Well, I suppose one can defend the
lies testimony offered by American Securitization Forum executive director Tom Deutsch before the Senate Banking Committee yesterday if one subscribes to the Through the Looking Glass theory of usage:
When I use a word,’ Humpty Dumpty said, in rather a scornful tone, `it means just what I choose it to mean — neither more nor less.’
And we all know how well things turned out for Humpty Dumpty….
Seriously, though, as we will see shortly, Deutsch gave one of the most outrageously dishonest presentations I can recall ever seeing, and readers know I specialize in calling that sort of thing out.
By way of background, we’ve discussed for some time the bigger implications of problems witnessed in foreclosure battles all over the US. Increasingly, consumer lawyers are recognizing that they can often successfully challenge foreclosures in which the loan was securitized by examining whether the party trying to foreclose really has the standing to do so, which is legal-speak for whether they are the proper party. If the loan was securitized, it is owned by a specific trust, and the trustee for the trust should be the party taking action. The trustee needs not only produce the note, but if questioned, also to demonstrate that it is the right party to enforce the note (note this is theory; some judges are more predisposed towards banks than others).
The problem is that the pooling and servicing agreements, which governs the formation and operation of securitization trusts, have very specific provisions for how the notes were to be conveyed to the trust. The notes were to be conveyed through multiple entities, which each transfer being a “true sale” before getting to the trust (this was to create “bankruptcy remoteness” so that if the originator failed, its creditors would not be able to take notes back from the trust to satisfy their debts).
The PSA called for the note to be endorsed by the intermediary parties (either in blank or specifically to the next party). The notes were also to be conveyed by a specified date, which in nearly all cases was no later than 90 days after the closing of the trust. The trusts were required to be organized under New York law, and New York trust law is unforgiving. Trusts can operate only as specifically prescribed; if the notes were not conveyed to the trust in the manner set forth in the PSA, it cannot deviate from its instructions and somehow make exceptions (it would be deemed a “void act”) .
Now mind you, the ASF is in a huge hole. Despite its claims otherwise, it’s a lobbying group for sell side firms; investors are also members, but their needs are not taken seriously (the ASF posture toward very sound reforms proposed by the FDIC proves where its true loyalties lie). It was already in a defensive position before this hearing. In November; as we discussed, it issued a long-awaited white paper to assail the critics’ arguments. But that paper was weak and unconvincing; indeed, the ASF effectively acknowledged its shortcomings by issuing it the same day as an unsympathetic Congressional Oversight Panel report was released and immediately prior to Senate and House hearings on mortgage documentation issues.
If the paper had been convincing, it would have made sense to publish it earlier, to force the COP and the hearings to incorporate its views. The late release was a tacit admission that the ASF regarded it as better off merely muddying the water than exposing its position to robust debate.
Investors, even the pro-bank sort, were not persuaded. Contacts of mine were getting calls from buy-side types, including those sympathetic to banks, who were dismissive of the ASF paper. And the fact that 13 law firms signed the article? As one investor sniffed, “This is meaningless. All those firms issued true sale opinions. They’ll say what they have to say to try to make this go away.”
The ASF position was, effectively, to ignore the requirements of the PSA and argue that the transfers were valid under the Uniform Commercial Code. The wee problem with that position is that Article 1 of the UCC allows parties to contract out of the UCC and opt for different conveyance methods, which clearly was the case here. And the other major leg of their argument was that the mortgage (the lien) follows the note (which as we have said repeatedly, is the case in 45 of 50 states). Therefore, they concluded, if the trustee had possession of the note, it could foreclose.
But it gets even better. A mere week after the ASF launched its pot-holed battleship, news broke of Kemp v. Countrywide, in which a seasoned Bank of America employee testified that it was not the practice of Countrywide to transfer the notes to the trustee, but to retain them until the trustee needed them to foreclose. Whoops! Suddenly the ASF’s white paper argument looks irrelevant. We’d been told that notes had not been transferred on a widespread basis, but the evidence that had appeared in tens of thousands of consumer cases, of the foreclosure mills scrambling to get the notes to the trusts. It was persuasive but not conclusive. Here was the first evidence of pattern and practice on behalf of an industry leader (Bank of America promptly issued a denial; most observers deem it to be unconvincing).
