By Tom Adams, an attorney and former monoline executive
On Sunday, the New York Times reported on a recent case known as Kemp vs. Countrywide. In it, the judge in his decision states that for the mortgage loan in question in the case, a Countrywide employee testified that the mortgage note had never been delivered to the trustee, as required under the securitization documents. In addition, the Countrywide employee testified that it was the company’s practice not to deliver the notes.
These facts were so extraordinary that I felt compelled to track down the underlying legal documents to the securitization to see what was going on. In the Kemp case, the trustee to the securitization (Bank of New York) was trying to file a proof of claim in Kemp’s bankruptcy, while Kemp was fighting the attempt claiming that the trustee did not have standing to make such a claim because it did not have possession of the mortgage note. While this was a bankruptcy case, the situation is similar to foreclosure cases where borrowers argue that the trustee for the securitization lacks standing to foreclose because the mortgage loan at issue has not been conveyed to the trust.
In the Kemp case, it appears that not only did Countrywide fail to properly convey the mortgage loan, it didn’t even bother to deliver it. Based on my review, Countrywide failed to comply with the terms of the agreement for the delivery of the mortgage notes. In addition, importantly, the trustee also failed to comply with the terms – it was required to certify it had the mortgage notes at closing and then certified annually that it had safeguarded the mortgage loan documents as required by the PSA.
As a result, if Countrywide actually failed to deliver all of the mortgage notes to the trustee, as the judge describes in the Kemp case, then
(1) This is a problem for the trustee proving it has standing for foreclosures or bankruptcies, as in the Kemp case,
(2) It seems like investors in the certificates issued by CWABS 2006-8 would have a good case to pursue claims against both Countrywide and the Bank of New York, as trustee, for failing to perform as required under the agreement,
(3) By stating that the notes had been delivered and certifying all of the notes had been received, Countrywide and the trustee seem to have misrepresented the transaction to investors, by creating the impression that the trust had secured the collateral, and
(4) The trustee’s annual certification under Reg AB that the mortgage loan documents were safeguarded and secured may open the parties up to additional liability for misrepresentation to investors, despite the fact that three-year statute of limitations may have expired for misrepresentations made in the offering statement for the transaction.
I tracked down the pooling and servicing agreement in the Kemp case from CWABS 2006-8 to make sure it did not have any unique exceptions to delivery. It did not. Section 2.01 of the PSA requires the Depositor (CWABS) delivery of the note to the trustee with all intervening endorsements as follows:
(g) In connection with the transfer and assignment of each Mortgage Loan, the Depositor has delivered to, and deposited with, the Trustee (or, in the case of the Delay Delivery Mortgage Loans, will deliver to, and deposit with, the Trustee within the time periods specified in the definition of Delay Delivery Mortgage Loans) (except as provided in clause (vi) below) for the benefit of the Certificateholders, the following documents or instruments with respect to each such Mortgage Loan so assigned (with respect to each Mortgage Loan, clause (i) through (vi) below, together, the “Mortgage File” for each such Mortgage Loan):
(i) the original Mortgage Note, endorsed by manual or facsimile signature in blank in the following form: “Pay to the order of ________________ without recourse”, with all intervening endorsements that show a complete chain of endorsement from the originator to the Person endorsing the Mortgage Note (each such endorsement being sufficient to transfer all right, title and interest of the party so endorsing, as noteholder or assignee thereof, in and to that Mortgage Note), or, if the original Mortgage Note has been lost or destroyed and not replaced, an original lost note affidavit, stating that the original Mortgage was lost or destroyed, together with a copy of the related Mortgage Note and all such intervening endorsements;
The trustee, pursuant to Section 2.02(a) of the PSA states that it has possession of the mortgage note (identified as section 2.01(g)(i)) and the assignment of mortgage (identified as section 2.01(g)(iii). See below:
(a) The Trustee acknowledges receipt, subject to the limitations contained in and any exceptions noted in the Initial Certification in the form annexed hereto as Exhibit G-1 and in the list of exceptions attached thereto, of the documents referred to in clauses (i) and (iii) of Section 2.01(g) above with respect to the Initial Mortgage Loans and all other assets included in the Trust Fund and declares that it holds and will hold such documents and the other documents delivered to it constituting the Mortgage Files, and that it holds or will hold such other assets included in the Trust Fund, in trust for the exclusive use and benefit of all present and future Certificateholders.
