FUBAR Mortgage Behavior: Florida Banks Destroyed Notes; Others Never Transferred Them

Before we get to the meat of the post, I have a fun project for readers. Just as “whocoulddanode” has become inextricably linked to the excuses for the failure to see the housing crisis coming, we need a new tag phase for the hopeless tangled mess that the folks who screwed up mortgage securitizations have foisted on Americans. Conceptually, FUBAR (Fucked Up Beyond All Recognition) is accurate, but it is pretty antique as far as slang goes, so we need a new term. Ideas encouraged.

But to give readers the latest report of modern FUBAR, mortgage edition, let us continue with the sorry saga of “Where’s My Note?” For the benefit of newbies, what everyone calls a mortgage actually has two components: the note, which is the borrower IOU, and the mortgage (in some states, it’s called a deed of trust) which is the lien on the property. In 45 states, the mortgage is a mere accessory to the note; you must be the real party of interest in the note in order to foreclose.

The pooling and servicing agreement, which governs who does what when in a mortgage securitization, requires the note to be endorsed (just like a check, signed by one party over to the next), showing the full chain of title, and the minimum conveyance chain is A (originator) => B (sponsor) => C (depositor) => D (trust). The endorsements also have to be wet ink; no electronic signatures permitted.

I’ve had a lot of anecdotal evidence to support the idea that these procedures, which were created in the early days of mortgage securitizations, were simply not observed on a widespread, if not a universal basis. My sense is that the breakdown in practice was well underway by 2004, but it may have taken place earlier. For instance, a group of over 100 lawyers in a loose network around Max Garndner, a North Carolina bankruptcy lawyer who has taken a serious interest in this area, now has a standing joke that the first one that finds a deal where the note was correctly endorsed must bronze it and hang it on their wall. In other words, in none of the cases this large group has seen were the notes transferred to the trust properly.

I’ve been reluctant to take as strong a stand as their collective experience suggests, but independent evidence confirms their report. One little stunner came courtesy Alan Grayson’s office. In 2009, the Florida Bankers Association wrote a letter to the Florida Supreme Court objecting to some proposed rule changes for foreclosure cases. The full text of the letter is here. The critical section:

The reason “many firms file lost note counts as a standard alternative pleading in the complaint” is because the physical document was deliberately eliminated to avoid confusion immediately upon its conversion to an electronic file. See State Street Bank and Trust Company v. Lord, 851 So. 2d 790 (Fla. 4th DCA 2003). Electronic storage is almost universally acknowledged as safer, more efficient and less expensive than maintaining the originals in hard copy, which bears the concomitant costs of physical indexing, archiving and maintaining security. It is a standard in the industry and becoming the benchmark of modern efficiency across the spectrum of commerce—including the court system.

This is highly entertaining, because the excuse is “oh we destroyed the note, so our standard practice is to use a lost note affidavit.” If this was really as widespread as the Florida Bankers Association suggests, they are in a whole heap of trouble, because in most (if not all) jurisdictions, original notes with proper wet ink endorsements are required. And in states that are serious about proper procedure (South Carolina, for instance), judges are not going to have much sympathy with the use of a lost note affidavit when the note was destroyed.

But while it is clear the notes weren’t handled properly, I’m not certain that this electronic scanning story is accurate either (meaning it isn’t standard practice in mortgage land). In plenty of cases, plaintiffs come up with collateral files with hard copies of documents in them, albeit including suspiciously helpful ones that appear miraculously at the last minute.

At least in private label deals (meaning non Freddie and Fannie), it appears instead that the notes are back with the originator, never endorsed as required in the pooling and servicing agreement, and are transferred out when needed. We provided a report that suggests all the notes from Countrywide deals are still with Countrywide, even though it securitized 96% of the mortgages it originated. We got even stronger confirmation over the weekend.

One of my colleagues had a long conversation with the CEO of a major subprime lender that was later acquired by a larger bank that was a major residential mortgage player. This buddy went through his explanation of why he thought mortgage trusts were in trouble if more people wised up to how they had messed up with making sure they got the note. The former CEO was initially resistant, arguing that they had gotten opinions from top law firms. My contact was very familiar with those opinions, and told him how qualified they were, and did not cover the little problem of not complying with the terms of the pooling and servicing agreement. He also rebutted other objections of the CEO. They guy then laughed nervously and said, “Well, if you’re right, we’re fucked. We never transferred the paper. No one in the industry transferred the paper.”

