Enforcement of Note vs. Enforcement of Mortgage

Watch out for the discrepancy between enforcement of a note and enforcement of an encumbrance. Enforcement of the note requires proof that the claimant is the owner of the debt, or has been authorized by the owner of the debt to enforce the note. Enforcement of the mortgage requires that the claimant be the owner of the debt. 

Judgment on the note can be rendered based upon legal presumptions arising from the UCC as adopted by state law as it applies to negotiable instruments. Mortgages (deeds of trust) are not negotiable instruments. The courts err when they apply Article 3 presumptions to the enforcement of a mortgage.

And take note that not all promissory notes are necessarily negotiable instruments and that therefore they too are not entitled to the benefit of legal presumptions under Article 3.

Always remember that legal presumptions are not intended to created findings of act that are contrary to reality. Quite the contrary, they are intended only as a convenience by which the court, in the absence of any meaningful objection, can presume such facts as part of its conclusion; no presumption should be employed if the evidence is tinged with a self serving nature and produced by the named claimant, and all such presumptions are rebuttable by exposing the reality. 

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 Possession of the original note usually results in a presumption that the possessor is a holder, and being holder usually results in the presumption that the holder is authorized to enforce as an agent of the owner of the debt.

Those are the rules for negotiable paper (notes). It is easier to state a case for enforcement of the note than enforcement of a mortgage or deed of trust. The intent in the law is to make it easy for notes to flow through the marketplace as cash equivalents. 

It is entirely possible for the same party to be awarded judgment on a note and denied judgment for enforcement of a mortgage or deed of trust, which are not negotiable instruments. An assignment of mortgage without a transfer of the debt is a nullity. But when the note is transferred, that is generally treated as though title to the debt has been transferred. That is an error in most cases involving claims of “securitization.” The reason it is an error is that the transferor of the note did not own the debt.

Both the endorsement of the note and the assignment of the mortgage can be attacked on the basis that authorization from the owner of the debt has not been shown. But the burden is on the claimed debtor (You) to rebut the assumptions and presumptions.

The only way to do that appears to be through discovery in which you request the owner of the debt to be identified. This is tricky and the other side knows it. They will reply that a designated party has some sort of authority to claim ownership without actually saying that they are the owner. So if you merely ask for the owner of the debt to be identified you probably won’t get very far.

You need to probe deeper than that. Go to an accountant and find out what the attributes are under GAAP and the FASB of an owner of the debt. The answer will be that the owner will have entries in its own books and records of an asset consisting of the claimed debt. Those entries must include an entry on the asset side of the amount of the supposed debt. Usually on the liability side there is a reserve for bad debt or default.

Any accountant will tell you that if the loan is not carried as  an asset on the books and records of the named claimant, they are not the owner of the debt.

This dichotomy is revealed easily in Article 3 UCC as adopted by state statute, which applies to notes and Article 9 UCC as adopted by state statute which applies to mortgages.

The legislative intent is that nobody should be allowed to enforce a mortgage without actually owning the debt. This is backed up by your jurisdictional argument, to wit: the party named as claiming the right to foreclose is not the party who will receive the benefits of that remedy because they have no financial injury in the first place. 

It’s one thing to get a money judgment against someone. But the legislature of every state has already decided that is quite another thing to take the homestead away from a homeowner. The big safeguard is the requirement that the claimant in foreclosure actually has ownership of the debt and therefore would be injured financially if the encumbrance were not enforced. 

Beware of the new lending bubble

What is clear to me is that nothing has changed except the government complicity in predatory lending practices is increasing despite the passage of Dodd Frank. A fact that keeps getting buried here is that Federal Law (Truth in Lending Act) puts the burden of determining affordability of an alleged loan product on the lender, not the borrower. That is the whole point of the Act — to avoid mistakes that borrowers might make with sales pitches that will result in financial ruin for borrowers and extreme wealth for underwriters on Wall Street.

When you see “CashCall” offering loans to people who have a FICO score of 585, we all should ask “how can they make money on alleged loans that are going to fail.” Legally the question becomes one that scares the hell out of the banks: having given a loan to someone who needed their help in making the down payment and who have a bad credit history, is the defense to the foreclosure action properly stated if “assumption of risk” or some other related defense is asserted?

The additional question is who is putting up the money for national advertisements on TV, radio and written media to get as many people as possible to take a loan they cannot pay. This is especially true when an alleged adjustable rate mortgage is involved with negative amortization and a teaser payment.

If the burden of affordability is on the lender and not the borrower and the loan resets to a payment higher than the entire household income the outcome is guaranteed to produce a “loss” that will be covered by multiple levels of derivative and hedge products that will turn the loss into a windfall for the intermediaries.

The effect of the foreclosure is that it rubber stamps plainly illegal behavior. The good faith estimate is completely  fictitious. The term of the loan is not 30 years; it is 3 years or whenever the loan resets. That means whatever fees are amortized over the life of the loan should be amortized over 3 years, not 30. So the cost of credit is falsely stated.

And of course the primary directive of TILA that the lender be disclosed is being completely overlooked. CashCall is not lending the money in the sense that they have no risk of loss. The value of the loan to CashCall must be in the fees it receives for acting as a sham conduit.

I also doubt if the promissory notes executed by borrowers in such a situation are negotiable instruments, especially when you consider the possibility of TILA rescission, which is a condition not stated on the face of the note.Shows how securitization worked. Partially correct. BEST IN CLASS

I give the following video a 90%+ rating. It doesn’t cover the sham conduit originator but otherwise it appears totally correct.

Shows how securitization worked. Partially correct. BEST IN CLASS

Check this out:

No Savings? No Problem. These Companies Are Helping Home Buyers With Down Payments
The Wall Street Journal

Lenders are coming up with novel ways for buyers to cobble together down payments. Read the full story

Is a Neg-AM Note a Negotiable Instrument?

The UCC is not ambivalent about protecting both the maker of a negotiable instrument and the party seeking to enforce it. The maker does not assume the risk of double liability except for instances where the note is purchased for value in good faith and without knowledge of the borrower’s defenses. In all other circumstances the object is to prevent the maker from being exposed to double liability.

The fact that a note is not a negotiable instrument does not mean that it cannot be enforced, or that it is void or whatever else people are saying on the internet. If the note does not meet the definition of a negotiable instrument then it is simply not entitled to the legal presumptions that are given to a negotiable instrument to ease its trading and enforcement. Any other approach would be equivalent to propelling parties who seek to enforce a note being vaulted into the elevated class of holder in due course.

In other words, if the note is not a negotiable instrument then enforcement can only be achieved by pleading and proving the facts needed to enforce without the benefit of legal presumptions that each State adopted as a a statute when the Uniform Commercial Code was made law.

In cases where a negative amortization is involved, the courts have blurred the issues. Such a loan has many extrinsic factors that should disqualify the note from being treated as a negotiable instrument.

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We must always remember that the purpose of the UCC is not to provide a vehicle for tricking anyone. The purpose is to allow for free flow of commerce and enabling the passing of paper instruments is essential to that function. Like many statutes creating legal presumptions, perhaps all of them, the point is simply to take what is almost always true in fact and simply create a legal presumption that the matter asserted is in fact true, until proven otherwise. Lest the use of such presumptions tip the due process scales, the definitions and rules regarding the use of legal presumptions must be strictly construed.

The issue of negative amortization is highly relevant on many levels including the one frequently mentioned — negotiability. The courts are probably confusing the ability to negotiate an instrument with BEING a negotiable instrument. The words of art are important. A marketable instrument is not the same as a negotiable one. The fact that someone is willing to buy a note does not make the note negotiable. A note featuring negative amortization should not be considered a negotiable instrument even though it might be marketable.

