Bringing down the house of cards
one Pro Se at a time.
Why the Original Note (and Ownership) Continues to Be Critically Important

Editor’s Comment: Yves Smith is right to point out that when the borrower’s note is not produced and not returned after the “sale” of the property, something is rotten in Denmark. Just so we are all clear, we are talking about the foreclosure sale where according to state law the highest bidder get the property. But the bidder must bid SOMETHING in order to take title away from the homeowner. The homeowner must either get the note returned in its original form along with the endorsements, OR the bidder must pay cash.

Nobody in any state is allowed to go to an “auction” of real property held pursuant to a right of sale or foreclosure and bid nothing. In fact, in many states, the bidder must put up a sum of money just to get into the bidding or even witness the auction.

So it is indeed strange that amongst the millions of foreclosures that have alleged resulted in putative “sales” no homeowner has received anything like a cancelled note or even an affidavit explaining why he did not get the cancelled note. That being the case, why should the homeowner be forced to legally recognize the alleged sale. It is obviously not complete if the homeowner has not received the note.

There are two ways the homeowner can get the note. Either someone has paid the auctioneer the bid price in cash or the actual party to whom the debt was owed bids the amount of the debt owed by that specific homeowner in which that homeowner offered that specific property as collateral to guarantee repayment. Another creditor to whom the debtor owes money simply won’t do (and this is where the banks’ position collapses).

I have spoken to certain people on the dark side and they take the position that if the bid was less than the principal due, then the note is not due until it is paid in full. But this flies in the face of those states where the alleged creditor is limited to the value of the property and may not pursue a deficiency judgment. It also fails to explain why the note is not returned when the bid was i fact the principal claimed by the creditor (even though we know that the principal claimed is not actually the principal due).

Which brings me to my point. Attorneys for borrowers are snatching defeat from the jaws of victory by their ignorance of the auction process. When you are arguing standing, instead of spending all your time on erudite sounding arguments, simply point out to the Judge that unless the would-be forecloser produces the original note along with proof of ownership, they have no right to bid at the auction unless they want to pay cash. Just point to the provision of the statutes that says so.

I would go even further and say that if the Judge, in his discretion, allows the foreclosure to proceed, that the order specific that this order does not constitute a finding that the the party initiating the foreclosure is necessarily the right party to submit a credit bid.

It is important to add that the person who is conducting the auction should be put on notice that there is a high likelihood that a party is claiming to be a creditor for the sole purpose of being able to bid on the house without ever paying for it. If the auctioneer (trustee, clerk or whatever) accepts such a bid without performing any due diligence, they could be subject to liability.

The argument that the homeowner is subject to double liability is valid and true but the Judges are not giving it any traction. They are not seeing that happen often enough to make it a real issue in their minds.

Yet Another Mortgage Scam: Homeowners Not Getting Cancelled Notes After Foreclosures, Hit by Later Claims
As we’ve discussed the “where’s the note?” problem of mortgage securitizations, some readers who are old enough to have sold a home more than once have said that while they’d gotten a cancelled mortgage note back on their first sale, on a more recent one, they hadn’t. They were concerned, and as this post will show, they are right to be.

By way of background, the popular press has done the public a disservice by talking about “mortgages”. A “mortgage” consists of two instruments: a promissory note, which is a IOU, and a lien against the property, which is referred to as a mortgage (in non-judicial foreclosure states, they are typically called a deed of trust and confer somewhat different rights, but we’ll put that aside for purposes of this discussion).

What appears to be happening on all too often in Florida is that when borrowers signed warranty deeds in lieu of foreclosure when they can no longer keep these homes, they often get only a satisfaction of mortgage, not a cancelled note. This is not what is supposed to happen. When a borrower deeds his property to the bank, the objective of the exercise is to cancel the debt. If the note has not been extinguished, it is referred to as a “zombie note”. As the Fort Myers News-Press reported last year:

Carol Kaplan, a spokeswoman for the Washington-based American Bankers Association, said leaving the note off the satisfaction of mortgage is “not a practice we’ve ever heard of.”

Turns out that’s a bit disingenuous. The article quoted Jack Williams, resident scholar at the American Bankruptcy Institute and a bankruptcy professor at Georgia State University:

“We saw something very similar to this in the debacle in the ’80s, people buying notes from the government and suing,” Williams said. “I won’t rule out that could happen again. They sold the note to collection agencies and law firms and places like that.”

