Back in the 1980s, a colleague was getting a doctorate at Harvard Business School and had to take a seminar in statistical methods. Each participant was assigned a paper and was required to present to the class a critique of the statistical approaches employed.
The paper he was given was a dissertation that had caused a bit of chatter in financial economics circles. The author had used prices at which the Fed bought and sold Treasuries in its daily open market operations, and had used them to analyze the results the Treasury achieved in its periodic bond auctions. The paper concluded that the Treasury was doing a bad job, the prices it was getting at its auctions were far worse than those recorded by the Fed in its daily market operations.
When it came time for his session, my colleague stood before the class, gave a brief outline of the paper’s argument and approach, and said, “I have only one comment. Typical Fed daily market operation purchases and sales are in the millions of dollars. Treasury bond actions are in the billions. The data in this paper is irrelevant to the question it purports to analyze.” He then sat down.
He got an A for the course. And he went on to become a business school professor.
An analysis posted by the law firm, SNR Denton, “Commentary on Transfers of Mortgage Loans to RMBS Securitization Trusts,’ makes a conceptual error similar to that of the paper my colleague thrashed. It makes a very long and impressive sounding rebuttal of the line of argument made with increasing success by attorneys in court, and recapped on this blog: that the parties to the mortgage securitization failed to take the steps required to convey the borrower promissory notes and related liens (technically, the mortgage or in some states, the deed of trust) to the the securitzation entity, a trust. But as we will show, the arguments made in the article are simply irrelevant.
And unlike the graduate student who performed the misguided Fed/Treasury analysis, SNR Denton clearly knows better. SNR Denton is effectively the successor to Thatcher, Proffitt & Wood. Thatcher Proffitt was a leader, arguably the leader, in devising the legal structures and documents for mortgage securitizations.
Let’s start from the top of the article, since the efforts to misdirect start there:
There is a tremendous amount of public commentary these days about possible defects in foreclosure proceedings commenced by loan servicers.
Notice how the problem is framed as relating to “public commentary.” There is no acknowledgment of the fact that many judges have dismissed foreclosures because the party attempting to foreclose was unable to prove it had standing, or that the servicers themselves have admitted to problems (albeit of a type they are trying to pass off as merely procedural, that of the use of improper affidavits). In fact, there are problems with foreclosures that have been surfacing in courts all over the US, to the point where the media has taken notice and the servicers have had to take action to address a particular type of abuse. But according to SNR Denton, this problem is merely one of perception.
After a few words about affidavits, we get to this:
Within this overall dialogue, however, more fundamental issues have been raised challenging both the validity of the procedures used to convey mortgage loans into securitization trusts and the qualification of the securitization trusts as a real estate mortgage investment conduit (“REMIC”) at the time those trusts were formed. These statements are false and misguided.
The reasoning behind these statements appears to be as follows: (i) in order to satisfy procedural requirements in connection with foreclosure, certain steps may need to be taken in order to document the ownership of a mortgage loan by the securitization trust, and (ii) since not all of these steps were taken at the time of the securitization, the securitization trust must not own the mortgage loan. This reasoning is faulty, because some of the steps that may be required under applicable state law in order to bring a foreclosure action are not required to transfer ownership of the mortgage loan.
The purpose of this article is to refute these challenges to the efficacy of mortgage loan transfers to securitization trusts. Simply stated, the industry standard procedures used for decades in transferring mortgage loans to securitization vehicles comply with the well-settled principles of law governing the transfer of mortgage loans, and therefore are effective to transfer ownership of the mortgage loans.
Yves here. Accusations like “false” and “misguided” imply that what follows is gospel truth, or at least defensible. Yet instead what SNR Denton provides is a series of arguments that are at best narrowly accurate but irrelevant. One can only conclude the intent of the article is to mislead.
The article never directly recites the argument made here, which is that there is substantial evidence that in many cases, the notes were not conveyed to the trust as stipulated. As we have discussed, the pooling and servicing agreement, which governs who does what when in a mortgage securitization, requires the note (the borrower IOU) to be endorsed (just like a check, signed by one party over to the next), showing the full chain of title. The minimum conveyance chain in recent vintage transactions is A (originator) => B (sponsor) => C (depositor) => D (trust).
The proper conveyance of the note is crucial, since the mortgage, which is the lien, is a mere accessory to the note and can be enforced only by the proper note holder (the legalese is “real party of interest”). The investors in the mortgage securitization relied upon certifications by the trustee for the trust at and post closing that the trust did indeed have the assets that the investors were told it possessed.
Effectively, what the article endeavors to do is focus attention on aspects of the law that might be helpful to the securitization industry but are not germane. For instance, relies upon “general custom and practice in the sale of mortgage loans” and the UCC, which is the Uniform Commercial Code (which has been enacted in all 50 states, with relatively few state-level idiosyncrasies).
But rub comes not from the legal considerations surrounding note/mortgage conveyance, but the particular stipulations of the pooling and servicing agreement, which all the parties agreed to. And it is also clear that the provisions of the PSA trump the UCC.
Article 1 of the UCC allows the parties to an agreement to vary the terms (Ie deviate from the UCC) by agreement. The key points of the germane section:
1-302 Variation by Agreement
(a) The effect of provisions of this Chapter may be varied by agreement.
(b) Good faith, diligence and reasonableness are the only terms that may not be changed by agreement.
(c) The presence of the words “unless otherwise agreed” does not imply that other provisions of this Chapter may not be varied by an agreement of the parties.
That means the UCC governs only with respect to issues not varied by agreement in the PSA.
Section 2 of the PSA stipulates provisions that deviate from the UCC. Typical provisions:
Section 2.01. Conveyance of Mortgage Loans.
Each seller hereby:
Sells, transfers, assigns, sets over and otherwise conveys to the depositor, without recourse, all the right, title and interest of such seller in and to the applicable mortgage loans.
The sales shall be as provided in this agreement.
Delivery shall be on or before the applicable cut-off date
The documents shall be delivered to the Master Servicer before the cut-off date
The Master Servicer confirms that all sellers have made such transfers and deposits before the cut-off date¡
Sellers by such deposits have conveyed to the Trustee for benefit of Certificate Holders all right, title and interest in and to the mortgage loans
The PSA also very clearly provided for an unbroken chain of assignments and transfers thought the parties (the A-B-C-D or more cited above). The use of intermediary parties between the originator and the trust, with a “true sale” occurring at each step, was intended to create FDIC and bankruptcy remoteness. The investors (who are called the certificate holders in the PSA) did not want a creditor of a bankrupt originator to be able to seize notes back out of the trust.
Some PSAs allowed for each party to endorse in blank, but the note still had to have endorsements by all the parties in the conveyance chain, while others stipulated that each endorsement had to be to the next party in the chain. However per NY trust law (and New York law was chosen in the vast majority of cases to govern the trust), the final endorsement had to be to the trust, not in blank.
The “unless otherwise agreed” language in Article 1 means you cannot rely on perfection solely by the UCC. It also means possession of the original note does not prove either ownership or perfection.
Now are any of these issues addressed in the SNR Denton article? Not really. The PSA is mentioned only in passing; the article weight heavily on the UCC. This part comes closest is under a section that discusses “general custom and practice in the sale of mortgage loans.” This is a backwards acknowledgment of what we and other have described: that in 2004, perhaps earlier, the securitization industry started ignoring the requirements of the PSA and would effect the transfers through the A-B-C-D parties via e-mailing lists of loan numbers (which were verified at each step) and wire transfers. SNR Denton is effectively arguing by invoking “general custom and practice” that we all should accept how then industry did things, you can make a legal case for it, as long as you ignore the sections of the PSA which govern what was supposed to happen.
