Earlier this week, we discussed how several measures proposed in Virginia would have the effect of redressing the power imbalance between banks and borrowers in the foreclosure process. One would give borrowers more time to mount defensed (Virginia has one of the fastest track processes in the US); another would require judicial approval for a foreclosure to become final. But the farthest-reaching proposal would force banks to maintain accurate property records in local government offices, which would end the use of MERS in that state.
Not surprisingly, the industry is not about to let this go down without a fight. Rep. Donald Merricks, who is also a bank board member (apparently of Virginia Bank & Trust) proposed House Bill 1718. It was due to come up for “check vote” today, which is a preliminary tally of support, but it was “pulled” meaning the bill is still pending but the check vote has been deferred.
This is a serious undertaking. The bill proposed to change Virginia’s Uniform Commercial Code, which is a set of provisions not to be tampered with lightly. The irony here is that this is an outcome we have warned about in our earlier discussion of the Statute of Frauds of 1677, that basic practices to prevent abuses in contracts and in courts might be gutted to give the banks a free pass on their mortgage mess.
These proposed changes in the UCC are a bit above my pay grade (I’ve looked at some sections of the UCC before, but this is not one of them), so informed reader input is encouraged. However, I am told that these proposed changes would have the effect of authorizing transfers in blank in Virginia. That in turn would (in theory) allow banks to claim that an blank endorsement by the originator would allow the trust (who is usually the fourth party or later in a chain of transfers) to assert ownership, skipping over the problem that the intermediary transfers appear seldom to have happened. The banks clearly view endorsement in blank plus a claim that the PSA itself effected the transfer to the trust as a “get out of fuckup free” card; the American Securitization Forum has argued that position stridently (we’ve shredded it in numerous posts, see here and here for examples).
I’d be curious to get confirmation that these language changes would produce that result. At the same time, I’m not certain that even if it did that it would save the banks’ bacon. Article 1 of the UCC allows parties to contract out of the provisions of the UCC. Pooling and servicing agreements clearly contemplated a far more specific set of steps that set forth in the UCC, and for good reason. The parties wanted the intermediary transfers to take place to establish bankruptcy remoteness. That means if an originator like New Century went bust, the investors did not want creditors of New Century to be able to claw loans back from their securitization. So it was necessary to launder the funds and the notes through at least one, and the state of the art soon became at least two, entities between the originator and the trust to protect investors from the risk of an originator failing. The other more exacting requirements of the PSA were to assure compliance with the Federal tax rules governing real estate mortgage investment conduits, aka REMICs.
Judges have seldom been asked to look at PSAs; many foreclosure defense lawyers don’t go there (not clear whether due to lack of knowledge or lack of necessity) and judges will in the absence of having the issue brought up by counsel, will tend to assume the UCC is germane. But both plaintiffs and defendants are upping their game, so I would expect more foreclosure defense attorneys to start pointing to the PSAs on securitized deals as setting forth the requirements for proper conveyance.
Regardless of how the legislative jousting plays out in Virginia, it is clear that the Massachusetts Supreme Judicial Court Ibanez decision has focused the mind of the securitization industry. But it even though it is moving out of the denial stage, its efforts to evade responsibility and gut well settled law to shift liability on to others is deeply troubling.
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“In the particular is contained the universal.”
– James Joyce
Yves, you are quite right to be troubled. You used the words “..well settled law.” Those are no small words and think of the conflict it took to in fact settle that law. It’s actually staggering. Yet one (or more) weak man can attempt to unravel it – or lay seige to it. The fulcrum is the right and equity and in the balance are literally lives of people as well as a societal bearing that our culture must re-adopt or ignore and by so, consent, to our dishonor and peril. The Banks have erred grievously. Our leaders mustn’t allow that error to re-codify our boundaries and besmirch the cavalcade of hard won agreements that will permanently mar the truth and goodness of the laws of our land.
I thought the rule of law was pretty well trampled back in late 2008 but maybe we get to see more smoke, mirrors and POOF, the banks problems are gone.
So again, who owns the banks and why are they allowed to set social, political and economic policy and law?
It is way past time this stopped.
I think States are prohibited by the Constitution from altering contracts. An ex post facto change in the UCC to accomodate the hiding of the chain of title in land contracts would be such an event. The banks should be closed, the leaders kicked out and the power structure of the government and political class of the United States given back to the people. I believe that bank charters have become titles of nobility, also prohibited by the constitution. No one else can lend what they don’t possess or own. Also, I was taught in the school of finance that money and capital were to be separate from each other and here we are with monetized mortgages. This was an extreme financial and economic error made to enable a few to make a lot of money and bankrupt the middle class.
