How Borrowers Could Make Money from Mortgages and Foreclosures

Originally posted by: Neil Garfield


Take a step back and then look at this situation from a wider perspective.


Understand that the real deal was the issuance of multiple levels of securities made possible by investors putting up money and borrowers signing their name. The investors did not understand they were creating an improper “yield spread premium” between what they were investing and the actual lower amount of what was loaned.


The borrowers of course had no idea that their signature would trigger $12 in revenue for every $1 that was loaned.


It would be one thing if everything was disclosed to investors and borrowers as required by law. It’s quite another when such disclosures are not only withheld but are also subject to active concealment.


Judges have been asking why borrowers should not be required to pay their just debts. The real question is how much of the borrower’s debt should be offset by a fair share of the undisclosed bounty created by his signature, reputation, and collateral. If there is anything left of the debt after the required disgorgement of undisclosed compensation and the royalty that should have been paid to borrowers, then the owner of the debt has a right to payment.


The stockbrokers (investment banks) should have been intermediaries but they converted investor money to money owned by the stockbrokers.


There are actually names for such situations that fall under the step transaction doctrine and the single transaction doctrine.


The law has always had remedies for such schemes in which the undisclosed revenue is disgorged or a share (royalty) of the undisclosed bounty is awarded to the party who thought they were entering into one small contract but whose signature was the foundation for a much larger scheme. It’s called unjust enrichment or wrongful enrichment.


The test for the step transaction doctrine and the single transaction doctrine is simple — would the smaller deal or the larger deal have come into existence without the investors or the borrowers. The answer is clearly no. No investment bank would have loaned money to borrowers without the money from investors. Nor could a loan exist without the agreement of borrowers.


Thus, investors and borrowers are all entitled to share in the entire venture instead of just the contracts they signed. And the entire venture involved the issuance of multiple levels of securities and “trading profits” that should have been allocated to investors, borrowers or both.


The lawyer who understands this and fights for it is likely to turn the entire industry on its head, where it belongs. He or she will also make more money than any other case in history.


And for those who resist the idea of giving a windfall to the homeowner, consider this:

  • the entire paradigm of lending was changed by the illicit application of the principles of securitization.
  • In the new paradigm, contrary to the requirements of the Truth in Lending Act, lenders (Stockbrokers/investment banks) were (a) not disclosed (b) and not subject to making proper disclosures.
  • TILA puts the responsibility for a good appraisal and viability of the loan on the lender — but the actual lender is no longer present at the closing table and finding liability for violation of lending laws now requires piercing multiple corporate and trust veils — or getting a judgment against a dead originator.
  • But the most important change in paradigm is that the lenders, having no risk of loss in lending, were not incentivized to make good loans and earn revenue through interest payments.
  • Instead they discovered that the worse the loan, the more money they made on the yield spread premium between what investors invested and what was actually loaned out.
  • And the worse the outcome, the more money they made on failure of the loan, the certificates issued in relation to the loan and the derivative instruments and insurance policies.
  • So, lenders were incentivized to make bad loans — a key fact that was obviously not revealed to borrowers or investors.
  • How many borrowers would have accepted the loan if they knew that their lender was betting, they would fail?
  • How many investors would have accepted the promise of a stockbroker to pay them a stream of cash flow from loans that the stockbroker knew would fail?
  • Why should the investment banks keep all that profit?
  • Why were the investment banks not taxed on the illicit income generated from this scheme?




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