Are Mortgages Fraudulent? The Case from Credit River.


Have you been told or have you read about any of these things lately?

Banks don’t lend money?

Bank’s monetize a borrower’s credit?

You don’t have to pay your mortgage payments and banks can’t foreclose?

There is really never ever any money involved in you getting a mortgage and buying a home?

If you don’t repay the loan, no one is actually harmed?


How about any of these?

The bank lent you your own money?

The bank basically hijacked your credit to cash a check at the fed using your signature and credit file?

The fed lent money to your underwriter on your signature and your promise, not theirs?

What about these statements?

This was money added to the money supply and given to your originator by the fed?

You’re not the borrower… you are the creditor and have given them or they have stolen your credit?

There CANNOT be any foreclosures because there never was any REAL money lent to the borrower?


Yes?  Well, if you have then you’re not alone…

I spoke with a homeowner facing foreclosure a couple weeks ago.  That’s not an unusual event, by any means, I speak with homeowners at risk of foreclosure every single day.  But this conversation was different.  I’d never heard anyone say the things he was saying as he described how banking and mortgages work in this country.


Basically, he was trying to tell me that all mortgages were fraudulent and something about the banks never lending any real money to anyone.  And then something about how his loan had been paid off by different kinds of insurance more than once.  The whole thing was adding up to his realization that he didn’t have to repay his loan and it wouldn’t matter at all.


I tried to ask a few questions in an attempt to get him to clarify what he was saying, but he got more and more frustrated with my apparent unwillingness to agree with his argument… whatever it was.

Another homeowner told me something similar recently, she said that no loans were ever originated.  I asked how that could possibly be the case, and she said the banks “collateralized the down payments ten times.”  I asked what she meant by collateralized, and just like the previous homeowner, she got frustrated with my question.  She then said it had something to do with the “Fed window,” which was obviously a reference to the discount window at the Federal Reserve.


She was sure that I already knew what “collateralized” meant and also that I knew all about the Federal Reserve, and therefore I was only asking my questions to give her a hard time.  I explained that I did think that I knew the definition of “collateralized” and did know about the discount window at the Fed, but I didn’t understand how those things related to her statement about no mortgages being originated.


In simple terms, I didn’t understand what “collateralized” and the discount window had to do with me applying for a mortgage and buying a home, and she was incredulous at my saying that I didn’t know.

I felt badly for the homeowners after the calls.  “Banks don’t lend money?  Well, that’s just silly.   “The bank lent you your own money?”  Well, that’s even sillier.  And your loan being paid off multiple times by insurance policies?  How can anyone believe that?  If that were true then investors would have no losses and we know that’s not the case, right?


For a while after the calls, I tried to put the conversations out of my mind.  I had seen increasing amounts of misinformation proliferate since the foreclosure crisis began, but I couldn’t help but wonder from where was this coming. Who would be telling people that no loans were originated, or making any of the other statements listed at the top of this article?


Coincidentally, a few weeks later a blogger I’m friends with called to ask if I’d heard of a company… Legal Forensic Auditors, or LFA.  He described them as a company that sells forensic audits, securitization audits, and other related “reports,” all provided to “help homeowners,” according to the company’s Website.


Help homeowners how, I couldn’t help but wonder.


I told him that I had never heard of them, but while we were talking I went online to find their Website to see what I could find out. I saw a tab labeled “Articles,” and clicked on it to see what was there.  Scrolling down I saw a headline, “Mortgages are Fraudulent,” and I don’t know why but I clicked on it.


In just a few seconds of reading, something was ringing bells…


“Here is an interesting article making the argument that your bank or mortgage company never was a lender to you. They basically hijacked your credit to cash a check at the fed using your signature and credit file.  They lent you your own money. The fed lent money to your underwriter on your signature and your promise, not theirs.  This was money added to the money supply and given to your originator by the fed. Sound crazy??  


