Wall Street Transactions with Homeowners Are Not Loans
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I think the biggest problem for people understanding the strategies that I have set forth on this blog is that they don’t understand the underlying principles. It simply is incomprehensible to most people how they could get a “loan” and then not owe it. It is even more incomprehensible that there could be no creditor that could enforce any alleged obligation of the homeowner. After all, the homeowner signed a note which by itself creates an obligation.
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None of this seems to make sense. Yet on an intuitive level, most people understand that they got screwed in what they thought was a lending process.
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The reason for this disconnect between me and most of the rest of the world is that most people have no reason to know what happens in the world of investment banking. As a former investment banker, and as a direct witness to these seminal events that gave rise to the claims of “securitization” I do understand what happened.
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In this article, I will try to explain, from a different perspective, what really happened when most homeowners thought that they were closing a loan transaction. For this to be effective, the reader must be willing to put themselves in the shoes of an investment banker.
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First, you must realize that every investment banker is merely a stockbroker. They do business with investors and other investment bankers. They do not do business with consumers who purchase goods and services or loans. The investment banker is generally not in the business of lending money. The investment banker is in the business of creating capital for new and existing businesses. They make their money by brokering transactions. They make the most money by brokering the sales of new securities including stocks and bonds.
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The compensation received by the investment banker for brokering a transaction varied from as little as 1% or 2% to as much as 20%. The difference is whether they were brokering the sale of existing securities or underwriting new securities. Obviously, they had a very large incentive to broker the sale of new securities for which they would receive 7 to 10 times the compensation of brokering the sale of existing securities.
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But the Holy Grail of investment banking was devising some system in which the investment bank could issue a new security from a fictional entity and receive the entire proceeds of the offering. This is what happened in “residential lending.” And this way, they could receive 100% of the offering instead of a brokerage commission.
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But as you’ll see below, by disconnecting the issuance of securities from the ownership of any perceived obligation from consumers, investment bankers put themselves in a position in which they could issue securities indefinitely without limit and without regard to the amount of the transaction with consumers (homeowners) or investors.
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In short, the goal was to make it appear as though loans have been securitized even know they had not been securitized. In order for any asset to have been securitized it would need to have been sold off in parts to investors. What we see in the residential market is that no such sale ever occurred. Under modern law, a “sale” consists of offer, acceptance, payment, and delivery. So neither the investment bank nor any of the investors to whom they had sold securities, ever received a conveyance of any right, title, or interest to any debt, note, or mortgage from a homeowner.
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At the end of the day, the world was convinced that the homeowner had entered into a loan transaction while the investment banker had assured itself and its investors that it would be free from liability for violation of any lending laws — as a “lender.”
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Neither of them maintained a loan account receivable on their own ledgers even though the capital used to pay homeowners originated from banks who loaned money to investment bankers (based upon sales of “certificates” to investors), which was then used to pay homeowners as little as possible from the pool of capital generated by the loans and certificate sales of “mortgage-backed bonds.”
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From the perspective of the investment banker, payment was made to the homeowner in exchange for participation in creating the illusion of a loan transaction despite the fact that there was no lender and no loan account. This was covered up by having more intermediaries claim rights as servicers and the creation of “payment histories” that implied but never asserted the existence or establishment of a loan account. Of course, they would need to dodge any questions relating to the identification of a creditor. That could be no creditor if there was no loan account. This tactic avoided perjury.
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Of course, this could only be accomplished through deceit. The consumer or homeowner, government regulators, and the world at large, would need to be convinced that the homeowner had entered into a secured loan transaction, even though no such thing had occurred. From the investment bankers’ perspective, they were paying the homeowner as little money as possible in order to create the foundation for their illusion.
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By calling it “securitization of loans” and selling it that way, they were able to create the illusion successfully. They were able to maintain the illusion because only the investment bankers had the information that would show that there was no business entity that maintained a ledger entry showing ownership of any debt, note, or mortgage — against which losses and gains could or would be posted in accordance with generally accepted accounting principles (and law). This is called asymmetry of information and a great deal has been written on these pages and by many other authors.
