The normal loan agreement is based upon certain accepted and presumed elements. The borrower desires to borrow money, he/she gets a loan of money and signs documents in favor of the lender setting forth the terms of repayment. The lender, who is responsible under TILA for the viability of the loan, makes the loan with the expectation of being repaid and earning a profit from interest and fees. The borrower relies upon the lender’s desire to be repaid and the lender relies upon the borrower’s intent to repay the loan according to its terms.
When the Federal Truth in Lending Act was passed — 5 decades ago — Congress made findings of fact that lenders were overreaching and even cheating consumers in loan transactions. So they passed laws that govern every mortgage loan. Those laws put the burden of viability of the loan on the lender. They also required disclosure of t he actual lender so that the consumer borrower had a choice about who he/she wanted to do business. And most importantly disclosures were required that revealed all compensation, commission, bonus or profit paid to anyone arising from the loan transaction.
Securitization as a theory would not have disturbed any of those rules (Reg Z) and laws (TILA). But as practiced it was warped into something unimaginable even to the PhD’s working at the Federal Reserve. By the late stage at which the FED woke up and realized what had been done the ongoing damage to homeowners, communities, cities and states had advanced far beyond anything that most analysts imagined was possible.
Unknown to all but a select few in underwriting investment banks, the loan agreement was enlarged to include elements that were unrecognizable even to experts. The borrower was led to believe that the loan agreement had not changed and that he/she was receiving all the necessary disclosures. The borrower was led to believe, by law, that the lender was taking responsibility for the viability and repayment of the loan.
But what had changed through the process of labeling parties and documents was that lenders were no longer lending money and even the parties who set up “warehouse lending” agreements were not lending money because they were all funded by investment banks who were using money advanced by investors who bought “certificates” that were, at the time of sale of the certificates, not tied to any list of loans. Thus table funding became the norm. More importantly, the actual lenders, the investment banks, would not have entered into the loan agreement without the sales to investors. The signature of the borrower became extremely valuable — a fact unknown to consumer borrowers and which is still largely unknown or not well understood.
This scheme resulted in an average of $12 of revenue for every dollar loaned. Such revenue or compensation was unimaginable until the investment banks split the debt from the paperwork. Contrary to the borrower’s understanding of the loan transaction the goal of the investment bank was not to take a risk on nonpayment, but to obtain the borrower’s signature for the sole purpose of creating a paper infrastructure above the signed loan documents. The investment bank has little interest in the viability of the loan and whether it is paid back. They were trading not on the debt but on the collateral.
Thus the relationship was different and much larger than the one presented to borrowers and inverted the incentive of the real lenders to make any loan rather than good loans likely to be repaid. The implied or actual contract was that the consumer borrower was contributing their signature , credit reputation and their homestead to a deal in which most of the revenue and profit was continually hidden and concealed contrary to the laws and rules expressed in TILA.
The main interest of the investment bank is to preserve the securitization infrastructure which is far larger than the underlying loan, whose existence is kept alive by a variety of ruses solely to preserve that infrastructure. Foreclosures are initiated for nonpayment not to get payment but to produce revenue. The monetary proceeds from foreclosure sales is distributed to the investment bank and its affiliates as revenue and not to pay down the debt, the existence of which is maintained as an illusion to justify the existence of the derivative instruments sold that derive their supposed value from various elements of the loan — principal, interest, collateral etc.
Since the law of contract starts with the intent of the parties it may fairly be said that there was no meeting of the minds because the true nature of the loan transaction was illegally concealed from the consumer/borrower. It is obvious that the borrower was directly intending to enter into one contract while the investment bank, acting indirectly through conduits was entering into another contract that entirely altered the scheme of interest, principal and cash flow.
In the end nobody owned the debt who paid value for it — a key component because only a party who has paid value for the debt may enforce the security instrument (Article 9 §203 UCC). The investors had paid value but never received ownership nor any right to enforce any debt, note or mortgage from consumer/borrowers. In foreclosures all documents had to be fabricated and forged to create the illusion that the paper trail was evidence of the money trail.
The investment bank had paid value using investor money but also never received title to the debt, note or mortgage and then the investment bank sold all elements of the debt to multiple third parties who were essentially betting on the outcome of the cash flow or the value of the loans or the value of the “certificates” that served as the ground floor of the derivative infrastructure.
This loan agreement viewed from the perspective of both the borrower’s point of view and the lender’s point of view was not a mirror (as required by contract law) but more like a picture of Dorian Grey in which reality masks the corruption of what had been a sacrosanct commercial transaction.
This opens the door to defensive claims of unjust enrichment when the loan agreement was executed and a new claim for unjust enrichment when the foreclosure ends with sale of the homestead property.