Where the heck had I heard this stuff before?  I couldn’t place it right away, but I knew I had heard something similar recently.  Then it hit me and I told my friend on the phone… Oh my God, I had just heard this same stuff from two different homeowners… what in the world was going on here?  The set-up to the article continued…


“This is very interesting reading and you should take a close look at Montgomery vs. Daly – Google this case and we have put a text copy of the case underneath this article. We have a deposition of a banker based on this very argument that will blow you away.  The banker admitted that no bank assets were lent to borrower, but rather a bookkeeping entry was used to create the money to lend and that bookkeeping entry was allowed because of the signature on the promissory note obtained fraudulently.”


I went on to read the article and I pulled some of the more outlandish quotes for the beginning of this article, but let me be very clear about something before I say anything else… it’s not true… none of it.  Not even a little bit… in fact, it’s utter nonsense.  And in normal times, no one would believe it for a moment.


But alas, these are not normal times.


First of all, let’s look at the case this whole line of thinking is based on… Montgomery v. Daly, a civil case in Credit River Township, Scott County, Minnesota, heard by the courts on December 9, 1968.  It’s often referred to as “The Credit River Case.”  Here’s the case in a nutshell version…


The Credit River Case…


First National Bank of Montgomery foreclosed on Jerome Daly’s property for nonpayment of the mortgage, and was seeking to evict him from the property.


Jerome Daly was an attorney who based his defense on the argument that the bank had not actually loaned him any money but rather had created credit on its books and therefore had not given him anything of value and was not entitled to the property that secured the loan.


The jury and the justice of the peace, Martin V. Mahoney, agreed.  The Justice of the Peace declared the mortgage “null and void” and said the bank was not entitled to possession of the property.


Now, it should come as no surprise that the bank appealed the very next day, and the decision was ultimately nullified on the grounds that a Justice of the Peace did not have the power to make such a ruling, but that’s really not the whole story.


You see… Jerome Daly was a kook.  He was also a long-time tax protester who was convicted of failing to file tax returns for 1967 and 1968, his argument being that the only ‘Legal Tender Dollars’ are those which contain a mixture of gold and silver and that only those dollars may be constitutionally taxed.


The United States Court of Appeals for the Eighth Circuit rejected his appeal and referring to Daly’s contention that the only dollars had to contain gold and silver, noted: “Defendant’s fourth contention involves his seemingly incessant attack against the federal reserve and monetary system of the United States. This contention is clearly frivolous.”


The Minnesota Supreme Court later disbarred Jerome Daly in a decision in a case very similar to the Credit River case, which involved the SAME justice of the peace.  In fact, the pair tried it several times until the Minnesota Supreme Court just had enough.  See In re Jerome Daly, 291 Minn. 488, 189 N.W.2d 176 (1971).  In the disbarment proceeding the Court noted that:


“Respondent’s persistent and continuing attacks on our national monetary system can hardly be regarded as zealous advocacy or a good-faith effort to test the validity of repeated decisions of courts of record. For, as found by the referee, up to the time of his findings and recommendations respondent had avoided payment of any Federal income tax for 1965 and subsequent years on the asserted ground that he has not received gold and silver coin and, therefore, had no earnings that were taxable. 


Also, he has taken personal advantage of the system he attacks by borrowing money from a bank to purchase lakeside property, only to subsequently defeat the bank’s repossession after mortgage foreclosure by taking the position that the bank’s extension of credit was unlawful, obligating him neither to pay the debt nor to surrender possession following expiration of the time to redeem. 


As detailed in the referee’s finding, we regard the tactics employed by respondent in the unlawful detainer proceedings before the justice of the peace as not only unprofessional but reprehensible.


The misconduct found by the referee, and demonstrated by respondent’s oral declarations before this court in violation of the Canons of Professional Ethics, reflects professional irresponsibility to such a degree as to render respondent totally unfit to continue to discharge the duties of an attorney.”


Now, even though an interested fifth grader could find out what happened in the Credit River case, Montgomery v. Daly, the nullified case and its arguments have been cited on numerous occasions by various conspiracy theorists and groups opposing the Federal Reserve System, who are particularly upset about the practice known as “fractional reserve banking,” and argue that the case demonstrates that all foreclosures are illegal and that the Federal Reserve System is unconstitutional…


… which in turn shows why we’ve had five million foreclosures over the last few years and why the Federal Reserve System is still with us and going nowhere anytime soon.
As a matter of fact, as recently as in 2008, a U.S. District Court decision in Utah noted that similar arguments have “repeatedly been dismissed by the courts as baseless” and that “courts around the country have repeatedly dismissed efforts to void loans based on similar assertions.”


