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Josh Rosner: “Could Violations of PSA’s Dwarf Lehman Weekend?”

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Josh Rosner, a well respected bank analyst (he describes himself as “a recovering GSE analyst”) is circulating a client note and it takes the foreclosure crisis very seriously.

The critical part is his discussion of the conveyance chain. As we indicated before, the minimum chain for a recent mortgage securitization is is A (originator) => B (sponsor) => C (custodian) => D (trust). Older deals might only have three parties, but recent vintage typically had at least four, and some as many as seven or eight.

The reason for doing this is bankruptcy remoteness. You as the buyer of a mortgage backed security want certainty in what you purchased. If an originator goes bust (as ironically many did), you don’t want the creditors to say, “They were already toast by the time they set up that MBS, so the sale of the loans was a fraudulent conveyance, we are gonna take the loans back.”

The way to prevent that was to introduce intermediary parties between the originator and the trust. Each party had to be independent (which meant fit the legal definition of independence; the intermediary parties and even many originators were dependent on financing called warehouse lines from the investment bank packager/distributors). The note (the borrower IOU) had to be endorsed (like a check) to the next party in the chain, who then endorsed it over to the party after that, with the last party being the trust.

Rosner’s remarks are consistent with our prior posts, and he adds a couple of important additional observations:

We have a larger and more significant concern, which, if proved out, could call into question the validity of nearly all securitizations and raise material questions about whether “true sale” was achieved.

Nearly all Pooling and Servicing Agreements require that “On the Closing Date, the Purchaser will assign to the Trustee pursuant to the Pooling and Servicing Agreement all of its right, title and interest in and to the Mortgage Loans and its rights under this Agreement (to the extent set forth in Section 15), and the Trustee shall succeed to such right, title and interest in and to the Mortgage Loans and the Purchaser’s rights under this Agreement (to the extent set forth in Section 15)”. Also, an Assignment of Mortgage must accompany each note and this almost never happen.

We believe nearly every single loan transferred was transferred to the Trust in “blank” name. That is to say the actual loans were apparently not, as of either the cut-off or closing dates, assigned to the Trust as required by the PSA.

Rather than continue to fight for the “put-back” of individual loans the investors may be able to sue for and argue that the “true sale” was never achieved. To think of it simply, if you go to sell your car and you endorse your title but neither you nor the party you are selling it to sign their name who owns the car? It appears you likely still do.

While there may be a view that the government can intervene it appears that the private contract spelling out the terms was violated at the transfer point. The Trustee, who has responsibility to make sure all loans were properly assigned to the trust, may have liability. So too might the lawyers who issued the legal opinions.

Yves here. Let’s deal with this in reverse order. The attorneys are probably not liable; lawyers who have looked at typical opinions have advised us that the legal opinions provided on these deals were highly qualified (they took the form “if you took the steps you said you are going to, you have a true sale”).

However, the significant part of Rosner’s comment is his belief (and Rosner typically has very good contacts) that the notes were endorsed in blank. That means they were presumably endorsed only by the originator. This means, effectively, that none of the intermediary transfers took place. This is independent of verification of what we’ve been told. Per a post from late September:

One of my colleagues had a long conversation with the CEO of a major subprime lender that was later acquired by a larger bank that was a major residential mortgage player. This buddy went through his explanation of why he thought mortgage trusts were in trouble if more people wised up to how they had messed up with making sure they got the note. The former CEO was initially resistant, arguing that they had gotten opinions from top law firms. My contact was very familiar with those opinions, and told him how qualified they were, and did not cover the little problem of not complying with the terms of the pooling and servicing agreement. He also rebutted other objections of the CEO. They guy then laughed nervously and said, “Well, if you’re right, we’re fucked. We never transferred the paper. No one in the industry transferred the paper.”

This creates a lot of problems. If the originator is bankrupt (New Century, IndyMac), the bankruptcy trustee is supposed to approve any assets leaving the BK’d estate. I’m told bankruptcy judges who have been asked were not happy to hear this sort of thing might be taking place, which strongly suggests this activity is going on without the requisite approvals. And who from the BK’d entity can endorse it over? It doesn’t have any more officers or employees. Similarly, a lot of the intermediary entities (the B and C in the A-B-C-D chain earlier) are long dead. How do you obtain their endorsements?

Now you understand why everyone is resorting to fabricated documents and bogus affidavits. There is no simple way to fix this mess. The cure for the mortgage documents puts the loan out of eligibility for the trust. In order to cure, on a current basis, they have to argue that the loan goes retroactively back into the trust. This is the cure that the banks have been unwilling to do, because it is a big problem for the MBS.

Yves here. The next question is “what does this mean for MBS investors?” If you are a Fannie and Freddie investor, there will probably be no obvious consequences, even thought there ought to be. The government is not going to want to raise doubts about the integrity of such an important market. Servicers will continue to pay advances on delinquent accounts.

The bigger implications will be for the servicers and trusts of securitizations for so-called non-conforming mortgages, aka private label or non GSE paper. If Rosner is correct and no one endorsed the notes correctly, at best this is now effectively unsecured paper. I’ve had securitization lawyers argue that even though the trusts may have impaired rights to foreclose, a lower standard of rights applies to ongoing payment, so the trust may be OK as far as non -defaulted borrowers is concerned. But the New York trust experts (and all the trusts are governed by New York law, this was the standard choice for these deals) say if no notes got to the trust by closing, it was unfunded and does not exist.

