Why knowledge of accounting is important to understand how the apparent debt vanishes in the context of securitization.

The big change occurred when the Wall Street securities firms forced securitization practices over the line. Whereas the purpose of securitization had always been to reduce risk, the investment banks meant to eliminate it. The only way you can eliminate the financial loss from a failed asset is if you don’t own it. That is basic accounting, basic law and common sense.

If you don’t own an asset there is no basis in the law that allows you to claim a loss if the asset is somehow damaged (assuming it even exists). If you have no loss then you have no claim and the court ahs no power to grant you any “relief”.

Why knowledge of accounting is important to understand how the apparent debt vanishes in the context of securitization.

Before 1995, all homeowner transactions were subject to the same accounting rules. Accounting consists of making data entries and issuing accurate reports about those data entries. All laws, regulations, and rules about data entries and reports are based upon compliance with Generally Accepted Accounting Principles and practices (GAAP). And all of GAAP is based on double-entry bookkeeping.

Double entry, a fundamental concept underlying present-day bookkeeping and accounting, states that every financial transaction has equal and opposite effects in at least two different accounts. It is used to satisfy the accounting equation: Assets = Liabilities + Equity. With a double-entry system, credits are offset by debits in a general ledger or T-account. See https://www.investopedia.com/terms/d/double-entry.asp

In legal practices and doctrines, such accounting entries and reports are considered evidence that transactions occurred. And if the entries were made by an employee of the company who personally received shipment or payment, that employee would make data entry of that receipt. The data is then processed through an accounting department that matches that entry with a different data entry showing how or why that shipment or money was received. In the simple example, if someone receives a payment it will be posted as a data entry of cash received. Accounting would post it as an increase (credit) to the cash account and a decrease (debit) of a prior account established with a product that was sold and converted into an account receivable.

Each data entry has a corresponding entry in some other account. If you paid for something, you would show a debit to cash and a credit to inventory for the product received. The outside auditor (or a court) takes all that as evidence of an event in the real world — unless, on examination, it turns out that the product was never received or that the cash was not used for the purchase of the product, such as in embezzlement.

So in a residential loan transaction, the lender keeps an accounting ledger in which all data entries are compiled. When the lender gives a borrower money, the lender debits a cash account and then credits another asset account to take the place of the cash it used to fund the loan. That other account is generically described as a loan account receivable. In general banking practice, a depository loan account is created in the name of the borrower, and the money proceeds from the loan are deposited into the name of the borrower. The borrower, if he or she was a business, would keep an accounting ledger that showed an increase (credit) to the cash account and an increase in accounts payable under the subcategory of loans payable.

So when the lender comes to court asking for foreclosure, it satisfies the prima facie elements of the claim for foreclosure by saying we loaned money to the defendant, we have the records, the defendant paid us until he didn’t, and we are suffering financial loss or injury arising from the defendant’s failure to pay. That would et them past the pleading stage.

Then at trial, the lender would produce its records custodian who would testify that he/she keeps the records for the lender. At the request of the Attorney for the lender, the custodian would provide the foundation testimony to establish that he has personal knowledge of how the books and records are kept, who receives payments, how they record them, and how the data entries are then recorded into the account ledgers of the lender. If the borrower contested whether payments were accurately entered, the lender would be obligated to produce a witness who actually received or supervised the receipt of payments from the borrower.

And so it was — for centuries.

Starting in 1995, the securitization system based upon “derivatives” (which began in 1983). So securities brokerage firms set about buying loan portfolios, initially, which evolved into borrowing to buy loan portfolios of real loans from real lenders. The first such activities were performed in accordance with the theory and intent of securitization of residential debt. Investors bought pro-rata interests in the portfolios which were managed by master servicers who subcontracted the work to subservicers. it was all perfectly legal but the securities brokerage firms were limited in sales to the dollar value of the loans. That in turn limited the commissions and fees to a percentage of the loan portfolios being traded.

Around the year 2000, everything changed. The securities brokerage firms started executing a plan that would give them multiples of the amounts traded as “loans” instead of percentage commissions. As an analogy, imagine a car salesman suddenly finding a way to get $500,000 for every car he/she sold for $40,000. If his/her commission was 5% the earings would increase from $2,000 to $500,000. And even if his scheme was somewhat illegal or extra-legal he would have enough money to pay off everyone around him to shut up, giving them more money than they had ever seen in their lives.

The rules of accounting and the rules of law are the same. If you don’t own an asset you have no financial loss associated with the loss of the asset. And that is because there is no account that gets debited or credited with any payment or disbursement related to the asset. According to GAAP and the law, if there are payments and disbursements, they are not related to an asset if it is not owned by the party who made or received payment.  Without that, the courts are without any authority to hear any dispute relating to the asset. If the party making a claim does not own the asset, it cannot claim a financial injury. And without a present financial injury, there is no claim.


Nobody paid me to write this. I am self-funded, supported only by donations. My mission is to stop foreclosures and other collection efforts against homeowners and consumers without proof of loss. If you want to support this effort please click on this link and donate as much as you feel you can afford.
Please Donate to Support Neil Garfield’s Efforts to Stop Foreclosure Fraud.


