One of the strongest testaments to the severity of the mortgage mess is the use of document fabrication as a remedy to otherwise insoluble problems. Although the business has now been shut down, the firm DocX, which was a subsidiary of Lender Processing Services, had a notorious price sheet that showed the comparatively modest fees it charged for creating, as in fabricating, documents out of whole cloth. Foreclosure defense attorneys reacted strongly to the publication of this information. The price sheets contained codes, and they had repeatedly seen these very same codes on foreclosure related documents and had wondered what they meant.
Why would lawyers and servicers (and their enabler DocX) resort to fraud? As we explained last October:
The pooling and servicing agreement, which governs the creation of mortgage backed securities, called for the note to be endorsed (wet ink signatures) through the full chain of title. That means that the originator had to sign the note over to an intermediary party (there were usually at least two), who’d then have to endorse it over to the next intermediary party, and the final intermediary would have to endorse it over to the trustee on behalf of a specified trust (the entity that holds all the notes). This had to be done by closing; there were limited exceptions up to 90 days out; after that, no tickie, no laundry.
Evidence is mounting that for cost reasons, starting in the 2004-2005 time frame, originators like Countrywide simply quit conveying the note. We are told this practice was widespread, probably endemic. The notes are apparently are still in originator warehouses. That means the trust does not have them (the legalese is it is not the real party of interest), therefore it is not in a position to foreclose on behalf of the RMBS investors. So various ruses have been used to finesse this rather large problem.
The foreclosing party often obtains the note from the originator at the time of foreclosure, but that isn’t kosher under the rules governing the mortgage backed security. First, it’s too late to assign the mortgage to the trust. Second, IRS rules forbid a REMIC (real estate mortgage investment trust) from accepting a non-performing asset, meaning a dud loan. And it’s also problematic to assign a note from the originator if it’s bankrupt (the bankruptcy trustee must approve, and from what we can discern, the note are being conveyed without approval, plus there is no employee of the bankrupt entity authorized to endorse the note properly, another wee problem).
To put things a bit more precisely, the mortgage securitization trust is the party that needs to be able to foreclose, but if the notes weren’t conveyed properly to it in the stipulated time frame, it does not have the legal standing to do so (presumably, a party earlier in the securitization chain can, but no one wants them to foreclose, since it would confirm that the MBS is in part if not in whole, not mortgage backed).
As readers may know, the idea that notes had not been conveyed properly on a large scale basis was treated as wild-eyed speculation last year (we had our intelligence directly from the head of one of the major subprime originators, who was stunned at the notion that the failure to convey the notes was a problem: “If what you say is true, we’re fucked. We didn’t move the paper. No one moved the paper”). Our impression is the breakdown started earlier, in the refi boom of 2002-2003. Since then, supporting evidence has continued to mount, on a large scale basis in courtrooms and with confirmation of pattern and practice in Kemp v. Countrywide. In that case, a senior Countrywide employee testified that Countrywide kept mortgage notes rather than having transferred them to the trustee (or a custodian acting on behalf of the trustee) as required in the pooling and servicing agreement. Abigail Field performed a small scale study (foreclosures in two New York counties) that provided additional support. It found that none of the Countrywide-originated notes had been transferred as stipulated, as were a very large proportion of notes serviced by Countrywide but originated by other players.
So what other less than proper devices have servicers and foreclosure mills used to work around this mess? One that we’ve discussed repeatedly in the past is the use of almost-certain-to-be-fabricated allonges. An allonge is a separate sheet of paper which is attached to a note to allow for more signatures, in this case, endorsements, to be added. Allonges have had a way of magically appearing in collateral files while trails are in progress (I’ve seen it happen in cases I was tracking; it’s gotten so common that some attorneys warn judges to be on the alert for “ta dah” moments).
Although I have seen cases where allonges were obviously phony (the Photoshopping was crude, with signatures forced to fit, and the servicer employee was also revealed in trial to have perjured himself), there has been a bit of resistance among the recognized experts on this beat to take the idea that made-up allonges were becoming the preferred fix for the widespread mortgage transfer stuff up. So the fact that Georgetown law professor Adam Levitin has come around to discussing this practice in his latest post, “Do We Have a Fraud Problem? The Case of the Mysteriously Appearing Allonge,” is significant. From his post:
Frankly, no one should ever be using an allonge if there is room for an endorsement on the original note…
The law on allonges is not particularly well-developed. The 1951 version of the UCC, in force in NY and South Carolina (I think), covers them in section 3-202, but the current version does not. The old version of the UCC required that allonges be “firmly attached.” That requirement seems to have been fulfilled via pasting or gluing and maybe stapling. Query whether paper clip or rubber band or simply in the same folder will suffice. I’m not sure why any of them would. None of these methods answers the question of when the allonge was created. I can paste or rubberband the day of trial. There’s a smidgen of state law on this, but it hasn’t been a major issue previously.
Which brings us to BONY v. Faulk. In this case, the foreclosure filing included a 3 page note. The note lacked endorsements connecting the originator to BONY as trustee for the foreclosing securitziation trust. This set up a motion to dismiss on the grounds that BONY didn’t have any right to do anything–it had no connection with the note.
But wait! Suddenly BONY’s attorney tells the court that she is in possession of the fourth page of the note, which includes a blank endorsement. Puhlease…..
But here’s what perplexes me. Suppose that an allonge is produced. How are we going to know when that allonge was created or that it even relates to the note in question? (Just so everyone’s clear–if the endorsement were created later, then BONY as trustee for CWABS 2006-13 trust had no standing at the time the action was filed because the trust didn’t own the note at that time.) How do we know that this attorney isn’t engaged in fraud on the court (and a host of other violations of state and federal law)?
And this isn’t even getting into the question of whether the PSA at issue requires specific endorsements, not endorsements in blank. As it turns out that’s a problem in this particular case. Here’s the PSA for CWABS 2006-13 trust. Section 2.01(g)(1) provides that the Depositor deliver to the trustee:
the original Mortgage Note, endorsed by manual of 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…
…..Critically, this PSA requires a complete chain of endorsement with all intervening endorsements. A single endorsement in blank ain’t gonna do it if this PSA means anything… The only way there should be a separate blank endorsement page is if there was non-compliance with the PSA. Are we really to believe that happened? (Well, yes, but the attorney can’t really argue that BONY generally doesn’t comply with its duties as trustee, now can she?)
We’ve already seen pretty shocking evidence of documentation fraud in foreclosures. Remember that the robosigning scandal was the by-product of depositions that aimed to show backdating of assignments to trusts….The depositions showed pretty clearly that there was backdating–the notarizations were by notaries who didn’t have their commissions until a couple of years subsequent or were done on Christmas Day, etc…..
I hope that courts will recognize that real serious potential for fraud that exists when one combines endorsements in blank with allonges and start demanding (1) that the complete note be filed with the original filing and (2) that anyone using an allonge prove that the allonge goes with the note in question. I think we’ve passed the point were there can be any assumptions of good faith and fair dealing.
Note that attacking the validity of the allonges directly (bringing in experts to say they are phony) isn’t the usual line of attack and for good reason. Judges don’t like having to rule that a bank was engaged in making up documents (yes, I know, they should be indifferent, but there a lot of resistance to issuing a ruling that is tantamount to calling big established institutions crooks). For readers who like technical details, there is also a good comment at Credit Slips by Tom Cox, the Maine attorney who broke open the robosigning scandal. He discusses arguments based on UCC §3-308(1) that can be used to attack bogus allonges.