Readers may find it odd that I keep returning to the matter of the widely touted letter last week signed by investors Pimco et al pushing Countrywide as servicer to put back loans on some 115 mortgage securitizations totaling $47 billion, of which the letter-writers holdings represent roughly $16.5 billion. The big reason is that this letter, which is a procedural first step which may be laying the ground for litigation, is likely to mean far less than the media reaction would lead you to believe. We did a quick and dirty analysis last week that showed that even if this effort succeeds, the recovery amount is likely to be far less than is widely anticipated.
Aside from the overhyping of this particular situation, we have suddenly seen a shift in sentiment where banks and servicers are suddenly seen as vulnerable, and all sorts of litigation is being filed. The problem is that a lot of reporters tend to treat all cases as having equally good potential, when some have good foundations in underlying legal theories and fact sets, while others are a stretch. This particular possible future legal action falls into the latter category.
Let’s dig into a couple of issues. First is that the letter claims that Countrywide (as servicer) has been remiss in not putting back loans. The argument is that there have been underwriting breaches, that loans were put into the trust that were in violation of the applicable representations and warranties when they were purchased by the securitization entities, and that Countrywide had a duty both to notify the investors of such breaches and to put back the loans to the originator.
Now let’s look at simple way this might play out: what if Countrywide simply denies there are breaches, or ignores the letter? What happens next?
The parties would then need to sue. They would argue that their have been breaches, that Countrywide should have put back loans, that it is in violation of its servicing agreement. The intent would presumably to force Countrywide to comply or to fire Countrywide. But how meaningful a threat is that, really? From MBSGuy:
If holders of the certificates representing a majority or supermajority, depending on the provision, vote together, they can potentially terminate a servicer or subservicer or a trustee.
Yves here. Note this group does not constitute a majority across all the bonds, but it might on selected issues, so they ability to terminate is questionable. But let’s go to the next part from him:
But what would be the point? Removing either of these entities would not fix the issue of conveyance of the mortgage loans and would not remove any liability that these parties might have. In addition, what replacement would be better? All of the servicers and trustees are implicated in this mess. As a result, it is really an empty threat.
On deals I was involved in, we would use the threat of terminating the servicer to try to compel them to correct their actions. It was very hard to get a new servicer to step in and take over a severely distressed transaction because it is a negative cash flow business. They would only do so if they could be paid in excess of the contractual servicing fee. In that event – where will the money come from? The only way to get it from the trust is to amend the agreement, which requires the consent of a super majority of the bond holders or the bond insurer. Even if you accomplished it, you would likely face litigation from adversely affected bond holders. Despite all of this, bond insurers have special contractual rights and can terminate servicing without bond holder consent.
The one time we did this, the new servicer really didn’t improve anything. The only way it really works is if you have a third party servicer on board at closing who contractually agrees to take over servicing at a set fee.
Yves here. So the only way to remove the servicer, if you aren’t a bond insurer and don’t have a rmajority or supermajority, as the case may be, is to sue for contract violation. But here the problem is circular: the plantiiff say there has been breaches, the servicer says no. This is a he-said, she said, unless the plantiffs can provide make a credible enough case that there must have been breaches ex having access to the loan files. If the plaintiffs can’t allege specific breaches, the odds are decent a judge will not permit discovery and will dismiss the case.
But some readers will say, aha, but didn’t Clayton just tell the FCIC that there were all sorts of violations of reps and warranties in the deals it reviewed in 2006 and 2007? ,True, but were any of these reports on Countrywide deals? There is reason to suspect not. Clayton was used most often on deals packaged by investment banks, where they were acquiring many of their mortgages from smaller banks and mortgage brokers. So the check by Clayton provided some reassurance to rating agencies. By contrast, Countrywide sourced all its paper from its own operation, and many investors looked more favorably upon loans that were sourced by banks than by diffuse networks. So it isn’t clear that Clayton would have reviewed any Countrywide deals.