Regardless, this mess looks likely to be an attorney full employment act. Stay tuned.

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70 comments

  1. Jackrabbit

    The other link in the chain is that the virtually all of securitized mortgages were bought by funds (hedge, pension, etc.) that have a fiduciary duty to their investors. That duty will REQUIRE them to investigate and pursue remedies. And anyone that doesn’t have that duty or is too small to take action on their own, will just piggyback on the class action.

    1. Jackrabbit

      The reason this is important, IMO, is that when dealing with the little guy, banks and the government can finesse the problem. We’ve already seen (on this blog and elsewhere) homeowner’s rights being attacked because they are “deadbeat borrowers.” If it was just the homeowner vs. the Banks, the Banks are likely to come out on top. But hundreds of institutional investors (and their well-paid lawyers) will not be so easy to roll over.

  2. Jim Haygood

    Eye-popping stuff indeed!

    My reaction, if I were a mortgage securitizer, would be to rush to Congress for a ‘Son of HR 3808′ fix. (The original HR 3808 was way too small-bore in scope to fix a problem of these dimensions.)

    Arguably, it might even be economically efficient to do such a thing. The downside is moral hazard — that people who made bad business judgements and engaged in shoddy practices would fail to pay the price that they should for royally screwing up.

    Some other major form of compensatory giveback should be demanded, if such a fix gets traction in the political realm.

    1. Jackrabbit

      I think (I’m not a lawyer) that HR3808 and anything similar might help with foreclosures but I don’t think it would help the problem of an empty Trust. There was a deadline for properly establishing the Trust which has passed.

      Remember AIG?? The Fed and Treasury argued repeatedly that the counterparties HAD to be paid 100% because the government could not interfere with private contracts.

  3. Mogden

    This is going to be another variant on TBTF, courtesy of Obama the ball-less wonder. If there’s any problem here that interferes with banks or conjures up the bogeyman of “systemic risk”, it will all be retroactively legalized.

    1. Jackrabbit

      Remember AIG?? The Fed and Treasury argued repeatedly that the counterparties HAD to be paid 100% because the government could not interfere with private contracts.

      1. Stan Getz

        Jackrabbit,

        The avoidance of private contract interference reasoning was pretext for bailing out Goldman, it wasn’t an unassailable tenet.

        1. Ina Deaver

          Nor shall the government impair the private right of contract. It’s pretty freakin’ unassailable.

          1. RueTheDay

            Seriously? The government was not obligated to bail out AIG in the first place. Thus, all this talk about the sanctity of contracts rings hollow.

            We have a MAJOR problem if the thought in this country takes the direction of 1) we must always bail out financial institutions when there is systemic risk and 2) when there is a bailout, ALL parties (well, all institutions not individuals) must be made whole in order to avoid “interference with private contracts”.

          2. Anonymous Comment

            Exactly. Not only in the courts, but also in the court of public opinion.

            Only in this case the argument flows in the reverse. You cannot enforce a contract which was previously negated by 1) fraudulent behavior and/or 2) a contract that was never completed and therefore is, by the nature of the laws – unenforceable.

            It’s gonna be hard to figure out, but this time it will be much less ambiguous which direction to go than it was in 2008. In 2008 the rumble in the economy was thought to have been brought on through no intentional fault, so it was hard to see the clear line. Once it becomes obvious what the original intentions were, it will be easier for people to choose sides.

            Now for the actual court… if SCOTUS got their hands on it, I’m sure they would consider the overlords before making their decision. [/snark?]

    2. Logician

      Mogden, I agree. The fix is already in. Obama is now saying he’ll support an “investigation.” We all know what that means. It’s the old “blue ribbon commission” trick. Meanwhile, they’ll legalize everything, ex post facto, just as the Wall Street Journal demanded last weekend.

  4. dladow

    “Servicers will continue to to pay advances on delinquent accounts.” But for how long? Is there a tipping point where the number of defaults is so large that the cash flow is not there to meet the interest payments?
    “The government is not going to want to raise doubts about the integrity of such an important market.” Sad but probably true. Who then will protect the US taxpayer’s interest? Is there any agency with jurisdiction over this kind of fraud who can force the GSE’s to enforce their putback rights? Will someone in Congress develop a spine? Purely rhetorical questions I’m afraid.

  5. bold'un

    If these allegations about intermediaries ‘B’ & ‘C’ are true, then one would expect the SEC to come down swiftly and heavily on them as having conspired to issue bonds under a false prospectus.

    The situation of non-Agency MBS bond holders is surely not hopeless. There are at least two remedies: 1/ breach of contract against the chain of institutions that failed to carry out their contractual obligations (and these surely had indemnity insurance contracts); 2/ on the assumption that the MBS trust can produce the original Note endorsed in blank, the Trust can surely act on it as the bearer. If delinquent homeowners wish to dispute the Trust’s title to a note endorsed in blank, surely the onus is on them to convince a court that the Note belongs to someone else.

    1. Yves Smith Post author

      The statute of limitations has passed, plus B and C did not make representation in the prospectus, they just took fees for having cash and an e-mailed list of loan numbers flow through them. So no avenue for SEC action.

