Hidden Equity in Securitized Mortgages
It comes as no surprise to learn that the investment banks have been hiding things from us for decades, since 1983 when the era of securitization of debt came into existence. Back then the nominal value of derivates on the autocratically controlled trading posts for derivatives was ZERO. They didn’t exist.
The main purpose was concealed from both homeowners and the purchasers of certificates issued by the investment bank. The point of the entire plan was to make money solely from the sale and trading of unregulated securities. There was no incentive to make a good loan or any loan. There was no incentive to use the money proceeds from sale of certificates to investors primarily for the benefit of the investors.
These facts were withheld, concealed and denied by the investment banks. But they continue to be true. And what that means is that all investors — homeowners who purchased what appeared to be loan products and pension funds who purchased what appeared to “sophisticated” loan products — are entitled to know the full scope of the deal and to be compensated accordingly for revenues generated it risks that were undertaken without knowledge of the scope and consequences of those risks.
And the fact that those homeowners and pensions funds still don’t realize the hidden value of their claims against the investment banks who benefitted so greatly from the securities scheme does not mean that no such entitlement exists. It simply means that they still don’t know about it.
Lawyers and homeowners keep asking me about notes, mortgages, endorsements, assignments, and delivery. The investment banks want all of your attention focused on the allonge or assignment.
One of the interesting things about that is that when fabricating transfers of the note, there is no recitation regarding payment of value in exchange for the endorsement. On the mortgage transfer, they usually recite “for value received.” Of course, we know that no value was received because no payment was due. And because no value was paid, the grantee could not be said to be the owner of any loan account receivable due from the homeowner. The “assignment” is a legal nullity which means that for legal purposes it is as if it never was written, signed or recorded.
The delivery of the note with an endorsement raises the presumption of the entitlement to enforce the note. And most courts use the delivery of the note as a basis for raising the presumption that the note constituted “title” to the underlying obligation. But that would only be true if there was a transaction in the real world in which there was a purchase and sale of the underlying obligation.
The reliance on endorsements to the promissory note skips the fact that there is never an assertion of the status of a holder in due course. If there was no status of a holder in due course what was missing? People forget to ask that. Was it that there was no payment for the purchase of the note? Was it that the endorsee was not acting in good faith? Or was it that the endorsee already knew of the defenses of the maker (homeowner)?
In all foreclosure cases, the claimant takes the position of a holder but not a holder in due course. And the lawyer for the claimant always attempts to leverage the apparent possession of the note as reason enough to foreclose on the mortgage or deed of trust. Setting aside the fact that the original note has probably never been produced, possession of the original note is not sufficient for enforcement.
The legal requirement for enforcement of a promissory note consists of possession plus authority granting the entitlement to enforce the note. Who can grant that authority? The answer must be the owner of the underlying obligation or someone who represents the owner of the underlying obligation. In either event, the owner of the underlying obligation must be identified.
The playbook for the banks consists of wearing out the homeowner or the attorney for the homeowner with strategies that misdirect attention from the real issue.
The real issue in any action to enforce a note or enforce a lien is very simple. It is about money. More specifically about money owed. It is not about games to play to get money because the note or mortgage exists. it is about collecting an unpaid debt.
Unless there is a debt and unless the debt is unpaid and unless the debt is due to the claimant there can be no claim. Why would anyone want to give money to someone just because they know about the original promise to pay money?
Knowledge is valuable to be sure, but the homeowner is under no obligation to pay for that knowledge, since he/she already has it, to wit: a promise to pay was issued at the origination of the transaction. But that promise was made in the context of what the homeowner believed to be a loan transaction with a specific lender who had a risk of loss on the transaction, just like the homeowner.
If the promise was made without knowledge of the full details of the elements of the deal, then the homeowner is entitled to Full disclosure and participation in the entire deal, not just part of it.
But the homeowner does not know what happened to that promise after he or she issued it. Since the counterparty to the transaction with the homeowner consists of a group of companies intending to make a profit on the sale of securities, the intent of the homeowner and the intent of the counterparty(ies) is entirely different.
The result in legal analysis is as follows: there is either no contract or there is a contract, the details of which have not been disclosed. Normally the remedy for this would be rescission. But even in the face of expressed federal law requiring rescission if the homeowner asked for it, judges have been universally opposed to enforcing rescission under statute or common law.
Court in equity are expected to do equity. In order to make sense out of the transaction involving the homeowner, the entire story must be told and adjustments must be made to the contract. If the homeowner is excluded from the securities scheme then there is no consideration for the issuance of the promissory note. If the homeowner is included in the securities scheme, then the issuance of the note was an investment into the security scheme, for which the homeowner was entitled to compensation.
That leaves open the question of the amount of compensation to which the homeowner might be entitled. This requires an evidentiary hearing in which the judge hears evidence on what reasonable compensation would be appropriate as payment to the homeowner for starting the highly profitable securities scheme. But I think a reasonable starting point would be whatever the amount was that was paid to or on behalf of the homeowner, leaving no balance due from either side.