Home › Forums › General › EHTrust/EHT Topics and Creative Real Estate Financing › “How to Beat the Banks at Their Own Game”
November 3, 2012 at 1:44 pm #6921
Over the past 14 years or so, I was absolutely obsessed with trying to figure out exactly how, to stop banks from foreclosing on the masses and finally got it right. From my extensive research, I reached the conclusion that if one is to truly understand “How to Beat the Banks at Their Own Game”, one must first have a general understanding of the following:
2. The Lending Process of Commercial Banks
3. The Definition of “Loan”
4. The Definition of “Debt”
5. U.C.C. Article 3 (Negotiable Instruments)
6. U.C.C. Article 9 (Secured Transactions)
7. P.S.A. Language-(Explained)
8. The Securitization Process
9. How to Formulate Proper AllegationsNovember 3, 2012 at 8:28 pm #34089
Darryl interesting comments for those of us focused on the same topic.
I don’t know if there’s a workable procedure, that for most cases will work or not, but I think this latest amelioration thinking that Bill is testing has a great deal of merit. Although I don’t have all the details of how it might work, the general approach is understood.
Regarding your posting, I’m not clear on what “P,S,A, Language-(Explained)” means but I assume it’s related to Public Service Announcements and the way they are drafted to mislead.
You’ve triggered my interest toward the U.C.C., so I’ll review those as I have little understanding of them.
Anything else you might be willing to pass along would be appreciated.
ThanksNovember 3, 2012 at 9:17 pm #34090
Here’s a related issue that’s stimulated my thinking.
The very devious, clever and purposeful avoidance designed into the loan closing process, whereby the seller executes the Warranty Deed but the document is never delivered, received or accepted by the buyer. Without conveyance and acceptance the title is left open to the attachment of liens.
It’s my understanding that, even after closing, this problem can be corrected by drafting, executing and recording a document appropriately labeled, “Certificate of Acknowledgment and Acceptance of Warranty Deed”. Once recording is finalized this action corrects the title defect and detaches/removes all liens, leaving the property with clear title. In essence, converting what was secured debt into unsecured. This process can be done quickly (inside of a week) assuming no difficulties are encountered in recording.
I suspect that if title was originally conveyed by the seller via a Special Warranty Deed the logic above would not apply!
Clearly, if true, this knocks the pre-tender lender/creditor/foreclosing entity on the head and there’s little they can do about it. If nothing else this would be a great way to start the amelioration process.
Any thoughts, thanksNovember 3, 2012 at 10:11 pm #34091
A few of us here in California have truly figured out what actually works and have free and clear properties which were once underwater.
By the way P.S.A. means Pooling and Servicing Agreement. IF you’d like I can go into detail here.November 4, 2012 at 1:08 am #34092
Thanks for the response – yes, I’d like to learn more about the P.S.A process and language.
I feel sure there are others who would appreciate the insight also.
Post details when you can.
Dave.November 4, 2012 at 1:56 am #34093
Money is defined in part as:
• The medium of exchange authorized or adopted by a government as part of its currency.
• Assets that can be easily converted to cash such as demand deposit accounts.
See-Black’s Law Dictionary 8th EditionNovember 4, 2012 at 2:01 am #34094
2. The Lending Process of Commercial Banks
• When a commercial bank makes a loan, it accepts as an asset the borrower’s promissory note.
• It creates a liability on its books in the form of a demand deposit balance in the amount of the loan.
• The deposit is backed by a physical asset that collateralizes the promissory note.
• In other words, commercial banks accept borrower’s notes for value, in exchange for a non-interest bearing checking account in favor of the borrower.
See-American Bankers Association, Money and Banking, David H. Friedman 4th EditionNovember 4, 2012 at 2:03 am #34095
3. The Definition of “Loan”
Next we must define the word “Loan” and its usage in commercial banking transactions. In order to grasp its true context, it’s necessary to analyze the deed of trust .
• However, we must first observe that even though, most notes contain standard language that reads “In return for a loan that I have received, I promise to pay U.S. $____________________ (this amount is called “Principal”), plus interest, to the order of the Lender , they usually burden the deed of trust to describe exactly what the loan is.
• Simply put, “Loan” means the debt evidenced by the Note.
See-CALIFORNIA–Single Family–Fannie Mae/Freddie Mac UNIFORM INSTRUMENT Form 3005November 4, 2012 at 2:05 am #34096
4. The Definition of “Debt”
Now that brings me to another point, debt. Debt has many meanings; however improper usage of the term can be to one’s detriment. Therefore is imperative that one identifies its true context.