    2. ella

      In America the burden of proof is generally on the plaintiff in any legal case. It is not up to the homeowner to prove a negative. Rather it is always the burden of the plaintiff, bank/ mortgage holder/servicer, to prove that they legally own the note, and the mortgage and that the defendant has defaulted. It is not acceptable for the plaintiff to commit perjury in their affidavits or to perpetrate a fraud on the court. The rule of law does not impose a duty on the defendant to prove that the plaintiff does not own the note, mortgage, etc.

  6. Logician

    Hate to say this, but I think Congress will make it all go away. Shelby and Leahy almost slipped it through last week. I think it’s only a matter of time until there is some “compromise” in which Obama blesses a “fix” in return for a meaningless “investigation.”

    The United States government is a wholly-owned subsidiary of Big Finance, and will do what it is told to do. Forget about “the rule of law.” No one in Washington, D.C. has ever once in their lives believed in that kind of naive crap.

  7. Tim

    What we are talking about people in the above is the Assignment/Endorsements, (not the ones American has been sent on the goose chase to discover in their land records either by Neil Garfield’s and likes such as), but the UCC fixation requirements!!!!! The dance above about the government not knowing is bs, though I love this site and blog,(Yves is great!!!!), you guys are not telling it like it is; that being, the evidence has always been on the “Instruments”, i.e., mortgage or deed of trust instruments as none of them were assigned in accord to securitized instruments of negotiation…….. pursuant to UCC 3-202, HELLO, NOW, WHY HAS NO one UP HERE FIGURED THIS OUT YET PLEASE?

    The other problem to this post is the statements the notes were endorsed, or assigned in blank!!!!!! The note cannot be indorsed in blank unless the deed or mortgage was so this does not float either and is nothing other than some ones planted propaganda for the banks!!!!!

    The mortgage or deed is paid to an Individual…….NO BLANK TRANSFERS MAY OCCUR…….HELLO, THAT BE THE ORIGINATOR GUYS SO HOW IN THE HELLS BELLS DID THE NOTE DO SOMETHING DIFFERENT WHEN WE ALL KNOW BY NOW THE DEED/MORTGAGE IS A COURIER WITH LUGGAGE SO THE NOTE CANNOT BE A SEPARATE AND DISTINCTLY DIFFERENT ENTITY TO THE DEED/MORTGAGE!!!! I WOULD HAVE EXPECTED BETTER FROM THIS SITE THOUGH IT HAS BEEN A WHILE SINCE I HAVE BEEN UP HERE!!!!

    This problem cannot be fixed and no amount of backdating in the world is going to fix this problem!!!!!! Now nor anytime in the future is the time to ever buy a foreclosed home so take that to the dumb bankers, wall street and the nazi e-cons who have diluted this whole thing!

    They all should be going to jail, i.e. the banks and while I know Lehman is not going to jail anytime soon, they must and need to go along with regulators and all who knew and should have known better as they are all crooks who hopefully for them, stuffed their pockets full of the loot and left country for those Cayman Islands and are living it large with Leh, )see Principal Residential Mortgage, Inc., Plaintiff and Appellee v.
    Zann Nash, Defendant and Appellant Montgomery Ward Credit and A.R. Audit Services, Inc., Defendants), regarding the affixed signatures being permanently affixed for all assigns!!!!!! This is spelt out very clearly in this case and ruling so to say a couple of bk judges are not happy about this, think of how the rest of we lonely citizens feel who have discovered this and now know for sure and fact our government and every regulatory agency, broker on wall street and scum who sold this trash to us and the world but they are all in on the heist!!!!!! We citizens are not happy!!!!! timcotten@mris.com.

    1. Anonymous Comment

      My first suspicious guess for why the assignments were ‘made in the blank’ was in order to keep the performing loans fungible. I think they thought it would be easy to interchange the loans at the time of necessity for the document.

      My next guess is simply the obvious thought – those filling out the forms did not know who it should be assigned to, therefore left it blank to be filled in by someone who did know. And since nobody did know, they remained blank.

  8. attempter

    This whole thing is mind-boggling. At one end the banks have technically abrogated their ownership of the land, at the other end they’ve also stripped their MBS, the very foundation of their balance sheets, of all “value” and even legal existence.

    While I expect the government to do whatever it has to do to “legalize” everything, even that might not be enough to put the Humpty Dumpty of economic confidence back together again.

    Like Hernando de Soto has argued, the entire psychological basis of the global economy depends upon the perceived legal integrity of this paper, and that integrity was less and less credible even before this mess came to full light.

    Going forward who could ever trust any of this again? Who will ever participate in any of these “markets” except to the extent he feels coerced? Who that still has some fiduciary duty could plausibly argue that he was justified putting anyone’s money into any of this? And when he’s sued, he like everyone else will have to rely on brute corruption in the courts. The courts themselves will have no choice but to plunge fully into the cesspool, since there’s no other way they’ll be able to countenance the way the executive and legislative branches are going to try to “fix” the most extreme economic crimes in history.

    1. readerOfTeaLeaves

      Like Hernando de Soto has argued, the entire psychological basis of the global economy depends upon the perceived legal integrity of this paper, and that integrity was less and less credible even before this mess came to full light.

      Completely agree with this synopsis.

