Livinglies's Weblog

SECURITIZATION CHANGED THE BARGAIN.

ONLY THE FINANCE SIDE GOT WHAT THEY WANTED.

People often criticize the points I make an appearance, articles, and pleadings because they think I am raising technical objections that won’t change anything. “You got the loan, didn’t you?” Actually no — virtually none of the transactions with homeowners resulted in anything resembling a loan agreement arising from a legally recognized loan transaction. But all of the participants from the world of finance used paperwork that was designed for loan transactions.

The balance of the bargain shifted completely with the advent of securitization.

In law school, we learn in the first few days of the first semester of the first class on contract law, each party to a contract must receive the benefit of the bargain. The essence of every loan agreement, and every contract in general, is that both sides have a reciprocal stake in the outcome of the performance of the agreement. Every contract requires a meeting of the minds, which means that both parties are in agreement as to the subject matter of the contract.

The fundamental shift that occurred when investment banks entered the lending marketplace under false pretenses was that securities brokerage firms were entering that marketplace without any risk of loss and with every intent of making immediate “trading” profits that in many cases exceeded any amount paid to or on behalf of any homeowner.

This complete absence of risk is what accounts for the inflated appraisals and underwriting of transactions based upon the ability to sell securities instead of the ability to profit from the interest on loaning money.

This changed the transaction without any notice or even any access to information for the average person. The average person was lured by deceit and misinformation into an application for a loan; and when the money appeared, they assumed they received a loan. Therefore, in good faith, they executed a promissory note for the return of the money, and a mortgage or deed of trust to secure the promise to return the money.

But what did they owe the thinly capitalized company or a name that allowed its name to be used as the “lender” and a transaction over which it had absolutely no control and in which it handled no money? Why did they owe money to anyone if the prime movers were participating without any risk of loss on the promise to pay elicited from the homeowner?

Who had a risk of loss?

Any investigation or research into securitization as it is currently practiced invariably and universally comes to the same conclusions every time. The only parties at risk are the homeowners and investors who loaned money to the investment banks under the false pretense of the sale of unregulated securities. Everyone else in the middle got paid in full. Most of the people and especially the investment banks got paid money that in some cases was hundreds of times the amount that they had previously been paid for introducing, brokering and underwriting transactions between the only two parties that had any financial stake.

None of the intermediaries had any risk of loss despite the use of more paperwork that pretended to create liability for bad underwriting or buybacks. All of the payment from homeowners has gone to those intermediaries. That includes the proceeds from foreclosed homes. And those intermediaries are under no obligation to use those proceeds to make payments to the investors who loaned money to the investment banks.

But the paperwork used to cover up this game create the illusion of just such an obligation, despite the vigorous defense of the intermediaries when sued by the investors. So far, the intermediary investment banks and related companies have won every case. In fact, the investors had not received a mortgage back security or anything resembling that type of instrument. They had received a discretionary, unsecured IOU that did not even qualify to be called a note much less a negotiable instrument.

What was the subject matter of the loan agreement?

The goal of the homeowner is simple: get a loan of money from a responsible lender that was based on a fair appraisal, on economically viable terms.

• A responsible lender would have an equal stake in making certain that the appraisal was reliable and would have long-term staying power because they are relying on the ability to sell the collateral in the event the homeowner stops paying.
• A responsible lender would have an equal stake in making certain that the terms of the payment schedule were economically viable because they are relying on the probability that the homeowner will continue paying the scheduled payments in order to make a profit.
• In fact, a responsible lender is legally responsible to make a fair assessment of the appraisal as presented and in making a fair and honest independent judgment on the viability of the loan — for purposes of the alleged loan contract. That is expressly and explicitly set forth in the Federal Truth in lending Act and in many state statutes that are equal or greater than the duties and responsibilities of a lender in a loan transaction.
• Instead, the abundantly obvious goal was to “underwrite loans” for the sole purpose of “selling” certificates (IOUs) to investors under false pretenses about the promises being definite, about the promises being backed by collateral and the promise that the subject matter of THAT contract (with investors) was to allow the investors to enter the consumer lending market with virtually no risk, insured certificates.
• With that purpose in mind, as also became obvious in 2008, any hiccup in the continued sale of new certificates interfered with the plan and the ability (i.e., willingness) of the investment banks to make the payments that were promised to investors.

BASIC CONTRACT ELEMENTS WERE ABSENT

AND REMAIN BOTH ABSENT AND EXPLOITED

Pursuant to common law and statutory law in virtually all countries for more than 4 centuries, possibly back to the year 1215 (Magna Carta) all contacts require the following basic elements to be enforceable:

• Meeting of the minds as to the subject matter
• Reciprocal value paid by each in money or action
• No violation of any other laws prohibiting either the contract or the promises
• Execution of the contract by words and behavior.
• Incorporation of restrictions. duties and obligations contained in other statutes or authority.
• If in writing, a  memorialization of all of the above.

Those elements, each of them, have not been present in any transaction with any homeowner or consumer since the late 1990s. It isn’t a loan just because someone labels it as a loan. It must be a loan and there must be both a borrower AND a lender.

 

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