Predominant Interest Defines “True Lender”

Based on the totality of the circumstances, the Court concludes that CashCall, not Western Sky, was the true lender. CashCall, and not Western Sky, placed its money at risk. It is undisputed that CashCall deposited enough money into a reserve account to fund two days of loans, calculated on the previous month’s daily average and that Western Sky used this money to fund consumer loans. It is also undisputed CashCall purchased all of Western Sky’s loans, and in fact paid Western Sky more for each loan than the amount actually financed by Western Sky. Moreover, CashCall guaranteed Western Sky a minimum payment of $100,000 per month, as well as a $10,000 monthly administrative fee. Although CashCall waited a minimum of three days after the funding of each loan before purchasing it, it is undisputed that CashCall purchased each and every loan before any payments on the loan had been made. CashCall assumed all economic risks and benefits of the loans immediately upon assignment. CashCall bore the risk of default as well as the regulatory risk. Indeed, CashCall agreed to “fully indemnify Western Sky Financial for all costs arising or resulting from any and all civil, criminal or administrative claims or actions, including but not limited to fines, costs, assessments and/or penalties . . . [and] all reasonable attorneys fees and legal costs associated with a defense of such claim or action.”

Accordingly, the Court concludes that the entire monetary burden and risk of the loan program was placed on CashCall, such that CashCall, and not Western Sky, had the predominant economic interest in the loans and was the “true lender” and real party in interest. [E.S.]

See 8-31-2016-cfpb-v-cash-call-us-dist-ct-cal

Federal District Court Judge John Walter appears to be the first Judge in the nation to drill down into the convoluted “rent-a-bank” (his term, not mine) schemes in which the true lender was hidden from borrowers who then executed documents in favor of an entity that was not in the business of lending them money. This decision hits the bulls eye on the importance of identifying the true lender. Instead of blindly applying legal presumptions under the worst conditions of trustworthiness, this Judge looked deeply at the flawed process by which the “real lender” was operating.

A close reading of this case opens the door to virtually everything I have been writing about on this blog for 10 years. The court also rejects the claim that the documents can force the court to accept the law or venue of another jurisdiction. But the main point is that the court rejected the claim that just because the transactions were papered over doesn’t mean that the paper meant anything. Although it deals with PayDay loans the facts and law are virtually identical to the scheme of “securitization fail” (coined by Adam Levitin).

Those of you who remember my writings about the step transaction doctrine and the single transaction doctrine can now see how substance triumphs over form. And the advice from Eric Holder, former Attorney General under Obama, has come back to mind. He said go after the individuals, not just the corporations. In this case, the Court found that the CFPB case had established liability for the individuals who were calling the shots.

SUMMARY of FACTS: CashCall was renting the name of two banks in order to escape appropriate regulation. When those banks came under pressure from the FDIC, CashCall changed the plan. They incorporated Western Sky on the reservation of an an Indian nation and then claimed they were not subject to normal regulation. This was important because they were charging interest rates over 100% on PayDay loans.

That fact re-introduces the reality of most ARM, teaser and reverse amortization loans — the loans were approved with full knowledge that once the loan reset the homeowner would not be able to afford the payments. That was the plan. Hence the length of the loan term was intentionally misstated which increases the API significantly when the fees, costs and charges are amortized over 6 months rather than 30 years.

Here are some of the salient quotes from the Court:

CashCall paid Western Sky the full amount disbursed to the borrower under the loan agreement plus a premium of 5.145% (either of the principal loan amount or the amount disbursed to the borrower). CashCall guaranteed Western Sky a minimum payment of $100,000 per month, as well as a $10,000 monthly administrative fee. Western Sky agreed to sell the loans to CashCall before any payments had been made by the borrowers. Accordingly, borrowers made all of their loan payments to CashCall, and did not make a single payment to Western Sky. Once Western Sky sold a loan to CashCall, all economic risks and benefits of the transaction passed to CashCall.

