There is a great post by Adam Levitin at Credit Slips which discusses the implications of the fact that a recent court decision in Kemp v. Countrywide Home Loans, Inc. stated that Countrywide had not transferred the note (the borrower IOU) to the Bank of New York, trustee for the securitization trust. Perhaps more important, the ruling also noted that a Countrywide employee stated that it was Countrywide’s practice not to transfer the note, which is contrary to the stipulations of the pooling and servicing agreement.
Levitin’s post discusses the implications of Kemp v. Countrywide and also gives an overview of the problems with securitization, with the legal arguments recapped in a way that is accessible to laypeople yet also serves to eviscerate address the usual industry defenses. I suggest you read it in full, but for the time pressed, I’ve extracted the juiciest bits:
This opinion could turn out to be incredibly important. It provides a critical evidence for the argument that many securitization transactions simply failed to be effective because non-compliance with the terms of the transaction: failure to properly transfer the mortgage meant that the mortgages were never actually securitized…..
So the critical issue here is whether the notes and mortgages were properly transferred to the securitization trusts….
A. The American Securitization Forum’s Argument
The American Securitization Forum (ASF) has a recent white paper that purports to explain how notes and mortgages are transferred in a securitization transaction. The white paper explains that there are two methods for transfer and that either can suffice, although typically both are used. Those methods are a negotiation of the notes per Article 3 of the Uniform Commercial Code (UCC) and a sale of the notes per Article 9 of the UCC (take a look at the definitions of security interest, debtor, and secured party to understand how UCC 9-203 functions to effect a sale). (The ASF argues that the mortgage follows the note, meaning that a transfer of the mortgage effects a transfer of the note. I’ve got my doubts on this too, but that’s for another time.)
B. Trust Law and the UCC Permit Parties to Contract for a More Rigorous MethodThe ASF white paper is correct to the extent that is explaining how notes could be transferred from, say, me to you or from Citi to Chase. But that’s not what happens with a securitization. A securitization involves a transfer to a trust, and that complicates things.
It’s axiomatic that a trust’s powers are limited to those set forth in the documents that create the trust. In the case of RMBS, that document is the Pooling and Servicing Agreement (PSA). Most PSAs are governed by NY law, which provides that a transaction beyond the authority of the trust documents is void, meaning it is ineffective.
PSAs typically set forth a very specific method of transferring the notes (and mortgages) that goes beyond what is required by Articles 3 or 9. This is perfectly fine under the UCC, which permits parties to deviate from its default rules by agreement (UCC 1-203), which can be inferred from the parties’ conduct, including the PSA itself. So what this means is that if a securitization transaction did not meet the requirements of the PSA, it is void, regardless of whether it complied with the transfer requirements of Article 3 or Article 9. The private law of the PSA, not Article 3 or Article 9, is the relevant law governing the final transfer in a securitization transaction…
So to tie this all back to Kemp: the note in Kemp lacked the endorsements required in the PSA. That means, as the Bankruptcy Court concluded, that the note was never transferred to the trust at the time the bankruptcy claim was filed. The Bankruptcy Court did not need to opine beyond that point, but it is a small step to recognizing that if the loan wasn’t transferred to the trust in the first place, it cannot be transferred now. PSAs contain numerous timeliness provisions about loan transfers, often related to ensuring favorable tax status for the trust. PSAs also require the transferred loans be performing (not in default). That means that for the securitization trust, the Kemp note is like caffeine in 7-up: never had it, never will. The securitization of the Kemp note failed.
Now here’s the real kicker: there’s no reason to think that the Kemp note was a unique, one-off problem. All evidence from actual foreclosure cases points to the lack of a chain of endorsements on the Kemp note being not the exception, but the rule, and not just for Countrywide, but industry-wide. Certainly on the non-delivery point (separate from the non-endorsement problem), Countrywide admitted that non-delivery was “customary.” If either of these issues, non-delivery or non-endorsement is widespread, then I think we’ve got a massive problem in our financial system.
Please do read the post in full here.
Legal authorities and the facts are lining up with the pattern we have outlined on this blog since August: that there was a widespread, perhaps endemic, failure to conform with the requirements of the pooling and servicing agreement regarding the conveyance of mortgage notes, that there is no easy fix, and that this creates serious problems for RMBS investors, and enormous liability for securitization sponsors, trustees and servicers.
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Levitan states:
“(The ASF argues that the mortgage follows the note, meaning that a transfer of the mortgage effects a transfer of the note. I’ve got my doubts on this too, but that’s for another time.)”