I do believe there is a lot of resistance to people getting free homes. But, I think there is a lot of support to the players taking their losses. The borrower has little control over loans made by banks. They have no control over the chain of title that emanates out of the transfer of paper between parties in securitization. Only a financial system can blow a bubble with borrowed funds and it was this bubble that now has the majority of Americans with a mortgage under water. I have read here or somewhere else that of the homes mortgaged with the $10.5 trillion in debt, there is only about $1 trillion in equity, not enough to pay the sales costs of the entire lot. People that finance with nothing or 5% down do so quite often because they don’t have more to put down. The idea most of these people could afford to sell with the current level of debt is absurd. I was in DFW when the market was overbuilt with speculative loans back in the 1980’s and once houses quit going up, there was no relief for those that needed to sell and we had as many foreclosures then as there have been in a market 50% larger. There is history that shows that this is what happens when prices merely quit going up on high leverage loans. Throw in deferred interest and buy down loans and it gets even worse. Falling interest rates didn’t save the DFW market in the 1980’s either, despite hundreds of thousands moving into the area.
I don’t know much about the Virginia legislature. (I recall that they had some vote which was hostile to offshore drilling, long before the Gulf Oil Eruption.) But the chronology of this sounds like the assertive move, hopeful of success, was the bank-unfriendly bill, while this bank-friendly bill is a response to that stimulus. If so, does that mean this assembly is not notably bankster-friendly? (Since otherwise why didn’t the bank-friendly forces take the initiative?)
(BTW, with regard to this proposal and to most bankster actions in general, the most relevant charge at the original Nuremburg tribunal would be Count One, a Common Plan to commit Crimes Against Peace, in this case to overthrow and destroy “political independence” and “sovereignty”.
Of course at any New Nuremburg we’d be more specific about the financialization Common Plan.)
One thing about the PSA emphasis on setting it up so that it’s bankruptcy-remote: Doesn’t this mean that they were already contemplating the mass bankruptcy of these originators years prior to 2007? As the banksters themselves keep saying, “Why would we impose these alleged extra requirements on ourselves that we didn’t have to?” Why indeed?
In other words, doesn’t the very rigor of the PSAs, the obsession with bankruptcy remoteness, implicitly prove the charge that all these mortgages were fraudulently induced, since it evinces that the banksters knew this was a bubble that would eventually burst?
I’ll defer to others with more hands-on experience than me, but I believe bankruptcy remoteness is a fairly standard feature of most securitizations, regardless of the underlying assets that produce the cash flows.
The securitized assets need to be shielded from creditor claims in the event of a bankruptcy by the originator or other parties. Otherwise, it would be much harder to get investors.
I don’t believe this is especially unique to residential mortgage-backed securitie (RMBS) or that it signifies anything related to the proposed Virginia bill or RMBS in general.
Mannfm writes: “I think States are prohibited by the Constitution from altering contracts. An ex post facto change in the UCC to accomodate the hiding of the chain of title in land contracts would be such an event.”
I’m not so sure about that. The banks would argue that the changes proposed to the UCC do not alter existing law, but instead clarify that law where uncertainty (whether blank endorsements are allowed) currently exists. The banks seem to have an inordinate interest in the UCC line of argument, and as far as I can tell the courts have not addressed this directly and instead have punted their foreclosure suits on different grounds.
The banks have obviously been looking for a quick and dirty solution to their dilemma for some time now, and if they have come up this UCC modification they must believe it has a chance of succeeding. As a follow-up, I expect the banks to present these changes to the UCC generally and hope that all the states adopt it.
The UCC isn’t a contract, it’s a series of gap-fillers. Where a contract is silent on term X, the UCC steps in and provides the terms for a court to construe the contract. So the contracts clause shouldn’t be implicated (and a whole body of common law on contracts had to abrogated in order to pass the UCC in the first place; since the UCC wasn’t deemed unconstitutional, we can infer that changes to the body of law covered by the UCC don’t implicate the contracts clause and aren’t unconstitutional)
There seem to be three notable changes contemplated by the bill, one of which is pro-consumer, one of which is pro-bank, and the other seems to be about guarantors (it’s long and boring, so I’m not wading in).
