Investors Were Not Injured By Non Payment from Homeowners. They Were Injured by Non Payment from Investment Banks

The trap door is thinking that investors were hurt by borrowers failing to make payments when in fact they were injured by brokerage companies not paying them regardless of how much money was being received and created. This trap door inevitably leads one into thinking that the money proceeds from a forced sale of property in foreclosure are being paid to investors. That is just not true.


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Exchange between me and fairly knowledgeable client:

Client: “But if investors put up the money then they would be the injured party if borrowers don’t pay, or at least if things were normal.”

From me:

Incorrect. Investors were injured by  the failure of brokerage firms to make payments to them that were purely optional. Investors were not injured by failure of borrowers to pay their mortgage payments as defined in the promissory note.

At the option of the investment bank, the investors who paid value for the certificates issued by the investment bank, continue to receive payments. Those payments come from a reserve pool of money funded entirely by the investors initial purchase of certificates (but they are labeled “Servicer advances”).

You are falling through the trap door that the banks and their lawyers have created. Investors did not put up money to purchase your loan or acquire it or originate your loan. They had no legal part in that unless a judge were to enter an order stating that while the form of the transaction says they had nothing to do with your loan, the investors were nonetheless substantively the “lenders.” The banks and the investors would argue against that since it would make investors liable for lending and servicing violations.

You are presuming something that the banks want you to presume. The truth is that the investors were told that they would be paid by the brokerage firm that set up the plan of what they called “securitization.”

The promise received by investors was from the brokerage firm not the borrower. The money on deposit with the brokerage firm was used to originate or acquire loans as a cost of doing business, to wit: the business of issuing and trading in derivative securities to which neither the investors nor “borrowers” were parties and therefore received no compensation despite the fact that without them none of those trades could have taken place.

The promise (certificate or mortgage bond) was issued in the name of a “trust” that at best was inchoate” under law (i.e., “sleeping”). The trust name was merely a business name under which the brokerage firm was doing business. The promise was not secured by any interest in the debt, note or mortgage on any loan. In fact, at the time of investment there were no loans in any portfolio that were the subject of the investment. There was a promise to aggregate such a portfolio and the list of loans attached to the prospectus is subject to the disclaimer that it is not the real list but rather an example of the kind of data the investors will see when the offering of certificates is complete.

The certificates themselves do not convey and right, title or interest to the debt, note or mortgage on any loan. The investors merely hold an unsecured promise to pay where the promissor is the brokerage firm (Investment bank) and the amount of payments to be received by investors are indexed on the data for an aggregate of loans; but such payments are entirely dependent upon the sole discretion of the investment bank (Brokerage firm) and the performance of the index — i.e., the performance of borrowers.

Investors thus receive money as long as the investment bank wants them to receive money regardless of actual performance of loans. The non performance of borrowers represents an excuse for the investment bank to stop paying the entire amount of their promise, if the managers of the investment bank so choose.

But since the investment bank (brokerage firm) was using money deposited on account the net result is that the investors paid value for the origination or acquisition of the debt but never got to own it under current law.

And the investment bank briefly became the “owner” of the debt without having actually paid for it, and then created a “sale” at its trading desk in which the loans were “sold” to the “trust” at an enormous premium (second tier yield spread premium) from the amount that was actually loaned to borrowers at much higher interest rates than the amount demanded by the investors. 

Bottom Line: Under current law in all jurisdictions nobody qualifies as the owner of the debt by reason of having paid for it because those two functions were split by the investment bank.

The value was paid by investors who did not receive ownership of the debt. The ownership of the debt as in the hands of the brokerage firm that started the securitization scheme and then transferred to itself using the name of the fictional trust. Hence the brokerage firm, directly or indirectly continued to “own” the debt without having actually paid for it. This is legally impossible under current law.

Under current law, nobody can claim to own or enforce a debt without having paid value for it. A transfer of rights to a mortgage is a legal nullity unless there is a concurrent payment of value for the debt. The only possible claimant in a court of equity is the investment bank, but they continue to hide behind multiple layers of sham conduits who actually have no contractual or other relationship with the investment bank. All such “securitized” loans are therefore orphans under current law where the debt, note and mortgage cannot be legally enforced.

The only way they have been enforced has the acceptance by the courts of erroneous presumptions that effectively reconstitute the debt, note and mortgage out of the prior transactions that split it all up. This produced the opportunity for profits that were far in excess of the loan itself which was viewed by the investment bank as simply a cost of doing business rather than an actual loan. Besides violating current law under the Uniform Commercial Code it also violates public policy as explicitly enunciated under the Federal Truth in Lending Act and public policy stated in various state laws prohibiting deceptive lending and servicing practices.

