WHAT IF THE POOLS ARE EMPTY?

Oct 15, 2010

COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary

If you’re looking for an analogy for the current mortgage crisis, look at the salad oil scandal, where the tanks were empty and the business model was simply fraud. The only difference, at the present time, is that most people are not even looking for the mortgages, much less their validity.

In the salad oil scandal of 1963 the game was simple. Investors were taken to a site where a substantial number of huge tanks were located. Each tank, they were told, was filled to the brim with salad oil. They were taken to the first tank and sure enough it was filled to the brim with salad oil. The tanks were so large that it took some time before the investors could be escorted to the second tank. During the time that they were traveling from the first tank to the second tank the oil was pumped from the first tank to the second tank. Thus going from tank to tank they confirmed that all of the tanks were filled to the brim with salad oil when in fact virtually all of the tanks were completely empty except for the oil clinging to the walls. The perpetrators had all of the arrogance and self confidence that we see in the current masters of the universe on Wall Street. They were wealthy and powerful with substantial influence and Washington DC. None of that change the fact that the tanks were empty. And at the end of the day the fraud was exposed, people went to jail, and investors lost $150 million.

Just like the great mortgage fraud that produced the great recession, the salad oil scandal would not have been possible without reams of documents that looked right even if they were wrong. It would not have been possible without credible sponsors upon whom many people would rely, since it was reasonable to assume that nobody with a good reputation would risk everything to participate in a fraudulent scheme––the exposure of which was inevitable. So it is with the current mortgage mess and this article looks at the consequences of the final revelations that are yet to come.

Contrary to the Wall Street Journal’s editorial opinion, the transfer of property and the creation of contracts are extremely important to the stability of our marketplace and our standing in the world. There is nothing in this article that the rest of the world does not already know. What everyone is waiting for in this country and beyond our shores is an acceptance and acknowledgment of the truth. Without that, there can be no confidence in our currency and no-confidence in our markets. Without confidence in our markets there can be no real financial stability of any meaning––to homeowners, investors, and foreign governments. The use of documents and public records and transactions relating to real property and personal property is essential for the stability of our society. Until this mortgage mess we all thought we knew what happens after an offer and then acceptance resulting in the transfer of real property or personal property. We all thought we knew that when a real property transaction was recorded in the public records, it was binding in the absence of fraud. We all thought we knew that the amount of fraud was minimal because the transactions had to be recorded in the public records. That model has been turned on its head and we now are faced with the question of finding a remedy to the distorted title chains in tens of millions of transactions.

The capital markets are beginning to perceive the depth of the problem. The so-called faulty filings and foreclosures as revealed a much deeper problem of far greater significance. The problem is that the documents referred to in the “faulty filings” do not exist and in many cases never existed. As I revealed on these pages repeatedly over the last year and a half, it has become readily apparent that transferred documents were never prepared, executed or delivered as required by the securitization documents. The time period for curing that issue has expired. Under the law, I can find no support for any strategy based upon an intention to transfer or an equitable transfer. The simple and inevitable conclusion is that virtually none of the loans were actually transferred into the pools. The fact that they distributed money as though the transfers had occurred leads to contractual matters and tax consequences that have very little to do with homeowners or borrowers, although they may have a profound affect on the investors. If the tanks were empty, the investors are simply entitled to recover their money from the parties that took their money. Any claim against the borrowers is strictly equitable based on unjust enrichment or other similar causes of action––none of which are secured.

If the tanks were empty, then any contract, loan, hypothecation, insurance, credit default swap or credit enhancement provision in any contract was based on an asset that did not exist. Federal bailouts were thus fraudulently obtained along with any payment from any party for any loss attributable to depreciation of assets that did not exist. Any current liability based on a claim to cover those losses would be eviscerated. Any claim of value on a balance sheet consisting of these non-existing assets would require a corresponding correction. Hence the values of the stock prices of the securitization players have begun to decline again while the stock values of the insurers and counterparties who were thought to have a liability on these nonexistent assets are seeing appreciation.

If there was no valid transfer of the loan, then the lender of record (in the public records of the County recording office) is named on an encumbrance which is unenforceable because the obligation of the debtor is not owed to the lender a record. That is the reason why I believe that none of these loans are actually secured. In fact, I believe there is a serious question as to whether any of the documentation prepared closing can be used at all, since the full intention of the parties and the identity of the real parties involved was never disclosed (contrary to federal law) before, during or after the alleged closing. It is therefore my opinion that after a thorough analysis by the courts the conclusion will be that each homeowner who acquired one of these obligations is free from any encumbrance until a legal judgment is executed in a court of competent jurisdiction. Any such claim could only be brought by a real party in interest and would be subject to affirmative defenses and counterclaims from the homeowner in connection with the fraudulent misrepresentations at the alleged closing.