CashCall agreed to reimburse Western Sky for any repair, maintenance and update costs associated with Western Sky’s server. CashCall also reimbursed Western Sky for all of its marketing expenses and bank fees, and some, but not all, of its office and personnel costs. In addition, CashCall agreed to “fully indemnify Western Sky Financial for all costs arising or resulting from any and all civil, criminal or administrative claims or actions, including but not limited to fines, costs, assessments and/or penalties . . . [and] all reasonable attorneys fees and legal costs associated with a defense of such claim or action.”

Consumers applied for Western Sky loans by telephone or online. When Western Sky commenced operations, all telephone calls from prospective borrowers were routed to CashCall agents in California.

A borrower approved for a Western Sky loan would electronically sign the loan agreement on Western Sky’s website, which was hosted by CashCall’s servers in California. The loan proceeds would be transferred from Western Sky’s account to the borrower’s account. After a minimum of three days had passed, the borrower would receive a notice that the loan had been assigned to WS Funding, and that all payments on the loan should be made to CashCall as servicer. Charged-off loans were transferred to Delbert Services for collection.

“[t]he law of the state chosen by the parties to govern their contractual rights and duties will be applied, . . ., unless either (a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice, or (b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.”
Restatement § 187(2). The Court concludes that the CRST choice-of-law provision fails both of these tests, and that the law of the borrowers’ home states applies to the loan agreements.

after reviewing all of the relevant case law and authorities cited by the parties, the Court agrees with the CFPB and concludes that it should look to the substance, not the form, of the transaction to identify the true lender. See Ubaldi v. SLM Corp., 852 F. Supp. 2d 1190, 1196 (N.D. Cal. 2012) (after conducting an extensive review of the relevant case law, noting that, “where a plaintiff has alleged that a national bank is the lender in name only, courts have generally looked to the real nature of the loan to determine whether a non-bank entity is the de facto lender”); Eastern v. American West Financial, 381 F.3d 948, 957 (9th Cir. 2004) (applying the de facto lender doctrine under Washington state law, recognizing that “Washington courts consistently look to the substance, not the form, of an allegedly usurious action”); CashCall, Inc. v. Morrisey, 2014 WL 2404300, at *14 (W.Va. May 30, 2014) (unpublished) (looking at the substance, not form, of the transaction to determine if the loan was usurious under West Virginia law); People ex rel. Spitzer v. Cty. Bank of Rehoboth Beach, Del., 846 N.Y.S.2d 436, 439 (N.Y. App. Div. 2007) (“It strikes us that we must look to the reality of the arrangement and not the written characterization that the parties seek to give it, much like Frank Lloyd Wright’s aphorism that “form follows function.”).4 “In short, [the Court] must determine whether an animal which looks like a duck, walks like a duck, and quacks like a duck, is in fact a duck.” In re Safeguard Self-Storage Trust, 2 F.3d 967, 970 (9th Cir. 1993). [Editor Note: This is akin to my pronouncement in 2007-2009 that the mortgages and notes were invalid because they might just as well have named Donald Duck as the payee, mortgagee or beneficiary. Naming a fictional character does not make it real.]

In identifying the true or de facto lender, courts generally consider the totality of the circumstances and apply a “predominant economic interest,” which examines which party or entity has the predominant economic interest in the transaction. See CashCall, Inc. v. Morrisey, 2014 WL 2404300, at *14 (W.D. Va. May 30, 2014) (affirming the lower court’s application of the “predominant economic interest” test to determine the true lender, which examines which party has the predominant economic interest in the loans); People ex rel. Spitzer v. Cty. Bank of Rehoboth Beach, Del., 846 N.Y.S.2d 436, 439 (N.Y. App. Div. 2007) (“Thus, an examination of the totality of the circumstances surrounding this type of business association must be used to determine who is the ‘true lender,’ with the key factor being ‘who had the predominant economic interest’ in the transactions.); cf. Ga. Code Ann. § 16-17-2(b)(4) (“A purported agent shall be considered a de facto lender if the entire circumstances of the transaction show that the purported agent holds, acquires, or maintains a predominant economic interest in the revenues generated by the loan.”).

