IF THE INVESTORS SAY THE BANKS OWE THEM THE MONEY THEN WHY HIT THE BORROWERS TOO?

It’s easy to get crazed and confused by all the questions revelations and news stories. Here is a summary of what I think it all means.

We all know that the investors were the source of all the funds that were used in loans where the receivables were cut up into pieces and then sold. This was done under a scheme that is commonly referred to as securitization. Supposedly investment pools were formed to purchase loans that were originated by third parties. When the foreclosures started the assumption was that the homeowner was obligated to make payments to the investors that purchased the pieces of the loans. This was to be accomplished by payments to servicers who in turn would make payments to trustees who in turn would distribute the money to the investors.

We all know that the highest probability is that the pools were empty and remain empty. We all know that the investors and even the federal government as an investor demand full repayment for the purchase of the defective mortgage bonds and synthetic derivatives that were used to construct a vast Ponzi scheme. The investors clearly have decided to make their claim against the investment banks and to avoid making any claim directly against the homeowners. So the source of funding is commanding the money back in full from the investment banks and not the homeowners.

Under the strategy being followed by the banks, the homeowners would be subject to foreclosure and even deficiency judgments even though the original source of funding has been paid in full. Under their strategy and theory the fact that the investors who were the source of funding are ignoring the existence of the trustee and the pool because the entire scheme was deceptive and fictitious, the homeowners would nonetheless be liable to any party designated by the investment banks. That liability would be represented by the promissory note executed by the homeowner and secured by the mortgage or deed of trust.

The problem with this strategy is that the banks are not the payee or the obligee under the promissory note nor are they the payee under the defective mortgage bonds. If the banks are liable to the investors and the homeowners are not liable to the investors the legal status of the obligation is in question. The best the banks could do would be to make a legal claim against the homeowners for unjust enrichment and to make a claim for an equitable lien against the homeowners property. This would be an entirely new transaction even if it were accepted by a court. In the meantime, it is obvious that the position of the investors corroborates the theory advanced by attorneys defending these fraudulent foreclosures. The obligation, note and mortgage were all split each from each other. The obligation is currently unsecured and cannot be secured without a new signature from the homeowner or a court order.

For this reason we have reported on this blog the growing strategy of showing the home as an asset with an unknown value in a bankruptcy petition. Creditors involved in the origination and securitization of the obligation would be shown as unsecured. The ability of a creditor to obtain relief from stay in order to pursue a judicial foreclosure or to proceed with a nonjudicial sale would be completely blocked, because on the petition they are either not shown at all, or shown as unsecured creditors with contested claims. The party claiming to be a creditor would have to show a colorable right to claim the status of a creditor and a colorable right to claim that the debt is in fact secured. No such colorable right exists without the note being payable to the alleged creditor. The only exception would be credible proof of an assignment and endorsement in which the note and mortgage was legally and actually transferred to the alleged creditor.

Since none of those transfers occurred at the time of origination of the loans nor did they occur while the loan was performing, the presentation of instruments purporting to transfer the loan must be accompanied by credible evidence showing that the alleged transfer of a nonperforming loan into an asset pool governed by a pooling and servicing agreement was valid. This is impossible. None of the asset pools (trusts) allowed for the transfer of nonperforming loans and the cut off date as required by the Internal Revenue Code and the securitization documents as in all cases long since expired. Thus the presentation of such documents without the supporting enabling documents is a direct attempt to commit a fraud upon the court. An increasing number of judges are warning that they will follow the example of other judges who have imposed fines on both the client and the attorney for this behavior.

The strategy of the banks is essentially political and not legal. They want the borrowers to take responsibility for the failure of the banks to properly disclose the nature of the transaction to the homeowners and the investors. If the investors have chosen their remedy against the banks than the obligation from the homeowner ceases to exist. As described above the homeowner may have a new obligation for unjust enrichment if a party comes forward and proves that they paid the homeowners obligation under the original loan. The burden of proof would be on the alleged creditor to establish itself as a party with standing and as a real party in interest. Since they are coming in under the laws of equity they would be required to show clean hands. This is also impossible since all of the loans were deceptive, fraudulent and lacked disclosure required under state and federal lending laws.

The banks that created this mess would therefore bear most of the responsibility for its consequences. It is highly improbable that under the best case scenarios there would be many investors or homeowners who would realize a windfall. But it is certain that the Wall Street intermediaries have already realized a windfall and would receive an additional windfall if they were able to pursue the borrowers and take the homes too. The banks are hoping that politics will triumph and that if they maintain control of the narrative they will be able to portray the homeowners as seeking a free house or a windfall, when in fact homeowners are merely defending themselves against a fraudulent transaction and a fraudulent attempt to use the courts as a vehicle to complete their deceptive scheme.

Posted in bubble, Corruption, Eviction, securities fraud |