Pro-bank: in order to enforce a lost note, previously a bank or trustee had to prove they had lawful right to enforce the note, possessed the note, and can’t reasonably track it down. The law changes the possession requirement to a requirement that the party seeking enforcement “directly or indirectly acquired ownership” from another party entitled to enforce the note. What this seems to do, then, is codify transfer by assignment. A bank doesn’t have to show that it possesses or possessed the note; they just have to show the PSA schedule showing transferring the notes (as well as the schedules for all intermediary assignments. It’s a bit like Ibanez: if the bank can show all the assignment contracts from originator to trustee, they can enforce the note)
Pro-consumer: when a note is transferred from bank A to bank B, the borrower’s payments are considered good if paid to bank A until and unless the borrower gets actual notice of the transfer. IIRC, the common law rule is that the paying to a transferor bank, even if no notice was received of the transfer, is still default if the transferee bank doesn’t actually get the payment.
Ibanez never said the PSA and loan schedule could effect a transfer. We’ve discussed this point at length, repeatedly in previous posts on Ibanez. Bank industry types have been taking language from the decision out of context to try to mislead investors and the broader public. This Virginia bill is an effort to pre-empt an Ibanez-type decision.
From an earlier post:
Immediately after the Ibanez ruling, in which two foreclosure actions were voided due to the failure of the servicers to prove that the trusts who allegedly owned the mortgages had standing, the American Securitization Forum issued a press release that said:
Even odder, people who ought to know better, ranging from Amherst Securities to FT Alphaville, are uncritically parroting the ASF party line.
Let’s look at what the decision actually says.
First, note the use of the word “may”. This is hardly definitive, it can be read in isolation as the the SJC saying this was arguable (as in “may” = “does”) or that they had considered the argument but were not reaching a firm conclusion.
But you can’t even make the more aggressive reading of that sentence, since the next one states:
And later, the ruling states:
This certainly seems to say the chain of title represented in the PSA must be followed by the actual mortgage documents if you want to use the PSA as evidence of standing. Since this appears almost never happened, it will prove quite difficult to cure. For the depositor to record the assignment into the trust to “cure” the standing, the depositor must show how he got title, and so on.
So we are back to square zero, which is needing to look at the chain of assignment and whether the parties that made the assignment were “holders” which generally requires both physical possession and valid ownership.
http://www.nakedcapitalism.com/2011/01/asf-lies-yet-again-brazenly-asserts-that-ibanez-ruling-validates-reliance-on-psa-for-transfers-blank-assignments.html
And the arguable “pro-consumer” point seems to have very limited applicability, while the effort to have the loan schedules to the PSA effect transfer is a major “get out of monster liability free” card for banks.
My interpretation of the UCC is that blank indorsement is already allowed, and I’ve seen nothing within the code that would eliminate the negotiation of promissory notes into a trust via blank indorsement. Such restrictions may be imposed in other statutes but I am not aware of any.
In my lay opinion the pertinent sections of the UCC are:
§ 3-201. NEGOTIATION.
(a) “Negotiation” means a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder.
(b) Except for negotiation by a remitter, if an instrument is payable to an identified person, negotiation requires transfer of possession of the instrument and its indorsement by the holder. If an instrument is payable to bearer, it may be negotiated by transfer of possession alone.
and
§ 3-205. SPECIAL INDORSEMENT; BLANK INDORSEMENT; ANOMALOUS INDORSEMENT.
(a) If an indorsement is made by the holder of an instrument, whether payable to an identified person or payable to bearer, and the indorsement identifies a person to whom it makes the instrument payable, it is a “special indorsement.” When specially indorsed, an instrument becomes payable to the identified person and may be negotiated only by the indorsement of that person. The principles stated in Section 3-110 apply to special indorsements.
(b) If an indorsement is made by the holder of an instrument and it is not a special indorsement, it is a “blank indorsement.” When indorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer of possession alone until specially indorsed.
(c) The holder may convert a blank indorsement that consists only of a signature into a special indorsement by writing, above the signature of the indorser, words identifying the person to whom the instrument is made payable.
(d) “Anomalous indorsement” means an indorsement made by a person who is not the holder of the instrument. An anomalous indorsement does not affect the manner in which the instrument may be negotiated.
In both 3-201 and 3-205 above part (b) expresses that when indorsed in blank the instrument becomes bearer paper and negotiation is effectuated by delivery alone.
I have been reading more of this, and another similar argument, in the past several weeks. I consider it to be a legal theory that as yet has not been articulately argued or decided.
