It’s worrying to see Paul Jackson, the creator of the generally-respected Housing Wire, damage his brand by continuing to provide misleading and erroneous commentary in an area of keen interest to his readers, the foreclosure crisis.
One could have hoped that Jackson would have learned to question his sources after unwisely sticking his neck out for them in a his article “A Crime of Omission” in which he sided with forgers against the critic of servicers. A takedown of his post by our Richard Smith was validated less than seven hours later by an extensive, exclusive Reuters article that not only validated Richard’s post, but all of our previous reporting on the company at issue, Lender Processing Services.
But Jackson has offered another erroneous defense of securitization industry bad practices in the form of “BofA, the MBS unwind, and the other side of the coin.” This post narrowly is a discussion of a recently widely discussed case, Kemp v. Countrywide, and more broadly, an effort to again discredit critics of the securitization industry. (In a tweet the next day, Jackson does appear to recognize that the post may have problems: “About today’s column: I feel the need to note that I do not address endorsement issues. Just to prevent words from being shoved in my mouth” but this falls short of acknowledging the full scope of the problems with his post).
If you didn’t know better, Jackson’s post would sound reasonable, even persuasive, because it hews to the form of a fair treatment. He first claims to present the case made by the critics, who are of the view that the problems with the breakdown in certain mortgage securitization processes are serious and not easily remedied. He then presents a rebuttal, quoting sections of a pooling and servicing agreement, as well as long quotes from unnamed attorneys.
But form and substance are very different matters. It’s ironic that Jackson’s prior critique took up the theme of “crimes of omission”. That piece started with the observation that a famed DocX price sheet, which showed fees for “recreating” various documents, including ones which under the law can ONLY be originals, so any recreations are by definition forgeries, was dated, and drew an incorrect inference, that the age meant it was no longer operative (Richard rebutted this in gory detail in his post). What was even more surprising was that he then used his incorrect reading to launch a general, unwarranted indictment of the veracity of all critics:
That those so aggressively accusing mortgage servicers of lying and fraud may themselves also be guilty of the same is a troubling trend…..Because it begs important questions: What other fact patterns have been twisted around? Who can we really trust to tell the truth here?
Get that? A false charge that an error was made is escalated into a full bore indictment, with all the right qualifiers in place to allow Jackson to pretend that he didn’t really mean what he effectively does: call critics of mortgage servicers liars and fraudsters.
And in his latest post, Jackson is guilty of precisely the same behavior he erroneously accused others of, a “crime” of omission. But in this case, it is not a single omission, but multiple ones. If one error is tantamount to fraud, in Jackson’s calculus, does his post deserve RICO status?
Let’s look at some of the post’s problems. First and foremost, Jackson fails to do the thesis he claims to rebut justice. As a result, the arguments he and his unnamed sources make for the most part do not engage the issues. Thus the material he offers as a defense is largely irrelevant and at key junctures, flat out wrong to boot.
Acts of Omission
1. Jackson mentions the “failure to convey” issue, but never explains the New York trust aspect, which is central to understanding both why this is a problem and why it is so hard to remedy (there is only an en passant mention by an attorney who does not appear competent in this area towards the end of his piece).
The reason this matters is that (as we have explained multiple times on this blog) is that virtually without exception, all residential mortgage securitizations were organized as trusts under New York law. New York trust law was chosen by the securitization industry in the mid 1980s when the now-largely-standardized legal documents were being developed precisely because it was well settled (key precedents go back to the 1800s) and unforgiving. Specifically, as law professors Adam Levitin, Ira Bloom, and other New York trust law experts have indicated, New York trusts can act only precisely in the manner set forth in their governing agreements. Any deviation is deemed a “void act”.
Why did the people coming up with this system make life so difficult for themselves? For very good reasons. They wanted the trusts to be bankruptcy remote, so that if the originator failed, as New Century and IndyMac did, that its creditors could not try to claim the notes sold to a securitization. The solution was to require it to be conveyed through intermediary parties before getting to the trust. The second reason was to conform with REMIC, the newly-created tax provisions. That too imposed very specific requirements, and they wanted to ensure that the trusts complied precisely.
2. Jackson also fails to even say what conveyance consists of. In rather crude terms, in this context, it is the steps necessary to get the notes, which are the borrower IOUs, into the securitization trust. At the very minimum, the notes must be endorsed as stipulated in the PSA and also be in the possession of the trustee or its custodian on behalf of the trust. This discussion is completely absent from the Jackson piece.
Acts of Commission. The article is rife with errors.
1. Jackson quotes a section of a selected pooling and servicing agreement and both misreads and misapplies it. He misreads it by quoting selectively. This is his argument:
In other words, this PSA’s terms explicitly anticipated the reality of missing documents, and also explicitly prescribed a remedy in the event missing documents were found to be a problem for the trust.
If you continue to read this section of this PSA, you see that if the defects, including the missing documents, can’t be cured, the loan is to be replaced. The trust does need to possess the actual note and mortgage.
In addition, the trustee is required to certify, after the cure period, that everything is present and accounted for, in a final certification, generally six months after the closing of the trust. If there were any defects noted in the final certification, the servicer was obligated to cure them in set time thereafter, generally ninety days after that. This is the germane language from Section 2.02, “Acceptance by Trustee of the Mortgage Loans”, of the Kemp PSA (boldface ours):
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. The Trustee agrees to execute and deliver within 30 days after the Closing Date to the Depositor, the Master Servicer and CHL (on behalf of each Seller) an Interim Certification substantially in the form annexed hereto as Exhibit G-2 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) all documents required to be delivered to the Trustee pursuant to the Agreement with respect to such Initial Mortgage Loans are in its possession.
