How to Use the Real Deal On Securitization to Homeowner’s Advantage

Like citizenship in this country litigation is not easy. We keep banging our heads against the same wall expecting a different result. We need a strategy that directly addresses the inescapable realities of every homeowner transaction and every securitization cycle.

My substantive analysis of the transaction is that the homeowner was drafted into a securitization scheme which in my opinion clearly triggers quasi contract and quantum meruit — the only possibility for inquiring into the adequacy of consideration. Lawyers and litigants have shied away from this because of its complexity and because they don’t know how to approach it.
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In simple terms the homeowner transaction was a “”Qualified Financial Contract” (QFC), part of which contained some apparent attributes of a loan, but which went much further and diverged extensively from a “loan” as the term is currently used in custom and practice in the financial industry and society in general.
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The QFC is not some invented term for this article. it is defined in all securitization documents. Investment banks knew they were not creating a loan. The job of litigants and their attorneys is to point out and argue that the documents submitted as a foundation for their claim of legal standing contains language that opens the door to quasi contract and quantum meruit. 
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In logistical terms, the homeowner delivered the only service the investment bank was seeking, to wit: issuance of the note and mortgage. Neither the investment bank nor the originator designee of the investment bank was at all interested in making a loan, collecting revenue from repayment nor assuming any meaningful risk of loss.
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Although the homeowner entered the transaction desiring a loan he/she didn’t receive a loan. If there is no legally responsible lender or creditor at the conclusion of that transaction, it isn’t a loan.
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And since too many bona fide third party transactions have occurred to rescind or unwind the transaction the only possibility remaining is to have a court reframe the agreement to include the basis upon which the investment bank entered into the transaction — i.e., the creation, issuance, selling, trading and hedging of unregulated securities.
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We know the investment bank had no intention of becoming a lender and that there was no intention to make investors lenders.
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And we know that the investment banks funded the origination or acquisition of the loan through originators and aggregators.
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Further we know that investors paid value for the certificates which excluded any right, title or interest in any debt, note or mortgage.
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The result, obviously intended, is that while parties were paying value, none of them ever received a conveyance of ownership of the debt, note or mortgage.
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And we can easily see that anyone who received such a conveyance (a) did not pay value and (b) was not acting as an authorized agent or representative of anyone who paid value in exchange for a conveyance of an ownership interest in the subject debt, note or mortgage.
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It was partly a scheme for avoidance or evasion of lending and securities laws.
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The reason for this is blatantly stated in all of the promotional material for sale of certificates, to wit: no liability for violation of lending or servicing laws using “bankruptcy remote” vehicles  for origination and acquisition of homeowner obligations.
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And scratch the surface and you discover that the only thing that makes the transactions bankruptcy remote is that the underlying obligation, note and mortgage are not included in the schedules of bankruptcy because they were never owned by the originator or aggregator.
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The problem for the last 20 years has been that nobody has been asking the obvious question: “if they don’t own the loan, then who does?” Or at least nobody has followed up on that question in which they truly persisted in aground war to get the answer.
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So any such conveyance was either a legal nullity (mortgage assignment) or did not carry the right to enforce (note). If the conveyance didn’t include the obligation there are very specific rules that apply.
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Authority to enforce the note can only come from one who is entitled to enforce. And the premier person who has the right to enforce is owner of the underlying debt that the note is supposed to memorialize. Under the laws of all jurisdictions nobody gets to own the obligation without paying value.
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This seems to be challenging not only for the courts but for defense lawyers. It is a very simple logical progression. In the end enforcement of the note is intended to pay the debt. If it doesn’t pay the debt the maker of the note is subject to multiple liabilities for the same transaction. And that is what happened. Since the originator did not substantively fund the homeowner transaction the issuing of the note and mortgage in favor of the originator was a legal nullity. The issuance of the note created a new liability that was not merged with the underlying obligation to repay the money, if any, that was received or paid on behalf of the homeowner.
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So the reason I mention all of this is that I have somewhat reluctantly but persistently arrived at the conclusion that the homeowner transaction was not a loan and yet the obligation to make payment survives even in quasi contract or quantum meruit.
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This is an unavoidable conclusion because we know that where money was funded to the homeowner or on his/her behalf and where the homeowner issued a promise to pay money, the obligation to pay arises and can be secured by a lien (mortgage or deed of trust) which in fact is enforceable.
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But note that since there is no lender or creditor at the conclusion of the securitization cycle, the intent of the homeowner is thwarted — i.e., he/she does not have a loan agreement. It is something else. And that is where quasi contract and  quantum meruit come into play.
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The homeowner could have bargained away reasonable compensation or consideration for his/her role in initiating the only documents that made securitization claims possible — i.e., the note and mortgage.
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Our legal system is not designed to correct stupid mistakes in bargaining or negotiation in transactions or agreements.
