More on Default Trap Door

There is a trap door that a lot of people are falling through. In a securitized loan the investor is the lender. In order for there to be a default, it is the investor who has lost money through non-payment. The investor has not lost money through non-payment if a payment was made through the government or insurance or cross collateralization that satisfies the obligation in whole or in part. If in part, then the question becomes whether the payments should be credited or the principal balance. Servicing banks will usually credit an extra payment to the monthly payments due and not to the principal unless specifically instructed to do so.

Now none of this takes away from the fact that it is dubious at best that the “borrower” (who is actually an investor first, an issuer second and then perhaps a borrower) is not a party to the bond transaction or any preceding transactions in the securitization chain which means that the unconditional promise to pay the “borrower” signed was instantly, at the time of closing, converted to a conditional promise to pay. That means because of the addition of terms and parties including co-obligors, that a new contract was created purporting to use the transaction between the named payee on the note and the “borrower” as the base transaction. The problem is that the borrower never agreed and never would agree as a reasonable person to have his identity used for the purpose of securing loans to other people nor to have his payments applied to defaults of other “borrowers.” Nor would the borrower agree as a reasonable person to keep paying after the obligation was paid. Thus we are left with a NEW CONTRACT and a series of NEW CONTRACTS going up the securitization chain as terms, conditions, insurance, parties were added.

The substance of the transaction is that the investor purchased a bond to which the “borrower” was not a party nor an obligor. The borrower signed a note to a party who was paid in full at closing satisfying the note at the same moment (or even before) the borrower’s “loan” closing — a transaction to which the investor was not a party. So we have two transactions in which the real parties in interest were kept separate and the real information regarding the entire single transaction was withheld from both sides. Either the investor transaction and the borrower transaction are linked or they are not. If they are linked as seems to be obviously the case, then the borrower has some liability on part of the obligation owed to the investor, along with all the other people (co-obligors) who fed out of that trough calling their withdrawal “fees,” “profits” etc. If they were not linked then there is nothing to talk about — no collection, no foreclosure —- because the obligation down the securitization chain, regardless of what level you stop at, has been satisfied in full plus exorbitant fees.

It seems stupid to even be required to state something this obvious — you cannot sue and collect on a loss that does not exist. To do so would be to create a windfall to perpetrators of fraud. While a windfall is not the object of this “game”, if it happens it clearly ought to go to the most innocent party — the one with the least access to information and who knew the least amount about the entire securitized chain of events (the “borrower”). However, to repeat my mantra, the investors were defrauded in virtually the same way as the “borrowers”. Thus a remedy that places everyone back in the position they were in before the fraud, would be to get as close as possible by funding a new mortgage that pays off the investor part of his investment, brings the balance of the note down to 80% of true loan to value, with affordable terms and perhaps an equity kicker for the investor. That would include BOTH borrowers and investors. The pretender lenders would be eliminated as they should be because they have no losses from these loans. Some of them may have losses stemming from selling multiple futures contracts on the same loan but that is simply a bad bet, a poor investment decision by a party who should and did know better.

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Tags: borrower, disclosure, foreclosure defense, foreclosure offense, fraud, Lender Liability, predatory lending, securitization, trustee
Posted in bubble, Corruption, Eviction, securities fraud |