• Debt is an obligation owed by one party (the debtor) to a second party, the creditor.
• Debt is created when a creditor agrees to lend a sum of assets to a debtor.
• Debt is usually granted with expected repayment; in modern society, in most cases, this includes repayment of the original sum, plus interest.
• In finance, debt is a means of using anticipated future purchasing power in the present before it has actually been earned.
• Debt is an amount of money borrowed by one party from another.
See-http://en.wikipedia.org/wiki/DebtNovember 4, 2012 at 3:19 pm #34097
U.C.C. Article 3 (Negotiable Instruments)
Article 3 applies to the negotiation and transfer of a mortgage note that is a “negotiable instrument,” as that term is defined in Article 3.
• The mortgage notes in common use today are typically negotiable instruments for UCC purposes.
See- UCC §§ 3-102, 3-201, 3-203 and 3-204; see, e.g., Swindler v. Swindler, 355 S.C. 245, 250 (S.C. Ct. App. 2003)November 4, 2012 at 3:21 pm #34098
What Constitutes a “Negotiable Instrument?”
• A “negotiable instrument” is defined as: an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it:
(1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder;
(2) is payable on demand or at a definite time;
(3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain
(i) an undertaking or power to give, maintain, or protect collateral to secure payment,
(ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral,
(iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor. UCC § 3-104(a).
• The fact that a mortgage note contains a variable or adjustable interest rate also does not affect the mortgage note’s status as a negotiable instrument.
• That is because UCC § 3-112(b) provides that interest may be stated in an instrument as a fixed or variable amount of money or it may be expressed as a fixed or variable rate or rates.
• The amount or rate of interest may be stated or described in the instrument in any manner and may require reference to information not contained in the instrument.
UCC § 3-112(b).
UCC § 3-104(b) defines “instrument” simply as a “negotiable instrument” for purposes of Article 3.November 4, 2012 at 3:23 pm #34099
How is a Negotiable Mortgage Note Transferred?
• A negotiable mortgage note is transferred when it is “delivered” by a person other than the mortgagor for the purpose of giving the transferee the right to enforce the note. See UCC § 3-203(a).
• “Delivery” of a mortgage note occurs when there has been a voluntary transfer of possession of the mortgage note. See UCC § 1-201(b) (15).
• As a general matter, the “transfer of an instrument, whether or not the transfer is a negotiation, vests in the transferee any right of the transferor to enforce the instrument . . .
” UCC § 3-203(b).
• Accordingly, a person in possession of the note becomes a “person entitled to enforce” if it can prove that it is the transferee. See UCC § 3-301.
• The easiest and most common way to transfer a negotiable mortgage note is through “negotiation.” Article 3 defines “negotiation” as “a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder.” UCC § 3-201(a).
• The “negotiation” of a negotiable mortgage note that is payable to an identified person or entity (such as the entity that originated a mortgage loan and whose name appears as the payee in the mortgage note) – “requires transfer of possession of the instrument and its indorsement by the holder.” UCC § 3-201(b)
• The “holder” of a negotiable mortgage note is “the person in possession of [the mortgage note] that is payable either to bearer or to an identified person that is the person in possession.” UCC § 1-201(b)(21)(A)
• In other words, upon the closing of escrow, the “holder” of the mortgage note is the entity that is the payee on the mortgage note and that possesses the note (either actually or constructively).
• After a negotiable mortgage note has been negotiated, the “holder” of the mortgage note is the entity that possesses the mortgage note if the mortgage note was indorsed to that entity or if the mortgage note was indorsed in blank or to bearer.
• The term “indorsement” is defined to include “a signature . . . that alone or accompanied by other words is made on an instrument [in our case, a negotiable mortgage note] for the purpose of . . . negotiating the instrument.” UCC § 3-204(a).
• Such an indorsement may be either a “special indorsement” or a “blank indorsement.” See UCC § 3-205.
• A “special indorsement” is a written indorsement that specifically “identifies a person to whom it makes the instrument payable.” UCC § 3-205(a).
• A “blank indorsement” is an indorsement that does not identify a person to whom the instrument is payable. See UCC § 3-205(b).
• When indorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer of possession alone until specially indorsed.” UCC § 3-205(b)
• The negotiation of a negotiable mortgage note that is payable to bearer (such as a negotiable mortgage note that has been indorsed in blank) is affected by “transfer of possession alone.” UCC § 3-201(b)
An indorsement is considered to be made “on an instrument” for purposes of negotiation when it is made either on the mortgage note itself or on a separate paper, often referred to as an “allonge,” that is affixed to the note. See UCC § 3-204(a). Once affixed, the allonge becomes “part of the instrument.”November 4, 2012 at 3:26 pm #34100
Who May Enforce A Negotiable Mortgage Note?
