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Interesting Conversation With Prospective Client and Attorneyby 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.
