There’s a great post up by Georgetown law professor Adam Levitin on the implications and misreading of two mortgage decisions last week, the Massachusetts Ibanez case and Harp in Maine. Here are key sections:
Ibanez means that to foreclosure in Massachusetts, a securitization trust needs to prove:
(1) a complete and unbroken chain of title from origination to securitization trust
(2) an executed PSA
(3) a PSA loan schedule that unambiguously indicates that association of the defaulted mortgage loan with the PSA. Just having the ZIP code or city for the loan won’t suffice. (Lawyers: remember Raffles v. Wichelhaus, the Two Ships Peerless? This is also a Statute of Frauds issue–the banks lost on 1L contract issues!)
I don’t think this is a big victory for the securitization industry–I don’t know of anyone who argues that an executed PSA with sufficiently detailed schedules could not suffice to transfer a mortgage. That’s never been controversial. The real problem is that the schedules often can’t be found or aren’t sufficiently specific. In other words, deal design was fine, deal execution was terrible. Important point to note, however: the SJC did not say that an executed PSA plus valid schedules was sufficient for a transfer; the parties did not raise and the SJC did not address the question of whether there might be additional requirements, like those imposed by the PSA itself…
So what does this mean? There’s still a valid mortgage and valid note. So in theory someone can enforce the mortgage and note. But no one can figure out who owns them…Ibanez did not address any of the trust law issues revolving around securitization, but there might be problems assigning defaulted mortgages into REMIC trusts that specifically prohibit the acceptance of defaulted mortgages. Probably not worthwhile risking the REMIC status to try and fix bad paperwork (or at least that’s what I’d advise a trustee)….
The Street seemed heartened by a Maine Supreme Judicial Court decision that came out on Friday, Harp v. JPM Chase. If they read the damn case, they wouldn’t put any stock in it.
In Harp, a pro se defendant took JPM all the way to the state supreme court. That alone should make investors nervous–there’s going to be a lot of delay from litigation. Harp also didn’t involve a securitized loan. But the critical difference between Harp and Ibanez is that Harp did not involve issues about the validity of chain of title. It was about the timing of the chain of title. Ibanez was about chain of title validity. In Harp JPM commenced a foreclosure and was subsequently assigned a loan. It then brought a summary judgment motion and prevailed. The Maine SJC stated that the foreclosure was improperly commenced, but it ruled for JPM on straightforward grounds: JPM had standing at the time it moved (and was granted) summary judgment. Given the procedural posture of the case, standing at the time of summary judgment, rather than at the commencement of the foreclosure was what mattered, and there was no prejudice to the defendant by the assignment occurring after the foreclosure action was brought, because the defendant had an opportunity to litigate against the real party in interest before judgment was rendered. The Maine Supreme Judicial Court also indicated that it might not be so charitable with improperly foreclosing lenders that were not in the future; JPM benefitted from the lack of clear law on the subject. In short, Harp says that if the title defects are cured before the foreclosure is completed, it’s ok. There’s a very limited cure possibility under Harp, which means that the law is basically what it was before: if you can’t show title, you can’t complete the foreclosure…
Which brings me to a critical point: Ibanez and Harp involve mortgage chain of title issues, not note chain of title issues. There are plenty of problems with mortgage chain of title. But the note chain of title issues, which relate to trust law questions, are just as, if not more serious. We don’t have any legal rulings on the note chain of title issues. But even the rosiest reading of Ibanez cannot provide any comfort on note chain of title concerns.
So who loses here? In theory, these loans should be put-back to the seller. Will that happen? I’m skeptical. If not, that means that investors will be eating the los…. Going forward, though, I don’t think there’s a such thing as a good faith purchaser of REO in MA.
You can’t believe everything you read. Some of the materials coming out of the financial services sector are simply wrong. Three examples:
(1) JPMorgan Chase put out an analyst report this morning claiming the Massachusetts has not adopted the UCC. This is sourced to calls with two law firms. I sure hope JPM didn’t pay for that advice and that it didn’t come from anyone I know. It’s flat out wrong. Massachusetts has adopted the uniform version of Revised Article 9 of the UCC and a non-uniform version of Revised Article 1 of the UCC, but it has adopted the relevant language in Revised Article 1. There’s not a material divergence in the UCC here.
(2) One of my favorite MBS analysts (whom I will not name), put out a report this morning that stated that Ibanez said assignments in blank are fine. Wrong. It said that they are not and never have been valid in Massachusetts:
[In the banks’] reply briefs they conceded that the assignments in blank did not constitute a lawful assignment of the mortgages. Their concession is appropriate. We have long held that a conveyance of real property, such as a mortgage, that does not name the assignee conveys nothing and is void; we do not regard an assignment of land in blank as giving legal title in land to the bearer of the assignment.
A similar line is coming out of ASF. Courtesy of the American Banker:
Perplexingly, the American Securitization Forum issued a press release hailing the court’s ruling as upholding the validity of assignments in blank. A spokesman for the organization could not be reached to explain its interpretation.