That means that all trustees were required contractually to say, in most cases six months after closing, that the trust did indeed have all the documents and everything was correct and point out any and all omissions.
The misapplication lies in confusing, or misrepresenting, failure to convey selected documents (which is what this section contemplates) with failure to deliver anything at all (the real problem). What made Kemp v. Countrywide so astonishing is that a senior employee of Countrywide said that not only had the particular note in this case not been transferred to the trust, but that it was Countrywide’s practice NOT to convey the notes. Under New York trust law, if NO notes were conveyed to the trust, the trust itself would be unfunded and hence not exist. That’s the extreme scenario that Professor Adam Levitin mentioned in Congressional testimony and on his blog but even lesser versions of this scenario (that some notes were conveyed and some weren’t) is still very damaging. It means that trustees on a widespread basis issued false certifications; it means that servicers had to have known the notes were not conveyed (if nothing else, the hunt to obtain the actual note to be able to foreclose would show it was not in the possession of the trustee). They also failed in their duty to put back the notes on behalf of the investors. (An aside: I had a long debate with a securitization attorney, the use of the term “put back” in the case of non-possession is annoying. He agreed the better term would have been “pay back”: but no one took who devised the documents originally ever imagined that that notes might not be conveyed as matter of policy.)
To put it more simply: “missing documents”, which are what Jackson discusses, are not at all the same as “not ever conveyed” documents.
2. This part is astonishing:
As a white paper from the American Securitization Forum notes, and as I’ve been told by more than a few attorneys I’ve spoken with, there is a significant difference between the concepts of physical possession and so-called “constructive” or “legal” possession of a note.
This is where the acts of omission come in. This argument does not wash in foreclosure-land. Stipulations vary by state, but in judicial foreclosure states, you need to be the “holder” of the note, and that is generally construed to mean to have both physical possession and have the legal right to enforce it, which for a negotiable instrument like a note, means being the party to which note has been endorsed (the PSA provides for more exacting requirements regarding endorsement, but let’s put that to one side for now.
So physical possession IS a requirement for the investors to have the rights they were promised, that they bought “mortgage backed securities” since in 45 of 50 states, if you are not the holder of the note, you cannot enforce the mortgage (the lien on the property)
It also does not wash in securitization-land. The PSA stipulated a series of transfers and required the trustee to certify that the notes reflected that these transfers had the endorsements consistent with these having taken place. Clearly the parties to the transaction evidenced considerable concern that this be done correctly. And it gets back to the New York trust issue which the American Securitization Forum, and derivatively Jackson, choose to ignore: the trust can only come to possess the notes in the manner stipulated. All five New York trust law experts who are the official advisors to New York state agree on this point.
3. Counterfactual assertion from unnamed attorney(s) on Kemp. Jackson relies on anonymous attorneys (why are they unwilling to give their names when they provide securitization-industry-flattering posiitons?) who manage to offer views that are inconsistent with numerous state and Federal bankruptcy court decisions. Read the examples, and decide how competent and informed you believe these unnamed sources to be:
“The (Kemp) case is a very narrow and probably wrongly decided case,” said one attorney I spoke with on condition of anonymity, after reviewing the court docket. “Where the original note is produced and is conceded to be at all times in the possession of the attorney-in-fact for the trust, the court’s reasoning is at best questionable. In fact, it defies common sense.”
Huh? The servicer is not the attorney-in-fact for the trust in Kemp. If they were, the attorney for BofA would certainly have tried this argument. In fact (hah!), the judge notes the plain language of the PSA, that the loan was supposed to be delivered to the trustee, and all parties agree in the case that this requirement was not met. Does this attorney know ANYTHING about securitization?
In fact, the Kemp decision seems to be very carefully reasoned. I expect that there is very little chance it will be overturned on appeal. Expecting a favorable verdict on appeal is the standard line of mafia dons leaving the courthouse after they’ve been convicted of multiple counts of murder, extortion and drug dealing.
Moreover, despite the kvetching of other unnamed attorneys in the Jackson post, I suggest they wake up and start familiarizing themselves with foreclosure decisions all over the US. Have they been asleep while judges all over the country have been deciding against banks trying to foreclose based on issues of standing? What makes Kemp sensational is NOT the judge’s decision. It has plenty of parallels in other courthouses. It was the very damaging testimony of Linda DiMartini: that Countrywide had a policy of not conveying notes.
This part is also raises questions about the expertise of Jackson’s sources:
“The Tom Adams declaration is completely inadmissible, same with the Bloom declaration,” said one attorney, under condition of anonymity. “They are acting as a judge, and trying to give the judge a legal conclusion. A witness is not allowed to opine on an issue of law, only on issues of fact. These declarations are entirely an opinion of law and probably wrong at that.”
Jackson’s quote came not from a trial attorney, or litigator, as they are called in corporate practice, but a creditor’s rights expert. That’s tantamount to asking a cardiologist about a bladder problem.