Although a borrower electronically signed the loan agreement on Western Sky’s website, that website was, in fact, hosted by CashCall’s servers in California. While Western Sky performed loan origination functions on the Reservation, the Court finds these contacts are insufficient to establish that the CRST had a substantial relationship to the parties or the transaction, especially given that CashCall funded and purchased all of the loans and was the true lender. Cf. Ubaldi v. SLM Corp., 2013 WL 4015776, at *6 (N.D. Cal. Aug. 5, 2013) (“If Plaintiffs’ de facto lender allegations are true, then Oklahoma does not have a substantial relationship to Sallie Mae or Plaintiffs or the loans.”).

The Court concludes that the CFPB has established that the Western Sky loans are void or uncollectible under the laws of most of the Subject States.7 See CFPB’s Combined Statement of Facts [Docket No. 190] (“CFPB’s CSF”) at ¶¶ 147 – 235. Indeed, CashCall has admitted that the interest rates that it charged on Western Sky loans exceeded 80%, which substantially exceeds the maximum usury limits in Arkansas, Colorado, Minnesota, New Hampshire, New York, and North Carolina. (Arkansas’s usury limit is 17%; Colorado’s usury limit is 12%; Minnesota’s usury limit is 8%; New Hampshire’s usury limit is 36%; New York’s usury limit is 16%; and North Carolina’s usury limit is 8%). A violation of these usury laws either renders the loan agreement void or relieves the borrower of the obligation to pay the usurious charges. In addition, all but one of the sixteen Subject States (Arkansas) require consumer lenders to obtain a license before making loans to consumers who reside there. Lending without a license in these states renders the loan contract void and/or relieves the borrower of the obligation to pay certain charges. CashCall admits that, with the exception of New Mexico and Colorado, it did not hold a license to make loans in the Subject States during at least some of the relevant time periods.

Based on the undisputed facts, the Court concludes that CashCall and Delbert Services engaged in a deceptive practice prohibited by the CFPA. By servicing and collecting on Western Sky loans, CashCall and Delbert Services created the “net impression” that the loans were enforceable and that borrowers were obligated to repay the loans in accordance with the terms of their loan agreements. As discussed supra, that impression was patently false — the loan agreements were void and/or the borrowers were not obligated to pay.

The Court concludes that the false impression created by CashCall’s and Delbert Services’ conduct was likely to mislead consumers acting reasonably under the circumstances

The Court concludes that Reddam is individually liable under the CFPA.

“An individual may be liable for corporate violations if (1) he participated directly in the deceptive acts or had the authority to control them and (2) he had knowledge of the misrepresentations, was recklessly indifferent to the truth or falsity of the misrepresentation, or was aware of a high probability of fraud along with an intentional avoidance of the truth.” Consumer Fin. Prot. Bureau v. Gordon, 819 F.3d 1179, 1193 (9th Cir. 2016) (quotations and citations omitted).

The Court concludes that Reddam both participated directly in and had the authority to control CashCall’s and Delbert Services’ deceptive acts. Reddam is the founder, sole owner, and president of CashCall, the president of CashCall’s wholly-owned subsidiary WS Funding, and the founder, owner, and CEO of Delbert Services. He had the complete authority to approve CashCall’s agreement with Western Sky and, in fact, approved CashCall’s purchase of the Western Sky loans. He signed both the Assignment Agreement and the Service Agreement on behalf of WS Funding and CashCall. In addition, as a key member of CashCall’s executive team, he had the authority to decide whether and when to transfer delinquent CashCall loans to Delbert Services.

