Ohio Sets Back Steamrolling: First Things First

Mellon Bank v Shaffer Ohio Appeals Ct Says You can’t Fix Jurisdiction

In a decision that is interesting from many points of view an Ohio appellate court ruled that you can’t fix jurisdiction by assigning the loan and recording the documents after the foreclosure suit is filed. This could have substantial effects on non-judicial states as well. If at the time of the notice of sale the foreclosing party did not possess ownership of the loan the notice should be declared void and anything that happened after that point would be reversed. In this case the foreclosure judgment was reversed and so was the sale.

I find it interesting from other points of view as well. If you look at the style of the case you will see a sneaky attempt to correct fatal defects in the alleged securitization of the loan. As I have seen in numerous other cases especially those involving US Bank there is no actual trust mentioned as the plaintiff. In effect, nobody is suing. There are a lot of  places where the word “trust” is mentioned but there is nothing that actually says that interest exists or that a trust has been named as the plaintiff.

In previous articles I have outlined why I think that the investors are actually in a common-law general partnership and not as beneficiaries in the trust. In cases like this the first reason is that the trust doesn’t exist at all under the laws of any state. The second reason is that they are using the self-serving designation of “trustee” for a pile of certificates. In most cases the certificates do not exist on paper and therefore there is no pile. But even if there was a pile of certificates they would only be evidence of the issuance of a mortgage bond by an entity that doesn’t actually exist (the trust) or could only exist by operation of common law as a general partnership.  In effect each investor seems to own either an indivisible share or a divisible share of a cluster of loans —  but only if their money was used to purchase those loans or was used to pay for the origination of those loans. I have no doubt that the investor money was used for the origination of the loans.

The problem for the banks is that  the note and mortgage do not mention or name the individual investors or the investors as a group even though the money trail leads directly from the investors down to the closing agent, who will undoubtedly claim that they did not realize that the money was not coming from the party claiming to be the originator (the pretender lender) which is why the closing agent prepared a note and mortgage naming a party who was not the source of funds (and therefore not the lender) and who had no contractual relationship with the source of funds. In fact it is fair to assume that the closing agent had no idea of the identity or existence of the investors individually or as a group either as a general partnership or a trust.

This is the reason why I have expressed the opinion that the mortgage never became a perfected lien against the property even though it was recorded. It is either fraudulent or a wild deed.  whether the investors can claim the benefits of a contract signed by the borrower without assuming the liability for disclosures required under the truth in lending act is a question that has yet to be decided. But part of it has been decided. In Missouri and other states it is established law that there is no such thing as an equitable lien. It either exists because it conforms to state law or it does not exist.

Another thing about this decision which comes from the style of the case is that the plaintiff is supposedly the successor in interest to J.P. Morgan Chase Bank. This is where discovery and subpoenas aimed at the money trail will prove that no such transaction ever existed. As Judge Shack in New York has pointed out several times there is no reasonable business basis for the purchase of a loan that is already in default and where the collateral is either worthless or substantially below the amount due. While it is true that generally speaking the law does not look to the adequacy of consideration, is also true that where the consideration is wildly out of reason, that something other than the loan itself was conveyed, to wit: either the mortgage servicing rights or the right to receive income as “trustee”.

In the  last point I will make is simply that all of the entities mentioned in this specific case were heavily involved in the securitization scam. First they sold the mortgage bonds under false pretenses and then claimed ownership of the bonds and the underlying mortgages; second they received third-party mitigation payments under circumstances where there was an express waiver of subrogation or contribution from the borrower. Those payments were not sale of the bonds or the loans.

Thus the bond receivable account should have been correspondingly reduced by the amount of money received by the banks on behalf of the investors. This obviously would reduce the account receivable that was due to each investor.

If the account receivable was properly adjusted for payments received from third parties the amount due from anyone (including the borrower) would be correspondingly reduced.

Thus even if the securitization scheme was executed properly, most of the loans to borrowers should have reflected a decrease in the principal amount due because the creditors’ account receivable had been reduced by payment. This is why I say to follow the money trail before you follow the paper trail. The paper trail only talks about transactions. The money trail reveals the actual transactions against which you can compare the paper trail proffered by the banks in illegal and wrongful foreclosures.

More Investors Are Suing Chase: Cheer them on!

Submitted by Beth Findsen, Esq. in Scottsdale, Az


One of the many things I find interesting in this lawsuit is that FINALLY the pretender lenders are at least being referred to as originators and not banks, lenders or any of the other things that had most people believing.

Here too investors sue the rating agencies, Moody’s, S&P, Fitch paving the way for borrowers to make virtually the same allegations against the appraisers and the pretender lender who hired the appraiser.

The only thing left for the investors is to realize that the only way they are actually going to mitigate losses is by creating an entity that negotiates modifications directly with borrowers. Otherwise these intermediaries in the securitization chain are going to continue cleaning their clocks.

Here are some morsels you too might find interesting

7. The true facts that were misstated in or omitted from the Offering Documents
(1) The Originators systematically disregarded their stated underwriting
standards when issuing loans to borrowers;
(2) The underlying mortgages were based on appraisals that overstated the
value of the underlying properties and understated the loan-to-value ratios
of the Mortgage Loans;
(3) The Certificates’ credit enhancement features were insufficient to protect
Certificate holders from losses because the underwriting deficiencies
rendered the Mortgage Loans far less valuable than disclosed and the
credit enhancement features were primarily the product of the Rating
Agencies’ outdated models. As such, the level of credit enhancement
necessary for the Certificates’ risk to correspond to the pre-determined
credit ratings was far less than necessary; and
(4) The Rating Agencies employed outdated assumptions, relaxed ratings
criteria, and relied on inaccurate loan information when rating the
Certificates. S&P’s models had not been materially updated since 1999
and Moody’s models had not been materially updated since 2002. These
outdated models failed to account for the drastic changes in the type of
loans backing the Certificates and the Originators’ systemic disregard for their underwriting standards. Furthermore, the Rating Agencies had conflicts of interest when rating the Certificates.
8. As a result, Lead Plaintiff and the Class purchased Certificates that were backed by collateral (i.e., the Mortgage Loans) that was much less valuable and which posed greater risk of default than represented, were not of the “best quality” and were not equivalent to other investments with the same credit ratings. Contrary to representations in the Offering Documents, the Certificates exposed purchasers to increased risk with respect to delinquencies, foreclosures and other forms of default on the Mortgage Loans.

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