Since when are expert witnesses not permitted to give opinions? This is a gross misreading of the Federal Rules of Evidence, specifically Rules 702 through 705. This gloss comes from Cornell Law School:
Most of the literature assumes that experts testify only in the form of opinions. The assumption is logically unfounded. The rule accordingly recognizes that an expert on the stand may give a dissertation or exposition of scientific or other principles relevant to the case, leaving the trier of fact to apply them to the facts. Since much of the criticism of expert testimony has centered upon the hypothetical question, it seems wise to recognize that opinions are not indispensable and to encourage the use of expert testimony in non-opinion form when counsel believes the trier can itself draw the requisite inference. The use of opinions is not abolished by the rule, however. It will continue to be permissible for the experts to take the further step of suggesting the inference which should be drawn from applying the specialized knowledge to the facts. See Rules 703 to 705.
Note that this attack is purely diversionary; a simple drive by shooting, evidently so he does not have to address the not-as-easy-to-dismiss content of the court submissions.
It might also behoove this unnamed critic to familiarize himself with the rule of evidence of the state of Alabama, where this trial took place. Alabama requires anyone pleading foreign law (which New York trust law is in Alabama) to disclose the experts they will rely upon. The experts were required to provide affidavits pre-trial. Opposing counsel chose neither to depose them pre-trial (they cross examined them cold) nor did they present experts of their own.
Ira Bloom is clearly an expert in New York trust law; he has an extensive publication history and regularly acts as an expert witness on New York trust matters. Opposing counsel even acknowledged that Bloom was obviously well qualified. Tom Adams was qualified as an expert in securitization industry practices.
If this testimony was so obviously inadmissible, then why didn’t opposing counsel protest? Opposing counsel was not a low-life, unsophisticated player or mere foreclosure mill, it was Sirote & Permutt, which is an old-line firm and handles big corporate work as well as foreclosures. The partner on the case is a seasoned trial attorney. The case took place in Jefferson County, the biggest courthouse in the state and the judge in question. Judge Scott Vowell, is the presiding judge in that district and a respected jurist.
And again we have a creditor’s rights attorney who by definition is not an expert in New York trust law (and New York trust law is different from that of other states) still opining with great confidence:
“The other real issue here is one of trust law in New York. How is a property put into a trust? You will note that the declarations completely avoid any law on this issue. If the parties intended to put the asset in the trust and some defect did not result in the actual transfer, the court would typically allow for the defect to be cured and treat the asset as part of the trust.
“Look at the argument: all parties to the transaction—the trustee, the beneficiary and the party owning the secured note — all intended to transfer the asset, but perhaps may have failed to follow a procedure for note delivery. The law will always attempt to honor the intent of the parties, so long as no rights of a third party are injured. In this case, all of the parties to the transaction agree on intent, and no one is injured.”
It’s 100% incorrect to say that mere intent works in New York trust law. There is over 100 years of precedent to that effect, as a result of robber barons abusing trusts. Jackson needs to get the views of people who know the terrain, and not industry incumbents defending their livelihood. He could start with the transcripts. From Bloom’s testimony (IN THE CIRCUIT COURT FOR JEFFERSON COUNTY, ALABAMA CASE NUMBER CV-2009-901113, transcript pp 347-348):
23 So with respect to having that discussion,
24 Professor, you are satisfied that this trust who is
25 the plaintiff in this action is not the owner of
1 this promissory note?
2 A Assuming that this is the — I’m going to
3 assume this is the promissory note?
4 Q Yes.
5 A The actual promissory note. Well, it was
6 endorsed to EMAX Financial. It was not endorsed
7 over to the trustee. So I don’t see that the
8 trustee is the owner of the — of that document.
9 Q With respect to the possibility that the trust
10 might have a remedy or affix, you’ve reviewed the
11 trust instrument, correct?
12 A What do you mean remedy or affix?
13 Q Does the trust instrument expressly state that
14 if the assets are not conveyed by the closing date
15 to the trust that the trust is not to accept any
16 further action?
17 A Oh, yeah. Yeah. So, I mean, I guess here
18 before we move on, I would just simply state that
19 my opinion, the asset was not — did not become an
20 asset of the trust. But I’ve also looked at
21 Article 10 of Subparagraph (i) that essentially
22 says that the trustee cannot accept any
23 contributions of assets after the March 12th date.
It would really help if Jackson’s quoted sources would put their names to what their views. The unwillingness to do so is troubling, particularly since none of these comments are likely to ruffle their clients.
But the sort of treatment Jackson is getting may be endemic in this space: casual, almost knee-jerk denials in the hope that these pesky critics will just shut up or, failing that, be ignored. But the evidence piling up in state and Federal courts is too substantial for this to be a realistic expectation.
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Informative post.
I have been asking several bank apologists as well as people whose opinions I generally respect about the DiMartini testimony.
to date, typically the response to my question “why did she say what she said” is “she was probably mistaken” or “she was a low level person who didn’t know what she was talking about”.
the obvious follow up question then is “why didn’t the bank put up someone who knew what s/he was talking about… and why didn’t they bring forth a different person to counteract DiMartini’s response”
the answer to that… silence.
Initially, I found Yves’ hypothesis to be intriguing but too fantastical to believe.
But it’s been how many months now? and the banks and regulators are no closer to resolving this issue than they were back in September.
Every passing week makes Yves’ assertions and hypothesis more likely. Discovery consistently seems to favor her argument over that of the apologists.
