At the time of the now famous Ibanez decision, in which the Massachusetts Supreme Judicial Court dealt the securitization industry a not-all-that-surprinsing loss by saying that lenders and servicers had to be able to produce reasonable evidence that the mortgage had indeed been transferred to the party that was trying to seize the house. The court wrote:
When a plaintiff files a complaint asking for a declaration of clear title after a mortgage foreclosure, a judge is entitled to ask for proof that the foreclosing entity was the mortgage holder at the time of the notice of sale or foreclosure…. A plaintiff that cannot make this modest showing cannot justly proclaim that it was unfairly denied a declaration of clear title.
Also note this section of the concurring opinion by Judge Cordy:
Foreclosure is a powerful act with significant consequences, and Massachusetts law has always required that it proceed strictly in accord with the statutes that govern it….The plaintiff banks, who brought these cases to clear the titles that they acquired at their own foreclosure sales, have simply failed to prove that the underlying assignments of the mortgages that they allege (and would have) entitled them to foreclose ever existed in any legally cognizable form before they exercised the power of sale that accompanies those assignments.
We were reminded of an outstanding mystery in the Ibanez case by a story tonight by Abigail Field on the role of carelessness by lawyers in the mortgage mess. She mentions a stunning aspect of the Ibanez case, one that quite a few observers, including yours truly, discussed privately at the time: that neither of the banks involved in the case produced a decent set of transaction documents (US Bank didn’t even provide a copy of the pooling and servicing agreement).
It is hard to convey how surprising this revelation is. If you have participated in any kind of corporate transaction, even at the small business level, your attorney as a matter of course will keep a signed copy of the agreement and any important related documents. The servicers and trustees would know that full well. So why did no one call issuer’s counsel and get the paperwork?
Field puzzles through this lapse and comes up with an incomplete list of possibilities:
So, the issue of partial deal documents that came to light in Ibanez and continues to crop up elsewhere means one of three things:
1. Securitization deals were so carelessly done that, despite all the proper documents being created, closing sets don’t exist.
2. Securitization deals were so carelessly done that not all the proper documents were created (such as lists of the mortgages involved) and so closing sets don’t exist.
3. All the documents and closing sets are fine, and the big banks have grown so incompetent they can’t give their foreclosure attorneys deal documents that they do have or could get from their securitization counsel.
I have trouble with her theories 1 and 2. The firms that did securitizations were white shoe firms, some of them of the cusp of top tier, the others just a wee notch below. And this was a bread and butter business. The donkey work of making sure all the documentation is in order is junior level time, which is marked up fully and thus nicely profitable. There would be no reason for the law firm to scrimp on it, and no reason for the client to want the law firm to cut corners.
MBS Guy has an opinion much more in keeping with mine:
I am even more convinced that the failure of the banks’ attorneys to track down the actual legal documents was not “carelessness”. I find it too hard to believe that the attorneys were this incompetent on an appeal of a major issue to the state’s supreme court. They had plenty of time (over a year).
Every deal I ever worked on had a full set of closing documents prepared in a binder. The issuer’s counsel law firm typically sent all of the documents to us via CD. We had stacks of them.
I suspect the foreclosing attorneys requested the documents and the requests were rejected by clever attorneys for the issuers who saw the potential liability and didn’t want to create a clear paper trail back to them.
If the low level foreclosing attorney looks incompetent in assembling his case, that’s one thing. If a big Wall Street law firm made a major mistake about the legal basis for selling loans without proper title in Massachusetts or any other state, well, that’s a whole different story.
Professor Adam Levitin has similarly pointed out that the major securitization law firms are in a sticky position, since they have legal liability on opinion letters.