One of the problems with consumer loans is that they are subject to TILA Rescission. That means that they are potentially enforceable if no notice of rescission has been mailed. Certainty is gone from that scenario. You cannot determine whether the note is an asset or a liability. It is practically the opposite of a negotiable instrument since it might well be worthless, and the even the purchaser of the note might suffer a total loss unless the purchaser had paid value for the debt in a transaction in which the seller owned the debt.

Most Neg-AM loans allow the borrower (or can’t stop the borrower) from switching from one payment plan to another, e.g. paying full amortization none of which changes are reflected on the face of the note. This creates relevant events that occur off the face of the note, making the actual amount of principal due (and interest on the changing principal) at any time subject to calculation, not just from the face of the note but from the face of extrinsic or parole records.

An interesting characteristic of most Neg-AM notes is that they contain provisions that require conversion or reset when the accrued interest is added to principal in such amount as to require the reset — i.e., usually at 115% of the original loan amount. But none of these features necessarily extrinsically change the terms on the face of the note. Modifications do that, but not Neg-AM loans. It is in the calculation of the principal and interest thereon that one must go to “business records.”

If Neg-AM notes can be negotiable instruments then buyers of the notes are expected to rely upon the legal presumptions that the note is what it appears to be. Such buyers, much like the borrowers, are in for a surprise when the loan resets, based upon an extrinsic calculation of when 115% of principal has been exceeded, and if exceeded, by how much. Certainty is gone. If certainty is gone then facts are necessary. No legal presumptions should apply.

There are very simple elements required in order to gain the legal presumptions that would apply to a negotiable instrument.

The main one is that the instrument must be payable in an amount that can be computed based upon the information on the face of the note. On the face of a Neg-AM note, there are terms and conditions that can easily be used to compute the total indebtedness, assuming that extrinsic factors have not come into play. All notes change every day in terms of the amount of interest due and, in the case of Neg-AM notes, the amount of principal, which goes up automatically by underpayment of interest.

It is generally agreed that a note on which there is a known or declared default is NOT a negotiable instrument for purposes of Article 3. You can’t know with certainty the amount due because you don’t know when the borrower defaulted. A DOT or Mortgage is not a negotiable instrument, and to enforce a DOT/Mortgage you must have paid value for the mortgage (Article 9), regardless of whether the note that is secured is a negotiable instrument or not. These are protections to be sure, but they are also insurance that the legal presumptions lead correctly to the truth of the matter.

A second element is that the payment must be due as of a date certain. A mortgage/DOT can’t be a negotiable instrument and cannot invoke the presumptions that a “holder” of a note can invoke, based upon possession and endorsement.

With Neg-AM notes the problem comes into high relief — when the “lender” knows that the reset will be in excess of the entire household income thus creating a virtual guarantee that the alleged loan contract will terminate in 3 years rather than 30 years. Hence the supposed indorsee of such a note is buying into a foreclosure situation, if he/she/it has done due diligence. If not, then here is a second situation where the note might be worthless and the buyer loses, unless the buyer bought the debt from a seller who owned the debt.

A third element is that the original note must either be made out to bearer or to a defined party. But it is possible for a note made payable to a non-lender or a fictitious party might be construed as bearer paper — if there was an actual transaction in which someone gave the borrower money, even if the identity of the funding source was concealed. The obviously violations of disclosure requirements are separate matters.

In all the elements the point is that in order for an instrument to be called “Negotiable” under Article 3 you must not need to inquire into parol or extrinsic evidence. All presumptions arise when the note is facially valid and there are no circumstances that the indorsee knows about that would undermine enforcement. With a DOT/mortgage, by definition on the face of the instrument, you must go to extrinsic evidence as to the presumed default on another instrument (the note) and you can only enforce upon proof of value paid for the mortgage/DOT.

A note might be facially valid and enforceable, which means that a party who pleads and proves they are entitled to enforce is entitled to a money judgment but not foreclosure unless they plead and prove they are a holder in due course, which by definition means that value was paid and hence the mortgage or DOT is also enforceable by them.

Other than an HDC, all the other categories of potential enforcement by a party should enable them only to enforce the note. Of course if the owner of the debt shows up, there would be no problems with enforcement of either the note or the mortgage because the owner of the debt is entitled to enforce the obligation to pay the debt.

Under securitization schemes in practice it is possible to own the mortgage but not be able to enforce it without having paid value. Courts that decide cases based upon the “mortgage follows the note” are missing the point of LAW that resides in their State’s adoption of the UCC, to wit: under no circumstances may a party force the sale of homestead property without being the owner of the debt. That is not a proposal. It is the law in all 50 states.

While the encumbrance may not be enforced, this does not invalidate the mortgage or deed of trust. When it comes time to sell or refi the property you will learn that you still must deal with the holder of the mortgage. An action in equity might be decided in your favor or you might have to pay a sum of money to the owner of the mortgage encumbrance even though they paid nothing for it.

People forget that there are three items here, not two. In addition to the note and mortgage, which serve only as evidence as the debt, there is the actual debt. Back before claims of securitization, all three were used interchangeably. Now it is different. If the funding source is not the payee on the note, then the doctrine of merger does not apply, to wit: the note becomes separate from the debt that arises to the person or party who advanced the money. If the Payee is in privity with the funding source then merger does apply. But most Payees were not in privity with the source of funds. The banks boast of how they created remote vehicles and relationships.

The very fact that there are terms allowing the payment to be less than PI for the month suggests that the borrower might very well have made some payments more than the minimum due. In other words, inquiry must be made to determine the debt balance with certainty. There is certainly an argument here that reference is to the payment history rather than just the note. If that is true then the face of the note is inadequate to determine the “certain sum” currently due. This can become an issue in any installment note.

A finding that all these questions are irrelevant would have dire consequences in the marketplace where certain types of predefined paper can be received in the free flow of commerce without uncertainty as to whether the paper can be enforced. This is a two edged sword. Opening the door beyond the strict definitions of the UCC is opening the door for more mischief involving fabrication of documents, forgery and robosigning.

The UCC is not ambivalent about protecting both the maker of a negotiable instrument and the party seeking to enforce it. The maker does not assume the risk of double liability except for instances where the note is purchased for value in good faith and without knowledge of the borrower’s defenses. And the purchaser should not bear the risk of a total loss immediately upon paying for the note — unless the purchaser knew there were problems and was willing to take his chances.

The final point I would make is that the question should be asked: Given the fact that so-called REMIC Trusts are supposedly buying the loan pools aggregated by the likes of Countrywide and its progeny, why do lawyers firmly announce that their clients are “holders” and not “holders in due course”.

The latter designation (HDC) would allow the possessor of the note to enforce both note and mortgage despite lending violations when the alleged loan was “originated.” Being an HDC might also avoid defenses that current abound — that there are breaks in the chain of title. If the would-be enforcers simply included the allegation (and proof) that they were the owners of the debt or a holder in due course it would be game over for borrowers. That they don’t assert that position is a tacit admission that the reason why they don’t is that they can’t.

Thus we continue to be mired in litigation with phantoms, ghosts,  smoke and mirrors.

Fla 2d DCA: HELOC Instrument Not Self-Authenticating Article 3 Note

Just because an instrument is not self-authenticating doesn’t mean it can’t be authenticated. Here the Plaintiff could not authenticate the note without the legal presumption of self-authentication and all the legal presumptions that follow.  And that is the point here. They came to court without evidence and in this case the court turned them away.

Florida courts, along with courts around the country, are gradually inching their way to the application of existing law, thus eroding the dominant premise that if the Plaintiff is a bank, they should win, regardless of law.


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see HELOC Not Negotiable Instrument and Therefore Not Self Authenticating

This decision is neither novel nor complicated. A note can be admitted into evidence as self-authenticating without extrinsic evidence (parol evidence) IF it is a negotiable instrument under the State adoption of the UCC as State Law.

