When I worked for Goldman, and later McKinsey, professionals at each firm would joke about presentations that passed the weight test. That tag line referred to documents heavy enough to land on a client desk with an impressive “thunk” so as to seem intimidating even before opening them. The implication was that length could and did serve to finesse substance.
Paul Jackson’s nearly 2600 word post endeavoring to address our previous critique of his analysis appears to be a similar weight test exercise. I do not mean to suggest that Jackson is seeking to deceive; rather, as I posited before, his main sources continue to be unnamed attorneys who are come from the securitization industry, given how closely his arguments hew to American Securitization Forum party line. A journalist is only as good as his sources, and it appears that Jackson has made at most only token efforts to reach out beyond his circle of usual suspects. It ins’t much of a stretch to imagine that some, perhaps quite a few, of his sources have exposure to liability based on securities law opinions they have provided and hence would be particularly eager to muddy the water on these issues to deter investor lawsuits.
While Jackson also claims to have invested “weeks” of research into this topic, this pales compared to the career-spanning efforts of legal authorities like New York trust law experts Professor Ira Bloom and Professor Adam Levitin, who are in complete opposition to the Jackson assertions (and remember that Jackson is not even an attorney).
Despite his claims of speaking to “trust attorneys in New York”, his analysis he presents on that issue is such a gloss as to call into question either the expertise and/or objectivity of the individuals he conferred with. As we indicated, the other three top New York trust law experts concur with the Bloom/Levitin reading (they are if anything more forceful in their position). Why did Jackson not call Levitin, who is accessible, if he really wanted to give a fair treatment of this topic? Sadly, the caliber of this post strongly suggests that Jackson’s readings come directly or indirectly from securitization industry sources, rather than resulting from a bona fide effort to get to the bottom of these issues.
Despite its length, Jackson’s post effectively makes only two points, and we will address each in due course. But from an argumentation standpoint, it fails for two reasons:
1. In many cases, the rebuttals offered are simply irrelevant to the arguments at hand.
2. The post engages in considerable misrepresentation and straw-manning of the analysis we and others have made concerning the problems with mortgage securitizations
Jackson frames his entire post around this straw man: “issues surrounding securitization trust validity.” And he fails even in his effort to refute that issue effectively.
Note we have never treated the question of whether the trust were void (a possibility under New York law if no assets were conveyed to it as of closing) as the basis for our argument. It has always been an aside, a passing mention of a worst case scenario. The securitizations have serious problems, both under New York trust law (which governs virtually all mortgage securitizations) and the laws of many states, without considering this extreme scenario.
So the entire piece is effectively an effort to divert attention from the real argument, which continues to be that the attempt to transfer collateral was inadequate as it relates to the collateral. Thus the trust is unable to establish that is has standing to foreclose in its name. This means, to use Adam Levitin’s turn of phrase, that they may be “non-mortgage-backed securities”, effectively unsecured consumer paper, when they were sold as something with far better credit protection. Now clearly, banks are still able to foreclose in many cases, but the more borrowers and judges wise up to the problems that the securitization industry itself created, the more often foreclosures will be contested successfully.
Jackson’s irrelevant rebuttal focuses on one leg of the standard two-leg spurious rejoinder: the securitization document is valid (his focus) and and the mortgage is valid. Neither point is in dispute.
One can only conclude that Jackson and his sources do not understand the argument or do not want to address it.
But let’s have some fun and shred Jackson’s diversionary discussion anyhow.
His post covers two bases:
1. For New York trusts, intent is sufficient to achieve conveyance
2. The revelation in Kemp v. Countrywide, in which a Countrywide executive said that Countrywide customarily retained the notes (the borrowers’ IOUs) rather than transfer them to the securitization trusts, as required in the governing agreement (the pooling and servicing agreement, or PSA) is not potentially significant as we and others have argued
Let’s go to his New York trust argument. The reason New York trust law matters is that the trusts are the owners of the borrower notes and related liens (confusingly called “mortgages” or in some states, “deeds of trust”). Thus they are the parties that can foreclose, and they are pretty much always stipulated to be governed by New York law.