In the real estate meltdown of the ’80s, he said, it was the Resolution Trust Corp., set up by the federal government to liquidate mortgage loans and other real estate assets held by failed savings and loan associations.

“Let me tell you, people made millions of dollars suing homeowners back in the day,” Williams said.

Some of the debt was in the form of deficiency notes: court judgments saying a certain amount was owed even after the property was sold at public auction.

But in other cases, Williams said, it was the note, straight up.

Even though the lawyers who’ve taken note of this practice are in Florida, the ground zero fo the foreclosure crisis, it is important to stress that anything that is happening in one state on a meaningful basis in securitized mortgages is very likely to be happening elsewhere. The securitizations were set up to be widely dispersed geographically and the servicers have set up their procedures to be as standardized as possible even with the differences in real estate law across states. If borrowers aren’t getting notes back in Florida, it’s quite probable that that is occurring in other states.

Xiomara Cruz, a Coral Springs attorney who has taken an interest in this topic, sent a warning to fellow lawyers:

I have seen in dozens if not hundreds of foreclosure suits allegedly “settled” for properties in Florida, MOST only include language satisfying the mortgage BUT DO NOT INCLUDE SPECIFIC CANCELLATION/SATISFACTION of the promissory Note. So that in essence your client just got a Release of Mortgage and nothing else.

I hate these tactics being used against consumers, the recording system and the judiciary. It is wrong. Regular people are being conned. Judges are being conned. Even many lawyers are being conned. The words “mortgage loan” and “mortgage” are being used by Fannie, Freddie, all Servicers, Banks as if they were interchangeable with ‘debt’ and ‘NOTE’ when the foreclosure mills walk into court or settle for their ‘clients’. Yet, when you ask the mills or the banks, servicers, Fannie, Freddie to put their money where their mouth is, all of a sudden its “we only made an agreement to settle the foreclosure suit, we dismissed with prejudice, we filed a satisfaction of mortgage, we can’t back to sue you” That is serious BOLOGNA and I don’t mean the capital city of Emilia-Romagna!

The very inherent INTENT of every borrower entering into a settlement is to cancel the debt, otherwise what good is to settle to give back the collateral willingly? Filing the satisfaction of mortgage only helps the banks, servicers, and Fannie/Freddie obtain clear title so they can sell it and make more money after already getting fat with interest for years, servicing fees, selling ‘beneficial rights’ to receive monthly payments, but not selling the actual underlying note. This situation gets horribly worse because if the note is left outstanding, it can be used upon by anyone else who obtains that note in the flow of commerce. A suit on the note is left open.

And she reports in a later message to me that servicers and even judges don’t take well to being pushed on this issue:

When this happened to my client, he immediately raised the flag requesting specific performance in the underlying foreclosure suit. However, the bank voluntarily dismissed the foreclosure action with prejudice while the motion for specific performance was pending hearing (which had already been set) and the judge ceded to the bank’s voluntary dismissal. He then hired me specifically after a year of calling everyone from members of congress to the OCC to the AG to obtain the cancelled note back because no one would give it him back to him marked cancelled. The bank and Fannie stated through their attorneys, over and over in every instance before our suit, that they never promised him anything else but a dismissal of the foreclosure suit and a satisfaction of mortgage, and he got a dismissal with prejudice. Long story short, its still there, the circuit judge dismissed all counts of the unfair consumer practices, unfair debt collection practices, with prejudice and although he really wanted to couldn’t dismiss with prejudice the breach of contract, specific performance counts but dismissed them without prejudice and with leave to amend “because he didn’t like some of the WHEREFORE clauses”.

This story borders of Kafkaesque. Yet Cruz is not being unreasonable. 25 years ago, an attorney who did not demand the cancelled note in satisfaction of a mortgage would have been considered grossly negligent. And the risk is not theoretical. Professor Williams described how people were defrauded in the wake of the S&L crisis when notes that should have been cancelled got into the wrong hands. April Charney had just seen a case on a 2008 foreclosure where the ex parte order returned the original note to the plaintiff/servicer. The hapless borrower is now being sued by the private mortgage insurer. PMI was typically used to insure the LTV over 80% on high LTV loans. In in the subprime market, lenders bought mortgage insurance on loans and paid the premiums themselves (via the trust) rather than have the premiums paid by the borrower, as is the more traditional structure.

