I know this is technical and even boring. But if you want to understand where tens of trillions of dollars went in 2008 and how it is about to happen again, you must read this.
The bottom line is that homeowners, falsely believing that they are in default, are actually stepping away from compensation that is due to them from investment banks that initiated the securitization schemes, without which the banks would not have made any loans.Equally true is that if homeowners knew the real facts they would have either sought other sources of financing or they would have received far greater consideration and incentives for entering into a doomed deal.
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In actuality the whole purpose was to produce ORPHAN LOANS and they succeeded, even though it was never legal or equitable by any standard.
Start with the Glass-Steagal Act of 1932.
There were four essential provisions: this act established the separation of commercial and investment banking activities and prevented securities firms and investment banks from taking deposits. It prohibited federal reserve member banks from:
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1. Dealing and non-governmental securities for customers
2. Investing in non-investment-grade securities for themselves
3. Underwriting or distributing nongovernmental securities
4. Affiliated or sharing employees with companies involved in such activities.
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The major investment banks had all started to violate the provisions of the act in 1983, when the concept of securitization of debt took hold. The unregulated sale of “certificates” a/k/a “mortgage bonds” was nothing more than a certificate of deposit creating an unsecured liability for the investment bank since it was both underwriter and issuer doing business under the name of a nonexistent trust.
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When the concept was expanded to residential loan transactions, investment banks knew that they were in substance taking deposits from customers without any restrictions on the use of those deposits.
As they often do, the investment banks began a major lobbying effort to ratify their illegal acts. This culminated in the 1999 Graham Leach Biley act which repealed the above provisions.
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The fate of banking, securities brokerage and underwriting, lending and borrowing was sealed when the major investment firms, calling themselves “banks,” were formally permitted to convert to commercial banks — despite their consistent track record of illegal behavior.
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This permission, achieved over a weekend during the 2008-2009 crisis essential legalized the previously illegal solicitation of deposits from investors who were purchasing certificates of deposit that were entitled certificates of entitlement issued by the investment brokerages. The result was a distribution of all risk of loss to the victims of the securitization scheme.
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Predictably, the risks associated with the activities that were banned in the Glass-Steagall act were not only legalized, but expanded. This resulted in the 2008 crash and continues to undermine the US economy and the economies of most nations around the world.
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The plan was presented as the securitization of residential loan obligations. But in actuality no such securitization ever occurred.
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Although the investment banks had received revenue equal to multiples of the amount of each homeowner transaction, they were not selling the debt and the buyers of the securities that were issued were not buying the debt.
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While some fund managers rejected the plan, the investment banks were able to influence most fund managers to purchase the securities that were issued, leaving the investors with an unsecured discretionary promise of a variable stream of income.
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The impact of this plan will be felt for generations. In order to sell the plan the investment banks needed to create the illusion that it was the debt that was being securitized and not just information about the debt or the performance of the debt. But in order to quell the objections of fund managers, and to maximize the profits of each investment bank book runner, the plan was constructed such that at the conclusion of each securitization cycle, there was no creditor who had established ownership of any loan account, directly or indirectly.
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*This had the side benefit of having the proceeds of insurance and hedge contracts payable to the investment firm rather than the investors or borrowers. See AIG bailout windfall to Goldman Sachs.
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For purposes of enforcement of the homeowner transaction, the investment banks needed to establish an infrastructure in which the securitization of the debt would be presumed by the courts based upon established rules of evidence arising from the facial validity of documents.
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The infrastructure established by the investment banks included private data collection, aggregation and reporting contrary to both public policy and state law regarding the transfer of interests in real property – especially conveyances of ownership of mortgages and deeds of trust.
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The infrastructure included the creation, control or acquisition of companies that would act in strict compliance with policy established by the investment banks. It also included the establishment, control, acquisition and outsourcing of companies that will willing to create documents that enhanced the illusion of the securitization of debt. All such documents were fabricated and contained false statements, to wit: they memorialize transactions that had never occurred in the real world.
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Currently the administration, collection and enforcement of promissory notes issued by homeowners is conducted for profit and not for restitution of an unpaid debt. The fact that this result is counterintuitive to the assumptions employed in the courtroom makes it easier for the investment banks to achieve a profit rather than a remedy for anyone who paid value to capitalize the scheme.
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The investment banks have invested heavily in a public relations campaigns spanning all types of media. The central myth propagated by that campaign is that the success of a homeowner in a foreclosure proceeding would result in a windfall “free house.”
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Nearly all homeowners, attorneys, judges, regulators and legislators have come to believe the myth of the “free house.”
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But in fact, as with nearly all facts about the plan purporting to securitize residential debt, the situation is exactly opposite to what is commonly assumed and even legally presumed in the courtroom.
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By selling securities that derived their perceived value from the existence rather than the ownership of residential debt, investment banks were able to achieve what had been heretofore impossible, to wit: they received total amounts of unrestricted deposits and proceeds of sales of “private contracts” that are commonly called derivatives; the sales resulted in net revenue, frequently untaxed, equal on average to 12 times the amount of any homeowner transaction.
