Securities, Notes and the Illusion of Enforceability

By William Hudson

State Court judges are missing the point- the paperwork is all an illusion in a majority of cases. Instead of being concerned that the bank is filing photoshopped, forged and robosigned documents into the court record, they are more concerned if the homeowner has paid. This is despite the fact that every large Bank in the country has been fined for foreclosure “irregularities”. Too many State judges are refusing to follow basic contract law or scrutinize the documents presented. Presumptions favor the banks in cases where there is hard evidence of fraud. It is now known that due to securitization that the vast majority of mortgage notes and assignments are created-on-demand to provide the impression that the note is valid. You would think that in light of this information that more judges would be concerned that the note is even enforceable.

Former FDIC Chairperson Sheila Bair  wrote a book in 2013 entitled Bull By the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself. Bair provides some interesting information on Mortgage Backed Securities she refers to as Non-Traditional Mortgages (NTMs). Non-traditional mortgages are not traditional mortgages as advertised to borrowers but security contracts. It was not disclosed to the homeowner that investors would be engaging in financial deals that would net them millions of dollars off a single loan. Most homeowners would not have agreed to have their signature and identity used to make millions of dollars for investors while they shouldered the risk. The homeowner’s risk includes taking out a “loan” on a home that is artificially inflated because of false economic factors and an inflated appraisal. Furthermore homeowners were not told that the originator on their note did not lend them a dime and would be paid more to foreclose on the homeowner than service the loan. Most homeowners would have preferred to live in a cardboard box than agree to these terms.

The promissory notes that were issued in these transactions are not worth the ink on the paper. According to Bair the loans were never properly assigned to the trusts, the trusts are empty and the bank is engaging in fraud to create the illusion of ownership. The lending practices that Ms. Bair claimed were “predatory” in 2001 had become “mainstream among most major mortgage lenders” by 2006. By repealing Glass-Steagall in 1999 the banks were allowed to run amok with very little regulation (if any) and little to no oversight. Here we are 17 years later and Congress hasn’t bothered to worry much about what the banks have done- and won’t until the economy implodes and their own home values and retirement funds plummet.

Along with the repeal of Glass-Steagall Congress passed the Electronic Signatures in Global and National Commerce Act otherwise known as E-Sign in 2000. This law effectively allows your signature on any document to be transferred electronically- if you give your “explicit agreement and authorization”. If you gave your explicit agreement was considered the consumer protection “safe harbor” provision that made it into E-Sign and UETA. E-Sign is the federal version of the state ratified Uniform Electronic Transactions Act (UETA). Homeowners were never notified about E-Sign and UETA when they signed their mortgage loans and did not receive a disclosure notifying them that their agreement to electronic transfers of the loan was necessary. It was kept a secret because most of us, understanding the value of our signature, would not have agreed to such a contract especially with the rise of digital fraud.

In order to securitize loan documents they needed to be electronically transferable but the homeowner was not advised about this little “fun fact”. Failure to obtain explicit agreement from the homeowner for electronic transfers does not nullify the underlying contracts – but it does bring up questions about the contract under state law. Homeowners were under the impression that they are obtaining a traditional mortgage when behind the scenes it had already been designated as a securities instrument.  Congratulations! As a homeowner you just signed a negotiable instrument that was “intended” to be whisked away and materially altered into a securities certificate under UCC Article 8 – but you didn’t know it. Too bad- so sad!

It appears that these promissory notes were designed to be transferred and negotiated under UCC Article 8 – not Article 3.  Article 8 governs documents in addition to “securities” and covers all financial assets including securities, as well as any property held by a securities intermediary for another person if it is agreed to be treated as a financial asset. The borrower is entitled to have access to the authoritative copy. And it appears courts in the past have felt that only the originals can provide sufficient warranty and clarification.

Since Glass-Steagall was repealed in 1999 the banking and financial industries have been defrauding homeowners and the public with a process that is such a clusterbomb that no one can decipher who paid who, when, why, and how. The courts who for hundreds of years relied on a set of laws based on consummation, transfers and validity are now lost. If they look to the Uniform Commercial Code they quickly find that the contracts are not enforceable because there were no actual disclosures of who was lending the funds to the originator (consummation), there was no meeting of the minds, and that the owner had issued a security with no disclosure- to his or her own detriment. Although securitization is legal, it was not legal the way it was enacted and the housing market will be decimated for years because of these deceptive deeds.

