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Sunday – April 1, 2018

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20 Winning Ways To Defeat Promissory Notes in Foreclosure Proceedings: Understanding the Differences Between Paper Notes, Securitized Notes, and Cyber Notes (Rebroadcast from February 22, 2015)

SPECIAL REMINDER:  DAYLIGHT SAVINGS TIME, ONCE AGAIN STARTING  AND THE FORECLOSURE HOUR WILL BE HEARD AT 6:00 PM PACIFIC TIME AND 9:00 PM EASTERN TIME ON THE IHEART INTERNET RADIO APP, ALSO REPEATED THE FOLLOWING HOUR ON IHEART RADIO.
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We will shortly be starting our eighth year on KHVH-AM News Radio, having examined virtually every aspect of the Mortgage Crisis in the United States.

If there is any lesson to be learned, it is the fact that our legal system — judges, legislators, and foreclosure defense attorneys alike — have failed to understand the changing nature of a residential real property promissory note, transitioning from Paper Notes to Securitized Notes to Cyber Notes.

Yet that rare evolutionary insight remains the key to understanding what has become the largest nationwide financial fraud in American history and what should be done about it.

Paper Notes: Our traditional mortgage law developed in England centuries ago based upon there being a contract between a landowner-borrower and a mortgage lender, with the note a negotiable unconditional promise to pay and a mortgage (or deed of trust) as a security instrument tied to a promissory note, the two being considered inseparable and the mortgage logically said to follow the note as security for repayment of the underlying debt.

If a note was sold by assignment, it therefore followed in the traditional legal understanding that the mortgage or deed of trust was transferred by assignment with it whether so stated or not.

The note and the mortgage on paper were nevertheless logically separate, since the former was a negotiable instrument whose original on paper was required therefore to be safeguarded in the custody of the lender as holder often to be converted into a bearer note, whereas the original of the latter was to be registered at the State recording office so as to establish priorities among competing mortgage, tax, and other liens on the underlying property.

On that basis, mortgages in lien theory States or deeds of trust in title theory States were enshrined in legislation providing for the separate treatment of a note as ownership of the debt and a mortgage or deed of trust as ownership of the right to foreclosure in the event of a payment default.

All of that was well understood, as expressed in the traditional view that the note and mortgage were separate physically but inseparable as a matter of law, with the mortgage traditionally said to logically follow the note.

Securitized Notes: Several decades ago however Wall Street altered the character of our major banks in order to unleash otherwise seem as trapped equity in real property in the United States through their securing of Congressional legislation changing their character into investment banks, who quickly transformed residential mortgages into securities by bundling them and slicing and dicing portions of the resulting tranches into stock certificates which they sold to institutional and private investors.

In doing so, the major banks chose to bypass State recording offices by keeping track of securitized trust owned sliced and diced mortgages and trust deeds on their own through creation in part of the Mortgage Electronic Registration Systems (MERS) in its many forms, since what was traded was not the mortgages or deeds of trust but the investment stock certificates in various tranches.

Securitized trust trading in turn has been and continues to be moreover largely hidden and unregulated, and when the Mortgage Crisis of 2008 occurred due to widespread use of fraudulent appraisals, fraudulent loan applications, fraudulent underwriting, and fraudulent loan documentation, the major banks serving as securitized trustees had to artificially recreate mortgages and mortgage assignments because State foreclosure laws were written to allow nonjudicial and judicial foreclosure on mortgages and deeds of trust only.

That required as we know enlisting an army of minimum wage robo-signing robots, each creating up to 600 false mortgage assignments falsely notarized per day and even eventually the photoshopped recreation of promissory notes and allonges, the originals of which the securitized trust industry had often lost or destroyed, otherwise seen as insignificant for their trading purposes, until it came time to foreclose.

The securitized note lost its traditional character as a negotiable instrument, but the legal system to this day has been ignorant and unprepared to apply securities laws to the creation and trading of promissory notes and related security instruments from the borrower’s perspective when it comes to foreclosure.

In securitized trading, the note follows the mortgage. That is because the mortgage or deed of trust is separately sliced and diced and placed in separate tranches of different trading values as the collateral to support the trust’s debt to its certificate investors to whom it owes an income stream.

The note follows the mortgage because once the mortgage is used as collateral to support the securitized trust’s new promise to pay its certificate investors, the certificate investors collectively have an equitable right to require the securitized trust to foreclosure for their benefit.

What often happens however is that the debt to the certificate holders is fully paid off by the income stream from each tranche, some of its included mortgages over performing and some underperforming or even foreclosed on.

It remains a mystery however where the monies from a foreclosure sale or resale or from collections on deficiency judgments or the proceeds from default insurance or monies from government guaranties actually go. To understand what is actually going on, the courts need to follow the money.

The American legal system has failed to understand the difference between paper notes and securitized notes, and that the application of traditional mortgage laws are largely inapplicable in foreclosure situations.

That is because the functions of the participants in real property securitization are misunderstood. The borrower is really unwittingly a stock issuer, the property and the borrower’s income stream are what are really being collateralized to support the stock sale, loan brokers are really securities salespersons, the securitized trusts and the master loan servicers are really securities dealers, and the certificate purchasers are the stock investors.

Ironically, the courts have no difficulty applying securities laws to protect the certificate investors, but provide no such fraud protection for borrowers, even though, for instance, it was never disclosed to borrowers that their property and their income stream were being intentionally converted into stock shares or that nonrecourse insurance was paying off partially or in full their debt.

Cyber Notes: The difference between securitized notes and cyber notes is that through the absence of regulation and the absence of transparency, promissory notes in cyber space have taken on a life of their own, the ultimate bit coins, and for instance even after the underlying property is foreclosed on, certificate investors in the majority of cases are still being paid either by the master servicer or through insurance proceeds, and their sliced and diced mortgages are still being actively traded as if no foreclosure had ever occurred, still living in the cyberspace of an alternative universe.

The legal system to protect homeowners needs to abandon applying traditional mortgage foreclosure concepts to securitized notes and to cyber notes, and instead to force to the surface the hidden operations of the securitized and cyber banking casinos, and by following the money stop unjust enrichment to the detriment of America’s duped homeowners, sucked into such risky shadow banking without their consent only to become victims of ultimately planned foreclosures when more money can be made by securitized trusts and especially their loan servicers by foreclosing on borrowers than by modifying their loans.

With this background in mind, we proudly rebroadcast our February 22, 2015 show that highlighted how to use this new understanding of the difference between paper notes, securitized notes, and cyber notes to defeat promissory notes, which was the first time anywhere that that distinction was first recognized and discussed in closing commentary by myself, Virginia Parsons, and Wendy Nora.

Gary Dubin

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