This creates a lot of problems. If the originator is bankrupt (New Century, IndyMac), the bankruptcy trustee is supposed to approve any assets leaving the BK’d estate. I’m told bankruptcy judges who have been asked were not happy to hear this sort of thing might be taking place, which strongly suggests this activity is going on without the requisite approvals. And who from the BK’d entity can endorse it over? It doesn’t have any more officers or employees. Similarly, a lot of the intermediary entities (the B and C in the A-B-C-D chain earlier) are long dead. How do you obtain their endorsements?

Now you understand why everyone is resorting to fabricated documents and bogus affidavits. There is no simple way to fix this mess. The cure for the mortgage documents puts the loan out of eligibility for the trust. In order to cure, on a current basis, they have to argue that the loan goes retroactively back into the trust. This is the cure that the banks have been unwilling to do, because it is a big problem for the MBS.

The former subprime lender CEO still refused this to consider this a problem: “Oh, Congress will pass a law.” My colleague pointed out that this was a state law matter, Congress had no authority, and even the Supine Court was unlikely to intervene in well settled real estate law. The arguments from the CEO were distressingly familiar, bank industry incumbents seem to resort to the same script: any borrower friendly solution will wreck the economy, the banks will have to get another bailout to get themselves out of this mess.

So here we are back to 2007-8. If you and I make a serious mistake at our jobs, we get fired, and if we make a really serious error, our company could perish. But when bankers screw up, and leave a lot of collateral damage in their wake, they are confident that their sugar daddies in DC will clean up the mess for them.

And the worse is they might even be correct if we let them get away with it this time.

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  1. attempter

    Hmm. No Note, No Problem = Nononope, which is the only response the rule of law or the naked capitalism can give to these questions. Though since the naked capitalism will still claim to be draped in the robe of the sanctity of the land property distribution, and will try to continue to enforce it, no longer legally but extralegally, imperially, by force, we can call this Mortgage Imperialism. (Empire almost contains the term MERS.)

    Well, that’s not a good answer yet, but a little brainstorming.

    Now, they’re fucked as the guy says. But I assume they’re not going to submit to the rule of law on this. I assume they’ll push Florida methods and worse as far as they can.

    So here again the question becomes, will the people roll over for this? Will those who are still paying continue to side with the banks against their own interest?

    Or will the people use this the way they should, as a revolutionary pivot point? This cannot be handled legally in the courts, so the system must either capitulate or move to open, systematic lawlessness in the courts. At that point it’s the people’s responsibility to refuse to recognize illegal tribunals like the ones in Florida.

    And once we embark upon that path, it never makes any sense to stop and stand still, but the anti-criminal action must be expanded. But unfortunately, history shows that debtors are almost never proactive this way.

  2. john

    So, here we are three years into this mess (right? August 2007 when the MBS market really started seizing up) and we’re just getting a handle on how it really worked?

  3. Mark

    Don’t see the big problem.

    So the homeowner’s Note is gone. The fact the homeowner did pay at least 1 mortgage payment is evidence to me that they owned the house or agreed to take full ownership of the house once all the mortgage payments for eventually paid, even if they didn’t sign the Note.

    1. Jesse

      So, if no signature is required, I could see how a shady agent pull some fast ones with miraculously-found documentation. That number there that said 6.5%? Oh, it looks like it’s actually 6.8% on our copy, you must have remembered wrong!

  4. F. Beard

    The arguments from the CEO were distressingly familiar, bank industry incumbents seem to resort to the same script: any borrower friendly solution will wreck the economy, the banks will have to get another bailout to get themselves out of this mess. Yves

    Not so. An equal and sufficient distribution of new legal tender fiat, United States Notes, to every US adult would fix everyone in nominal terms:

    1) Underwater homeowners could pay down their mortgages to current price levels.
    2) Savers would be compensated for years of suppressed interest rates.
    3) The banks would be fixed.
    4) State tax revenues would be fixed.
    5) The economy would be reflated.

    Inflation risk? Then put the banks out of the counterfeiting business via leverage restrictions.

    The Bible commands debt forgiveness (Deuteronomy 15, Leviticus 25) every 7 years even if the debt is not created out of thin air as our current banking system allows. Our need to obey is much greater today.

    Thanks Yves, for your excellent and patient explanations of the mess we’re in.