A “meeting of the minds” must exist with respect to each material issue in the agreement. Montagna, 269 S.E.2d at 845; Scott v. Pacific Gas & Elec. Co., 904 P.2d 834, 841 (Cal. 1995).   Failure to agree on essential terms of a contract indicates a lack of mutual consent and online agreements must also demonstrate that both parties intend to be bound to the contract.   See Feldman v. Google, Inc., 513 F. Supp. 2d 229, 236 (E.D. Pa. 2007). Although online agreements include credit card agreements and loans that are accepted online, mortgage notes otherwise known as promissory notes fall into a different category. Even if the mortgage agreement was downloaded from the Internet the Uniform Electronic Transactions Act still required that an explicit agreement be made at the time of issuance, but homeowners never received notice of UETA “safe harbor” clauses. So much for the fact that contracts require the, “Terms of the agreement should be clear and unambiguous, and it is the duty of a court, not a jury, to determine if a valid contract exists. See W.J. Schafer Assocs., Inc. v. Cordant, Inc.., 493 S.E.2d 512, 519 (Va. 1997).

These electronic issue affect the overall validity of a contract but are rarely plead in court. Other essential elements of a contract tend to go unaddressed in a foreclosure dispute including the “agreement to agree”. A promise to agree in the future is not binding on the parties, and therefore creates a failure of consideration. Consider the clause in your promissory note that says the lender “may transfer” the note. It does not say the lender “will” transfer the note, or “is going to” transfer the note, or even “already has transferred the note.” The clause quite clearly communicates that “sometime in the future” the lender “may” transfer the note to someone else. “May” as defined by Black’s Law Dictionary (8th ed. 2004) is futuristic:

may, vb. 1. To be permitted to <the plaintiff may close>. [Cases: Statutes 227. C.J.S. Statutes §§ 362–369.] 2. To be a possibility <we may win on appeal>.

Transfer, according to Black’s Law is also well defined:

transfer, n.1. Any mode of disposing of or parting with an asset or an interest in an asset, including a gift, the payment of money, release, lease, or creation of a lien or other encumbrance. • The term embraces every method — direct or indirect, absolute or conditional, voluntary or involuntary — of disposing of or parting with property or with an interest in property, including retention of title as a security interest and foreclosure of the debtor’s equity of redemption. 2. Negotiation of an instrument according to the forms of law. • The four methods of transfer are by indorsement, by delivery, by assignment, and by operation of law. [Cases: Municipal Corporations 917. C.J.S. Municipal Corporations §§ 1658–1660.] 3. A conveyance of property or title from one person to another. [Cases: Bills and Notes 176–222. C.J.S. Bills and Notes; Letters of Credit§§ 4, 29, 139–141, 143–159.]s

“May transfer” appears to mean that “sometime in the future” the lender might dispose of its interest in this note to another party. However when a note is securitized (in most cases) the warehouse lender or investment bank has already taken the “transfer” when it funded the loan before the homeowner ever signed the note. It did not happen in the future – it had already occurred and there was no disclosure, meeting or the minds or mutual assent. Why not just change the terms in the contract to actually what will transpire? Why the secrecy?

Basic contract law would allow us to deduce that there was a securitization already in motion, and that the originator failed to obtain explicit agreement to electronically transfer the documents per UETA, that the mortgage was intentionally designed to avoid the consumer safe harbor of UETA, and that the clause in the note the “lender may transfer the note” (in the future) wasn’t defined; when in fact the note had already been pledged and paid for in a securitization transfer; and, undisclosed to the homeowner – would it be considered “far too central” to the transaction when it appears “there was never any intention to enter into a binding contract” by the originator? The Illusion of Consummation is why Neil Garfield advocates the act of Rescission. There is something sinister when a homeowner is not allowed to know WHO is LENDING the homeowner MONEY. If you don’t know WHO has “skin in the game” HOW can you negotiate in good faith if there are any bumps along the road during a 30 year mortgage? A servicer who is rewarded financially to foreclose and who has never paid a dime for your loan has no “skin in the game.” In your grandparent’s time if someone got sick or lost a job they would go see their banker and make an agreement to correct any deficiency. The banker didn’t want the home- they wanted payment. Today, the bank does not want the payment, or even the house- they want the foreclosure.

The mortgage contract should be called a securitization contract since the intent is to securitize the loan. Because of the securitization and the material alteration of a negotiable instrument under UCC Article 3 that mutates into a mortgage backed security under UCC Articles 8 and 9 without disclosure to the borrower- wouldn’t that appear to be a central contract issue?

“Because I conclude that the parties merely agreed to agree in the future, and that no contract resulted, I would affirm the district court’s dismissal of the promissory estoppel claim as well. As the majority opinion concedes, the district court’s ruling was correct if there was never any intention to enter a binding contract;  promissory estoppel cannot create a contract where none exists. See Rennick v. Option Care, Inc., 77 F.3d 309, 316-17 (9th Cir.1996).”

In most mortgages it does not appear that there was ever any intention by the loan originators to enter into a binding contract with the homebuyer. The loan had already been sold by the originator before the borrower ever signed the loan. The originators deliberately hid where the funds were coming from and never owned the note. The funds were already committed to a different party and funded before the borrower signed. How could the originator transfer what he didn’t own? It couldn’t and it appears that it didn’t. Therefore, the paperwork appears to create the illusion of ownership while the true money trail is obfuscated.

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