The inquiry as to whether a promissory note is a negotiable instrument is simple:

  • Does the body of the note claim to memorialize an unconditional promise
  • to pay a fixed amount
  • (editor’s addition) to an identified Payee? [This part is assumed since the status of the “lender” depends upon how and why it came into possession of the note.]

A note memorializing a line of credit is. by definition, not a fixed amount. Case closed, the “lender” lost and it was affirmed in this decision. There was no other choice.

The only reason why this became an issue was because counsel for the homeowner timely raised a clearly worded objection to the note as not being a negotiable instrument and therefore not being self-authenticating. And without the note, the mortgage, which is not a negotiable instrument, is meaningless anyway.

This left the foreclosing party with the requirement that they prove their case with real evidence and not be allowed to avoid that burden of proof using legal presumptions arising from the facial validity of  a negotiable instrument.

The typical response from the foreclosing party essentially boils down to this: “Come on Judge we all know the note was signed, we all know the payments stopped, we all know that the loan is in default. Why should we clog up the court system using legal technicalities.”

What is important about this case is the court’s position on that “argument” (to ignore the law and just get on with it). “This distinction is not esoteric legalese. Florida law is clear that a “negotiable instrument” is “an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order.”§ 673.1041(1), Fla. Stat. (2012) (emphasis added).”

So THAT means that if the trial court is acting properly it will apply the laws of the state and THAT requires the court to rule based upon the UCC and cases involving
negotiable instruments.

But none of that invalidated the note or mortgage, nor should it. THAT is where it gets interesting. By denying the note as a self authenticating instrument the court was merely requiring the foreclosing party to proffer actual evidence regarding the terms of the note, including the manner in which it was acquired and how the foreclosing party is an injured party — a presumption that is no longer present when the note is denied admission into evidence as a self authenticating negotiable instrument.

The foreclosing party was unable to produce any testimony or exhibits demonstrating the prima facie case. Why? Because they are not and never were a creditor nor are they agent or representative of the actual party to whom the subject underlying DEBT was owed.


Florida law requires the authentication of a document prior to its admission into evidence. See § 90.901, Fla. Stat. (2012) (“Authentication or identification of evidence is required as a condition precedent to its admissibility.”); Mills v. Baker, 664 So. 2d 1054, 1057 (Fla. 2d DCA 1995); see, e.g., DiSalvo v. SunTrust Mortg., Inc., 115 So. 3d 438, 439-40 (Fla. 2d DCA 2013) (holding that unauthenticated default letters from lender could not be considered in mortgage foreclosure summary judgment). Proffered evidence is authenticated when its proponent introduces sufficient evidence “to support a finding that the matter in question is what its proponent claims.” § 90.901; Coday v. State, 946 So. 2d 988, 1000 (Fla. 2006) (“While section 90.901 requires the authentication or identification of a document prior to its admission into evidence, the requirements of this section are satisfied by evidence sufficient to support a finding that the document in question is what its proponent claims.”).

There are a number of recognized exceptions to the authentication requirement. One, as relevant here, relates to commercial paper under the Uniform Commercial Code, codified in chapters 678 to 680 of the Florida Statutes. “Commercial papers and signatures thereon and documents relating to them [are self-authenticating], to the extent provided in the Uniform Commercial Code.” § 90.902(8); see, e.g., U.S. Bank Nat’l Ass’n for BAFC 2007-4 v. Roseman, 214 So. 3d 728, 733 (Fla 4th DCA 2017) (reversing the trial court’s denial of the admission of the original note in part because the note was self-authenticating); Hidden Ridge Condo. Homeowners Ass’n v. Onewest Bank, N.A., 183 So. 3d 1266, 1269 n.3 (Fla. 5th DCA 2016) (stating that because the endorsed note was self-authenticating as a commercial paper, extrinsic evidence of authenticity was not required as a condition precedent…

We cannot bicker with the proposition that “for over a century . . . the Florida Supreme Court has held [promissory notes secured by a mortgage] are negotiable instruments. And every District Court of Appeal in Florida has affirmed this principle.” HSBC Bank USA, Nat’l Ass’n v. Buset, 43 Fla. L. Weekly D305, 306 (Fla. 3d DCA Feb. 7, 2018) (citation omitted). That is as far as we can travel with Third Federal.

The HELOC note is not a self-authenticating negotiable instrument. By its own terms, the note established a “credit limit” of up to $40,000 from which the Koulouvarises could “request an advance . . . at any time.” Further, the note provided that “[a]ll advances and other obligations . . . will reduce your available credit.” The HELOC note was not an unconditional promise to pay a fixed amount of money. Rather, it established “[t]he maximum amount of borrowing power extended to a borrower by a given lender, to be drawn upon by the borrower as needed.” See Line of Credit, Black’s Law Dictionary, 949 (8th ed. 1999).

This distinction is not esoteric legalese. Florida law is clear that a “negotiable instrument” is “an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order.”§ 673.1041(1), Fla. Stat. (2012) (emphasis added).

Investigator Bill Paatalo: Why Are The Oregon Courts Ignoring Its Own Rules Regarding The “Surrender And ‘Tender’ Of ‘Original’ Negotiable Instruments?”

This is the Oregon Uniform Trial Court Rule regarding the surrender of negotiable instruments before the entry of a judgment. Oregon is typically a non-judicial foreclosure state. However, the bank servicers have been increasingly choosing to go the judicial route. My sources are telling me that the clerks in the Oregon courts who have been asked about this rule have either said, “we aren’t doing that,” or they provide an expression like that of a “deer in the headlights.” Apparently, the Oregon Court Rules don’t apply to the banks if deemed inconvenient.
(1) In all cases when a judgment is to be based on a negotiable instrument, as defined in ORS 73.0104, the party obtaining judgment must tender the original instrument to the court before the entry of judgment, unless the court has found that such party is entitled to enforce the instrument under ORS 73.0309, and the court must enter a notation of the judgment on the face of the instrument.
(2) The trial court administrator shall return the original instrument only after filing a certified copy of the instrument.
Bill Paatalo
Private Investigator – OR PSID 49411

Educating the Judge

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I recently had the occasion to assist as consultant on a case in a non judicial state. The Judge was clearly struggling with giving the homeowner due process but still not able to connect the dots. So I proposed that a preliminary statement be submitted in answer to the demurrer that was filed.

Plaintiff concedes the obvious — that when money was received by him or on behalf of him, a liability arose (the debt). But as stated in Yvanova, that debt arose by operation of law from the receipt of funds from a particular identified source. And the debt is not owed to the world at large but only to the party who advanced the funds.

The debt exists without anything in writing. In fact, there was nothing in writing creating a loan contract between the funding source and the Plaintiff, as alleged in the complaint. Further there is a complete absence of any allegation or evidence, despite years of requesting same in formal requests and informal requests, in which any of the parties in the chain ever paid one cent for the origination or acquisition of the alleged loan that they alleged was sold successively.

Ordinarily the debt would merge into a promissory note in which Plaintiff was the maker and the payee was the aforesaid funding source. But the funding source was never mentioned in the note or mortgage, which now contains the signature of Plaintiff obtained by fraud in the execution, to wit: Plaintiff signed said documents based upon the representation that the payee on the note (and the beneficiary under the deed of trust) was the funding source.

The debt owed to the funding source was thus not merged into the note because the funding source and the payee on the note were two completely separate and distinct entities. Hence the transfer of the note was the transfer of paper that was worthless and which ceased status of negotiable instrument when the Defendants asserted a default in performance under the note that had been fraudulently obtained. Hence no entity can assert the status of “holder” or “holder in due course” inasmuch as such terms arise solely from the state adoption of statutes from the Uniform Commercial Code, Article 3, governing negotiable instruments.

JPMC was the underwriter, Master servicer and agent for trusts that appear to be legally nonexistent and in any event completely controlled by JPMC Nonetheless control over all the events related to the debt, note and mortgage lies in the hands of JPMC.