 

So all that said, here is what I wrote to someone who was requesting my opinion: Don’t use this unless and until you (a) match up the facts and (b) confer with counsel:

Debtor initially reported that the property was secured because of (a) claims made by certain parties and (b) the lack of evidence to suggest or believe that the property was not secured. Based upon current information and a continuous flow of new information it is apparent that the originator who was named on the note and deed of trust in fact did not loan any money to petitioner. This is also true as to the party who would be advanced as the “table funded” lender. As the debtor understands the applicable law, if the originator did not actually complete the alleged loan contract by actually making a loan of money, the executed note and mortgage should never have been released, much less recorded. A note and mortgage should have been executed in favor of the “true lender” (see attached case) and NOT the originator, who merely served as a conduit or the conduit who provided the money to the closing table.

Based upon current information, debtor’s narrative of the case is as follows:

  1. an investment bank fabricated documents creating the illusion of a proprietary common law entity
  2. the investment bank used the form of a trust to fabricate the illusion of the common law entity
  3. the investment bank named itself as the party in control under the label “Master Servicer”
  4. the investment bank then created the illusion of mortgage backed securities issued by the proprietary entity named in the fabricated documents
  5. the investment bank then sold these securities under various false pretenses. Only one of those false pretenses appears relevant to the matter at hand — that the proceeds of sale of those “securities” would be used to fund the “Trust” who would then acquire existing mortgage loans. In fact, the “Trust” never became active, never had a bank account, and never had any assets, liabilities or business. The duties of the Trustee never arose because there was nothing in the Trust. Without a res, there is no trust nor any duties to enforce against or by the named “Trustee.”
  6. the investment bank then fabricated documents that appeared facially valid leading to the false conclusion that the Trust acquired loans, including the Petitioner’s loan. Without assets, this was impossible. None of the documents provided by these parties show any such purchase and sale transaction nor any circumstances in which money exchanged hands, making the Trust the owner of the loans. Hence the Trust certainly does not own the subject loan and has no right to enforce or service the loan without naming an alternative creditor who does have ownership of the debt (the note and mortgage being void for lack of completion of the loan contract) and who has entered into a servicing agreement apart from the Trust documents, which don’t apply because the Trust entity was ignored by the parties seeking now to use it.
  7. The money from investors was diverted from the Trusts who issued the “mortgage backed securities” to what is known as a “dynamic dark pool.” Such a pool is characterized by the inability to select both depositors and beneficiaries of withdrawal. It is dynamic because at all relevant times, money was being deposited and money was being withdrawn, all at the direction of the investment bank.
  8. What was originally perceived as a loan from the originator was in fact something else, although putting a label to it is difficult because of the complexity and convolutions used by the investment bank and all of its conduits and intermediaries. The dark pool was not an entity in any legals sense, although it was under the control of the investment bank.
  9. Hence the real chain of events for the money trail is that the investment bank diverted funds from its propriety trust and used part of the funds from investors to fund residential mortgage loans. The document trail is very different because the originator and the conduits behind what might be claimed a “table funded loan” were not in privity with either the investors or the investment bank. Hence it is clear that some liability arose in which the Petitioner owed somebody money at the time that the Petitioner received money or the benefits of money paid on behalf of the Petitioner. That liability might be framed in equity or at law. But in all events the mortgage or deed of trust was executed by the Petitioner by way of false representations about the identity of the lender and false representations regarding the compensation received by all parties, named or not,
  10. The current parties seek to enforce the deed of trust on the false premise that they have derived ownership of the debt, loan, note or mortgage (deed of trust). Their chain is wholly dependent upon whether the originator actually completed the loan contract by loaning the money to the Petitioner. That did not happen; thus the various illusions created by endorsements and assignments convey nothign because the note and mortgage (deed of trust) were in fact void. They were void because the debt was never owned by the originator. hence the signing of the note makes it impossible to merge the debt with the note — an essential part of making the note a legally enforceable negotiable instrument. The mortgage securing performance under the note is equally void since it secures performance of a void instrument. Hence the property is unsecured, even if there is a “John Doe” liability for unjust enrichment, if the creditor can be identified.
  11. The entire thrust of the claims of certain self-proclaimed creditors rests upon reliance on legal presumptions attached to facially valid documents. These same entities have been repeatedly sanctioned, fined and ordered to correct their foreclosure procedures which they have failed and refused to do — because the current process is designed to compound the original theft of investors’ money with the current theft of the debt itself and the subsequent theft of the house, free from claims of either the investors or the homeowner. The investment bank and the myriad of entities that are circulated as if they had powers or rights over the loan, is seeking in this case, as in all other cases in which it has been involved, to get a court judgment or any order that says they own the debt and have the right to enforce the evidence of the debt (note and mortgage).
  12. A Judgment or forced sale is the first legal document in their entire chain of fabricated documentation; but the entry of such a document in public records, creates the presumption, perhaps the conclusive presumption that all prior acts were valid. It is the first document that actually has a legal basis for being in existence. This explains the sharp decline in “workouts’ which have dominated the handling of distressed properties for centuries. Workouts don’t solve the problem for those who have been acting illegally. They must pursue a court order or judgment that appears to ratify all prior activities, legal or not.