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Since the homeowner had asked for a loan and had received money, it never occurred to any homeowner that he/she was not being paid for a loan or loan documents, but rather was being paid for a service. In order for the transaction to be perceived as a loan obviously, the homeowner had to become obligated to repay the money that had been paid to the homeowner. While this probably negated the consideration paid for the services rendered by the homeowner, nobody was any the wiser.
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As shown below, the initial sale of the initial certificates was only the beginning of an infinite supply of capital flowing to the investment bank who only had to pay off intermediaries to keep them “in the fold.” By virtue of the repeal of Glass-Steagall in 1998, none of the certificates were regulated as securities; so disclosure was a matter of proving fraud (without any information) in private actions rather than compliance with any statute. Further, the same investment banks were issuing and trading “hedge contracts” based upon the “performance” of the certificates — as reported by the investment bank in its sole discretion.
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It was a closed market, free from any free market forces. The theory under which Alan Greenspan, Fed Chairman, was operating was that free-market forces would make any necessary corrections, This blind assumption prevented any further analysis of the concealed business plan of the investment banks — a mistake that Greenspan later acknowledged.
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There was no free market. Neither homeowners nor investors knew what they were getting themselves into. And based upon the level of litigation that emerged after the crash of 2008, it is safe to say that the investors and homeowners were deprived of any bargaining position (because the main aspects fo their transition were being misrepresented and concealed), Both should have received substantially more compensation and would have bargained for it assuming they were willing to even enter into the transaction — highly doubtful assumption.
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The investment banks also purchased insurance contracts with extremely rare clauses basically awarding themselves payment for nonexistent losses upon their own declaration of an “event” relating to the “performance” of unregulated securities. So between the proceeds from the issuance of certificates and hedge contracts and the proceeds of insurance contracts investment bankers were generally able to generate at least $12 for each $1 that was paid to homeowners and around $8 for each $1 invested by investors in purchasing the certificates.
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So the end result was that the investment banker was able to pay homeowners without any risk of loss on that transaction while at the same time generating capital or revenue far in excess of any payment to the homeowner. Were it not for the need for maintaining the illusion of a loan transaction, the investment banks could’ve easily passed on the opportunity to enforce the “obligation” allegedly due from homeowners. They had already made their money.
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There was no loss to be posted against any account on any ledger of any company if any homeowner decided not to pay the alleged obligation (which was merely the return of the consideration paid for the homeowner’s services). But that did not stop the investment banks from making claims for a bailout and making deals for loss sharing on loans they did not own and never owned. No such losses ever existed.
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Investment bankers first started looking at the consumer lending market back in 1969, when I was literally working on Wall Street. Frankly, there was no bigger market in which they could participate. But there were huge obstacles in doing so. First of all none of them wanted the potential liability for violation of lending laws that had recently been passed on both local and Federal levels (Truth in Lending Act et al.)
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So they needed to avoid classification as a lender. They achieved this goal in 2 ways. First, they did not directly do business of any kind with any consumer or homeowner. They operated strictly through “intermediaries” that were either real or fictional. If the intermediary was real, it was a sham conduit — a company with virtually no balance sheet or income statement that could be collapsed and “disappeared” if the scheme ever collapsed or just hit a bump in the road.
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Either way, the intermediary was not really a party to the transaction with the consumer or homeowner. It did not pay the homeowner nor did it receive payments from the homeowner. It did not own any obligations from the homeowner, according to modern law, because it had never paid value for the obligation.
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Under modern law, the transfer or conveyance of an interest in a mortgage without a contemporaneous transfer of ownership of the underlying obligation is a legal nullity in all states of the union. So transfers from the originator who posed as a virtual creditor do not exist in the eyes of the law — if they are shown to be lacking in consideration paid for the underlying obligation, as per Article 9 §203 Uniform Commercial Code, adopted in all 50 states. The transfers were merely part of the illusion of maintaining the apparent existence of the loan transaction with homeowners.