This is an interesting question that is more easily understood if you typically litigate matters. Corporations are typically called to deposition by a corporate representative who can speak for the company on a proscribed set of matters. They are often supposed to pick the best person to do that – that is, sometimes the deposing party asks for a specific person, and sometimes they leave it up to the company to produce “the custodian of the records,” or the person best informed to testify about “X.”
If the deposing party asked for a specific person, they get the testimony of that person and the corporation can argue that they were talking out of their butt. If the corporation provided “the custodian” – or otherwise sent the person who was supposed to have the best knowledge? It kind of acts as an admission on its own, or else you may have committed discovery abuse. Now normally, corporations get away with that a lot, but it looks bad – especially if you properly set the scene and establish that this is the custodian or the person with the best knowledge.
Therefore, it might just not be that easy to rebut the testimony. It’s an easier question in theory than in practice in a lot of cases.
I should have clarified by saying that often corporations will purport to send the best person with knowledge, but they send some flunkie who knows very little – they do that both to gum up the works and obscure things, but also because that person won’t be able to do much damage.
Only sometimes it backfires. Then they either have to fess up, or take their lumps.
As a loyal reader, I have avoided jumping in on this subject for some time. Although I continue to read this column’s repeated assertions that NY law requires strict compliance and that is why corrective action cannot occur after the deadline, I haven’t seen any analysis that supports that conclusion.
The PSA’s specifically contemplate curing problems after the fact. Although the transferors of the notes may have breached their contracts, that doesn’t necessarily mean that an imperfect transfer (i.e., a sale for consideration not accompanied by all necessary endorsements or by delivery of the original note) is void. It may be voidable (i.e., the purchaser may be able to undo the transfer), that doesn’t equate to the obligor on the note being discharged from the obligation. Legally, this draws into focus the difference between a covenant and a condition.
The failure to deliver proper endorsements or the note could mean that third parties have claims that may have priority over the claims of the purchaser. So, while the focus on problems in securitization is good, the real issues here is that Lehman Brothers’ trustee in bankruptcy (or some creditor of the transferor of the notes) may have superior claims to the notes not properly transferred and the trust may be an unsecured claimant with respect to the value of any note not properly transferred on the date of the original sale.
I find it implausible that a court will hold that the obligor on the note doesn’t owe the money. Similarly, someone will be entitled to foreclose, the question is who gets the money.
A mortgagor being foreclosed upon (your “obligor”) has a right to expect that the security will be sold for the best price obtainable at the sheriff’s sale. Why? Because that price affects the amount of the deficiency for which the obligor may become liable (deficiency judgment) or overage payable to the mortgagor (however unlikely).
As long as there exist title questions (your Lehman’s Trustee’s possible claims, for example), the bidders at foreclosure sale will reduce their bids to reflect the increased risk of questionable title.
State foreclosure statutes generally seek to maximize foreclosure sale bids to the benefit of the mortgagor in default. That the mortgagee has created title issues that undermine that policy should bar the mortgagee until the title issues have been cured.
I find it implausible that a court will hold that the obligor on the note doesn’t owe the money.
to my understanding, nobody is claiming this.
instead, they are simply claiming that the trust doesn’t have legal standing to foreclose IF the mortgage was not properly conveyed to the trust…
now some people are claiming that what MIGHT happen is that this act may convert the loan to an UNSECURED loan. but that doesn’t negate the loan… it simply converts it from a secured to unsecured loan. the borrower still owes money.
Similarly, someone will be entitled to foreclose, the question is who gets the money.
we all agree upon this. But who is that party if the mortgage was not properly conveyed into the trust?
I think the commonly used example is this:
what if Countrywide originated a securitized mortgage and failed to convey the note to Deutsche Trust.
if the borrower defaults does Deutsche Trust have the right to foreclose? Or Countrywide?
I don’t think anyone is saying improper securitization discharges the mortgage repayment obligation. The issue is whether the financial institution claiming the right to foreclose can prove that they are a party in interest. When an individual loan goes into default, it gets bounced from the portfolio but, as Yves explained earlier, oftentimes the loan servicer has an obligation to continue to pay (advance) into the investment with a right to seek compensation out of foreclosure proceeds.
I think you’re conflating the “show me the note” movement with well-founded suspicions of rampant securities fraud on investors in MBS. But your point about priority among creditors in the bankruptcy-remoteness chain has merit, and is a nuance lost on many outside of the law. You may also be conflating the status of notes as commercial paper requiring physical delivery/ink endorsements along the chain and lien/title recordation, which does serve a notice function relating to creditor priority.
To my mind, the third parties who may have big-time (as in multi-billion $$) causes of action arising out of rampant faulty securitization are the investors, certainly not the borrowers. They are beneficiaries of the trust and the persons harmed by failure of due diligence by the firms providing trustee services pursuant to the PSAs.
The legal opinions on these REITs all state “if everything goes exactly as it says in the PSA, this will work.”
I know – I’ve seen them. This should be interesting. As to the choice of NY Law, the clause is solid, right down to the conflicts clause. These trustees will have a lot of ‘splaining to do. I’m with you: the investors are the ones with a really good case.
But along the way, it will seriously take effort to figure out who is the party entitled to enforce the security interest against the underlying asset (if any). They opened Pandora’s box when they bypassed recording, failed to transfer documents, and left them sitting around in blank with some broker working through three corporate shells for Countrywide.