Professor Adam Levitan is clearly a person of great knowledge and has espoused the view that PSA’s, through the following language, require “the original Mortgage Note bearing all intervening endorsements showing a complete chain of endorsement from the originator to the last endorsee” (http://www.creditslips.org/creditslips/2010/12/fisking_the_asf.html).
I have read a small number of PSA’s (20-30) and have not encountered that language in any of them. I do not doubt that some do include it but apparently it is not standard, or boiler plate, language.
But further even if that language is included it seems that satisfaction of the word “all” may be met by the use of a single blank indorsement. As shown above once indorsed in blank an instrument becomes bearer paper and negotiation per UCC 3-201(b) and 3-205(b) is by delivery alone.
I am anxious to see this issue decided. In fact I am hopeful that my interpretation proves to be erroneous.
Amp,
I think your largely correct. Property law has always been a creature of state law and the UCC isn’t applicable. When a bank can’t prove it is the holder of the lien or has title (in title states) under state real estate law due to not possessing the note. They then put forth an assignment argument asserting they are the last recipient of the assignment of this note, via the PSA, when the note was assigned to the trust.(i.e. they are contractual privies of the originator). However, this argument is poorly conceived because state law dictates transfers of property. Moreover, they aren’t privies of the originator due to the blank assignment as they haven’t been conveyed an interest in the property under contract or real estate law. They won’t get a chance to make the UCC argument as its not applicable. no assignment , no standing. Hence, the proposed legislation won’t offer a fix.
Even if the UCC were applicable, the UCC blank assignment clause referenced by an earlier poster, I don’t believe, could be allowed to be employed for a two reasons: 1. there is no ambiguity in the contract language. A blank assignment is no assignment. The UCC only allows addition of a term if there is ambiguous terminology. The PSA requires conveyance to the trust as a predicate to the PSA’s operation/applicability. The bank has no standing under state law or the PSA. This is not an ambiguous term its a fatal defect as the bank can’t show the most rudimentary thing, that it has any property interest to invoke the court’s jurisdiction, no right to redress, otherwise known as standing. 2. Even if one could argue the bank had standing to bring the suit, The home owner was not a party to the writing of the PSA and my understanding of contract law is that a court would not fill in a blank assignment for a bank that didn’t follow the language of its own contract (one it had power to draft) to the detriment of the home owner who had no ability to affect the drafting of the contract.
The issue with blank endorsement is that the ASF is trying to use endorsement in blank to argue that it effected transfer to a trust, when conveyance (actual delivery) which is also necessary for a transfer to have taken place with a negotiable instrument either never took place or took place after the foreclosure started. If you are going to rely on endorsement in blank, you need delivery.
And the PSA called for intermediary transfers, so trying to rely on the PSA as some sort of fix for the failure to convey to the trustee is dubious too
Should have provided more background, I keep forgetting how many legs this argument has
All you smart people out there are confusing me.
If a state as title laws, and those laws wheren’t followed, then who cares about the UCC or PSA? If they didn’t follow those laws, and the notes where not endorsed properly, then why argue about UCC or PSA?
Just want to understand.
The UCC is state law (most states implemented the UCC in full form, a few states have minor tweaks in the language) and the PSA is contract. The question is which should be the guide to determining whether the loans were transferred properly. Since the UCC specifically allows for parties to contract out of relying on the UCC, and that appears to be the intent of the PSA, it appears reasonable to look to the PSA rather than the sections of the UCC that cover conveyance.
They are trying to usurp our established set of land record rules. Are we going to let them?
Our land records was one of the first rights the founding fathers set to establish…so fierce was their right to own property.
If you mess with the land records, we will no longer consider pitchforks a useful weapon.
The question would be, more precisely, can the UCC override the Statue of Frauds? I am not a VA lawyer, but I am a Mass. lawyer and here are the relevant MA/VA laws:
MA Law: Fourth, Upon a contract for the sale of lands, tenements or hereditaments or of any interest in or concerning them; or,
Unless the promise, contract or agreement upon which such action is brought, or some memorandum or note thereof, is in writing and signed by the party to be charged therewith or by some person thereunto by him lawfully authorized.