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And this brings us to the strategies to be employed by homeowners in contesting foreclosures and evictions based on foreclosures. Based upon my participation in review of thousands of cases it is always true that any question regarding the existence and ownership of the alleged obligation is treated evasively because the obligation does not exist and cannot be owned.
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In court, the failure to respond to such questions that are posed in proper form and in a timely manner is the foundation for the victory of the homeowner. Although there is a presumption of ownership derived from claims of delivery and possession of the note, the proponent of that presumption may not avail itself of that presumption if it fails to answer questions relating to rebutting the presumption of existence and ownership of the underlying obligation. Such cases usually (not always) result in either judgment for the homeowner or settlement with the homeowner on very favorable terms.
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The homeowner is not getting away with anything or getting a free house as the investment banks have managed to insert into public discourse. They are receiving just compensation for their participation in this game in which they were drafted without their knowledge or consent. Considering the 1200% gain enjoyed by the investment banks which was enabled by the homeowners’ participation, the 8% payment to the homeowner seems only fair. Further, if somehow the homeowners’ apparent obligation to pay the investment bank survives, it is subject to reformation, accounting, and computation as to the true balance and whether it is secured or not.
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The obligation to repay the consideration paid by the investment bank (through intermediaries) seems to be a negation of the consideration paid. If that is true, then there is neither a loan contract nor a securities contract. There is no contract because in all cases the offer and acceptance were based upon different terms ( and different deliveries) without either consideration or execution of the terns expected by the homeowner under the advertised “loan contract.”
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Payments By Homeowners Do Not Reduce Loan Accounts
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Each time that a homeowner makes a payment, he or she is perpetuating the myth that they are part of an enforceable loan agreement. There is no loan agreement if there was no intention for anyone to be a lender and if no loan account receivable was established on the books of any business. The same result applies when a loan is originated in the traditional way but then acquired by a successor. The funding is the same as what is described above. The loan account receivable in the acquisition scenario is eliminated.
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Once the transaction is entered as a reference data point for securitization it no longer exists in form or substance.
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For the past 20 years, most homeowners have been making payments to companies that said they were “servicers.” Even at the point of a judicial gun (court order) these companies will fail or refuse to disclose what they do with the money after “receipt.” Because of lockbox contracts, these companies rarely have any access to pools of money that were generated through payments from homeowners.
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Like their counterparts in the origination of transactions with homeowners, they are sham conduits. Like the originators, they are built to be thrown under the bus when the scheme implodes. They will not report to you the identity of the party to whom they forward payments that they have received from homeowners because they have not received the payments from homeowners and they don’t know where the money goes.
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As I have described in some detail in other articles on this blog, with the help of some contributors, the actual accounting for payments received from homeowners is performed by third-party vendors, mostly under the control of Black Knight. Through a series of sham conduit transfers, the pool of money ends up in companies controlled by the investment bank. Some of the money is retained domestically while some is recorded as an offshore off-balance-sheet transaction.
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In order to maintain an active market in which new certificates can be sold to investors, discretionary payments are made to investors who purchase the certificates. The money comes from two main sources.
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One source is payments made by homeowners and the other source is payments made by the investment bank regardless of whether or not they receive payments from the homeowners. The latter payments are referred to as “servicer advances.” Those payments come from a reserve pool established at the time of sale of the certificates to the investors, consisting of their own money, plus contributions from the investment bank funded by the sales of new certificates. They are not servicer advances. They are neither in advance nor did they come from a servicer.
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Since there is no loan account receivable owned by anyone, payments received from homeowners are not posted to such an account nor to the benefit of any owner of such an account (or the underlying obligation). Instead, accounting for such payments are either reported as “return of capital” or “trading profits.” In fact, such payments are neither return of capital nor trading profit. Since the investment bank has already zeroed out any potential loan account receivable, the only correct treatment of the payment for accounting purposes would be “revenue.” This includes the indirect receipt of proceeds from the forced sale of property in alleged “foreclosures.”
