If you are asking yourself ‘why are judges ruling against homeowners when they know the banks scammed them?’ Then you need to understand a judge’s most basic insight into the human condition is that it is impossible to con an honest man.* It is larceny lurking in the soul of its victim that is preyed upon. What does that mean?
The mortgage deals were too good to be true – but the homeowners believed it to be the truth… because they wanted it to be and it all boils down to making “easy” M-O-N-E-Y.
Now, this isn’t saying that most homeowners weren’t scammed. But there were those who “played” the system. For example in one case, the borrower started with a small, short term loan on vacant property that a year later when the loan came due, the borrower refinanced for 3 times as much on another short term loan, and had spent the first $50,000. The borrower apparently used the funds for his own perks – cars, jewelry, trips and when the 2nd loan came due, he crafted a scheme to get over 5 times as much money as the first loan from yet another bank…by fabricating a story that he was going to build a very large house when in reality the majority of the funds had to be used to pay off the previous loans and there would never be enough money to build the house he had designed and used to garner the bank funds. It appears that the borrower had no intention of ever building the house or even paying off the last loan.
Because loans in the mid-2000s were basically given on a signature, banks did very little fact finding and relied upon contract law to protect their interests. The last loan the borrower above received was yet another short term “mortgage” loan.
The banks can follow the pay offs – and they know a pyramid scheme because it’s easy for them to spot. The borrower was deluded to think he could get a way with it and just lucky that the bank foreclosed and took the property – and that the bank didn’t pursue other avenues.
This is why the judges take a jaundice view of homeowners – because there are people who played the system. And while money was easy to procure – there was a contract that was attached. How many times have you heard – “I didn’t have time to read it” or “I didn’t know what that meant” ???
Banks know contracts will generally hold up in a court of law because:
RESTATEMENT (SECOND) OF CONTRACTS § 157 (1981) (“Generally, one who assents to a writing is presumed to know its contents and cannot escape being bound by its terms merely by contending that he did not read them; his assent is deemed to cover unknown as well as known terms.”)
There is more to the contract issue and as a mortgagor we should all understand the paperwork we sign – because this is what the courts make their decisions based upon.
SAMUEL WILLISTON & RICHARD A. LORD, A TREATISE ON THE LAW OF CONTRACTS § 31.5 (4th ed. 2003) (“As a general principle, all adults are presumed to be capable of managing their own affairs, and the question whether a bargain is smart or foolish, or economically efficient or disastrous, is not ordinarily a legitimate subject of judicial inquiry.
If freedom of contract means anything, it means that parties may make even foolish bargains and should be held to the terms of their agreements. A contract is not a non-binding statement of the parties’ preferences; rather, it is an attempt by market participants to allocate risks and opportunities. [The court’s role] is not to redistribute these risks and opportunities as [it sees] fit, but to enforce the allocation the parties have agreed upon. While the parties to a contract often request the courts, under the guise of interpretation or construction, to give their agreement a meaning which cannot be found in their written understanding, based entirely on direct evidence of intention, and often on hindsight, the courts properly and steadfastly reiterate the well-established principle that it is not the function of the judiciary to change the obligations of a contract which the parties have seen fit to make. . . . Unless the contract is voidable due to mistake, fraud, unconscionability, or another invalidating cause, or invalid in whole or in part due to illegality or another violation of public policy, the court must enforce it as drafted by the parties, according to the terms employed. . . .”). Source: Credit Slips, Bob Lawless 10/30/2014.
As noted – the cunning borrower status is not applicable to all homeowners. But the “con” and its contracts were equal opportunity players – meaning if you were gullible – you too, could be “had.” The banks and their loan agents (pretender lenders) practiced an art, a mixture of improvisational theater, mind control, and mimetic misrepresentation.*
Mutual mistake is a term (and affirmative defense) that should be thoroughly explored. If Samuel Williston and Richard Lord intended “mistake” to represent mutual or unilateral mistake – think of the contract formation in another light.
- The documents were designed to appear like traditional mortgages. The sales pitch and conversations with the originator never mentioned securitization or non-traditional mortgages (NTMs); however, since there are no state or federal statutes that address these quasi-securities NTM vehicles, in the alternative it appears there was mutual mistake in that the originator and Mortgage Electronic Registration Systems, Inc., for example, assumed the documents, as deliberately designed, would appear to fall under traditional mortgage statutes. The homeowner, having no knowledge of the scheme behind the documents made a mistake of considering the documents to be traditional mortgages since they had no disclosure otherwise. Restatement (Second) of Contracts 154 (1981).
- The originator’s sponsor participated with the funding to originator before the homeowner’s documents were processed knowing that the originator was insinuating there was a traditional mortgage and note to the homeowner. The homeowner was unable to readily modify his mortgage loan because it no longer existed (or never did) in the form that he thought he had bargained for as the documents had been made static so that securitization certificates could be packaged and sold to numerous investors. The traditional mortgage loan did not exist and appears never existed even at the inception of the transaction.
In most securitization cases there was a simultaneous loan procurement to securities exchange scheme in progress. The originators, like New Century as a “lender”, had Flow Mortgage and Sale Agreements between themselves, one of their shell subsidiaries (as Servicer/Sellers) and an investment bank. These agreements were compounded from years prior and set into motion long before the homeowner came on the scene. What came first, the homeowner or securitization? Answer: securitization.