Here are the sections of the SNR Denton piece that come closest to addressing the matters at hand:
In a private label RMBS transaction, the relevant contractual agreement is typically a pooling and servicing agreement, which conveys the mortgage loans from the depositor to the trustee on behalf of the securitization trust. Another relevant document could include a separate mortgage loan purchase agreement, under which the mortgage loans are sold by the sponsor to the depositor immediately prior to the sale from the depositor to the trust, with representations and warranties that are assigned to the trustee. These documents contain clear granting language that conveys ownership of all of the seller’s “right, title and interest in and to” the mortgage loans to the trustee on behalf of the securitization trust. There is a schedule or exhibit to these documents that specificly identifies each loan sold under the agreement.
Note that none of this acknowledges the requirement of the PSA that the note be endorsed to show the full chain of conveyance. Also observe the emphasis on ” These documents contain clear granting language that conveys ownership…”. The documents cannot alone convey ownership; the stipulated steps also have to be completed. The article does acknowledge the importance of delivery of the note in the following section, but again fails to address the PSA issues:
Physical delivery of the mortgage note to the purchaser or its agent, together with an endorsement of the note by the seller in blank, are also key components in the sale of mortgage loans for several reasons.
As we indicated, many PSAs required specific endorsement (to a particular party), not in blank, so this is inaccurate (except as far as describing “general custom”). The article repeats its assertion about endorsements in blank (note the section we boldfaced):
Notes may be delivered to the purchaser with an endorsement in blank. It is common for a mortgage note for a mortgage loan that has been sold to have stamped on it an endorsement to the effect of “Pay to the order of _____________, without recourse”, signed by the originator or a subsequent purchaser. Such an endorsement has the effect that any subsequent transfer of the note presumptively only requires physical delivery (i.e., with no additional endorsement). Therefore, where there are successive purchasers to a note, the endorsement in blank by any prior holder is a sufficient endorsement for purposes of the most recent purchaser.
As we indicated, that’s rubbish. The boldfaced language falsely claims that if the note was endorsed by A in the prototypical A-B-C-D chain we set forth earlier, then D could rely simply on the endorsement by A. In fact, the PSA required the full chain of endorsement and also required the depositor (the C party) endorse the note to the trustee (it is New York trust law requirements, not specified in the PSA, which would call for the final endorsement to be to the specific trust, not just the trustee).
Some other assertions are matter of fact, not law, and SNR Denton appears not to be on top of the facts:
In private label RMBS transactions, the prevailing and nearly universally-followed practice has been for the endorsed notes to be physically delivered to the trustee, or to a custodian as the trustee’s agent, at the closing of the securitization.
First, we’ve had industry executives of large “private label”, meaning non-Fannie/Freddie originators say the notes were never conveyed from the originator, and not simply for their bank, but across the industry. It appears they were conveyed only when someone needed to foreclose, which was well after the closing of the trust.
Second, there is ample evidence in court across the country of out of time assignments. of the note and the related lien being assigned to the trust shortly before a foreclosure action was commenced, in some cased, even afterwards, so again well after the closing of trust.
If you parse the piece carefully, its contentions hinge on these arguments, which in turn hinge on ignoring key provisions of the PSA and not integrating New York trust law considerations.
It ends on a indignant tone, and amusingly, resorts to the new preferred bankster line, “loose lips will tank the markets”:
We believe that the recent allegations of possible wholesale failures to convey ownership of mortgage loans to private label RMBS trusts are baseless and unfounded. All parties to these transactions, including issuers, underwriters, trustees and investors, clearly intended that the transactions convey ownership of the loans to the trusts, and appropriate steps were taken to effect such conveyance in accordance with well-settled legal principles governing transfers of mortgage loans. Any attempts to assert otherwise today are inaccurate and uninformed, and, if left to stand unchallenged, could cause substantial and unwarranted harm to the economy.
These arguments are “baseless and unfounded” only if you do readings of the law intended to favor your clients and ignore ample evidence in past and present court cases. If SNR Denton doesn’t like what it is reading on this blog, I suggest it take up the matter with the judges who are looking at the evidence and the terms of the PSA and are in a fair number of cases ruling against the servicers and trusts for having failed to prove their standing to foreclose.
To put it another way, if this is the best defense a leading law firm in the securitization industry can mount, it shows they have a weak case.
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sounds like you have effectively boxed the arguments against one of the leading ABS law firms in the country. Thacher went down in flames, SNR Denton faces a similar conclusion when the law suits now start piling up. The entire premise of what the firm advises is in doubt. well done!
Any attempts to assert otherwise today are inaccurate and uninformed, and, if left to stand unchallenged, could cause substantial and unwarranted harm to the economy.
I hope somebody’s compiling each and every one of these extortionate threats for the day if and when we ever do have our Finance Sector Nuremburg, so that these criminals can be found guilty not only of having destroyed the economy as the knock-on effect of their general fraud and robbery, but as having shown intent to deliberately destroy it in terrorist fashion, to enforce compliance with their demands.
And I reiterate that the threat itself, according to most definitions of terrorism, is already the act.
NPR radio news is hourly trumpeting this story off of AP:
http://www.npr.org/templates/story/story.php?storyId=130805618
Bernanke claims the Fed is looking into forecloser fraud in conjunction with 50 state AG probe.
Fed Press Release as of Today:
http://www.federalreserve.gov/newsevents/press/other/20101025a.htm
I presume this will be good news that the attention is being turned to the fraud by the highest authorities on the Federal Level. Perhaps some of this can be attributed to the pounding delivered from this direction.
Warren Buffett defends
PDCA “Profit and Crimes” Orlando 2011…………………………………………………………………………………
Volume mailing of Invitation to PDCA “Profits and Crimes” Orlando 2011. Meet and greet PDCA “criminals,
double-crossers, liars, and loosers” including Richard”Sergeant Schultz Greene and Jerry “I’ll just pray for you” Russo. Signature Funding by Chris Connor and Sherwin-Williams, Warren Buffett and Benjamin Moore, and Elliott Portnoy and SNRDenton. “Profits and Crimes” approved by PDCA Executive Committee and
Greg Schnurr, Carol Adkins, Dave Siegnor, Mark Casale, John Lanzillotti, Mark Foster, Ron Olson, Debbie
Zimmer, Bob Cusumano, Albert Waksman, Mike O’Donnell, Karen Gallivan, John Cushing, Frederick Nance,
Sam Fifer, Bill Shoup,Ellen Kullman, and Charles Bunch. Attend “Profits and Crimes” and see what the “PDCA Criminal Advantage” can do for you! http://www.webetrayamerica.com also http://www.fakingourethics.com
I’m not sure you address SNR’s argument. Their argument is that the securitization pools did, in fact, come to own the mortgages. Your rejoinder is that they breached the PSA, which isn’t responsive. Assuming ex arguendo that it was a breach, it’s an open question whether it’s a material breach.
jpe,
It appears you did not read this post carefully.
You misrepresenting the argument made. I indicate the PSA trumps the UCC, per article 1 of the UCC. The parties stipulated that the notes had to be endorsed in a particular way to be conveyed to the trust. So the parties are required to adhere to the terms of the PSA. That sets the standard for what is necessary for the trust to own the notes.