ASF’s credibility seems to really be crumbling here. It’s one thing to disagree with the Massachusetts SJC. It’s another thing to persist in blatant misstatements of black letter law.
(3) Wells and US Bank, the trustees in the Ibanez case, immediately put out statements that they had no liability. Really? I’m not so sure. Trustees certainly have very broad exculpation and very narrow duties. But an inability to produce deal documents strikes me as such a critical error that it might not be covered. Do they really want to litigate a case where the facts make them look like such buffoons? Do they really want daylight shed on the details of their operations? Indeed, absent an executed PSA, I don’t think the trustees have any proof of exculpation. They might be acting, unwittingly, as common law trustees and thus general fiduciaries. I think they’ll settle quickly and quietly with any investors who sue.
You can read the full text of this worthwhile post here.
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Ouch!
http://blogs.reuters.com/christopher-whalen/2010/10/20/everything-that-americans-once-knew-about-home-mortgages-but-should-ask/
Collateral follows the debt…
Ultimately it is important for Americans to learn how mortgages are priced and sold, both to borrowers and investors alike. There are big legal problems now being exposed in this multi-trillion dollar industry, a financial sector which is essential to the economic well-being of the U.S. For example, what happens to the investor in a mortgage backed security if the underwriter fails to deliver the mortgage note to the trustee? This is just one issue that will be litigated by the banks, investors and housing agencies in Washington for years to come.
But the most important thing for all consumers to understand is that when a mortgage is in default, the fact that the title records at the court house are in disarray does not void the mortgage note nor does it change the fact that the loan is bad. Foreclosure is a tragedy for one family, but an opportunity for another and the means by which communities and financial institutions defend their tax base and financial health. This process of liquidation and sale is why the U.S. will recover from the housing mess.
The bad guys in the housing bust are not the banks who must foreclose on homes, but the politicians in both political parties who used reckless housing policies to further their personal interests. This is a bipartisan national scandal. Barney Frank, Chris Dodd, Phil Graham, Alan Greenspan and their contemporaries are the authors of our collective misery, not the local banker who must clean up the mess created by government intervention in the housing market.
Yes, the invisible hand is godly, sacrosanct. So the clenched fist of the government must be to blame.
I mean, really, we’ve all been witness to how heavyhanded the government is in manhandling the TBTF banks.
Whalen has gone utterly out of his mind. The part you excerpted reads as if he has not read a single thing on the securitization mess.
Politicians had absolutely NOTHING to do with the language of a pooling and servicing or the securitization industry’s utter failure to adhere to the terms of contracts they themselves devised.
And he is also wrong re where this winds up. The mess that the securitization folks created is so bad that in many cases no foreclosure will happen. Go and read the Levitin post as I suggested. I’ve noticed that Whalen does not have a good sense of the limits of his knowledge and too often opines on legal matters without getting having first gotten deeply into the weeds with attorneys who are seasoned in the relevant areas.
The party who has the note OUGHT to be able to foreclose, but that ain’t the trust, and no one wants anyone other than the trust to foreclose. There is no way to assign the mortgage to the trusts now (it runs tons of legal and tax risks, even in cases where that might be possible. Intermediary entities that are bankrupt or liquidated make it impossible in many cases). And there is no way to get the $ from a foreclosure outside the trust to the trust.
Foreclosures outside the trust would be proof that the RMBS were non-mortgage backed securities. The consequences to that market would be devastating. Why do you think the ASF is running such ridiculous arguments to try to claim that everything is fine, nothing to see here? The reality, that many if not virtually all trusts have no clear ability to foreclose if challenged is the what they desperate not to have exposed.
Exactly.
Fortunately, if any member of the Ivy League/Wall Street axis of oligarchy is ever truly at risk, Penny-on-the-Dollar Tim and Buyer-of-Last-Resort Ben will be there to put taxpayer-funded cement overshoes on the securities in question and make sure they never see the light of day again.
Sterling point! Now isn’t that a fair statement that tranche holders have an actionable reps and warranties cause?
Also, what about the chain of title, will the seller of an REO be able to grant a warranty deed? Then, who holds title to the property?
I’m sure you know far more about this topic than I but in reading the Mass case I don’t recall the judge saying the homes can’t be foreclosed upon. One of the judges even prescribed a remedy(mortgage schedule), basically scolding the plaintiffs for being careless and sloppy.
The court’s opinion clearly states that such assignments do not need to be in recordable form or recorded before the foreclosure, but they do have to have been effectuated.
And while I respect Adam Levithan and your opinion you are saying some different things than some other respected opinions such as Chris Whalen, Laurie Goodman and Bill McBride(Calculated Risk).
Your standard sounds like the same one the MSM uses.
You have one person who says something, so you must find another person who says just the opposite. That’s called “balance.”
Of course things like ccoherence, logic, reason, ethics, morality, truth and factual reality don’t even enter into the equation.