In addition, as we have stressed, it isn’t clear whether the investors will be able to prove that delinquencies were the result of underwriting failings, as opposed to job loss, death, or disability. As we indicated, this is normally argued on a loan-by-loan basis, which makes these cases absurdly expensive to pursue, hence they are usually settled for not very juicy amounts. Barry Ritholtz points to some testimony which suggests in the MBIA lawsuit against Countrywide on similar issues, the judge seemed inclined to look at a sample rather than all 384,000 loans, but the two sides have yet to agree on a sampling methodology. And the loans within that sample will be reviewed individually.
Before you argue, “Surely, it’s common sense, the fact that the loans were bad had to have made a difference,” let’s consider a hypothetical conversation. Countrywide calls the risk manager for one of the investors to the stand:
Laywer: You were in charge of risk management during 2006 and 2007, is that correct?
Lawyer: Did that include the development and use of models to estimate losses on subprime loan pools and bonds?
RM: [Some detail about nature of job and who did what, but answer is effectively yes]
Laywer: What was the worst case scenario that you modeled for housing price declines and unemployment?
RM: [After much hemming and hawing] Housing prices flat and unemployment at 6.5%
Lawyer: What level of losses do you think your model would have shown with unemployment at 10% and housing prices falling 25-45%, with the most severe declines in the biggest markets?
RM: [After vigorous efforts not to answer the question] Over 35%, maybe over 40%
Lawyer: And what losses are projected for subprime mortgage pools?
Let’s consider a few more factors that will complicate the plaintiffs’ case (assuming things get that far).
The mortgage securitization pipeline was screaming for product from 2005 onward. In particular, the demand was for “spready” loans, meaning bad ones to feed the demand for CDOs, which in turn was driven by subprime short like Magnetar (see ECONNED for details).
There may be incriminating evidence at the investors re the quality of these deals. If the investors bought the paper knowing the loans were worse than advertised, how can they claim to be victims of the servicer?
The bond insurers had the right to review the loan files at the time of the deal. It’s a bit hard for them to call foul now when they dropped the ball then. Although the Pimco/BlackRock/Fed action does not depend on the bond insurer outcome, the bond insurer agreements give them stronger grounds for litigation than investors.
There are also procedural hurdles to overcome. Per reader Fred:
Not only is standing a huge issue, but class certification is very problematic. The defense will argue that each underlying putback should be reviewed individually on its own and that it is not a class action. This could well be true since each loan needs to be looked at individually to determine the FICO score and individual misrepresentation.
Also major problem with choice of law in which state. Can’t use same foreclosure law uniformly throughout the United States since the laws are different in each state.
Certainly venue will be a key factor. It will be Federal Court but where is not yet known.
If case gets beyond standing, class issues and choice of law issue the case will drag on for years through the appelate courts.
Of interesting note is the firm that is representing the plaintiffs is a Houston firm with little mortgage experience. Not your typical NY Blue Blood firm, that may understand the huge procedurals hurdles.
We are no fans of Countrywide, but that should not stand in the way of recognizing that not every legal case against them is necessarily a slam dunk.
We’ll discuss soon, hopefully this evening, possible reasons for the NY Fed signing up for this adventure.
Indeed. It does look like a difficult case for the plaintiffs. Wouldn’t it be easier for them to assert instead that the MBS were flawed at origination? As has been commented before – the mortgages were never conveyed to the trust. http://www.market-ticker.org/akcs-www?singlepost=2218173
Denninger is calling for anyone who can demonstrate a single wet-signature note properly conveyed to an MBS trust.
I wondered about that myself. If I’m understanding Yves correctly, part of the problem with litigating over (essentially) the quality of the loans is that there’s enough subjectivity involved that it makes the outcome far less certain.
Litigating over not actually getting the loans itself though seems like it would be a lot more cut and dry: produce the notes (or even a random subset), and are the necessary endorsements there or not? If not, the quality of the loan would seem to be largely irrelevant (since the consensus seems to be that then the trust never ‘owned’ it in the first place).
I’m curious to know what hurdles would be in place with this approach over the one being hinted at in the putback letter.
So would I like to know.
Since I first commented I have been considering it further. I am far from a conspiracy believer, but I do wonder whether NY Fed supporting protracted litigation on the quality of loans might in fact be buying time for a congressional legislative “solution” to the whole of the MERS nominee / split notes debacle.
Peterson puts it well in his MERS title theory paper. Any legislative solution would create great mischief to property law. But I am sure congress will look at it closely anyway. The banks are on thin ice and it is cracking.