The Trustee agrees to execute and deliver on the Closing Date to the Depositor, the Master Servicer and CHL (on behalf of each Seller) an Initial Certification substantially in the form annexed hereto as Exhibit G-1 to the effect that, as to each Initial Mortgage Loan listed in the Mortgage Loan Schedule (other than any Initial Mortgage Loan paid in full or any Initial Mortgage Loan specifically identified in such certification as not covered by such certification), the documents described in Section 2.01(g)(i) and, in the case of each Initial Mortgage Loan that is not a MERS Mortgage Loan, the documents described in Section 2.01(g)(iii) with respect to such Initial Mortgage Loans as are in the Trustee’s possession and based on its review and examination and only as to the foregoing documents, such documents appear regular on their face and relate to such Initial Mortgage Loan.
According to the language above, the trustee specifically issues a preliminary certification that it has all of the notes on the closing date.
In addition to the preliminary certification of its receipt of the notes, and the final certification that all required documents have been received, the trustee also delivers an annual certification for the transaction. This annual certification is required pursuant to the SEC’s Regulation AB, for asset backed securities. Specifically, the trustee certifies each year, pursuant to SEC regulation section 1122(d)(4)(ii) that:
(ii) Pool assets and related documents are safeguarded as required by the transaction agreements.
In March, 2007 Countrywide filed the form below from Bank of New York, as trustee, that the trustee’s sections of Reg AB were in compliance, including the pool assets and documents were safeguarded as required by the PSA.
If the notes were not delivered to the trustee, and a court determines that saying the notes were safeguarded for the trust when they were still with Countrywide is a material mis-statement, Countrywide and/or the trustee could face liability under Regulation AB.
Finally, the PSA contains a standard provision that states that if for the some reason the agreement is determined not to be a sale, then the parties intend for the transaction to be the grant of a security interest in the mortgage loans for the benefit of the certificate holders. In order to ensure that the agreement is the grant of a security interest, the depositor (CWABS) files UCC statements for the mortgage loans and represents various facts including, pursuant to Section 10.04(b)(v):
All original executed copies of each Mortgage Note that are required to be delivered to the Trustee pursuant to Section 2.01 have been delivered to the Trustee.
It would appear that, if the Countrywide employee’s testimony is accurate that none of the notes were delivered to the trustee, then Countrywide and the trustee would be unable to argue, as a fall back, that the trust has a security interest in the mortgage loans because the notes were not delivered and therefore are not in the possession of the trustee.
While the Countrywide employee’s statement about the failure to deliver of the other notes was not directly at issue in the case, and thus was not confirmed by the court, if true, it raises serious issues for Countrywide and for Bank of New York. Countrywide’s law firm has denied that the bank failed to convey notes as a matter of policy. However, it seems odd that an employee would make such a claim without some basis for that belief. We are in the early stages of finding out how widespread the failure to convey notes really was, and the Countrywide employee statement suggests these concerns could be well founded.
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In the Kemp case, the trustee to the securitization (Bank of New York) was trying to file a proof of claim in Kemp’s bankruptcy, while Kemp was fighting the attempt claiming that the trustee did not have standing to make such a claim because it did not have possession of the mortgage note. While this was a bankruptcy case, the situation is similar to foreclosure cases where borrowers argue that the trustee for the securitization lacks standing to foreclose because the mortgage loan at issue has not been conveyed to the trust.
What a great advertisement for the Show Me the Note movement. The Gonzalo Lira piece was another. Everyone should do it.
No wonder the banksters pushed the “deadbeat homeowner” meme with such fervor. If the guilty-as-charged-homeowner meme could have been made to prevail, and homeowners foreclosed upon without a fair trial or hearing, then all these unpleasant revelations that are now coming to light—-an inevitable byproduct of judicial discovery proceedings—-could have been avoided.
The banksters did everything they could to create bought and paid for courts that would be “efficient.” The intent was, under the banner of doing things with utmost speed, a two-step process to 1) paint homeowners with the face of evil so that they could 2) be declared guilty without all that pesky discovery that is part of real trials—-the ones where truth-seeking still matters.