 

SINGLE TRANSACTION RULE REVISITED

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Many questions are piling in as lawyers start to drill down into the whole securitization scheme. The COMBO helps; yet in order to properly present the case in court you need to understand more than just your transaction. When I started the blog, and periodically thereafter, I made reference to a doctrine that was created in the context of tax litigation but which applies and has been applied in commercial situations. Sometimes you have to figure out the goal of the transaction in order to determine the parties. The doctrines that apply are the SINGLE TRANSACTION DOCTRINE and the STEP TRANSACTION DOCTRINE. The key question that is answered is what was the goal — or to put it another way, if you take out that piece, would the same transaction have otherwise still occurred in some other fashion?

Applied to debt, whether it is mortgage or otherwise, it is stated as follows: If investment bankers were not selling mortgage bonds to investors, would the loan have been otherwise been made? If the answer is no, there would have been no transaction, then the doctrines apply. If the doctrines apply, then the nature of the transaction is determined by its goal — the issuance of mortgage bonds, and all the exotic hedge and credit enhancements products that went along with it. Once that is determined, the real parties in interest emerge — the mortgage bonds were sold for the purpose of funding loans. So the loans and the bonds are the evidence of the total transaction. The borrowers and the investors are the real parties in interest. Most interpretations of RPIT come down to money — who gave it and who got it?

It might be that the more significant party in interest on the borrower side is not the homeowner at all, but rather the investment banker who created a promise to pay the investors under false pretenses. The homeowner did not know about that promise and certainly had no idea of the false pretenses. The issue is whether the mortgage, deed of trust or other security instrument is enforceable as to power of sale, foreclosure or otherwise. That can only be true if the right party has signed it and the right party enforces it. But it is also restricted to enforcement of a valid outstanding obligation, which is described in other instruments.

Usually, in a mortgage loan, the obligation is described in a note. In our current situation the obligation is described in a convoluted series of documents, some of the them fabricated, including the PSA,, prospectus etc. because the lender investor didn’t get a document from the homeowner, they received it from the investment banker. Thus the totality of the documentation with the investor and with the borrower might be used to describe the obligation — but then you have that pesky problem of Truth in Lending where all the documents must be revealed and disclosed to the borrower.

The only reasonable interpretation in securitization transactions is that the entire risk of loss would have shifted to a different party if the mortgage bonds were not being sold. This is what caused all the intermediaries to abandon normal underwriting standards. This ALL parties involved in ALL parts of the transaction are mere intermediaries or conduits and not possessed of any economic interest int he transaction, except those arising out of their role as a conduit. For example, if you write a check to Target to buy a TV, the goal was to purchase a TV. the fact that you wrote a check, that TARGET took the check to their bank, that the check was cleared through Federal Reserve or other intermediaries, and presented to your bank who sent it to their account processor which then provided the information as to whether the funds were present to cover the check, which led your bank authorizing payment is all irrelevant to the issue of the purchase of the TV. 