In these cases, maybe this was really a pre-meditated Unilateral mistake because the homeowner was the only one that did not know:
- (1) about the securitization process, or (2) that the originator was not the actual lender and would not be the holder of the note, or (3) that Mortgage Electronic Registration Systems, Inc. was a bankruptcy remote shell with no assets, employees, software, or membership but meant to infer (without reality) electronic recordation without explicit authorization. Nor was homeowner aware that the documents were intended to induce gambling on Wall Street. Apparently, the other parties were aware of the scheme, they just did not disclose the facts to the homeowner. Restatement (Second) of Contracts 153 (1981).
Unwittingly, homeowners authorized the pretender-lender’s ability to transfer the documents to a [pre-contracted investment bank] third party – just as New Century and its subsidiary were acting simultaneously with under the New Century, as lender, umbrella in the loan to securities procurement scheme. It appears, the “lender,” who was also “Servicer/Seller,” effectively became an “agent” for the homeowners and “a special relationship might have been created between” New Century and its homeowners as in Mackintosh v. California Federal Savings & Loan Association, 113 Nev. 393 (1997). On remand, the district court in Mackintosh concluded that a special relationship did exist between the parties and that Cal Fed had breached its duty to disclose.
In these cases the multi-tasking lender/seller/servicer (“LSS”) was privy to all and actual transactions taking place behind the scenes that the homeowner was never privy to. The homeowner relied on the LSS to be the ‘eyes and ears’ for the homeonwer and trusted the LSS. Had the homeowner known of the truthful or the concealed aspects of the simultaneous transaction it would not have entered into contract. Homeowners were denied the opportunity to say ‘no’ to the intention behind the contract because it didn’t know what the underlying scheme was, nor could it exercise rights of rescission because there was nothing to be seen or reviewed that would invoke rescission based on review of the imitative traditional-looking paperwork in front of the homeowner. The only way the homeowner could have known was intentionally, wantonly, willfully and egregiously concealed from the homeowner so that the LSS could set up their ‘pigeons’ in securities and exchange transactions using the homeowners’ identities and homes as collateral in its gaming scheme knowing that honest homeowners would never have authorized such conduct.
Homeowners, in the case of New Century, were unaware of its coinciding cyberspace loan to securities procurement scheme and New Century failed to disclose its pre-contracted arrangements. The mention of a Wall Street investment bank would have identified the Wall Street players and is obviously one of the reasons why assignments were never made. Wall Street could not afford a landslide of rescissions. Also, properly recording the sale transactions would have hindered other multiple coinciding swap and CDO deals as the property would be already disbursed.
New Century and its concealment participants went to great lengths to conceal the transactions from the homeowners. No assignments were filed or notification of the documents changing hands occurred between the origination dates and the date of default. It was unquestionably made to appear that New Century was the lender and mortgagee.
Through concealed, but systematically pre-planned computer automation maneuvers in a cyberspace of electronic transfers and exercises, homeowners’ collateral and credit were whisked off to New York and thereafter, without a legitimate legal trail, vanished. “An act or practice is deceptive if ‘first, there is a representation, omission, or practice that, second, is likely to mislead consumers acting reasonably under the circumstances, and third, the representation, omission, or practice is material.’” FTC v. Gill, 265 F.3d 944, 950 (9th Cir. 2001).”
There are no valid reasons why proper transfers and assignments did not occur. However, there are plausible motives why Wall Street and its concealment participants chose to hide the securitization facts from the public. There is a study, “Five Years After the Crash: What Americans Think about Wall Street, Banks, Business, and Free Enterprise” conducted by the American Enterprise Institute’s author, Karlyn Bowman, that analyzed various polls and studies regarding America’s confidence in Wall Street. Bowman noted that the Harris pollster has consistently followed American’s opinion of Wall Street and found in 1989 (just before the latest trend of non-traditional mortgages were crafted) that only 8% polled had any confidence in Wall Street. Bowman’s report states, “Large majorities have long told pollsters that Wall Street is greedy, selfish, and unethical. But negative sentiments were magnified by the events of the fall of 2008.” “In another question from 1996, 64 percent agreed that “most people on Wall Street would be willing to break the law if they believed they could make a lot of money and get away with it.””
It becomes apparent that Wall Street was not very popular and would not likely attract average Americans to gamble their homes if homeowners knew Wall Street players were involved. Homeowners finding out that Wall Street was gambling with their properties could have caused a flood of rescissions.
Apparently, the unwritten policy among all the Wall Street investment banks and securitization trust trustees was not to file the assignment documents until 3 months after the homeowner defaults. Many loans that are not in default today are actually in limbo because their originators have ceased to exist, like New Century – or never really existed at all like America’s Wholesale Lender – but no assignment has ever been made to establish any other ownership. The titles are likely clouded as in this case, because where are the documents after New Century, Home 123, or any other bankrupt lender ceased to exist?
Just something to think about. Many thanks to DM, DW, our law professors and our ban of merry researchers, paralegals and attorneys for their time and energy… Credit Slips… *And an enjoyable re-read of Guy Lawson’s Octopus (Crown 2012).