  5. Tim Duncan

    Yves –

    As an attorney, I undersatnd and appreciate that the judicial system operates with finite resources. In every area of the law, judges will often choose expediency over making sure that the constitution and every law is being followed to the letter. This is often a gut call by the judge based on years of experience (and, yes, sometimes by their own predjudices as to the character of the parties involved). Thus, I have some sympathy for the need to move things along in foreclosure cases if the fact of the matter is that the defendant has stopped paying on a legitimate mortgage and is trying to avoid payment or foreclosure on technicalities.

    That being said, there are some very real risks here for homeowners – whatever the status of their mortgage – that the mortgage and securiitzation industry caused by shoddy practices.

    Proper filings of liens, documentation and acknowledgements of assigments all protect against multiple parties making claims on a single stream of payments and underlying collateral.

    All of us who have been in finance know that one of the most comon areas of fraud involves the sale of notes, leases and other streams of payment to multiple parties. In most cases, the fraudster will perpetuate and build the fraud by using a small portion of the proceeds from the sale of the payments to maintain the payment stream for a period of months or years before being caught or skipping town.

    So, while borrowers have an obligaton to perform as stated in the promissory note which should not be abrogated my meaningless technicalities, they also have a right to be protected against multiple claims on a single note. The latter is only feasible if the lender and subsequent holders of the note properly followed long established legal procedures which they seem to have ignored in many cases.

    If the lender cannot adequately prove ownership of a note, they can offer no assurance that others will not subsequently pop up demanding payment from the homeowner on the same note after payment or a foreclosure.

    1. Pearl

      If, indeed, you truly are an attorney, Mr. Duncan–you most certainly are not a very good one. “Meaningless technicalities?” Seriously?
      With all due respect sir, I do believe that whomever decided to confer upon you a juris doctorate degree must have based the decision upon some sort of “meaningless technicality.”

      1. Pearl

        So sorry, Mr. Duncan. The prior comment was made in error and intended for another commenter. You are clearly a fine attorney because you and I come down on the same side of this issue!
        Please accept my apology, and best regards.

  6. Marion

    It strikes me that in SC at least and probably every other state the bankers would have no trouble at all marching down to the legislature and getting them to authorize a ‘cure’, either permitting the ‘lost note’ pleading if there is an electronic record, or allowing a transfer of a note out of a bankrupt company nunc pro tunc, as they used to say in law school.
    What I don’t understand is how the plaintiffs found employees dumb enough to sign false affidavits. I hope they were being paid enough to compensate them for the risk they were taking. Whatever the justification of monkey business with documents, courts take a serious view of having perjury committed.

  7. Francois T

    My colleague pointed out that this was a state law matter, Congress had no authority, and even the Supine Court was unlikely to intervene in well settled real estate law.

    Well, well ,well! State law huh?

    Isn’t that too bad for the banksters?

    Consider this:
    How do you buy politicians in 45 to 50 states? State politicians are much closer to the voters than the distant and haughty federal blowhards in DC. Furthermore, and contrary to what’s going on in DC, there are newspapers and TV stations following State politics and the actors.

    As the evidence of widespread fraud become well known, (did you notice the paucity of news on this topic in the MSM?) competent lawyers for the homeowners will be merciless in asking for the proper documents. Even if the judge decide to gloss over the problems, they’re sure to get reversed on appeal.

    How many times does a judge want to get reversed on appeal?

    Gonna be fun to watch…get the popcorn!

    1. liberal

      “State politicians are much closer to the voters than the distant and haughty federal blowhards in DC.”

      There’s actually no evidence for that, and my view of things is that the opposite is actually true. In particular, while Federal politicians suck up to business interests, state-level politicians are far worse. And local (municipal) politicians are always and everywhere in the pockets of local developers.

  8. Tom Stone

    My solution? Bar any entity that has filed a false affidavit from asserting a claim (dirty hands) and have the note in such cases escheat to the various states. Those states can then modify the terms or reduce the principal balances as they wish. This keeps bad actors from profiting from their fraud upon the courts and provides money to cash strapped states,it also helps promote stability in households and communities as well as reestablishing a chain of title.

  9. marion

    I don’t know about anywhere else, but in states with Republican governors and legislatures like mine, there is no question that the banks have the control they need to get what they want out of the legislature. The public has been convinced by those people that it’s not in their interests to accept money from the federal government–and we’re one of the poorest states in the union.
    And as for the media keeping watch and blowing the whistle…you’re joking.

  10. Rick Halsen

    FUBAR. Hmmmmmm. Ancient but effective. A substitute?