New York trust law is very unforgiving. The trust can operate ONLY as specified in its governing agreements. Any deviation is considered a void act. So the failure to adhere to the stipulated terms of the PSA means the trust cannot accept the notes. This is not my view, but the view of ALL the New York trust experts that are official advisors to New York state on trust law matters.
In addition, as you chose to overlook, the SNR Denton article contends, falsely (falsely because there is ample court evidence to the contrary) that the notes were delivered to the custodian acting on behalf of the trust by closing. So the facts on the ground are at odds with the legal argument SNR Denton is trying to present.
As I indicated clearly, possession of the original note does not prove either ownership or perfection. And in many cases, the trusts do not even have possession; we have been told by industry sources the notes are often with the originator, sent to the trustee only for the purpose of foreclosure.
hehe. Let’s ignore the IRS on REMICS, real estate law, and NY securities law. Then obviously the industry can convert mortgage notes to bearer bonds with the owner being whomever finds one laying on the street or in MERS, the trust funds can run “Just In Time Inventory” when some paperwork fodder is needed for foreclosure, and if not available or the owner of the bearer bond is questioned, use Six Sigma electronic paperwork processes to generate evidence for the courts.
Nothing unsound here. Move along everyone. Investors too. Your investment is in good hands and will be administered fairly and in your best interest.
LOL
“The investors in the mortgage securitization relied upon certifications by the trustee for the trust at and post closing that the trust did indeed have the assets that the investors were told it possessed.”
Does this mean that MBS holders can demand their money back from the trustee as they’ve been sold securities by false pretenses?
At the closing of each RMBS transaction. The Trustee and/or Custodian delived a signed receipt of the Custodial File (which is compsosed of all the paperwork including the Note) The trustee had a set amount of time post closing to inspect the file and request missing documents before certifying it had everything except X. I find it hard to believe that the Trustees forged these documents and did not receive the files on thousands of transactions. It may have happed on some, but systematically no.
Senior industry executives (one at a very large bank whose name you will recognize) said his bank did not transfer the notes, and further claimed no one in the industry did. In addition, there are lots of examples of out of time assignments of notes, which also means they did not make it to the collateral file as stipulated.
You may choose not to believe it, but the evidence on the ground supports the idea that there were widespread deviations from the stipulated process.
Is the right thing to do still in the swing of things?
By Dwight Baker
October 25, 2010
Dbaker007@stx.rr.com
Cover up consumes too much of the time today inside the Beltway of Washington DC.
Ethics are not to be found in any branches of our Government city, county, states and federal.
Many see as I do that a change in our Democratic government needs to come and soon. Many have no clue what to do except try to vote one crook out and put another in his or her place.
The use of the SEE SAW YAW of LAW has been the mainstay in the crooked mess of the home finance crisis. But now the ambulance chasing tort lawyers are set to begin suing the ones with the biggest bucks. That may be the one thing that ends up saving our nation. I sure hope so.
Therefore what are the only other solutions, I have read of none?
http://www.nakedcapitalism.com/2010/10/snr-denton-provides-intellectually-dishonest-flawed-defense-of-mortage-securitizations.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29
http://www.truthdig.com/report/item/the_tea_party_test_case_20101022/
I might be wrong, but it sounds like SNR Denton is arguing that the PSA effectively transferred ownership of the notes, regardless of whether they were properly endorsed or endorsed in blank. If so, this is the same argument that the banks made in the Ibanez case now pending before the Mass. Supreme Judicial Court, with a twist. In Mass., a mortgage is not just a security agreement, it’s a conveyance of title to land subject to the mortgagor’s right of redemption. Therefore, a mortgage assigment must comply with the Statut of Frauds (contracts for the sale of land must be in writing, etc.). An assigment in blank would clearly not comply because there is no named assignee. Therefore, the banks had to argue that there was something in writing transferring ownership of the mortgage since the assigment itself didn’t do so.
Bob,
PSA stands for “pooling and servicing agreement.” It is the agreement that stipulates how and when the assignments are to be made.
It is slowly coming to light that it was “the prevailing and nearly universally-followed practice” that the assignments were not made how the PSA requires nor when the PSA requires.
Yves also cites NY trust law, which also has requirements as to how and when the notes are assigned. It is also slowly coming to light that it was “the prevailing and nearly universally-followed practice” that these laws were violated.
Real estate law pretty much falls under the aegis of the states. If the banks couldn’t even abide by the PSA or NY trust law, I suspect that, as you point out in the case of Massachusetts, the banks ran afoul of state laws as well, and on a massive scale.
DownSouth,
I’m sorry if I wasn’t clear. I understand what PSA stands for and I understand what a pooling service agreement is. The attorneys for the banks in the Ibanez case argued that the PSA itself was the assignment; in other words, the PSA transferred all of the loans in bulk. They had no choice but to make that argument because the only other written document purportedly transferring the loans was a blank assignment which did not comply with the Statute of Frauds. This is their argument, not mine.
Oh, OK. I misunderstood. My bad.
It’s just that the argument they made—-that the PSA is the assignment—-is so farfetched as to be beyond the realm of comprehension. I suppose it shows how desperate they are.
Yves, I have a question about whether the “schedule or exhibit to these documents that specificly identifies each loan sold under the agreement” in all cases lists the exact mortgages, including those that “were conveyed only when someone needed to foreclose, which was well after the closing of the trust.”
In other words, not questioning your interpretation of the legality of the (non-)conveyance by proper endorsement of the notes into the MBS, have there been any switcheroos of mortgages being foreclosed in the name of specific MBS? I’m curious as to whether mortgages were placed into the MBS as they defaulted, in order to manipulate the performance of the MBS, or whether they just didn’t bother to endorse the notes over to the MBS until ‘necessary’ to foreclose, out of laziness, indifference to the law, or for some other reason. Your 10/8/10 post about John Paulson, which quoted from The Greatest Trade Ever seemed to hint at manipulation, after the fact, of the performance of mortgages (whether or not to modify loans), and switching them among MBS:
Per Zuckerman, In January 2007, Paulson employees heard that Bear Stearns traders had told investors on a couple of occasions that ” ‘It’s not so simple to short mortgages. A servicer can just buy mortgages out of a pool, so you guys will never be able to collect’ ” on the credit default swaps used to make the short wager.
Does this also mean that none of the performing mortgages have left the warehouse of the originator, and are endorsed in blank, making them bearer instruments, as Josh Rosner stated?
AR said: “I’m curious as to whether mortgages were placed into the MBS as they defaulted, in order to manipulate the performance of the MBS, or whether they just didn’t bother to endorse the notes over to the MBS until ‘necessary’ to foreclose, out of laziness, indifference to the law, or for some other reason.”
That’s the million dollar question, isn’t it? That is if we’re talking about the spirit-of-the-law or the moral question. SNR Denton concedes that the letter-of-the-law was not adhered to, but it asserts that the spirit-of-the-law was.
SNR Denton claims that “All parties to these transactions, including issuers, underwriters, trustees and investors, clearly intended that the transactions convey ownership of the loans to the trusts.” That’s a true statement. But the rub comes in how and when the conveyances were made.
Are we to believe that the lawyers who crafted the PSAs and the legislature who promulgated the laws didn’t have good and valid reasons for stipulating in great detail how and when the conveyances were to be made?