JPMC is referred to as lender in Plaintiff’s complaint, although the funding actually came from institutional investors and passed through JPMC as an intermediary conduit. JPMC initiated the transfer of funds from accounts in which commingled funds from institutional investors from multiple trusts had been deposited.

The assumption that any Trust or other special purpose vehicle ever funded the origination of a loan, or even purchased it for value is a fiction. The only valid purchase would have been from those institutional investors. There being no such purchase asserted nor in existence, the paper instruments upon which the Defendants rely are merely obfuscations of the truth. And the reason they seek foreclosure is that the forced sale of the property would be the first legally valid document in their entire chain.

If securitization actually occurred, then one of two things would have occurred:
  1. The Trust or other special purpose vehicle would have funded the origination, thus eliminating the need for endorsements and assignments. [The Trust would have been the payee on the note and the mortgagee on the mortgage]. OR
  2. A bona fide lender would have received actual money for the sale of the debt, note and mortgage. Both the lender or the purchaser would have a record of the payment.
The reason I say that securitization is virtually nonexistent and the reason why Adam Levitin calls it “Securitization fail” is that neither of those things happened in the vast majority of so-called loans. I even object to the using the word “loan” because I find it misleading. A scheme that relies on stolen money and fraudulent documentation should not be given the title “lending.” This takes nothing away from the fact that the debt exists. But in nearly all cases, the debt is unliquidated and unsecured.

Weidner: Notes Are Not Negotiable Instruments

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Editor’s Notes:  

Matt Weidner appears to have mastered the truth about securitization and how to apply it in foreclosure defense cases. The article below is really for lawyers, paralegals and very sophisticated pro se litigants. His point about being careful about how you present this is very well taken. This is for lawyers to do and lawyers should read this and get with the program. Securitization turned about to be virtually all SHAM transactions with the real financial transaction hidden away from the view of the borrower, the courts and even securitization analysts. The operative rule here is that the existence of a financial transaction does not mean that strangers to that transactions can claim any rights. 

These loans were nearly always funded by other parties who had made promises to investors whose money was used to fund the mortgages. The very existence of co-obligors and payments by them defeats the arguments of the banks and servicers. I’d like to see ONE investor come into court and say that yes, they would ratify the inclusion of a defaulted loan into their pool years after the cutoff date which negates their tax benefits. There is o reasonable basis for an investor to do or say that. That leaves the loan undocumented, unsecured and subject to offset for predatory and wrongful lending practices.

The wrong way of approaching this is any way in which you are going into court to disclaim the obligation when everyone knows you received the money or the benefit of the money. The obligation exists. And the only way to discharge that debt is through payment, waiver (or bankruptcy) or forgiveness. Anything that smells like “I don’t owe this money anymore” is going to be rejected in most cases. But an attack on the lien and the reality of the true creditor is a different story. That needs to be presented as simply as possible and I think I good way to start is to deny the loan, obligation, note, mortgage etc on the basis of an absence of any financial transaction between the borrower and the party named on the documents upon which the foreclosers rely. Any discovery at all will reveal that the money never came from the payee on the note or mortgagee or beneficiary on the mortgage or deed of trust. 

by Matt Weidner:

Let’s start with real basic stuff here.  Sometimes law is complex, nuanced,difficult.  Other times it’s black and white…you just read the words, look at the facts and the answer is unavoidable.  Such is the case with the simmering dispute over the fact that the notes that are part of nearly every residential foreclosure case are not negotiable instruments.  Oh sure, too many courts won’t take the time to consider the argument and…just yesterday I heard an appellate court argument where the judges just kept repeating the mantra, “this is a negotiable instrument” without ever doing any analysis at all and without any finding of that “fact” from the trial court.  The attorney needed to stop the appellate judge right there and say, “No Your Honor, it’s Not A Negotiable Instrument”.

Just last week, in a trial court, here’s exactly the way it went down.  Now, keep in mind, this argument in court was supplemented by a long and detailed memo similar to the one attached here.  The best part it was in front of one of Florida’s most respected and brilliant judges.  He’s been on the bench longer than I’ve been alive, he knows more law in the tip of his finger than most lawyers get in their whole bodies in an entire lifetime, he’s presided over tens of thousands of foreclosure cases. It was a beautiful thing to see an argument before a dedicated jurist whose seen and heard it all before that really made him sit up, dig in to those decades of judicial wisdom and then do the heavy lifting. That’s one of the beautiful things about this job….despite decades of work and hundreds of years of law, out of nowhere something new and exciting can still get the intellect and wisdom fired up and shooting like a cannon. Here’s how it goes down:

Your honor, I’ve highlighted and present for you the statutory definition of a “negotiable instrument”.  Because it’s a statutory definition, it’s black and white. We cannot alter or weave or color it with shades of gray….here’s what it is:

673.1041 Negotiable instrument.—
(1) Except as provided in subsections (3), (4), and (11), the term “negotiable instrument” means
an unconditional promise or order to pay a fixed amount of money, with or without interest or other
charges described in the promise or order, if it:
(a) Is payable to bearer or to order at the time it is issued or first comes into possession of a
(b) Is payable on demand or at a definite time; and
(c) Does not state any other undertaking or instruction by the person promising or ordering
payment to do any act in addition to the payment of money.

FL Article 3

Now, we’re all stuck with exactly that definition. Before we examine the note in this case, let’s first think about what a negotiable instrument is….a check made payable to a person for $100. An IOU for $100.  Bills of lading with a total included.  It’s all real simple.

So now that we’re fixed about what a negotiable instrument is, let’s examine what it ain’t.  What ain’t a negotiable instrument, as defined by Florida law is the standard Fannie/Freddie Promissory note and the following paragraphs are the primary reasons why.  Read each one carefully and ask, “Are these sentences conditions or undertakings other than the promise to repay money?” (Of course they are)


I have the right to make payments of Principal at any time before they are due.  A payment of Principal only is known as a “Prepayment.”  When I make a Prepayment, I will tell the Note Holder in writing that I am doing so.  I may not designate a payment as a Prepayment if I have not made all the monthly payments due under the Note.

I may make a full Prepayment or partial Prepayments without paying a Prepayment charge.  The Note Holder will use my Prepayments to reduce the amount of Principal that I owe under this Note.  However, the Note Holder may apply my Prepayment to the accrued and unpaid interest on the Prepayment amount, before applying my Prepayment to reduce the Principal amount of the Note.  If I make a partial Prepayment, there will be no changes in the due date or in the amount of my monthly payment unless the Note Holder agrees in writing to those changes.

5.         LOAN CHARGES

If a law, which applies to this loan and which sets maximum loan charges, is finally interpreted so that the interest or other loan charges collected or to be collected in connection with this loan exceed the permitted limits, then:  (a) any such loan charge shall be reduced by the amount necessary to reduce the charge to the permitted limit; and (b) any sums already collected from me which exceeded permitted limits will be refunded to me.  The Note Holder may choose to make this refund by reducing the Principal I owe under this Note or by making a direct payment to me.  If a refund reduces Principal, the reduction will be treated as a partial Prepayment.


This Note is a uniform instrument with limited variations in some jurisdictions.  In addition to the protections given to the Note Holder under this Note, a Mortgage, Deed of Trust, or Security Deed (the “Security Instrument”), dated the same date as this Note, protects the Note Holder from possible losses which might result if I do not keep the promises which I make in this Note.  That Security Instrument describes how and under what conditions I may be required to make immediate payment in full of all amounts I owe under this Note.  Some of those conditions are described as follows:

If all or any part of the Property or any Interest in the Property is sold or transferred (or if Borrower is not a natural person and a beneficial interest in Borrower is sold or transferred) without Lender’s prior written consent, Lender may require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender if such exercise is prohibited by Applicable Law.