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Hence the investment bank was receiving undisclosed (and concealed) compensation for origination or acquisition of the loan in the amount of $12 for each one dollar that was paid to the homeowner.
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Because the transaction with investors did not involve the sale of the debt, and even the origination of the homeowner transaction did not involve the purchase of the note or the mortgage or the underlying obligation by anyone who had provided the funding for the transaction, each of the parties was able to maintain the legal position that they were not subject to the federal Truth in Lending Act nor any state law governing lending or servicing practices.
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In fact, the investment banks had created the appearance of the loan transaction that resulted in the absence of the creditor or lender that could be subject to public policy or legislative restrictions on lending practices.
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After the statute of limitations on claims arising from lending laws, the banks took a different stance in pursuing foreclosures and collection. They portrayed themselves as lenders or successor lenders acting indirectly through intermediaries such as trustees, trusts, servicers or attorneys in fact.
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Misapprehension of the securitization process is widespread and even almost universal. This has resulted in the bias or assumption that the proceeds of forfeiture of residential homesteads through the process of judicial or nonjudicial foreclosure will eventually result in payment to a creditor who paid value for the underlying obligation and who was therefore an injured party proximately caused by the nonpayment of the homeowner.
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To the extent that such an assumption relates to investors who purchased certificates in the name of a nonexistent or barely existent trust, the assumption of fact is erroneous, to wit: investors continue to get paid regardless of the performance on any individual loan. They get paid by the investment bank partly from funds from a “reserve fund” which is vaguely described in the prospectus for the sale of the “certificates.”
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The reserve fund consists entirely of deposits made by investors. The deposits consist of both purchases of the trust certificates issued in the name of a single putative trust and from purchases of the trust certificates issued in the name of multiple other putative trusts.
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The inclusion of the proceeds of sales of derivatives issued by investment banks using the name of multiple putative trusts has caused some financial experts to referred to the scheme as simply another Ponzi scheme. The purpose of this article is not to justify or support that description.
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The point of this article is to merely demonstrate that the assumption that the investors are not getting paid as a result of nonpayment by homeowners is false.
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Investors neither paid for nor received any conveyance, legally or equitably, of any right, title or interest in any debt, note or mortgage issued by any homeowner. They do not get paid on the basis of any term or condition contained in any promise made by any homeowner to anyone.
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The payments received by investors are first, based upon discretion of the investment bank and second, funded from wide ranging business activities that only partially include the unauthorized and illegal administration, collection and enforcement of notes and mortgages.
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To the extent that the assumption in court is that the investment bank will receive the proceeds of a foreclosure sale, this assumption is true. *
Further complicating understanding of the convoluted nature of the securitization scheme is the fact that it is in fact the investment bank that issues the funding for the origination or acquisition of virtually all homeowner transactions. Since they are doing it with deposits made by investors, it may be fairly stated that they are in substance the lender or the successor lender (in the case of the acquisition of the loan).
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However, after detailed analysis by multiple financial experts, it is quite clear that while the transaction with the homeowner may have resulted in a general ledger entry on the books of record of the investment bank, the existence of the transaction on those records was at best fleeting. In most cases the transaction on the trading desk of the manager for collateralized debt obligations occurred contemporaneous or even before the homeowner transaction was consummated. At the very latest, the transaction was off the books of the investment bank within 30 days.
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This left an orphan debt — no person or business entity maintained a ledger account in which ownership of the debt was reported.
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The homeowner transactions were primarily consummated through the use of a sham intermediary under the guise of a “warehouse lending” agreement. While the title of the document may refer to warehouse lending, and some of the terms of the document are similar to those found in a warehouse lending agreement, these agreements are actually a replacement for the actual agreements that were initially drafted on behalf of the investment banks.
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Those agreements were entitled “Purchase and Assumption Agreement”. Under the terms of those agreements the intermediary for the investment bank was contracting with a company that would serve, for a fee, as the “originator” of the transaction. Such an originator had no legal right, title or interest to any money or any claim related to any transaction with the homeowner.
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All payments from homeowners were either forwarded to a lockbox or diverted to a lockbox that was maintained and controlled by yet another third party intermediary whose contractual obligations are owed to the investment banks.
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Neither originators nor services ever actually see the the money paid by homeowners in their own bank accounts. The usual lockbox arrangement is with Black Knight, formerly Lender Processing Services (LPS) formerly operator of DOCX who produced tens of thousands of false, fabricated and fraudulent documents in the pursuit of unlawful foreclosures.
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This leaves us with the question of the legal status of the promise made by the homeowner to pay money. The promise in most cases was obviously made to a party that was not entitled to receive any money either legally or equitably. Equitably they had no right to receive any money from the homeowner because they had not given the homeowner anything of value. Legally, they were not entitled to the money because the underlying debt was not owed to them.
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This is often overlooked when in court the parties accept the allegations as proof. Pleadings allows a claimant to say almost anything. But in the proof the claimant must still show that the claim is owned by them or if it is just seeking judgment on the note alone then they must show that they are pursuing the claim on behalf of a creditor who paid value for the ownership of the underlying debt.