Shell Game: Nominees and Principals All Change Depending upon Circumstances

In reality there are nothing but nominees for undisclosed principals on both the note and mortgage. The money for funding the mortgage came from investors who pooled their money together. At the moment the borrower accepted the benefit of the loan funding, an obligation arose by operation of law between the borrower and the lender. But the lender is different than the party named on the note and mortgage (DOT).

This does not mean the obligation does not exist. But it does mean that the documentation contains declarations of fact that are not true. Hence it must be concluded that either the note is NOT evidence of the debt or that at best it is partial evidence of the debt — the balance of the information being contained in the closing documents with the investor lender and parole evidence in which the actual money trail differed from both the closing documents recitals for the borrower and the closing documents recitals with the investor lender.

Under ordinary rules of construction, the note is not the obligation. The note is considered the evidence of the obligation — if it indeed contains declarations of fact that are true. The mortgage or DOT is neither the obligation nor the note. The mortgage is considered to be incident to the note. Thus if the note is defective, the mortgage does not contain terms that are enforceable. Hence the issue is not whether the debt exists, but whether it is secured by collateral and if so, under what terms contained in which gaggle of documents that the parties used to “securitize” the loan.

This is not confusion created by the borrower who thought justifiably that he could rely upon the representations of the persons attending the loan closing that the parties were properly disclosed and that their remuneration was properly disclosed in accordance with TILA. This confusion arises strictly because the intermediaries wished to create a gray area in which they could claim ownership of the loan for purposes of trading and gambling “off balance sheet” and without accounting to either the investor-lender or the homeowner-borrower.

In order to sustain the position of the opposing parties, the court would be required to accept the parties shown at closing on the note and mortgage as the real parties in interest for one purpose, the parties who traded in insurance, credit enhancements and credit default swaps as owning the loan for other purposes, and the investors from whom all the money was obtained for funding the loans as the real parties in interest for still other purposes.

The chaos from these practices are precisely the subject of indictments and civil suits across the country in which the title registries were either ignored or corrupted or both. The burden of clarification and proof of ownership should be on the party or parties seeking relief and it should result in a single lien that is owned by one or more parties and not multiple liens without any accounting for which party can submit a credit bid and for how much the credit bid can be submitted.

If the note and mortgage (DOT) are incomplete at best and wrong in certain respects in describing the transaction then the lien purportedly recorded against the debtor’s property was never perfected. The actual security instrument contains MERS, an admitted nominee for an undisclosed principal and a “lender” which in fact was a nominee for an undisclosed lender or other party.

The point here is that the obligation that a rose by operation of law when the borrower accepted the funding is either undocumented or incompletely documented, making it unsecured. If the property is unsecured then it is part of the bankruptcy estate which can then be utilized, unencumbered for the beenfit of creditors and the debtor alike.

The proof of this line of thinking lies in the alleged auction which was improperly conducted. Assuming the auctioneer was properly and duly authorized however, and that the substitution of trustee was properly and duly authorized, the party submitting the bid at auction did so without tendering any promissory note much less the complete package of documentation that would prove its status as holder and owner of the loan (i.e. the party to whom the money is actually owed arising from the borrower’s obligation when the loan was funded).

At the alleged auction, the auctioneer announced the receipt of a credit bid from a party that had not established itself as the actual creditor, nor did the auctioneer collect the note that would constitute the bid. Since there was not cash paid at the auction, there cannot be said to have been a transaction because neither the cash nor the note was tendered as a bid. Hence the “sale” was a fictitious sale and the deed issued upon sale would have been improper, leaving the debtor with title tot he property unencumbered by the alleged mortgage or DOT.

It is one thing to apply the law for purposes of  jurisdiction and establishing a colorable right to initiate a foreclosure proceeding. It is quite another to bid the property into one’s own name to the detriment of the actual creditor, leaving the debtor with a continued liability.

Bloomberg: Housing Prices Continue to Plunge

EDITOR’S COMMENT: Somebody once said that after Americans have exhausted all other options they will finally  do the right thing. I hope that is true. Because until we start treating homeowners as victims instead of deadbeats, the situation cannot change. And until we consider the interest of investors to be far more important than the appearance of financial stability in banks that are holding fictitious assets, confidence in our financial markets and the willingness  to invest in American markets will be diminished.