    BRBAU. Banana Republic Business As Usual.

    (Pronounced Brrrrbow, bow as in bow-wow. Fitting in a canine sort of manner.)

    Not as dynamic as FUBAR but in conjunction to the BRBAU situation we face today unfolding in the U.S. perhaps soon BRBAU will be all of reality and then some. Yup, I do definitely believe we’re going BRBAU with this here mortgage daisy chain cluster phuck.

    “Gee Grandpa, you guys really FUBARBRBAUED things up, didn’t ya?”

  11. phemfrog

    Yves, what does this mean for people like me who are not at risk for foreclosure, but have had their mortgage securitized and sold multiple times?

    My initial mortgages (1st and HELOC) were through Quicken Loans, who immediately sold them to Countrywide and Indymac. When they tanked, BofA got my HELOC and OneWest got the 1st.

    So do any of these folks actually have the note? What is that going to mean if i wanna sell the house!!?

    1. Eric

      Come to think of it, I paid off a mortgage in 2009 and was a little surprised not to get something back suitable for burning. My folks paid off a 1968 vintage 30 year fixed mortgage a little early – maybe in 1994 – and they actually got back paperwork that they ceremoniously burned in the Weber while grilling hot dogs. Me, I got a form letter with words that made it sound like it was the last paper on earth that I should burn. My parents have passed, so too late to figure out what paperwork came back to them, but it seemed like something that was from the 1968 closing or at least from the county register with a matter of days afterwards closing.

  12. Mindrayge

    Yves, maybe this isn’t something you know but I have to ask the questions.

    What does this do in terms of the tax exempt status of those MBS vehicles? It was my understanding that a “true sale” of the note was required. If the note wasn’t transferred does the IRS still consider it a “true sale”? The transfer of ownership would be evidence of the sale. If that wasn’t done then what proof is there that a sale actually took place?

    Of course I have an obvious fraud question. If the note was never transferred what was there to prevent the last valid holder of the note from using that as collateral for other borrowing (money markets, for example) or even to place that note in another MBS?

    Finally, doesn’t the trustee for the MBS bear all of the responsibility here? They are on the hook for making sure that A-B-C-D is executed properly for the benefit of the trust. If they knowingly accepted or willfully destroyed the proper chain haven’t they broken the trust itself under the various trust laws? New York State seems to be the trust jurisdiction of choice but I am sure there are others.

    Further, in terms of FDIC actions, wouldn’t this expose MBS to “clawback” (well not true clawback) in that those notes are assets still held by the originator?

    Sorry for all the questions but I think this all goes way beyond who is, or who is not, entitled to foreclose.

  13. dladow

    In 2009, Washington state amended its deed of trust foreclosure statute RCW 61.24 that are very similar to what happened in California to their foreclosure rules. On the debtor friendly side, the changes enacted a 30 day delay in sending the notice of defalt and requiring the trustee to contact the debtor in a manner similar to the California code. And the claims of common law fraud and the trustee’s failure materially to comply with the deed of trust law, are not waived by the borrower’s failure to bring a lawsuit to enjoin a foreclosure sale of an owner-occupied one- to four-unit residence, but these claims must be asserted
    within two years of the foreclosure sale.
    On the creditor friendly side, the trustee no longer has a fiduciary duty to the borrower; now the trustee merely has has “a duty of good faith to the borrower, beneficiary, and grantor.” Another significant change, in light of your blog post above, is that although “there must be proof that the beneficiary is the owner of the obligation secured by the deed of trust, [a] declaration by the beneficiary that the beneficiary is the actual holder is sufficient proof.” In other words, no need to produce the original note, assignments, or allonges. It would be interesting see where these amendments originated – my guess is from the financial industry lawyers/lobbyists, and that the removal of the requirement to produce the note and no more fiduciary duties were more than adequate trade offs for what seems to be essentially eyewash consumer protection provisions, although the 2 year claims period following foreclosure could possibly bite if the good faith requirement can be shown to have been violated.

  14. Tom Blanton

    All of the ranting about sloppy paperwork involving the assignment of notes serves as a huge distraction from far more important issues like actual fraud in the mortgage origination process (like bogus appraisals) and fraud/misrepresentation in the bundling and marketing of mortgage backed securities.

    Anyone who is familiar with legal documents filed as public records will find sloppily prepared deeds, wills, agreements, and mortgage documents all day long in every courthouse in America. But, all this sloppy document preparation is not what caused the system of mortgage finance to collapse and it did not create an artificial bubble to burst in the real estate market.