      Reading this post, I kept having the image of a wheel spinning; the hub shifting more off-center with each revolution, as the rubber starts to shim off and tear apart and fly off.

      Congress can try and do some kind of abracadabra, as can Obama, as can other forces. But until and unless the underlying fraud is addressed, this only becomes more absurdist by the day.

      1. fjf

        Also agree. And there is the foreign perspective.

        The global economy went into the tank because of this. The rest of the world is forced to contemplate American “leadership” of the world economy? The rest of the world has to accept American “hot money?” The rest of the world has to accept QE2 and the consequent devaluation of the dollar (67% of which are held outside the US)?” The rest of the world has to accept American veto rights at the IMF? The rest of the world has to accept the US financialization of commodities markets so that people starve while Wall St pockets outrageous bonus money?

        America is in process of revealing itself as a spineless kleptocracy in which the rule of law is subservient to the interests of the economically powerful. The last state to make similar revelations was the USSR and we know how that movie turned out.

        1. Paper Mac

          “America is in process of revealing itself as a spineless kleptocracy in which the rule of law is subservient to the interests of the economically powerful. The last state to make similar revelations was the USSR and we know how that movie turned out.”

          “Spineless kleptocracy” is a great description. I would say it’s also a raubwirtschaft, which also has fairly terrible historical prognoses in late imperial rome and neo-assyria. Perhaps the elites in the US have looked at those in Russia and decided that it won’t be so bad, at least for them.

    2. Tao Jonesing

      The size of the problem is too big to reflate out of it. The behavior will not be legalized. The TBTF banks, on the heels of announcing more record bonuses for a (con) job well done, will have to go down in flames because nothing else will be acceptable politically, both in the U.S. and around the world. In order for the revolution to not be televised, the TBTFs will have to be euthanized.

      It took the stock market almost fifty years to recover the last time major corruption came to light during the Great Depression, and this time the problem is worse.

      1. Tao Jonesing

        From Karl Denninger, a link to a Citi analyst report regarding their meeting with a law professor about the possible outcomes of foreclosuregate.

        http://market-ticker.org/akcs-www?singlepost=2209430

        From the paper Karl links to:

        “Levitin articulated three possible outcomes to the aforementioned issues and assigned an equal likelihood to each. In his best case scenario, these issues are deemed merely technical in nature and are successfully resolved but it takes at least year to do so and all foreclosures are delayed by at least a year. Levitin disputed the claim by banks that these issues can be resolved in a month or so and attributed the banks’ claims to “legal posturing.” In the medium case scenario, litigation ensues and it takes years to sort out these matters. In the worst case scenario, the aforementioned issues become a “systemic problem” which causes the mortgage market to grind to a halt as title insurers refuse to insure mortgages involving existing homes.”

        Even the best case scenario all but assures Chris Whalen’s prediction from last week of of a new banking crisis within 3-6 months. http://www.aei.org/docLib/Whalen.pdf

        I was betting on the under, but I now think it will come before Nov. 2nd to ensure that the expected QE2 is as big as possible . . .

        And now I guess we know that QE2 is really intended as just another bank bailout, but this time we’re not even pretending that the government has a say in it.

        1. attempter

          The “deeming technical” scenario is one possible manifestation of what I meant by pseudo-legalizing.

          I suppose regardless of what the government does, there’s going to be tremendous litigation.

          I can’t imagine why they’d prefer a crisis and massive increase in deficit spending before the election. That sounds like a job for lame ducks. But maybe this crash will come on so fast they won’t have any choice.

          You’re right that the Bailout has been completely taken out of the hands of Congress, just the way they all like it. It’s autocracy all the way.

  9. Dikaios Logos

    Obviously, this is anecdotal, but I do know of a few attorneys that had been out of work for a while that got jobs in the last month in NY working in take-no-prisoners litigation boutiques.

    Maybe the blood really is in water?

  10. ChrisPacific

    “Rather than continue to fight for the “put-back” of individual loans the investors may be able to sue for and argue that the “true sale” was never achieved.”

    I wonder if this wouldn’t be in the interests of servicers as well, if it gave them a claim to recover the purchase price from the originator, less any payments they may have collected. It could effectively give them a do-over on the whole sorry episode by allowing them to unload the non-performing mortgages at a price much higher than they are now worth. If that were the case it would of course not be in the interests of originators, but the government might step in and twist some arms, or even manage the transaction itself in cases where the originator is now government-controlled. They could sell it to the public by claiming that owning the notes would give them more power to help foreclosure victims, since people are losing patience with the line about how we must all capitulate to prevent financial Armageddon.

    That just leaves the little matter of years of institutionalised fraud, but I’m sure the servicers can rely on their buddies in the government to take care of that for them by passing a law of some kind. (Most obvious angle of attack: if the sale never took place, then neither did any fraudulent activity connected with it).

    I fear that this may become a mechanism for yet another massive transfer of taxpayer money to financial institutions.

    1. ZADOOFKA FLORIDA

      So, let me get this straight: the “trusts” were empty and they sold “air” in the MBS, and subsequently paid themselves huges salaries and bonuses on empty air. Sounds like freezing assets and claw back time to me.

      1. Jackrabbit

        “Air” implies that the Trust owns nothing.