I anxiously await Levitin’s description of the reason for his doubts and the implications thereof. The dicta in Carpenter v. Longan is not persuasive, and thus any case relying upon Carpenter is not persuasive. After all, in Carpenter, the mortgage and note were both assigned – and there was no Article 3 or 9 at that time.
Did you even read his piece?
It’s very clear in 45 states being the real party of interest in the note is critical to foreclose. There are tons of decisions affirming that, this is not a matter of relying on Carpenter, as you mistakenly assert.
The PSA set up very specific conditions for conveyance of the note.
They appear not to have been adhered to on a widespread basis.
Thanks to NY trust law, retroactive fixes don’t work.
Yves
First of all, I am most grateful to you for the commitment you have shown to this issue and to your many excellent commentaries. At Thanksgiving, we should express our thanks to those who have contributed to the greater good in such a selfless manner as you have, so Thank You Yves.
Yes, I read the Levitin piece, and the comments to his piece as well. I also went on ECF and reviewed more of the Kemp case documents. I also noted in review of the documents that New Jersey has a different version of UCC 9-203 than in other states. This is also mentioned in the Levitin article.
And, yes, I still would appreciate seeing Prof. Levitin’s further discussion on this issue.
What I do not think is such a great idea is continuing to cite to dicta in a Supreme Court concerning a territorial decision where the case was actually about rights of a bona fide purchaser of na unmatured note. Nor do I think it is helpful to on the one hand assert that Congress cannot intrude into a MERS fix for constitutional reasons, and then cite US Supreme Court dicta as authority. This was the topic of another posting of mine this week.
Certainly, the note is paramount, but there is much fuzzy thinking, even by well intentioned state judges who are no so well versed in the law in this area.
In addition, cases tend to be interpreted narrowly, and not expansively. Thus, it would be appropriate as a precedential issue to limit the Kemp case to situations with the NJ UCC variant. Kemp of course of great embarrassment having clarified where the notes probably reside.
Clearly, one cannot foreclose without the note, as a generality.
Has anyone produced a table of the 45 jurisdictions, with citation to the relevant state courts decisions, and including whether there are UCC variation? I am sure the Denton has this – but, does this exist in the public sphere? My thought is that a state by state analysis would show to Congress how dangerous it is to intrude into this area.
Clearly there are problems under NY Trust law – the consequences there are tax and put-backs by investors. Congress can fix a lot of the tax issues perhaps.
But, I do not agree that retroactive fixes don’t work. I do not understand why one cannot retroactively fix the foreclosure problems by retroactively and properly and accurately with due corporate (and bk trustee) authority reassemble the note and mortgage, and foreclose. To do this means blowing the trust. Blowing the trust means bad tax consequences. At the federal level, Congress could ameliorate some of those consequences perhaps.
Anyway, thank you again,
Addenda:
But, the mortage and note may not be reassembled after the claim bar date in a bankruptcy, as illustrated by this court decision. Wonder if Congress could “fix” this as well?
Appologies to all the legally and financially trained posters on the blog and specially to Yves, who has provided the forum for the discussion.
However, the bulk of posters here seem to be working from a false premis; namely that the old rules hold and that the system can be fixed. I think that opportunity is gone. When the laws and structure of a system are so perverted that it is not possible to understand the underlying shape, then the system cannot be reconstructed. There are famous quotes about ‘blind people describng elephants’.
To be arguing technical financial and legal matters is like trading deck chairs on the Titanic.
I don’t want to see a crash any more than anyone else. However, I would rather see it now, than when the world’s industry and commerce is totally destroyed. Delaying a settlement will have that effect. And spending the nest ten to twenty years negotiating who gets what and who is to blame will not change the result. The best we can hope for is to start over as soon as possible.
It’s not over yet Paul. Keep in mind the wisdom gleaned from two famous quotations.
Sigmund Freud from Interpretation of Dreams “Words are the nodal points of numerous ideas, and are therefore predestined to ambiguity.” This means that nothing really means anything except what you want it to mean, until the ambiguity becomes intolerable, and then it just explodes.
And then Plato from the Republic, when the sophist Thrasymachus argues that justice is “the advantage of the stronger.” Remember, the Athenians killed Socrates, so Plato had a chip on his shoulder that had some merit. It’s easy to dismiss him as an authoritarian hack but he had “issues”. If I put myself in his place, it’s not comfortable at all.