The Florida rocket docket, where the average “trial” lasts only about three minutes, is but one example of a judicial system created specifically to serve the interests of the banksters. CNN did this video segment on Florida’s “foreclosure robo-judges.” “There is no evidence, and I want to say this with as much clarity as I can,” declares Judge Soud, who heads up Jacksonville’s rocket docket, “nothing has presented to us in the Fourth Circuit that there is any fraud being perpetrated on the court.” Soud concludes that “What is being classified as possible fraud can also be classified as sloppiness, can be classified as neglect, but the word fraud, the technical aspects, the legal aspects we do not experience that.”
So the banksters are declared free-of-sin at the same time homeowners are demonized and judged guilty-as-charged. It’s the new American apartheid. It’s a system, to paraphrase Wikipedia, under which the rights of the majority are curtailed and minority rule by the banksters is maintained.
Of course this practice—-declaring one group free-of-sin while concomitantly demonizing and judging another group guilty-as-charged—-is nothing new to America. Ralph Ellison describes a notorious example of this tactic from America’s not-too-distant past:
When a Negro male came into view, the homeliest white woman became a goddess, a cult figure defied in the mystique of whiteness, a being from whom a shout or cry or expression of hand or eye could unleash a rage of human sacrifice…
[I]t was the Negroes who were designated the South’s untouchable caste. As such, they were perceived as barely controllable creatures of untamed instincts, and a group against whom all whites were obligated to join in the effort required for keeping them within their assigned place. This mindless but widely held perception was given doctrinal credibility through oppressive laws and an endless rhetorical reiteration of anti-Negro stereotypes. Negroes were seen as ignorant, cowardly, thieving, lying, hypocritical and superstitious in their religious beliefs and practices, morally loose, drunken, filthy of personal habit, sexually animalistic, rude, crude and disgusting in their public conduct, and aesthetically just plain unpleasant… Thus, as far as many whites were concerned, not only were blacks faceless, but this facelessness made the idea of mistaken identity meaningless, and the democratic assumption that Negro citizens should share the individual’s recognized responsibility for the welfare of society was regarded as subversive.
In this denial of personality (sponsored by both law and custom), anti-Negro stereotypes served as an efficient and easily manipulated instrument of governance. Moreover, they prepared Negroes for the role of sacrificial scapegoat in the ritual drama of Southern society…
[….]
This was the anthropological meaning of lynching, a blood rite that ended in the death of a scapegoat whose obliteration was seen necessary to the restoration of social order. Thus it served to affirm white goals and was enacted to terrorize Negroes.
For the lynch mob, blackness is a sign of satanic evil given human form. It is the dark consubstantial shadow which symbolizes all that its opponents reject in social change and democracy. Thus it does not matter if its sacrificial victim is guilty or innocent, because the lynch mob’s object is to propitiate the insatiable god of whiteness, that myth-figure worshipped as the true source of all things bright and beautiful, by destroying the human attributes of its god’s antagonist which they perceive as the power of blackness. In action, racial discrimination is as nondiscriminating as a car bomb detonated in a crowded public square, because both car bomb and lynch rope are savagely efficient was of destroying distinctions between the members of a hated group while rendering quite meaningless any moral questioning that might arise regarding the method used. The ultimate goal of lynchers is that of achieving ritual purification through destroying the lyncher’s identification with the basic humanity of their victims. Hence their deafness to cries of pain, their stoniness before the sight and stench of burning flesh, their exhilarated and grotesque self-righteousness.
–Ralph Ellison, “An Extravagance of Laughter”
I made this connection during the summer:
Deadbeat Borrower is the new Welfare Queen.
It’s just another form of racism, giving those who have not yet been dispossessed someone to sneer down at: ‘at least I’m not a deadbeat borrower! I work hard, save and pay my bills. I don’t try to live above my station in life.’
Nevermind that the American Dream is that we all have an equal chance to rise above our birth caste, and that debt is the American way of life.
In The Century of the Self Adam Curtis has a section on how Madison Avenue had to shape the housewife’s mindset out of feeling ashamed for using convenience foods, rather than cooking from scratch. In the same way we were all supposed to shed our shame at living beyond our means via credit/debt.