A point to also be considered:
Servicers usually cannot be terminated unless a replacement servicer is in place. This is a ratings requirement. So the threat by holders to terminate a servicer is not very persuasive, especially given who would want to step in at this point, at a reasonable fee and with adequate if not outrageous indemnification demands?
A very good reason why a servicer would not act without the strict written instructions of a supermajority, if not 100% of holders, is they would be targeted by the very same investors if their actions did not conform to what the investors would have wanted, all after the fact. A no win for the servicers.
Standard of care, fee structure and indemnification coverage for the servicer is all pressaged on if something is wrong and needs to be fixed, the “real stakeholders”, ie the bondholders will tell the servicer what to do.
PIMCO et al is saying this is our first stake in the ground. No more, no less.
This is like the Exxon Valdez spill but with no leaking ship run aground or drunk captain to put a focus on. We have only the swirling, murky, dirty, INTENTIONALLY poisoned markets and a lot of deflective finger pointing bullshit being thrown about in a divisive blame game.
Invoking the blatantly scam ‘rule of law’ at this point in the game and immersing oneself in deflective details is fairy tale, ‘I want to believe so badly’, denial.
This financial crisis is the intentional work of financial terrorists in our midst. The big picture tells the liberating story. The details are the road to divisive death.
Reprogram the drones, bring the troops home to Wall Street. The financial terrorists within make 9/11 look like a day with Mr. Rogers. That is the matter we should keep returning to.
Deception is the strongest political force on the planet.
Is there a possibility that Mozilo’s recent settling of the SEC case against him might come into this? If the SEC has relevant emails and other documents, perhaps the New York Fed knows something we don’t regarding Countrywide and BAC which led to this action. The timing doesn’t quite seem coincidental.
Lawyer: What level of losses do you think your model would have shown with unemployment at 10% and housing prices falling 25-45%, with the most severe declines in the biggest markets?
RM: The validity of my model was circumscribed to portfolio of loans that followed underwriting standards. The level of losses you described is not consistent with this assumption.
In court testimony or a deposition, you have to answer the question asked. The answer you provide is non responsive to the question.
“We’ll discuss soon, hopefully this evening, possible reasons for the NY Fed signing up for this adventure.”
I thought as a fiduciary, due to Bear Stearns (Maiden Lane), they had no choice.
25 October MMX
Barack Obama faked to the Left. Faked to the Right. Then dropped the ball.
I just looked through these deals though bloomberg VAC andf CLP and they are breach.
Some of the deals have greater than 30% in 90 but not in foreclosure. Why?
The contract clearly states if the servicer doesn’t perform, the trustee becomes the servicer. I work with a guy who was at countrywide during this time and they operated under a cookie cutter approach for contracts – they had to due to the volume.
Bank of New York was the trustee on the deal for this particular one, but there must be others. For example, any of the former LaSalle are now part of BoA now.
In general, we can say the new servicer would be the current trustee.
But the point is how can these investors prove the underlying loans were materially misrepresented? right now, they have no smoking gun or information, or no way to get this information.
But if I needed to get inforamation on individual pools and loans, then this would be my strategy:
1. Remove servicer who knows the docs do not support the prospectus so is slowing down foreclosures.
2. New servicer keeps foreclosure process at the same rate, and balks at documents because they don’t support being able to foreclose easily.
3. Investors ask why so slow now – we just put you in place and this is a no brainer? Trustee says “docs given me by prior servicer don’t make any sense and don’t seem to be complete.”
4. Investors files lawsuit to see individal loan paper work within pools – which is reasonable because of string of delays in foreclosing on these properties.
5. Trustee/Servicer can’t provide the note trail and it is clear that the loans in the pool do not match prospectus or filings.
5. SEC fraud uncovered. Because SEC StoL usually begins from discovery depending on the situation – it is still active.
6. Putbacks and criminal prosecutions. RICO for Countrywide, BoA, and Citi.
The size of losses due to housing prices going down do not factor into this process at any point. Only the missing paper work plus material misrepresentation need to be present for hundreds of billions of losses to be taken by Citi, BoA, and JPM
Would anyone be able to elucidate item #5 in this blog comment? Fraud at SEC… has seemed to be quite likely, but is seldom discussed.
