SINGLE TRANSACTION RULE REVISITED

4 Nov

From: Charles Cox [mailto:charles@bayliving.com]
Sent: Monday, October 24, 2011 2:58 PM
To: Charles Cox
Subject: SINGLE TRANSACTION RULE REVISITED

New post on Livinglies’s Weblog

blavatar-default.png

SINGLE TRANSACTION RULE REVISITED

by Neil Garfield

Many questions are piling in as lawyers start to drill down into the whole securitization scheme. The COMBO helps; yet in order to properly present the case in court you need to understand more than just your transaction. When I started the blog, and periodically thereafter, I made reference to a doctrine that was created in the context of tax litigation but which applies and has been applied in commercial situations. Sometimes you have to figure out the goal of the transaction in order to determine the parties. The doctrines that apply are the SINGLE TRANSACTION DOCTRINE and the STEP TRANSACTION DOCTRINE. The key question that is answered is what was the goal — or to put it another way, if you take out that piece, would the same transaction have otherwise still occurred in some other fashion?

Applied to debt, whether it is mortgage or otherwise, it is stated as follows: If investment bankers were not selling mortgage bonds to investors, would the loan have been otherwise been made? If the answer is no, there would have been no transaction, then the doctrines apply. If the doctrines apply, then the nature of the transaction is determined by its goal — the issuance of mortgage bonds, and all the exotic hedge and credit enhancements products that went along with it. Once that is determined, the real parties in interest emerge — the mortgage bonds were sold for the purpose of funding loans. So the loans and the bonds are the evidence of the total transaction. The borrowers and the investors are the real parties in interest. Most interpretations of RPIT come down to money — who gave it and who got it?

It might be that the more significant party in interest on the borrower side is not the homeowner at all, but rather the investment banker who created a promise to pay the investors under false pretenses. The homeowner did not know about that promise and certainly had no idea of the false pretenses. The issue is whether the mortgage, deed of trust or other security instrument is enforceable as to power of sale, foreclosure or otherwise. That can only be true if the right party has signed it and the right party enforces it. But it is also restricted to enforcement of a valid outstanding obligation, which is described in other instruments.

Usually, in a mortgage loan, the obligation is described in a note. In our current situation the obligation is described in a convoluted series of documents, some of the them fabricated, including the PSA,, prospectus etc. because the lender investor didn’t get a document from the homeowner, they received it from the investment banker. Thus the totality of the documentation with the investor and with the borrower might be used to describe the obligation — but then you have that pesky problem of Truth in Lending where all the documents must be revealed and disclosed to the borrower.

The only reasonable interpretation in securitization transactions is that the entire risk of loss would have shifted to a different party if the mortgage bonds were not being sold. This is what caused all the intermediaries to abandon normal underwriting standards. This ALL parties involved in ALL parts of the transaction are mere intermediaries or conduits and not possessed of any economic interest int he transaction, except those arising out of their role as a conduit. For example, if you write a check to Target to buy a TV, the goal was to purchase a TV. the fact that you wrote a check, that TARGET took the check tot heir bank, that the check was cleared through Federal Reserve or other intermediaries, and presented to your bank who sent it to their account processor which then provided the information as to wheth er the funds were present to cover the check, which led your bank authorizing payment is all irrelevant to the issue of the purchase of the TV.

In our current crisis, all those intermediaries are vying for the TV when one of them has any economic interest in it. In this example, the intermediaries would have that opportunity if Target didn’t care whether or not they got back their TV or didn’t care to fight about it for whatever reason. The vacuum and opportunity for disinterested intermediaries to pretend to be interested and pretend to have rights to the TV would be almost irresistible if you had no ethics, morality or conscience. The single transaction doctrine and step transaction doctrine were created to sort out such situations.

In the mortgage context, that is exactly what is happening. I predicted 4 years ago that litigation results would depend entirely upon whether the Banks could be successful at misdirecting the attention of the court to the parts of the transaction instead of the totality of it — the money processing through conduits and intermediaries — or if they were correctly instructed by borrowers that they now know that the real transaction was the purchase of a mortgage bond by investors and that the borrowers signature was merely incident to, and necessary for the completion of the transaction such that the investment banker would not be required to return the money to the investor.

Like Target in the example above, the investors have decided, so far, not to fight with the homeowner but rather to take their fight to the investment banker who sold them the bonds under false pretenses. But if the investors and borrowers did get together and settle the obligation in any manner or with any means, the issue of foreclosure would be over. There would be no obligation or at least there would be no default.

There are issues as to how to characterize the fraudulent foreclosures, unlawful detainer, seizure of personal property, etc. And the related question is whether those involve transfers of interests in property or if they involve instruments that are investments, securities or whatever. I have concluded as an expert that the documents of “transfer” (forgetting their foundation and authenticity for a moment) are in actuality part of a larger scheme whose end purpose was the issuance of multiple forms of securities or other instruments exempted from security regulation. Even if exempted, it doesn’t make it a real estate transaction.

It does make it a fraudulent scheme, if the the property owner was fraudulently induced into executing documents under the pretense that this was a conventional mortgage loan situation, when hidden from the property owner, it was really part of the loop of issuing “mortgage bonds” (certificated or noncertificated to investors. Since the goal was to get money from investors and then have them abandon their interests in the “mortgages” or the “property” the property aspects seem incidental to the real nature of the transaction.

In fact, when you take a step back, you will see that the borrowers were duped into becoming "issuers" of paper that they had no idea was going to be used for bonuses on Wall Street. Borrowers did not know that the amount loaned to them or for their benefit fell far short of the amount collected from investors.

Under that scenario, their was, as I have said from beginning, a single transaction. That transaction was between the investor and the property owner, which was undocumented since neither were in privity to a written instrument in which both of them appeared. Or it could be said that the note is one small part of the documentation, in which the PSA, A&A, prospectus, bond, etc. were in TOTAL, the documentation. If those documents are, in total, the only documentation of the transaction, then the note cannot be accepted into evidence without the rest of the evidence.

And the security instrument or agreement (Deed of trust) might only mention the note. If it does that, then it has referred to a piece of paper that does not have all the terms of the transaction. Since they were intentionally hiding the existence of a the securitization chain from the borrower, it can’t be said that the omission of the other documents was accidental. Thus the security instrument would be invalid on the most fundamental grounds — it does not secure the obligation — evidence of which is contained in multiple instruments, it attempts to secure only the note, which does not contain all the evidence of the obligation and terms of repayment.

As such, if that is accepted by the Court, the security instrument would need to be reformed in order to be effective. Whether that reformation would relate back to the original recording is a question I cannot answer. But in my opinion, no security instrument is capable of being enforced if it makes reference to a single document that is to be used as evidence of an obligation, the performance of which triggers the enforcement provisions of the security instrument — unless that single document contains all the evidence of the obligation.

b.gif?host=livinglies.wordpress.com&blog=1877341&post=15049&subd=livinglies&ref=&email=1&email_o=wpcom

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: