They Are Trading on Data, Not Ownership

The word “derivative” is used like “alakazam!” It is as if the word conjures up some magical mystery formula by which brokers and traders can engage make money without ever investing in anything real. The most recent explosion happened with Mr. Hwang and the Archegos hedge fund. Here is the quote from the April 3, 2021 New York Times article by Kate Kelly, Matthew Goldstein, Matt Phillips and Andrew Ross Sorkin.

Hwang kept amassing his stake, people familiar with his trading said, through complex positions he arranged with banks called “swaps,” which gave him the economic exposure and returns — but not the actual ownership — of the stock. [e.s.]

See https://www.nytimes.com/2021/04/03/business/bill-hwang-archegos.html?referringSource=articleShare

The article points out that the positions taken by Hwang were “complex” and did not involve ever buying or owning the stocks that would bring him riches or losses. Hwang was not a shareholder. His complex positions boiled down to one simple point: he was betting on data that arose from reports about the movement of the real stock on real exchanges. He could not bring a shareholder derivative action because he wasn’t a shareholder.

This is a whole new level of securitization. And it was brought to us by Wall Street brokers. They were not satisfied by finding undervalued bonds that would pay out 3-4 times the price on the bond market. They were not satisfied by the creation of junk bonds in which value was created out of nothing with the near certainty that the acquired companies would fail. The broker’s next generation’s scheme was to bring forth a cloud of smoke and mirrors in which there was no value and there were no losses for the broker and they named it “derivative.”

So they invented certificates that would be called mortgage bonds. They were issued not by any lender but by the brokers themselves in the name of a brand name bank, as trustee for a nonexistent trust. The purchaser of the certificates received discretionary promises from the broker that they would receive some regular payment — not from the trustee bank who was guaranteed and indemnified against any claims or losses by the brokers.

The investors were told that the money to pay them would come from homeowners who were putting up their homes as collateral for a loan deal. The homeowners, of course, had no idea the investors, the brokers, the trustee or the trust was named or existed. The homeowner thought that he/she was dealing with a company that was lending them money. That company would become known as the originator.

But they were not given any right to collect that money. They only received a promise from the investment bank that the scheduled payments to investors would be made. Investors received no right, title or interest in any transaction, obligation, debt, note or mortgage from homeowners. And buried within the prospectus was the “disclosure” that the payments might come from the money the investors had advanced and not from homeowners. It might even come from investors in other deals. And any analysis by any competent securities analyst would have and did reveal that this was a Ponzi scheme.

Meanwhile, the brokers took part of the money from the investors and paid homeowners to execute the note and mortgage. But the brokers never took ownership of the transaction, debt, note, or mortgage. Like Hwang, the brokers started trading securities as if they owned the stock (or loan) but not really owning it. But the brokers took it one step further. Unlike Hwang who could not bring a shareholder derivative action because he wasn’t a shareholder, they instructed companies to pose as loan servicers who in turn would hire attorneys to foreclose on the loans that were not owned by any of the designated parties.

The linchpin problem in foreclosures is simple. The brokers had borrowed money from lenders like Credit Suisse against the sale of certificates to investors, the proceeds of which were used to pay off the lenders. The borrowed money was what was used to pay homeowners. So the investors’ purchase of certificates was in no way linked to funding any transaction with homeowners.

This meant that nobody owned the loan and nobody had ever made an entry on any general ledger on which any loan account receivable was ever started. It also meant that nobody had a loss arising from a missed scheduled payment from the homeowner. And since nobody in the chain had ever paid for ownership of a loan, no loan was created, despite the homeowners’ belief that they had applied for and received a loan.

Since the money for the homeowner transaction came from a third party loan to the brokers, and since that loan was satisfied by the sale of certificates (“mortgage bonds”) there was no possible transaction in real life in which anyone could legally transfer ownership of the loan. Such a transfer could only (a) come from someone who owned it and (b) be effective upon payment of value for the underlying debt of the homeowner.

So they faked it. And nearly all foreclosures in all U.S. jurisdictions arise out of the transaction described above. And that means that nearly all of them were fraudulent organized schemes to defraud homeowners, investors, and all related people. When homeowners agreed to pay money to the originator and its assigns and successors, they had no idea that there was no reason to pay any money to anyone under this scenario.

When the homeowner issued the note and mortgage, he/she did so with the contractual intent to enter into a loan agreement that never materialized. There would never be anything more than a payment history if the homeowner started making scheduled payments. there would never be a loan account a loss arising from performance on the “loan,” and there would never be compliance with federal and state lending statutes, rules, and regulations.

Homeowners didn’t know it and they had no way of knowing that they were not involved in a loan that would be owned by anyone. They were paid a fee ranging from 2%-10% of the total amount of revenue generated from the fake “securitization” of their “loan.” They had no reason to return that fee without their specific and explicit contractual assent to the arrangement.

But what homeowner would have entered into such a transaction where there was no risk of loss by a real lender, complying with the law? What homeowner would have wanted to be part of any securitizations scheme? What homeowner would not have sought professional help from advisers? What homeowner would not have been advised that the incentives for this transaction, were not to profit from payments of interest, but rather to profit from the sale of securities? What homeowner would not have been advised that the appraisals produced for the “Closing” were merely made as instructed and did not represent actual value? What homeowner would have signed a deal where the securities stood to gain windfalls of money if the loan failed?

And all of that is useful to know not because you are going to prove it in court. It is useful because it is true and you can be confident that when you insist on compliance with timely and proper discovery demands your opposition will fail or refuse to do it. And that is what opens the door to the homeowner’s victory.

The claim against the homeowner cannot be proven as a prima facie case unless the named claimant can be proven to have owned the loan, debt, note, and mortgage and would receive the proceeds of foreclosure to make up for an economic loss caused by the homeowner. that prima facie case is generally viewed as presumed from the start of the litigation.

But once the homeowner contests the presumptions, and demands discovery relating to the actual movement of money in the real world in exchange for ownership of the debt, note and mortgage, the presumption can be rebutted if the opposition fails to comply. And it will be rebutted because the opposition can’t comply.

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• But challenging the “servicers” and other claimants before they seek enforcement can delay action by them for as much as 12 years or more.
• Yes you DO need a lawyer.
• If you wish to retain me as a legal consultant please write to me at neilfgarfield@hotmail.com.

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