As for this item from the post:
Does anyone have a link to a good, reliable public source for data sets about these numbers…?
(Thx in advance if anyone has a good link or two.)
“The contract clearly states if the servicer doesn’t perform, the trustee becomes the servicer”
Q: Who declares that the servicer is not performing?
The investors can petition for a removal of the servicer. First step is to notify the servicer they are not performing and they want to remove the servicer. The servicer has 60 days to remedy the specific complaints in the notification.
The notification served by the 25% of investors that included the fed contained many different points related to variety of issues. There is no way for BoA to be able to remedy these all these complaints. Failure to remedy on any one of them is enough to remove the servicer. The letter put this in boldface so BoA would know.
I don’t have the docs in front of me at this time, and I don’t remember the rest of the process. I’ll look it up tomorrow and post it here. Be assured that the removal of the servicer is the first step and not the last step of the process that leads to nationalization of BoA.
Changing the servicer is an important first step to getting direct access to the documents held by the servicer and trustee. Right now, BoA can claim incompetence.
The investors will have more legal options when the new servicer looks at the documents and either cannot foreclose or gets much different values out of the pool. The new servicer is bound to reasonable servicing, which these documents cannot deliver.
Then, the investors will be able to look at every mortgage in the pool for other document failures. This investigation will make it clear the pool does not match what was claimed by Countrywide in the prospectus. Or, it will be clear that the mortgages and notes were not transfered properly to the pool. Or both.
The SEC will be compelled to look into the securitization process and documents.
FYI – the pools I looked over were mostly jumbos with average credit scores in the 700+ range. I was shocked – I expected subprime.
This cannot end well for BoA, JPM, and many other banks.
If you have access to bloomberg, just look up the deals by typing ID [space] [deal name], then you can use and for more information on the overall pool and the tranches, and go to DES and then the prospectus for information. The prospectus is only about 290 pages. I’ve read and written many legal docs/contracts for financial companies – like exchange rules and patent applications – and these docs are not difficult to parse.
As indicated, it is well night impossible to remove a servicer of a distressed portfolio. It’s cash flow negative. You’d need to pay someone to take it on and there is no obvious source of cash to do that. It would have to come from the investors. Some if not many of these “investors” are in fact fiduciaries to third parties.
Thank God somebody has finally explicitly and clearly observed that litigation, particularly securities litigation or any complex commercial litigation, is never a slam dunk. There are always procedural impediments, defenses of varying strength and other complicating factors.
That said, I think the letter was a shot across the bow, a sign that the buy side beast is stirring, and really, really, refreshing for that. As for the involvement of the New York Fed, maybe it’s in the nature of a long-overdue fishing expedition. Maybe it’s a “FU Strong Message to Follow” telegram. Or maybe it’s a way to get a place by the campfire where it can glean the plans of the MBS investors about to hit the warpath. Time will tell.
Re: “If the investors bought the paper knowing the loans were worse than advertised, how can they claim to be victims of the servicer?
Putback letter references FTC/C-Wide Settlement and includes footnote for further info on it.
FTC complaint and settlement details C-Wide’s extensive mortgage servicing fraud occurring post purchase and clearly without notice to investors. Granted per settlement there was no admission of guilt on C-Wide’s part. Nevertheless $108 million was largest FTC servicing fraud settlement to date.
Footnote in putback letter:
1 The specific details of the Master Servicers’ wrongful conduct are available in a press release issued by the Federal Trade Commission, which is accessible at the following website:
humm… The Creedit Score System is FRAUD!!! and is Promoted and Okayed by our own United States Government!
humm… ***** TOP AND URGENT****
To all voters and my neighbors in the State of Massachusetts… The Governor to be… If Deval Patrick worked for the Predatory Mortgage Company “AMERIQUEST” he cann not be Governor… he is a S.O.B. Crooked Politician!
The irony is that ( perhaps to increase supply of sub-Prime), Countrywide was steering Prime borrowers as well as ill suited home buyers into sub Prime by paying a 3 percent commission to the brokers up through Sept 2006.
“This is a he-said, she said, unless the plantiffs can provide make a credible enough case that there must have been breaches ex having access to the loan files.”
