For some unknown tech reason the Tom Ice article from the Florida Bar Journal will not post. See end of article for quotes from article.

This article explains why the banks are unlocking a door they really don’t want to see opened when lawyers argue that the homeowner has received some value by not paying rent or mortgage payments. 

If you calculate everything that the homeowner and the banks should have received out of what was in reality a securities deal in which the homeowner was an investor, the cost-benefit analysis runs strongly in favor of the homeowner being owed money from the banks and not the other way around. 


As Tom Ice, Florida Bar Journal December, 2012,  has expressed his opinion that the courts are getting it backwards, I say the same. The failure to disclose essential facts about a transaction is not a foundation for excluding that which has not been disclosed and which was required to be disclosed by statutory law, common law, and common sense.

I think that homeowners have a right to receive disgorgement of all monies they have ever paid to anyone in connection with the satisfaction of a loan account receivable that does not exist — unless the deal is reformed to include disclosure and to impose or impute compensation to the homeowner for accepting a nontraditional financial arrangement that does not comply with existing law — but one in which they (homeowners) agree or covenant not to take advantage of the legal violations. 


I also think that homeowners could petition the court for reformation and damages relating to the amount of compensation they should have received as an incentive to become an investor in the security scheme, and for (1) their continuing cooperation and (2) pretending that the transaction had been a loan, without which no securities could have been issued or sold. If the statute of limitations has run on such claims then it could be framed as recoupment in affirmative defenses which are not subject to the statute of limitations. 


Around 15 years ago I filed just such a claim in federal court and Maricopa county Arizona on behalf of a family member. The banks went nuts. Confidentially I received information about memoranda in which they had decided that I was entirely correct but they were instructed to oppose it with all strategy, tactics, and means possible.


They filed a motion to dismiss and I had a AAA quality attorney who had previously worked in a white glove law firm. She was amazing. It was clear that opposing counsel could not produce any credible argument against the claim. It was equally clear that the judge understood that. And unfortunately, it was also clear that the judge didn’t like that. There was no ruling for 14 months. The order simply said that the motion to dismiss was granted, without any opinion or any recitation of fact or law. There were insufficient resources to take this up on appeal since it was extremely likely it would only be decided at the highest levels.


The argument that homeowners are getting some sort of value by virtue of not having to pay anything towards a mortgage or rent must fail in the light of their offsetting entitlement to reasonable compensation for becoming participants and investors in a new business deal— i.e., for there to be mutual or reciprocal consideration and a meeting of the minds.


Let me give you an example: in the Smith case in Florida which has already been won once, I’m told that it is highly probable that the original securitization scheme exists only as a legacy name at the present time. It is highly probable that the transaction has been subject to several securitization schemes each producing revenue equivalent to around 12 to 15 times the original transaction. I have not told the client this, but my source is very knowledgeable and has been entirely trustworthy and credible. If true, this would mean that the $200,000 loan produced at least $7.2 million in revenue or as much as $9 million in revenue.


On Wall Street, the typical finder’s fee is based on a commonly used formula 5-4-3-2-1. 5% of the first million, 4% of the second, 3% of the third, 2% of the 4th, and 1% of everything over that. So as a finder, homeowner Smith would have been entitled to receive payment in cash upfront of at least $50k+$40k+$30K+$20k+$10k = $150,000. Since he did not receive that, he would be entitled to interest at some statutory rate which I will arbitrarily set at 6%. From 2006 to 2021 is 15 years. 6% of $150k is $9k. So accumulated interest would be 15 x $9k = $135k. So at this point, the liability for a finder in the Smith deal would be at least $285,000 on the $200k “loan.”


But Homeowner Smith was not just a finder. He was a participant without whom the deal could never have been done by anyone. He was also an investor. Scenarios differ on Wall Street but such persons, adequately represented, typically get a range of 5% – 25% which would be at least $350,000 plus interest to $450,000 plus interest up to a high of $1.75 million to $2.25 million, plus interest. Since the investment is literally at the ground floor with the most risk the actual figure would tend to be higher rather than lower. The status of the homeowner as an investor, if the homeowner had proper information and representation, would be ignored on Wall Street.


And just to be fair there is a plausible argument for limiting the finder’s fee to the first round of sale of securities. But that argument doesn’t hold any water for a participant and ground floor investor.


