Is it a Loan or Not?

There is a law against murder, but the law defines murder. So if you accidentally kill someone or kill someone in self-defense it is not murder even though the same shot was fired. The same is true for obligations. They become legal debts based upon a certain restrictive set of events and actions. Those legal debts, in turn, become enforceable legal debts either “as is” or based upon some written instrument that conforms to statutory law. The authority to enforce must always come from the owner of the underlying obligation. Everything else is paper and paper can be shredded. But obligations cannot be shredded and even without a written contract, the obligation can be enforced by a court of law.

So the basic rule for all promises to pay is that the promisor (homeowner) always owes the money only to the owner of the underlying obligation. The law is clear. You can only own the underlying obligation by paying value for it. But you can enforce certain paper documents as though you owned the obligation if you satisfy the form and content of such claims. Such claims are treated as though the owner of underlying obligation was present — unless otherwise shown by the party responding to such claims. Homeowners have rights, but like everything else, use it lose it.

Under all existing statutory and common law for centuries, there are certain basic elements required to produce an enforceable contract. No agreement, whether oral or in writing, will ever be enforced by any court unless there is a finding of fact and conclusions of law that there was a “meeting of the minds” what is the purported agreement is alleged to have come into existence (originated).

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Even in cases where there has been a meeting of the minds in entering into an agreement, the contract will still not be enforced unless the consideration expected by each party was received. Up until such payment or delivery occurs the contract is considered “executory” which means unenforceable. And even then the contract will not be enforced if it violates public policy or law. So it is not as simple as most people think it is.

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Here is a simple primer on enforceable contracts — and why the transactions with homeowners either do not start or do not end up as “loans.”

