recover money from the borrower, but those actions are far from secured, and certainly subject to numerous defenses. The investors are barred from enforcing either the note or the mortgage by the terms of the instruments, the terms of the PSA and the rule of law. They are left with an unsecured common law right of action to get what they can from a claim for unjust enrichment or some other type of claim that actually reflects the true facts of the original transaction in which the borrower did receive a loan, but not from anyone represented at the loan closing.

Now we have the Cashmere case. The only assumption that the Court seems to get wrong is that the investors were trust beneficiaries because the court was assuming that the Trust received the proceeds of sale of the bonds. This does not appear to be the case. But the case also explains why the investors wanted to take the position that they were trust beneficiaries in order to get the tax treatment they thought they were getting. So here we have the victims and perpetrators of the fraud taking the same side because of potentially catastrophic results in tax treatment — potentially treating principal payments as ordinary income. That would reduce the return on investment below zero. They lost.

Click to access Cashmere-v-Dept-of-Revenue.pdf

I have changed fonts to emphasize certain portion of the following excerpts from the Case decision:

“Cashmere’s investments merely gave Cashmere the right to receive specific cash flows generated by the assets of the trust at specific times. But if the REMIC trustee failed to pay Cashmere according to the terms of the investment, Cashmere had no right to sell the mortgage loans or the residential property or any other asset of the trust to satisfy this obligation. Cf. Dep’t of Revenue v. Sec. Pac. Bank of Wash. Nat’/ Ass’n, 109 Wn. App. 795, 808, 38 P.3d 354 (2002) (deduction allowed because mortgage companies transferred ownership of loans to taxpayer who could sell the oans in event of default). Cashmere’s only recourse would be to sue the trustee for performance of the obligation or attempt to replace the trustee. The trustee’s successor would then take legal title to the underlying securities or other assets of the related trust. At no time could Cashmere take control of trust assets and reduce them to cash to satisfy a debt obligation. Thus, we hold that under the plain language of the statute, Cashmere’s investments in REMICs are not primarily secured by mortgages or deeds of trust.
“Cashmere argues that the investments are secure because the trustee is obligated to protect the investors’ interests and the trustee has the right to foreclose. But, this is not always the case. The underlying mortgages back all of the tranches, and a trustee must balance competing interests between investors of different tranches. Thus, a default in one tranche does not automatically give the holders of that tranche a right to force foreclosure. We hold that if the terms of the trust do not give beneficiaries an investment secured by trust assets, the trustee’s fiduciary obligations do not transform the investment into a secured investment.

“In a 1990 determination, DOR explained why interest earned from investments in REMICs does not qualify for the mortgage tax deduction. see Wash. Dep’t of Revenue, Determination No. 90-288, 10 Wash. Tax Dec. 314 (1990). A savings and loan association sought a refund of B&O taxes assessed on interest earned from investments in REMICs. The taxpayer argued that because interest received from investments in pass-through securities is deductible, interest received on REMICs
should be too. DOR rejected the deduction, explaining that with pass-through securities, the issuer holds the mortgages in trust for the investor. In the event of individual default, the issuer, as trustee, will foreclose on the property to satisfy the terms of the loan. In other words, the right to foreclose is directly related to homeowner defaults-in the event of default, the trustee can foreclose and the proceeds from foreclosure flow to investors who have a beneficial ownership interest in the underlying mortgage. Thus, investments in pass-through securities are “primarily secured by” first mortgages.

“By contrast, with REMICs, a trustee’s default may or may not coincide with an individual homeowner default. So, there may be no right of foreclosure in the event a trustee fails to make a payment. And if a trustee can and does foreclose, proceeds from the sale do not necessarily go to the investors. Foreclosure does not affect the trustee’s obligations vis-a-vis the investor. Indeed, the Washington Mutual REMIC here contains a commonly used form of guaranty: “For any month, if the master servicer receives a payment on a mortgage loan that is less than the full scheduled payment or if no payment is received at all, the master servicer will advance its own funds to cover the shortfall.” “The master servicer will not be required to make advances if it determines that those advances will not be recoverable” in the future. At foreclosure or liquidation, any proceeds will go “first to the servicer to pay back any advances it might have made in the past.” Similarly, agency REMICs, like the Fannie Mae REMIC Trust 2000-38, guarantee payments even if mortgage borrowers default, regardless of whether the issuer expects to recover those payments. Moreover, the assets held in a REMIC trust are often MBSs, not mortgages.