Jackson chides yours truly for not offering a legal analysis, which is amusing, since a legal analysis would run to at least the length of a law review article. He offers a teeny legal argument (which he incorrectly implies is tantamount to a legal analysis). I’m going to reproduce the entire section from his post:
It turns out that in New York common law, a single case, Brown v Spohr (1904), has become axiomatic in establishing the essential elements of a valid trust. Those elements, very specifically and verbatim:
1) A designated beneficiary;
2) A designated trustee, who must not be the beneficiary;
3) A fund or other property sufficiently designated or identified to enable title thereto to pass to the trustee; and
4) The actual delivery of the fund or other property, or of a legal assignment thereof to the trustee, with the intention of passing legal title thereto to him as trustee.
Here, I want to zero in on the fourth element of a valid trust, as it is the most relevant. In particular, notice that “actual delivery” of the asset to the trust is not the sole method by which one can convey an asset into trust; a “legal assignment” to the trustee is considered equivalent to and, on the basis of this language, indistinguishable from actual delivery for the purposes of establishing the validity of, and conveyance into, a trust.
Regardless of whether via actual delivery or legal assignment, New York trust law also recognizes the foundational importance of “the intention of passing legal title” (emphasis mine) to the trustee. The language used clearly does not require “the act of passing of legal title” in order for a valid trust to exist, or for conveyance; nor should passing legal title to property be confused with either delivery or legal assignment of the same.
Yves here. This is pretty far off beam. First, even if a single case is a key precedent, reasoning from it in isolation is dangerous, and in this case, misleading. Second, he has conveniently excluded key context, which is the requirements of the pooling and servicing agreement.
While PSAs differ in some particulars, as a general rule they hew to this form:
In conjunction with that assignment the depositor will deliver for each mortgage loan… the following documents and things:
The PSA then goes on to discuss transferring the actual underlying assets in the form required which is endorsed properly through the chain of ownership showing all intervening endorsements from the party originating the loan to the last endorsee. Note that this is not simply stipulated in Article 2 of the PSA, which is where most people look for this language. It is set forth in this sort of detail, typically requiring specific endorsement (NOT endorsement in blank) in the custodial agreements or the trustee’s acceptance certificates. These indicate that the endorsements will be completed in the form required with the time frame set forth in the trust agreement.
And remember why endorsement is important. Promissory notes are negotiable instruments. If they are not endorsed properly, ownership has not been conveyed. If someone hands you a check made out to them and fails to endorse it over to you, you similarly cannot deposit it.
Now why does this matter? An important concept is that symbolic delivery, which is what this “legal assignment” amounts to, is kosher ONLY IF physical delivery cannot be effected. And various New York decisions take a pretty strict view of that matter. I’ve only pulled a few examples, but here is an appeals decisions that has been cited recently (and hence is considered valid as precedents) with germane language. From the New York Appeals courtMatter of Szabo, 1961:
This court has said: “The delivery necessary to consummate a gift must be as perfect as the nature of the property and the circumstances and surroundings of the parties will reasonably permit; there must be a change of dominion and ownership; intention or mere words cannot supply the place of an actual surrender of control and authority over the thing intended to be given.” (Vincent v. Rix, 248 N. Y. 76, 83.)
Szabo is discussed in later decisions (see here, in 1984) as clarifying certain matters in Vincent v. Rix, which is the foundational case; in more recent decisions, Szabo and Gruen v. Gruen are cited as critical precedents.
Now let us go back to Jackson. Consider the language from Vincent that is reaffirmed in Szabo, that the delivery much be as perfect as circumstances permit. We had over 15 years of notes being endorsed thorough the full chain of title and delivered to the trustees before the securitization industry appears to have decided this was too much bother. So they can’t fall back on the excuse that the requirements the industry itself devised and kept commemorating in contracts on an ongoing basis were just too onerous to adhere to.
In addition, “there must be a change in dominion and ownership”. A note endorsed in blank back at the originator, or anywhere other than in the hands of the trustee, could easily by accident be treated as property of the party possessing it. These are bearer instruments if endorsed in blank, as we are told many were; if endorsed specifically, they are “owned” by the last endorsee. The only way to make sure that the note ownership was transferred would have been to endorse it properly, though the full chain of title, to the trustee (NY law actually calls for it to be endorsed to the specific trust, but we’ll skip that nicety for now). Thus the failure to deliver and properly endorse a negotiable instrument fails both the dominion and ownership standards.
Now is this reading definitive? Hardly, which is why matters like this are better left to recognized authorities in this space, and not the unnamed individuals Jackson prefers to consult. The mere incorporation of a few considerations that Jackson confidently breezes over based on his few weeks of chatting with sources and reading some cases shows that there are plenty of precedents favoring our reading.