Yves,
Wonderful post.
Hopefully, Housing Wire and Paul Jackson are being well compensated for being a mouthpiece for the American Securitization Forum and the sell-side.
Keep up the good work!!
Gasman: Please show the case law in NY demonstrating your bizarre assertion. I find it impossible to believe foreclosures will be allowed to proceed without the plaintiff demonstrating standing.
In the Kemp v. Countrywide case, 08-18700, U.S. Bankruptcy Court, District of New Jersey, an appeal has yet to be filed by Countrywide. One would think that Countrywide (BAC Home Loan Servicing, L.P.) would want to have this decision reversed quickly, and even would move for an expedited appeal. Of course, the judge is that case is the Chief Judge, Judith H. Wizmur.
In the Alabama case, U.S. Bank v. Erica Congress, what did the Judge Vowell decide. I have not located a decision. Also, do you have a link to the full transcript.
Thanks for pointing out that there are specialties of law. On the whole, those structuring the PSA are not litigators. Further, many a real estate transactional lawyer had never been involved in a foreclosure, or even a related bankruptcy case.
warning: this comment risks wandering too far into procedural issues. the time for appeal has expired. (Fed R Bankr Pro 8002 allows 14 days to appeal; that time period ran 11/30/10, because the order was entered 11/16/10). however, I don’t think they COULD appeal the document the judge entered, since it is an “Opinion” and not an “Order” and there is no “so ordered” language in the opinion. I don’t understand why. Proper procedure here is that the judge enters an order which disallows Countrywide’s claim. Only upon entry of an Order is that Order subject to appeal.
FWIW, Judge Wizmur is a good, smart judge. This does not preclude her from being wrong or overturned on appeal, but remember, you can’t facts that were undisputed at trial, unless you have new facts you were literally prevented from knowing before and during trial. Countrywide could and should have put on evidence that they did transfer the note; they chose not to; that choice of theirs is not subject to appeal.
edit, second para.:
“FWIW, Judge Wizmur is a good, smart judge. This does not preclude her from being wrong or overturned on appeal, but remember, you can’t *APPEAL* facts that were undisputed at trial…”
Thanks for the background, BK Atty. I’ve only skimmed a Law 101 textbook, so this information is appreciated.
Even appealing the decision won’t put the lid on the fact that someone at Countrywide testified that it was their policy to NOT transfer the notes.
All Countrywide/BofA has to do is show all the notes that were transferred correctly to prove her wrong.
*crickets*
Mostly an observation that I find these revelations and the unveiling of massive, systemic fraud particularly interesting in the context of the WikiLeaks dustup, the increasing frustration around US political gridlock, and guardian.uk reports that indigenous people are ‘marching on Cancun’ to insist on water security, sustainable economics, and social justice viable climate control legislation.
Interesting times…
I could be wrong, but I’m thinking that Paul Jackson’s sockpuppetry is probably not a very prudent move on his part. Bad timing.
Excellent shredding.
The law will always attempt to honor the intent of the parties, so long as no rights of a third party are injured. In this case, all of the parties to the transaction agree on intent, and no one is injured.
That no third parties are injured is a vastly bigger lie than just as it applies to this case.
Omission and commission. It looks like this was the moment for which Paul Jackson spent all that time and effort building up his brand. His handlers are now activating this previously dormant “asset”.
C’mon Yves, give them a break. Signing things and Fed-Exing notes is too hard! Just give them some time to paper over this, and everything will be fine!
Nice work. I’m very interested to know who the mysterious sources are. Lawyers who signed off on the PSA language, or servicer & foreclosure mill stooges trying to keep the music going. Or shills for MERS, who know they are in it deep.
Minor copy edit:
You speak of Reuters validating NC’s reporting. Isn’t it the other way round? Otherwise, great work!
The Reuters article repeats very detailed material in NC posts from the beginning of October. Even if Reuters started with our posts, it appears they re-reported them. You don’t stick your neck out with a major feature without having done your spadework. They could also have discovered the same things independently. Either way, it’s a “professional” validation of our reporting
Just to amplify:
The headline over at DK is “Reuters/Smith: G.O.P. Is Executing Plan To ‘Bankrupt’ States”
although I’d argue the same copy edit needs to be made there ;-)
Take credit, it’s due to you!
I just hope your head still fits through the doorway ;-)
Minor correction: Jackson’s source is correct that Tom Adams’ declaration is likely inadmissible. Expert witnesses cannot opine on a matter of *law* — the reason being that the *judge* is the legal expert, thank you very much.
Ed,
I suggest you reread the affidavit. Adams was qualified as an expert in securitizations from a business perspective. Opposing counsel was well aware of the nature of his expert status. During the direct examination in court, they objected once that the question would have him opining on matters of law, not matters of practice. They would have objected to his entire affidavit if that argument would fly.
Adams was providing testimony based on his expectation of what the contracts meant as a “buy side” member, or investor, which was the role his firm played on the deal in question as bond insurer. Thus he is speaking to industry norms and expectations.
We’ve also lost the thread a bit (understandably) as to why we are talking about the Bloom and Adams affidavits in the first place. The argument in the last ASF testimony was that Levitin offered no evidentiary support for his views, ergo they were unfounded. I said, “Gee, I’m just a bystander, but I have this, and if I have these documents, I’d be surprised if Levitin doesn’t have more and better.” So the Bloom and Adams material is meant to be indicative of what else is probably out there, most likely on the individual legal planks that Levitin builds into a bigger argument.