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  1. An offer of goods or services based upon specific terms that are expressly stated or which are understood to be included in the offer of goods and services.
  2. Acceptance of the offer on the terms stated.
  3. Reciprocal consideration. This means that each party gives the other party something of recognized value that is relevant and pursuant to the contract. The consideration must be material and in substantial compliance with the terms of the proposed contract.
  4. Each party must act, at least initially, in accordance with the terms of the contract. This element is generally understated but often used in the interpretation of whether a contract is enforceable or not.
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So in analyzing any contract, lawyers look at it differently than other people. We look for the elements that are required by the rules. If the elements are not present, the usual result is that the “contract” unwinds (rescission) putting the parties back in their original position before they ever made an offer or accepted the offer.
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So when we apply this required analysis under the rules to the issue of whether or not the transaction with the homeowner is a loan or some other transaction, the result is obvious. In the context of “securitization”, there are only two possible conclusions. Either the transaction was never a loan, or it was converted from a loan to something else.
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Lay people get confused because the answer seems obvious when you fail to apply the elements of an enforceable contract. From the perspective of a non-lawyer lawyer, the homeowner was seeking a loan, applied for it, and received it. It is inconceivable to the non-lawyer that the transaction could be anything other than a loan. And this conclusion is common to most lawyers and judges who fail to do the analysis.
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In the context of securitization, it is easy to see a substantial deviation from the elements of an enforceable contract in most instances. When the parties enter into a transaction each with a different intent than the offer and terms, you do not have an impossible contract even if consideration or value has been paid.
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For the sake of simplicity, I am focusing on the alleged “refinancing” originated by using the name of a mortgage broker or thinly capitalized shame conduit.
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The homeowner enters the transaction with the intent of borrowing money and repaying that money in accordance with the terms offered by a lender. The term “lender” is defined by law and custom and practice. If the homeowner is seeking a loan but the party making the payment to the homeowner is acting for an entirely different reason than loaning money, we are not left with an enforceable loan contract.
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What is left is something else — and that alters the legal enforcement of the contract to reflect or memorialize the reality of the actual elements that are often concealed by one party. This is performed by the court as part of common law or statutory rescission or reformation of the contract to maintain the statutory and common law requirement of fairness and honesty when entering into the agreement.
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But lawyers understand that if the aggrieved party fails to present the actual elements in proper form and at the proper time, an unenforceable unconscionable contract becomes completely legally enforceable.
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And when the case is over, it is forever done even if substantial injustice has occurred. It is not up to a judge to guess at possible issues or defenses.
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When presented with allegations that are filed in accordance with the rules, including unfounded fraudulent allegations, the judge is required to give judgment to the party who made the allegations — unless the homeowner properly and timely raises issues related to the foundation and authenticity of the allegations.
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If you look at the transaction with the homeowner from the perspective of an investment bank, you see an entirely different transaction and an entirely different intent than that of the homeowner. The investment bank has no lending intent. It is not even a legal party to the transaction with the homeowner. The payment to the homeowner is only made because some incentive must be paid to the homeowner to sign documents that will appear to be loan documents when viewed by anyone without knowledge of the investment bank’s scheme.
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The investment bank purposely distances itself from the transaction with the homeowner so that neither the investment bank nor investors who purchased certificates from the investment bank have any lender relationship with the homeowner. And by using a mortgage broker or sham conduit, any violation of statutory or common law requirements in lending is limited to that of the mortgage broker or sham conduit by definition could not possibly pay any substantial judgment for material violations.
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The investment bank, therefore, avoids all potential liability, at least on its face, for lending violations and in particular for compliance with the Federal Truth in Lending Act (TILA). The natural person is associated with the mortgage broker or sham conduit is protected from personal liability by virtue of limited liability produced by compliance with the technical requirements for establishing a business entity. The mortgage broker or sham conduit can be protected by bankruptcy or simply by going out of business.
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When the homeowner executes a promissory note and mortgage, he or she does so in accordance with the homeowner’s intent to enter into a loan transaction. Under custom and practice as well as the strict requirements of statute at common law, the homeowner failed to receive a counterparty who could be properly described as a lender, with lending intent, lending behavior.
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Since the mortgage broker or same conduit was not permitted to receive or disperse any funds related to the transaction with the homeowner, it could not properly be described as a lender in any event. The old assignment and assumption agreements that preceded even the applications for loans were replaced with the same agreement bearing a new title of “warehouse lending agreements.”
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The terms of the old “Purchase and Assumption Agreements” and the new “Warehouse Lending Agreements” were the same, to wit: the originator (mortgage broker or sham conduit) was at all times acting as a service provider to the intermediary for the investment bank. And it was the investment bank, acting through intermediaries, who sent money to the “closing table” for payment to or on behalf of the homeowner. But what was the intent of the investment bank in paying that money?
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The essential question, at this point in the analysis, is whether the investment bank did intend to receive payments from the homeowner or in the forced sale of homes in foreclosures? The answer is of course in the affirmative. So the analysis by the uninitiated (people who have not been to law school or who fail to use the knowledge taught to them in law school) is that since the homeowner intended to get a loan and pay it back and since the investment bank gave the homeowner money with the intent of getting money from the homeowner, why isn’t that a loan?
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This is precisely where the systemic risk arose that froze the bond trading markets and credit markets arose, resulting in the worst economic crash since the great depression. The intent of investment banks was to sell securities — as many as possible and to get money from homeowners in transactions that could be steered in a manner that appeared to be consistent with a cascade of declared defaults that were guaranteed to occur. this is exactly the opposite of the requirements of a “lender” under TILA.
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That act makes it abundantly clear that “lenders” must be responsible for underwriting loans with the intent of creating viable loans based upon accurate property appraisals. By creating unviable loans that, for example, offered minimal payments for a limited duration and reset to monthly payments one excess of the entire household income, investment banks created loans that were not viable.
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And by delivering appraisals to homeowners that vastly departed from standards of basic custom and practice, they made sure that the homeowner would be stuck with underwater transactions that removed any incentive to make payments.
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In fact, one of the most obvious deviations from any practice associated with residential “lending” was highlighted in 2005 by 8,000 licensed appraisers. In 2005 8,000 appraisers petitioned Congress saying that they were being coerced into false appraisals. They either did the appraisal as instructed or they would never see another appraisal job. Congress ignored it. They were faced with the choice of putting food on the table or lying about the value of the property. Many appraisers dropped out of the market. The rest were tempted by oversize fees (that in many cases were partially kicked back to the loan originator) or felt compelled to stay in the market because they had nowhere else to go. see https://livinglies.me/2018/03/06/bank-of-american-class-action-certified-countrywide-via-landsafe-used-inflated-real-estate-appraisals/
