Countrywide Admits to Not Conveying Notes to Mortgage Securitization Trusts

Testimony in a New Jersey bankruptcy court case provides proof of the scenario we’ve depicted on this blog since September, namely, that subprime originators, starting sometime in the 2004-2005 timeframe, if not earlier, stopped conveying note (the borrower IOU) to mortgage securitization trust as stipulated in the pooling and servicing agreement. Professor Adam Levitin in his testimony before the House Financial Services Committee last week described what the implications would be:

If mortgages were not properly transferred in the securitization process, then mortgage-backed securities would in fact not be backed by any mortgages whatsoever. The chain of title concerns stem from transactions that make assumptions about the resolution of unsettled law. If those legal issues are resolved differently, then there would be a failure of the transfer of mortgages into securitization trusts, which would cloud title to nearly every property in the United States and would create contract rescission/putback liabilities in the trillions of dollars, greatly exceeding the capital of the US’s major financial institutions….

Recently, arguments have been raised in foreclosure litigation about whether the notes and mortgages were in fact properly transferred to the securitization trusts. This is a critical issue because the trust has standing to foreclose if, and only if it is the mortgagee. If the notes and mortgages were not transferred to the trust, then the trust lacks standing to foreclose…

If the notes and mortgages were not properly transferred to the trusts, then the mortgage-backed securities that the investors’ purchased were in fact non-mortgage-backed securities. In such a case, investors would have a claim for the rescission of the MBS, meaning that the securitization would be unwound, with investors receiving back their original payments at par (possibly with interest at the judgment rate). Rescission would mean that the securitization sponsor would have the notes and mortgages on its books, meaning that the losses on the loans would be the securitization sponsor’s, not the MBS investors, and that the securitization sponsor would have to have risk-weighted capital for the mortgages. If this problem exists on a wide-scale, there is not the capital in the financial system to pay for the rescission claims; the rescission claims would be in the trillions of dollars, making the major banking institutions in the United States would be insolvent.

As we indicated back in September, it appeared that Countrywide, and likely many other subprime orignators quit conveying the notes to the securitization trusts sometime in the 2004-2005 time frame. Yet bizarrely, they did not change the pooling and servicing agreements to reflect what appears to be a change in industry practice. Our evidence of this change was strictly anecdotal; this bankruptcy court filing, posted at StopForeclosureFraud provides the first bit of concrete proof. The key section:

As to the location of the note, Ms. DeMartini testified that to her
knowledge, the original note never left the possession of Countrywide, and that
the original note appears to have been transferred to Countrywide’s foreclosure
unit, as evidenced by internal FedEx tracking numbers. She also confirmed
that the new allonge had not been attached or otherwise affIXed to the note.
She testified further that it was customary for Countrywide to maintain possession of
the original note and related loan documents.

This is significant for two reasons: first, it points to pattern and practice, and not a mere isolated lapse. Second, Countrywide, the largest subprime originator, reported in SEC filings that it securitized 96% of the loans it originated. So this activity cannot be defended by arguing that Countrywide retained notes because it was not on-selling them; the overwhelming majority of its mortgage notes clearly were intended to go to RMBS trusts, but it appears industry participants came to see it as too much bother to adhere to the commitments in their contracts.

As one hedge fund investor noted, “Whenever we’ve gotten into situations on the short side, no matter how bad we think it is, it always proven to be worse.” The mortgage securitization mess looks to be adhering to this script.

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  1. Sufferin' Succotash

    Deadbeats! Deadbeats!
    CRA! CRA!
    Shanana Law!
    Cthulu Ftagn!
    Daaaiiisyyyy, Daaaiiisyyy, Give Me Your Answer Truuuuuuue!

    1. Dikaios Logos

      In the midst of all this gloomy mess, I am extremely appreciative of contributions like yours. Thank you!

  2. attempter

    So there’s sweet proof. The mortgages are unsecured loans, and if you stop paying the bank and stay in the house, there may be no legal way for the banksters to get at you.

    And the MBS, all those toxic assets to which the Bailout was nominally dedicated, are also merely worthless paper, and the transactions based on nothing.

    There’s no way the “rule of law” can get out of this one, on either end of the legal apocalypse.

    1. Skippy

      Ha! Virtual lending you say! Some virtual bar/club just sold for 650,000ish in the UK, gross annual 250ish. Then we have a game in Steam now that has started a in game market, some hats make 250 or better with one going for over a grand. Then arbitrary Steam drops the value to zero when they make it free ha ha ha.