Those excessive profits should, in my opinion, be the subject of reallocation that includes the investors and borrowers without whom those profits could not exist. These are the actions for disgorgement and recoupment to which I have referred elsewhere on this blog. But in order to have real teeth I believe it is necessary to join the investment banks who had a role in the claimed “securitization.”

In affirmative defenses you can name a third party but you must express the defense as something for which the actual named claimant is vicariously accountable. Otherwise you need to file a counterclaim, the downside of which is that many such claims are barred by the statute of limitations whereas affirmative defenses are not usually subject to the statute of limitations.

The reason you can’t get a straight answer to discovery is that ownership and payment have been split between two entirely different parties. Yet current law demands that the enforcing party be (a) the owner of the debt, note and mortgage and (b) the party who paid value for the loan. In most situations involving claims of securitization that requirement cannot and is not meant to be fulfilled.

Clearly  changes in the law are required to allow for securitizations as practiced. But in order to do that the laws regarding disclosures to investors and borrowers must get far more specific and rigorous so that freer market forces can apply. With transparency market corrections for excessive or even unconscionable transactions are possible — allowing both borrowers and investors to bargain for a share of the bounty created by securitization arising from the investment of investors and borrowers.

Current law supports disgorgement of such profits because they were not disclosed. But current law fails to identify such “trading profits” as arising from the the actual transaction with investors, on one hand, and the borrowers on the other hand. This might be accomplished in the courts.

But a far better alternative is to level the playing field with clearly worded statutes that prevent what had been merely intermediaries from draining of money and other value from the only two real parties in interest as defined by both the single transaction doctrine and the step transaction doctrine.

7 Responses

  1. The problem is this — financial crisis was covered up in fast acting action. However, no one contemplated the real consequence to homeowners or investors. Now, servicing/title records are the result of the disaster of the cover-up. This is not only a problem as to correction of the “records,” title, and fraud – which, frankly, can’t be fixed, but also important as to moving forward.

    Our politicians, and regulators, are asleep at the helm. Diversion? They will do – both sides – until all remains — COVERED UP.

    Divert attention – politicians will do.

    Thanks Summer. Thanks Neil. Thank you all.

    Not good. .

    Oh and, Hammer — maybe — I don’t know. Depends on who the “corporate’ advancer is. Who is advancing anything – and why? Loans were already reported as in default — before signed on dotted line.

  2. Nancy Pelosi – and others – gave Big Banks $31 Trillion reward for fraud – and NOTHING to those who were really harmed – borrowers – except an approved theft of homes on all levels of Courts. .

    The Government enables and covers for banks fraud because….bankers ARE the Government!!!!

    Example: I received a letter from HUD forwarded to me by Sen. Peters (MI) whom I asked to intervene.

    The letter came from HUD’s Senior Vice President Michael R. Drayne, who since 1993 to 2011 was working as a Senior Executive at Chevy Chase bank (now Capital One) who defrauded borrowers, insurance Companies (Ambac for example) and investors from billions of dollars, stole hundreds of thousands homes, lied to borrowers non-stop, and swamped with legal cases in all Courts.

    Now Michael Drayne happily works for Ginnie Mae where he spent several years “controlling Issuers” (aka cover for their fraud with MBS- and and racks $190K per year from taxpayers for his criminal conduct.

    Drayne shamelessly LIED in Sen. Peters’ face about current status of my loan with Ginnie Mae; and gave contradicting with other parties (renamed Countrywide Financial dba Caliber and PennyMac)

    If Drayne. Kurland, spector and others were in jail 10 years ago, next to Madoff, America would not face another crisis in the size of Armageddon

    But Drayne is a Senior Vice President at HUD!!!!!!!

    Liar and Thief is controlling our public Office!!!

  3. Investors were also violated, harmed and injured by breaches of their own governing contract by all the parties involved but the homeowners.

  4. More than that Neil. Regulation AB – pilot program way back — was never abided by. Loans were segregated – in violation.

    Who knew???? Not investors – not borrowers. Securitization? Did not happen for many – billions affected. The structure – the structure.

    Who knew? Those in control at the time?.

    Nancy? And you want impeachment? Maybe — But, lets go back in time.

    When did you know – or didn’t you know – and you should have known?

    Not here to advocate Trump — Frankly – he should be on top of this with clear agenda. Missing in action.

    But Nancy, — someone came to you on begged knee – and you said okay? Without question? And we are to believe you now?




  5. Lending standards to slide for homeowners with spotty credit, Moody’s warns in 2020 outlook

    more of the same in store for all….

  6. Are corporate advances a euphimism for servicer advances?

  7. Great info. We need to push a common sense home finance law where all terms are clear and defined for the borrower and real parties of interest.

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