Livinglies's Weblog

Hat tip to Summer chic

From the very beginning — when homeowners or prospective homeowners are first applying for a loan or refinance — they are faced with (a) understanding the transaction (something that TILA was supposed to fix) (b) whether to go on offense and (c) whether to just wait and go on defense.

Nobody wants to sign into a deal that is bound to end up either in litigation or the threat of it. But that is exactly what almost every would-be borrower gets in the “lending marketplace.” They certainly are NOT getting a loan with a “true lender” (look it up) and there is no loan account, nor any risk of loss or any other attributes that one would expect from the counterparty in a loan transaction.

And despite the Good Faith estimate and other disclosure statements that are required by law to be delivered in clear bold English regarding the compensation, commissions, profits or other revenue generated from the supposed “loan” transaction, there is absolutely no disclosure of the fact that but for the issuance and sale of securities at amazing levels of revenues and profits, there would be no loan.

So no homeowner understands that the closing is a ruse. The closing agent is just another layer in the series of curtains that provide cover for plausible deniability. The agent’s job is to secure signatures on documents that will be reported — not used — as the basis for the sale of unregulated securities (that should be regulated as securities).

There is no lender. there is a mortgage broker or just a salesperson. And that salesperson signs an endorsement of the note at or near the time of the “closing.” the agent often receives only a report of distribution of money and instructions to record the documents — but sometimes receives a wire transfer from an unknown source with instructions on how and when to disburse.

So the bottom line is that the consumer gets the money or money is paid on behalf of the consumer and the consumer makes a written promise (the promissory note) to pay back what they received. But they only made that promise because they thought this was a loan transaction and not an essential step in the issuance and sale of securities — and many layers of derivatives based upon the sale of those securities.

The consumer never gets a chance to do what TILA intended — bargain for the best possible deal, which in this case would be a share of the stupendous revenues and profits from the sale of securities equal to, on average, at least 12 times the amount of the money they were receiving. And for Wall Street, that was what the deal was all about. Securities firms are not interested in lending money. They are only interested in selling securities. Any other tale told by Wall Street is pure rubbish.

Theoretically, the time for challenging eh transaction is contemporaneous with the start of it — but no consumer knows anything about their transaction except the misrepresentations and the absence of any disclosure about the true nature of the transaction.

It is only later when someone seeks to enforce their promise to pay, that consumers as homeowners begin to realize that they are dealing with companies that are basically sham conduits and placeholders without any authority to settle but who take “applications” for settlement or modification and falsely report that they went to investors who turned down the request.

If I had to say what I thought were the two biggest errors in American finance it would be this: the advent of “Unaccountable Accounting” (See Abraham  Briloff) with its off-balance sheet fictions, and the ability of security firms to incorporate and even sell their stock in IPOs.

The change in accounting methods began when I was first working on Wall Street, probably contributed to the great “Paper Crash,” and started the institutionalization of fraud. The ability to move transactions off the reporting statements of companies was absurd, but it happened and it is still with us.

The change in the business structure of securities firms (“investment banks”) was at least as profound. Whereas the principals were personally liable for the misdeeds of their eter[rise, that ceased when they successfully lobbied for incorporation.

The risk was shifted to shareholders and none of the personal wealth of the managers and owners could ever be disturbed by giant fines or damage claims. In a word, they went from accountable to unaccountable, just like their financial statements.

But there is a large body of legal decisions that says “not so fast.” if the principals of an illegal enterprise benefit from that enterprise, they must give the money back, pay taxes, and they will be subject to fine or forfeiture in both criminal, civil and individual lawsuits.

Summer’s point is very well taken.

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And Eric Holder when he was leaving office as Attorney general said the same thing. Sue the individuals. One of his many disagreements with Obama was how softly that administration treaded with Wall Street, continuing the stupidity that preceded such behavior during George W and Bill Clinton administrations. Maybe stupid is the wrong word. it was certainly ignorant prodded by either lies or misrepresentations who had drunk too much Kool-Aid.

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NOTE: There is a consitutional argument here that I don’t think can be effectively disabled by the banks. The nonjudical process was made into law becasue of the number of uncontested foreclosures. Forcing a hoemowner to deny allegations in a petition for TRO is a denial of due process precisely because there is nothing to deny. There have been no allegations and therefore no case in controversy. As I have argued since 2006, the process of relaignment of the parties would make the statutory scheme constitutional. But without it, the scheme is unconsitutional as applied.

The proof of this proposition is obvious. Look to any judicial state and compare it with any nonjudical state. Homeowners in judicial states win far more often then homeowners in nonjudicial states. Why is that?

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