If Lender exercises this option, Lender shall give Borrower notice of acceleration.  The notice shall provide a period of not less than 30 days from the date the notice is given in accordance with Section 15 within which Borrower must pay all sums secured by this Security Instrument.  If Borrower fails to pay these sums prior to the expiration of this period, Lender may invoke any remedies permitted by this Security Instrument without further notice or demand on Borrower.


So, the deal is, if we were sitting in a law school classroom, there’s not a chance in the world but that every student in the room and the professor would agree and understand that the document being examined side by side is not covered by the definition provided.  The problem is we get into courtrooms and we get infected by considerations that are beyond and above the operative law.  Judgment gets clouded by preconceived notions and prejudices against our neighbors and favoritism for the criminal banking institutions that caused all this mess. Even to this day, years into this, years into all the fraud and the lies and the deceit, it’s like we’re still hypnotized by the banks and their black magic and voodoo.

Now, if you really want to take it a step deeper, Margery Golant makes a very credible argument that in doing this analysis we cannot just look at the note alone, but that we must also examine the mortgage that follows with it.  They truly are two integrated documents and you can see from her highlights that so many of the provisions in the mortgage have nothing to do with security and everything to do with conditions on the payment of money….these provisions are just jammed into the mortgage and kept out of the note to try and prop up this artifice of negotiability.  Read her highlights with this analysis in mind:

Fannie Florida Mortgage with Golant Highlights

Further supported by this case Sims v New Falls

Now, understand the industry never intended these notes and mortgages to transfer via endorsement.  The industry set this whole system up so that the notes and mortgage would transfer via Article 9 of the UCC.  It’s just so plain and simple.  They never set it up or intended that million dollar notes and mortgages would transfer via forged endorsements, undated squiggles and rubber stamps or floating allonges.  Of course not…that’s just crazy.  The entire system was created such that notes and mortgages and all the servicing agreements and rights and liabilities would transfer via far more formalized Assignments, with names and dates and notary stamps and witnesses.  The Article 9 transfer regime had nothing to do with protecting consumers, but everything to do with protecting the players in the industry from the scams, the lies, the cons that they all like to play on one another. (Hello, LIBOR anyone?)

But when the shifty con artists that set this whole securitization card game up, they were so focused on how much money they were making, they never considered what would happen when the whole house of cards blew down.  When it blew down, they threw their Article 9 intentions out the window and adopted the whole Article 3 negotiable instrument delusion.  Isn’t it an absurd argument when they cannot answer the question, “if assignments don’t matter, why do you still bother to do them?”  It’s because they do matter….assignments were and remain the foundation of their transfers.  The problem is Assignments, what with their pesky dates and legible names and notaries and all reveal the lies and the fraud and the con that developed once the system came crashing down and they all started stealing from one another. (With the explicit approval of our state and federal government to do so….too big to jail you know.)

Anywhoo, there’s still some faint glimmer of hope as long as we still have good judges out there that are willing to think these things through and do the heavy lifting, we might be able to rescue our nation’s judicial system and in fact our nation as a whole from this deep, dark black pit that we’ve all descended down.

I urge everyone to be very careful with these arguments.  I’m a very big supporter of pro se people and consumers being integrated into their courtrooms and being fully engaged in the public spaces they own. I’ve also seen some very good pro se people go into courtrooms and do some very beautiful things.  In some ways it’s like a “From the mouths of babes” experience.  Language and arguments stripped away from all their lawyerly pretense can have a magic effect on a judge’s ear and thoughtfully and well-prepared arguments are often received with great enthusiasm from our circuit courts….particularly those judges that recognize the roots of our civilian circuit justice system.  The danger is that ill-prepared and poorly presented arguments will taint the ears and poison the minds of judges that might otherwise accept with an open mind…..keep that in mind.  Max Gardner is the Obi One Kenobe of all this and there’s just something about the way he lays it out so clear and clean and simple that has it all make sense.  I really encourage everyone to get all his material and invest in the week long bootcamp before you go trying any of this out…..MAX GARDNER BOOTCAMP

And now my briefs:








By Collete McDonald

Editor’s Note: Ms. McDonald hits the nail on the head with this article. You should incorporate it word for word in any relevant memoranda. Why is this important?

Because most of the “notes” (assuming they were the real notes and were timely indorsed and not back-dated) are presented as having been indorsed “without recourse.” Your opposition is counting on the fact that you don’t know the UCC, and you don’t know anything about indorsements.

This is another case where the instrument could appear valid on its face but for the fact that it is a fake. In this case the words “without recourse” on a note (executed as evidence of an obligation on a home loan) is contradicted by the very instrument that authorizes the indorsement — the PSA (Pooling and Servicing Agreement). The PSA ALWAYS provides for conditions, terms and provisions that are exactly the opposite of “without recourse.” These conditions have a negative effect on the negotiability of the instrument. So not only do we have a case where the “assignment” or indorsement” was merely an offer that was never accepted (and could not be accepted as per the terms of the PSA) but you also have an instrument that could not be negotiated under the terms expressed on it.

WHAT ARE THE CONDITIONS EFFECTING THE INDORSEMENT “WITHOUT RECOURSE?”: Well the main one is that the pooling and servicing agreement states that if the loan becomes non-performing, the assignor must replace it with either cash or another performing loan. Nothing could be more clear that the indorsement was WITH RECOURSE.

The bottom Line: Most if not all “assignments” or “indorsements” are without effect, which means that the party having legal title to the instrument is the party named on it. And THAT means that each time the opposition attempts to establish authority under the chain of securitization, they are actually making the case that they have no such authority. You can’t come to court and say I am the Trustee for asset backed Pool XYZ which has ownership of this loan” and then turnaround and say you also have authority (legal authority supporting the power of sale in non-judicial states and the standing to foreclose in judicial states) to represent the “lender.” Not if the “lender” is named on the note as payee and on the mortgage or deed of trust as the lender.

If they want to establish some equitable right to enforce the note, they MUST file a judicial action.


A phrase used by an endorser (a signer other than the original maker) of a negotiable instrument (for example, a check or promissory note) to mean that if payment of the instrument is refused, the endorser will not be responsible.

An individual who endorses a check or promissory note using the phrase without recourse specifically declines to accept any responsibility for payment. By using this phrase, the endorser does not assume any responsibility by virtue of the endorsement alone and, in effect, becomes merely the assignor of the title to the paper.

A without recourse endorsement is governed by the laws of commercial paper, which have been codified in Article 3 of the Uniform Commercial Code (UCC). The UCC has been adopted wholly or in part by every state, establishing uniform rights of endorsers under UCC § 3-414(1).

A without recourse endorsement is a qualified endorsement and will be honored by the courts if certain requirements are met. Any words other than “without recourse” should clearly be of similar meaning. Because the payee’s name is on the back of the note, he is presumed to be an unqualified endorser unless there are words that express a different intention. The denial of recourse against a prior endorser must be found in express words. An implied qualification, based on the circumstances surrounding the endorsement to a third party, will not be recognized by the courts. An assignment of a note is generally regarded as constituting an endorsement, and the mere fact that an instrument is assigned by express statement on the back does not make the signer a qualified endorser.

The qualification without recourse, or its equivalent, is limited to the immediate endorsement to which it applies. It may precede or follow the name of the endorser, but its proximity to the name should be such as to give a subsequent purchaser reasonable notice of the endorsement to which it applies.

A person might agree to accept a check without recourse if the person believes she could collect the money in question. Often the purchaser of such a note will acquire it at a substantial discount from the face value of the note, in recognition that the purchaser can only seek to collect the money from the original maker of note.

An example of a without recourse note is a personal check written by A, the maker, to B, the payee. B, in turn pays off a debt to C by endorsing the check and adding the without recourse phrase. If A’s bank refuses to pay C the check amount because A has insufficient funds in his checking account, C cannot demand payment from B. C will have to attempt to collect the money from A.