Ed
It is common to have an expert lawyer testify as to the law in another jurisdiction.
It is also relevant if, in a technical area, and independent expert provides and explanation of technical areas of the law, in affidavit or testimony form.
This happens every day.
“New York trust law was chosen by the securitization industry in the mid 1980s when the now-largely-standardized legal documents were being developed precisely because it was well settled (key precedents go back to the 1800s) and unforgiving. Specifically, as law professors Adam Levitin, Ira Bloom, and other New York trust law experts have indicated, New York trusts can act only precisely in the manner set forth in their governing agreements. Any deviation is deemed a “void act”.”
Could we get a quote from the relevant New York statutes, and some citations of case law here, please? This is the Internet, not television — you should let us see the texts you’ve consulted rather than simply invoking them from on high.
I don’t mean to sound churlish, but I am not a legal research service. I have already provided far more in the way of quotes, documents, and citations than you see on most legal blogs, much the less a finance/econ blog. I’ve delivered multi thousand word posts on this topic. I’ve tried to be thorough, but my job is not to be exhaustive.
I have indicated that all five of the experts on New York law trust law that New York state relies upon for guidance are in agreement on the issues under discussion. This is a comparatively rare example of unanimity among top experts.
I mentioned Ira Bloom, you might start with his publication history. When I spoke to a securitization industry lifer (former general counsel), the thing that got them to change their mind was that Ira Bloom concurred with the theory. Bloom is a real heavyweight in this space, and the other experts are if anything more definitive on the points he discussed.
Go ahead and sound churlish. You’ve provided tutorial services to a whole year’s worth of law students and will likely see little return. The old lawyer in my home town used to brag about getting paid in chickens. Where are your chickens?
Still, keep letting in the sunshine. The foreclosure courts in Florida remind me of what I’ve read about Soviet era tribunals. Bonhoeffer had a hearing, in a way. If exposure raises opposition, you’ve done more good than most.
Yves,
I’ve been reading your LPS stories and your recent posts on Paul Jackson. I thought I might alert you to this Dow Jones story April 2009, more than 20 months ago.
DOJ Probing Mortgage Data Processing Firms
884 words
23 April 2009
The Department of Justice is conducting a nationwide probe of the company whose automated systems handle half the mortgages in the U.S., looking for evidence Lender Processing Services Inc. has “improperly directed” the actions of lawyers in bankruptcy court.
And Paul Jackson reacted the the same way:
http://www.housingwire.com/2009/04/17/lps-shares-hammered-by-dow-jones-report
It sounds to me that what’s making this so confusing is that there are (at least) two different types of contract law jurisdictions in the US: some lock the parties into the text of the written contract pretty strictly and others believe that it is the judicial system’s job to realize the intent of the parties entering the contract.
It sounds to me that what Yves is saying is that New York is a jurisdiction where the judges don’t look far beyond the written text of the contract to determine what was actually agreed between the parties. If New York judges look askance at “intent” arguments by parties to a written contract, Jackson’s lawyer is in trouble.
Not exactly.
New York judges are as non-formalistic as any regarding interpretation of contracts, but this is a matter of trust law, not contract law.
Trust law in New York and elsewhere is clear that a trust can ever only do what it is specifically authorized to do and no more.
Can someone please explain this to me. I’m currently interested in buying a short sale with Bank of America as the lender, but the property was formerly a Countrywide originated loan. Looking through the public records, this property has a beneficiary of MERS, which means 99% that this property was securitized and sold as an MBS bond. So let’s assume that is the case.
So let’s say I submit an offer and seller accepts. Then, now it’s up to the lender (BofA) to either accept or counter my offer. Now some articles say that the lender, BofA in this case, needs to negotiate will seller on a price, and lender may need to take a loss on this short sale.
First question, didn’t BofA buy CountryWide at a significant discount, therefore, bought this property at a firesale price, probably a 50% discount, and may even profit off this deal??
Second question, if this property was bundled into an MBS bond and sold to investors (probably owned by Fannie Mae now), then how is BofA taking a loss? Doesn’t the loss occur to the investor, or the bond holder? I’m not making the connection on how BofA would lose money on this short sale deal.
I’m a complete layman when it comes to law (bankruptcy or otherwise). This:
If you were going broke, you might start selling everything you have – cheap. You might even want to sell your prized bass boat, to your brother-in-law, for a dollar, then go pull the chain. You can probably buy it back in a year or so, right? Because those really smart cats up in Warshington get this, they wrote a piece into the code that says a bankruptcy trustee (she who is supposed to protect the creditors that will get pennies on the dollar) can “claw back” those last minute sales and sales for “less than full value”, and use those assets to pay legitimate creditors, in a pro-rata fashion.
There is, however, a way to defeat the “claw back” and that is a “true-sale.” The “true sale” is one for full value, to a non-related party. It works like a bankruptcy firewall and creates a legal theory called “bankruptcy remoteness.” So these smart ducks in NY, who put together these deals that are really good reading material when you can’t get to sleep, plugged in a “middle man” if you will. They sold all the loans to this duck, and he then sold them to the trust. They even went so far as to write this duck into the deal, by name. His only purpose is so, Gawd forbid, somebody like Countrywide, Indymac, Longbeach, Ocwen…………..go down the tubes, then that trouble maker (mentioned above, the trustee) wouldn’t be able to reach into the fine NY trusts and grab back the assets.