This is why the entire discussion Jackson advances on “legal assignment” argument is a fail. So you can ditch the entire discussion on his post in the sections on “New York trust law, and the importance of intent” and “Controlling law and context”.
He also makes a leap in the next section, on the UCC. We’ve indicated repeatedly that the germane section of the UCC is Article 1, which allows parties to hold themselves to requirements other that those set forth in the UCC. The argument as to which section of the UCC is germane in interpreting a PSA is one that to my knowledge has rarely if ever been presented to a judge in a foreclosure case. And it would not have changed the outcome in Kemp. So Jackson declaring a decision that mentioned Articles 3 and 9 of the UCC in passing cannot be deemed to be definitive.
Now let us turn to the part of the post that deals with our arguments on Kemp v. Countrywide. Again, we have a lengthy argument that utterly misses our point. In this case, we weren’t as explicit as perhaps we might have been. But Jackson is big on projection; he makes an anticipatory warning in a tweet about not putting words in his mouth, and then goes and does precisely the same thing.
The really funny bit about this section is how confused it is. He actually concedes the point we are making, then twists himself in knots to make another spurious argument. Here is his critical admission:
There is a difference between a trust owning an obligation, versus having the ability to enforce it.
Did Jackson not get the memo? If the trusts can’t enforce their obligations, meaning foreclose, they have non-mortgage-backed securities! Glad to see you agree that the scenario that the industry critics are worried about is a legitimate concern.
But no, Jackson immediately reverts to saying anyone who says anything bad about securitizations is wrong and ignorant to boot:
One of my sources noted last week that if an attorney-in-fact held possession of a note indorsed in blank, it’s the same thing as the trust holding the same. Naked Capitalism’s Smith derided this view:
Huh? The servicer is not the attorney-in-fact for the trust in Kemp. If they were, the attorney for BofA would certainly have tried this argument. In fact (hah!), the judge notes the plain language of the PSA, that the loan was supposed to be delivered to the trustee, and all parties agree in the case that this requirement was not met. Does this attorney know ANYTHING about securitization?
I won’t ask Smith a similar question about her knowledge of servicing practices, as I should have explained my source’s remark more clearly. Every servicer I have ever seen in a private-market deal has a limited Power of Attorney that grants them the ability to act as attorney-in-fact for the trust they are a named servicer for. And it’s my understanding that an attorney-in-fact for the trust holding on to assets owned by the trust constitutes “actual possession” to the trustee itself.
Why is this argument barmy? It’s utterly circular logic and falls apart when examined.
Let’s go through the logic, and you also need to look at the Kemp decision, which Jackson either did not do or did very selectively. The bankruptcy judge understood clearly an issue we’ve raised earlier, that “Countrywide” is not one beast. Countrywide as servicer is most decidedly not the same as Countrywide as originator:
Pursuant to the PSA, Countrywide Servicing, and not Countrywide, Inc., was the master servicer for the transferred loans.
So query: by what mechanism can Countrywide as originator, one legal entity, legitimately transfer the notes to Countrywide as servicer, a different legal entity? A power of attorney allows a designated party to act in the place of a principal. That means it can never have rights or authority beyond those held by the principal; by nature, a principal cannot confer rights or powers it does not have.
You can’t convey possession of an asset you don’t possess via a power of attorney. This is a complete non-concept. The only way the notes can legitimately get from Countrywide as originator to Countrywide as servicer is via conveyance to the trust, which everyone in the Kemp case agrees did not happen! Per the judge:
Because the Bank of New York never had possession of the note, it can not qualify as a “holder” under the New Jersey UCC.
To put it more simply, any provisions of whatever standard form power of attorney that Countrywide as servicer was conferred by Bank of New York would be invalid to the extent those provisions relied upon possession of the note.
As we indicated earlier, Jackson has again reverted to a tactic we’ve seen in his earlier work, to focus on one point of an argument which he considers to be weak (in each case, incorrectly) and then try to pump it up to suggest all criticisms by the same parties are invalid. And as we’ve said repeatedly, if the industry thinks all it has to do is muddy the New York trust arguments, which was the focus of Jackson’s piece, it is smoking something very strong. From a recent post:
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.
Jackson’s posts provide compelling evidence that the securitization industry’s self-destructive stance remains unchanged.