Bankruptcy Judge Invalidates Securitization Payment Structure

Editor’s Note: 180787_86_opinion Lehman My reading of this report is that the underlying principle of the ADDITION of conditions and co-obligors changed the homeowner’s note from being negotiable to non-negotiable. This decision doesn’t say that but the underlying reasoning leads me to believe that we are on the precipice of a paradigm shift in the way that derivatives are perceived in court and the marketplace. It appears a large number of other writers agree.

The relevance is that if the derivatives are construed as part of a single transaction in which the homeowner loan was funded, and that there are conditions under which the derivative operates that add or change the original contract as set forth in the note, then the original note was REPLACED with a new deal that did not include the homeowner.

This means the original obligation was replaced with a new obligation in which parties inserted themselves into that contract without disclosure to either the investor who funded the transaction or the homeowner who secured the transaction with the home. In my opinion (check with your own lawyer) the legal effect is that the note was a nullity the moment it was signed or assigned. This eviscerated the security rights of the creditor — although the creditor (if he/she/they can be found) might have some right to sue in equity to create a constructive trust over the property — subject to the various defenses and counterclaims available to the homeowner.

This does NOT mean that the obligation ceases to exist. But it DOES mean that the note is no longer the evidence of the obligation. It is for other reasons (third party payment by Federal agencies, insurers, or counter-parties) that the obligation has been reduced or eliminated. And it is for still other reasons that the off-set to the obligation (payment of several layers of undisclosed yield spread premiums among them), that the obligation could be eliminated or reduced.

The reaction from the financial community clearly shows they are concerned about far-reaching implications of this seemingly minor and esoteric decision. They couldn’t be so concerned and inflamed unless they saw the whole securitization scheme unraveling.

Bloomberg Friday, January 29th, 2010, 10:59 am

A federal bankruptcy court judge in New York ruled earlier this week that long-held assumptions about payments owed to a counterparty in securitization deals cannot be enforced under US Bankruptcy Code, in a decision set to upend the securitization market.

The decision was handed down by Judge James Peck, the judge overseeing the Lehman Brothers bankruptcy proceedings, who said that certain contractual provisions in a Lehman collateralized default obligation (CDO) are unenforceable under Chapter 11.

The CDO, called Dante, was also hedged by a credit default swap (CDS) provided by Lehman Brothers Special Financing (LBSF). Lehman Brothers Holding Inc. (LBHI) provided credit support to LBSF before both units filed bankruptcy in fall 2008.

After Lehman went bankrupt, trustees for the bondholders initially laid claim to the Dante obligations. When they did not receive compensation under the agreements of the CDO, they took Lehman to court. Peck dismissed the trustees’ claim under ipso facto clauses, and by doing so, threw off previously accepted principles of securitization.

“From a credit perspective, [the] ruling has important implications because it contravenes what have been longstanding market assumptions as to the enforceability of the documents as agreed to by the parties at the beginning of the transaction, and more specifically, the priority of payment provisions,” according to commentary on the ruling from credit rating agency Moody’s Investors Service.

Structured finance transactions often contain swaps – interest rate swaps, basis swaps, foreign exchange swaps, total return swaps and credit default swaps (CDS). Moody’s said the presence of this derivative contract can sometimes introduce additional risk of counter-party default. At the time of default, a counterparty could fail to meet its obligations to the issuer and/or be owed a swap termination payment if it is “in the money” at the default event.

In the case of Dante, the bankruptcy triggered early redemption of notes and required distribution of collateral proceeds that secured the notes. The United Kingdom law governing the program documentation provides that payments to the swap counter-party precede payment to noteholders. A default by the counterparty due to bankruptcy would require that payments be made to the swap counterparty only after noteholders are paid in full.

Peck decided these subordination provisions constitute “ipso facto” clauses — those that seek to modify the relationship of contracting parties due to bankruptcy filing — that are void under bankruptcy law.

The ruling contradicts previous decisions on the same case within United Kingdom courts. Additionally, Moody’s said the ruling may bear “profound” and far-reaching implications for structured finance transactions.

“[The ruling] challenges long-held assumptions relating to the subordination of swap termination payments to a swap counterparty following a swap counterparty bankruptcy,” Moody’s said in an e-mailed statement, adding that determining the impact on individual securities will require case-specific analysis.

Write to Diana Golobay.

Lawyer’s foreclosure defense of ‘quiet title’ faces tests

“The note is often produced at some point in the litigation, but the real problem is, how did they get it? When did they get it? And did the transfer of ownership comport with federal and Florida law for the transfer of such negotiable instruments?”
In cases that are dismissed based on these arguments, foreclosure defense attorneys said lenders aren’t as eager to re-file the case.

Editor’s Note: If you ignore the hype about history being made, this is an informative article about a trend sweeping the country. Yes it IS that simple.

The best way to smoke out the REAL LENDER is by filing a lawsuit seeking to quiet title. This has already been done successfully in dozens of cases in many states. We are tracking what people are reporting. In almost ALL cases where this was the central focus of the attack against the pretender lender, the homeowner was awarded quiet title by DEFAULT. (The other side never answered).

TRANSLATION: The Court (Judge) entered a Final Judgment declaring that the homeowner owned his/her/their house free and clear of all encumbrances. The claims of the pretender lender were thrown out and the homeowner was left with his house as an asset, not alibaility. The homeowner was no longer subject to foreclosure or ANY claim on the note or mortgage that was signed at “closing.”

Like the NY York decisions recently reported quiet title is another way to invalidate the mortgage and extinguish the note and any right to enforce it.

CAUTION: “PRODUCE THE NOTE: It’s a valid strategy but it offends the sensibilities of many judges. If THAT is the focus of your attack or defense, then you are rolling the dice on ONE thing when there are many arrows in your quiver. Many Judges have held, contrary to the rules of evidence, that merely being unable to produce the original note is NOT a reason to stop the foreclosure. Legally it can be argued this is wrong. I think it is flawed legal reasoning. But the other side is that “just because the “lender” was sloppy in its record keeping does not mean the homeowner should get away scott free. ” Actually, legally, I think it DOES mean that and that Charney is right. But I think you need to couple your argument with why this is a matter of substance and not just procedure or legal sleight of hand.

The reason why many Judges HAVE applied the evidentiary rules regarding production of the note is that there could be someone else holding it with a greater right to enforce it than the pretender lender who is trying to foreclose. And in fact (with the help of a forensic analyst to assist as an expert) the securitization process multiple parties who COULD have the actual original note in their position and/or who COULD be parties with a superior legal right to be paid on the note —because THEY are the ones who actually advanced the money for the loan or they advanced the money to third parties who advanced the money to fund the loan.

Lawyer’s foreclosure defense of ‘quiet title’ faces tests

Jacksonville Business Journal – by Kimberly Morrison

April Charney of Jacksonville Area Legal Aid.

The house at 12920 Mt. Pleasant Road is a modest ranch-style home. The man in it is John McCampbell, a 61-year-old car mechanic who lives with his two children and fiancée.
He took out a $156,000 mortgage from the now-defunct Washington Mutual, which foreclosed on his home in 2004 after he lost his job. But when the lender was unable to produce the deed to prove it had a right to foreclose, McCampbell beat the foreclosure and remains there today.
Now McCampbell and his Fort Caroline home are poised to make history in foreclosure defense with an experimental legal approach that would wipe out his mortgage debt and hand him a clean deed. It’s called a “quiet title,” where the court establishes a party’s title to the property to remove or “quiet” any challenges or claims to it.
It sounds like an impossible endeavour. But April Charney, a Jacksonville Area Legal Aid attorney, has spent the past four years teaching lawyers across the country the legal framework of this foreclosure defense. With an average of 3,000 foreclosures filed every month in Jacksonville alone, there’s no shortage of lawyers tapping her expertise.
“It’s an exceptionally layered, nuanced practice of law, but right now a very productive one,” Charney said recently after her latest sold-out seminar in Jacksonville.
Bankers counter that Charney is taking advantage of a legal technicality.
Anthony DiMarco, executive vice president of governmental affairs for the Florida Bankers Association, said errors on assignments are not tantamount to a person not being responsible for their mortgage.
“When you are doing lots and lots of anything — and there were lots of these loans written — there are human beings involved and there were mistakes along the way just like anything else,” DiMarco said.