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No reasonable person would lend money based upon collateral that was overvalued because that diminishes the value of the supposed “loan.” Any money paid to a homeowner under such an arrangement is being paid for reasons other than a “loan.” It is exactly the opposite of custom, practice law, and rules of lending.
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It was always the practice of lenders to use the most conservative appraisal, based upon the median income of the area and reasonable comparables (using time and geography). Sudden jumps in prices were not used for valuation unless there was some fundamental underlying reason for the jump, like the discovery of gold or oil. A one-off sale 10 miles away was never even included in the appraisal computation.
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The petition from the appraisers predicted exactly what happened. Prices deviated from value. And that produced a result that was a sure bet: housing prices would fall. That in turn would make it more likely that more foreclosures would be conducted to “recover” the money that was “loaned.” Knowing that, the investment banks created “innovations” in unregulated securities and insurance contracts that bet on what they already knew would happen — a housing crash.
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Knowing this, the investment bank was able to plot out the strategy of creating transactions that looked like loans, declaring them in default and obtaining money from insurance and SWAP contracts (See AIG, AMBAC etc) based upon an “event” declared by the investment bank in its sole discretion.
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Since the insurance and counterparty liability on those contracts was based upon the “event” rather than any real loss, the proceeds were always paid to the investment bank rather than any investor. The investment bank then used its effective control of the process to foreclose, taking the proceeds from the forced sale as extra income without ever giving investors or anyone else who owned a receivable any money at all.
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All of the securities issued and sold were based upon the announcement of events that may or may not have occurred in the real world rather than ownership or loss associated with any investment of money that showed up on any accounting ledger. They were called “derivatives” because they had no intrinsic value. Their only value arose from future announcements about data, not from losses or gains in any investment. Again, this is the opposite of a “lender.”
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The goal of the investment bank was always to profit from the sale of a virtually infinite number of securities, all of which derived their “value’ from announcements or reports of data performance, not ownership, gain, or loss on any investment or loan. The secondary goal was to eliminate the risk of loss when the homeowner failed to make a scheduled payment. The third goal was to profit from the failure or refusal of homeowners to make a scheduled payment by taking the home.
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Any reasonable homeowner would have at least sought professional advice if they knew that the transaction was based solely on the sale of securities rather than a conventional loan. When buying stopped, so did transactions with homeowners. No losses were incurred by investment banks, originators, aggregators or investors arising from “defaults” announced by intermediaries (“Servicers”). There was no such risk of loss because none of them owned the underlying obligation. In plain language, investors lost money because the investment banks said they lost money (i.e. they refused to pay investors all that was promised). The promise to pay was always in the sole discretion of the investment bank.
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The same analysis is true for all the other parties acting as aggregators or underwriters. There is no lender. There was never any risk of loss. It was always about fees for participating in a giant charade. Therefore, the transaction cannot be defined or described as loan purposes of legal analysis. In plain language, there can be no loan without a lender. And there can be no successor lender without an originating lender.
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This is not a theory or opinion. It is a factual report not the status of the law that has been established as a foundation for all contracts for centuries. The only people who would and do disagree are those who are not lawyers and who have no expertise in basic contract law. So if it wasn’t a loan agreement, what was it?
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This leaves two questions. If it wasn’t a loan why did the homeowner receive any money? What did the homeowner receive in exchange for the execution of the promissory note and mortgage (or deed of trust).
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The homeowner received money as an incentive or fee for service. The homeowner intended to receive money as a loan. The homeowner executed a promissory note and mortgage in exchange for receiving a lender and a loan agreement finding the lender and homeowner into an enforceable loan contract. The contract, according to the rules of law, automatically incorporated the requirements of statutory law and common-law doctrine of Fair dealing and honesty.
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The homeowner did not receive what the homeowner intended. The absence of a lender is what made modification, settlement, forbearance or other agreements impossible. The absence of the lender explains the random nature of modifications that were offered. There is simply no party who could authorize such modifications. And therefore there was simply no party who could authorize anything in connection with the underlying obligation, legal debt, note or mortgage.
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Therefore there was no meeting of the minds and more importantly, no consideration received by the homeowner for the issuance of the note and mortgage. The money that was received by the homeowner what is an incentive payment or fee for service in launching the next securitization scheme. As such there was no liability attached to it. Giving that money back with interest resulted in negative consideration for a transaction that the homeowner would have rejected out of hand if presented with the facts.
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Lacking consideration at the beginning the “agreement” or “contract” was only partially memorialized due to lack of information about the true nature of the transaction don’t risks assumed unknowingly by the homeowner. The result is an agreement that is not legally enforceable without reformation or which is subject to either common law or statutory rescission. But that said, failure to raise such issues in the proper way and at the proper time, has resulted in millions of homeowners losing their homes to parties who had no loss and were only seeking gains.
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This does not directly relate to the transaction with homeowners that originated as an actual loan with a lender. The nuance, absent from most analyses, is that subsequent to the closing, the lender is paid off but the underlying obligation is neither purchased nor transferred to the party making the payment nor anyone acting on behalf of the party making the payment (i.e., the investment bank acting through intermediaries).
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In both cases though the result is the same. there is no successor lender and therefore no authorized servicer, no authorized enforcer of the underlying obligation, legal debt, note or mortgage, and no risk of loss. the risk of loss has been extinguished by the process of securitization in practice. No sale of the debt has occurred and hence, under law, no right to enforce has been transferred. You can’t claim you are not a lender for purposes of avoiding liability for violations of lending statutes while claiming the right to enforce a scheduled payment because you are a lender.
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The last question that needs to be answered is the apparent windfall to the homeowner. That windfall only exists if you view the transaction as a loan. And even then it does not take into account all the risks of loss and actual losses sustained by the homeowner upon entering into such agreements destined to be reference points for reports on data performance.
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So there is most likely available various claims for violations of TILA, FDCPA, RESPA, FTC, Little FTC, RICO etc. either as causes of action in a lawsuit or as recoupment in affirmative defenses. In judicial states recoupment is only limited to the amount claimed against the homeowner. It is not time-barred like claims brought in lawsuits.
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And so the final conclusion is that there is no windfall to the homeowner. It was no stroke of luck that ensnared the homeowner into a bevy of risks and losses.
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The payment received by the homeowner was a payment that should be credited towards the total reasonable payment that should have been received by the homeowner for assuming and sustaining those losses and for providing a service to investment banks that enabled them to generate an average of $12 for each dollar transacted with the homeowner.  Viewed that way, the homeowner received a commission equal to about 8% on the business plan of selling securities — a plan that the homeowner would most likely have never accepted if the facts had been revealed as required by law.
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Neil F Garfield, MBA, JD, 74, is a Florida licensed trial and appellate 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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2 Responses