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And in all events there was no sale of the homeowner’s obligation to anyone at any time during the securitization cycle – nor is any asserted or alleged in any subsequent documentation or even pleading with any court.
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The absence of such allegations is contrary to normal pleading practices and should be corrected by the highest court of each state in establishing baselines for pleading foreclosures. A simple requirement that someone declare, under penalty of perjury, that they have ac dual personal knowledge of the status and ownership of the underlying debt and that the allegations in the complaint fairly represent the ownership of the debt and injury to the Plaintiff, would in effect eliminate virtually all foreclosures.
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The sale of the debt is currently presumed to have occurred by virtue of the legal presumptions arising from the apparent facial validity of fabricated assignments of mortgage or fabricated endorsements of the note.
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The legal analysis is simple. It is well established law that the authority to enforce a mortgage, note or obligation must come from a party who has paid value for the underlying obligation in exchange for ownership of that obligation. If no such creditor exists, then no authority can be granted.
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Given the above analysis, one might be tempted to conclude that the homeowner should be able to rescind the transaction entirely as being violative of public policy, public law and centuries of common law doctrines. But the problem with that conclusion is that the investment banks have created an infrastructure in which dozens of bona fide purchasers for value have engaged in various contracts predicated on the existence of (but not the ownership) of each homeowner transaction.
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Most courts have attempted to “punt” the issue by ignoring fatal deficiencies in the allegations in the prima facie case of anyone claiming a right to administer, collect or enforce a homeowner obligation. Many even go so far as to deny discovery on any issue which might defeat the assumptions of the court and the legal presumptions being employed by the court arising from the facial validity of fabricated, false, forged backdated instruments.
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The only remaining construction is through reformation of the contract to allow for a mere designee, rather than a creditor, to pursue administration, collection and enforcement of the homeowner obligation. The obvious procedural problem is that nobody has asked for this.
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The inescapable truth is that securitization necessarily involves two contracts, but the court system has been focussed on only one of them — the loan agreement. The securitization contract is considered as irrelevant despite the fact that in most cases the claimant is alleging securitization as the basis for standing.
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With the facts laid bare is entirely clear that neither the securitization contract nor the loan contract could have ever existed without the other. It is equally clear that the loan contract results in a product that retires the underlying debt from the books of any and all creditors.
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The securitization contract conscripts the homeowner into a highly complex financial transaction about which he or she knows nothing and never consented and which undermines the loan contract by providing incentive for the “lender” to violate lending laws, inflate appraisals and approve toxic transactions because they are betting against viability.
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The parties involved in “lending” are consistently violating both public policy and public law rather than conforming to the basic requirements of the Truth in Lending Act that requires a “lender” to be responsible for the viability of the “loan.” But without a lender, no such party exists and the risks to the homeowner are increased exponentially.
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The net result is that the homeowner is drafted into two transactions producing an immediate loss along with probability future losses. Homeowners receive no compensation or consideration for assuming such risks because (a) they are concealed and (b) they had no opportunity to bargain for incentives or compensation.
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In conclusion, the myth of the windfall free house, accepted so widely even by the homeowners themselves, overlooks the fact that they were due compensation and consideration that they never received. While the amount of the consideration due to any specific homeowner might vary and be subject to resolution in a court of equity, it seems clear that the the appropriate amount of such consideration — especially after a period of time in which statutory interest is attached — might be equal to or greater than the amount demanded in foreclosure.
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But neither one could be legally collected unless the two contracts — loan and securitization — were reformed into one contract allowing for the appointment of a designee creditor rather than the usual and legal requirement of an actual creditor.
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In 2006, when I predicted not only the collapse, but also the order of firms that would collapse, I stated that the only way to avoid the coming catastrophe was to force all stakeholders to the table to share the risks of the miadventure since there was plenty of blame to go around. My pleas were ignored.
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I renew them again with this article because the next round (2020-2021) might be worse than 2008-2009. And the precise vehicle for forcing all parties to the table to share all of the risks is employment of the equitable doctrine of reformation, which has been in existence for centuries. Like 12 years ago, failure to do so is at our peril.
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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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Filed under: foreclosure |
“Hence the investment bank was receiving * * * compensation for origination or acquisition of the loan in the amount of $12 for each one dollar that was paid to the homeowner.”
In my opinion, this is an absurdity and if you argue this, you might as well just hand over the keys. The problem that the author has is that he gets fixated on certain ideas and cannot be budged from them even with dynamite. This is very “Rorschacian.” Conclusory arguments like this that have no factual basis do great damage to not only litigants, but to NG’s “brand,” as well. I don’t know why he doesn’t just stick to simple arguments such as no proof that the plaintiff paid value for the note. That argument has black letter UCC support. And without payment of value, the plaintiff could not have lawfully possessed the note and mortgage at the time that it brought the foreclosure action.
Show me my $350,000+ and I will gladly show you the keys.