Now, I’m not a lawyer, so by all means, consult with an attorney, but I think I’ll go out on a limb here and say that I wouldn’t be in any sort of hurry to make an argument based on this case in an effort to save your home from foreclosure.  If you decide to ignore my advice in this area, however, please do invite me to the proceedings so I can sit in the courtroom.  I would not want to miss it for anything in the world.


The file for this case has been scanned and the documents are available at:


And should you want to find out more about the kooky movements that have shown up in our courts, here’s a link to “Law on the Edge.” Pathfinder to Law on the Edge: Sovereign Citizens, Common Law Courts, Patriot Groups, Tax Protesters, et al.


Fractional Reserve Banking…


Fractional-reserve banking, we should all understand, has been around for a long, long time.  Why people don’t like it, I really don’t know.  It was originated many centuries ago when bankers realized that depositors do not all demand their money at the same time.


The creation of fractional-reserve banking predates the existence of governmental monetary authorities, which was back when people would deposit their gold and silver with goldsmiths and receive a note for their deposit… like a receipt.  Soon the notes became accepted as a way to pay for commercial transactions… they became an early form of paper money.


The goldsmiths noticed that people didn’t redeem their notes for their gold and silver at the same time, so they saw an opportunity to invest their reserves in interest-bearing loans, and soon they became interest paying and interest earning banks.  Fractional reserve banking had arrived.


In those early days, however, if people lost confidence in their goldsmiths/banks to repay them, they would all rush down there to try to be first to get their money out, and the “run on the bank” was also born.


So, by the later part of the 1600s, countries started creating central banks, which had the power to set reserve requirements, centrally store gold and silver assets and transfer them in the event of a bank run and be the lender of last resort should a bank fail.  Over the years, central banks have also expanded their responsibility to include interest rates and various measurements of the money supply.


Here’s how fractional reserve banking increases the money supply… in this example the required reserves are set at 20 percent, although in real life today they could be as low as three percent.


You deposit $100. The bank lends out $80. Keeps $20 in Reserves.


The next bank gets the $80. Loans out $64. Keeps $16 in Reserves.


The next bank gets the $64. Loans out $51.20. Keeps $12.80 in Reserves.


The next bank gets $51.20. Loans out $40.96 Keeps 10.24 in Reserves.


The next bank gets 40.96. Loans out $32.77. Keeps $8.19 in Reserves.


The next bank gets $32.77. Loans out $26.21. Keeps $6.55 in Reserves.


The next bank gets $26.21. Loans out 20.97. Keeps $5.24 in Reserves.


The next bank gets $20.97. Loans out $16.78. Keeps $4.19 in Reserves.


The next bank gets $16.78. Loans out $13.42. Keeps $3.36 in Reserves.


The next bank gets $13.42. Loans out $10.74. Keeps $2.68 in Reserves.


The next bank gets $10.74.




So, as you can see in this example, there was only one deposit of $100 that made it all happen… and it works because of fractional reserve banking.  Why is this a bad thing?  I really have no idea.



There’s a lot of debate about whether we should or shouldn’t have a centralized, yet private Federal Reserve bank at all, and I do understnad that debate to some degree, but why people would think fractional reserve banking is a bad thing… no clue.


Some say the U.S. Government should print its own money and sell it to the banks to lend into our economy as opposed to allowing the Federal Reserve to create the money and loan it to our government through its purchases of Treasury Bonds at interest.  But, remember that the Federal Reserve is required by law to turn over its profits to the U.S. Treasury each year, and last year, 2012, the Fed handed over $76.9 Billion, according to The New York Times.


The Times reported that roughly 97 percent of the Fed’s income last year was from interest payments on its investment portfolio, including $2.5 trillion in Treasury and mortgage-backed securities, which it has been buying in an effort to keep long-term interest rates down, such as the rates we pay on mortgages.