If, of course, a Trustee did try reaching into one of these fine investment vehicles, they would likely find what Sir Stephen Hawkins has referred to as a Black Hole. Or as we say down here, an empty pond.
Got me?
I’m still not grokking this. If the set of necessary and sufficient conditions for remoteness is one true sale, why the intermediaries?
It smells more like dodgy arbitrage (or conspiracy, if in a less polite mood) to this layman.
Originator is A.
If you sell directly to the trust, it can be clawed back.
Per Foghorn, you need at least a B, A => B => C (trust) to create bankruptcy remoteness.
For various reasons, the overwhelming majority of recent deals have two intermediary parties, A => B => C => D, with D the trust.
Any requirements on what B may/may not be? If it’s an entity that exists solely for the purpose of creating remoteness, that seems like a sham to me.
Even if it’s an entity with other bona fide reason to exist, could it not be pursued in the case of A’s bankruptcy? If it can’t cough up what’s demanded, then it’s bankrupt, and it’s C’s turn…
I understand the practice out there. I just don’t understand its logic. It seems like “bankruptcy laundering” to me.
BTW, Sorry about that missing closing tag. Hope this fixes it.
Jackson is a syptom of a disease striking a lot of cats in the real estate market and financing; raw fear.
Fear that the mega gravy train will become less than a used Tonka toy ready to be disposed of after Christmas day.
Fear that the extent of the fraud be revealed AND UNDERSTOOD by John Q Public.
That lead to the fear of having John Q Public screaming for an extended show of cretins in orange jump suits heading for the State Forced Vacations Center. They were denied with the big banksters, but not this time…bitchez!
The powers that be in DC are also under the vise grip of fear; they should (and rightly so IMO) be accused of throwing thousands of people in the grinder of unlawful financial practices in the name of “saving the system”, (code word for “protecting our most generous donors”) when it is precisely the time to slaughter the goddamned system and restore sanity, moderation and the rule of law.
Alas, “restore sanity, moderation and the rule of law” is nowadays spin as being a radical communist…exactly when, in the South America of the 50s to the 90s, the oligarchs of the Church agreed with the rich landowners to declare “communists” ergo enemies of the Church (and the State) anyone who would advocate for human rights and civil justice.
I strongly suggest to the actual fats cats to ponder the last paragraph. Look at where is the South American continent today. Many more governments with center-left inclination, (ain’t that scary?) a more equitable distribution of wealth than in the USA (surprised, huh?) and a trending upward in the Human Development Index.
They could do worse…just as we are.
Yves,
One other flaw with the anonymous no-nothings, in this part:
“Look at the argument: all parties to the transaction—the trustee, the beneficiary and the party owning the secured note — all intended to transfer the asset, but perhaps may have failed to follow a procedure for note delivery. The law will always attempt to honor the intent of the parties, so long as no rights of a third party are injured. In this case, all of the parties to the transaction agree on intent, and no one is injured.”
The third party who has been injured is the borrower. Their title is likely clouded. If in foreclosure or bankruptcy they face suit by parties they are not obligated to, etc. When signing the original note the borrower explicitly agreed to be bound by all other future assignments of the note and thus were a party in all on-going transactions involving the note. This argument, as others have made previously, appears to treat mortgages and notes within the same realm as chattel. It doesn’t work that way (as the banks have found out) in the courts. I have yet to see a case where the plaintiff forecloser attempts to make the explicit chattel argument, yet in articles (anonymous or otherwise) we see this argument raised again and again.
Thx for calling this guy’s sh1t talking out Yves. If there wasn’t a real problem these banks,servicers etc.. wouldn’t be resorting to felonies on a this large of a scale. It defies logic to thinks this is a little oops.
We know fraud happened on a large scale. I think it is time to question the “why?”
All these note endorsement and assignment issues can be cured with parole evidence. Emails, certified mail receipts, wire transfer statements, affidavits of witnesses to the transaction etc etc etc…
Instead we have thousands of forgeries and perjuries. No evidence ANY note was conveyed or assigned properly out of MILLIONS!
WHY? WHY? WHY?
There should be plenty of evidence to prove the transaction but there is none…
WHY?WHY?WHY?
Indio007,
You ask why? Because Ferrari keeps changing the car – year after year. Because the neighbor just bought a Trinity Yacht 10 feet bigger than mine. Because my wife didn’t make the cut on the “Real Housewive’s of Beverly Hills” this year. Because our house in Greenwich, our Brownstone on Park Avenue, our Chalet in Aspen and our spot in St. Bart can only be reached by G5. Because the Swiss outed where we were hiding money, so now we have to pay taxes, so we have to make twice as much. Reasons, trillions of them. Probably more, I just don’t know what comes after a trillion. I suppose the Treasury will teach us a new term in the new year.
Thanks for your efforts on society’s behalf. Maybe someday some will go to jail for their actions.
‘So physical possession IS a requirement for the investors to have the rights they were promised, that they bought “mortgage backed securities” since in 45 of 50 states, if you are not the holder of the note, you cannot enforce the mortgage (the lien on the property)’
This article and string is such great dialogue that I’m almost afraid to ask such a basic question, but here goes–which 5 states do not require the enforcer to be the holder of the note?
