By Tom Adams, an attorney and former monoline executive
On Sunday, the New York Times reported on a recent case known as Kemp vs. Countrywide. In it, the judge in his decision states that for the mortgage loan in question in the case, a Countrywide employee testified that the mortgage note had never been delivered to the trustee, as required under the securitization documents. In addition, the Countrywide employee testified that it was the company’s practice not to deliver the notes.
These facts were so extraordinary that I felt compelled to track down the underlying legal documents to the securitization to see what was going on. In the Kemp case, the trustee to the securitization (Bank of New York) was trying to file a proof of claim in Kemp’s bankruptcy, while Kemp was fighting the attempt claiming that the trustee did not have standing to make such a claim because it did not have possession of the mortgage note. While this was a bankruptcy case, the situation is similar to foreclosure cases where borrowers argue that the trustee for the securitization lacks standing to foreclose because the mortgage loan at issue has not been conveyed to the trust.
In the Kemp case, it appears that not only did Countrywide fail to properly convey the mortgage loan, it didn’t even bother to deliver it. Based on my review, Countrywide failed to comply with the terms of the agreement for the delivery of the mortgage notes. In addition, importantly, the trustee also failed to comply with the terms – it was required to certify it had the mortgage notes at closing and then certified annually that it had safeguarded the mortgage loan documents as required by the PSA.
As a result, if Countrywide actually failed to deliver all of the mortgage notes to the trustee, as the judge describes in the Kemp case, then
(1) This is a problem for the trustee proving it has standing for foreclosures or bankruptcies, as in the Kemp case,
(2) It seems like investors in the certificates issued by CWABS 2006-8 would have a good case to pursue claims against both Countrywide and the Bank of New York, as trustee, for failing to perform as required under the agreement,
(3) By stating that the notes had been delivered and certifying all of the notes had been received, Countrywide and the trustee seem to have misrepresented the transaction to investors, by creating the impression that the trust had secured the collateral, and
(4) The trustee’s annual certification under Reg AB that the mortgage loan documents were safeguarded and secured may open the parties up to additional liability for misrepresentation to investors, despite the fact that three-year statute of limitations may have expired for misrepresentations made in the offering statement for the transaction.
I tracked down the pooling and servicing agreement in the Kemp case from CWABS 2006-8 to make sure it did not have any unique exceptions to delivery. It did not. Section 2.01 of the PSA requires the Depositor (CWABS) delivery of the note to the trustee with all intervening endorsements as follows:
(g) In connection with the transfer and assignment of each Mortgage Loan, the Depositor has delivered to, and deposited with, the Trustee (or, in the case of the Delay Delivery Mortgage Loans, will deliver to, and deposit with, the Trustee within the time periods specified in the definition of Delay Delivery Mortgage Loans) (except as provided in clause (vi) below) for the benefit of the Certificateholders, the following documents or instruments with respect to each such Mortgage Loan so assigned (with respect to each Mortgage Loan, clause (i) through (vi) below, together, the “Mortgage File” for each such Mortgage Loan):
(i) the original Mortgage Note, endorsed by manual or facsimile signature in blank in the following form: “Pay to the order of ________________ without recourse”, with all intervening endorsements that show a complete chain of endorsement from the originator to the Person endorsing the Mortgage Note (each such endorsement being sufficient to transfer all right, title and interest of the party so endorsing, as noteholder or assignee thereof, in and to that Mortgage Note), or, if the original Mortgage Note has been lost or destroyed and not replaced, an original lost note affidavit, stating that the original Mortgage was lost or destroyed, together with a copy of the related Mortgage Note and all such intervening endorsements;
The trustee, pursuant to Section 2.02(a) of the PSA states that it has possession of the mortgage note (identified as section 2.01(g)(i)) and the assignment of mortgage (identified as section 2.01(g)(iii). See below:
(a) The Trustee acknowledges receipt, subject to the limitations contained in and any exceptions noted in the Initial Certification in the form annexed hereto as Exhibit G-1 and in the list of exceptions attached thereto, of the documents referred to in clauses (i) and (iii) of Section 2.01(g) above with respect to the Initial Mortgage Loans and all other assets included in the Trust Fund and declares that it holds and will hold such documents and the other documents delivered to it constituting the Mortgage Files, and that it holds or will hold such other assets included in the Trust Fund, in trust for the exclusive use and benefit of all present and future Certificateholders.
The Trustee agrees to execute and deliver on the Closing Date to the Depositor, the Master Servicer and CHL (on behalf of each Seller) an Initial Certification substantially in the form annexed hereto as Exhibit G-1 to the effect that, as to each Initial Mortgage Loan listed in the Mortgage Loan Schedule (other than any Initial Mortgage Loan paid in full or any Initial Mortgage Loan specifically identified in such certification as not covered by such certification), the documents described in Section 2.01(g)(i) and, in the case of each Initial Mortgage Loan that is not a MERS Mortgage Loan, the documents described in Section 2.01(g)(iii) with respect to such Initial Mortgage Loans as are in the Trustee’s possession and based on its review and examination and only as to the foregoing documents, such documents appear regular on their face and relate to such Initial Mortgage Loan.
According to the language above, the trustee specifically issues a preliminary certification that it has all of the notes on the closing date.
In addition to the preliminary certification of its receipt of the notes, and the final certification that all required documents have been received, the trustee also delivers an annual certification for the transaction. This annual certification is required pursuant to the SEC’s Regulation AB, for asset backed securities. Specifically, the trustee certifies each year, pursuant to SEC regulation section 1122(d)(4)(ii) that:
(ii) Pool assets and related documents are safeguarded as required by the transaction agreements.
In March, 2007 Countrywide filed the form below from Bank of New York, as trustee, that the trustee’s sections of Reg AB were in compliance, including the pool assets and documents were safeguarded as required by the PSA.
If the notes were not delivered to the trustee, and a court determines that saying the notes were safeguarded for the trust when they were still with Countrywide is a material mis-statement, Countrywide and/or the trustee could face liability under Regulation AB.
Finally, the PSA contains a standard provision that states that if for the some reason the agreement is determined not to be a sale, then the parties intend for the transaction to be the grant of a security interest in the mortgage loans for the benefit of the certificate holders. In order to ensure that the agreement is the grant of a security interest, the depositor (CWABS) files UCC statements for the mortgage loans and represents various facts including, pursuant to Section 10.04(b)(v):
All original executed copies of each Mortgage Note that are required to be delivered to the Trustee pursuant to Section 2.01 have been delivered to the Trustee.
It would appear that, if the Countrywide employee’s testimony is accurate that none of the notes were delivered to the trustee, then Countrywide and the trustee would be unable to argue, as a fall back, that the trust has a security interest in the mortgage loans because the notes were not delivered and therefore are not in the possession of the trustee.
While the Countrywide employee’s statement about the failure to deliver of the other notes was not directly at issue in the case, and thus was not confirmed by the court, if true, it raises serious issues for Countrywide and for Bank of New York. Countrywide’s law firm has denied that the bank failed to convey notes as a matter of policy. However, it seems odd that an employee would make such a claim without some basis for that belief. We are in the early stages of finding out how widespread the failure to convey notes really was, and the Countrywide employee statement suggests these concerns could be well founded.