The central bank is now the largest single investor in federal debt and securities issued by Fannie Mae and Freddie Mac.  But Fed officials note that this still saves money for taxpayers because those interest payments otherwise would be made to other investors.  Fed Chair Bernanke half-jokingly told Congress last year that: “It’s interest that the Treasury didn’t have to pay to the Chinese.”


He’s a funny, funny man, don’t you think?


If you’re interested in this debate, you should listen to this Mandelman Matters Podcast with the President of the Public Banking Institute, Ellen Brown.


If you’d like to read more about money and how it all works, here’s a link to Modern Money Mechanics – A Workbook on Bank Reserves and Deposit Expansion, which is very easy to read and published by the Federal Reserve Bank of Chicago.


Where do banks get the money they lend out to borrowers?


Well, there are different sources.  Basically, banks get their money from:


  • Shareholders in the bank who buy shares.
  • Deposits of various types.
  • Bonds sold by the bank.
  • Borrowing from the Federal Reserve and Federal Home Loan Bank.
  • Some kept in reserve at the Fed.


They then make loans, but not from one of those buckets or the other… just from that available pool of cash.  Banks can borrow from the Fed’s Discount Window and if the rates are low enough, and there’s demand from credit-worthy borrowers, lend it out at a profit.


Here’s the thing about mortgages, however.  Banks don’t have a lot of money that they can lend out for 30 years.  No one deposits money into a bank in a 30-year CD, right?  Of course, right.  So, banks can originate loans, but then they need to sell them to get their cash back without having to wait for 30 years for us to pay off our mortgages.


The kind of investors that want to invest their money for 30 years are insurance companies and pension plans.  You see, you buy life insurance when you’re thirty but you’re probably not going to use it until many years later, if at all, assuming it’s term insurance.  So, an insurance company can invest money for the long run, because it won’t need to pay many claims sooner than that.  Pension plans are the same sort of deal.  You start contributing to your pension plan when you’re younger, but won’t be taking that money out until you retire and therefore pension plans too, can invest for the long-term.  Get it?


But, insurance companies and pension plans don’t have retail branches where people go every day to deposit their paychecks, so the banks originate the loans and then they sell them to those who can wait for a longer period of time for their money to be repaid… insurance companies and pension plans.  Well, and let’s not forget Funny and Fatty… the two ugly sisters known as the GSEs.


They buy loans too… in fact, today they buy all the loans, except those considered sub-prime, which are insured by the FHA… who is insolvent but so what… and stop being such a gloomy Gus.


The FHA can get as much money as it wants to throw away on bad loans from the Treasury, and the Treasury gets its money from… hang on… from US.  Okay, so what?  I’m not making the decisions so I’m not going to complain.  As long as people with low credit scores can buy homes, and Realtors can earn commissions, and mortgage brokers can charges lots of points and fees… well, I’m good with it.


So, how could people be led to believe such statements as, “The bank lent you your own money?”  That, I’m afraid, I think I understand.


The foreclosure crisis began in late 2006, at least that’s when foreclosures first spiked, but in 2009, when President Obama told the nation about his Making Home Affordable program, which became HAMP for those at risk of foreclosure, that’s when things started to decline for homeowners, and I’m not just talking about losing homes.


This crisis is unique because it’s a quiet crisis.  This past August, when I took off for a little over a month to visit colleges with my wife and daughter, it became obvious… the foreclosure crisis vanished.  I had stopped blogging, stopped checking emails and stopped taking calls, and the foreclosure crisis completely disappeared, as far as I was concerned.  I was still seeing a newspaper most days, still catching news on television here and there.  But, foreclosures as some sort of “crisis,” completely went away when we went away on vacation.


Even the presidential candidates, although only a few months before the election in November, and even when campaigning in foreclosure ridden states like Nevada and Ohio, neither said a word about any sort of “crisis.”  I had left my blog to visit colleges for a month, and when I did, I had left the foreclosure crisis behind.


How is this possible? The answer is found in understanding the power of “shame.”  


When someone can’t make even a single mortgage payment, they’re stressed about it.  After two months not being able to make a payment, the stress goes up.  After three months, many homeowners report not being able to sleep through the night.  It gets worse as the months pass, and a large part of why it gets so much worse is because the homeowners can’t tell anyone about their situation… they’re ashamed.