        I’m not a lawyer, but I would think that the standard for invalidating the Trust or sale of securities based on the Trust would be much lower than that the Trust was completely empty. If there are a sufficient number missing (remember, there is scant reason why they should not all be there), such that it can not be adequately explained (to a judge) by simple error, then it probably be material and actionable.

        1. Jackrabbit

          I’d guess that a few percent missing might be actionable but low enough that a judge’s first inclination would be to give the Trust time to recover the docs (or whoever is acting on behalf of the Trust). But if the number missing is high enough (10%? 20%?, . . .), then I’d guess that the judge might be more inclined to invalidate the Trust/Sale immediately.

          This would be an important technical consideration for the institutional investors and their class action lawyers: what is the threshold at which the Trust/Sale can be invalidated? The lower it is, the greater chance that they will be successful (so the more likely that they bring suit.)

  11. Nicholas Weaver

    This is THE big deal problem with the mortgage mess, which isn’t getting the coverage it deserves:

    The forclosures will eventually happen: SOME entity still has their name on the note and therefore standing.

    But this really changes the pushback-game on warantee/repurchase…

    But the other interesting thing is it may make different tranches react differently. EG, NPR’s ‘toxie’ was killed due to loan modifications: such modifications benefit senior tranches but hurt junior tranches.

    But the delay in foreclosure here has the opposite effect: it hurts the senior tranches (by making the eventual payout less) but benefits the junior tranches (by keeping the cash-flow coming, since the servicers still have to pay the cash flow)… OWch…

    1. readerOfTeaLeaves

      I’m not in finance, so please feel free to elucidate briefly about this very interesting point:

      But the other interesting thing is it may make different tranches react differently. EG, NPR’s ‘toxie’ was killed due to loan modifications: such modifications benefit senior tranches but hurt junior tranches.

      But the delay in foreclosure here has the opposite effect: it hurts the senior tranches (by making the eventual payout less) but benefits the junior tranches (by keeping the cash-flow coming, since the servicers still have to pay the cash flow)… OWch…

      1. Nicholas Weaver

        The NPR Planet money team, about 9 month back, bought a toxic mortgage bond (a tranch of a bunch of liar loans from Countrywide, mainly in Florida and California), which they ended up naming “Toxie” for ~$.01 of face value, mostly to watch it die.

        It ended up dying quicker than expected (they only got back about $500 of their $1000 investment) and predicted, because what happened is that as loan modifications went through, that would end up reducing the stream of payments. Since they were the last tranch still alive, it died pretty quickly before they got their money back. But such loan mods do benefit the senior tranches, as they are more likely to get their money back.

        But in these suspended foreclosures, the servicer is still making the stream of payments. Upon eventual foreclosure and sale, the servicer gets their money back first, but until then, they have to keep making payments like the mortgage was current. Thus for the very junior tranches, a 6 month moratorium on foreclosures means 6 more months of payments. Since these low tranches can’t hope to survive overal, their maximum benefit is to have the process be as slow as possible.

        Yet at the same time, the moratorium would hurt the senior tranches, as the total value recovered goes down because those payments end up being paid out to all the tranches alive, not just the senior tranches which would recover when the house is foreclosed upon.

        1. readerOfTeaLeaves

          Thanks for elucidating.
          Having read Econned, I figured that it worked somewhat the way you describe, but wasn’t uber-confident.
          Appreciate you taking time to clarify.

    1. Big Money

      “May Affect 9 Million Foreclosures”

      9m foreclosure
      $100k each house price (just for easy estimate)
      1:20 leverage

      That’s $18T worth of money somewhere in the world with no reason to exist, aka. pure fictional money. US annual GDP is about $15T.

      Whoa, I don’t believe even Ben’s printing machine can replace all those bogus wealth.

  12. rossmoyer@comcast.net

    “The fix is already in. Obama is now saying he’ll support an “investigation.” We all know what that means. It’s the old “blue ribbon commission” trick. Meanwhile, they’ll legalize everything, ex post facto, just as the Wall Street Journal demanded last weekend.”

    The monstrous hooligans in charge of these matters, either don’t see, don’t want to see, or don’t care that their relentless and instinctive abdication of their duty to hew to the law is deeply corrosive to what is left of our civil society. Let them retroactively decree that activities which are and were known to be flatly illegal are now, through vile political sleight of hand, legal, and the accumulated insults to decency, legality, and good faith will reap the whirlwind.

  13. Opinionated Bloviator

    Pop quiz, what do Argentina, Venesuala, Zimbabwe and Somalia have in common apart from being third world s**tholes. The answer is a corrupt legal system that runs under ‘The Rule Of Whim’ not ‘The Rule Of Law’. Can you sustain a first world economy on third world legal practises? My bet is NO. Google the term “The United States of Argentina” and then re-read the article above.

  14. Aaron

    A lot of people are saying that the “foreclosures will happen eventually.” This is not necessarily true, especially in judicial foreclosure states.

    A mortgage is a separate contract from a loan. A borrower enters into a mortgage agreement that allows the lender to be the first party to benefit from the sale of a house, up to the total amount owed on the loan.

    If a mortgage is invalid, there is still a loan outstanding, but the lender no longer has the right to be in the first position to take sale proceeds. The lender has to stand in line along with all other creditors, to get whatever assets the borrower may have.