“So, if the trustee defaults, the investors may require the trustee to sell the MBS, but the investor cannot compel foreclosure of individual properties. DOR also noted that it has consistently allowed the owners of a qualifying mortgage to claim the deduction in RCW 82.04.4292. But the taxpayer who invests in REMICs does not have any ownership interest in the MBSs placed in trust as collateral, much less any ownership interest in the mortgage themselves. By contrast, a pass-through security represents a beneficial ownership of a fractional undivided interest in a pool of first lien residential mortgage loans. Thus, DOR concluded that while investments in pass-through securities qualify for the tax deduction, investments in REMICs do not. We should defer to DOR’s interpretation because it comports with the plain meaning of the statute.

“Moreover, this case is factually distinct. Borrowers making the payments that eventually end up in Cashmere’s REMIC investments do not pay Cashmere, nor do they borrow money from Cashmere. The borrowers do not owe Cashmere for use of borrowed money, and they do not have any existing contracts with Cashmere. Unlike HomeStreet, Cashmere did not have an ongoing and enforceable relationship with borrowers and security for payments did not rest directly on borrowers’ promises to repay the loans. Indeed, REMIC investors are far removed from the underlying mortgages. Interest received from investments in REMICs is often repackaged several times and no longer resembles payments that homeowners are making on their mortgages.

“We affirm the Court of Appeals and hold that Cashmere’s REMIC investments are not “primarily secured by” first mortgages or deeds of trust on nontransient residential real properties. Cashmere has not shown that REMICs are secured-only that the underlying loans are primarily secured by first mortgages or deeds of trust. Although these investments gave Cashmere the right to receive specific cash flows generated by first mortgage loans, the borrowers on the original loans had no obligation to pay Cashmere. Relatedly, Cashmere has no direct or indirect legal recourse to the underlying mortgages as security for the investment. The mere fact that the trustee may be able to foreclose on behalf of trust beneficiaries does not mean the investment is “primarily secured” by first mortgages or deeds of trust.

Editor’s Note: The one thing that makes this case even more problematic is that it does not appear that the Trust ever paid for the acquisition or origination of loans. THAT implies that the Trust didn’t have the money to do so. Because the business of the trust was the acquisition or origination of loans. If the Trust didn’t have the money, THAT implies the Trust didn’t receive the proceeds of sale from their issuance of MBS. And THAT implies that the investors are not Trust beneficiaries in any substantive sense because even though the bonds were issued in the name of the securities broker as street name nominee (non objecting status) for the benefit of the investors, the bonds were issued in a transaction that was never completed.

Thus the investors become simply involuntary direct lenders through a conduit system to which they never agreed. The broker dealer controls all aspects of the actual money transfers and claims the amounts left over as fees or profits from proprietary trading. And THAT means that there is no valid mortgage because the Trust got an assignment without consideration, the Trustee has no interest in the mortgage and the investors who WERE the original source of funds were never given the protection they thought they were getting when they advanced the money. So the “lenders” (investors) knew nothing about the loan closing and neither did the borrower. The mortgage is not enforceable by the named “originator” because they were not the lender and they did not close as representative of the lenders.

There is no party who can enforce an unenforceable contract, which is what the mortgage is here. And the note is similarly defective — although if the note gets into the hands of a party who DID PAY value in good faith without knowledge of the borrower’s defenses and DID GET DELIVERY and ACCEPT DELIVERY of the loans then the note would be enforceable even if the mortgage is not. The borrower’s remedy would be to sue the people who put him into those loans, not the holder who is suing on the note because the legislature adopted the UCC and Article 3 says the risk of loss falls on the borrower even if there were defenses to the loan. The lack of consideration might be problematic but the likelihood is that the legislative imperative would be followed — allowing the holder in due course to collect from the borrower even in the absence of a loan by the so-called “originator.”

18 Responses

  1. Reblogged this on Deadly Clear and commented:
    This is well worth repeating.

  2. concerned21

    yes i saw it 🙂
    keep posted how it goes with your story…..

    i have found really “FUNNY” things now that the property was stolen.

    by the way, i hope you are not seeking help here…..if so ,unfortunately , you will get none or may be, but be prepared, i was reading one post where was said could be 100 k in attorney’s if you want help…….sounds crazy, one regular people hardly can “support” the ~$800 attorneys charge monthly (don’t forget the crazy retainers, and fees, etc….eeyyy somebody has to pay for that louboutin shoes!!)

    i hope these guy are saving some of that money, because when all this finally ends…….there will be no more “let’s help the people” samaritans and people ,as before , will get attorneys just for divorce or traffic tickets……. 😉

  3. I sent you a reply @ 5:54. Thanks so much!

  4. @Al we later found out that the Judges wife is an attorney and the head of the legal department for one of the Big Banks! Talk about a conflict of interest. I will not pay another cent after paying $35,000 in legal fees but I have not given up our story is about to be exposed by an ETHICAL REPORTER whose voice will be heard. I am sorry for what happened to you. It sucks.