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Our system is designed to enforce the intent of the parties. So we can’t get away from the intent to create an obligation and the intent to have that obligation enforceable and memorialized by a note and mortgage. In fact, I propose we should embrace it.
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The reason is that the intent to create the enforceable homeowner obligation was not the only intent operating. Since the securitizations cheme — and the homeowner’s vital role in it — was not disclosed (actually actively concealed), the homeowner did not, could not and never did bargain away rights to compensation or consideration for his role and risks in this dangerous risky transaction.
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Thus we enter the realm of quasi contract and quantum meruit. 
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So now the question is how much consideration  did the homeowner actually receive for issuance of the note and mortgage? Since it wasn’t a loan, even though that was what was intended by the homeowner, the receipt of money must be categorized as payment of consideration. And that is a lot of consideration by any standard.
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But now the issuance of the note and mortgage becomes a service rather than the result of an underlying obligation to repay.
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So the consideration of the receipt of benefit from the funding of the homeowner transaction is entirely offset by a promise to pay more than the consideration received in the form of money paid to the homeowner. That might still result in a court finding some consideration, since the money on the front end might not be found by a court to exactly equal the money promised on the back end.
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On the other hand there is good reason to find that the consideration for issuance of the documents required to start securitization claims, securities, selling trading and hedging was entirely negated by the concurrent promise to pay more than the money received. But assuming there was a finding of consideration, was it enough?
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In a court of equity wherein rescission is no longer an option the court must determine what a reasonable homeowner would have bargained for or received through the process of free market forces if disclosure had actually been made regarding the securitizations scheme and the vast profits and revenue generated under the scheme.
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The court would hear testimony from a variety of experts and reach a conclusion as to whether the homeowner had received enough consideration or if the homeowner should have received more as per the quasi contract and not just what was presented as a loan agreement.
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The range of possibilities is nearly infinite. From zero to a majority of the pot because the investment bank secretly tricked the homeowner into a dangerous transaction, the risks of which were unknown to the homeowner. Using the shadow banking marketplace (i.e., where all derivatives are traded for nominal value) as the external reference point for heuristic projection, it may be fairly assumed that the average revenue generated from each securitization cycle was $12 for each $1 transacted with homeowners. Additional securities analysis reveals that the figure could be much higher.
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In a free marketplace where there was no asymmetry of information the fair question could be posed as follows: from the investment bank’s perspective they would be saying that they are going to make $12 on each $1 during the securitization cycle, perhaps more.
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The homeowner and investor sitting at the same fictional but still legal table would inevitably concede that for inventing and managing such an ingenious scheme the investment bank might be entitled to the lion’s share of the profit.
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The investors would say their role as investors is critical to the existence and success of the securitization cycle. And since capital is valued more highly than labor they would claim a greater share than that awarded to homeowners. Homeowners would make the same argument as investors — without them there is no securitization and there are no revenues and there are no transactions claimed as “loans.”
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So looking at the customs and practices of the financial industry the investors would probably initially claim 40% as angels and the homeowners could justify a claim of around half that amount for their indispensable role.
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Or one could look at the money actually spent (commissions, bonuses etc) on getting homeowners to execute the required note and mortgage while concealing the truth about the transaction as a measure of what the homeowners should get. Or a license or royalty arrangement might be adopted.
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All of them in my opinion average around 15%-20% of the total revenue generated by the scheme. this would leave the investment bank with 40% or more of the securitization cycle revenue which is around 1000% of normal revenues for underwriting and sale of debt securities.
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So the court would offset the obligation with whatever it decided was reasonable consideration for the homeowner. It would either order payment to the homeowner of any excess consideration due or order the homeowner to pay the balance of the obligation after offset for the consideration due. And if the homeowner still owed money both the note and mortgage would be enforceable.
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But here is the rub. None of this is possible without creating a contract by decree in which it is possible to designate a party who is not a creditor to act as a creditor — in a transaction to which the homeowner agrees that for all purposes the designee will be a creditor. And that creditor is subject to lending and servicing laws. This is essential because under current law only the owner of the debt can enforce the mortgage and only someone representing the owner of the debt can enforce the note unless they are a holder of the note in due course — which means they purchased it for value in good faith and without knowledge of the  maker’s defenses. 
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So it becomes necessary to plead for this attribute to be made part of the newly minted agreement because without it, you don’t have an enforceable agreement  Without an enforceable agreement you’re left pleading for damages under RICO, wrongful foreclosure, etc. And while the note and mortgage might not be subject to enforcement, they still exist. No lender or buyer will complete a transaction with that hanging over the deal.
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Neil F Garfield, MBA, JD, 73, is a Florida licensed trial attorney since 1977. He has received multiple academic and achievement awards in business and law. He is a former investment banker, securities broker, securities analyst, and financial analyst.
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5 Responses