Oops!
I said that “SNR Denton concedes that the letter-of-the-law was not adhered to, but it asserts that the spirit-of-the-law was.”
That perhaps mistates SNR Denton’s position. Its argument seems to be more along the lines of “If the spirit-of-the-law is adhered to, the law was adhered to, and it’s not important that the letter-of-the-law was adhered to.”
To bring it down to layman’s terms, don’t SNR Denton’s legal and moral arguments pretty much boil down to these:
1) Everybody’s doing it, so that makes it OK. SNR Denton’s argument is replete with phrases like “It is common,” “industry standard procedures used for decades,” and “the prevailing and nearly universally-followed practice.”
It reminds me of the time when I was driving on I-10 west of Houston. The speed limit was 55 mph but almost everybody was driving 70 to 75, including myself. The highway patrolman singled me out and stopped me. My internal lawyer immediately deployed, arguing that “everybody was speeding.” However, this argument didn’t resonate with the officer. It didn’t resonate with the judge either. I was found guilty and had to pay the fine.
2) The timing of a transaction is not important. SNR Denton argues that the failure to properly assign the notes to the trust at the time those trusts were formed is not important.
One time I stopped in Brady, Texas and filled my car up with gasoline. For whatever reason, I drove off without paying. Nothing happened, and on my way back through Brady I stopped and paid the clerk. So the clerk believed me when I told her that I had merely forgotten to pay her when I filled my car up.
But what if it would have happened differently? What if, instead of my momentary lapse happening in a small rural community like Brady with a tight knit community with a high level of interpersonal trust, it had happened in Houston? And what if the clerk had called the police and they had detained me? Would my argument that “I had merely forgotten to pay” have resonated in those circumstances?
And what if it could be shown that my “universally followed practice” was to drive off without paying first? How would that affect the believability of my claim that “I had merely forgotten to pay”?
SNR Denton argues that the intentions were pure, like mine were when I went back and paid the clerk after the time of sale. “All parties to these transactions, including issuers, underwriters, trustees and investors, clearly intended that the transactions convey ownership of the loans to the trusts,” it asserts.
Two things seem to undermine this claim, however. First, the banks did not voluntarily go back and attempt to make things right. There was no effort on their part to make things right until they had already been caught. Second, the failure to assign ownership of the loans to the trusts at the time those trusts were formed was no rare event; it was no momentary lapse like my driving off without paying. Quite the opposite, this was the way the industry conducted its business on an everyday basis.
I’m not impressed by the SNR Denton article. It speaks
in generalities. The devil is in the details. There
are no references to US Federal or State Law (apart
from the U.C.C.) . It seems a full discussion would
have to include real estate law, trust law,
REMICs, securities laws and regulations, contract law,
and at length; it would help if they cited case-law,
law review articles or other scholarly publications.
SNR Denton:
“the industry standard procedures used for
decades in transferring mortgage loans to
securitization vehicles comply with the
well-settled principles of law governing
the transfer of mortgage loans,”
The real question is whether and to what extent
the “standard procedures used for decades”
were followed around the time of the real estate
bubble . Even then, just because something is
standard procedure doesn’t mean it produced the
desired end result, in the eyes of the law.
Lastly, from the experience listed for
Stephen Kudenholdt, it’s not clear to me
how much he has been involved in litigation.
David Bernier
Yves,
Perhaps you should stick to economics and let those who know law do law. You cite (but ignore) the PSA provision which says:
Each seller hereby:
Sells, transfers, assigns, sets over and otherwise conveys to the depositor, without recourse, all the right, title and interest of such seller in and to the applicable mortgage loans.
It is clear that the PSA by its terms does not require an endorsement of the notes. As to whether legal provisions outside the PSA do require a chain of title, that remains a separate issue, perhaps of state law relating to foreclosure, perhaps of trust law governing the securitizations. Like it or not, law is complicated. Mixing it with outrage distorts the process.
There is plenty of blame to go round in the mortgage mess, beginning at the top levels of government, continuing through predatory and felonious originators, greedy and clueless bank executives, witless and deceptive borrowers willing to take absurd risks and misrepresent critical financial data. But constantly pushing the idea that failure properly to shuffle the papers leaves every owner of every mortgage securitized in the past fifteen years with no right to enforce a claim against the collateral makes you sound like a shyster lawyer running one of those Florida television ads rounding up clients behind in their payments.
What do you hope to gain from the destruction of residential mortgages as a credit instrument?
Yves, why do you hate America? LOLZ
jake chase said: “Perhaps you should stick to economics and let those who know law do law.”
Oh, I get it, that’s why we have trial by juries composed of lawyers instead of trial by juries composed of our peers.
Yves, you’ve definitely stepped on the toes of the priestly class, with all its legalese that only it can interpret. After all, wide readership of these sacred texts is a privilege it reserves to itself, so it can interpret passages to support its sophistry and politics.
“Perhaps you should stick to economics and let those who know law do law.”
Very humble of you, dear Jake.
I suspect that Yves knows a fair bit about law. I base this on her skillful and judicious use of the English language when presenting her views. But I guess she should listen to you instead of doing that…
According to Yves, the typical PSA also, in addition to your quote, says:
The sales shall be as provided in this agreement.
Yves follows up by saying, “The PSA also very clearly provided for an unbroken chain of assignments and transfers thought the parties (the A-B-C-D or more cited above).” She does not quote those sections but I’m inclined to think that she isn’t making that part up just to make a case.
Unless you can produce evidence that the typical PSA does NOT include such language then your comment is based on an incoherent and flawed argument.
We hope to help your racketeering clients lose a little weight on the new eight-year nutriloaf diet.
Frauds. White-collar criminals.
Better get some mob lawyers of counsel right now.
Jake, the investors who are supposed to eat the losses are entitled to rely on compliance with the PSA, a document discussed in the offering materials. If I represented one of them, I would not agree that this is mere paperwork. I’d be looking for a deep pocket who didn’t comply with the rules to help out on those losses.
Jake the Chase —
“failure properly to shuffle the papers .. What do you hope to gain from the destruction of residential mortgages as a credit instrument?”
The documentation of individual loan packages is in your view mere shuffling of the papers. Jake, Jake, Jake .. given the obscene profits taken out by the participants in this “industry,” and participants would rather play golf than shuffle the papers that would have insured a system governed by integrity rather than fraud and laziness, why were the papers not shuffled? This and MERS (created as a lazy “solution”) is what is threatening the real estate lending industry. What is so impossible about recording all mortgages, notes, and assignments thereof in a legally mandated government operated registration system – oh yea, it may cost a little bit of money, and, alors, you may not want the transparency that would result.
I am not sure what Yves is attempting to do, but, modification (destruction) of the current standard way of doing business is absolutely required. Instead of paying fees to those who do not do what they are supposed to be doing, we need to pay those who maintain the integrity of the system. No longer will obscene bonuses be paid to those who do very little at all except paper over fraud and incompetence.
If each loan had to be handled with care and documented carefully with a loan package that was 100% complete and could be audited at a later time, there would be less money to go around to pay the obscene bonuses, but we would not be facing a meltdown of the savings or so many people who placed their life savings into the custody of these clowns.
Show me an incomplete loan package, and 9 times out of 10, there is some fraud or fee gouging involved.
