Millions of Americans, myself included, foolishly bought overvalued homes during the housing bubble. Now it turns out that our notes were sliced and diced so many times that we cannot be sure that our monthly payments are going to who is the legal owner of the note thanks to MERS. This is a crisis of epic proportions for everyone involved and could lead to another financial meltdown that Congress will be asked to fix.
One the one hand, there is the school of thought that homeowners can force their lender to “produce the note” during foreclosure proceedings, but this defense only works in judicial foreclosure states. By doing so, borrowers have the hope of stalling the proceedings and can stay in their home rent-free or under a best case scenario walk away owning the home free and clear. But this is a straw man because while the lender does not have a valid contract to collect, the borrower is not disputing that they actually owe the money but merely disputing who they owe it to and therefore would be unjustly enriched if they were allowed to keep the property without paying. In Arizona, for example, in Weisband Chapter 13 Case No. 4:09-bk-05175-EWH while the court ruled against GMAC, they made it clear that Barry Weisband still owed money to someone.
The Debtor argues that, in an asset securitization scheme, only the securities investors have standing to seek stay relief because they are the only parties with a financial interest in the securitized notes. However, because the Debtor executed the Note and received consideration (which he used to purchase the house), the contract is enforceable regardless of who provided the funding. In other words, the fact that the funds for a borrower’s loan are supplied by someone other than the loan originator, does not invalidate the loan or restrict enforcement of the loan contract to the parties who funded the loan. A number of cases and treatises recognize that consideration for a contract, including a promissory note, can be provided by a third party. See, e.g., DCM Ltd. P’ship v. Wang, 555 F. Supp. 2d 808, 817 (E.D. Mich. 2008);Buffalo County v. Richards, 212 Neb. 826, 828-29 (Neb. 1982); 3 WILLISTON ON CONTRACTS 7:20 (Richard A. Lord, 4th ed. 2009); RESTATEMENT (SECOND) OF CONTRACTS 71(4) (2009).
Notes are regularly assigned and the assignment does not change the nature of the contract. The assignee merely steps into the shoes of the assignor. In re Boyajian, 367 B.R. 138, 145 (9th Cir. BAP 2007); In re Trejos, 374 B.R. 210, 215 (9th Cir. BAP 2007). No additional consideration is required, as opposed to a novation which creates a new obligation. Id. at 216-17 citing RESTATEMENT (SECOND) OF CONTRACTS 280, cmt. e. Therefore, the Debtor’s argument that the Note is unenforceable because the funder of the Note was not the payee fails. The Note is still valid and can be enforced by the party who has the right to enforce it under applicable Arizona law.
Conversely you have the conundrum that would allow the banks and other interested parties to basically disregard contract law in the interest of the economic well being of the country. Some pundits, like John Carney at CNBC, believe that Congress will step in and with a wave of the pen they and the POTUS will make it all right. (For those of you that are skeptical you need to look no further than the bailouts of GM and Chrysler where the unions were pushed to the front of the line over secured creditors.)
Here’s what is going to happen: Congress will pass a law called something like “The Financial Modernization and Stability Act of 2010” that will retroactively grant mortgage pools the rights in the underlying mortgages that people are worried about. All the screwed up paperwork, lost notes, unassigned security interests will be forgiven by a legislative act.
The put-back crisis is not driven by economics. It is driven by legal rights. And there’s simply zero probability that the politicians in Washington are going to let Bank of America or Citigroup or JP Morgan Chase fail because of a legal issue.
So here’s what I expect will happen. The lame duck session of Congress will pass a bill that essentially papers over the misdeeds of the banks that originated mortgage securities. Every member of Congress and every Senator who has been voted out of office will cast a vote for the bill. And the President will sign it.
Essentially there is no good solution for this but once again the federal government will overlook the bad behavior of their benefactors and bail them out at the expense of the American people under the guise of TBTF. This my friends will be another further attempt by the government to blur the public-private line of the free market. Contrary to the claims of many, we are not headed in the direction of socialism, instead we are on the fast-track to fascism.
Our Republic is so screwed.