But how would that operate? Those opinion letters were in an “if-then” form, “if you followed the steps you set forth, then you have a true sale.” But it now appears that much if not all of the securitzation industry opted, sometime after 2002, to change its procedures for how it handled promissory notes and liens without changing its contracts. That means, as we have pointed out repeatedly, that the parties in the origination process made very specific commitments to investors that they violated repeatedly, as a matter of business practice. Yet astonishingly they didn’t change the agreements to reflect what appears to have been a widespread adoption of new practices. Instead, they let the disparity, and the attendant liability, go unremedied.
It seems inconceivable that some of the players involved did not get counsel’s advice on this issue (I’d be stunned if Goldman didn’t; the firm is obsessed with having legal cover for its actions). But the breakdown was primarily in the custodial/trustee end of the process, which is a particularly low fee activity. So it is possible that the trustees or custodians conferred with their attorneys and did not formally bring issuer’s counsel into the loop. At the same time, these bad practices appear to have become so deeply embedded that I find it hard to believe that everyone on the sell side of these deals did not know what was happening as the new procedures became widespread.
As Field intimates, and I’ve said separately, until we see lawyers disbarred and facing charges, we can be pretty certain that we are only scratching the surface of mortgage abuses. But it is beginning to look like that day is not too far off.
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Incompetent? How about so used to getting their way that… ?
“As Field intimates, and I’ve said separately, until we see lawyers disbarred and facing charges, we can be pretty certain that we are only scratching the surface of mortgage abuses. But it is beginning to look like that day is not too far off.”
What an optimist. Being of a libertarian bent, I follow closely the myriad cases of police shooting unarmed civilians. One never sees true investigations. (One infamous case in Oregon has a report that the person stumbled into a policemen, causing three accidental discharges into the back of the victime).
One never sees questions even RAISED about whether there was any care in issuing the search warrant. One never even see the issue raised of benefit of Swat deals for drug raids that net noting or just small amount of marijuana. The idea that the Florida Supreme court has to remind JUDGES to actual follow the law proves that our “legal system” is a farce, designed to generate so much paperwork, that any malfeaseance can be ascribed to “error” or to take so long that people give up.
Yes, I am sure there will a few jurior lawyers somewhere disbarred. If you find one prosecuted for mortgage fraud(I will not even demand he be convicted) I will donate 100$ to your site. I hope I lose the bet.
I second fresno dan’s bet. Any prosecution would earn NC a 100$ payable “dealer’s choice”; paypal, physical paper, golden sovereign or a wheelbarrow of n’gwees or kwachas.
I do hope to lose that bet.
Back from the Twilight Zone, I recommend “With Liberty and Justice For Some”, the soon to be published book by Glenn “Glennzilla” Greenwald. It’ll explain in chapter and verse, the abomination that our system of justice has become.
It goes with saying that I do not work for him, his publisher or any affiliated business or party to this publication.
I’ve seen this movie before, and played a few bit roles in it.
The short answer is that dealmakers get paid to make deals. They do not get paid for making sure that the “i’s” in the deal are dotted and the “t’s” are crossed.
If there is a closing coming up tomorrow, the Big Swinging Dicks who run this deal are not about to let their lawyers hold the closing up because of some niggling concerns about missing paperwork. They’ll call the law firm partner in charge and tell him that this needs to get done, one way or the other.
The lawyers know who pays their fees so they don’t push back too hard. The path to “partner” is paved in part by knowing how to get around missing or incompetently drafted documentation and being diplomatic in dealing with such deficiencies. Remember, you do not want to be known to the client as the guy who is holding up the deal.
The deal gets signed on schedule and the bankers are on to the Next Big Score.
I did deals. I pushed back. My firm backed me. If you are not comfortable with the documentation, you have to lay the problem out for the client, very carefully explain the risks, and then the client can in some cases make the call on whether the risk is worth taking for them, or whether they want to wait on getting the deal done until you the lawyer are comfortable. On the one hand, corporate officers seem infinitely more comfortable with risk than white-shoe firm lawyers; on the other hand, they are paying you a lot to worry about things that they may not see as a clear risk yet. Depends on what’s missing: sometimes you demand the documentation be lined up, other times you might be willing to let the client decide.