    So the lender can still sue the borrower, get a judgment, and try to get the home sold. However, in the meantime, the borrower can do some fancy footwork. For example, most obviously, the borrower could do a Chapter 13 bankruptcy (or even a chapter 7 if the homestead exemption is big enough). This would discharge all unsecured borrower debts, including the home loan (now that there’s no mortgage) leaving the homeowner with no debt and a free and clear house.

  15. Rick Halsen

    Metaphorically the soft and brown doesn’t hit the fan with this then one can only conclude that TPTB have determined from here on out there is no fan to hit.

    History has always shown that whenever countries take away the fan, the soft and brown never stops being slung. Unfortunately other countries will take note of this and will avoid the area of soft and brown accumulation accordingly.

    We are screwing ourselves and we are not even leaving flowers.

  16. Justicia

    Here’s an excellent law review article (pre-publication) that explains why MERS is a disaster. (It’s well written and ot too heavy going for non-lawyers.)

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1684729

    Two Faces: Demystifying the Mortgage Electronic Registration System’s Land Title Theory

    Christopher Lewis Peterson
    University of Utah – S.J. Quinney College of Law

    Real Property, Probate and Trust Law Journal, Forthcoming

    Abstract:
    Hundreds of thousands of home foreclosure lawsuits have focused judicial scrutiny on the Mortgage Electronic Registration System (“MERS”). This Article updates and expands upon an earlier piece by exploring the implications of state Supreme Court decisions holding that MERS is not a mortgagee in security agreements that list it as such. In particular this Article looks at: (1) the consequences on land title records of recording mortgages in the name of a purported mortgagee that is not actually mortgagee as a matter of law; (2) whether a security agreement that fails to name an actual mortgagee can successfully convey a property interest; and (3) whether county governments may be entitled to reimbursement of recording fees avoided through the use of false statements associated with the MERS system.

  17. jal

    This is not a US problem that can be solved by US politics.

    All international holders of MBS etc. can and will get a ruling in their own countries which will force the “put back” down the line right to the originator to try and swallow.

    I just heard Yves on BNN. Good. Not enough time to explain the international implications.
    jal

  18. Rick Halsen

    I wonder how the folks in Europe see all this and if they’re having any sort of the same problems with titles. I hope they didn’t copy our ‘more efficient’ system in this regard. lol

  19. Pascal Blacque

    You say: “I’ve had securitization lawyers argue that even though the trusts may have impaired rights to foreclose, a lower standard of rights applies to ongoing payment, so the trust may be OK as far as non-defaulted borrowers is concerned. But the New York trust experts (and all the trusts are governed by New York law, this was the standard choice for these deals) say if no notes got to the trust by closing, it was unfunded and does not exist.”

    Thanks… I was looking for that answer but it still leaves the real issue in limbo. How can the trust be OK to receive payments if the trust does not exist?

    At this point, I feel like the big wig attorneys you mentioned yesterday have probably looked into this issue and have concluded it was a non-starter or not a money-making opportunity, no?

    By the way, a few of my colleagues who are current on their mortgages have received letters from their lenders asking them (almost ordering them) to cooperate in reconstituting the documentation in their file. In other words, they lost it. Well I’m sure the lenders are not looking for their net-worth statements or mortgage applications, right?

    So why would my colleagues continue paying a lender that may have no legal claim to the note and title?

    In the end, as I’ve said here, I think that if non-delinquent or non-defaulting borrowers are still legally obligated to pay their lenders (and thus investors), then the whole “foreclosure fraud” problem will not be allowed to thrust the US, and potentially the world, back into recession…

    Thus Obama is caught between a rock and a hard place: side with the rule of law and maybe lose both upcoming elections (short term pain and long term gain for the country) or side with the banks/economy and hope his presidency survives (short term gain and long term pain).

    Any odds?

  20. Ron

    Congressman Brad Miller was talking yesterday saying the MBS holders such as the Pension Funds etc have been wanting more information from the large banks regarding these trusts so that they could or can review the contracts for fraud. The Banks to date have withheld that information per Miller. So we have three players..

    The defaulted homeowner

    The Bank

    The MBS holders

    My guess the MBS holders have lots of money and lawyers to make a case which also may spell the end of the current mortgage finance market as we have come to know it. The banks do not have the dollars to make good the MBS holders so what next?

  21. john c. halasz

    Query to Yves et alia: if the notes were not in fact properly conveyed to the REMIC trusts and thus the trusts are in effect worthless and empty, by the same token, doesn’t that mean that restrictions on mortgage modifications due to such trusts are also null and void? Couldn’t then the government offer to buy out the empty trusts at a discounted rate and institute a real mortgage mod program?

  22. Razzz42

    Why do you think just about every foreclosure is on standby? Because if one case is lost when the supporting (legal) documentation can not be produced then it over for all cases of this nature. And this is not breaking new ground, case law goes back to the era of cavemen.

    No doubt the little people (taxpayer) will have to ante up to cover all the bad debt which avoided scrutiny by being traded over the counter and was never funded properly by lacking proper oversight except charges enough to cover commissions plus, to insure your MBS, you were sold a CDS to gain your confidence. Any and all involved were complicit.

    Remember SEC let these things (CDS) slide underneath their radar as being considered private contracts when they actually fell under the heading of insurance policies.

    MBS were just outright fraud. Any body going to jail yet?