But isn’t this letter a first step before demanding access to the loan files? I always assumed that was one of the goals behind writing the letter.
No, the bond investors don’t have any contractual rights to the loan files (unlike the bond insurers, who do). So they have to sue and not have their case dismissed and then they could request them in discovery. But a lot of judges will not look favorably upon non-specific allegations of a breach in the servicer’s duty to put back loans, particularly so long after the deals closed.
And you have a further issue: were these parties even harmed? The ones that took the big losses were the ORIGINAL investors. The Fed most certainly isn’t, and the Fed keeps maintain it will lose no money on these investments. If they bought this paper after it fell in value, they arguably don’t have much of a basis for saying they were harmed. By then it was WELL known in general that subprime loan were bad.
Your first point is exactly why removing the servicer is the first step in the process.
RE: Harm. Many of these pools were not sub-prime at issuance or even later. Many of the pools were jumbo prime. The pools I looked at – I did not look at them all, just random ones out of the list – had average credit scores 710+. 710+ is not subprime, less than 620 is subprime.
These pools have 50% in either 90+ or foreclosure. The investors have every right to ask the mismatch between the prospectus and the reality of the pool – even if they are not the original investors.
I’d never looked at these before, and the numbers were eye-popping. Anyone with reasonable intelligence looking at the data of these pools would ask the same thing. if this get before a judge, these pools will be opened up.
Did you bother reading the post? Servicers never get removed because they need to be replaced. Any servicer is now losing money big time on servicing. You’d need to pay a new servicer a lot more. How do you get all the investors to agree to that?
hum… What on earth my “ex”good friend Barack is doing? can we gullible, stupid, crazy and hard working Americans truly honored!!!… as a side effect, an act of monstrous evil Democracy exposed, the shallowness of a complete meaninglesseess of the American lives. Perhaps this is the stronger pleasure for Barack Obama and his “Brigade”… We gullible, stupid, and crazy Americans learned and are still learnig about the “invisible” hell hold in Washington.
“If the investors bought the paper knowing the loans were worse than advertised, how can they claim to be victims of the servicer?”
The point of this remark is that Countrywide can turn around (as can homeowners, by the way) and sue the investors on the basis that they don’t have own securities, they own unsecured loans. Homeowners will sue investors, insurers and banks for conspiracy.
As for the investors? They want to know what the homeowners themselves signed off on. The homeowners themselves also were beneficiaries of the scam.
“The bond insurers had the right to review the loan files at the time of the deal. It’s a bit hard for them to call foul now when they dropped the ball then. Although the Pimco/BlackRock/Fed action does not depend on the bond insurer outcome, the bond insurer agreements give them stronger grounds for litigation than investors.”
You’re missing the point here. They didn’t “drop the ball,” they were co-conspirators.
“Not only is standing a huge issue, but class certification is very problematic. The defense will argue that each underlying putback should be reviewed individually on its own and that it is not a class action. This could well be true since each loan needs to be looked at individually to determine the FICO score and individual misrepresentation.”
This is not so difficult since the Ponzi scheme handled each “investment” in the same way. Every interest was standardized as part of the Ponzi scheme. It was a method of operation. Including, by the way, selling the same loan to different entities simultaneously.
The real question is whether the Government was a co-conspirator. I feel that it certainly was, and that civil discovery will bring this out. The Government didn’t “fail to investigate” or “fail to act.” It is the GOVERNMENT which is the organizer of this Ponzi scheme. You’re just going to have to get used to that.
Once the public concludes that the Government is a criminal, then you will start to see substantial non-compliance (including ceasing to pay property taxes and fighting the consequences in court with allegations that the government entity is ITSELF a participant in the scheme: this happens to be true).
“Also major problem with choice of law in which state. Can’t use same foreclosure law uniformly throughout the United States since the laws are different in each state.”
That’s why RICO suits.
“Indeed. It does look like a difficult case for the plaintiffs. Wouldn’t it be easier for them to assert instead that the MBS were flawed at origination? As has been commented before – the mortgages were never conveyed to the trust. http://www.market-ticker.org/akcs-www?singlepost=2218173”
The point of this remark is that the investors from the outset knew they were contributing money to a Ponzi scheme. That gives you securities, or a security interest in anything? Don’t think so!!