Merely by following state laws, the residential mortgage will remain a sound credit instrument. The question you need to raise is why the “best and the brightest” created a structure that threatens the “destruction of residential mortgages as a credit instrument.”
Yves – good work.
dejavuagain-
you need a guest blog.
“Instead of paying fees to those who do not do what they are supposed to be doing, we need to pay those who maintain the integrity of the system. No longer will obscene bonuses be paid to those who do very little at all except paper over fraud and incompetence.”
This cannot be said enough. If people want capitalism to survive, the integrity of the system must be as uncorruptible/accountable as humanly possible.
hellow may nime is artist afshin
may mother nime mrs artist leila forouhar to losangeles
Jakechase … if it was so obvious that PSA provisions had been respected, do you really think competent attorneys and judges out there wouldn’t have noticed and said so already?
At the end of the day, the law and powers that be will have to rule on what is exactly meant by “intended” and “appropriate” in the quote below…
“All parties to these transactions, including issuers, underwriters, trustees and investors, clearly intended that the transactions convey ownership of the loans to the trusts, and appropriate steps were taken to effect such conveyance in accordance with well-settled legal principles governing transfers of mortgage loans.”
Jake the Chase
Keep trying …
1.”Most of the borrowers are paying”
Huge percentages are NOT paying.
2. “most of the security owners paid full value for the mortgage assets”
Actually, most owners of MBS in the relevant periods overpaid for the mortgage assets, and, were not delivered the requisite documentation to establish ownership by the MBS trust.
3. “What about savers who purchased slices of that debt?”
They can be paid full value for their investments. The only investors for whom sympathy is owned are pension funds. They should sue their advisors and trustees as well for not performing due diligence. The requirements that 25% of MBS purchasers must agree to sue should be declared void as an offense against public policy (decency).
4. “It is time intelligent people began writing about a sensible solution to this problem …”
Well, there are many problems. The first intelligent solution is to require the foreclosing servicers to obtain the full documentation trail required to establish ownership of the note and mortgage. This will be painful and expensive and may result in after the facts transfers to the trusts causing tax and other problems. Then, all documents should be recorded in the local recorders office, and related fees paid. Then, each trust needs to register in the state where they wish to foreclose, since they are doing business in those states. Then a foreclosure is brought in the name of the actual owner. Then, we will have clean title. This will be expensive. The CEO’s of the banks owning servicers will get minimal bonuses this year. If a servicer is “independent”, then the sponsoring IB bank funds the costs. This process if supervised in each state by knowledgable title and real estate lawyers will cost several thousand dollars. The title system will be restored and homes will become marketable. For homes already foreclosed, the “servicers” have to back track and perform all these steps, INCLUDING RECORDATION OF ALL INSTRUMENTS in the local title office.
4. Next solution – remove the effective exemption of liability of the rating agencies.
5. Next solution – abolish MERS – but, prior to their abolishment, they have to go back and record properly all the assignments of notes and mortgages for all 60 million of the loans bogusly “recorded” on MERS, so that honest people who luckily can pay off their mortgages receive good title. If they do not do this, sue them in the mother of all RICO suits.
6. Next solution – require all sponsors to hold 10% of all MBS securities on their own books.
7. Eliminate all guarantees of cash flow payments for servicers in all MBS pools. It there are guarantees, must be made by the sponsor.
8. Do not accept MBS legal opinions from attorneys who, without the aid of a paralegal, have never closed a residential loan soup to nuts including handling title issues, insurance, etc. and have never appeared in a court in a contested foreclosure case.
9. At investment banks, Require all junior MBA graduates to work in a loan origination and loan closing departments – my gosh, an actual apprenticeship – prior to them even touching an MBS, CDO, PSA.
10.All mortgage loan packages should be scanned in with underwriting documentation.
11. Loans in SEC regulated MBS or purchased by an ERISA pension plan must be originated by licensed and name loan originators, whose names and lines appear in the final mortgage file.
Uh – fix the system and pay for it in short.
There is no simple fix here – it is practical to fix it, but will turn the system upside down so it does not happen again.
What you want is a shovel and someone else to dig the hole, bury the problem, and hope the problem is not watered.
To summarize:
1) New home buyers will like to know that they paid the right guy when buying the home. They do not want to get booted out at some later date, and be owners of a new loan anyway, by any of the “moneys in the middle”.
2) New and old MBS investors will want to know that they are not getting screwed by all the “monkeys in the middle”.
3) Taxpayers will want to know that MBS and Treasury bonds don’t become perfectly fungible instruments in order to preserve the vastly superior lifestyles of the “monkeys in the middle”. We will be accused of “monkey envy” by the industry, but I’m ok with that.
Let me try again. Whatever the defects of securitization, we still have a mountain of mortgage debt. Most of the borrowers are paying; most of the security owners paid full value for the mortgage assets; all of the mortgagors applied the loan proceeds to acquire residential property. Let’s agree that all the monkeys in the middle: originators, sponsors, dealers, servicers, trustees are con men, crooks, (supply your own adjective). What do we do now? Please raise your hand if you believe everyone who took a mortgage since 1995 (perhaps earlier) should get a free pass because his note was not properly assigned. Should all that mortgage debt simply disappear? What about savers who purchased slices of that debt?
It is time intelligent people began writing about a sensible solution to this problem, which promises to destroy what little is left of the value of money and to make who knows what percentage of existing homes unmarketable.
Frankly it’s obvious you haven’t been reading this blog. Nobody is promoting a free pass for anyone and that’s exactly the point. You seem to want to sweep under the rug any and all errors by the banks, servicers, etc. That’s the double standard in focus here. Moreover, by digging a little deeper into this mess, we may find that there were other “intentions” at play. The question is who broke the law and what to do about it…
Sorry, I replied in the thread above – see my reply just above.
Here’s a possibility. Let’s get some law made addressing the violations (if any) of the PSA’s and establish a system that doesn’t rely on “break the rules now and ask for forgiveness later.”
How in the world you come up with the idea that Yves is advocating a “free pass” for the borrowers is beyond me.
Yves will be the first to acknowledge that the borrowers owe SOMEBODY for the loan they took out. There’s no free lunch here. The issue is conveyance and you can’t fix a problem that you won’t acknowledge. There is law to be made here and Yves is simply suggesting that we get on with the process. These issues need to be resolved in the courts. When a mortgage is sold and packaged the rules need to be clear and they must be followed. To hell with the “spirit of the law” – try that line on your bank when you violate the fine print in your credit card agreement in some totally insignificant way that allows them, nonetheless, to levy a penalty.
A means will have to be found to convey the note and the title to the trust but that has to happen after the violations have been exposed. Sweeping it under the rug and doing it on the sly isn’t appropriate.
Yves has a deep respect for contract law. In her opinion that law is being violated. The perps need to be brought to heel with penalties and then the appropriate remedies can be found. I agree with her completely. The rule of law is the only tool the weak have to protect their interests against the rich and powerful. She speaks as an opposing voice to the monied interests who just want this issue to go away.
And, just for the record, your likening Yves to a Florida shyster lawyer was a cheap shot and deeply offensive. You have the impertinence to tell her that she should leave the law to lawyers. You certainly don’t sound like a lawyer in your ramblings. And I doubt you know Yves’ educational background enough to say whether she does or does not have a law degree.
Speaking strictly for myself and without intending to embarrass Yves, she is a personal hero – and I don’t have many. I don’t agree with everything she says or all the issues she takes up. But I am emotionally and intellectually convinced that she is fair. I would be delighted to have her as my judge in a court of law. I think the law would be well served.