So if the rental value of the home was $1500 per month, that would be $18,000 per year. Over 15 years that would $270,000 plus declining interest. Given that analysis, how could anyone say that Smith got anything but the opportunity to mitigate much higher damages for the 13 years he has been litigating and why would anyone exclude the cost of that litigation? THAT is how investment bankers think and work. Show this email to anyone who actually knows what is going on in the CDO factories and they will confirm every word of this.

Quotes from Tom Ice Article in 2012 Florida Bar Journal:

Despite the shift toward article 9 as the real world mechanism for transferring loans, article 3 negotiability has become the dominant legal theory argued by plaintiffs in support of their standing to bring for closure actions. In the quart room, article 3 serves as the basis for arguing and evidentiary shortcut which not only discards ownership of the loan as an element of proof, but which circumvents basic foundational evidence for the authenticity of the note itself, claiming that promissory notes are “self authenticating” under the UCC, standing is now routinely, albeit incorrectly, established on a single unsworn representation by plaintiffs counsel that the document presented is the original note. [Editor’s Note: Attempts at correcting this defect have been unsuccessful thus far]

The key to this evidentiary shortcut, this in difference to who actually owns the loan, is the idea that, under article 3, mere possession, even wrongful possession, of a bearer instrument confers an unassailable right of enforcement. This argument holds that the court need not inquire into the true ownership of the note because, even if the banks possession is shown to be illegitimate, the matter does not concern the borrower (or of the Court), but rather concerns only the true owner. [Editor’s Note: Keep in mind that that all existing law requries that the debt be purchased by anyone who wants to enforce it through foreclosure]

UCC §3-501(b)(2) provides that, upon demand for payment, the borrower may ask that the person seeking payment give “reasonable identification” and if the demand is made on behalf of someone else, “reasonable evidence of authority to do so.” [Editor’s Note: This is the basic missing element to all claims for administration, colelction and alleged enforcemnt of alleged obligations. The entire focus is on assuming things about the obligor without any inquiry as to whether an obligee even exists.]

EDITOR NOTES: in all civil actions in any court, it is a constitutional basic requirement that the claimant or plaintiff who is bringing the claim or lawsuit for any breach of any statutory, common law or contractual duty, must have suffered some sort of legally recognizable injury that arises from a breach by the party against whom they have filed the claim. That is simply logically and legally impossible if the claimant has not purchased the underlying obligation in a foreclosure. 

Ice’s point is that Article 3 does in fact, traverse or avoid that requirement in favor of transferability of instruments — but my position is that such a waiver of constitutional requirements may in and of itself be unconstitutional. But it is a long-standing practice redating the constitution, so there is little doubt that such practices and laws will remain unchanged as to at least pleading enforcement of the note. But as Ice points out, that only entitles the successful pleader to a monetary judgment — not the forced sale of the homestead. 

In any event, it is the exception and not the rule for pleading and litigating civil actions. And the banks themselves made transfers and enforcement of security instruments like mortgages and deeds of trust strictly subject to the requirements of Article 9 which by its title alone signifies that it is intended to regulate all such transactions and actions. 

The idea that someone could force the sale of homestead property without owning the underlying obligation simply because of the public policy in favor of transferability of promissory notes is absurd. And it is not simply absurd. It is illegal by all standards under current statutes, rules, and regulations as well as common law precedent. There is nothing in the law (or common sense) to support what is currently going on in the courts and for that matter, the last 20 years. 

The issue that was missed by Mr. Ice and which is missed and ignored by almost everyone else, is whether there was ever a loan, and even if there was, is there currently an enforceable transaction that could be reasonably defined as a loan?

The answer to that question does not come from legal research. It comes from a knowledge of investment banking in addition to custom and practice in the lending marketplace. No transaction qualifies for definition as a loan if it is lacking a loan account receivable, a lender, a creditor, or any other parties who might suffer a financial loss as a result of some breach by the party who executed a promissory note.

The fact that Wall Street has been successful at obscuring the transaction from any meaningful scrutiny by government or lawyers is not a good reason to call it anything, much less a loan. 

No party qualifies under the definition of a debt collector in the absence of those elements that define a “loan.” Any party who seeks collection against the maker of the note in that scenario is engaged in an illegal scheme. They are not debt collectors because there is no debt.