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By retaining total control over the accounting treatment for receipt of money from investors and homeowners, the investment bank retains total control over how much taxable income it reports. At present, most of the money that was received by the investment bank as part of this revenue scheme is still sitting offshore in various accounts and controlled companies. It is repatriated as needed for the purpose of reporting revenue and net income for investment banks whose stock is traded on the open market. By some fairly reliable estimates, the amount of money held by investment banks offshore is at least $3 trillion. In my opinion, the amount is much larger than that.
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As a baseline for corroboration of some of the estimates and projections contained in this article and many others, we should consider the difference between the current amount of all the fiat money in the world and the number and dollar amount of cash-equivalents in the shadow banking market. In 1983, the number and dollar amount of such cash equivalents was zero. Today it is $1.4 quadrillion — around 15-20 times the amount of currency.
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Success in Litigation Depends Upon Litigation Skills: FOCUS
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I have either been lead counsel or legal consultant in thousands of successful cases defending Foreclosure. Thousands of others have been reported to me where they used my strategies to litigate. Many of them resulted in a judgment for the homeowner, but the majority were settled under the seal of confidentiality.
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Thousands more have reported failure. In reviewing those cases it was clear that they were either litigated pro se or by attorneys who were not skilled in trial practice and who had no idea of the principles contained in this article and my many other articles on this blog. I would describe the reason for these failures as “too little too late.” In some ways, the courts are designed more to be final than to be fair. There are specific ways that information becomes evidence. Most people in litigation do not understand the ways that information becomes evidence and therefore fail to object to the foundation, best evidence, hearsay etc.
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Even the people that submit wee phrased and timely discovery demands fail, more often than not, to move for an order to compel when the opposition fails or refuses to answer the simple questions bout the establishment, existence, and ownership of the underlying alleged obligation, debt, note or mortgage. Or they failed to ask for a hearing on the motion to compel, in which case the discovery is waived. Complaining about the failure to answer discovery during the trial when there was no effort to enforce discovery is both useless and an undermining of the credibility of the defense.
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Since I have been litigating cases for around 45 years, I don’t expect younger attorneys to be as well-versed and intuitive in a courtroom as I have been. It’s also true that many lawyers, both older and younger than me, have greater skills than I have. But it is a rare layperson that can win one of these cases without specific training knowledge and experience in motion practice and trial law.
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In the final analysis, if the truth was fully revealed, each foreclosure involves a foreclosure lawyer who does not have any idea whose interest he/she is representing. They may know that they are being paid from an account titled in the name of the self-proclaimed servicer. And because of that, they will often make the mistake of saying that they represent the servicer. They are pretty careful about not specifically saying that the named plaintiff in a judicial foreclosure or the named beneficiary in a nonjudicial foreclosure is their client. That is because they have no retainer agreement or even a relationship with the named plaintiff or the named beneficiary. Such lawyers have generally never spoken with anyone employed by the named plaintiff or the named beneficiary.
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When such lawyers and self-proclaimed servicers go to court-ordered mediation, neither one has the authority to do anything except show up. Proving that the lawyer does not actually represent the named trustee of the fictitious trust can be very challenging. But there are two possible strategies that definitely work.
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The first is to do your legal research and find the cases in which investors have sued the named trustee of the alleged REMIC trust for failure to take action that would’ve protected the interest of the investors.
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The outcome of all such cases is a finding by the court that the trustee does not represent the investors, the investors are not beneficiaries of the “Trust,” and that the trustee has no authority, right, title, or interest over any transaction with homeowners. Since the named trustee has no powers of a trustee to administer the affairs of any active trust with assets or a business operating, it is by definition not a trustee. For purposes of the foreclosure, it cannot be a named party either much less the client of the attorney, behind whom the securitization players are hiding because of a judicial doctrine called “judicial immunity.”