• The maker of a mortgage note is obligated to pay the note to the “person entitled to enforce the instrument.” UCC § 3-412.
• The “person entitled to enforce” a negotiable mortgage note includes “
(i) the holder of the instrument,
(ii) a non-holder in possession of the instrument who has the rights of a holder.” UCC § 3-301.
• Accordingly, to enforce a mortgage note against the borrower, a person must generally prove either that it is a “holder” or that it is a transferee with the rights of a holder. See UCC § 3-301.
• The first category of persons that may enforce a mortgage note is a “holder.
• A “holder” of a negotiable mortgage note is “the person in possession of the mortgage note that is payable either to bearer or to an identified person that is the person in possession.” UCC § 1-201(b) (21) (A).
• The second category contemplated by UCC § 3-301– a “non-holder in possession who has the rights of a holder” – is more difficult to define.
• A person would qualify as a “non-holder in possession” if possession of the mortgage note was transferred to him from the transferor, but the transferor did not indorse the mortgage note. See UCC § 3-203 cmt. 2.
• In this circumstance, the transferee is entitled to enforce the instrument, but to do so, the transferee must first prove both possession of the un-indorsed mortgage note and prove the transfer of the mortgage note by the holder to the transferee.
• In both situations, the person seeking to enforce the mortgage note must have possession of the note.
• U CC § 3-301 also permits a person without possession to enforce a mortgage note where the mortgage note has been lost, stolen, or destroyed within the meaning of UCC § 3-309. See UCC § 3-301.
The right to enforce an instrument and the ownership of that instrument are not necessarily the same. See UCC §3-203 cmt. 1. Thus, a party may have the right to enforce the instrument, but not have “ownership” of that instrument. A party need not be the “owner” of the note to enforce it. See UCC § 3-301November 4, 2012 at 3:29 pm #34101
What Rights Against Borrower Defenses are Available?
What Rights Against Borrower Defenses are Available to the Holder of a
Negotiable Mortgage Note?
• A key concept relating to the negotiation of negotiable mortgage notes is the “holder in due course” doctrine. That is because where the “holder” of a negotiable mortgage note is deemed a “holder in due course,” the holder takes the mortgage note subject only to specific limited defenses of the borrower. The following is a brief summary of an expansive area of law.
• Under UCC § 3-302(a), “holder in due course” means the holder of an instrument if:
a) the instrument when issued or negotiated to the holder does not bear such apparent evidence of forgery or alteration or is not otherwise so irregular or incomplete as to call into question its authenticity;
b) the holder took the instrument:
I. for value,
II. in good faith,
III. without notice that the instrument is overdue or has been dishonored or that there is an uncured default with respect to payment of another instrument issued as part of the same series,
IV. without notice that the instrument contains an unauthorized signature or has been altered,
V. without notice of any claim to the instrument described in Section 3-306[regarding claims of a property or possessory right in the instrument or its proceeds, including a claim to rescind a negotiation and to recover the instrument or its proceeds],
VI. without notice that any party has a defense or claim in recoupment described in Section 3-305 (a). UCC § 3-302(a).
• Under Article 3, a holder in due course of a negotiable mortgage note takes the mortgage note free of:
a) all prior claims to or regarding the mortgage note by any person
b) most defenses to enforceability of the mortgage note that may be raised by parties with whom the holder in due course has not dealt. See UCC§§ 3-305 and 3-306.
• The defenses to which a holder in due course may be subject are found in UCC § 3-305, and include; a defense of the obligor based on ,
(i) infancy of the obligor to the extent it is a defense to
a simple contract,
(ii) duress, lack of legal capacity, or illegality of the transaction which, under other law, nullifies the obligation of the obligor,
(iii) fraud that induced the obligor to sign the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential terms, or
(iv) discharge of the obligor in insolvency proceedings.
UCC § 3-305(a) (1).November 5, 2012 at 9:44 pm #34102
Wow, Great stuff! This will take sometime to absorb. I’m working on it.
How this information ties into understanding how to achieve a mortgage settlement is key.
Can settlement, when armed with this knowledge, allow the matter to be resolved administratively, or must one revert to judicial action at some point?
I also wonder, whether a forensic examination of the loan documents and processing are needed?
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