I fully realize that the national narrative that has been developed by Wall Street — in carefully orchestrated releases and lobbying — stands for the proposition that the transaction with homeowners is and always will be a loan.

And being a lawyer for nearly 45 years, I understand full well why Wall Street would not take the obvious legal steps that could support or at least tend to support their legal thesis — reformation of the transaction to create a contract in which a virtual creditor with a virtual debt is created, admitted, acknowledged and accepted by the homeowner who is now falsely labeled as a borrower.

That contract would contain the covenant that the homeowner would agree not to raise such defenses and specifically and expressly, for convenience of the parties, to be labeled as a borrower while the transaction is labeled (for convenience) as a loan that can be enforced — without which the entire securitization infrastructure would fail. 

Despite the availability — I would argue necessity — of bringing an action in reformation Wall Street doesn’t want to do that because it would require Wall Street to acknowledge that the homeowner is the party who launches the sale of securities and who is actually paying for that launch without any current consideration for having done so. That in turn would require payment to the homeowner as stated above in this article. That payment would not cause any loss to anyone but it would reduce the profitability of the current securitization superstructures. 

It would also reveal the need to enforce consumer protections and rights by government agencies who would step in and take another look at those “certificates” that appear to be unregulated securities. 

But most of all it would reveal the basic fallacy behind the “free house” mythology and free use of the property for which the homeowner “has not paid.” The homeowner DID pay for the property out of the incentive paid, thus far, for starting the securities scheme.

The homeowner DID pay for an investment in that scheme without ever meaning to do so. Homeowners are most probably due more than what they received at closing and probably a lot more. This is not a question of how much the homeowner owes but rather how much the homeowner is still due — from the investment banks who were never disclosed as part of the transaction that produced out-sized revenue. 

Blaming homeowners for the financial crisis brought on by the improper and illegal use of securitization strategies on Wall Street is like blaming OxyContin addicts for using the drugs as prescribed and dying.

There are three elements to the scam that created this crisis:

  1. The development of a national narrative that was carefully promoted over years to everyone who would be part of the scheme. 
  2. The improper and illegal use of labeling sanctioned by the government. 
  3. Addiction to the money generated to all the players — which includes the courts who in many cases were actually paid by the banks to use rocket dockets to grease the skids for an illegal scheme.

2 Responses

  1. StillFighting – I too agree with a lot of this. But, homeowner as an investor? Don’t think so. Participant in scheme? Yes – unknowingly. Can try to fight this in court – get a good judge – and may very well be successful. Getting a good judge – not so easy. The government knows that these loans were in violation of consumer protection laws (however weak they are). Nothing funded – no mortgage – even though homeowners paid for a mortgage. No mortgage – no note. They were told “transaction” paid off prior loan BY THEM. NOT!!! Never happened. All you got is non-friendly debt collector – transferred over and over and again. You need something to shock the courts. Unknowing participant in a scheme already bailed out by government? Not enough. Need to show – never got a mortgage that paid off prior “Loan” by the borrower with real funding by any entity to the borrower to pay off prior loan. Did not happen. Records will show this – need a judge to allow the records in. And, frankly, I think claimed “trustee” is claimed master servicer for default securities administrator – before there was any default. “Claimed” not valid. That is violation of TILA – and no SOL for fraud. Need proof that BORROWER got actual funding that paid off prior loan – by THEM – via the transaction that borrower thought they got. Nope. Did not happen. There is NO proof of that because it did not occur. This is the landmine. Securities were fake, but, more importantly – the “mortgage” was fake. That is the homeowner/consumer issue. It is not a “value” issue — it is a “CONTRACT” issue. You lie – you should pay the price. And they lied. Unfortunately, government was too concerned with bail-out – which ignored the true victims. This is a consumer protection issue. And, no one here to help. Neil can make you successful in court — but for the majority of people — the government has failed.

  2. Neil and Community,

    I agree with all of this…
    Do you think there will soon be lawyers who will take on the cases outside of foreclosure defense, and pursue recovery of lost revenue on a contingency fee basis?
    Who cares what the percentage is… 40/60 or 50/50 or something else. It would make it worth the attorney’s time to chase it.
    Your thoughts?

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