Hmm, what to do, let’s see… what did we do to Michael Milken when he wrecked the capital markets with white collar CRIME?
Let’s do that.
The “QUESTION OF THE FREE PASS”
It is not in the character of the American home owning public to seek reparations. To seek to be made whole nor through power or legal minutia, find a work around to what they clearly entered into by contract. Namely, without any money at all or at least a very small down payment, they most fervently wanted to buy and live in a house as their primary residence. The American business community as well as the Federal Government has supported this state of affairs since the end of WWII on a massive scale, as large as the scale of corporate enterprise that they promoted for businesses since Cornelius Vanderbilt.
This was done without contravening the established and customary practices of common law, as well sensible lending practices. It was done successfully, with wide acceptance of the American public as a whole and drove ownership, up until recently, beyond 67% of the American households.
By 1990, in the aftermath of the S&L scandal, and with 50 years of mortgage borrowing as a part of the rite of passage of most Americans, getting an approval for a loan from a bank was ispo facto proof that you could afford whatever the bank offered under whatever the terms offered. It was inconceivable that fraud in the marketing, the actual selling, the application process, the final approval or in the closing and signing of documents would have anything which would result in the failure of this loan to be repaid. Outside of actuarial probabilities for a small percentage of loans to not perform and go into default, nobody thought they were getting into debt for the purposes of a predatory banking activity solely designed to skim off profits in the form of points, junk fees on the front end of the deal and more profits to be derived as these loans were sold off by aggregators for even greater profits to the capital markets.
It is the social contract among the citizens of this Republic to at least deal lawfully with one another for the sake of a civil social order. We all understand what is expected of us, and we all act accordingly to get through the day, to earn a buck, to take care of our families and to preserve the communities which serves as the platform of our lives. AGAIN, IT IS IPSO FACTO PROOF THAT A LOAN APPROVAL FROM A BANK MEANS IT IS SAFE, THAT WE CAN CARRY THE FINANCIAL BURDEN, THAT WE SHOULD NOT HAVE TO WORRY ABOUT BE GIVEN SOMETHING WE CAN’T HANDLE.
But this is not the case. We as a borrowing public were presented with “SUPER TANKER AMERICA”. An unsinkable ship of economic prosperity. Able to sail through the roughest of waters during the most powerful typhoons of economic dislocation. We were presented with a self regulating economy that might have isolated cases of economic failure but over all, the products that we were presented from the best educated and best paid minds of the financial services industry would certainly be sound. Didn’t we see the FDIC bronze plate at every bank? Did we not sign government mandated paper work guaranteeing we were properly advised that this was an Equal Economic Opportunity by Federal Law?
Did not every single closing enter into the notarized public record on the HUD-1 closing document? A government form in universal use? Did not the Head of the Federal Reserve, Alan Greenspan tell us for almost 2 decades how strong the economy was and how carefully he and his fellow banking governors watch over it? Did not the mass evening news and printed press and more recent cable business news outlets trumpet the watchful eye of Alan Greenspan and Co?
Was there any reason to believe by most Americans, that the heart of capitalism, banking, would offer anything else other than a slam dunk sure bet for themselves and would never let a penny out of their hands unless it was prudently and judiciously and LEGALLY UNDERWRITTEN, DOCUMENTED AND ACCOUNTED FOR, IN COMPLIANCE WITH MULTIPLE LAYERS OF STATE BANKING COMMISSIONS AND NUMEROUS FEDERAL AGENCIES AND REGULATORS?
Is there anyway the average American with one or two jobs in a household could ever have imagined that they would be in foreclosure today? Could they imagined being one of the 20% of the homeowners still paying a mortgage on a home that is worth less than what they borrowed. Do you think then, they could watch themselves be attacked as some complaining losers or fast talking schemers that would weasel their way out paying for a box of Girl Scout cookies, or worse, expect a society they worked in for years to accuse them of little more than common thievery on a grand larceny scale?
We have to follow the laws, even to the point of losing our homes to foreclosure. The banks have to follow the laws, to the point of going to jail, if they are convicted of lying to the courts, like every other lying forger of official court documents has. If, and only if, the law is on the side of the defaulting homeowners, and they get a free pass, it is not because they have done anything to beat the system, it is because the laws of the system which they prudently and judiciously pursued in their self interests permits them to do so. If the banks and servicing entities did not know this, ignorance is no excuse for the law. Next time, follow your mother’s advice, and don’t sign anything!
“The article never directly recites the argument made here, which is that there is substantial evidence that in many cases, the notes were not conveyed to the trust as stipulated.”
The investors agreed that the notes would not be conveyed to the trust.
“The investors in the mortgage securitization relied upon certifications by the trustee for the trust at and post closing that the trust did indeed have the assets that the investors were told it possessed.”
This is where you are wrong. The investors knew perfectly well that the trust did not have the assets. There was more money to be made by playing the assets than by complying with the law. You are making assumptions about what investors knew and did not know. Your assumptions are incorrect.
“As we indicated, that’s rubbish. The boldfaced language falsely claims that if the note was endorsed by A in the prototypical A-B-C-D chain we set forth earlier, then D could rely simply on the endorsement by A. In fact, the PSA required the full chain of endorsement and also required the depositor (the C party) endorse the note to the trustee (it is New York trust law requirements, not specified in the PSA, which would call for the final endorsement to be to the specific trust, not just the trustee).”
As you will discover, the investors knew this was going on and agreed to it. Why? Because it facilitated the Ponzi scheme. It is only when the money stops coming in that the thieves fall out among themselves. That is exactly what is going on now. Only you are saying that the investors and homeowners are not among the thieves. You are wrong. The investors and homeowners are among the thieves.
What about the biggest part of this Ponzi scheme? Selling the same loan simultaneously to different entities? Where’s your discussion of THAT? Absolutely everyone knew about that one. Who’s innocent now?
“I’m not sure you address SNR’s argument. Their argument is that the securitization pools did, in fact, come to own the mortgages. Your rejoinder is that they breached the PSA, which isn’t responsive. Assuming ex arguendo that it was a breach, it’s an open question whether it’s a material breach.”
You’re missing the point. The point of the Ponzi scheme was that NO ENTITY would own the mortgages. It is only this which allowed more money to come into the Ponzi scheme. This is the essence of the illegality, and the reason for the illegality.
“I might be wrong, but it sounds like SNR Denton is arguing that the PSA effectively transferred ownership of the notes, regardless of whether they were properly endorsed or endorsed in blank. If so, this is the same argument that the banks made in the Ibanez case now pending before the Mass. Supreme Judicial Court, with a twist. In Mass., a mortgage is not just a security agreement, it’s a conveyance of title to land subject to the mortgagor’s right of redemption. Therefore, a mortgage assigment must comply with the Statut of Frauds (contracts for the sale of land must be in writing, etc.). An assigment in blank would clearly not comply because there is no named assignee. Therefore, the banks had to argue that there was something in writing transferring ownership of the mortgage since the assigment itself didn’t do so.”
This is why homeowners, who think they hold title, do not. The question is whether they knew they did not hold title, and participated in Ponzi scheme anyway. The answer is that they agreed not to hold title, in order that they might participate in the Ponzi scheme.
