About Those Notes…Evidence of Security
by Adam Levitin
Since last October, shortly after the robosigning scandal broke, I’ve been talking until I turned blue in the face about robosigning being the tip of the iceberg with mortgage problems and that the real issue was chain of title. Robosigning appeared to be an almost unexpected deposition by-product; the real goal in the depositions that uncovered the robosigning was exposing the backdating of mortgage endorsement. And that they did–the notaries’ whose seals were on the documents didn’t have their commissions when the assignments supposedly took place.
But why would anyone bother backdating mortgage assignments? The immediate reason is to show that the foreclosing entity was the mortgagee at the time the foreclosure action was brought. And lurking behind this is the mother of securitization fail issues (see also here and here)–the potential failure to transfer the mortgage notes into the securitization trusts.
When the securitization fail issue was getting attention last fall, one thing that was sorely lacking from the discussion was empirical evidence. I could refer to individual mortgage files I’d seen and a host of anecdotal evidence, but I hadn’t attempted to do any sort of empirical survey.
But Abigail Field at Fortune has actually gone and done this. Incidentally, this is what federal bank regulators were supposed to do–go and look at the actual notes for foreclosure filings. Amazing how one intrepid journalist was able to accomplish much more than a beavy of bank examiners. And Field finds that there are real problems with the mortgage files.
I know this is like saying that the sky is blue to those Credit Slips readers who do this for a living. The extraordinary occurence is a note that is properly endorsed, not a flawed note. There’s nothing unusual about seeing endorsements are done by the wrong party, done on the wrong date (after the closing of the trust), backdated (possibly criminal behavior, including bankruptcy fraud if that’s part of a proof of claim). But more often than not, endorsements are simply missing. And that’s what Field found.
Field looked at 130 cases where BONY was foreclosing as trustee for a Countrywide MBS.
In 104 of those cases, the loan was originally made by Countrywide; the other 26 were made by other banks and sold to Countrywide for securitization.
None of the 104 Countrywide loans were endorsed by Countrywide – they included only the original borrower’s signature. Two-thirds of the loans made by other banks also lacked bank endorsements. The other third were endorsed either directly on the note or on an allonge, or a rider, accompanying the note.
The lack of Countrywide endorsements, combined with the bank’s representation to the court that these documents are accurate copies of the original notes, calls into question the securitization of these loans, as well as Bank of New York’s right, as trustee, to foreclose on them. These notes ostensibly belong to over 100 different Countrywide securities and worse, they were originally made as long ago as 2002. If the lack of endorsement on these notes is typical — and 104 out of 104 suggests it is — the problem occurs across Countrywide securities and for loans that pre-date the peak-bubble mortgage frenzy.
The lack of Countrywide endorsements also corroborates [the testimony of Linda] DeMartini [in Countrywide v. Kemp, which BoA disputes], who said that in her 10 years at Countrywide she had never seen a note with an endorsement, and that as foreclosures had been increasingly litigated, she had been handling the original notes, not just the copies scanned into the bank’s database.
What Field’s research shows is that there is a real legal issue to be hashed out: do the endorsements matter or not in securitization?
The argument of the ASF and bank law firm K&L Gates (which has a whole memo on why I’m wrong–read it here–I’m still waiting for a cut of whatever they billed for writing it…) really now has to be that a transfer that complies with UCC Article 9 is all that is necessary for the mortgages to be transferred to the trust and that any additional requirements in the PSAs are irrelevant.
I think it’s very hard to explain away the very specific endorsement langauge in the trust agreements. It’s not there for shits and giggles. There are good legal and economic reasons for including it relating to bankruptcy remoteness, tax treatment, and accounting treatment. If these terms were superfluous (belt and suspenders), they would have been jettisoned as too costly (indeed that seems to have been what happened in practice by people who didn’t recognize their importance).
But even if the ASF and K&L Gates are right and UCC Article 9 is all that matters, there’s another problem–most MBS don’t even comply with UCC Article 9-203 sales provisions (requiring an authenticated contract that describes the property being transferred) because (1) they don’t contain loan schedules, (2) the schedules can’t be shown to be originals integrated with the PSA itself, (3) the schedules don’t identify the property sufficiently, or (4) the PSAs aren’t executed documents. Remember, K&L Gates lost Ibanez on this basis, not on a failure to comply with the PSA basis. As far as I can see, we’ve got a securitization fail problem either way. The only questions are the scope (which might vary depending on the route of the fail) and what will make this issue unavodiable for financial markets.