Livinglies's Weblog

Courtesy of Bill Paatalo, I have located the stark 2009 admission by the Florida Bankers Association that original notes were destroyed contemporaneously with the loan closing.

Here is the quote:

The reason “many firms file lost note counts as a standard alternative pleading in the complaint” is because the physical document was deliberately eliminated (e.s.) to avoid confusion immediately upon its conversion to an electronic file. See State Street Bank and Trust Company v. Lord, 851 So. 2d 790 (Fla. 4th DCA 2003). Electronic storage is almost universally acknowledged as safer, more efficient and less expensive than maintaining the originals in hard copy, which bears the concomitant costs of physical indexing, archiving and maintaining security. It is a standard in the industry (e.s.) and becoming the benchmark of modern efficiency across the spectrum of commerce—including the court system.

THIS ARTICLE IS NOT A LEGAL OPINION UPON WHICH YOU CAN RELY IN ANY INDIVIDUAL CASE. HIRE A LAWYER.
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see Florida Bankers Assoc Comment Letter

The Florida Bankers Association is the only bankers association in Florida and its members include all the community bankers whose voices have been muffled and of course all the banks that have been involved in the entire “securitization” mortgage meltdown. Note that bankers are not bad. Bad bankers are bad.

I first became aware of the practice of eliminating original documentation in 2004 and again in 2007 when I was involved in some real estate transactions in Arizona. They refused to let the Buyer or the Seller have an original contract and required the parties to only use Fax copies as confirmation of a deal. In fact, that is what prompted me to start ask questions.

I noticed for example that when buyers wanted to add landscaping or other such items to new construction they were being encouraged to add it to the mortgage rather than pay for it. This “encouragement” was opposite to good practices and very distant from best banking practices. While landscaping theoretically made the property more marketable it did little to add value.

So an 80-20 LTV was being shrunk before it even had begun. A $200,000 home with an additional $20,000 in landscaping expense resulted in a loan of $176,000 instead of $160,000, for a home that was still worth less than $200,000 since appraisals were regularly marked up by $20,000. Thus the loan was basically a 100-0 loan (and going down fast when the market made a “Correction.” After the correction the loan was upside down on average 130-0. In commercial loans borrowers are allowed to walk away from that. In residential loans consumers are stuck with it.

It didn’t take long for me to realize that a bubble was being created that was astronomical by comparison to all other financial bubbles in human history. Given my personal experience on Wall Street as an investment banker I knew that they had to be involved simply because there was no way to make money from such lending as a commercial bank. The rates were too low and the risk was not just too high, it was obviously intended. The lender would get burned. It had to be an investment bank who had a scheme.

My suspicion about Wall Street was further corroborated when I saw the intense competition to get borrowers to sign for such loans, spending hundreds of millions of dollars on advertising in virtually every media and especially targeting areas where the typical borrower would ordinarily have trouble getting any loan. This was further exacerbated when the NINJA loans were revealed — No Income No Job No Assets.

There was only one possible way to make money from this jumble. And that was to sell the same loan many times. It’s simple math. The trick was in how to hide the fact that you were assuming a risk of virtually guaranteed failure of the loan while leaving the homeowner and the neighborhood to eat it and hide the multiple sales of the same asset, keeping all the profit even in a market collapse which, as an investment banker, you knew was coming because you made it collapse.

As any embezzler knows you can’t hide it if you don’t control it. So the essence of the greatest trick of all time was to sell the loans without selling the rights contained in the paper. Sell the paper but then take back everything that is written on it. And that is what happened.

So the problem with the plan was that hundreds of years of common law and statutory law required that the original note be produced if that was the basis for a claim for enforcement of the note or ownership of the underlying debt (and therefore for a claim for foreclosure of mortgage or deed of trust).

If everyone continued to demand delivery of the original note then that loan could not be sold multiple times. Thus it became the job of the investment banks to convince investors that an image was even better than the original note, regardless of what the law requires. That was easily accomplished once the assertion appeared to be accepted by all major banks who were in on the deal and some who didn’t realize what they were doing.

And the insurers of the bogus mortgage bonds issued in the name of trusts that didn’t exist were distracted from looking for transfer of the original note. I know this partly from the reports and my interviews with hedge  fund managers who actually did peek under the hood and were horrified by what they saw and refused to buy the mortgage bonds or any hedge contract based upon the alleged mortgage bonds which were neither bonds nor actually derived in value from real mortgage loans. Certificate holders were barred or otherwise disclaimed any right, title or interest to the loans. They received a promise from an “obligor” who was actually the investment bank doing business under the fictitious name of a nonexistent trust. Sell it but don’t REALLY sell it. But by all means keep the money!

Once everyone accepted the image files it was easy to do commerce in images instead of the real thing. But then came the legal requirement to produce the original note in court so everyone was filing foreclosures based upon a lost note. That didn’t work well. It made foreclosures go judicial in non judicial states and the requirements of proving a lost note were greater than the capacity of the appointed claimant to prove it mainly because the appointed claimant had no claim.

That’s when they pulled the rabbit out of the hat. The next “industry practice” was to mechanically reproduce the original note from an image because the original had in fact actually been destroyed as revealed in the Katie Porter study when she was a law professor in Ohio in 2007. Now she is in Congress. The recreations were so good that even the borrowers could not distinguish  the mechanical signatures from their own — except when they remembered that they had signed in a different colored ink.

The real proof problem was that borrowers were unwilling to spend money on forensic document examiners to uncover the widespread practice of forgery and perjury. The strategy of the investment bankers was brilliant. They reasoned quite correctly that since the borrowers knew they had signed an original note and that there appeared to be no reason to duplicate their signature the borrowers would simply walk from their homes and never be the wiser. In addition to pornographic profit from sellign the loan multiple times, the investment banks would also get millions of homes. It worked.

So here we have a banking association representing BofA, Chase, Wells Fargo, Citi et al saying that it was OK to have destroyed the original notes and OK also not to comply with laws requiring them to prove the lost note, although their argument by stealth uses the strict requirements of establishing a lost note, as if that were the practice. In practice they were getting judges to overlook strict compliance and go with legal presumptions.

Some form of weak verification is required in most states now — especially after the 50 state multi billion dollars settlements and other settlements now totalling nearly half a trillion dollars arising out of these morally bankrupt and lawless strategies. But the fact remains that whether verification is required or not, the investment banks have directly or indirectly convinced most members of the public, the judiciary and the legal profession that each case is about a real creditor (buried in the woodpile) against a deadbeat borrower.

And because the people in poor and middle class neighborhoods don’t have deep pockets they don’t have deep voices either. The media has long since given up on the largest economic crime in human history and so has government — which assures us and the investment bankers that it can, it will and it is all happening again. This time the emphasis is on student loans and small business loans because the residential loan market is saturated.

 

Filed under: foreclosure |