If you get yourself as a lawyer into a situation where the client does a deal where you are not entirely comfortable, or all the docs aren’t ready, or whatever, I cannot conceive of a universe — anywhere, on any plane — in which there is not an incredible memo to the file explaining the steps that the lawyer went to explaining the risk to the client. Heck, I’d probably get the client to SIGN the memo. No license, no work. You are in a fiduciary capacity — you don’t mess around with stuff like that.
So trust me: Yves is right. Those docs are there. Heck, if they are not, there is a CYA memo explaining exactly why not.
“So trust me: Yves is right. Those docs are there. Heck, if they are not, there is a CYA memo explaining exactly why not.”
I’ll take Yves’ word and yours, since I’m not qualified at all to evaluate the documentation angle of that stuff.
That said, this so begs the question: Why didn’t any MASCJ demanded, (as in “should you fail to produce it or indicate to me exactly who, what, where and in which position, thou shall regret to have cross my path”) for said documentation? I mean, a scorching third degree interrogation for the Justices could’ve yield some interesting answers to this question, no?
I can’t conceive the Justices were not curious (to put it mildly) to know.
Because the mortgages weren’t simply securitized and sold off, the same mortgage was sold off many, many times.
And therein lies the crux of the central fraud, along with the fundamental peddling of securitized debt, i.e., snake oil…..
The SJC is an appellate court. It doesn’t get to retry the facts, call new witnesses, or add new evidence. Its job is to examine the evidence presented in the original case and find whether the judge’s interpretation of the law is sound, and for the most part they’re called upon to err on the side of the judge (if an expert testifies in court, and the original judge finds his testimony unreliable, the appellate court’s obliged to presume he was unreliable, since they weren’t there). So they had to work with the docs they were given, which were shit.
Did you ever work on real deals? I kinda doubt it. I have, for decades. I don’t know anyone who isn’t pretty attentive re the deal docs, they ARE the deal. Except traders, and they by definition aren’t deal people. You sound as if you are giving a sales/trading perspective, not a dealmaker perspective. Being attentive to the contracts is a key part of the justification for the high fees to the clients, after all.
I can nevertheless agree that the people who understand what the language really meant deliberately avoiding bringing up issues that might crater a transaction. But that is COMPLETELY different than not keeping final deal docs. That’s very basic housekeeping. It would be tantamount to not keeping a copy of your tax return if you had filed it yourself. Do you think anyone who has meaningful tax liabilities does that? You can always find an exception here and there but it’s isolated. And attorneys always keep copies of deal docs, always.
The dog ate my homework excuse should not be accepted if there is no dog at home.
Marie McDonnell’s amicus brief to the MASJC provides some insight.
The only ‘deal docukments’ presented to the court by Plaintiffs’ lawyers were copies of those she had downloaded from the Bloomberg terminal and presented in her prior amicus brief to the Land Court. (She had made annotations on the docs.)
McDonnell noted that the loans were tracked with up to three different numbers, but that the docs only had zip code and ‘payment history’ as identifiers (one of the loan’s numbers was used only for tracking ‘payment history’).
McDonnell further learned from the Springfield Assessor’s Office that USBank had ‘owned’ the Ibanez house once before, having flipped it through a middle man to the Ibanez’ in 2004-5. One wonders when, if ever, USBank actually had had recorded title to the Ibanez property. McDonnell concludes:
Appellant U.S. Bank foreclosed on July 5, 2007 and on May 23, 2008 recorded its foreclosure deed which indicated it paid $94,350.00 at the sale.
On December 15, 2008, Appellant U.S. Bank sold the property to Blue Spruce Entities LLC for $0.00; in a simultaneous transaction, Blue Spruce Entities LLC sold the property to HomeSolutions Properties LLC for $5,500.00.
These facts raise serious questions about why Appellant U.S. Bank would pay $94,350.00 at auction for the Ibanez property and sell it for $0.00.