Keep up the great work in holding their feet to the fire, Yves!
I’m a lay trustee of a UK Pension Fund and only came on this wonderful site recently. There are two things I don’t understand:
1) As a billion dollar pension fund, our assets are held by one or more custodians. We don’t have physical possession. (Probably just as well because Iron Mountain had a fire at one of their depositories and incinerated all our old documents). But can’t the earlier parties in the chain claim to be acting as custodians of the paper?
2) I don’t claim to understand what auditors consider important or trivial, but I know that our internal and external auditors spend a lot of time (and our money) investigating that the assets we think we hold are really in our possession. Surely there must be some auditors who have screwed up on an Anderson-like scale?
Keep up the good work!
Hi Westwinds,
I’m sure I’m even more “lay” than yourself, but here is what Yves and her cohorts have turned up:
“1) As a billion dollar pension fund, our assets are held by one or more custodians. We don’t have physical possession. (Probably just as well because Iron Mountain had a fire at one of their depositories and incinerated all our old documents). But can’t the earlier parties in the chain claim to be acting as custodians of the paper?”
It’s fine to name a custodian, and for the trust not to have physical possession, but the notes were not formally signed over to the next party. In this case, there is no formal legal possession, as well as no physical possession — and the terms of the trust (Pooling and Servicing Agreement) does not permit you to transfer ownership after a (typically) 90-day period after the agreement.
They assigned them over using the electronic database MERS, if even that. And MERS itself has no legal standing, and at best has sloppy book-keeping. From the foreclosures happening, it looks like the same note was sold to multiple trusts in some cases, making a strong case for the physical transfer of notes.
“2) I don’t claim to understand what auditors consider important or trivial, but I know that our internal and external auditors spend a lot of time (and our money) investigating that the assets we think we hold are really in our possession. Surely there must be some auditors who have screwed up on an Anderson-like scale?”
Banks did sampling of loans and used that as leverage against the price of the assets they were buying. They didn’t give the results of their sampling to the investors who bought shares of the security. Some securitizations didn’t pass individual loan data on to their investors, to which you might say caveat emptor. The investors bought into these dodgy securities because the banks paid ratings agencies to give these securities AAA rating.
Successful litigation has happened where banks withheld the fact that banks could bet that the security would fail.
Let’s assume Yves is right. Suppose every single securitization of the last ten or fifteen years violated the terms of the trust. Suppose nobody can find a single original note and nobody holds a valid assignment of an original note. Does that mean nobody has a right to foreclose, or does it perhaps mean that in every foreclosure proceeding every party to the securitization process must be joined as a plaintiff?
I would join them as a defendant. The question that I have is whether the person purporting to hold the note can just force the mortgagor into bankruptcy in order to make the outcome final and force the joinder of anyone with a claim. It would neatly accomplish the task at hand, it seems to me. Of course, that’s not my area. . . .it’s just me thought.
This is a bit of a mischaracterization. Not sayin’ they can’t find the notes in all or even many cases. Sayin’ the note is with the wrong party, which creates big time problems.
The party that holds the note (possesses and can show ownership via how the note is endorsed) is the one that can foreclose. If that is not the trust, which appears to be true in a lot of cases, that is a monster problem. No one wants theh party that really can foreclose (even assuming they can, if it got hung up with a BK’d entiity, that creates a further layer of complexity) to foreclose because it needs to be the trust. And the way the securitization was set up makes it pretty much impossible to convey the notes to the trust at this late date.
Sleeweed, you noted correctly that in 2009 Mr. Jackson “reacted in the same way” by using a “news story” and his publication to defend LPS. But Jackson goes so unbelievably far in touting his integrity that one has to seriously question it. And sleeweed, you hit the nail on the head. Right on it. Yves and Richard thank you for your columns. And I learn a lot from the responses of such a knowledgable following.
No lawyer I, but it is surprising that bondholders cannot apply to the courts to have the securitization trustees set aside as having manifestly failed in their duties. That should allow a new set of Trustees to be appointed with a wider brief that must now include patching the errors of the deposed trustees, for instance receiving ‘late’ or ‘defaulted’ endorsements.
In general this concerns trust law, real estate law and securities law (as in ‘my word is my bond’); I am surprised we are not hearing more about securities laws. If I wanted to replace Trustees, I would try enlisting the support of the SEC who should be very angry about imperfect, not to say fraudulent, securitizations.
Yves, setting aside the fact that we are not permitted to ask Paul for a clarification of HIS opinion, we note his emphasis in his reply to your reply, upon “intent”.
Please, correct me if we are wrong, but is it not true that the problem with the Trust’s transactions AND with the MERS system is that they had the specific intent NOT to transfer the document OR legal title? Is that not what MERS was create to not do?
And, if “intent” is Paul’s way of re-invalidating and/or re-invigorating his putative Defense of the un-defendable shell game that they were playing, does not his house of cards (no puns intended) flop? As in all fall down.
After reading all this, I couldn’t help but wonder about “Bankruptcy Remoteness”, when all the PSA’s I’ve seen/read have sales consideration of only $10.00US for each of the various transactions?
Ten bucks doesn’t seem quite parity for a pool of notes worth $1.2 billion or so, even on a commission basis.