Now the ‘deadbeat borrower’ meme is being used to impose stigma on those who have become excess labor in a de-industrialized society.
OMG! DownSouth, Does that mean I will never again dare to put on my one lonely pin striped suit in public, for fear of being lynched…Assuming we are successful..After all; Even if we manage to change the form of government, we are unlikely to change human behavior.
How prevalent is this? “US Bank as Trustee” is among the leading plaintiffs with foreclosure cases in Cook County, IL. Like the Bank of New York how does one prove that US Bank is remiss in certifying that it has the original note?
The trustees probably used robo-signers for the certifications. Just as in foreclosures, some lackey likely sat at a table signing hundreds of pieces of paper stating they had reviewed all the documents, when in fact they never cracked the file. It does seem to be their MO.
i noticed that this bankruptcy case seems to be a case of BoA suing Freddie Mac and seeking disclosure of Freddie Mac materials. this seems odd/interesting–doesn’t BoA stand to suffer more from this disclosure of countrywide practice than BoA would gain in winning this particular case? i’m confused… can anyone clarify what this case is about? i’m wondering why none of the blogs has mentioned this but they seem to be presenting it as just “a bankruptcy case”–which led me to think it was a homeowner bankruptcy.
now that i’ve been reminded that Freddie Mac (underwriter of my HAMP mod.) is in receivership, i’m wondering what happens to my mortgage if/when Freddie Mac completely goes under, which seems quite possible given Freddie Mac’s deep involvement in the massive fraud situation. any thoughts?
I’m not sure which case you are referring to. The case being discussed is Kemp v Countrywide.
“Before the court for resolution is the debtor’s adversary complaint
seeking to expunge the proof of claim filed on behalf of the Bank of New York
by Countrywide Home Loans, Inc. as servicer. The debtor challenges the
creditor’s opportunity to enforce the obligation alleged to be due, based
primarily on the fact that the underlying note executed by the debtor was not
properly indorsed to the transferee, and was never placed in the transferee’s
possession.”
Here’s the link to the decision
http://graphics8.nytimes.com/packages/pdf/business/20101116-KempVCountrywide.pdf
sorry. i am thinking of a different case. i will post the relevant info.
once again, i apologize. this is a different case noted at the 4closurefraud blog. here’s the link:
http://4closurefraud.org/2010/06/21/freddie-mac-bank-of-america-taylor-bean-whitaker-important-info-amp-statement-for-you-all-regarding-assignments-transfers-note-ownership/
though this is not the validation of the same form of fraud posted in this story at NC, i got the two cases mixed up because their evidences of fraud seem equally important (but maybe they’re not?)
at any rate, i’d be very interested in anyone’s comments on my questions about this case, if anyone here at NC would care to check out the link. thanks!
As more and more of these cases are brought forward, it’s becoming increasingly difficult to keep the decisions, depositions and players straight. IANAL so my brain hasn’t been trained that way :)
I am however, finding it fascinating to follow the discovery and case law which is unfolding as we speak. Thanks for the link. I hope one of the resident experts here can pipe in and answer your question.
p.s.
i agree with AR about the new Welfare Queen/racist aspect to the blaming the deadbeat. it’s been on my mind for awhile. no one dares speak it out loud, it seems, but i bet the victims have not been silent about it among themselves. it would be interesting to see a racial/ethnic breakdown of the abused homebuyer/fraudulent foreclosure victim population.
on another (related) note: how close are we really to the kind of social breakdown that happened in interwar germany? i’m seeing comments on the blogs welcoming the “meltdown of everything” as the only way to get the full attention of the high rollers on the damage that’s been done and stopping the snowball. but obviously the meltdown of everything is very dangerous. so what do we wish for? i guess we hope that enough people with the power to implement constructive government action come to their senses soon enough?
and while i have the floor… i’ve also been noticing a tendency of commenters around the liberal blogs to predict that the administration/congress will figure out a way to paper over all the fraudulent paper/nonpaper (MERS) problems, to avoid the collapse of the TBTFs. my guess, though, is that the reason they are being so quiet now about the matter is that they are well aware of the enormity of the problem, and behind the scenes they are trying to figure out a way to make it all better by somehow legitimizing the massive fraud retroactively, but they haven’t been able to come up with anything. for it seems that if they had an idea that they thought would fly, they would be acting on it right now. it’s hard for me to believe that they are simply clueless about how imminent a real crisis is, or that they are deliberately planning to do nothing until things get so bad they have no choice but to do something–anything. or maybe they just think they cannot do anything until the next session of congress?