VA law: 6. Upon any contract for the sale of real estate, or for the lease thereof for more than a year…
The VA Supreme Court writes: The essential terms to a contract for the sale of real estate include “the names of the parties, the terms and conditions of the contract, and a description of the property sufficient to render it capable of identification.” Reynolds, 187 Va. at 108, 46 S.E.2d at 9. and: Additionally, where parties intend to culminate their agreement with a signed contract, there is a strong presumption that no contract exists until a contract is formally signed and in writing. Atlantic Coast Realty Co. v. Robertson, 135 Va. 247, 253-54, 116 S.E. 476, 478 (1923). Overcoming such a presumption requires “strong evidence.” Andrews v. Sams, 233 Va. 55, 58, 353 S.E.2d 735, 737, 3 Va. Law Rep. 1900 (1987).
That is virtually the same as Mass.. In Mass., as one gathers from Ibanez, the SJC adheres to and respects the old laws as they have stood the test of time. The VA court, from my brief research,seems to do the same.
One could argue that there is a conflict of laws here. There are varied ways to resolve such conflicts. One is to look at which law is older and the court will presume that the legislature knew about the older law and, if they wanted to override it with the new law, would have clearly done so in specific ways. The answer here is clear. S of F wins.
Another way is to look at whether one law handles a specific area and the other law handles a general area. Here, as written, that answer is fairly clear. S of F wins.
The only way the UCC can ever win is if the legislature specifically changes it to defeat the S of F. That would be a seismic shift away from over 300 years of law. Maybe VA will get away with it but I really have a hard time seeing Mass. doing so.
That doesn’t even address the issue of whether or not they will apply it retroactively of proactively. They cannot just apply it retro for a few years (equal protection/due process make that impossible); so every real estate transaction that has happened is now playing under new rules.
That is, as they say in Ghostbusters, a giant roach: ‘that will bite your head off.’
This bill won’t legitimize assignments of mortgages/deeds of trust “in blank”. It looks to me like they are trying to close off any claim that the promissory notes of borrowers are non-negotiable for starters. It also seems they are trying to fix certain lost/destroyed note problems.
The reading I got after the post went up was that this was an attempt to forestall Ibanez-type decisions, but that this bill was not well though out enough to do the trick.
Aren’t they really trying to legitimize the MERS records that already exist? There is other legislation currently making rounds in the VA assembly to in effect kill off MERS recognition in VA.
If they legitimize MERS records in VA, then wouldn’t all such records in their database be legitimate? And since VA is home to MERS couldn’t such records then be printed out as legitimate copies regardless of their state source? In effect creating a mortgage laundering operation in VA?
I have to think that the banks are going to do whatever they have to to assure that the assignments were legal. If they were not and the trusts never hade legally assigned notes then the exposure is huge.
This bill is definately targeted at Ibanez and MERS.
Wonder what other states they are trying this in? I’m betting this is a national strategy.
My hopes are not high for VA.
The speaker sits on the board of a bank.
The chairman of the courts committee (Albo) got 12% of his 2010 funds from the VA Bankers Association.
Merrick was a banker for 25 years and sits on the board of a bank.
It probably not just Virginia. The whole bipartisan effort to eliminate business regulations comes at a very convenient time, doesn’t it?
Amp & Stupendous,
Amp is largely correct. Property law has always been a creature of state law and the UCC isn’t applicable. When a bank can’t prove it is the holder of the lien or has title (in title states) under state real estate law due to not possessing the note. They then put forth an assignment argument asserting they are the last recipient of the assignment of this note, via the PSA, when the note was assigned to the trust.(i.e. they are contractual privies of the originator). However, this argument is poorly conceived because state law dictates transfers of property. Moreover, they aren’t privies of the originator due to the blank assignment as they haven’t been conveyed an interest in the property under contract or real estate law. They won’t get a chance to make the UCC argument as its not applicable. no assignment , no standing. Hence, the proposed legislation won’t offer a fix.
Even if the UCC were applicable, the UCC blank assignment clause referenced by an earlier poster, I don’t believe, could be allowed to be employed for a two reasons: 1. there is no ambiguity in the contract language. A blank assignment is no assignment. The UCC only allows addition of a term if there is ambiguous terminology. The PSA requires conveyance to the trust as a predicate to the PSA’s operation/applicability. The bank has no standing under state law or the PSA. This is not an ambiguous term its a fatal defect as the bank can’t show the most rudimentary thing, that it has any property interest to invoke the court’s jurisdiction, no right to redress, otherwise known as standing. 2. Even if one could argue the bank had standing to bring the suit, The home owner was not a party to the writing of the PSA and my understanding of contract law is that a court would not fill in a blank assignment for a bank that didn’t follow the language of its own contract (one it had power to draft) to the detriment of the home owner who had no ability to affect the drafting of the contract.