I have found that, as a rule of thumb, those on the “other side” of this issue, who are normally well-respected and reliable sources of information, tend not to be lawyers. They don’t seem to understand that looking at this from a legal perspective is the only way it can be looked upon at this point.
The experts who were mentioned are truly experts in their field–there is no doubt about that. But this issue has (necessarily) been passed off to a different field. At this juncture, those three very respected analysts are no longer providing expert analysis on this subject, due to their lack of a background in law.
I also feel that if any of those three mentioned were to sit down and talk with a lawyer who is an expert in this area–all three would “get it.” They haven’t had their light bulb moment yet. But I think they will.
you are saying some different things than some other respected opinions such as Chris Whalen, Laurie Goodman and Bill McBride(Calculated Risk).
I’ve been posting at CR since 2005 (although I don’t post as much since 2008 or so), and feel I “know” him about as well as any other anonymous poster would.
I personally wouldn’t say that CR is saying different things than Yves per se… Instead, he has been more hedging his bets.
the only real difference I’ve seen is that Yves has asserted that she thinks that there are endemic and pervasive problems and errors in the mortgage/securitizatino industry , while CR stipulates that to this point there has been no PROOF that the issue is endemic, and he cannot imagine that the smartest guys in the room would make such a foolish mistake.
I haven’t seen that he disagrees with Yves’ assertions IF Yves were correct about the endemic nature. In fact, I would hazard a guess that he would agree with Yves IF he could be persuaded that the issues are endemic/pervasive (which he is not persuaded at this point).
I also agree with Pearl that CR is stepping outside of his typical “expert” comfort zone here.
I don’t read the other two experts as much.
The Congressional Oversight Panel, five Congressional hearings (four separate committees) and I am told the upcoming FCIC report all endorse the legal arguments made on this blog. And that included die hard Republicans like Richard Shelby, who roasted MERS president R.K. Arnold.
Wailin Whalen –
Barney Frank done it – put him in jail.
Give me a pass – whats a little fraud,
Whats wrong with greed
And, everyone has the right to be stupid – is that a crime?
Anyway, everyone is doing it and I am a TBTF
Big deal.
Oh Barney ..
He made me do it.
What a little fraud.
Whats a little greed
He made me sell junk.
He made me cut corners.
Ohwooo – that dammnnnnnnnBAAAAAAAARNY FRANK –
“Ultimately it is important for Americans to learn how mortgages are priced and sold, both to borrowers and investors alike.”
Fat chance
“The bad guys in the housing bust are not the banks who must foreclose on homes, but the politicians in both political parties who used reckless housing policies to further their personal interests. ”
Yes, pity those poor innocents in the loan origination industry who were too weak to stop creating products they knew would bust and sold to people they knew would fold. Posses of populists came twisting arms.
As part of your list of shame you should have Bush, who, when the FBI presented evidence of widespread fraud, as in felonies, told them to cork it and went back to cutting taxes.
http://www.seattlepi.com/national/397690_fbiweb28.html
“Going forward, though, I don’t think there’s a such thing as a good faith purchaser of REO in MA.”
It may not be quite that bad. My understanding is that this is all old news to the people on the ground in MA, and that all the servicers started cleaning up their act when the original Land Court decision came down. That’s not to say that they CAN clean it up in every instance but they knew, well before the SJC decision, that the land court would clobber them without a valid pre-foreclosure assignment. In marked contrast to the bankruptcy court whose chief justice has for some time been comfortable with the trust agreement assignments the SJC decision described.
Interesting question: Did the folks who owned the house pay the property taxes during the delinquency? If the bank stops paying because it can not foreclose and they pay the taxes they are ok, otherwise the property taxing agency can have a tax sale. So even if you get the mortgage set aside you better pay the taxes or the gov will take the property. In that case there are no chain of title issues involved, the question is simple were the taxes paid? Now one thing is that the government agencies should tighten up the time limits so that after 1.5 years of taxes are unpaid it gets sold. But of course the additional thing is the banks if they have the note, can sue for the balance and force BK on the owner.
Right.. so this is ‘illustration of lawlessness’ article number 2,506… and counting.
We’ve already figured out and had proven to us again and again that title fraud is rampant in this country. Got it.
Now… Where are the PROSECUTIONS? There’s criminal fraud here, people. Where are the perp walks? It’s been three years I’ve been reading everyone’s keveching, and not ONE case of fraud has been brought and prosecuted.
Yves.. You know these ‘people’. What gives?
I’m losing patience. I’m damned tempted to forget about being an honest broker in society and just joining with the criminals. They get rich, I get screwed. Hell with THAT!
Usonian ended with: “I’m losing patience. I’m damned tempted to forget about being an honest broker in society and just joining with the criminals. They get rich, I get screwed. Hell with THAT!”
Unfortunately what got us to the TBTF point is the accumulation of folks like you that decided Hell with THAT and went along with the criminals. It has taken 40+ years but it is hard to see how to go from here to some place positive without lots of pain and adjusting.