I don’t know about you, but if I knew that the economy would return to health by giving somebody money or property or any other sort of benefit I would be hard-pressed to say no and allow more people to lose their homes, their dignity and their hopes. We tried giving everything we had to the banks. It’s time to look in other directions.

Home Prices in 20 U.S. Cities Decline 4%
By Shobhana Chandra

Home prices in 20 U.S. cities dropped more than forecast in December to the lowest level since the housing crisis began in mid-2006, indicating foreclosures are hampering the industry’s recovery.

The S&P/Case-Shiller index of property values in 20 cities fell 4 percent from a year earlier, after decreasing 3.9 percent in November, a report from the group showed today in New York. The median forecast of 31 economists surveyed by Bloomberg News called for a 3.7 percent decline.

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Abandoned houses at the Desert Mesa subdivision in North Las Vegas. Photographer: Jewel Samad /AFP/Getty Images

Play Video
Feb. 28 (Bloomberg) — Robert Shiller and Karl Case, co-creators of the S&P/Case-Shiller index of property values in 20 U.S. cities, talks about the housing market and home prices. The S&P/Case-Shiller index fell 4 percent in December, more than forecast, to the lowest level since the housing crisis began in mid-2006. Shiller and Case speak with Tom Keene on Bloomberg Radio’s “Surveillance.” (Source: Bloomberg)

Play Video
Feb. 22 (Bloomberg) — Douglas Yearley, chief executive officer of Toll Brothers Inc., talks about the outlook for the U.S. housing market. Yearly also discusses Toll Brothers’ first-quarter earnings and the Obama administration’s efforts to stimulate the housing market. He speaks with Trish Regan on Bloomberg Television’s “Street Smart.” (Source: Bloomberg)

Play Video
Feb. 28 (Bloomberg) — Home prices in 20 U.S. cities dropped more than forecast in December to the lowest level since the housing crisis began in mid-2006, indicating foreclosures are hampering the industry’s recovery. The S&P/Case-Shiller index of property values in 20 cities fell 4 percent from a year earlier, after decreasing 3.9 percent in November, a report from the group showed today in New York. Betty Liu reports on Bloomberg Television’s “In the Loop.” (Source: Bloomberg)

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Signage for the Toll Brothers Inc. Diablo Estates is displayed at the entrance of a development in Clayton, California. Photographer: David Paul Morris/Bloomberg

Distressed properties returning to the market mean prices will stay depressed, prompting buyers to wait for cheaper bargains and impeding construction. While sales have begun to stabilize, a rebound in home values may take time, underscoring Federal Reserve policy makers’ concern that weakness in housing is blunting their efforts to spur the economic expansion.

“We’re still dealing with a lot of distressed properties and very low absolute levels of demand,” said Sean Incremona, a senior economist at 4Cast Inc. in New York, who accurately projected the 4 percent drop. “We’re not seeing any of the stabilization in housing activity filter through to prices.”

A separate report today from the Commerce Department showed orders for U.S. durable goods fell in January by the most in three years, led by a slowdown in demand for commercial aircraft and business equipment.

Three Years
Bookings for goods meant to last at least three years slumped 4 percent, more than forecast, after a revised 3.2 percent gain the prior month. Economists projected a 1 percent decline, according to the median forecast in a Bloomberg News survey.

The Standard & Poor’s 500 Index was little changed at 1,367.54 at 9:34 a.m. in New York. The 10-year Treasury yield fell two basis points from late yesterday to 1.90 percent.

Economists’ estimates for the year-over-year change in the home price index for December ranged from declines of 4.1 percent to 3.2 percent, according to the survey. The Case- Shiller index is based on a three-month average, which means the December data was influenced by transactions in October and November.

The November reading was previously reported as a year- over-year drop of 3.7 percent.

Home prices adjusted for seasonal variations fell 0.5 percent in December from the prior month, following a decrease of 0.7 percent in November. Unadjusted prices fell 1.1 percent from the prior month.

Shows Trends
The year-over-year gauge, begun in 2001, provides better indications of trends in prices, the group has said. The panel includes Karl Case and Robert Shiller, the economists who created the index.