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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4 Responses

  1. And who is paying the property taxes each Quarter ???? I think this is often overlooked in their Theft of the houses.

  2. Time to define that is “mortgage” and that is “Note” in securitization.

    Note is homebuyers’ promise to pay for information about transactions happened in the past – aka when loans were actually funded.

    For example, if Joe purchased a home from Jane (who had no mortgages on her property) and “borrowed” any money for this purchase ($100,000 for example), this is the only time when the actual financing is necessary.

    When Wall Street Banks securitize Joe’s promise to pay $100,000, place information about this transaction on Black Knight’s database, and destroy all documents pertaining to Joe’s purchase – after that no financing necessary.

    Lets say George wants to buy this home from Joe for $150,000 10 years later.

    George goes to a pretender Lender who prepared a document called “mortgage”. Joe , who placed $10K as a downpayment , at that point paid at least 30K back to Wall Street Banks, so he had $40K equity in the house created by HIS money.

    George put $15 K downpayment for the house, plus closing fees which usually include the first month payment.

    So, at the closing Joe will receive about $60 K (difference between $100K original price with $90 K “loan” and $150K, asking price.

    Where Joe’s money will come from? He will receive a refund of his downpayment (10K) plus his payments (30K) plus $15K from George, which totals $55K.

    The rest ($5K ) maybe will come from some other source.

    So, that will receive George in this transaction? He will receive a property Deed after he promise to repay for a hon-existing financing since in securitization scheme here is no need to create any “loans

    “Mortgage” is merely with new numbers a new reference point to a prior transaction which happened in the past such as original funding of home purchase with borrowed by Wall Street Banks from undisclosed lenders.

    With securitization scheme no one needs to actually fund any home “loans”.

    No one Buyer do not see any money during “closing” transaction – except it has cash out involved.

    This new reference point creates a new base for a new securitization scheme now based on George promise to repay for information about Joe’s transaction, with all numerical adjustment made by Wall Street Banks.

    So, while in Joe’s initial purchase at least some money came to the closing table – $90K, with ALL following “sales and resales” no financing is necessary at all.

    The buyers receive a new document called “Mortgage” where Wall Street merely change amounts “owed” and interest rates.

    This information is recorded in Black Knight – to create the next reference point for all future transactions.

    So, every foreclosures is a theft of a home from a homeowner who signed a promise to pay for information about someone’s “debt” which was extinguished long time ago.

  3. Neil – this is all correct. But something missing that also occurred in late 1990’s and was addressed by Congress (I think unknowingly because who knows what our politicians do) that is – in 2000 – deregulation. The GSEs were suffering financially on fixed rates being manipulated by the government (and Charles – you need to find out who securitized for Ginnie — they did not do themselves). At the same time all this was happening, the government was pushing under the Community Reinvestment Act (CRA) to fund loans to low/middle income people. Who had to fund? The Banks – and then sell to GSEs. No go on that. NO PROFIT FOR ANYONE. They figured a way out around it.
    The banks were already servicers to GSEs. Funding loans for GSEs got them NOTHING. Fund loan to turn over to GSEs? They were not idiots!!!!.
    So they got the loans out of the GSEs by whatever means was possible. That is, report a default, report a delinquency, collect insurance, purchase loan outright (not permitted), push and solicit refinances — whatever way they could do it – they did it. (And credit card funding involved). It shifted share of “mortgage” market share greatly from GSEs to private banks – who had non-banks on their payroll. Then the banks, formerly known as servicers to GSEs, claimed to securitize the “loans” themselves.
    THAT is where the accounting stopped. In effect, all was just “reinstated” GSEs loans but without GSE name on it. The GSEs were precluded from selling performing loans. Thus, these loans were coded something other than “Performing.” And, no accounting necessary. But, it goes even further — because these PLMBS were set up with internal credit enhancement by structure rather than the old derivative formula. That is, the bottom tranches were sold first to bottom feeders, and the top tranches right back to the GSEs- who failed to refinance themselves in the first place!!! But CRA mandates were met!!!!! Under CRA mandates, banks claimed to “FUND” and sell to GSEs. But they did not sell the loan, they sold the fake security backed by no “loan” accounting!!!!! So much time has gone by.
    Nothing was done to fix the fraud. It was covered up. They had no other way but to leave scapegoat homeowners in the dust. So — who do you call — “Ghost Busters?” Woodward and Bernstein not available.
    It is so obvious — and no one cares. No one wants to rock the political boat that agreed to all.

  4. Trying to get lawyers to understand let get the low hanging fruit first that we can easily get the information who owns what, however we know exactly who must own the Ginnie Mae pooled loans and how they get the additional monies is through draws that they make other loans.

    All the Notes must be endorsed in blank and relinquished to Ginnie to prevent any sale off of the loans. This is done without assign the title to Ginnie who cannot purchase the debt, but through UCC3 can own the Notes!

    Here is the class action law suit!

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