Shame is a painful feeling about oneself as a person, associated with genuine dishonor, disgrace, or condemnation.  Guilt is saying “I did something bad,” while feeling shame is saying, “I am bad.”


People are ashamed that they can’t make their mortgage payment, so they can’t tell anyone… not their parents, not their closet friends, not co-workers.  I interviewed a 62 year-old homeowner who had put off 14 sale dates before finally saving his home by getting his loan modified.  I asked him if he had told anyone what he was going through and he said no, it was not the kind of thing one would tell anyone.  I replied that I understood and then asked him whether his wife had talked to anyone along the way.  I was wondering whether women were more likely than men to talk to someone else under such circumstances, but his reply totally shocked me.  “I never told her,” he said as he wiped a tear from the corner of his eye.


Fourteen moments in time over more than a year when their home could have sold at a trustee sale and he never even told his wife.  The stress must have been indescribable.  Shame is what drives us to keep silent about how we think or feel.  And the power of shame binds us all.


Very often we feel shame as a result  of outside influences, and as it relates to losing a home to foreclosure this is absolutely the case — disapproval by our parents’ or peers’ over our being in the position to potentially lose our homes, or the opinion of society-at-large that those losing homes are “irresponsible borrowers,” are both examples.


Joseph Burgo, Ph.D. has practiced psychotherapy for more than 30 years and writes a blog on Shame for Psychology Today.  Dr. Burgo provides the following example of external forces that often drive us to feel ashamed that I think makes it easy to understand…


“If I do poorly on a test or my business fails, I might not want anyone else to know because I’m afraid they’ll think less of me.”


Shame and non-disclosure has also been the focus of researchers who not surprisingly have found that “non-disclosure was related to the anticipation of negative interpersonal responses to disclosure (in particular labeling and judging responses) in addition to more self-critical factors including shame.”


The lack of human contact that comes from being unable to talk to anyone over a long period of time is a form of solitary confinement, and putting someone into solitary for more than a few weeks is considered a form of torture that can lead to certain mental illnesses including depression and permanent or semi-permanent changes to brain physiology.

Dr. Stuart Grassian, a Board Certified Psychiatrist and member of the faculty at Harvard Medical School for over twenty-five years has extensive experience evaluating the psychiatric effects of solitary confinement and his observations and conclusions related to this issue are cited in a number of federal court decisions.


Dr. Grassian believes there is no question that minimal opportunity for social interaction—can cause severe psychiatric harm.  In his paper titled, “Psychiatric Effects of Solitary Confinement,” which appears in the Journal of Law & Policy, Vol. 22:325, Dr. Grassian states…


“It has indeed long been known that severe restriction of environmental and social stimulation has a profoundly deleterious effect on mental functioning.”


It’s important to note that, according to Dr. Grassian, this issue does not just apply to prisoners, but is also a major concern for patients in intensive care units, or spinal patients immobilized by the need for prolonged traction, military situations, polar and submarine expeditions, and in preparations for space travel. So, you don’t have to actually be in solitary confinement to experience the negative psychological effects of isolation.


Researchers observing individuals confined with small groups, such as being confined to work over the winter in the Antarctic, have reported “progressively worsening depression, hostility, sleep disturbance, impaired cognitive functioning, and paranoia.”


Grassian also explains that, “Such disturbances were often observed in individuals who had no prior history of any mental illness.”  He has found that “common effects of solitary confinement include increased sensitivity to stimuli, hallucinations, and other changes in perception, as well as cognitive problems including memory loss, difficulty thinking, and impulsiveness.”


Craig Haney of the University of California at Santa Cruz, also an expert on the effects of solitary confinement, says the following… People experience isolation panic. They have a difficult time psychologically coping with the experience of being completely alone.”


Haney’s research has shown that some people, “lose their grasp of their identity, because who we are, and how we function in the world around us, is very much nested in our relation to other people.” 


And the longer we are isolated from human contact the more our ability to process information is undermined.  Some lose their ability to register and regulate emotion.  “The appropriateness of what you’re thinking and feeling is difficult to index, because we’re so dependent on contact with others for that feedback.”  


