For the Banks: A Modest Proposal

Richard F. Kessler
Documentary Clearing House and Associates LLC.
941-924-5608
941-926-5051
richardfkessler@verizon.net
documentaryclearinghouse.com

My research has revealed 16 types of toxic documents. Never before has it been necessary for lenders
to foreclose defaulted loans through the use of spurious documents. As everyone knows by now, the
proverbial cat being out of the bag, the paper documents required to foreclose were never created. This
has led to the farce of employing foreclosure mills and documents retrieval services able to perform a
metaphysical impossibility-namely retrieving documents authenticated for use in court which never
existed in the first place.

The result has been a sequence of damage control pronouncements from the banks and their sponsors.
The first was the jump into the river defense: denial. The second was it is all technical and
inconsequential. It is a result of sloppy paperwork. The third defense was self-pity. We had no choice.
The securitization industry was overwhelmed. The volume of work was unanticipated; it could simply
not get done.

The last line of defense is familiar to lawyers. In law school lawyers are taught, if the facts are on your
side, argue the facts; if the law is on your side, argue the law; if neither the facts nor the law are on your
side, argue that the other lawyer’s client is a sob. The banks raised the sob defense by stating that the
document crisis was all the fault of borrowers who had defaulted. If the borrowers had continued to pay
their mortgages on time, there would be no toxic document crisis.

The banks have concluded that toxic documents do not pose a restriction upon continuation of
foreclosure. The reasoning behind this decision is a kind of real politik of banking. Who objects to
recommencement of wrongful foreclosure? Not the borrowers who do not defend themselves. More
than 90% of foreclosures result from a default judgment. The borrower never showed up in court to
contest the foreclosure. Not the lawyers who defend contested cases. There is very little to be earned
defending people who cannot afford to pay their mortgage. Moreover most attorneys have local
practices requiring their appearance before the same panel of judges. Most local attorneys fear the
wrath and retribution of judges whom they displease. Not the judges. Their dockets are being swamped
by foreclosure cases. A delay resulting from plaintiff’s misuse of faulty documents only complicates and
extends the foreclosure process. In short, if there is no one left who has judicial standing to complain,
the foreclosure juggernaut can proceed unimpeded. Due process suffers. In the United States today,
increasingly it is only accorded to those privileged few who can pay for it.

A modest proposal is here offered. Although based upon part performance, it may appear inconceivable
that a banker can tell the truth, that is nevertheless precisely what I recommend. The best reason for

1
allowing foreclosure to go forward despite the filing of toxic documents is that the documents were
never created because paper documents do not work with paperless transactions.

The genius of modern capitalism, the independent spirit of American entrepreneurism and new
technology in IT and MIS transformed the secondary mortgage market. In the past, mortgages were
considered long term, illiquid instruments. Today, the combined effects of these three forces has
converted these illiquid instruments into liquid, short term, publicly traded securities. This has opened a
rich vein of funding for financing the sale and resale of housing. It is also an important income source for
invested capital securities trading.

These forces enabled accelerated expansion of the volume, trading velocity, quantity and type of
investment securities traded using mortgages. This transformation proliferated the types of investment
transactions used and the segmentation and fractionalization of mortgage cash flows in secondary
market operations.

None of this would or could have been possible without digitization of the entire process. Such
digitization was required for the origination, servicing, funding and conveyancing of mortgage
instruments. The securitization of mortgages made paper records and instruments redundant, obsolete,
anachronistic and inefficient. If paperless, electronic transactions had not been available and employed,
the transformation of the secondary mortgage market and the wide expansion of housing opportunities
and investment vehicles could never have been accomplished. It can be argued convincingly, the
recovery from the recession, the national interest, public policy, general welfare, the public interest and
soundness of financial transactions including securitized transaction require the legitimization and
judicial institutionalization of digitized documents and electronic transfers.

Regarding the misuse of documents to establish a chain of mortgage title, it can be argued that the use
of these documents represented a nunc pro tunc (“Now for Then”) to provide the documents “now”
required for foreclosure which had not been provided “then” when mortgage interests were conveyed
electronically in a paperless transfer. Moreover this approach represented bad judgment made in good
faith by sponsors of securitization charged with the responsibility of protecting investors in the face of
mounting defaults.

There has been a profound misconception of what is required to show that a plaintiff bringing a
foreclosure action is the actual “holder’ of the mortgage note who is entitled to foreclose. The chain of
mortgage title and submitting the original promissory note in court is one way to prove the status of
holder. It is the usual and commonly expected way to demonstrate holder status. However, it is not the
only way. A person can become the holder of the note by receiving delivery. It can be argued that the
trustee became the holder of the mortgage note by entering into a mortgage purchase agreement
which included the mortgage and taking “electronic delivery of the mortgage in exchange for payment
of the seller.

Next, the trustee can present proof that it has claimed to be holder and received payment of
installments from the borrower, third parties by acting as sponsors of the securitization have treated
the trustee as holder and payments have actually been paid to certificate holders in accordance with the

2
trustee’s status as note holder as detailed in the Master Pooling and Servicing, Prospectus other
documents in the public record field with the Securities and Exchange Commission and no other party
has objected to the trustee’s right to claim payment. The electronic system works extremely well as
demonstrated by the fact that although more than $8 trillion of mortgages have undergone electronic
transfer to a MBST trustee, only a handful of cases have arisen where the borrower has claimed the debt
to have been paid or that the mortgage is held by another holder or does not exist in fact.

Finally, the test suggested by the UCC and used by some bankruptcy courts that the holder is the “real
party in interest” can be shown by electronic documents. The trustee can demonstrate that all
securitization transactions, individually and collectively, were designed to enable the trustee to become
the holder of the note, collect the proceeds and pass the proceeds through to the investors and
foreclose on the secured property in the event of default.

Finally, the plaintiff can argue that a court sitting in equity does not do equity if it allows an unearned
windfall to the debtor. Judicially mandated forgiveness of indebtedness create the risk of moral hazard.
It also rewards those who do not discharge their dents and punishes those who do. For these reasons,
even where a court finds the mortgage unenforceable; as a result of the misuse of toxic documents and
the non-existence of paper documents, the court is bound to declare an equitable trust or constructive
mortgage in favor of the debtor. Neither forfeiture nor rendering the mortgage unenforceable is an
appropriate outcome irrespective of the misconduct of the plaintiff.

CONCLUSION

The financial institutions seeking to enforce foreclosure of a mortgage or deed of trust sold to a MBST
have compromised the foreclosure proceeding with the introduction of toxic documents. The most
salutary corrective to this problem is to correct the record with the unvarnished truth and prove holder
status without reliance upon a chain of title using spurious documents. Strong legal arguments are
available to support judicial foreclosure in the event of a default of a securitized mortgage using
authentic records and expert testimony.

To those members of the mortgage foreclosure defense bar, a word of caution is provided. Never since
the start of this recession have the lenders been under greater pressure to utilize extra-judicial
settlements of defaults. More and more lenders can quickly resolve the holder status uncertainty by
accepting a deed-in-lieu or a short sale. At the same time, the use of toxic documents has all but made
summary judgment unavailable.

A further word of caution is indicated. The misuse of toxic documents creates civil and criminal liability.
Notwithstanding, such conduct will not necessarily enable the borrower to escape the debt or terminate
foreclosure. It is far more likely that the courts will continue to attempt to use the “four corners
doctrine” and similar reasoning to exclude claims for damages of r actionable liability of the plaintiff or
sponsors of the securitization requiring the defendant instead to bring a separate cause of action for
wrongful foreclosure, abuse of process and malicious prosecution and mortgage fraud.

3
4