  23. rms

    I love this blog.

    this to me is simply a mind blowing issue. why this isn’t the most talked about story, I have no idea.

    but what scares me is that it will encourage homeowners to stop paying altogether if there is a precedent where banks en masse failed to do the paperwork properly.

    it is simply incredible. I do not envy Obama’s choices.

  24. Pascal Blacque

    Adam Levitin hits it right on the head in this article from Diana Olick: http://www.cnbc.com/id/39634568

    Levitin says the documentation problems involved in the mortgage mess have the potential “to cloud title on not just foreclosed mortgages but on performing mortgages.”

    And “You have a trust that has been getting payments from borrowers for years that it has no right to receive. So you might see borrowers suing the trusts saying give me my money back, you’re stealing my money.”

    And … performing mortgages account for approximately 85% of a +/- $3T RMBS market?

    If true … Sudden Stop … here we come!

  25. Jason

    One aspect of this that I’m still trying to figure out. Perhaps it’s selection bias, but it seems that for a long time, banks were content to send delinquent homeowners a notice, and otherwise leave things as is. I think it was even mentioned on here people that stopped paying their mortgages and got to sit in their house, essentially rent free (sometimes for years).

    However now it seems like the foreclosure pace has picked up significantly over the past several months. Something must have caused the banks to change their minds, but what was it?

    My naive suspicion is that it might be cash flow related, but not sure I can actually come up with a narrative that explains it to my satisfaction. I’m curious if others have thoughts on that.

    1. Darby Shaw

      Jason,

      Its very very simple. The major players (Virtually any bank that matters, specifically BOA, Ally/GMAC, Wells will soon follow, Litton, which is an important one, its part of…you guessed it! Goldman Sachs!JP Morgan/Chase)have been colluding for the last 2 years trying to figure out what to do with this mess. So what do they do? Hire a shit-ton of dirty lawyers! Hence the firms in Florida and the “Robo-signing” scandal. And rather than admit to collective fraud, nay, the largest economic fraud in the history of nations, what did they do? They burned all the evidence.

      So why the rush now? As sure as you are reading this, somewhere in this country there is a BOA executive is having a shred-fest with damaging documents. They knew this was coming for 2 years, and that is a fact. So better to destroy the evidence, and hoard enough cash to ride this out. Why do you think credit markets tightened and underwriting guidelines got so impossibly high? They didn’t WANT to lend the money! And the smaller banks were FORCED to take TARP funds, as the big players put them in a tough spot. Play ball, or get absorbed. The real issue is at what level this climbs into the government.

      Who…knew…what…when.

  26. Darby Shaw

    Oh, I almost forgot!

    The banks had gutted securities (MBS) and started mixing the parts up. An MBS is cross collateralized. Imagine a bag full of 1 inch by 1 inch pieces, lets say 5000. Well, imagine if every one of those 5000 pieces has 5000 strings that attach to each and every piece of paper in the bag. So you cant just take 5 out the bag and have 4995 left,you dig?

    Well, when these MBS’s were being created, they werent just made and sold. They would get an order from some institutional investor (And who hold most of these suckers in the US? Govt. pension funds, and then run out and try to fill the order, that is to say they needed 5000 pieces for the bag.

    So what if you cant come up with the 5000 fast enough? No problem! Relax your lending standards to take in more loans and turn your head to all the crap loans you are stuffing these pigs with. They also illegally used parts of one bond and stuck them in with multiple MBS’s, and they all did this knowing full well what they were doing.

    Ive posted a link to the kentucky brief, and that has a lot more detail. Here it is again:

    http://www.scribd.com/doc/38654717/Class-Action-vs-Mortgage-Electronic-Registration-Systems-Gmac-Deutsche-Bank-Nation-Star-Aurora-Bac-Citi-Us-Bank-Lps-Et-Al

    Go to part 66 or so and go read untill you throw up in your own mouth. Its that bad.

    So when the almost-end came in ’08, the jig was up. Or was it?

    All the chickens are coming home to roost.

    And they all knew what was up. Saying “The Banks” is no longer enough….”The Banks” were and are packed with individuals who perpetrated this fraud.

    1. skippy

      Were will we store all these crims and yes the bile has been in the back of my throat for a long time now.

      In my mind, if the federalismo gubermint creates out of hole cloth, a fix, some states might threaten secession. If left to the states it will be a blood bath as this has destroyed the balance sheets and constituents lives…cough voters of these states. The states that became de facto banks in and of themselves will not be warmly viewed by the rest…eh.

      The World watches….

      Skippy…now lets think about all that false value added to the market since the late 1990s…eh…illusions that David Copperfield would be jealous of…eh

  27. ella

    Stunning: “In an effort to rush through thousands of home foreclosures since 2007, financial institutions and their mortgage servicing departments hired hair stylists, Walmart floor workers and people who had worked on assembly lines and installed them in “foreclosure expert” jobs with no formal training, a Florida lawyer says.

    In depositions released Tuesday, many of those workers testified that they barely knew what a mortgage was. Some couldn’t define the word “affidavit.” Others didn’t know what a complaint was, or even what was meant by personal property. Most troubling, several said they knew they were lying when they signed the foreclosure affidavits and that they agreed with the defense lawyers’ accusations about document fraud.” http://www.rawstory.com/rs/2010/10/lawyer-finance-industry-hired-hair-stylists-walmart-workers-approve-foreclosures/

    Cutting corners, saves billions. Any wonder the bonuses are in the hundreds of billions year after year?

