Why Are Trusts Alleging Holder Status and Not Holder in Due Course?

THEY ARE ADMITTING THEY DIDN’T PAY FOR THE LOAN

THIS CORROBORATES THE ALLEGATION THAT THE TRUST WAS UNFUNDED

IF THE TRUST WAS UNFUNDED IT COULD NOT HAVE ORIGINATED OR ACQUIRED THE LOAN

In situations where the alleged REMIC Trust is the party initiating foreclosure, you will find in most instances that they are alleging that they are the holder. The fact that they are not alleging that they are the holder in due course raises some interesting questions. First, it is an admission that they did not pay for the loan for value in good faith and without notice of borrower’s defenses.

This in turn leads us to the PSA where you can see for yourself that only good loans properly underwritten can be included in the trust based upon the procedures for transfer and payment that are set forth or implied in the trust instrument (the PSA). Remember that the ONLY reason the party is appearing in court as the foreclosing entity is by virtue of the Pooling and Servicing Agreement (PSA). Their ONLY authority, as a “holder with rights to enforce” derives from the trust instrument (PSA). So any argument that the PSA is irrelevant is nonsense — it should be an exhibit in court or else the foreclosure should be dismissed. If they want to argue to the contrary, they must reveal the creditor and reveal the alternative authority to enforce apart from the trust instrument. If it has anything to do with the trust or trust beneficiaries however, the document (Power of Attorney) derives its power from the trust instrument as well (PSA).

The way the Banks tell it, an assignment dated not only after the cutoff date, but after the alleged declared default of the loan forces investors to accept that which they specifically excluded in the  trust instrument (PSA) — a bad loan that violates the REMIC provisions of the Internal Revenue Code subject them to adverse tax consequences and economic losses that were NOT built into the deal. How can a state judge in Florida or any other state order or enter judgment that forces a bad loan on investors who specifically called fro a cutoff of any new loans in the pool years before the foreclosure? If the loan was already declared in default. how can the trust beneficiaries be forced to accept a bad loan?

At the very least these John Does must be given notice and since the servicer knows who they are (because they have been paying them) they should give notice to the investors that their rights may be significantly impacted by a court decision in which the servicer or trustee of the REMIC trust is taking a position adverse to the interests of the trust beneficiaries and in violation of the trust indenture.

Since the requirements of the PSA always provide for circumstances that are identical to the definition of a holder in due course, why is the allegation that they are just a holder? The answer is plain: in order to establish that they are a holder in due course their proof would be limited to the fact that they paid for the loan, in good faith and without knowledge of borrower’s defenses. That proof would insulate the trust and trust beneficiaries from borrower’s defenses by definition (see Article 3, UCC). The allegation of only being a holder, exposes the trust and trust beneficiaries to defenses that were intended to be barred by virtue of being holders in due course of each and every loan. Thus this too is an allegation contrary or adverse to the interests of the trust and the trust beneficiaries. Again without notice to the trust beneficiaries that the trustee or at least lawyers for the trustee are taking positions adverse to the interests of the investors and the trust.

What difference does it make? It makes a difference because of money which is after all what this case is supposed to be about. The investors’ money either went into the REMIC trust or it didn’t. If it did, then the trust is the right vehicle for the transaction although most PSA’s say the trust cannot bring the foreclosure action. But if it didn’t go into the REMIC trust account, and the trust was ignored in the origination and/or acquisition of the, loan then the borrower is even more entitled to know what payments the investors (f/k/a/ trust beneficiaries) have received. If there have been settlements, then how much of the original debt is left? If there were servicer payments, was there ever a default and how much of the original debt is left? If there were third party payments to the creditors then how much of the original debt is left?

What seems to be an elusive concept for judges, lawyers and even borrowers is that their debt was paid by someone else. That is what happens when you have fraudulent transactions and the perpetrators get caught. In this case, there was plenty of money available to private settle more than $1 Trillion in claims of fraud from investors and fines that are steadily increasing into the tens of billions of dollars. Because the intermediary banks had essentially stolen the identity of the lenders and the borrowers, they made claims and got paid as though they were the lenders. Now they are using the proceeds of what were disguised sales of the same loan multiple times to settle with investors and settle only with those borrowers who present a credible threat. In the end the banks are wiling to pay trillions because they got illegally trillions more.

The big question is when it will occur to enough enough judges, lawyers and borrowers that they are entitled to offset for those payments that were actually received or on behalf of the actual creditors. It isn’t a difficult computation. Thus the notice of default, the notice of the right to reinstatement, the end of month statements, and the acceleration letter all state the wrong amounts and are fatally defective. They are misrepresentations that are part of a string of misrepresentations starting with the lies told to the managers of stable managed funds who purchased, and kept on purchasing mortgage bonds issued by an apparent REMIC trust whose terms were being routinely ignored.

Thus it is not RELIEF that the borrower is asking, it is JUSTICE. The creditor is only entitled to get paid once on each debt. The creditors are the investors or trust beneficiaries. The demands made on borrowers for the last 7 years have actually been demands from the intermediaries for payment of fees, commissions and advances made or earned by them, according to their story. They are not claims on the mortgage loan, which was either paid down or paid off without disclosure to the borrower. Had the pay down or payoff been recorded and applied, virtually all of the loans that were improperly foreclosed by strangers to the original transaction (no privity) would have been avoided because the amount of the payment could have been dropped easily under HAMP. As stated repeatedly on these pages, this is not a gift of principal REDUCTION. It is justice applying a principal CORRECTION due to payment received — the ultimate defense under any lawsuit for financial damages.