Typically, the acquisition price for a foreclosing mortgagee is a bookkeeping entry, not a cash payment. The fact that Appellant U.S. Bank could give away the Ibanez property for no consideration whatsoever suggests that it may have lacked a pecuniary interest in the Ibanez loan to begin with.
This raises the question of whether Appellant U.S. Bank had standing to institute the original foreclosure action because it apparently would not have suffered any damages if it never collected what was alleged to be owed by the borrower Ibanez.
Out of curiosity I searched ‘HomeSolutions’ and ‘Blue Spruce’ and found that these entities have been buying foreclosures all over the country, typically for under $10,000 each, and many of them from Fannie & Freddie. Sometimes they sell the homes onward without even registering the title in their own names. Is this a fencing operation? It would be interesting to learn what connections these entities may have to major banks.
This is why I asked in my comment yesterday why the banks are foreclosing en masse when they seem only to be profiting in the amount of their bogus servicer fees, or perhaps getting a Fannie payout on the face value of the original loan.
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I suspect that the ‘deal documents’ are unspecific as to the mortgages in the deals because they intended to switch loans in and out (by zipcode) in order to manipulate the CDS triggers. This would explain endorsing notes in blank, because they didn’t know at first which deal a particular note would wind up in.
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Another curiosity: why are mortgage servicing rights handshaked around so promiscuously in the MERS database? Wouldn’t this have to mean that PSAs are switched around from one servicer to another? I think the simpler explanation is that this is evidence of shuffling the loans to manipulate the performance of the MBSs.
http://www.ma-appellatecourts.org/?brief=SJC-10694_09_Amicus_McDonnell_Brief.pdf
You are right on the money, good citizen, although I believe there are still several other profit factors you missed, but overall brilliant and on-target remarks!
+1,000,000 to you today.
One thing for sure — A white shoe firm would have a complete and accurate binder of closing documents. Been there, done that. Also, the “if … then” opinions of counsel invariably put the onus of accurate reps and warranties back to the client. Lawyers will not suffer liability unless they knew the transaction was flawed, which is not common as they would arrange plausible deniability if they suspected sculduggery.
BoA = Bank of Amnesia, that much is clear.
But it’s the same old, same old, using a tried and tested tactic, whether it’s Rumsfeld, or Bliar, or Andy Coulson (phone hacking scandal in the UK, aka the new Watergate) – none of these bastards can ever remember, especially when the truth represents so much inconvenience for them.
For the rest of us, our duty is clear – never, ever forget.
Will someone explain to me why there is a significant difference between faulty securitizations performed on mortgages versus those performed on other kind of assets.
Or are all Wall St securitizations performed on anything potentially flawed?
While MBS Guy’s speculation sounds plausible, my confusion here is that the bank in question is not the bank that originated the deal, but rather the bank acting as trustee. I’m not sure the trustees counsel would be in a position to tell them to with-hold documents necessary to defend the trust – that would seem to me to be creating liability for the bank rather than shielding it. I do agree that in my experience these documents are complete, although the detail of information on the loan schedule may not be up to the mass. courts standards.
I think we have to add an option where, 9. It did not matter to the originators because they realized they could ask the court for anything for the first 10 years of securitization when the court didn’t question anything they presented. They submitted crap, and figured the court was okay with it. There is some concern that these attorneys believed the banks were buying the law, and covering their bacon with truffles
If you would like another one to challenge the law abiding theory; Wells Fargo created loans for 7 years knowing the deeds of trust was void by having fictitious parties installed. They were in such a hurry they ignored basic dirt law to cut a corner. I will tell the rest of the story before long. WF likes to keep their “securitization” schemes very private. I found out why. Any one with a WF loan can start asking questions. You will get no reply. Try it, it will amuse you until anger sets in.
Where should we look for your ‘tell-all’ to appear. I’m eager to read what you have to tell us.