    If anyone is really worried about whether their mortgage note has been properly assigned, protect yourself by retaining proof of payment of your mortgage payments and documents from whoever claims to be the noteholder or servicer.

    Getting lenders to record releases for mortgage loans has always been a problem. Sometimes they will drag their feet for months. Follow up after you refinance to make sure loans paid off have been released. Ask your closing agent to provide you with a recorded copy of the release.

    1. Yves Smith Post author

      With all due respect, you don’t seem to have read the post or taken the time to understand the issues. This isn’t “sloppy paperwork.” The industry set out BY DESIGN to ignre/override the legal requirements they needed to satisfy for the MBS to actually own the notes, and these requirements are reflected in their own pooling & servicing agreements, and which they had adhered to for many years.

      In addition, you need to wake up and smell the coffee. So exactly what are we gonna do about origination fraud? Most if not all of the bad originators are bankrupt. That isn’t a viable course of action. And suing for bad reps and warranties on the MBS deals? Reps and warranties suits are hard to win (those legal beagles do a very good job of contemplating various bad doo doo; damages tend to be meager) and more important, the statue of limitations has passed under securities laws.

      This is the only avenue of recourse for borrowers who have been screwed. I assume you don’t realize that you are effectively telling them, like Charlie Munger, to suck it in and cope?

  15. stopGOVTwaste

    SECTION 20 on the standard FANNIE/FREDDIE Mortgage Instrument says that the note can be sold but ONLY if the MORTGAGE goes with it. MERS prevents this from happening. So what they are bringing to court is actually a FAKE COUNTERFEIT NOTE!

    Even the President of the FL BANKERS ASSOC. says that the “original” notes were destroyed.


    UCC § 3-604
    FL Stat. 673.6041
    § 913 By loss or destruction of instrument [11 Am Jur 2d BILLS AND NOTES]

  16. Rick Halsen

    There outta be a real law against this sorta stuff. Enforced by real judges, real prosecutors, and real bailiffs. And real state legislators, real governors, and real attorney generals. Where in the hell do you find these real people nowadays?

    What have we let ourselves turn into?

    A rotten banana republic? I mean I can live with a banana republic as long as they’re real fresh. But this is ridiculous.


  17. John F. Opie

    ***//Conceptually, FUBAR (Fucked Up Beyond All Recognition) is accurate, but it is pretty antique as far as slang goes, so we need a new term. Ideas encouraged.//***

    How about SPALL?

    Shoddy Practices Are Legalized Larceny

    Or MOFU?

    Mortgage Originator Fucked Up

    or DINAJ

    Dilbert Is Not A Joke

  18. lawgrace

    QUESTIONABLE commercial and residential real estate foreclosures via deceptive and fraudulent proceedings enable lenders to repeatedly, illegally flip properties, and enables falsified IRS form 1099-A’s. Foreclosure fraud is the best means by which unscrupulous foreclosure mill lawyers deceptively auction and bid (or insiders bid) and acquire those properties; and some neighborhoods blighted.

    Foreclosure fraud deliberately utilizes defunct mortgage lenders companies or companies which no longer own promissory notes; huge ransom “fees makes it even harder for property owners to regain properties. Two particular companies “which benefit from fraudulent foreclosures are Wells Fargo and Freddie Mac.

    Representations about Freddie Mac billion dollar losses should be weighed against the needless money that Freddie –as well as other lenders– PAY foreclosure mills and debt collectors who utilize courtrooms to outmaneuver and persecute property owners who oppose fraudulent foreclosures. Further, when justified lawsuits for fraud –as well as for OUTRAGEOUS “Unfair Debt Collection Practices,” become filed against lenders and mills, those same lawyers make additional $$$$ from litigating and concealing their own wrongdoing!

    Further, THE SHOCKING fabricated pleadings filed in Bankruptcy courts for FRAUDULENT REPOSSESSION of commercial and residential real estate res ipsa loquitur is demonstration of intentional foreclosure fraud. Foreclosure fraud has many far reaching effects for people; for example: UNJUSTIFIABLE HOMELESSNESS, UNFAIRLY answerable for IRS tax bills, and undue “deficiency judgments.” **MORE: http://open.salon.com/blog/wwwlawgraceorg/2010/08/18/case_in_point_foreclosure_mills_judicial_fraud_consumer

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