  5. Al, of course everyone laughs at the frivolous and usless arguments bandied about this blog.

    Again, the ONLY proven methodology is attacking the contract.

  6. concerned21

    tell me about it, taking about corrupt Judge and an unethical attorney , the florida judge , that ignored all the fake papers , fake notaries , 4 “original” notes , from frausters douglas c zahm mill and midland mortgage / midfirst bank is now a federal judge appointed by the president…..

    and unfortunately we were sold by one of mr garfield friends who was in his recommended attorneys, jon lindeman,

    you should see the court rooms and how they enjoy and have a great funny time in the 1 or 2 minutes hearings laughing and chatting in our face about how stupid all of us are….. even the bailiffs make some jokes about crazy homeowners …

    ..filing an appeal in florida ?…..ohh well..the 3rd court of appeal also will ignore all ur crazy arguments and stuff ,( we have to consider that the new federal judge was in the middle and will be a bad move to even dare to question him…..ohhh politics … know)

    experience: 9 more months of irregularities from fraudclosure mill ‘s candor towards the court, rules violations and new frauds upon now the appeal court .

    so, yes … crazy world we are living ….


  7. We had an unenforceable contract that we paid off and zero was applied to the principal. We met the Burden of Proof and had the Preponderance of Evidence of FRAUD, Illegal foreclosure, violations of MGL ch 244 sec 14, RESPA, HOEPA, FDCRP violations etc. We had a corrupt Judge and an unethical attorney who was too afraid to hold the Judges feet to the fire.

  8. Ginnie Mae)
    Ginnie Mae I Mortgage Backed Securities
    Expands affordable housing in America by linking global capital markets to the nation’s housing market.
    Nature of Program: Ginnie Mae guarantees investors (security holders) the timely payment of principal and interest on securities issued by private lenders that are backed by pools of Federal Housing Administration (FHA), Veterans Affairs (VA), Rural Housing Service (RHS), and Public and Indian Housing (PIH) mortgage loans. The full faith and credit guarantee of the U.S. Government that Ginnie Mae places on mortgage-backed securities lowers the cost of, and maintains the supply of, mortgage financing for government-backed loans.
    In the Ginnie Mae I program, all mortgages in a pool are fixed-rate, single-family mortgages with the same interest rate. The mortgage interest rates must all be the same, and the same lender must issue the securities. With the exception of Ginnie Mae I pools that are used as collateral for state or local bond financing programs (BFP) for which Ginnie Mae provides special consideration, Ginnie Mae I securities have a servicing and guarantee fee that totals 50 basis points, and the minimum pool size is $1 million.
    To issue a Ginnie Mae I security, an approved lender applies for a commitment from Ginnie Mae for the guaranty of securities. The lender originates or acquires mortgage loans and assembles them into a pool of mortgages. The Ginnie Mae I program permits lenders to issue securities backed by pools of single family, multifamily, and manufactured housing loans where the interest rate is the same for each loan in the pool. The lender decides to whom to sell the security and then submits the documents to Ginnie Mae’s pool processing agent. The agent prepares and delivers the Ginnie Mae guaranteed security to the investors designated by the lender. The lender is responsible for selling the securities and servicing the underlying mortgages. Issuers of Ginnie Mae I securities are also responsible for paying security holders on the 15th day of each month.
    Applicant Eligibility: A firm must be approved as an issuer based on capital requirements, staffing, experience criteria, and infrastructure. The firm must also be an FHA-approved lender in good standing.
    Legal Authority: Section 306(g) of the National Housing Act (12 U.S.C. 1721(g)).
    Administering Office: Ginnie Mae, U.S. Department of Housing and Urban Development, Washington, DC20410-9000.
    Information Sources: Administering office; Office of Mortgage-Backed Securities.

  9. I’m saying that as one half of the Estate somebutty owes me a lot of money.

  10. Cookie- I see the 10/1. What are you trying to say? If you are a title expert can you just spit it out in 1 post instead of 4? Thanks.

  11. My husband attended a seminar about 4yrs ago where he learned his net worth was 1.49 million $ I giggled and said if your worth so much money why do we have a $149,000 mortgage? 10/1.