What you hint at is that perhaps the Ibanez case was filed for the purpose of gulling the MA Land Court into rubber-stamping the ‘sloppy paperwork’, thus setting a precedent going forward?
It seems that USBank and WF could easily have just sold the Ibanez and LaRace houses and moved on. Surely thousands of other questionable foreclosures had been sold off without attempting to first clear title.
I have a Wells Fargo loan. I pay them every month. I just learned that they are NOWHERE on my title. There has been no transfer to them. I am now suing.
I am bringing suit on a house that is not in default.
These jokers couldn’t complete this paperwork to save their souls.
GMAC was NEVER given the authority to title on my property and they completed the “Deed of Reconveyance.” So, this title is hopelessly screwed up. I will like to see GMAC trying to recreate documents and try to file them several years late and after they no longer have any interest in my house.
The game is getting interesting, folks.
Yves-
I worked in a major NY area law firm 2005-2007 and we were one of Bear’s primary counsel handling mortgage transactions. You’re quite right about the paperwork and it did in fact usually fall to junior people like me– the transcripts exist (usually both paper and CD) somewhere at these law firms. It was one of our primary functions and, as you say, we billed Bear quite a bit for work compiling these transcripts.
That may be – but ..,
I have reviewed many a binder from major NY law firms, and the binders are as complete if deemed to be complete.
Frequently, the recorded versions of documents were not in the binder, nor the UCC’s as filed. Documents of acceptance by document custodians would be documents for signature, but not signed. Yet, the binders were “deemed to be complete.”
If the schedule of loans was inadequate and lacked sufficient detail, then the binder would nonetheless be deemed complete. If the agreement allowed substitution of mortgages subsequent to the “closing”, then the binder may never have the final schedule inserted in the closing binder – and, who know, the final schedule many not ever be signed by all parties. The idea of a supplemental closing to review all final versions was just not a concept ever appreciated.
As in house counsel, I implemented a policy to not pay the closing legal fees until such time as a closing binder was produced with ALL documents fully executed and recorded, if need be. Should there be an “excuse” for not including the final version, then the final version needed to be included with the name of the firm and attorney responsible to assure that the document was completed. The closing index was to highlight all incomplete documents with the responsible person identified in the index. The binder had to be identified as a preliminary binder. Final legal fees were not paid until the final final real final binder was supplied.
ps What I always loved is this: frequently, many document requiring execution are attached to a a master agreement. Frequently, what would appear was the executed master agreement with the attachments also executed.
Agreed re the schedule of loans issue, this looks like a gaping hole in the documentation (or more accurately, confirmation that no one though the loan schedules would be used to prove ownership, this is now a weird effort at a fix).
But not having the PSA? That just is NOT credible. Strategically, someone decided not to produce it.
Yves, I think you have got the doc issue nailed pretty well. The banks don’t want the docs to come under scrutiny in court, rummaged through and more pointed questions asked about the mechanics and actions of the Trusts. They’d rather play the percentages with homeowners and keep the real wolves at bay – the investors.
Question: Why the hell aren’t signers of 8-K’s and other SEC docs related to the trust agreements being investigated? Guess its a dumb question as it relates to “Liberty and Justice For Some” as was mentioned above. I mean here you got a guy certifying SEC reporting (SVP, usually) and what he is certifying hasn’t happened – and likely never will, or in complete violation of the Trust Agreement, if it does happen. WTF? It’s a whole cloth misrepresentation.
Thanks, Yves, for your outstanding work and for your occasionally discussing mine. I agree the docs must be there, because as I said every deal I ever did/knew of had closing sets, and not only is that part of the value added by attorneys (as I also noted) it’s great billable work done by low level associates, as you did.