“Standard of care, fee structure and indemnification coverage for the servicer is all pressaged on if something is wrong and needs to be fixed, the “real stakeholders”, ie the bondholders will tell the servicer what to do.”
This seems to be arguing that the insurers were somehow innocent. However, it will come out that the insurers were themselves participants in this Ponzi scheme.
“Is there a possibility that Mozilo’s recent settling of the SEC case against him might come into this? If the SEC has relevant emails and other documents, perhaps the New York Fed knows something we don’t regarding Countrywide and BAC which led to this action. The timing doesn’t quite seem coincidental.”
Poor Mozilo!! All he was doing was commiting the crimes the Government told him to commit. It is the Government which is the criminal here.
This is the U.S. Government telling you that it is a participant in the Ponzi scheme. By the way, it was when public opinion concluded that the Government was a criminal, that the French Revolution occured:
BofA Takes Out Lows As Sheila Bair Says Servicers’ Issues Could Be “Very Damaging”, “More Problems” To Aruse In Mortgage Servicing
Submitted by Tyler Durden on 10/25/2010 11:25 -0500
Bank of America Federal Deposit Insurance Corporation Sheila Bair
Finally the FDIC acknowledges the shitshow:
BAIR: LITIGATION FROM SERVICER ISSUES COULD BE `VERY DAMAGING’
BAIR SAYS FORECLOSURE PROBLEMS WILL REQUIRE `GLOBAL SOLUTION’
BAIR: CRISIS REQUIRES `DECISIVE’ ACTION FOR MORTGAGE SYSTEM
BAIR: FDIC SECURITIZATION RULES `CONSISTENT’ WITH DODD-FRANK
And the kicker:
BAIR SAYS CRISIS REVEALED `CRITICAL FLAWS’ IN MORTGAGE FINANCE
humm… Where all you have been??? through the Americans eyes… Our entire United States Government is Fraud!!!… Our Wars… are Fraud and a Ponzi Scheme… Our Social Security is the bigets Ponzi Scheme and fraud system can any government have… Our Medicare/Medicaid system is a Ponzi Scheme and fraud… Our IRS system is a Ponzi Scheme and fraud… Our Food and Drug Administartion is a Ponzi Scheme and fraud… Our FTC is a Ponzi Schame and fraud… you see I can go on, and on, and on Oh! Our Department of Trasure is honored number One.. Ponzi Scheme and fraud Agency… and what about… Freddy and Fenny and the other that my friend Barack abolish… Sally was a Ponzi Scheme for the poor learning colleges students… thanks to Wiki Leaks we gullible, stupid, and crazy Americans learn and undertand how our transparent Government works.
Here and in the following paragraph “there” is mis-spelled as “their”.
what if Countrywide simply denies their are breaches, or ignores the letter?
Thanks, funny I never made mistakes like that five years ago…eek…incipient Alzheimers?
More likely culprit: Astonishing output day after day after day!
I blame built in spell checkers and especially the ones that try to correct the spelling as you type. I click submit if I don’t see the spell checker underlining a word in red. Edit buttons are nice.
Then again, I’m getting old and doing the same thing too.
(Now I’ll date myself) I think we were all better touch typers when we had to use IBM Selectrics because typing mistakes entailed more moral hazard.
I’d be interested to see what kind of tax liability a home-“owner” would incur if the note holder can’t enforce payment due to impairment. Does the tax become due when the owner stops paying, or when the banks actually write down the loan?
The Obama administration said it intends to offer a plan to overhaul Freddie, Fannie and the country’s housing finance rules by January 2011
IMO, arguing against the WSJ, National Review or Forbes mag on matters of real estate titling or title insurance is a straw man. For whatever reason, the WSJ and Forbes, in particular, have a long history of getting things wrong: their essential position is that title insurance is a protectionist “toll” that increases transaction costs, rather than a free market solution that significantly reduces them. NR is is a late-comer to this side (maybe they were too busy trying to link illegal immigration to the crisis?), but having read the blurb myself this weekend while visiting my dear old dad, I got the impression that whoever wrote it had the various op/eds in their “reference binder” and regurgitated the basic talking point.
