The Market Ticker – Mish Is Again Off The Rails (Foreclosuregate)


State attorneys general are not happy with a $5 billion offer by major banks to settle lawsuits regarding robo-foreclosures and other alleged grievances. Some officials want as much as $20 billion. The compromise threat is on the high end.

He then goes on to try to make the case with:

This is what I want to know:

  1. How many people lost their home to foreclosure out of an error? By error I mean the wrong person, a home with no mortgage, or a major procedural error.
  2. How many people think they deserve a free house and clear or a principal reduction over “show me the note” nonsense or other problems including unemployment?
  3. How many people did banks string along for many months with promises of work-outs, where the person paid their mortgage for months, then lost their home.

Dismissing #2 right up front, of course.

There’s a problem with this: The UCC, along with the contracts in question, do not support his liberal interpretation of “Show me the Note.”

Bluntly, you only owe the person who actually owns your note money.  The UCC is very specific on what has to happen for two events to take place:

  • The security interest (the right to toss you in a foreclosure, as opposed to simply suing for money which you may not have)and
  • The owner of the paper having holder in due course status.

Neither of these are “technicalities.”

First, if someone sues for foreclosure who doesn’t actually own the loan the person who does own it still has an enforceable claim against you.  That means you could get foreclosed upon and then sued by the actual owner for the money, effectively being forced to pay twice – once by ejectment from the property and then again by being financially destroyed a second time through a lawsuit for money damages.  The UCC and general contract law, along with the PSAs, are structured in a form and fashion to prevent this.  Ignoring these very real legal requirements is not a “formality”, it is part and parcel of the rule of law.

Second, the “Holder in Due Course” status is extremely important and germane.  One of the sordid facts of the “aughts” (the 2000s) is that many people were sold money under false pretense of some sort.  There were myriad frauds, including floating-rate loans sold as fixed, “riders” in middle of paperwork that was slipped in un-noticed and in violation of the good-faith estimates and claims given to borrowers before closing along with all sorts of chicanery and outright fraud.  Lending officers held themselves out not only as sellers of money but as qualifiers of a person’s capacity to pay, an expert opinion proffered based upon ratios and program claims given to homeowners.

There is a fair issue triable at law as to whether active frauds occurred in these areas.  Some of the cases are black-letter, where borrowers had their own submitted figures and papers altered by lending officers through multiple iterations through computer-based underwriting without their knowledge.  Others are more nebulous and may have (or may not have) involved active deception by the borrower himself.  These are issues to be tried in a court of law and examined by a trier of fact. 

If holder in due course status does not apply to the current “owner” of the debt the remedies available to the buyer extend to the current holder of the paperIt is only through establishment of that holder in due course status that the paper’s owner escapes successor liability for these actions.

This isn’t academic in these situations by any means.  The majority of borrowers in “risky” loans such as 2/28s, 3/27s and Option ARMs have reasonable assertions to make in these situations.  You cannot try these cases “en-masse” and dismiss the claims by fiat; you must look at them individually, in each case, and try them on the facts.  If in point of fact the trust never got the paper as required by the PSA then the trust has no “holder in due course” status at best as a late transfer now takes place with knowledge of the fraud claim existing against its origination, which negates that status.

In many of these cases it appears that the PSA was in fact not complied with and in many of those situations the conundrum becomes even worse, because the originator, securitizer or depositor, whoever they may be, is out of business and has no successor organization.  In some (but not all) of these cases the corporate estate is in bankruptcy and the asset in question is properly an asset of the bankrupt estate.  The Trustee of the bankruptcy is the only one legally empowered to transfer an asset out of a bankrupt estate prior to its final disposition at law and your assertion of a contractual right to that asset is immaterial as you are subject to the priority of claims in a bankruptcy action.

I have seen many examples of exactly this sort of apparent fraud, where an “assignment” takes place on a day during which the organization allegedly performing the assignment literally does not exist as a matter of fact or law.  Even worse there are assignments that appear to have been initiated by the grantee, which is exactly backwards and is effectively identical to me assigning myself title to your house – without your signature anywhere to be found!

In still other cases where transfers did not happen the REMIC sections of IRS code prohibit the transfer without destroying the trust’s tax preference.  In some cases that late transfer might actually have negative value when one considers the tax implications on a lookback basis.  In all cases where a legal bar exists to that late transfer the choice has to be taken – either perform it late, take the tax hit and have the certificate holders sue the hell out of the Trustee for not performing their duties faithfully (and exposing them to a huge retroactive tax hit) or take the hit of not having the security and losing the principle they allegedly “loaned” but in fact paid for nothing.   It is manifestly unjust to simply pretend these violations of the law never happened.

Finally, some of these circumstances have irrevocably severed the security interest.  Such an event is a disaster for the noteholder, but again, that’s not the buyer’s problem.  He is not “unjustly enriched” by such an event, as he still owes the money – he just can’t be foreclosed upon.  The holder of the note in these cases may still sue and recover to their ability (which may, admittedly, be quite limited.)

What’s happening here is a mass delusion.  We have a bunch of institutions that through their own hand violated not only black-letter law but the contractual provisions they entered into with investors around the world.  When this failure was first discovered they tried to cover it up with bogus affidavits that nobody had even read, say much less verified – if they had verified them they would have known that the paperwork wasn’t done and the alleged transfers were not made.  When they got caught doing that the next response was to claim that the homeowner was a deadbeat anyway, and thus “deserved it”, which is identical to the rapist claiming that his victim “deserved” to be raped because she had a short skirt on and no panties, and he could “clearly see” the target of his assault.

We properly dismiss that sort of defense these days when it comes to rape, although that same delusional process used to work once in a while in those cases.

If I “lend” you money but fail to protect my own interests by my own hand, uncolored by anything you do, that I have reduced or eliminated my rights of recourse is not your problem.  It’s mine.  It is not unjust for a debtor to demand that his creditor prove that he followed the law and that he really is the creditor, especially when there is very reasonable doubt as to whether or not he is.

Finally, it is never excusable to say “well that apparent felony (perjury) is just fine because the deadbeat over there didn’t pay his mortgage.”


Bankers for the last thousand years have existed entirely on the back of the storage and keeping of physical documents.  Your passbook savings account from your childhood is just one example.  So were the common ledgers going all the way back to the Depression and beyond.

These “record keeping” lapses are not an occasional error or problem; they’re systemic and intentional.  Now, having been caught, the excuses have become manifest and outrageous.

The borrower does not deserve to be raped simply because she wore a short skirt.

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