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The second thing you can do is to ask, probably during mediation at the start, whether the lawyer who shows up is representing for example “U.S. Bank.” Or you might ask whether US Bank is the client of the lawyer. The answer might surprise you. In some cases, the lawyer insisted that they represented “Ocwen” or some other self-proclaimed servicer.
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Keep in mind that when you go to mediation, frequently happens that it is attended by a “coverage lawyer” who might not even be employed by the Foreclosure bill. Such a lawyer clearly knows nothing about the parties or the case and will be confused even by the most basic questions. If they fail to affirm that they represent the named trustee of the named fictitious trust, that is the time to stop the proceeding and file a motion for contempt for failure to appear (i.e., failure of the named plaintiff or beneficiary to appear since no employee or authorized representative appeared.)
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And the third thing that I have done with some success is to make an offer. You will find in most cases that they are unwilling and unable to accept or reject the offer. A substantial offer will put them in a very bad position. Remember you are dealing with a lawyer and a representative from the alleged servicer who actually don’t know what’s going on. Everyone is on a “need to know” footing.
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So if you make an offer that the lawyer thinks could possibly be reasonable and might be acceptable to an actual lender who was holding the loan account receivable, the lawyer might be stuck between a rock and a hard place. Rejection of an offer that the client might want to accept without notifying the client is contrary to bar rules.
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But both the lawyer and the representative of the alleged servicer know that they have no authority. So they will often ask for a continuance or adjournment of the mediation. At that point, the homeowner is well within their rights to file a motion for contempt. In most cases, the court order for mediation requires that both parties attend with full authority to settle the case. In plain language, there is no reason for the adjournment. But they need it because they know they have no authority contrary to the order mandating mediation. Many judges have partially caught on to this problem and instruct the foreclosure mill lawyer to make sure he doesn’t need to “make a call.”
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Every good trial lawyer knows that they must have a story to tell or else, even if the client is completely right, they are likely to lose. You must focus on the main issues.
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The main issue in foreclosure is the establishment, existence, and ownership of the alleged underlying obligation. All of that is going to be presumed unless you demonstrate to the court that you are seeking to rebut those presumptions. There can be no default and hence no remedy is there is either no obligation or no ownership of the obligation by the complaining party.
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Discovery demands should be drafted with an eye towards what will be a motion to compel and proposed order on the motion to compel. They should also be drafted with an eye toward filing a motion in limine. Having failed and refused to answer basic questions about the establishment, existence, and ownership of the alleged underlying obligation, the motion in limine would ask the court to limit the ability of the foreclosure mill to put on any evidence that the obligation exists or is owned by the named Plaintiff or beneficiary. They can’t have it both ways.
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Failure to follow up is the same thing as waiving your defenses or defense narrative.
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So that concludes my current attempt to explain how to win Foreclosure cases for the homeowner. I hope it helps.
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Neil F Garfield, MBA, JD, 73, 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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FORECLOSURE DEFENSE IS NOT SIMPLE. THERE IS NO GUARANTEE OF A FAVORABLE RESULT. THE FORECLOSURE MILLS WILL DO EVERYTHING POSSIBLE TO WEAR YOU DOWN AND UNDERMINE YOUR CONFIDENCE. ALL EVIDENCE SHOWS THAT NO MEANINGFUL SETTLEMENT OCCURS UNTIL THE 11TH HOUR OF LITIGATION.
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But challenging the “servicers” and other claimants before they seek enforcement can delay action by them for as much as 12 years or more.
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Yes you DO need a lawyer.
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If you wish to retain me as a legal consultant please write to me at neilfgarfield@hotmail.com.
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Please visit www.lendinglies.com for more information.
Filed under: CORRUPTION, discovery, Discovery -Subpoena, evidence, foreclosure mill, investment banking, Investor, legal standing, MBS TRUSTEE, MODIFICATION, Motions, originator, Presumptions, prima facie case, securities fraud, standing, TILA, TRIAL OBJECTIONS | Tagged: fake securitization, REMIC TRUST, securitization, US BANK | 5 Comments »