The money proceeds from the forced sale of homes is not going to get paid to anyone who owns a loan account receivable. In effect, the courts are proceeding as though reformation has occurred without going through the process of reformation in which both sides would receive the benefit of a bargain (even if it was one created by a court).
Homeowners have never received the benefit of the bargain that exists. Without their initial and conitnued cooperation, the securitization scheme fails. Without the securitization scheme the transction fails. (There is no money).
Some questions arose as a result of my recent post. People asked me whether I was now conceding that there is a valid loan agreement or a valid enforceable underlying transaction. My answer is no.
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Perhaps I did not express my point clearly enough. As it stands, in the world of securitization, there is no loan. That is the conclusion of my analysis. If the definition of a loan requires the presence of a borrower and a lender, with the lender assuming a risk of loss on the loan agreement, then there is no logical basis for asserting that the loan exists. If the definition includes the start of a loan account receivable on the books of the lender and its continued existence throughout the term of the relationship with the homeowner, then there is no loan. It is simply not legally or logically possible. This leads to a conundrum.
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We have a loan agreement without a loan. We have a loan agreement because we have documents saying that there is a loan and an agreement.
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Normally such a scenario would lead to common law rescission or statutory rescission. So what would ordinarily happen in a transaction like this, is that the court would find that there was differing contractual intent going into the transaction or that circumstances had changed the nature of the transaction without the agreement or consent of one of the parties. But to do that, would be to dismantle a much larger set of transactions in the world of derivatives, whose existence depends upon reports of data that include performance under a loan agreement without a loan.
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So the next step in the legal process, if you can’t rescind the transaction without disturbing dozens of other transactions, is to reform the base transaction. This time, either the parties agree on the terms, or the court will set the terms. In order to maintain the securitization infrastructure, the reformed transaction would include the homeowner’s consent to the deal. It would also include transparent disclosure of revenue arising from the origination of the reformed transaction. And it would include a finding of adequate consideration paid to the homeowner for participation in the reformed agreement.
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It’s not perfect, but it is the only legal way out of this mess. It would mean creating an enforceable agreement in which the homeowner agreed that the transaction was a loan for purposes of enforcement. This would mean that the homeowner agreed to the appointment of a designated creditor rather than an actual one. Such agreements would be imputed to the homeowner regardless of present actual intent. This process does not actually create a loan agreement that is enforceable under current law. The nuance here is that it creates an agreement to treat the transaction as though it were enforceable under current law. Presently there is no such agreement and that is why homeowners win.
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If the investment banks and government regulators were being honest, they would own up to the fact that reformation is the only way out. But the investment banks do not want reformation, because that would include disclosure and sharing of revenue that was never intended when securitization was launched. It would reduce their revenue and their profit. It would also increase competition to provide incentives to homeowners to enter into future agreements. Those are all things that the investment banks do not want. And because of the revolving door between regulatory agencies and Wall Street, the regulators are stuck.
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I think that homeowners have standing to demand (i.e. file a lawsuit) the reformation and maybe they should. But there is no question that this would be an uphill battle since most people do not recognize the need. But the fact remains that under current law, none of the foreclosures can legally be allowed to proceed. The money proceeds from the forced sale of homes is not going to get paid to anyone who owns a loan account receivable. In effect, the courts are proceeding as though reformation has occurred without going through the process of reformation in which both sides would receive the benefit of a bargain (even if it was one created by a court).
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So the bottom line, following the logic of my blog post, is that there is no loan, but there could be a loan — or at least a virtual loan.
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At the present time, the only practical Avenue open to homeowners is to attack the case against them, revealing the unwillingness or inability of the Foreclosure Mill to produce corroborating evidence for the legal presumption they seek to apply from fabricated documents. If the homeowner starts early enough and has the resources to be persistent and aggressive, the foreclosure action will most likely fail. The problem with this avenue of attack is that the later the homeowner starts the more likely it is that admissions will be imputed to the homeowner that diminishes the likelihood of success in court.
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Neil F Garfield, MBA, JD, 74, is a Florida licensed trial and appellate attorney since 1977. He has received multiple academic and achievement awards in business and law. He is a former investment banker, securities broker, securities analyst, and financial analyst.
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