So my bet is that the lawyers will figure this all out with combinations of words that become increasingly impenetrable to any sane mind. They’ll throw words at it like you throw weedkiller on a lawn to keep it flourescent green or like you throw teargas on a rioting crowd or like you put some nutcase in a straight jacket. And then Somehow it will all disappear into an ocean of linguistical chaos and then and then and then, like it always is and like it always does.
I appreciate your effort, but you aren’t making me feel better.
RMBS securitization would be dead already if government would let it. 97% of new loans are from GSEs.
That’s the solution in my book. Finish it off and close the GSEs.
Have banks write loans and keep them. Investors can open interest paying savings accounts or buy CDs to fund it. The “risk on” types can buy bank stock and take the dividends. Regulators can focus on preventing the next S&L crisis instead of presiding over ever more spectacular financial failures.
Interest rates on mortgages would probably go up, and probably depress housing prices further, but we are going that direction anyway, unless you want GSEs and the Fed forever subsidizing interest rates at the taxpayers and savers expense.
Flammable CDS would disappear from the derivousesphere. Good riddance.
The range of bank VP pay would converge from the current span of Walmart Hello Guy to $100,000,000 back to something more like a bell shaped curve centered on $100,000.
i agree. america is supposed to be a happy country. let’s not bicker, and argue, about who stole 2 trillion dollars from who.
now, maybe i’m on food stamps, maybe half my family is unemployed, maybe i know someone who works two jobs to pay her mortgage, maybe i know people who had to move out of california because ‘house’ prices there became unaffordable, so they cant see their family and cant afford to travel back for holidays, maybe all that price increase was speculation on ‘synthetic houses’ created for the sole purpose of Magnetar, Goldman, et al ‘hedging’ against them and making huge profits, even as they got bailed out by the government (i.e., me, my unemployed family, etc), and maybe we are all told continually this was all our fault, even though some of us have college degrees that are worth the paper they are printed on, maybe some of us have started drinking or gambling and of course that’s all our fault too (except of course for those of us on that anti-parkinsons drug but hey, i’m sure that never came up in clinical trials) and maybe the real unemployment rate is 25% and in some areas much much higher, and maybe Detroit has devolved back from the industrial age to the agricultural age, and maybe this is our fault too, because the big bad unions forced Roger Smith to throw 10 billion dollars down the toilet with EDS and Saturn and ‘lights out factories’ that never worked, and maybe we are just whiny libtards who want the governent to hand everything to us, as we cook ramen soup over a pot we pulled out of a dumpster.
or maybe i should be like jim cramer. he was homeless once, did you know that? he also sold hot dogs in a ball park. and you know what he decided? fuck it. it’s not worth it being honest. i can start a hedge fund too, ya know. all i need is an armani suit and a haircut and to act like don draper. women cream their pants over that shit and guys get a hardon. thats what its all about. amiright?
whatever we do, though, don’t let us get bitter and cynical and try to find out ‘who caused this’ and ‘what caused it’. back to normal, back to starbucks, back to asking people ‘do you want to sign up for our Target card and save 15%’ at the checkout aisle, back to service with a smile while some hedge fund fattie in a too-small jacket screams at you and throws his latte on the floor like a 6 year old child and you have to stand there and say nothing and then smile and nod when your boss tells you that you handled it poorly and she expects you to clean it up quicker next time.
back to your apartment with neighbors selling drugs (funny, your cousin got 3 years for marijuana posession…) and shooting each other and guns and violence and prostitution and parents who are sure the whole problem is that nobody beats their kids these days. back!
you are right. oh so right! righter than you know.
That’s ridiculous. Most hedgies are frat bois, not fatasses. Not to mention they don’t shop at Target.
I’m sure to be alone in this sentiment, but it will be a travesty if the funds that invested in these shams get made whole based on a legal procedure not being properly followed.
If all these securitizations have to be unwound, does this mean that all the bonuses that were paid related to these deals also have to be unwound? Presumably, for example, the investment bankers should not continue to be rewarded for these deals.
LOL…Which part of the word ‘Extortion’ are you unclear about??
Let’s see.. for starters.. most mortgages have now been run through MERs at least once…….
……
….you know there are some really nasty viruses out there and “We” just can’t be certain that one of them hasn’t infected MERs
OH my! That title issue would be nasty wouldn’t it??
Paul,
What part of extortion are you unclear about…..holy cow…too bad I didn’t read that PRIOR to having a swig of wine in my mouth! That was wasted….but your comment, priceless….and so true it is sadly comical.
There you go..:) happy to help. You also made my day, I had to laugh at the image you sent.
We might as well all have a chuckle. Tomorrow awaits whether we are ready or not.