Do a search for the terms “reverse redlining” and “foreclosure fraud” and you’ll see the connection.
The gains in minority wealth accumulation since the 1960’s were ripe for the picking, and ‘ghetto loans’ meshed smoothly with the focus on individual minority rights as a diversion from limiting monopoly capitalism’s equal opportunity predation.
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I don’t think there is a plan b to resolve the current mess, because I think this is the endgame of fractional reserve, growth-requiring capitalism. Only energy can support growth, and we’ve passed peak oil.
Bush v. Gore was necessary in order to carry out the parallel plans of the oil cartel and the Wall Street cartel. Both the PATRIOT Act and MERS were written and conceived in the 1990’s, and waiting to be implemented under Cheney.
I believe it is in the national interest for the states, the Congress and the administration to work towards a solution to reconnect mortgages with the underlying notes. The word fraudulent here goes beyond the general condition of the mortgage securitization mess. It is well documented that many foreclosure proceedings involved affidavits that were frauds on the court. But reconnecting, where needed, mortgages and notes would eliminate the commonest factor contributing to the use of fraudulent affidavits. How is this a bad thing? If a borrower has agreed to an endorseable loan note, is he or she harmed if legislative or regulatory steps are taken to facilitate the effective endorsement/transfer of their note to an end party that was intended to hold it? Likewise if an investor bought a bond that was supposed to have been backed by foreclosure rights on the underlying mortgages, is he or she harmed if those rights are restored by new legislation?
I sense that there are significant segments of both the borrower and investor populations that are wishing that the situation develop in such a manner that the one group can discontinue servicing their debts without risk of losing the collateral, while the other can return poor investments to the source. But I don’t believe either are harmed if the intended situation were to be recreated at this time. Borrowers could still challenge foreclosures and investors could still try to return investments.
Eric,
You make it sound as if the banksters would sit still for having the chain of title problems sorted through without harming the investors or the borrowers. Such an assessment of the motives and intentions of the banksters is extremely naive.
The very thing the banksters don’t want is an impartial decision maker to balance the interests of banker, borrower, investor and tax payer. What the banksters do want is a partial decision maker to screw over borrowers, investors and tax payers for their benefit.
A very enlightening discussion in regard to this can be found during the Senate hearings last week here beginning at minute 2:05:00.
The banksters will deploy all their political resources, which are substantial, to stop any resolution that does not favor their interests.
Eric and DownSouth;
At this point there cannot be a settlment which does not harm both the ‘borrower and the investor’. I have written quite a lot on this. I believe the crash has been deliberatly engineered to harm both.
To put it in folksy terms..”The waiter stole the meat out of the sandwich while carrying it from the kitchen to the table, then to cover up he burned down the restaurant.”
How do you see this affecting the kathy patrick lawsuit? I’m guessing this significantly strengthens the case for putbacks, from all parties (GSE, private label, mono).
alethia33 wrote:
i’ve also been noticing a tendency of commenters around the liberal blogs to predict that the administration/congress will figure out a way to paper over all the fraudulent paper/nonpaper (MERS) problems, to avoid the collapse of the TBTFs. my guess, though, is that the reason they are being so quiet now about the matter is that they are well aware of the enormity of the problem, and behind the scenes they are trying to figure out a way to make it all better by somehow legitimizing the massive fraud retroactively, but they haven’t been able to come up with anything. for it seems that if they had an idea that they thought would fly, they would be acting on it right now. it’s hard for me to believe that they are simply clueless about how imminent a real crisis is, or that they are deliberately planning to do nothing until things get so bad they have no choice but to do something–anything. or maybe they just think they cannot do anything until the next session of congress?
———————–
I was one of the early commentors(perhaps under a different “name”) to state that after the election Congress will likely pass something to protect MERS and its owners, and give the bill a heinous name that is the opposite of the truth.