I guess I was just being a bit too flip; I really think the problem is #3, bank incompetence. I take from the comments to your piece that actually there’s a good fact question as to whether the mortgage schedules are really complete, that perhaps they were done in a way that facilitated swapping mortgages in and out of a deal for various trader purposes. The reason I lean toward incompetence at the banks, read, I should have been MUCH more precise: incompetence at the servicer, is twofold. 1)There’s lots of evidence of massive incompetence already. Consider the way servicers communicate with their foreclosure counsel (LPS desktop and whatnot) is ineffective and the records of the servicers are in poor shape so that they when they do give foreclosure counsel info, it can be inaccurate. Add to that the relentless drive to do everything on the cheap, which LPS and Nationwide Title Clearing are manifestations of–heck, BofA is being sued for lacking the staff to do traditional banking well, much less foreclosures/servicing.
In what universe can these massive institutions, that have hollowed themselves out at the same time they have created massive problems for themselves, that don’t want to pay counsel to foreclose properly– function competently when their existing business model that operated successfully for years is suddenly challenged?
2) While I think the risks to the white shoe firms for whatever due diligence failures they committed and whatever state law provisions they somehow missed the deal violating, I don’t think they would all choose to systematically withhold deal docs as a way of protecting themselves. It’s not like it’s only one firm’s deal documents that are missing. The problem is cropping up all over the country. It only makes sense to me that the foreclosure counsel don’t know what to ask for because they’re not paid to know, they’re paid to be quick and not ask questions; when the counsel do ask the communication doesn’t go well b/c they can’t just call up someone who knows something and talk to them; and finally, even if the message gets through, the servicer has no internal idea how to get the request routed to where the deal docs are stored (if they’re the original master servicer party to the deal docs) or to ask the trustee for the deal docs (which it and its counsel surely have.)
So in sum, I think there’s a real issue to be investigated re the mortgage schedules, and I think the incompetence of the servicers and their current business models cannot be overstated. And that incompetence is much more likely than conspiracy to explain the inability to get the docs to foreclosure counsel.
Please forgive the embarrassing grammar errors above. I promise to be more articulate next time. ;>)
ACF
Thanks for taking the trouble to contribute, as well as for your ongoing efforts.
I think it’s important to distinguish what happens on routine foreclosures (processed by foreclosure mils, which are factories with extremely high paralegal to partner ratios) versus a case like Ibanez at the state supreme court level. I’ve sat in on cases with fallen white shoe corporate firms doing foreclosures (this often happens in secondary cities when their local companies are bought out). Referring to the PSA is a very recent strategy by anti-foreclosure lawyers; most counsels argue from a simpler “show me the note” strategy.
So the mess that goes on on regular FC cases to me isn’t definitive, because as you suggested, they know real estate, not securitization, and don’t know what to ask for if pushed in that direction.
But a state supreme court case is a big deal, particularly given how adverse the lower court decision had been. Pretty heavyweight attorneys had to have been brought in. That’s why I think some of the choices had to be strategic.
I believe this is the inverse of the old saw “Never expect fraud where mere incompetence would do”. The dog did not eat their homework. Nope. Somewhere, those papers exist – or they were purposely destroyed. The originators have reason to keep them hidden. What those papers show, in toto is pervasive fraud – mortgage pools that didn’t conform with the trust PSAs, mortgages placed in more than one pool, etc., etc., etc. What they now want is to be able to service those mortgages by foreclosing without having to provide all the evidence that would allow deconstructing the fraud. Given the stuff we have already seen – it would not shock me if they actually get their wish granted. Yves, am I missing something here? I am surprised you did not list this as an option.
Follow the money. When those over the counter contracts went sour and the accompanying CDS were about to expire worthless due to lack of funding, here comes TARP. Time to trigger all the remaining CDS and in a hurry so as to get paid off and what won’t fly have the taxpayers buy it through some guarantee during a takeover or absorption or sell bad paper direct at par to your local neighborhood friendly government agency.
Taxpayer supported FDIC will end up ceasing BofA and their ilk, it’s just a matter of time.
These separate realities running in parallel sharing cloned docs amongst leveraged scheme will eventually converge due to gravity.