If the MBS are show to not really be mortgage backed at all, what if any effect does this have on CDS? Aren’t the swaps based on the underlying financial instruments? Would that all just become worthless paper? That would be the tsunami that takes down the system.
JOE vs. RMBS Volcano
Skippy…tis sad…to think so much was wrought…for so little…by so few…at the cost of so many.
I would condemn them to that windowless room of pale flickering light for eternity…
http://www.youtube.com/watch?v=oGLKnAvzlg4
Thus, doth the pot begin to boil…
There are going to be some very, very high-priced attorneys fighting some other very, very high-priced attorneys in the very near future.
They already are.
Why does no one ask “why the loan docs weren’t transferred into the REMIC trusts?” It appears the reason was that the notes were re-pledged, i.e. sold again. A Ponzi scheme ala Bernie Madoff. This isn’t sloppiness. It’s intelligent design.
I don’t buy that. There is no question some notes were sold twice or even more often, but this was not that common.
Remember, never attribute to malice that which can be explained by incompetence.
This is garden variety corners cutting and laziness on an unheard of scale.
Yves,
I’m not so sure about that. Why wouldn’t they sell these loans over and over? Why not when all they needed to do was electronically make it so? Do you really believe that they would perjure, forge, lie, and obviously securities fraud….but selling a note twice was off the table? Not in my book. I believe this was also part of the scam.
If notes/mortgages got sold twice/thrice a lot of the time, all the deadbeat borrowers in the world couldn’t cobble together a month’s payment.
Let me see if I got this straight..
were you reading out of yesterday’s ‘news headline’…?
(x)% of American homeowners are at least one payment in arrears and because of the wretched state of the economy, twice that many are stuggling to stay current..?
It is one thing to say multiple sales of the same loan happened and it represents a real borrower risk and another to say it was a widespread practice. It does appear to have happened at at independent mortgage brokers. They were badly run and often hired people like former pizza delivery guys to gin up mortgages. Some of them no doubt were entrepreneurial enough to figure out that selling the same loan more than once was easier work than finding a new borrower.
Even though the bank originators were plenty sloppy, and engaged in very bad practices (Countrywide churning subprime borrowers was classic) remember, banks specialize in legalized forms of exploitation, the clever use of contracts and procedures to extract fees and shift risks on to hapless parties. Selling a loan twice or more is pretty obvious bad behavior and could be caught via some diligent probing of SEC filings (each loan does get a unique number). It would be too easy to catch if done in a large institution on an organized basis.
And we’d also see much greater incidence if it were done in one of the bank originators on a concerted basis.
>> Remember, never attribute to malice that which can be explained by incompetence.
I’m not a fan of that aphorism.
Consider statements like “we ‘thought’ there was WMD” and “we bought the CDO’s at face value because we ‘thought’ they were worth that”. Many people act with malice and later attribute their actions to “mistakes”. If as a rule of interpreting facts we “never” attribute their actions to malice, then plenty of scumbags will go free.
It’s supposed to mean, “only if there’s no direct evidence of malice.”
In the case of the banksters we know there’s plenty of both.
I’ve been wondering too. Not transfering the note would definitely make it easier to re-pledge it again. Since we are talking about pervasive and systemic fraud, it’s certainly a possibility to be aware of.
Another reason not to ‘dabble’ into the derivatives business. Instead, you might throw your money out of the window straight away.
I have to keep reminding myself it’s only Monday of a short trading week. And this broke last week. And Madame Mortgenson only brought it up basically over the weekend.
Or as Audit Notes put it…
“What can we conclude from this flurry over info in the 18th paragraph of Morgenson’s column? Well, for one, that she’s got so much string she can afford to toss a bomb like this into one of her regular columns. The other is, that she buried the lede.
I’ll say it’s both.”
Audit Notes: Countrywide, WSJ Stays Ahead on Probe, Blodget
http://www.cjr.org/the_audit/audit_notes_countrywide_fail_w.php
http://www.bloomberg.com/news/2010-11-22/bofa-employee-clarified-testimony-on-mortgage-notes-lawyer-says.html?cmpid=yhoo
A Bank of America Corp. employee who said that Countrywide Financial Corp.’s policies were to retain mortgage notes later clarified her testimony in a New Jersey bankruptcy case, a lawyer for the company said.
“Countrywide’s policy and practice has been and remains to fully comply with the pooling and servicing agreements, including forwarding any necessary documents to the trustee,” Larry Platt, a lawyer at Kirkpatrick & Lockhart, said in an e- mailed statement.