  28. Antipodeus

    Yves, first, thanks for a great site with many interesting resources & links. (I stumbled across your site via Dr. Karl over at the Market-Ticker – discovered him about Nov. ’08 & went back & started at his first post – April 1st,2007… April Fools’ Day!?)

    Looking at the slow-motion train wreck of the American financial system from down here in Australia, all we can do is throw up our hands in near-despair for our American cousins. and reach for the popcorn. Pecora must be spinning in his grave!

    Serious question – in the light of all derivative-spawned chaos you seem about to experience, what about all those TRILLIONS of dollars worth of CREDIT DEFAULT SWAPS out there? What is going to happen with those?! And doesn’t the U.S. Federal Government now own most, if not all, of AIG?

    Lastly, we are really, truly & sincerely sorry for failing to seize the passports(s) of RUPERT MURDOCH before he could flee to the U.S. & claim economic refugee status (& U.S. citizenship). “Faux News” is all our fault! But at least it’s ‘fair & balanced’, right?

  29. Mike the Mad Biologist

    Does anyone know if this has any ramifications for AIG? It would seem to me that, depending on the particulars of the contract, defrauding AIG on the nature of the ownership of the underlying assets they were insuring would be grounds for a lawsuit. You can’t buy, in most cases, insurance for something you don’t actually own.

    I’ll admit I could be way off base here.

  30. Andy

    Can someone explain what this means:
    “Servicers will continue to pay advances on delinquent accounts”

    How do servicers pay money to the Trust if no money is coming in?

  31. underh20

    Thoughts on my mortgage please:

    July 2005: purchased property

    August 2005: security closing date

    Dec. 2007: mortgage assigned from original lender to MERS

    Both the county records and MERS show assignment from original lender to MERS (presumably to the trust) more than two years after the security closed. (The lender went bankrupt in 2007 and perhaps they finally attended to the docs.)

    What I am thinking….

    Since the docs (presumably both mortgage and note) were delivered two years after the closing of the trust/security, the Trustee would have no standing to sue in event of non-payment. (We are current on the loan/high credit scores.)

    Just wondering if somehow holding the mortgage in the name of the original lender for two years is somehow deemed delivered to the trust for purposes of the closing of the trust. If not, we are in the situation where no one — not the servicer, not trust, nor original lender (they were paid by investors at trust closing) have standing to collect the mortgage payments.

    Right or wrong? What would you do?

    1. Greg

      underH2O, the answer to your question will probably depend on your home state’s interpretation of the Uniform Commercial Code, which covers the transfer of negotiable paper such as your promissory note to Lender. If, as in the example provided in the post, your note is endorsed by Lender in blank, then the simple delivery of the paper itself to Trust may be sufficient to confer the right to collect on the note to Trust. Recording an assignment of mortgage is great for things like getting away from delinquent tax notices and suits from municipalities for housing code violations, but in many states it doesn’t do a thing to actually transfer the loan paper. The mortgage is just a hook to get you to pay the debt, so whoever holds the debt is generally considered to hold the mortgage. Your state may have some quirks built in to its version of the Commercial Code, though, so my info could be off-base.

      First thing you’d really have to do would be to find out if your loan is actually part of a trust, and that would involve a long and painful search through the SEC’s database of filings. If your loan was purchased by a trust, the PSA is probably available as an exhibit to a 10-K filing. In turn, the PSA will have an exhibit listing all the account numbers (and possibly ZIP Codes) of the securities purchased by the trust.

      If your loan isn’t in a trust, then you’re looking at the whole “what rights does MERS have” argument currently being fought in a number of states, and that’s a topic for a different post.

      1. Yves Smith Post author

        See article 1 of the UCC, part 1:

        (3) The effect of provisions of this Act may be varied by agreement, except as otherwise provided in this Act and except that the obligations of good faith, diligence, reasonableness and care prescribed by this Act may not be disclaimed by agreement but the parties may by agreement determine the standards by which the performance of such obligations is to be measured if such standards are not manifestly unreasonable.

        One of the effects of that section is that parties can hold themselves to more demanding standards than provided for in the UCC so long as they do not violate the obligations of “good faith, diligence, reasonableness and care” and performance of those standards is not manifestly unreasonable.

        Since the industry actually did comply with the more stringent requirements of the PSA (endorsement and conveyance of the notes through the full chain of title) for roughly the first decade of securitizations, it can’t be deemed to be unreasonable.

        PSAs ALL require endorsement by all parties in the specified conveyance chain. Some require endorsement to the next party, others allow for endorsement in blank. BUT the final endorsement (to the trust) needs to be specific, not in blank, to satisfy New York trust law.

  32. John

    As a lowly REALTOR, this frightens me to the core. As a US citizen, I’m incensed. As a father, I weep for my children.

  33. mares

    So, if the paper, say from New Century Mortgage never made it through the chain/trust, Then what rights do these servicers have to collect monthly payments??? Since there is no pooling and servicing agreement in effect.

    If New Century Mortgage was not funder of the loan and they are listed on the documents, isnt that fraud in itself???

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