|by Neil Garfield|
I had an interesting conversation with the lawyer for a prospective client who was interested in either litigation support or using me for expert advice or expert testimony. The lawyer was an experienced litigator. What was good about the conversation is that he voiced up front the basic question that is in the mind of nearly all judges, litigators, homeowners, legislators and regulators. It comes from that presumption that arises in the mind of nearly everyone when they hear about a loan transaction. Their mind instantly focuses on whether the borrower made any payments and if so whether they stopped making payments. It doesn't occur to anyone to immediately focus on whether there was a loan or if there was any particular reason why payments stopped. And it certainly doesn't occur to anyone to immediately question whether or not the creditor had received payments --- especially after the borrower admits that he had not made any payments. That is the quintessential case in loans where claims come from the alleged securitization of debt. The answers to these questions are completely counterintuitive. Those answers just don't make sense unless you know the whole story; even then, it is hard to comprehend why banks would have sacrificed brand names that date back 150 years or more.
And after speaking with him I have concluded that the basic error that is being made by all the people who are affected by this chaotic mortgage crisis is that foreclosure defense consists of finding some technical error by the banks thus defeating their rightful claim to be repaid money they had loaned to the borrower. My answer is that if you are starting from that position it is very hard for me to see anyway that any lawyer for any borrower could do anything more than delay the inevitable.
The lawyer had it right. There wasn't one case in the country in which a proper assignment had not been enforced. And there were no cases I could give him where the results were to the satisfaction of the client, because I promised the clients that I would not give out even their case number. The lawyer concluded that neither I nor my opinions had any credibility. And yet I continue to help people, and, as can be seen, from comments posted on this blog, many people thank me for helping them save their homes. So what is the problem here? It's one I have been wrestling with for 7 years.
The lawyer for the client prospect (as expert witness) asked all the right questions but, as most lawyers do, he preceded each question with a statement that could not be controverted. I am sure he is very good at cross examination. He presumes to know even the things he doesn't know because he was after a result. Despite countless publishing of favorable results in trial, in bankruptcy court and on appeal all reported here and on other media sources and blogs, any really good lawyer is going to have trouble with this. And the reason is that any good attorney wants to reduce the fact pattern down to issues which which there can be no argument. The problem here is that such lawyers do themselves and their clients a disservice, unless they slow down and stop skipping the steps.
The real problem was well stated by this and other lawyers and judges from the bench: how can you really defend any case in which the homeowner accepted the benefits of a loan and then did not pay according to its terms? Why should any court refuse to enforce a valid assignment? Why should the borrower be let off the hook of liability just because there are defects in the documentary trail?
If you drill down, it is very simple: for those who wish to stop inquiring after they see the note, mortgage and payment history of the borrower, there is not much you can do to dissuade them from their preconceived conclusion. It is a fact that the Wall Street banks introduced fraud and complexity on a level never seen before, and therefore spawned a lot of controversy over what to about it. The problem which this lawyer had was that he cannot conceive of a real defense where the borrower stopped paying on an apparently valid debt.
His view is shared by most judges. So the job of the lawyer in foreclosure defense is to address those issues head on, one piece at a time, and to reduce the factual and legal arguments to the simplest components with which nobody could disagree. For example, should the creditor in a loan transaction be allowed to collect more than the amount of the debt? Everyone would agree that should not be allowed. Does it matter who makes the payment on behalf of the borrower as long as it is clear that the payment is for the that particular debt? Everyone would agree that a payment counts against the debt even if someone other than the borrower made that payment.
Does it matter if the loan was granted by a party who used money obtained by defrauding a third party? Bing! That is where the honest discussion can begin because there are multiple potential answers. My answer is that fraud was an intervening factor by an intermediary (investment bank) with apparent authority who violated all the essential terms of their intermediation for the benefit of themselves (the broker dealers/investment banks) and to the detriment of the party whose money was used to fund loans that were not approved by the "lender" (the party who was defrauded --- i.e., now referred to as "investor" or "trust beneficiaries"). While there are other possible conclusions, these are actions in equity and the people trying to enforce the fraudulent documents have very dirty hands which is to say, the opposite of "clean hands."
My answer is that the broker dealers diverted the money and diverted the paperwork to make it look like they were the lenders and to get the proceeds of TARP, insurance, etc. and who are now foreclosing, taking the property too --- to the detriment of the investors who would benefit far more by a reasonable workout with the homeowners. There is also an obvious detriment to the homeowner who loses a home without any hope of even speaking with the party whose money was used to fund the origination or acquisition of his loan (and not getting credit for third party payments whose payments may have negated the alleged default or reduced the obligation to one that the borrower can afford).