Bank of America, based in Charlotte, North Carolina, acquired Countrywide in 2008.
“The associate whose testimony was cited in the ruling was asked about a process outside her normal scope of responsibilities and in an entirely different department from where she worked,” Platt said.
“A review of her testimony shows she later clarified that she was not comfortable testifying about the circumstances under which original loan documents would move, or whether and to what extent they ever are moved. This would include the initial delivery of original loan documents to the trustee,” he said.
there’s official policy, then there’s what your boss yells at you about if it’s not done quickly enough. and never the twain shall meet.
You’ll all like this one too.
Yves, Prof. Levitin and others are putting in their two cents on the Mortgenson article.
Well, what would happen if a guy who used to work for Wells Fargo started a business inspecting how Wells Fargo represented the stuff it presented to investors. Since he don’t woik fuh dem no mo’.
Foreclosure Detectives Hunt for Lies
http://online.wsj.com/article/SB10001424052748703559504575631110278708250.html
Yves – If it was mere sloppiness that the notes didn’t get transferred into the REMIC trusts, wouldn’t the Trustees/Custodians have picked this up? Were they incompetent too? And what about MERS? According to RK Arnold’s Senate testimony (p.7) “Every time a note or servicer changes hands, a notation of that change is made (electronically) on the MERS System by the members involved in the sale.” If that were so, MERS would know where their members’ notes (and trust deeds) were and robo-signers would be unnecessary as would lost note affidavits. Your Washington Post guest’s blog of Oct. 26 seems to confirm the multiple transfers theory.
No one is obligated to report to MERS, it’s strictly voluntary.
We have a deposition in which the trustee admits they didn’t check the notes, even though that was pretty much the only thing they were supposed to do.
Basically, it appears that there was a tacit agreement within the industry to move to a new practice of not conveying the notes. Problem is no one bothered changing the boilerplate in the PSAs to reflect that.
This potential clash of banksters and lawyers looks like a contest of cold-blooded predators—sharks and anacondas fighting over a dwindling stock of prey. And you still get the feeling they’ll suddenly call a time out, agree on a fix (honor among thieves), and tear into the taxpayer again.
But hopefully, the defects really are harder to “fix” here. This will force a (survivable) collapse, change the game and allow a rebalancing of a more sustainable economic ecosystem (maybe even one that doesn’t necessitate spending trillions to kill hundreds of thousands of people in the ME).
The minutiae of legalities here are rather eye-glazing for a layperson. And however compelling to insiders, it still seems anti-climatic and likely to end in a question of who finally gets to eat the homeowners and taxpayers, who gets what body parts.
One hopeful historic analog here may be the untouchable Al Capone. The feds could never nail him for trafficking or even mass murder, but they finally got him on tax evasion, enough counts to put him permanently out of business. Could something as seemingly mundane as faulty transfers and securitizations finally cause the long overdue unraveling of casino capitalism?
Will anything come of today’s massive FBI sweeps of hedghogs and insider trading rings or is all that yet another distraction— to end in a roundup of the usual suspects, speechifying, and cost-of-business fines?
The trial lawyers only get paid if there is a fight.
How the hell is this coming up now, after all these years? If notes weren’t being sent to trusts, shouldnt trusts have spoken up about this? It had to have been public knowledge by now. Just doesn’t make sense that something so big like this can be hidden from the public for so long…
See my comment of 2:02 AM.
If the Trusts were running ahead of supply and creating MBSs without notes, as Taibbi suggests, then the originators may have known from the start that the notes were meaningless.
Also, where are the other employees who were chucking notes? So far just a few robo-signers and now the hero of Kemp vs Countrywide.
While this whole issue is presenting itself in the foreclosure context, and while I may be missing something, I don’t see how the problem isn’t MUCH larger, infecting/clouding the title of all mortgages that have been securitized (which, with mortgages of even reasonably recent vintage, seems to have been nigh unto all).
When the house is to be sold (and let’s assume that the mortgage payments are completely current, no late fees, no complications on that front), who is to be paid off, and how does anyone know that the right entity is being paid off, and that there won’t be someone else who appears later and says that they were the rightful owner of the note, and haven’t been paid off, and that, therefore, the purported sale and purchase were null and void etc. etc.? It certainly seems that the title insurance business has just gotten infinitely riskier.
Its always good to learn tips like you share for blog posting. Thanks for your high quality work and keep on writing articles in such a high quality manner. – There is always room at the top. Daniel Webster 1782 1852: on being advised against joining the overcrowded legal profession (attributed)