‘Show me the note’

Before asking the court to quiet a title, a foreclosure must be dormant for five years. That brings Charney to a critical juncture in many of her early cases where the five years is at or near its expiration. She’ll be seeking multiple quiet titles in 2010, including one for McCampbell, her client.
Charney is a national authority on foreclosure defense, and a driving force behind what is often called the “show me the note” movement making its way through jurisdictions across the country. The strategy is crippling lenders’ ability to foreclose on homes when they are not able to produce the note as evidence of their right to bring a foreclosure.
At the crux of her argument is the very loan itself, securitized loans that became commonplace in the late 1990s, and quickly dominated mortgage lending practice.
Mortgage securitization is the process of bundling home loans into securities and selling them to investors. Mortgage servicers collect monthly payments and distribute them to securities investors.
But Charney said the critical error was that the originating lenders systematically pledged the loans, and didn’t actually transfer them to the trusts that are supposed to hold them and issue the securities. The result is a paper trail that goes nowhere, and a reasonably successful legal strategy.

‘A red herring’

A secondary snag in lenders’ ability to obtain a foreclosure is the physical note, or lack thereof. The Florida Bankers Association testified to the Supreme Court task force on residential mortgage foreclosure that originals were “deliberately eliminated to avoid confusion” when entered into an electronic format. The problem with that is the court requires an original.
Ownership transfers after the foreclosure has been assigned, copies of notes and false signatures have been argued to amount to fraud.
“The ‘produce the note’ argument is really a red herring,” said Chip Parker, a Jacksonville foreclosure defense attorney. “The note is often produced at some point in the litigation, but the real problem is, how did they get it? When did they get it? And did the transfer of ownership comport with federal and Florida law for the transfer of such negotiable instruments?”
In cases that are dismissed based on these arguments, foreclosure defense attorneys said lenders aren’t as eager to re-file the case.

“There is some sloppiness, and what used to be tolerated by the courts is no longer being tolerated because the judges are starting to see the effect of sloppy pleading,” Parker said.

A slippery slope?

Lenders bringing foreclosures and attorneys defending them both claim to be on the side of their communities. Lawyers said the best thing for neighborhood stability and property values is to keep people in their homes. Bankers have a different approach.
“The best thing is to get through the foreclosure as quickly as you can,” DiMarco said. “The faster you can get through a foreclosure process, the faster we can get it sold and in the hands of someone who can get to be a contributing member of the community.”
DiMarco maintained that lenders are doing everything they can to work with homeowners and avoid a money-losing foreclosure, but took notice of a new phenomenon in the housing market — strategic foreclosures on the part of consumers. With courts backed up, mortgages upside down and banks more timid about foreclosing, some consumers who can pay are opting not to.
Lawyers don’t advise those who can afford to make their mortgage payments to stop in hopes they can get a free house out of it, and aren’t convinced that their tactics could provide an incentive for people to intentionally enter foreclosure. They point out that these are long, hard-fought battles that destroy credit.
Lawyers recognize that there must be some end other than a country full of ownerless and free homes. Charney is fiercely advocating a federal intervention, which bankers similarly see as the only reasonable solution.
“I had the vice president of a big mortgage company ask me, ‘What you’re doing here — do you understand what’s going to happen? You’re going to destroy the country. And if you don’t stop, we’re just going to go to Congress and get the laws changed.’ ” said Max Gardner III, a Shelby, N.C.-based bankruptcy attorney who also teaches foreclosure defense. “And my response is, ‘We have some changes we’d like to make, too.’ ”
kmorrison@bizjournals.com | 265-2218

Jose L. Semidey



I needed to know what the following means, from my Trustee’s Deed Upon Sale … specifically the last part that reads “as Trustee for Mastr Adjustable Rate Mortgages 2004-15, Mortgage Pass-Through Certificates, Series 2004-15“. JP Morgan Chase was my Lender prior to my last re-fi in September 2004, which was done thru RBC Mortgage Company [as listed on my Deed of Trust as my Lender]. The Bank of New York I’m assuming is/was my Lender after my payments began going to GMAC [as their service provider] in December of that same year. That being said, they “skipped” a link in the chain [RBC Mortgage Company] … which I do not think they can deny or get around. They never recorded an Assignment to that effect. Except … that last section, specifically “Mortgage Pass-Through” has me a bit concerned. Is that trying to establish a link directly from JP Morgan Chase Bank to The Bank of New York ?? On my Public Records, the transactions shows myself as the Grantor, and RBC MTG CO. and also MERS as the Grantees. Trustee’s Deed Upon Sale doc attached.
The Bank of New York Trust Company, N.A., as successor-in-interest to JP Morgan Chase Bank, N.A., f/k/a JP Morgan Chase Bank, as Trustee for Mastr Adjustable Rate Mortgages Trust 2004-15, Mortgage Pass-Through Certificates, Series 2004-15“.


Interesting questions posed by this. First the conveyance without covenant or warranty which makes it what we call a quit-claim deed in Florida. It conveys whatever interest the grantor has but does not guarantee that the grantor has any interest. This in itself means that the parties understand that there could be a title issue. The fact that the full amount was paid is also suspicious. Why would anyone pay 100 cents on the dollar for this mortgage and note. Even in a normal market, there would be some variance up or down. Watch out for the word “lender”. The “lender” is the one who lent you the money at the loan closing. In fact, the lender on your paperwork is a pretender lender whose name and charter was borrowed or rented by an undisclosed party for an undisclosed fee (both of which are TILA violations). Any subsequent party claiming an interest in the mortgage, note or property would be called something else. If someone claims to have ownership of the note they are called the holder. If they claim to have ownership of the note free and clear of any defenses, then they claim they are a holder in due course.

But here is the rub — by the very nature of the way they “pooled” these notes, the note lost its individual identity under the express terms of the pooling and services agreement (something that Carol Asbury noted before I did). What that means is that the revenue from the note was made part of a larger promise to pay, under which the payments under one note could be effectively applied to another note where the payment was not made. This was even more expressly provided when the pool was assigned in different parts to the Special Purpose Vehicles, that issued certificates to investors in which the investors thought they were buying triple AAA cash equivalent securities backed by mortgages and notes that were, according to the sellers of the certificates negotiable.

But a negotiable note is ONLY a note where there is an unconditional promise to pay. The pooling with the aggregator, the placement of parts of the pool into tranches (divisions) of the SPV (corporation that issued the certificates of mortgage backed securities). In this case the obligation was created by the funding of the loan. The source of the loan was an undisclosed party. That party was calling the shots, including the terms of the note that it needed to justify the presale (selling forward, which means selling what you don’t have “yet”) of the asset backed securities. With the pooling agreement at the aggregator (loan wholesaler) level combined with the re-pooling at the SPV level the note was converted from an unconditional promise to pay to a conditional promise to pay — i.e., if you didn’t pay your note, it is quite possible that a third party could and in fact did pay part or all of the payments or the principal of your note. The presence of insurance, credit default swaps, bailouts from the U.S. Treasury and Federal reserve indicate that the only party who could possibly claim to be holder in due course has been paid in part or in full and yet they continue to foreclose on property — hence the term “Fraudclosure.”