Nineteen of the 20 cities in the index showed a year-over- year decline, led by a 12.8 percent drop in Atlanta. Detroit showed the only increase, with prices rising 0.5 percent in December.

Nationally, prices decreased 4 percent in the fourth quarter from the same time in 2010 to the lowest level since mid-2006. They fell 3.8 percent from the previous three months before seasonal adjustment, and fell 1.7 percent after taking those changes into account.

“The pickup in the economy has simply not been strong enough to keep home prices stabilized,” David Blitzer, chairman of the S&P index committee, said in a statement. “If anything, it looks like we might have re-entered a period of decline as we begin 2012.”

Demand Steadies
Recent reports indicate demand is steadying. Existing-home (ETSLTOTL) sales rose to a 4.57 million annual rate in January, the National Association of Realtors reported last week. While it was the best showing since May 2010, distressed properties made up the largest portion of all purchases since April.

Toll Brothers Inc. (TOL) and D.R. Horton Inc. are among builders benefiting from job growth as well as cheaper properties and record-low mortgage rates.

“We’re optimistic,” Doug Yearley, chief executive officer at Horsham, Pennsylvania-based Toll Brothers, said in a Feb. 22 interview with Bloomberg Television. “We have orders that are up significantly. We’re seeing deposits up, we’re seeing traffic up.”

Excess supply of distressed properties is dragging down values for all houses. About 5 million houses have been lost to foreclosure in the U.S. since 2006, according to RealtyTrac Inc. Banks may seize more than 1 million U.S. homes this year after legal scrutiny of their foreclosure practices slowed actions against delinquent homeowners in 2011, it said last month.

“Restoring the health of the housing market is a necessary part of a broader strategy for economic recovery,” Fed Chairman Ben S. Bernanke said in the cover letter of a Fed study on the housing market that he sent to Congress last month.

To contact the reporter on this story: Shobhana Chandra in Washington at

To contact the editor responsible for this story: Christopher Wellisz at


We are receiving reports that BAC is sending out letters declaring that they are transferring loans from BAC or Bank of America, the parent company as of July 1, 2011.

The question is why? It seems that BOA is starting to realize the title problems inherent in its takeover of Countrywide and the initiation of loans using money from investors who bought bogus mortgage bonds. There is no doubt that the fundamental defects in the original loans is starting to bother BOA and other banks, along with their shareholders and creditors. They managed to get the NY Federal Reserve Bank to issue a statement that was dismissive of such claims. But the Fed doesn’t decide contractual or property rights — that is the exclusive province of the judicial branch applying existing laws.

There is a great deal of confusion added to the chaos that is inherent in the illusion of securitization. It comes from the fact that most people, including regulators, lawyers and judges, fail to appreciate the difference between the servicer and the creditor. Indeed, the pretender lenders are counting on this confusion when they go to court and it is working, albeit less and less as Judges start looking behind the veil of attorney representation and false affidavits that leave the court record bereft of any actual evidence. It might be that the servicing rights have been transferred and not the loan.

But remember that the servicing rights arise from the securitization documents and if those were not followed, thus subjecting the loan to servicing as per the pooling and servicing agreement, the administration of the account by the servicer could be alleged as ultra vires.  And remember that just because something is transferred doesn’t make it any more valid than it was before the transfer. So if the original obligation, note, mortgage deed or other closing documents were not in compliance with law, and factually were at variance with how the loan was actually funded and by whom, then the transfer doesn’t make those defects disappear. The pretenders have been largely successful at convincing the courts otherwise, but each day more judges are realizing that the fact that a “loan” was transferred, doesn’t mean that the loan even existed or that the lien was perfected.

In any event, it would seem that if you receive such a letter, you should ask to see the documents evidencing the transfer. First you are entitled by law to this information, according to Dodd-Frank law. Second whatever they send you they are committing themselves in writing to a specific set of facts that they can no longer change in the shell game they are playing in the courts. At that point it makes sense to inquiring about who signed what and to demand the entire chain. The possession of a COMBO title and securitization report and analysis will go nicely with this effort. A retort expressing the desire to rescind and/or a qualified written request will set the stage for starting off any proceeding with your truthful allegation that first, before they do anything else, they must comply with the requirements of law and respond to your request.

Bringing down the house of cards
one Pro Se at a time.
Bringing down the house of cards
one Pro Se at a time.