We’ve had a series of posts (see here, here, and here) on the judge’s decision in a case called Kemp c. Countrywide, which provided what appeared to be the first official confirmation of what we’ve long suspected and described on this blog: that as of a certain point in time post 2002, mortgage originators and sponsors simply quit conveying mortgage notes (the borrower IOUs) through a chain of intermediary owners to securitization trusts, as stipulted in the pooling and servicing agreements, the contracts that governed these deals. We say “appeared to be” because Bank of America’s attorney promptly issued a denial, effectively saying that the employee whose testimony the judge cited in his decision, one Linda DeMartini, a team leader in the bank’s mortgage- litigation management division. didn’t know what she was talking about. As we discussed, this seems pretty peculiar, since she was put on the stand precisely because she was deemed to be knowledgeable about Countrywide’s practices.
Today, an article appears in Bloomberg, and it appears to be a rehash of this now week-old story, so I was puzzled to see it run now. But buried in the article is the probable reason for this piece, namely, that the Bloomberg reporters saw that BankThink had purchased and posted the trial transcripts, and quoted more of DeMartini’s testimony. And it isn’t pretty. From Bloomberg:
The judge asked DeMartini whether the notes ever move to follow the transfer of ownership, according to the transcript of the August 2009 hearing.
“I can’t say that they’re never moved because, I mean, with this many millions of loans as we have I wouldn’t presume to say that, but it is not customary for them to move,” DeMartini said.
This is in keeping with the judge’s recap, and also underscores the notion that it was Countrywide’s practice to not convey the notes. We have been told separately that a senior industry executive also said that no one in the industry transferred the notes. If true, this has very serious implications. As we’ve indicated, it means that residential mortgage backed securties are not secured by real estate, or as Adam Levitin put it, they are “non mortgage backed securities. Bloomberg provides further comments along those lines:
“It may mean investors who think they bought mortgage- backed securities bought securities that aren’t backed by anything,” said Kurt Eggert, a professor at Chapman University School of Law in Orange, California.
With the ramifications so serious, expect industry denials to continue apace until the evidence becomes overwhelming.
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Of course there is no discussion of the elements of the article that don’t agree neatly with the “grassy knoll” approach to legal analysis, such as:
“The transfer of mortgage notes was outside the scope of DeMartini’s knowledge because she doesn’t deal with the sale of loans, Platt said.
DeMartini, who at one point said she wasn’t “comfortable”
testifying about the extent to which notes were transferred before continuing to do so” OR
“Those who seek to attack the integrity of securitizations have taken a number of approaches that have been refuted, so now they’re focusing on New York trust law,” said Karen B. Gelernt, a lawyer in New York at Cadwalader, Wickersham & Taft LLP who works for banks.
The part of the law they cite relates to “actions taken by the trustee after the trust is formed; it’s nonsensical to apply this provision to the creation of the trust,” she said. “There doesn’t appear to be any case law that supports their interpretation.”