Shame has made this country able to lose five million homes to foreclosure almost without a peep.  But just because its stayed relatively quiet, that doesn’t mean people haven’t been deteriorating, if not physically, then mentally.



Cognitive dissonance… 


The term “cognitive dissonance” is used to describe the discomfort we feel resulting from our holding of two conflicting beliefs.


Do you remember Aesop’s Fables?  Well, my mother used to read them to me when I was a little boy.  And one of my favorites was, “The Fox and the Grapes.”  Of course, I didn’t realize then that it was just a story about a fox, I always thought of it as an example of “cognitive dissonance.”  (Hang on… reverse that last sentence.)  Here’s the story…


A famished fox saw some clusters of ripe black grapes hanging from a trellised vine. She resorted to all her tricks to get at them, but wearied herself in vain, for she could not reach them. At last she turned away, hiding her disappointment and saying: “The Grapes are sour, and not ripe as I thought.”


And thus we have the origin of the phrase “sour grapes,” which is used to describe when someone wants something, can’t get it, and then decides it must not have been be worth wanting it in the first place.  We use the expression “sour grapes” to describe someone who is bitter because he or she failed, but in reality it’s a coping mechanism to avoid what’s called cognitive dissonance.


There are many cognitive biases that can affect how we think about something, especially when we find ourselves in stressful situations.  Sometimes when we want to believe something it can become easy to accept.


Impact bias is the tendency to overestimate the emotional impact of a future event, whether in terms of intensity or duration.  And I see that all the time when people are sure that losing their home will be the end of the world… and then it isn’t.  Human beings are incredibly resilient, we should all remember.  People lived through concentration camps and managed to have wonderful lives… surely we won’t die from renting, right?  Want to know a secret?  I’ve never talked to a homeowner who lost a home that wasn’t much happier a year later.


Focalism occurs when people focus too much on certain details of an event, ignoring other factors.  And you can probably think of times when that’s been a factor in your own life, right?   Immune neglect refers to our unawareness of our tendency to adapt to and cope with negative events.  We’re a lot better at it then we think at times.


“Some people believe with great fervor preposterous things that just happen to coincide with their self-interest.” Judge Frank Easterbrook, Coleman v. CIR (7th Cir 1986) 791 F2d 68 at 69 [and quoted in several  subsequent court decisions].


More and more I’m hearing homeowners buying into ideas that aren’t even close to being true, and they don’t want to be told otherwise either.  The problem with this is… it’s a sure fire path to homeowners losing the battle they claim they want to be fighting.  The other day, I heard someone explain the securitization process in such a way that I couldn’t even respond.  I didn’t want to be the one to tell them they were wrong, but I also didn’t want to see them lose their home as a result.


It’s perfectly understandable that many people don’t know what to believe anymore, after all, what we’ve seen happen all around us could drive anyone a little batty.  But, understand that holding onto something that’s not true isn’t going to help you… in fact, it’s sure to have the opposite effect.


So, check everything out… twice… three times… check with more than one source… look for recognized experts and write to them.  Ask them to refer you to good sources of information.  I’ve written about most of the issues in play today, try reading one of my articles and follow the links to the sources.


The foreclosure crisis is a crisis, and it’s a good idea to get smarter about a lot of things.  It’s said that by 1934, even farmers were reading economics text books during the Great Depression.  They wanted to know more about what was happening all around them.


Just don’t take what anyone says at face value… and if they can’t explain something so that you understand it… don’t assume that it’s because you’re not smart enough… it’s not you… it’s them… if they can’t explain every detail, then they don’t really know what they’re talking about.


Nothing happens over night.  You’ll get it if you just keep learning.  And in a crisis like the one we’re facing today, knowledge can stop you from being scammed… lead to saving your home… and stop you from losing your mind and not even know it.


Remember that we’re going to be just fine.  We could all lose our homes and soon we’d find new ways to be happy again.  During the Great Depression people lost everything, but many have memories of how close their families became.  Yes, we’ll be fine.


The bankers on the other hand can’t survive without our spending and charging and borrowing.  So, it may seem like they have all the power right now, but it’s just not the case.  Heck, if they keep foreclosing in Florida, in a few years they’ll be giving away condos in Miami when you open a business checking account.


Mandelman out.

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