The reason you aren’t seeing a lot of comments on this anymore is that there isn’t much to say now – we are waiting to see what happens. However, I have read somewhere online recently that the owners of MERS are lobbying HARD on the Hill right now, so you can bet they are trying. But speculating about it at this time is sort of pointless as there are so many more important immediate things to discuss – like Kemp vs. Countrywide.
The SC justices who prevailed in the Citizens United case have done an evil thing to our country and we will be living with the consequences for years to come. I hope history treats them as harshly as they deserve to be treated.
From Mr. Ritholz…
“The speed over quality underwriting procedures in securitizing and processing that $2 trillion in sketchy mortgages is well over $100 billion dollars. That’s according to an article in Barron’s this weekend, citing research from Compass Point Research & Trading, looking at potential putbacks to the banks.”
http://www.ritholtz.com/blog/2010/11/barrons-putbacks-to-banks-could-be-134-billion/print/
That would be $134 Billion, according to Barrons.
I would like to take the demmonizing out of both sides. Many borrowers are delinquent and should be foreclosed so the rest of us will keep paying our mortgages and credit costs will remain reasonable. Assuming the story is typical these trustees should not be allowed to foreclose, investors in the securitization should have a cause of action and the states probably have larg claims for failure to pay recording fees. It will settle out over time. The courts should impose sanctions if documents are fraudulently filed .
James,
you have a biased (I didn’t sy unfounded) point of view. It is your point of view which has allowed much of this abuse to occur unchecked till now.
Perhaps you need to take a walk in the shoes of others less fortunet for a while. Have a bit of care for your fellow man before you loose your job and ability to pay your debts.
The lenders in this scenario were both the profesonals and the puppet masters of the theater. The property bubble was engineered deliberatly. The public was informed in every forum, MSM and professional advice colum; that the comming inflation would take care of any mortgage debt shortfall. There were few disenting voices. The lenders kne full well that most people could not service the debt they were aquiring, yet they lent the money cheerfully. The lenders were being paid on both ends so why complain.
Meanwhile back at the ranch plans wer already underway to yank the rug out from under everyone. Corporate America was well on the way to commiting a suicide ritual. Actually more of a “Jack the giant killer illusion”, but that is another story.
The certifications could be a way to get around the statute of limitations.
And, the fraud could be subject to treble damages in a civil RICO suit.
The stability of the financial system might be at risk (further risk), but emotions call for the sword to be sunk up to the hilt.
Possession is 9/10ths of law. When it comes to promissory notes, it 10/10ths.
Several bankruptcy courts have treated the schedules executed by borrowers as admissions (filed under the penalty of perjury)to get around the lack of possession by the lenders.
In bankruptcy cases, debtors would be well advised to list their debts with any lender in their schedules as disputed until they know who has phyiscal possession of the note.
James wrote: Many borrowers are delinquent and should be foreclosed so the rest of us will keep paying our mortgages and credit costs will remain reasonable.
—————————–
There is a fairness argument that supports this.
However, I have read in numerous places that the bondholders’ losses are greater when a home is foreclosed, then sold than the loss would be to the bondholders if 25% of the principal were written off many of these loans, lowering payments. This would help a lot of people because it would mean less neighborhoods with the stigma of foreclosure, poor maintenance of foreclosed homes, etc.
In other words, I think the neighbors are better off when loans are restructured with lower principal balances (assuming the borrower is able to make payments at a reduced principal amount and is not unemployed or otherwise unable to pay.)
So the future of these neighborhoods should also be considered, which means that it might be fair to the neighborhoods to give borrowers principal reductions. Of course, if the IRS insists on billing the homeowners for “income” equal to the amount forgiven, then the principal reductions might not be workable.
Lot of talk by ex mortgage securitization folk that some of the time the Trustee was the “originator.” Maybe we well find how often that CW and WFC are nominees of the Trustee to hold the mortgages and notes, since they actually retained possession of the mortgage papers. Or there was some confused assumption that CW and WFC were bona fide paper warehouses for the Trustees.
This is all very strange that the servicers have not brought forth this argument and instead have never produced an actual assigned mortgage/note. ( Since as Yves has quoted they are can not be separated per SCOTUS.) But then
the CEOs of these entities do not seem to have been selected for their knowledge.