So what does Deutsch say in his written testimony? Well, first he tells readers that securitizaton markets are SO important that we all need to bow to their needs:
Restoration of function and confidence to the securitization markets is a particularly urgent need, in light of capital and liquidity constraints currently confronting financial institutions and markets globally….With the process of bank de-leveraging and balance sheet reduction still underway, and with increased bank capital requirements on the horizon, such as those expected in Basel III, the funding capacity provided by securitization cannot be replaced
with deposit-based financing alone in the current or foreseeable economic environment.
Translation: you are debt junkies and you need us more than we need you. Of course, there is no consideration of the fact that the financial services industry is bloated and value destroying. Overly cheap credit, if that is indeed what securitization sometimes offers, should be the first thing to go.
But it gets even better:
In his written testimony as well as his statements before the Senate Committee, Mr. Levitin does not rely on the decisions in any court cases but instead discusses standard provisions of documentation typically used to issue RMBS, which generally is in the form of a pooling and servicing agreement (“PSA”). A typical PSA includes a section requiring that legal documents for each pooled mortgage loan be delivered to the trustee, or to a custodian on the trustee’s behalf. This provision typically requires delivery of the original mortgage note, which must bear the following indorsements: 1) either an indorsement in blank or an indorsement to the trustee, and 2) a ‘complete’ or ‘unbroken’ chain of indorsements from the originator or named payee to the person signing the indorsement in blank or to the trustee. The language does not specify who must sign the indorsement in 1). The language used in these typical provisions in any PSA uses either the word “complete” or “unbroken”, with no apparent difference in intended meaning from deal to deal. The typical language does not state, nor does it imply, that a “complete” or “unbroken” chain means that all prior owners or holders of the note must appear as part of the chain. Nor does any judicial proceeding consider or uphold this novel opinion. Nor does Professor Levitin provide any third-party support for his interpretation of a typical PSA.
Yves here. This is just astonishing and wildly untruthful. Putting aside the effort to minimize the critics’ case by personalizing it and limiting it to what Levitin offered as testimony last week, the “Mr. Levitin does not rely on the decisions in any court cases” is false. The fact that Levitin did not provide specific citations does not mean one can conclude he did not have rulings that supported his reading. There are literally hundreds, perhaps even thousands, of consumer cases in which judges have denied trustee efforts to foreclose precisely because the notes had not been conveyed correctly. Common screw ups include: the note assigned after the date of foreclosure and shifting stories as to who owned the note). And in particular, judges have not taken well having the note assigned by or through parties that had nothing to do with the securitization chain (no joke, they were not parties to the agreement) or endorsed by bankrupt entities well after they are toast when this has been called to the judge’s attention.
Indeed, why, as we have written, is the preferred fix now for foreclosure mills to present allonges (attachments to the note which contain additional signatures, except these are almost never attached in the manner required by the UCC) which often are clearly suspect (as in, for instance, with visibly Photoshopped signatures altered to fit in the document) precisely to show the proper chain of title if this issue didn’t matter? The behavior on the ground suggests strongly that now that consumer lawyers have gotten wise to vulnerability to questions of standing based on reading the PSA, they are scrambling to create a paper trail that conforms to its requirements?
But the brazen part is to assert, Humpty Dumpty style, that “complete” or “unbroken” chain of endorsement means something other than what it obviously means. This language is not difficult to parse. Deutsch’s prevaricating is simply an insult to the reader’s intelligence. The parities CLEARLY intended for the notes to be conveyed through intermediary entities; that was critical for bankruptcy remoteness. And they CLEARLY intended for them to get to the trust by no later than 90 days after closing; that was necessary to get the desired REMIC tax treatment. But Deutsch is trying to engage in revisionist history and hope his audience is too uninformed to see through it.
As for third party support for Levitin’s reading of a PSA, I would find it very likely that he has some, since I’m very much on the periphery and can provide backup myself. Below is a affidavit from Tom Adams in an Alabama consumer case that supports Levitin’s views. It specifically discusses his expectations for endorsements based on his involvement in this specific securitization as well as his over 20 year experience in the securitization industry:
Professor Ira Bloom, a New York trust expert, and one of the five advisors to New York state on trust matters, also provided an affidavit in the Congress case that confirms the Levitin reading (note that Bloom mentions “lifetime trusts”; he and other New York trust experts have separately confirmed that his reading would apply to New York trusts generally. such as the business and investment trusts that Deutsch mentions).
Note that both affidavits were submitted pre-trial and opposing counsel did not present any expert witness testimony that disputed these arguments.
Some readers have complained that I haven’t ever provided a PSA. Even though they are plentiful on Edgar, I’ve uploaded the one at issue in this case. The conveyance language is in Article II, which starts on page 31 of the pdf.