In our current crisis, all those intermediaries are vying for the TV when none of them has any economic interest in it. In this example, the intermediaries would have that opportunity if Target didn’t care whether or not they got back their TV or didn’t care to fight about it for whatever reason. The vacuum and opportunity for disinterested intermediaries to pretend to be interested and pretend to have rights to the TV would be almost irresistible if you had no ethics, morality or conscience. The single transaction doctrine and step transaction doctrine were created to  sort out such situations.

In the mortgage context, that is exactly what is happening. I predicted 4 years ago that litigation results would depend entirely upon whether the Banks could be successful at misdirecting the attention of the court to the parts of the transaction instead of the totality of it — the money processing through conduits and intermediaries — or if they were correctly instructed by borrowers that they now know that the real transaction was the purchase of a mortgage bond by investors and that the borrowers signature was merely incident to, and necessary for the completion of the transaction such that the investment banker would not be required to return the money to the investor.

Like Target in the example above, the investors have decided, so far, not to fight with the homeowner but rather to take their fight to the investment banker who sold them the bonds under false pretenses. But if the investors and borrowers did get together and settle the obligation in any manner or with any means, the issue of foreclosure would be over. There would be no obligation or at least there would be no default.

There are issues as to how to characterize the fraudulent foreclosures, unlawful detainer, seizure of personal property, etc. And the related question is whether those involve transfers of interests in property or if they involve instruments that are investments, securities or whatever. I have concluded as an expert that the documents of “transfer” (forgetting their foundation and authenticity for a moment) are in actuality part of a larger scheme whose end purpose was the issuance of multiple forms of securities or other instruments exempted from security regulation. Even if exempted, it doesn’t make it a real estate transaction.

It does make it a fraudulent scheme, if the the property owner was fraudulently induced into executing documents under the pretense that this was a conventional mortgage loan situation, when hidden from the property owner, it was really part of the loop of issuing “mortgage bonds” (certificated or non-certificated to investors. Since the goal was to get money from investors and then have them abandon their interests in the “mortgages” or the “property” the property aspects seem incidental to the real nature of the transaction.

In fact, when you take a step back, you will see that the borrowers were duped into becoming “issuers” of paper that they had no idea was going to be used for bonuses on Wall Street. Borrowers did not know that the amount loaned to them or for their benefit fell far short of the amount collected from investors.

Under that scenario, their was, as I have said from beginning, a single transaction. That transaction was between the investor and the property owner, which was undocumented since neither were in privity to a written instrument in which both of them appeared. Or it could be said that the note is one small part of the documentation, in which the PSA, A&A, prospectus,  bond, etc. were in TOTAL, the documentation. If those documents are, in total, the only documentation of the transaction, then the note cannot be accepted into evidence without the rest of the evidence.

And the security instrument or agreement (Deed of trust) might only mention the note. If it does that, then it has referred to a piece of paper that does not have all the terms of the transaction. Since they were intentionally hiding the existence of a the securitization chain from the borrower, it can’t be said that the omission of the other documents was accidental. Thus the security instrument would be invalid on the most fundamental grounds — it does not secure the obligation — evidence of which is contained in multiple instruments, it attempts to secure only the note, which does not contain all the evidence of the obligation and terms of repayment.

As such, if that is accepted by the Court, the security instrument would need to be reformed in order to be effective. Whether that reformation would relate back to the original recording is a question I cannot answer.  But in my opinion, no security instrument is capable of being enforced if it makes reference to a single document that is to be used as evidence of an obligation, the performance of which triggers the enforcement provisions of the security instrument — unless that single document contains all the evidence of the obligation.