My guide to reading any of the above-mentioned pubs (that is, I can predict with 100% accuracy where they will come down) is “master good – slave bad.” Give me any dichotomy like lender/borrower, landlord/tenant, seller/buyer, employer/employer, police/accused, and I know what they will say. Any deviance from this can always be resolved by reference to a more fundamental principal that gets to power relationships: for example, Morgan Stanley (tenant)/”ABC Properties” (landlord) is not really a deviation, since the proper dichotomy is really something else like TBTF Bank/local yokel patsy.
I’m not sure what you are referring to. Securitization has been around since the inception of FNMA, and sub-prime securitization all of my career (before “subprime,” I knew it as “B-C-D”). In the 90s, there was far less to go on in the public records because security interest assignments were generally not recorded until a loan was paid off. In this sense MERS was a major step forward, because all that had linked a security interest of record to a particular account was a borrower’s credit report, and if that credit report was not avaialble (for example, on a prior owner’s mortgage), it was extraordinanily difficult to resolve title defects.
My purpose isn’t to defend MERS, but rather state that discrepencies between the security interest holder of record and the note payee is nothing new, and I am not persuaded yet that non-identity of the note-holder and of record security interest holder, per se, is a fatal defect, or any more common now than it used to be, at least in my liftime (or career). The better question, IMO, is at what point, is non-identity fatal?
As for applying UCC rules to residential real estate notes, Prof. Dale Whitman (a leading case-book editor on real estate finance) recently wrote an article calling into question whether the UCC applies at all to standard notes. His survey of cases shows that to the extent the UCC does apply, it hase been by stipulation by the parties as opposed to actual judicial determinations of negotiability. While he doesn’t come to any hard conclusion on this issue, he does make a pretty good case that the bank attorneys who drafted the standard FNMA note, don’t appear to have cared very much about negotiability/non-negotiability, or they would have made their intent far clearer.
Unfortunately, in my jurisdiction this revolves more around agency law generally, and more specifically statutorily specified agency relationships, so I don’t get into it very much. Nonetheless, the blogs I read on these issues come to much clearer conclusions of how this all is supposed to work than I have found support for.
I follow that the New York trust law, REMIC rules and PSA provisions probably make certain actions (any “action” in an essentially “passive” entity) of the trustee (primarily acceptance or conveyance of assets) ultra vires, but so far, I haven’t seen a clear indication that anybody except beneficiaries of the trust would have standing to assert the ultra vires argument. Bankruptcy cases denying relief from a stay for lack of standing, IMO, are not the best guide because the claimant just has to wait out the stay until there is a dismissal or discharge. Lien avoidance (that is upheld on appeal), on the other hand, will be a very good guide.
Yves Smith, thanks for all the great reporting and
I have a question about how the sample data from Clayton
just might help a prosecutor, so I’ll give the general idea.
I think I understand the issue about reps.
and warranties: it’s too late now to
be of use in a lawsuit by MBS investors
that would seek repurchases from banks?
In other words, they might succeed with
other issues, such as the PSA but not
the reps. and warranties in the prospectus
Anyway, yesterday I watched the video of the FCIC with Angelides
in Sacramento around Sept. 23. There was a session with Johnson and
a current Clayton executive. Presumably, Clayton might
have kept copies of their “due diligence” and “compliance”
testing/quality asuarance work. I don’t know if it was compliance for
REMIC rules, trust law, or the eventual securitization,
or none of the above.
I only watched the video once. I got the impression
the iBanks wished to know which loans had compliance
problems (per Johnson’s testimony). Still, as only about 10% of bought loans were
sampled, the iBanks would only know about “regulatory
compliance” problems for 10% of the mortgage/(mortage files) bought.
Anyway, assuming Clayton kept copies of their reports
on the total 910,000 loan files they sampled, and assuming a prosecutor
somehow got a copy of those from Clayton, do you think these and
maybe testimony from Clayton people could help
to establish “probable cause” or “reasonnable grounds”,
as the case may be, so that a judge might be willing to
issue a subpoena to an originator or iBank for
“lots” of mortage documentation files? The
attorney/prosecutor might want to see loan
documents as part of an investigation.