TILA and Purchase Money First Mortgages: From FAQ

QUESTION:

ANSWER: This is a far more complex question than it appears. Normally it would be simple. But in the context of the mortgage meltdown of 2001-2008 there are more questions than answer. Yes, on its face, purchase money first mortgages are excluded or exempted, depending upon how you want to look at it. BUT there are a number of factors that take the exemption away, in my opinion. to wit:

1. Combining with a HELOC is generally considered to be a single transaction that removes the exemption
2. Refi’s are covered by TILA
3. Illegal transactions are void ab initio: this was a securities issuance scheme — for the fraudulent issuance of securities based upon the revenue and security of an instrument that was converted (a) from negotiable to non-negotiable and (b) from secured to unsecured
4. This was a table funded loan wherein the source of funding and the fees paid were NOT disclosed. We are getting answers now that say we cannot have the information as to who the holder in due course is or who the source of funding was because it is “confidential.” The source was a non-chartered, non-regulated, non-registered lending entity for whom the exemption was intended. The “pretender lender” rented its charter to an unauthorized entity for a fee of usually 2.5%, abandoned its underwriting standards in favor of whatever the source of funds wanted, and conspired in a predatory “lending” scheme that was in fact a Ponzi scheme involving unregulated securities, undisclosed insurance, and commitments to apply payments on the note to the obligations of others.
5. While certain remedies might not be available under TILA, the inquiry doesn’t stop there. TILA and Reg Z make it abundantly clear what the “lender” duties are — and in every case we have seen the lender abdicated its fiduciary duties, disbanded its appraisal review committee and basically rubber stamped anything the funding the source wanted.
6. The pooling of loans in and of itself might remove all exemptions and exclusions. Carol Asbury has hypothesized that the note and mortgage effectively lost their original identity as soon as they were “pooled.” I agree.
7. Remember that the economics were turned on their head.

• Before the securities fraud in the mortgage meltdown, banks were underwriting their own loans and putting their own balance sheets at risk.
• So they wanted loans that would be likely to be repaid, which meant that the borrower was credit worthy which in turn meant that the interest rate was fairly low.
• In a secondary market, if the bank wanted to offload some risk to adjust its balance sheet it might make a small profit or take a small loss for a 5%-6% loan.
• During the securities fraud period, the funding sources wanted loans with extremely high interest rates (at least nominally stated on the note) — sometimes exceeding 16.5%. With teaser rates and ignoring the fact that the first adjustment would take the payment higher than the gross income of the “borrower” they could “qualify” the “borrower” based upon the first payment which could have been as low as a a few hundred dollars on a multimillion dollar loan.
• By overloading the “pool” of loans with “toxic waste” (tranche z) loans and hiding them under a thin layer of traditional loans, the secondary market became a wild west of selling loans for 2-5 times the funding amount. Thus a $300,000 mortgage bearing an interest rate of 16.5% could be sold for more than $900,000 because it was buried in a pool of mortgages that hid the real nature of the pool.
• By selling loans whose expected life was far less than what was represented and whose quality was near zero compared with the 30 years investors thought they were buying with triple AAA ratings, investment banks were creating “profits” of such excess that it was possible to quadruple the income of mortgage brokers, appraisers, title agents, and “pretender lenders.”

Tags: foreclosure defense, foreclosure offense, TILA
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