Is a holder the same as a creditor and what is the difference?

Wall Street banks have weaponized confusion among people in the legal profession that starts in law school. In so doing they have created a virtual creditor when the law requires a real creditor. But they have used the confusion to apply legal presumptions of facts that are untrue. Let’s take a look at that.

Start with the law. If you want to enforce a security instrument (mortgage, deed of trust, etc.) the law requires that you just have paid value for the underlying obligation. There are plenty of alternatives to that wording but the one that was chosen after considerable analysis and debate was that the enforcer must have paid value for the underlying obligation.

This was enacted into law over centuries (starting in common law England)  including the National Code in the U.S. which later became the Uniform Commerical Code, Article 9  §203 adopted verbatim in all U.S. jurisdictions.

This has been further refined by cases that acknowledge that the judge can’t replace use his own judgment as to what is adequate consideration for the purchase, but if the value” paid was nominal (like $1) then there is the absence of value paid.

They could have said that it was sufficient to have possession of any negotiable instrument (i.e., a note) in which the maker was the same as the property owner who signed the mortgage or deed of trust. But they decided against that since foreclosure was the most extreme civil remedy that was possible and they wanted to make certain that nobody lost their property to someone claiming rights to a free trading certificate or note rather than the actual debt.

Wall Street investment banks have turned that on its head. Despite centuries of profound legal and moral analysis they have somehow managed to get the judiciary to abandon centuries of precedent and law. It is now considered doctrine that possession of the negotiable legal negotiable instrument (i.e. the note) is insufficient to foreclose. That is not the law and the courts have gone off the rails.

The result has been that foreclosures are routinely approved when the sale of the property results in payment to parties who have not paid value for the underlying debt and who have no intention of paying the money to anyone who did pay value for the underlying debt. The coverup for this rogue behavior in the courts is premised on the grand notion that somehow the money will find its way to a real creditor — despite the utter lack of any allegations or evidence to that effect.

This brings us to the questions presented in the title of this post.

A “holder” is someone who either has possession of the original note or who has the right to such possession along with the authority from the owner of the debt to enforce it, which authority is usually presumed from the possession of the instrument or the claim to right of possession. Do you see the circular logic here? But there is a reason for it.

The same people who analyzed the right to enforce a security instrument also analyzed the right to enforce a note. Recognizing that such notes could qualify as negotiable instruments, the writers of decisions and codes decided that the threshold for enforcing a note would be much lower than enforcing a security instrument. the reason for that was that such notes were frequently transferred between merchants and customers and that the framers wanted to encourage the free flow of commerce. The possibility of bad enforcement of a note was outweighed by the bad effect of bottlenecking commerce. Not so with mortgages.

While the authority to enforce the note is theoretically based upon a grant only from the owner of the underlying debt, that authority is presumed from delivery and thence possession. The problem as the reader can see is that the courts have been sucked into a maelstrom, to wit: the mortgage secures the performance of the note. So the alleged breach of the note triggers enforcement of the mortgage because that is exactly what the mortgage says. So the courts skirt around the requirements of law by presuming that the underlying obligation has been transferred to the enforcer when in fact no such thing has occurred.

The provision of the mortgage that says its enforcement is triggered by a breach of the note is a work-around to avoid application of the legal requirement that only breach of the underlying obligation, owned by the enforcement because he paid value. This error is compounded in practice. People with absolutely no right, title or interest in the underlying obligation are declaring defaults on loan accounts receivable that they do not own and in which they have no authority to administer, collect or enforce.

In fact, they are doing so when there is ample evidence that there is no loan account receivable at all. All evidence suggests that in the effort to insulate themselves from liability for violations of lending and servicing statutes, the loan account receivable is retired from existence — having been more than offset by the sale of multiple layers of securities from multiple offerings of more than one securitization infrastructure.

So for purposes of enforcement of a security instrument (mortgage, deed of trust etc.) there must be an account receivable owned by the enforcer because the enforcer (claimant, plaintiff, beneficiary) paid value. the confusion arises because the investors paid value for sure. But few people have paid attention to what they paid for — or what they did not pay for.

The answer is always in the result —- investors received an unsecured promise to pay that set the amounts they would receive according to a discretionary formula based upon discretionary reports from the investment banks. The whole point was for them to get the benefits of diversified “lending” without being a lender — i.e., without owning the loan account receivable. The point was to create the appearance of lending while avoiding any of the pitfalls — like compliance with the lending and servicing statutes.

So investors paid value but they did not pay value in exchange for ownership of any debt, note or mortgage. And the money they paid went not to homeowners who were falsely classified as borrowers but rather to banks who had loaned money to the investment bank against the sale of the certificates sold to investors. So the investors did not pay for “loans” to homeowners in either form or substance.

But since the value was already paid there is no reason for anyone to continue to pay value for ownership of a virtual loan account receivable when there is no actual loan account receivable. And that is why when you ask for proof of payment you get all sort of twists and turns from the foreclosure mill who knows they are pursuing a case in which the named plaintiff or the named beneficiary has no rightful claim to declare a default, foreclosure, or forced sale of the property to satisfy only the element of greed. Indeed, without the presence of a loan account receivable on the books of a creditor, there can be no default.

Policy Note: It is possible for the legislatures to actually authorize the use of virtual debts by virtual creditors. But in doing so they would need to specify the disclosures to the borrower of the risks being assumed that go far beyond the risks of a conventional loan transaction.

If borrowers know that they could not trust the appraisal they would have options. If borrowers knew that the virtual lender had no interest in the viability of the transaction, they would be offered incentives and options to accept those risks. If borrowers knew that they were the object of a bet that the transaction would fail they might b margin for a piece of that bet as a hedge. In short, the investment banks would no longer have unbridled discretion over the proceed of securitization and would be subject to free-market processes in which the investors and homeowners could bargain for better terms and would receive better offers from the competition. 

In short, that would mean the profits of investment banks would be somewhat diminished. It would not mean actual financial losses or injuries to anyone. As the system currently stands the investment banks are minting silly money in which people are paid as much as 100 times what they could otherwise earn. 


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.
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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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