My answer is that sale of the property without including the investors in the mix is a continuation of the fraud that began when the investors were sold "bond" issued by a Trust that was and remains unfunded and which never had any hope or possibility of paying interest or principal to the investors. But the issue raised by the lawyer is a troublesome one and requires complex arguments as opposed to bullet points. The victim here is clearly the investors who bought bogus mortgage bonds. But he asked another question: how is the homeowner hurt?
My answer that being foreclosed upon by a complete stranger is very damaging didn't satisfy the homeowner's lawyer. And in a way, he was right. because in the end, it is still about a loan that the borrower didn't pay. That is where the complexity comes in. Because the money that was taken out of investor pockets has been restored in whole or in part by third party payments from co-obligors that were not disclosed as part of the borrower's transaction but now, after the cutoff dates of the Trust instrument, are considered to be part of the deal including the borrower homeowner in the deal the broker dealer made with the investor.
Thus the question becomes this: If you break it down what rights of enforcement exist on (1) the debt, (2) the note and (3) the mortgage or deed of trust? The answer in simple terms is that the likelihood of enforcement on each one of those diminishes the more you drill down.
Start with the debt. It arises simply because legally when you receive money it is either payment, a loan or a gift. Since we know that it is a loan, that means you owe it back to the party who loaned the money. You don't owe it to the depository bank at which they maintain a demand deposit account and from which they advanced the funds even though that bank is literally the source of the funds. The owner of the account from which the money was advanced to you is the one you owe. The owner of the account in our case is the broker dealer which itself was acting as a depository for investor funds that should have been paid to the trustee for a REMIC trust but was not and never was intended to be sued as such. We know the Pension fund that invested in the bogus mortgage bonds is the actual funding source and there is little disagreement about that. How many conduits or depository institutions were used to channel the money to your closing table is irrelevant. You owe the money to the party whose money ended up in your pocket.
Then the note. The note, as we lawyers were all taught in first year law school, is NOT the debt. It is evidence of the debt. And it is evidence of the agreed terms and the loan contract. And it should be evidence of the loan from the investor to the homeowner. So unless that note names the investor as the payee (or an authorized representative of the investor disclosed to the borrower), the note is evidence of nothing --- except the fact that you signed a document that recited facts that were at best wrong and at worst, lies. Lawyers often forget that table-funded loans are one of the main reasons why the Federal Truth in Lending Act was passed --- to make sure customers knew the identity of their lender and had choice in the marketplace. So it is no argument, under TILA and Reg Z, to say that it doesn't make any difference if they lied at the closing table, you lose upon signing the promissory note. And the legal reason for that is because if that were true there would be uncertainty surrounding every loan transaction if it was OK for the closing agent to put a strawman's name on the note and mortgage instead of the the investor --- particularly when the pooling and servicing agreement and prospectus assure the investor that the investor is the one who will be protected by owning the note and being the beneficiary on the deed of trust or mortgagee under the mortgage.
Then the Deed of Trust (non-judicial states): The pattern of conduct that is virtually 100% is that once a loan becomes delinquent and the decision is made that this loan has been chosen for forced sale (foreclosure) the first thing "they" do is change the Trustee on the Deed of trust. Why? Because a real trustee would not take orders from a beneficiary who appears out of nowhere and can produce no proof that they entered into any transaction in which they acquired the Deed of Trust, the note, or the debt. The San Fransisco study showed that 65% of all foreclosures involved "strangers to the transaction." This meant that a complete stranger named itself as the new beneficiary, named a controlled entity to be the new substitute trustee and then sold property with the homeowner not being any wiser, because they knew they had not made some payments on their mortgage obligation. So it isn't enough to say you are the new beneficiary, you should be required to prove it. It is true that many courts are ignoring this requirement, but the number of courts that are allowing this inquiry is increasing every week. And as Judge Hollowell in Arizona pointed out in a CLE seminar, the effects of ignoring these issues is going to result in a mass of title litigation. Yes, it matters.
The test of a good expert witness is not just credentials we some of us have, but also the presentation of facts upon which his opinion rests. That presentation must lead inexorably toward the conclusion that the expert states such that the trier of fact (judge or jury) would have come to the same conclusion if they had all those facts. The opinion is incidental to the presentation of facts. The attempt to boil this down to one or two bullet points begs the question. Wall Street intentionally created more complexity than necessary and more layers than necessary in order to obscure the fact that they were committing fraud on the investors, the insurers, the government, and other third party co-obligors. The typical trial lawyer response is "how do I boil this down to something that is understandable." The answer, as any lawyer who does complex financial litigation will tell you, is step by step.