“Perhaps you should stick to economics and let those who know law do law. You cite (but ignore) the PSA provision which says:
Each seller hereby:
Sells, transfers, assigns, sets over and otherwise conveys to the depositor, without recourse, all the right, title and interest of such seller in and to the applicable mortgage loans.
It is clear that the PSA by its terms does not require an endorsement of the notes. As to whether legal provisions outside the PSA do require a chain of title, that remains a separate issue, perhaps of state law relating to foreclosure, perhaps of trust law governing the securitizations. Like it or not, law is complicated. Mixing it with outrage distorts the process.
There is plenty of blame to go round in the mortgage mess, beginning at the top levels of government, continuing through predatory and felonious originators, greedy and clueless bank executives, witless and deceptive borrowers willing to take absurd risks and misrepresent critical financial data. But constantly pushing the idea that failure properly to shuffle the papers leaves every owner of every mortgage securitized in the past fifteen years with no right to enforce a claim against the collateral makes you sound like a shyster lawyer running one of those Florida television ads rounding up clients behind in their payments.”
The problem with this comment is that the design of the Ponzi scheme was that no individual or entity in the sceme would have legal ownership of any issue. That was the intent of the scheme. Why? It facilitated the flow of money into the Ponzi scheme.
I don’t know what world you have been living on, but investors of MBS did not get together and say “let’s create a PONZI scheme so we can screw ourselves.”
It is the essence of a Ponzi scheme that the participants are not “screwing themselves” as long as the money is coming in. It is also the essence of a Ponzi scheme that the money will always keep coming in.
Next?
Next what? Your turn to go read up on what an mortgage originator and investment bank are and what they have been doing the last ten years.
Your turn to read up on what mortgage originators and investment banks are when they are participants in a Ponzi scheme.
In general, your turn to read up on what a Ponzi scheme is. You seem not to know. I sense moral outrage on your part.
Moral outrage is not part of a Ponzi scheme.
Then I guess the corollary is that $8 trillion in MORTGAGE BACKED SECURITIES don’t depend on chain of title and that little defect was just an honest mistake and takes precidence over any state real estate law, IRS tax law and securities law.
My point is that these are not securities at all. They are instrumentalities of a Ponzi scheme.
More outraged sensibility on your part will, no doubt, follow this comment.
Nevertheless, your CAPITAL LETTERS suggest to me that you are approaching the conclusion supported compellingly by the facts:
the U.S. Government is a participant in the Ponzi scheme.
I am assuming the next G20 summit will take place in Varennes. A tout a l’heure, mon coco.
There’s a bigger problem with the Denton article that you omit:
Denton claims “Simply stated, the industry standard procedures used for decades in transferring mortgage loans to securitization vehicles comply with the well-settled principles of law governing the transfer of mortgage loans, and therefore are effective to transfer ownership of the mortgage loans.”
There is, however, not a single case reference indicating that courts have approved the “industry standard procedures.” Every lawyer knows that it is possible for a court to find a breach of duty even if the “industry standard” is met. Unless some case law can be cited that shows that the courts in each state (or at least New York) are bound by precedent to respect this “industry standard,” it would be very questionable for a lawyer to claim that this is settled law (and you will observe that Denton does not actually make this claim). Every lawyer is trained to look at both sides of an issue and just because you have a (possibly strong) argument that you are complying with the “principles of law governing transfer”, that doesn’t mean that you are allowed to forget that a court could come to a different conclusion.
So I agree with Yves that Denton by claiming “industry standard”, but not settled law, has made an argument to which the proper response is: “Where’s the beef?”
And we should recognize that Denton’s last sentence is really an acknowledgement of the weakness of the argument: If you don’t accept our interpretation of the law, “substantial and unwarranted harm to the economy” will result. This is called a policy argument, and in the law is usually a sign of significant weakness in your case.
You are missing the point in criticizing Yves. The essence of a Ponzi scheme is that it is lawless. There is no compliance with the law, there is no disobedience of the law. There is no law, period. That is how Ponzi schemes are set up: by agreeing that no laws will be violated, and no laws will be obeyed.
This is fine, as long as the money keeps coming in. When the money stops coming in, then and only then does the law come in.
What has yet to be discussed is the fact that U.S. Government is a participant in this Ponzi scheme. It is a co-schemer and co-conspirator.
This is what civil discovery will bring out. And then?
Damn dude, someone who actually gets it! However, it is a little bit lonely, now isn’t it?
The nuances of the particular legal issues at play are of little import. No, what is really interesting is the societal impact when both the educated (yes, Yves, I’m speaking to you) & great unwashed both realize that it was ‘our’ very own government that was the chief instigator & facilitator of the Great Ponzi.
Now, granted I use the term ‘our’ government very loosely. In reality, We the People are simply specimens in an ant farm, going about our daily tasks believing we have some nominal control (witness the upcoming ‘elections’), yet all the while existing merely for the amusement of the masters.
It was great while it lasted. Pity the PTB failed in pulling off another bubble. Imagine the happy rush of money into another wild boondoogle if they had succeeded. Yep, it’s all fun to play the game as long as no one is left holding the bag.
Perhaps, I’m simple minded, but I don’t see why a transfer that is effective for one purpose can’t be ineffective for another. It’s a pretty safe bet that the deal lawyers weren’t paying any attention to the post-closing back office procedures (they weren’t being paid to).
I realize that the condescending tone of the SNR Denton memo may be irritating and that Yves Smith is making an argument in her blog, but this mess isn’t going to be resolved through legal memoranda posted on law firm websites or anywhere else in the blogosphere.
My sense is that Smith is making some good points, but her arguments are far from free from doubt, and that the law firm memo is pretty much beside the point. You need the standing of a party in interest to do much as a litigant in any court, whether in a foreclosure or bankruptcy proceeding or anything else. Generally speaking a record owner, a beneficial owner or a trustee has what it takes (or can have it). Generally speaking a custodian or a registrar doesn’t (and can’t).
This is a back office snafu of heroic porportions, the biggest in generations. READY? FIRE! AIM.
Here comes the mop-up operation…
“Lawsuit Wave Could Hurt Housing Market: FDIC Chief”
http://www.nytimes.com/aponline/2010/10/25/business/AP-US-Bair-Housing.html?hp
Watch how they interpret what all parties truly “intended”…
Please excuse the interjection, but I couldn’t find a
direct e-mail for Yves.
First, thanks for the excellent material on this
growing mortgage securities controversy.
I will point, however, that it’s comprised of
several distinct elements and often confusing to
the layman, (meaning non-lawyer at this point.)
The chain-of-title issue seems quite crucial and
possibly devastating for this class of investments,
if breaks in conveyance reflect faulty legal design
rather than mere error (on whatever scale.) It would
be helpful if Yves could publish, and occasionally
update, an outline of the developing controversy
with definitions of such seemingly important legal
terms as “assignment-in-blank” or “allonge.”
These posts, and the ones at The Big Picture by Ritholtz, are the best at covering these issues.
I worked in commercial real estate securitization in the 1990’s. I was with an originator and we were VERY careful to follow procedure for assignments. Now, if all the later assignments were done to get the mortgages and notes properly conveyed to the trusts, I don’t know.
We had a law firm that not only closed the loans, but helped us put together the detailed disclosures as to any loans that had characteristics outside of the standard ones.
I had no idea (at that time) that the residential mortgage securitization process was being done in such a sloppy manner. Heck, I didn’t even know that “no doc” loans existed.