Back to the not-very-persuasive Deutsch attempts at legerdemain. Aside from disputing the reading of a specific case Levitin cites (and note, as we have stressed repeatedly, all the top New York trust experts concur with his interpretation), Deutsch’s other argument amount to depicting the securitization market as TBTF and hence above the law:
The notion that new legal decisions in all 50 states would be handed down with no legal precedence to nullify trillions of dollars of mortgage securitization transactions simply because the trusts acquired an interest in the pooled loans in accordance with applicable law but not in the manner that Mr. Levitin claims the trust documents require, appears on its face to be an unreasonable assertion.
Um, this isn’t “with no legal precedence”; New York trust law is very well settled and precedents go back to the late 1800s.
We now get to his efforts to explain away what appear to be widespread failures to observe the contacts. This is another doozy:
It is unclear and seemingly unreasonable to practicing industry lawyers why parties to a transaction would contract around the UCC by imposing significant additional indorsement requirements upon themselves, and then to have systematically failed to observe those expanded requirements. On the other hand, it is very reasonable to interpret the PSA language as not having been intended to require this expanded chain of indorsements above and beyond UCC requirements for indorsements, where the actual indorsement practice satisfied the UCC requirements.
This is simultaneously laughable and damaging. The argument basically boils down to: “Gee, the fact that no one bothered to observe the contracts means they never intended to. So we’ll just pretend those provisions don’t count.” Does that mean that people who promptly went into default obviously never intended to pay, and should therefore get free houses? Or that when a borrower sends a payment a day or two late, they clearly intended to pay on time, so no late fees should apply? I think a lot of people would agree to that theory of contracts as long as it applied to consumers as well as banks.
But notice the amazing admission: “then to have systematically failed to observe those expanded requirements.” This is even better than Kemp v. Countrywide! The head of the ASF tells the public in Congressional testimony that the entire industry group he represents “systematically failed” to honor their own agreements! We’ve suggested as much on the blog as a worst-case scenario, and now we have official confirmation.
But the reason that this is all so stunning is, utterly contrary to what Deutsch implies, was that these “expanded requirements” were standard in the industry from its early days and were adhered to. That’s why investors and industry participants have had difficulty believing that the notes were not conveyed on a widespread basis. In the 1980s and the 1990s, the contract terms governing conveyance were observed. For instance, industry members recall closings being delayed because a particular box of notes had not gotten to its intended destination. While compliance may not have been 100%, the notes were endorsed and the paper was moved.
As we’ve indicated again and again, what appears to have happened is the originators and packagers changed their practices without modifying their agreements to reflect this change. That means investors participated in deals that were misrepresented in fundamental ways. Conveyance of the note is critical to having clear rights to foreclose; any savvy investor would have been concerned about that issue had the industry behaved properly and revised the contracts to reflect its new procedures.
Now narrowly, Deutsch is right: securitization litigation is a cutting edge field, and no investor yet has decided to sue based on the the failure to convey the notes allowing for the recission of the trust, which Levitin has discussed as one remedy, or on a contract damage theory, of losses resulting from difficulties in foreclosures due to standing issues. So there is no case law on the entire theory presented by Levitin. However, there is ample case law on the major issues of law, and the factual matters are fairly easy to prove.
Nevertheless, it’s possible no investor will decide to pursue this sort of case, which would leave this question unsettled (trustees are apparently threatening investors not to, and I am told a lot of buy side investors are loath to alienate the dealer firms on which they think they depend for information. But there are some major actors, like Wells Fargo and US Bank who would seem not terribly well positioned to retaliate even if these concerns were valid). However, consumer lawyers are getting more and more sophisticated in using the PSA arguments to fight foreclosures, and the more bad press the banks have gotten, the more receptive judges appear to be becoming.
Thus even if the overarching issue remains unresolved due to continued timidity of investors, the odds are high that RMBS will have enough uncertainty regarding the ability of trusts to foreclose as to look more and more like unsecured consumer debt. That alone is a sufficiently damaging outcome that it ought to focus the mind of the ASF. Instead its reflex is to engage in classic shoot-the-messenger behavior, to attack those who point out the colossal mess the industry has created, and bury its head in the sand rather than work towards remedies.
Lewis Carroll again manages to dispatch the ASF reasoning rather tidily:
“Contrariwise,” continued Tweedledee, “if it was so, it might be; and if it were so, it would be; but as it isn’t, it ain’t. That’s logic.”