  12. Mr. Reed, you keep saying that I said so and so. No, just parroting what the courts have said, just like you parroting what the scammers and legal incompetents have said.

    Attacking the mortgage transaction is the ONLY methodology that works, the multimillion dollar awards confirm it:

  13. Why would the homeowners grant a W.D. To the capital asset funding company? Why would their shell company place themself on the note as lender? Why didn’t they record the note with the mortgage? Why are there no liens on title? Answer .. The Note, the Mortgage and the Mortgage Note. I wouldn’t file both notes either. Attack the Mortgage!

  14. @Rock we half way listen to Neil because he got this funding thing he will not left go, but MERS has stop assigning stuff and I know Fannie not any longer allowing them in there issues. A non-holder does not have any interest in the loan, and there no need for anyone to foreclose for another one because if the proper entity is in title what is someone else in title for the “holder in due course”?

    If Fannie, Freddie or Ginnie or ABC Bank has purchase the loan then they will have a Note endorsed to them and a Securities Instrument that must be filled out on the day they purchase the loans. Now the Securities Instrument does not have to be recorded unless the new owner is going to sell the Note to another. The originator does not have to show proof because they are on the face of the Note as the original maker of the loan.

    What you are saying makes not since that someone foreign to the Note should not have to simply present an endorsed Note and a receipt were they exchange value of the loan.

    In the State of Pennsylvania, and DC, Fannie & Freddie have stop any and all non-judicial foreclosures. You Rock need to get on board that times are changing and what was tricking the court is no longer working. As the court were allowing this crap because they were ignorant to the fact as homeowners only had attorneys like you that were advising the client to take the death penalty instead of probation!

    Blacks could not vote in this country back in the day because they were considered 3/5th on a person, when the fact was that no person can factually be 3/5th of another person. After 300yrs of slavery white were force to change by a civil war, laws that were on the books like assault or enslaving a person were prosecuted, and it became legal to teach blacks to read and write!

    I never seem somebody who about telling other that some bank that never purchased anything but in possession of a Note has the right to foreclose? What the amount of debt that owed? What did bank ABC pay for the debt? What was exchanged?

  15. How does Mr. Garfield continue to post comments that are not only factually incorrect, but legally incorrect as well. Am I the only one that sees this?

    In Taylor v. Deutsche Bank Nat. Trust Co., 44 So.3d 618 (2010), the Fifth District Court of Appeal of Florida held Deutsche Bank Nat. Trust Co. (“Deutsche Bank”) had standing to foreclose because MERS properly assigned the note to it and a lack of a beneficial interest in the note does not deprive an assignee of standing in a foreclosure action.

    The Court held that ownership of a beneficial interest in the note is not required to commence foreclosure. Standing to foreclose may be derived either by being the holder of the note or a nonholder in possession who has the rights of a holder.

    The Florida District Court of Appeals in American Home Mortgage Servicing, Inc. v. Bednarek held that a servicing agent of a larger bank had standing to file a foreclosure action against a homeowner because it properly acquired the mortgage and was therefore the note holder and owner for the purposes of foreclosure.

    The District Court of Appeal of Florida in Wells Fargo Bank, N.A., v. Morcom, 2013 WL 5575634 (Fl. Ct. App., 5th Dist. 2013), held that mortgagee was not required to be both holder and owner of promissory note in order to have standing to foreclose.

  16. Al where you been at? You understand the Ginnie Mae entire scheme! Neil fails to realize where the gold is at!

  17. can you make an article about GINNIE MAE SECURITIZATIONS?
    seems they have different rule.

    also, there is no sponsor, depositor , etc…. but only the ISSUER ….

    and who “owns” the loans , GINNIE MAE ?

  18. UCC3 is talking about someone that paid for the loans in originator or purchaser of the loan, and not the purchaser of about product such as a bond or MBS, because the investors is buying a direct risk product and not the mortgage loans!

    The is why UCC9 simply says provide an endorsed Note and receipt to prove “holder in due course”! It seem people want to make thing difficult when reasonable proof is all that required. The reason the endorsed Note and receipt are not being presented is that they are not available.

    You either purchased a home mortgage Note as a lender or you did not. Neil must understand that only a register lender can product a home mortgage loan and not every Tom. Dick & Harry! For some reason this guy seem to think that if you got a bunch of money you can put out a sign and start doing business without getting a license!

    Can we just start practicing law, and defending other people? This is not parents making a loan to there children, but other people engaging in lending monies for the purpose of home mortgages. Fair Housing Act!

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