  1. This is exactly that they do not – but instead of bad appraisals Wall Street created a “bidding war ” where homebuyers are willfully pay ABOVE appraised value and get bigger “loans” which will expectably fail within 1-5 years from “origination.

    So criminal and cynical

    As of Judges – this is not judicial job to GUESS that a non-existing Plaintiff exists and somehow will pass money to investors.

    Constitution and the law has a very clear definition: Plaintiff MUST have standing and must suffer damages.

    Period. These are Judges who refuse to follow law created this crisis.

    ALL these foreclosures between 2002-present time are void and must be reversed. This is not about total injustice – this is about mass fraud upon the Court committed by officers of the Court.

    Wall Street lawyers are all officers of the Court and they coming to hearings to lie and steal someone’s home wth forged documents while cannot even tell who is their client.

  2. Well put Neil. But a lot is left out.
    1) You state accurately – “Either the transaction was never a loan, or it was converted from a loan to something else”
    2) Securitization has been around for a long time. It is private label securitization that went afoul. Securitization should have no relevance to borrower. But, somehow, it does because there is no other avenue for debt collectors. They hide under the fake trusts/trustees.
    These crisis loans, were converted from a previous valid contract into “something else” that was never disclosed to borrowers. The valid contract preceded the “loan” at last transaction which ended up in in fake private label “securitization” with no “asset” securitization could be derived from, and no accounting. And, that is where the fraud lies.
    Fees were assessed, when they never should have been. Loans were reported in default (before last transaction) – when they never should have been. So, yes – converted from a loan to something else without the borrower ever knowing. And, once that happens – it is permanent. It continues into “loan modification” fraud, and continued servicer (debt Collector) fraud, and irreparable title in perpetuity. It is not about payments to anyone. It is about conversion.

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