For more information please call 954-495-9867.

Insurance and Hedge Proceeds Applied to Loan Balances

One of the more controversial statements I have made is that certain types of payments from third party sources should be applied, pro rata, against loan balances. Some have stated that the collateral source rule bars using third party payments as offset to the debt. But that rule is used in tort cases and contract cases are different. There are certain types of payments, like guarantees from Fannie and Freddie that might not be susceptible to use as offset because they are caused by the default of the debtor and because they are not paid until the foreclosure is complete.

But the insurance, credit default swaps and other hedge products that caused the banks to receive payment are a different story. Those are not paid because of a default by any particular borrower but rather are caused by a unilateral declaration of a “credit event” declared by the Master Servicer and are paid to the holder of the mortgage bonds. The mortgage bonds are issued by a trust based upon the advance of money by investors who wish to pool their money into an asset pool and receive income with what was thought to be a minimum of risk.

Since the broker-dealers (investment banks) were acting as agents for the trust and the bond holders, any money received by them should have first been allocated to the trust, then pro rata to the bond holders. Whether or not this money was actually forwarded to the bond holders is irrelevant if the investment banks were the agents of the investment vehicle and thus owed a duty to the investors to whom they sold the mortgage bonds.

Logic dictates that if the money was paid to the banks as “holders” of the bond (because they were issued in street name as nominee securities) that the balance owed by the trust to the investors was correspondingly reduced — reflecting the devaluation of the bonds declared by the master servicer based upon such criteria as the lack of liquidity of the bonds that had been trading freely on a weekly basis, or because of the severe drop in real estate prices down to their actual values, or because of other factors.

It should be noted that the declaration of the banks is unilateral and in their sole discretion and not subject to challenge by anyone because the declaration creates an irrefutable presumption that the content of the declaration is true. Thus the insurance company must pay, the credit default swap counterparty must pay and other hedge partners must pay as a result of an act by the bank, not the investor nor the borrower.

All the loans contained in the asset pool subject to the declared credit event are affected. And since the reason for the declaration has little relationship to defaults, and plenty of other more important reasons, the amount owed to investors is reduced by the receipt of the payments by their agent, the bank. That means the account receivable of the lender is reduced, regardless of which bank account the money happens to be deposited.

If the account receivable is reduced before, during or after a delinquency of the borrower (assuming the loan is actually in existence) then the borrowers’ balances should be reduced, pro rata for each loan in the asset pool that was the subject of the declaration of a credit event. It is therefore my opinion that the homeowner could and probably should file an affirmative defense for offset for the pro rata share of insurance, credit default swaps etc.

There is one more source that should be considered for offset. Several investors have made claims against the banks claiming that their money was misused and that the terms of the loan were not followed including, bad underwriting and unenforceable documents created at closing. Many of them have already settled those claims and received payment, thus reducing their account receivable from the trust (and by pure logic reducing, dollar for dollar the account payable from the trust). Since the sole source of payment on the bond is the payment of the mortgages, it follows that by utilizing the most simple of accounting standards, the balance owed by the homeowner would be correspondingly be reduced, pro rata, dollar for dollar.

The fact that the underwriting was bad, the loans were not viable or enforceable and based upon inflated appraisals and lies about the income of the borrower, is not something caused by the borrower. The fact that the money was paid to all of the investors in that particular asset pool means that each investor should get a share equal to the amount of money they invested compared to all the money that was invested in that pool.

As to figuring out how much of the offset goes to the borrower’s account payable, it should be calculated in the same way. The amount of the borrower’s debt should be compared with the total amount of loans in the asset pool. This percentage should be applied against all third party payments that did not arise out of the default by the borrowers. In fact, it should be applied against all borrowers whose loans were claimed by that asset pool, whether they were in default or not. This would be grounds for a claim by people who are “current” in their payments for a credit or refund of the amount received from insurance, credit default swaps, or payments by the banks in settlement of investors’ claims of fraud.

This approach should be brought up very early in litigation so that there is plenty of time to pursue the discovery required to determine the amount received and the proper calculation of pro rata shares. If you do it at trial, the best you can hope for is that the judge will take notice of the fact that the foreclosing party only brought part of the documents relating to the loan instead of all of them, which should be the subject of a subpoena for the designated witness of the bank to bring with her or him all of the documents relating to the subject loan or any instrument deriving its value in whole or in part from the subject loan’s existence.

Thus at trial you can have a two pronged attack, getting them coming and going. The first is of course the fact that the originator did not fund the loan and that the break between the money trail (actual transactions) and the paper trail (fictitious transactions) occurred at the closing table. In most cases that is true, but it can be replaced or buttressed by the fact that the same argument holds true for acquired loans that were previously originated. The endorsement of the note or assignment of mortgage is a fictitious instrument if there was no sale of the loan. The important thing is to talk about the money first and then use that to show that the documents are fabricated relating to no real transaction.

Then you also have the argument of offset which hopefully by then you will have set up by discovery.

Practice Note: Many lawyers are accepting fee retainers far below the level that would support properly litigating these cases. Now that the marketplace has matured, lawyers should reconsider their pricing and their prosecution of the defenses, affirmative defenses and counterclaims. Even clients who announce a goal of just staying as long as possible without paying rent or mortgage are probably saying that because they think they owe more money than is actually the case.

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