You are therefore left with two extremely high probabilities to the point of being, in my opinion, virtually certain: (1) the named lender on your loan documents was paid in full contemproaneously with your loan closing and (2) the note was negotiated despite the fact that it was non-negotiable. This leaves the “lender” on your closing documents in the position of (a) having been paid in full and probably not even taking the loan on is balance sheet and (b) lacking an argument that it “negotiated” (Sold) the note to a third party. If the note was not sold and the lender received payment in full, neither the obligation nor the security (mortgage) exists by operation of law entitling the homeowner to file a lawsuit to quiet title on his property.

For those claiming the homeowner is seeking a windfall — that isn’t true. The homeowner admits to signing a note but is merely saying that the party claiming rights to foreclose, and any party acting in furtherance of that claim is acting ultra vires (without authority, right, or justification). To do otherwise would cause the unjust enrichment of a party seeking to obtain ownership of property despite the fact that the party seeking foreclosure has already been paid in full, plus fees. Which is the windfall — a homeowner who got hoodwinked by deceptive and predatory lending practices or a thief who already got paid and now wants the property too?

And from Cesar Silvas:

The bank of New York claims to be the Trust. The Trust of securitized mortgages must qualify as a holder in due course or qualify as having the rights of a holder-in-due-course. In order to prove that they are the holder-in -due-course they must physically possess the note (a custodian could be used to hold note). To be holder in due course, there must be proper endorsement to the trust. This mean that there must be proper endorsement from the originating lender to the wholesale lender to the issuer, and finally from issuer to the trust. However, the Trust may not be able to produce the note and thus will show some paper (usually a forgeries) in order to claim to be holder-in-due-course. Another claim they may raise is that trust have the “rights” of a holder-in-due-course. I think that a good line of defense against claims of having the “rights” of a holder-in-due-course can be that a party cannot acquire rights if it engaged in fraud or illegality affecting the instrument. Example, issuer cannot acquire “rights” of a holder from wholesale lender if issuer engaged in fraud (U.C.C.§ 3-203 (b)).

There was Fraud in the Factum since securitizations often are involved. The truth is that there was fraud in the factum. The Defendants filings with the Securities and Exchange Commission (SEC) shows interconnected and affiliated parties that aided and abetted a pattern of fraud by the originating lender and, thus, trust cannot acquire the rights of a holder-in-due-course per U.C.C.§ 3-203 (b). To use participation theories, we must show that financial institutions providing lending capital for a predatory lending scheme are dictating loan terms or, at least, are aware of the predatory characteristics of the loans (England v. MG Investments, Inc., 93 F. Supp. 2d 718 (S.D. W.Va 2000)).

Such information may be found in the 8K and 10K filings with the SEC. For example, a federal district Court held that the Wall Street underwriters (Lehman Bros.) for a predatory lender could be liable to injured consumers on an aiding and abetting theory where consumer allege that the underwriter knew of the lenderʼs fraud and provided substantial assistance to the lenderʼs scheme (Aiello v. Chisik, 2002 U.S. Dist. Lexis 5858 (C.D. Cal. Jan. 10, 2002) ). Proving such a fraud can be a good defense to fight a trust’s claims to be holder-in-due-course or claims of having the “rights” of holder-in-due-course.

Fannie Mae and Freddie Mac: Holders in Due Course? – NO

We’ve received a few questions regarding the impact of the “takeover” of Fannie Mae and Freddie Mac by the Federal government. These were chartered by congress as opposed to any state and it is questionable whether anything has actually changed except for management personnel and style. They were theoretically private corporations with their common stock traded publicly, but there was a “guarantee” aspect to their function that was backed by the U.S. Treasury. This problem is not unlike the dubious standing of the “guarantee” of student loans. Once they are securitized, they are paid, which means there is nothing to guarantee.

Thus my basic answer is that nothing has changed. They bought pools of “assets” of dubious quality and diverse and dubious description. The dumping of the note into the pool (or the intent to do so, even if it was not properly executed), which note is only evidence of the debt, not the obligation itself, may have destroyed or altered the obligation (or might have imposed conditions that did not originally exist when the promise to pay was created, which would make the note a conditional promise to pay and therefore non-negotiable) — if the act of putting the note into the pool changed the obligation (or was evidence of changing the obligation) in some way.

For example, cross collateralization, over-collateralization and reserve pools, combined with insurance products and credit default swaps, combined with the various covenants in the pooling and service agreement, the assignment and assumption agreement, and the creation of the SPV and the certificates of “mortgage” backed securities usually allow for application of receipts to be used in accordance with the requirements of the and covenants of the documents creating the pool — contrary to the express terms of the original note and the original promise to pay wherein payments from the borrower are only applied to satisfy obligations due under his/her obligation as evidenced by the original promissory note.

The assignor would then be substituted as the obligor, which might be a novation. If that is the case, then the mortgage becomes meaningless and subject to removal by quiet title action. It brings up the interesting question of splitting the note from the mortgage and having one party as obligor and another party as mortgagor — and whether the novation creates a merger of mortgagor and mortgagee.

Foreclosure Defense: UCC on Delivery of Note

From: Whitman, Dale
…. UCC amendments that require a secondary market purchaser of a note to give credit for any payments made to the original payee of the note, if they were made before the maker of the note was notified that the note had been transferred. [Editor’s Note: This is exactly what happened in a majority of the securitization loan transactions]
There are two sources of law that bear on a secondary market purchaser’s (or its servicer’s) right to foreclose. The first is the UCC, if the note is negotiable. Under Art. 3 of the UCC, the right to collect or enforce a negotiable note can be transferred only by physical transfer and delivery of the original note itself. And a person who doesn’t have the right to enforce the note obviously can’t foreclose the mortgage that secures the note. In many cases these days involving residential loans, the note has been lost or mislaid, or simply was never delivered to the secondary market investor. Maybe someone can find it now, and maybe not. If not, it can’t properly be foreclosed.
Bear in mind that this applies only to negotiable notes. It isn’t easy to determine whether a note is negotiable, and that is often an issue that could be litigated. If the note was nonnegotiable, UCC Art. 3 is completely inapplicable; the right to enforce it can be transferred merely by a document of assignment — including a document that lists and purports to assign hundreds or thousands of notes. No delivery of the original note is necessary or even relevant, although delivery is one way to accomplish a transfer of the right of enforcement. Of course, a foreclosing court is still entitled to insist on evidence that the note was in fact assigned, even if the assignment was part of a bulk transaction.
Bottom line: whether the UCC’s delivery requirement applies is often difficult to determine, and would require a factual and legal inquiry into the wording of the note and circumstances of the purported transfer.
The second relevant body of law is state foreclosure law. In a fairly large number of states (but not all), a mortgage can’t be foreclosed unless and until the foreclosing party has a record chain of title of assignments of the original recorded mortgage. Since in many (non-MERS) cases there is no recorded assignment, the secondary market investor (or its servicer) would have to obtain and record one before foreclosing. Fannie Mae, at least at one time, used to take care of this problem by obtaining an assignment for every loan they purchased, but not recording them. If the loan needed to be foreclosed, they would record the assignment before filing the foreclosure. [Editor’s Note: to record any document, one would need to comply with all statutory requirements which includes personal knowledge of the signatory if an affidavit is filed]
Of course, in the current context some loans have been assigned multiple times, and some of the intervening assignees are probably out of business or dissolved, so that obtaining written assignments from them would be problematic or impossible.
A third issue, though perhaps not as difficult as the first two outlined above, is whether the foreclosing servicer is properly authorized by the secondary market holder (or the custodian or trustee, in the case of securitized loans) to act as an agent in the holder’s behalf. In a judicial foreclosure, the servicer will have to prove its authority.
There is no doubt that in the tremendous flurry of secondary market transactions that occurred incident to the securitization of subprime mortgages in the 2002-2006 period, many transactions were done in complete disregard of the principles outlined above. Those chickens are now coming home to roost.
Dale A. Whitman
Professor of Law Emeritus
University of Missouri-Columbia
Telephone 573-884-0946
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