Bombshell Admission of Failed Securitization Process in American Home Mortgage Servicing/LPS Lawsuit

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EDITOR’S NOTE: It is comforting to know that at least some people are paying attention. From one of the largest servicers in the country comes an admission that securitization of mortgage loans was an illusion. The facts alleged by AHMSI  in its lawsuit against LPS are true in virtually all cases in which any bank or other entity has claimed an interest in a mortgage loan.

They are actually saying two things: first, they are saying that their practice was to create the documents supporting the foreclosure by an entity that was essentially picked at random and that these documents were created only as necessary in foreclosure litigation (otherwise they just proceeded with any old documents); second, they are saying that the people who signed those documents lacked any authority or appointment to represent any real party in interest and that the signature was forged on behalf of other people who also lacked any authority or appointment to represent any real party in interest.

In the four years that I have been analyzing and writing about this mortgage crisis it has been my consistent opinion that the original mortgage transaction was a single transaction between a borrower and the lender. The single transaction doctrine or the step transaction doctrine utilized in a myriad of other cases involving both real property law and commercial transactions create simplicity out of what appears to be a complex series of transactions. I have repeatedly said in my writings and in my presentations at seminars that those who participated in the securitization scam would prevail as long as they were able to direct the attention of a judge to only one part of the transaction, to wit: the part where the borrower receives the benefit of funding a loan. The burden is on borrowers to redirect the attention of the judge to include both sides of the transaction.

The lender’s side of the transaction is as simple as the borrower’s side. The lender funded or advanced money for the purpose of funding a mortgage loan. The pretender lenders don’t want any judge looking behind the veil. But the facts are clear. The lender in the transaction was a group of investors who never received any notice of the transaction with the borrower, much less the actual note and mortgage. The investor/lender received a mortgage bond that was supposedly backed by a perfected mortgage lien on the property owned by the borrower. Instead of naming the lender as the mortgagee, nominees were inserted into the documents executed by the borrower. The failure to disclose both the identity of the lender and the terms under which the lender advanced money (contained in the prospectus and the pooling and servicing agreement) results in an imperfect lien. (The test for a perfected lien is being able to determine the identity of the party from whom you would obtain a release).

At the time of the original transaction the party designated as the “lender” was powerless to execute a satisfaction of mortgage. By definition this means that the lien was never perfected. With few exceptions all of the entities that have been involved in the initiation of foreclosure proceedings have been nothing more than middlemen pretending to represent the investor/lender when in fact their intent was to divert money, proceeds, and property from the investor/lender into their own pockets. In order to do this the pretender lenders must actually foreclose on property and conduct what purports to be a foreclosure sale and continue billing fees against the revenue stream that is due to the investor/lender. When they get to zero balance because the property value is lower than the amount due to the servicer or other middleman, the property goes to the middleman instead of the investor/lender.

This is why there can be no widespread modifications, short sales, or any mediated settlement in which the immediate result is either reinstatement of the mortgage or cash proceeds–both of which would have to be reported and paid to the investor/lenders. Nobody on Wall Street wants the investors to get anything and the borrowers are viewed with complete disdain. Who cares about them?

If the original transaction is simply viewed for what it is–a transaction between the borrower and the investor/lender the solution to the mortgage mess becomes clear. The only actual function of the intermediaries in the securitization process is to act as conduits for clearing transactions. It is obvious that they have intentionally failed to act in accordance with the requirements of the pooling and servicing agreements and the prospectus that was given to the investor/lenders. If they were playing fair they would have disclosed the identity of the actual lender and the terms of payment to the actual investor/lender. That would include payments received from the borrower as well as numerous third parties based upon factors that were not necessarily related to payments by the borrower. The transaction in which the investor/lender advanced money was based upon liability and guarantees from multiple parties.