  1. Not being an expert…I cannot imagine many of these scenarios working, but I cannot be certain. Chasing my tail for 12 years and filing complaints with everything from, funding to invalid assignments, to standing[I filed standing improperly], etc…all have fallen on deaf ears. The only success I have seen is lack of possession at the time of filing, no rights of the parties to enforce, no title with deed assignment, lack of standing…off the top of my head. Tired of chasing my tail…it appears to me only, the origin of the origination is where it all began and squarely where the breaches of our contract fall. Anything that happened later and I’m just assuming here, falls under their breach with the contracts they hold with outsiders. And, I have seen success challenging the PSA as the homeowner and its relationship to our injury. My $.02 on the matter…

  2. Try this argument out in court, and get back to us and let us know how this defense worked out for you.

    Judges have hundreds of cases on their dockets. They are not going to spend any time considering these pie in the sky arguments. They have appellate case precedents that they will adhere to. They are not going to try and make new law from the bench. New law is for appellate courts and legislators to make.

    Ya gotta stop drinking this kool aid, folks. You’ve been around the block long enough to know this by now.

  3. @ANON ,, How? Simple .. As the banksters had regulatory assistance from the SEC and IRS you must conclude that it was simply the Federal Reserve … they’ve owned the government for over 100 years. This was an op to enrich their member banks.

  4. Well put Neil. Only – how did they get away with it? That is the missing link. They got away with it BECAUSE it was never a mortgage to begin with – and never funded by anyone.

    And what happened to the warehouse lender loans when all went belly-up? Hmm. Stayed with the warehouse lender — that lent nothing to begin with. And who were the warehouse lenders? The security underwriters. Hmmm – again. .

    You know always a great analysis here. But missing is the who what when why and HOW this OCCURRED. .

  5. With this comment how can a mortgage loan be considered a ‘valid transaction” as required by the NMS and homeowner bill of rights when there’s securitization involved?

    “Since the securitizations cheme — and the homeowner’s vital role in it — was not disclosed (actually actively concealed), the homeowner did not, could not and never did bargain away rights to compensation or consideration for his role and risks in this dangerous risky transaction.”

    And haven’t we been told all or most securitization actually failed?

    More than difficult this is the definition of insanity. Only way homeowners should pursue this line of thinking is for damages IMO. To team up with these fraudulent entities would enable the white collar criminals and the harm done to communities and society.

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