It’s very clear from everything I read that the originators and others involved in residential mortgage securitization were focused only on volume/profit, and willfully disregarded proper conveyance procedures and underwriting.
I can’t blame the workers as they clearly had no background in real estate, so they had no idea that what they were doing was substandard work. It has been fascinating reading excerpts from depositions by people who worked in various parts of the process all the way from the origination of loans to the foreclosure activities.
In the old days (sigh), when originators kept loans on their books they were careful to follow the rules because if they didn’t they’d lose money.
Though securitization brought down borrowing costs and made more capital available for home mortgages, the ability to sell off all these loans profitably and quickly clearly resulted in complete corruption of the process.
I used to be strongly in favor of securitization. Now I think it shouldn’t be done unless and until we get federal laws in place as to conveyance rules, the IRS monitors compliance with it’s rules about how soon conveyances to the trusts must be made, and originators are somehow forced to maintain some ownership, and thus some risk, in these deals.
At the risk of sounding naive, it’s truly disgusting to me how so many entities jumped in and made large fees in this industry, and now try to run away from the consequences by claiming this is just a matter of people wanting to get free houses or walk away from their obligations.
I worked in both the residential and commercial sides of mbs in the early-80s. As to commercial loans, the loans were only documented correctly if the outside counsel were experienced commercial real estate attorneys. This pretty much ruled out the NY law firms advising the major investment banks. At that time, commercial did not mean retail office leasing and multi-family apartment buildings. When S&L’s were permitted to loan outside of the single family residential area, the problems really started up on the commercial side, for the S&L management running the deals had no idea what they were doing, and, when their deals were packaged into deals by the same attorneys, watch out.
On the residential side, it was a mess as well. Almost all hands on-mortgage originators were female, and knew where every body was buried. Almost all of the managers up the chain were male. Even worse, the “heavy hitter” male management, if they had any experience, had experience only within a single state. In a firm originating and packaging mortgages on a nationwide basis, this was a recipe for disaster. This was compounded by hiring Wall Street law firms to provide the advice for the structure of the MBS deal. I will say they knew trust law, and that was about it.
The constant pressure from the bankers was to turn the mortgage MBS’s into senior corporate bonds with steady cash flows, with all the dirty work to be done by low level employees and other entities.
OK.
I was holding off.
I can no longer hold my peace.
President Obama will be in the same boat as Herbert Hoover.
Arrival of that boat to this shore?
End of 1Q 2011 or early 2Q. Banks will close. The walls of some very large institutions, including the Federal Reserve will hit the floor.
http://www.creditwritedowns.com/2010/10/bank-holiday-is-best-solution-for-epidemic-of-mortgage-fraud.html
In order to foreclose one needs to prove ownership of the note to the court. Failure to do so would prevent that foreclosure. However, the obverse is not necessarily true.
Failure to be permitted to foreclose by being unable to prove ownership of the note is not the same as proving that the foreclosing party doesn’t own the note. So it is possible to be the owner of the note and not prove it sufficiently and not be entitled to foreclose.
For example a missing indorsement might prevent a foreclosure, but if correctable (another issue), once the indorsement is supplied, if the default continues, I suspect that the foreclosure would be permitted.
I keep reading about how NY trust law applies…but no one ever posts a statute or case cite.
Can anyone post such a citation?
Thanx.
It’s not a citation, it’s stipulated in the contracts, the pooling and servicing agreements.
Yves,
I can find no reference to NY trust law in the PSAs. The PSAs merely state that the agreement is governed by the laws of NY. Period. NY’s EPTL specifically exempts these types of trust from its purview. (EPTL = Estates, Powers, Trust Law, and is concerned with noncomercial trust entities, such as testamentary trusts and estate planning trusts.)
Can u be more specific?
Thanx
Bob
The reason for choosing NY as governing law, I am told by people who worked on the original securitization documentation in the 1980s was specifically because NY law on trusts was very well settled. The choice of NY law was largely to get the trust governed by NY law precisely because they wanted the trust to have no discretion to assure compliance with REMIC requirements.
As to the specific issue you raise, I’m not familiar with that provision, but I am pretty confident your conclusion is not correct. That is not the view of any of the five experts who officially advise New York State on trust law matters. They’ve all been consulted, they all agree with the trust law reading expressed on this blog (that’s why I publicized it, I was aware of their consensus on this matter before I presented this argument). The ones in a position to all have given depositions and/or court testimony to this effect, specifically on PSAs.
Yves,
Thank you for your attention to this matter.
However, this still does not answer the question as to what exact statute or leading case governs the New York law cited as controlling in the PSAs and the Prospectuses. It is not sufficient to just say “New York law governs.” Exactly WHAT part of the Consolidated Laws or McKinney’s are these folks talking about? This is important. If the five experts are truly experts, answering this question for us should be trivial. Aren’t you a little concerned that not one of these experts is able to answer the simple question posed here?
Thanx
Bob
Bob,
I find it interesting you chose to distort what I said. I tell you all the top experts on New York state law as regards trust matters have already disagreed with the very argument you raise. I’m not a legal research service, I don’t find it necessary to go beyond finding a consensus, actually unanimity, among the relevant experts on the matter at hand, particularly when I have put the specific issue to them. To put it bluntly, “What about ‘no’ don’t you understand?” It seems that you are trying to suggest I am somehow irresponsible, when the simple matter is your reading is rejected by the authorities in this subject area.
I have also spoken to a securitization expert who has participated in some of these same hearings (as in he’s not there to take a position on the underlying legal theory) and he says judges are not sympathetic to the distinction your are trying to make, independent of the views of the NY experts.
I pinged again and I got rather dumbfounded reactions to your line of questioning:
They have no doubt formed trusts under NY law. Are they so stupid that they can’t figure out that the common law of NY is harder on them than the statutes we have cited?
They seem completely incapable of acknowledging that transfer is mandatory under any theory of law in the state of NY whether statutory or common law.
Yves
Wow! You shocked me with the tone of your response.
I think that you misunderstand what I am getting at here. I’m not challenging either you or your experts, nor am I suggesting that you are irresponsible in any way. Quite the contrary, actually. In fact, I’m on your side. I just want to know before I get into court with these guys, what NY law they are going to throw at me by way of defense.
Now, if you’re telling me that the trust law that governs is common law, and not statutory law, that’s fine. That’s all I need to know. I’ll just take a look at NY Jur2d and Restatement Second Trusts and find what I’m looking for there. Just want to make sure that I’m not missing a statute or two along the way.
Thnx
Bob
P.S. Tried to subscribe but never got the email confirm
No, the issue is:
1. NY Trust statutes and related case law govern. Some people have tried to argue that these are lifetime trusts rather than gift trusts, hence NY trust statutes don’t apply. The NY trust law experts reject it, as have judges (in their reactions, per the expert witness who has no dog in this fight, they seem incredulous that anyone would try this argument).
2. In the unlikely event a judge were to deem the specific trust statues are not germane, it’s still a NY trust. That means common law would apply. That’s even worse as far as outcomes for the securitization industry is concerned.
The key decisions are more than 100 years old. This is REALLY well settled law.
Thanx for the update, Yves. Love your work, by the way.
Look, just one more request and I’ll stop bothering you on this one (and I’ll give ya a scoop to boot as soon as I file my action):
What specific NY statute are these guys/experts and the banksters referring to?
Kind regards,
Bob