The facts here are actually quite simple. The wrong party was designated on the note and the mortgage. Vital terms of repayment or omitted from both the note and the other disclosure documents in violation of the requirements of the federal truth in lending act. The intermediaries were only interested in the money trail and they knew they would create whatever document trail was necessary to support what they had done with the money. This is like your bank failing to post a deposit transaction or making claims on a transaction between you and a third-party in which a payment by check was involved. The bank is merely a conduit and has no rights in the principal contract between you and that third-party. This is established law. Yet in the mortgage mess the banks have succeeded in convincing judges that their mere presence as intermediaries is sufficient to establish themselves as agents for everyone. This success has not been without substantial rewards. It is the intermediaries who are taking the houses and eventually the proceeds at a cost to and detriment of the investor/lenders and the borrowers.

The borrowers have no way of knowing the actual balance due on their obligation since the intermediaries refused to provide any accounting for the receipt of any funds from any party other than the borrower. This keeps the judges attention focused on the borrower and whether the borrower made payments–instead of requiring proof that a payment was due, and if due, to whom? By requiring borrowers to deal with intermediaries instead of the principals the banks have succeeded in creating an impenetrable barrier to modification or settlement of these defective mortgage loans.

 The bottom line is that the securitization of mortgages loans never actually happened. The defects in the origination process, the absence of transfer documents and delivery in accordance with the pooling and servicing agreements are incurable. It is simply not possible to require an investor/lender to accept the transfer a loan, obligation, receivable, note or mortgage that is already in default and that had never been perfected as a lien. This leaves the record clouded with a “mortgagee” or “payee” to whom no money owed. While it is possible for the investor/lenders to assert claims and perhaps establish equitable or judgment liens, they have not shown any desire to do so. The record is devoid of any attempts in the last 10 years of any such attempt.

Thus the lien is (a) unenforceable by anyone and (b) being enforced by parties who wouldn’t have the right to try, but for the willingness of the Courts to look at only the whether the borrower made payments instead of requiring proof as to whether a payment is due, the actual balance and to whom it is owed.

BY YVES SMITH

Bombshell Admission of Failed Securitization Process in American Home Mortgage Servicing/LPS Lawsuit

Wow, Jones Day just created a huge mess for its client and banks generally if anyone is alert enough to act on it.

The lawsuit in question is American Home Mortgage Servicing Inc. v Lender Processing Services. It hasn’t gotten all that much attention (unless you are on the LPS deathwatch beat) because to most, it looks like yet another beauty contest between Cinderella’s two ugly sisters.

AHMSI is a servicer (the successor to Option One, and it may also still have some Ameriquest servicing). AHMSI is mad at LPS because LPS was supposed to prepare certain types of documentation AHMSI used in foreclosures. AHMSI authorized the use of certain designated staffers signing with the authority of AHSI (what we call robosinging, since the people signing these documents didn’t have personal knowledge, which is required if any of the documents were affidavits). But it did not authorize the use of surrogate signers, which were (I kid you not) people hired to forge the signatures of robosigners.

The lawsuit rather matter of factly makes a stunning admission (note that PSA here means Professional Services Agreement, and it was the contract between AHSI and LPS, click to enlarge):

Did you get it? They said that these procedures were standard between the two companies, which was to “..to memorialize the transfer of ownership lender to the securitization trust” right before initiating foreclosure. If you are a regular reader of this blog, you know that is impermissibly late. The note and mortgage had to get to the trust by a clearly specified date, usually 90 days after closing. As we’ve written numerous times, in the overwhelming majority of cases, the securitization entity was a New York trust, and New York trusts are like computer code, they can only operate exactly as stipulated. The exception was trusts by Chase and WaMu, which did allow for the originator to serve as custodian for the trust.

So AHMSI has just admitted that all of its foreclosures done with LPS were completed by the wrong party. In Alabama, wrongful foreclosures are subject to statutory damages of three times the value of the house, and recent cases have awarded much higher multiples of the property’s value. This little paragraph is a litigation goldmine for the right attorneys. I hope they have fun with it.

I’ve included the entire filing.

AHMSI v LPS File-Stamped Petition

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