      Skippy….People paying for virtual stuff…duty to the future…productivity[!] value added electrons and protons go long!

    2. rd

      The mortgages are unlikely to be unsecured loans. In fact Countrywide may be in a better position to foreclose than before because they are probably the ones to have registered the mortgage at the county office. If they have the note and they are the entity registered at the county offices, then traditional property law says that they are the proper mortgage note owner and would have grounds to foreclose.

      However, under untraditional property law they sold the mortgage and registered it with MERS which would have recorded that transfer. Since the transfer appears to have not actually occurred under trust law, then they may have committed fraud on the MBS investors by collecting money from them for something that actually doesn’t exist from the investors perspective.

      If this scenario is what is going on, then I don’t see how people don’t go to jail for two reasons:

      1. Fraud for not conveying the securities to the trust but completing the MBS sale anyway.

      2. Fraudulent misstatement of several years of accounting statements since the mortgages would presumably still have been on the bank’s books with everything that entails.

      This could get very messy on nearly every front.

      1. Sinaptics

        Here’s my question:

        Yves has said multiple times that the securitization process goes A->B->C->D. At which point does it break down? Does the services retain the note? Or does step C have the note?

        1. Skippy

          how many later 2006-8 loans were fraudulent in the first place…um…why the rush to foreclose when so many could be modified the old fashion way.

          1. karen1p

            Actually, my loan was originated at WaMu and we are finding the transfer from WaMu to the MBS trust with LaSalle/BoA is also faulty.

          2. Skippy

            Party pooper, well maybe it can be for…jurist desertus. You know, handing out 8 figures to a pulse and call it fiduciary duty to all involved.

            Skippy…BTW the way…Murderocks premium rag down here, on Sunday, had the gumption to print (front page) a column with some treasury bloke sayin there might be a housing bubble down under. That 9 Billion RMBS lifeline is down to its backing…I dub it the *GLOBAL RE-GIFTING RMBS/DEBT SCAM*…going to be an EPIC re-gifting Xmas around here this year…LOL.

      2. svsm

        Per the decision, Countrywide doesn’t have standing to enforce the note either.

        It’s an interesting read.

        From last paragraph of page 20 and all of page 21

        “The fact that the proof of claim in question was filed by “Countrywide
        Home Loans, Inc., as servicer for Bank of New York, Trustee” does not alter the
        enforceability of the note. Bankruptcy Rule 3001(b) provides that a proof of
        claim may be filed by either the creditor “or the creditor’s agent.”

        FED.R.BANKR.P.3001(b). Here, Countrywide, Inc. was the originator of the
        note and mortgage, but sold both the note and mortgage to the Bank of New
        York as Trustee, and filed the proof of claim as the “servicer” for the Bank of
        New York. A servicer has standing to file a proof of claim on behalf of a
        creditor. See,~, Greer v. O’Dell, 305 F.3d 1297, 1302 (11th Cir. 2002) (“A
        servicer is a party in interest in proceedings involving loans which it services.”);
        In re Viencek, 273 B.R. 354, 358 (N.D.N.Y. 2002); In re Gulley, No.
        07-33271-SGJ-13, 2010 WL 3342193, *9 (Bankr. N.D.Tex. Aug. 23, 2010)
        (“many courts have held that a mortgage servicer has standing to participate in
        a debtor’s bankruptcy case by virtue of its pecuniary interest in collecting
        payments under the terms of a note”); In re Minbatiwalla, 424 B.R. 104, 109
        (Bankr. S.D.N.Y. 2010); In re Conde- Dedonato, 391 B.R. 247, 250 (Bankr.
        E.D.N.Y. 2008) (“A servicer of a mortgage is clearly a creditor and has standing
        to file a proof of claim against a debtor pursuant to its duties as a servicer.”).
        But Countrywide, as the servicer, acts only as the agent of the owner of the
        instrument, and has no greater right to enforce the instrument than its
        principal. See,~, Greer v. O’Dell, 305 F.3d at 1303. Because the Bank of
        New York has no right to enforce the note, Countrywide as its agent and
        servicer cannot enforce the noteP”

      3. attempter

        The mortgages are unlikely to be unsecured loans.

        Isn’t it the case in most states that the note and the lien cannot legally be separated or, if separated, reattached?

        If so, isn’t the detached note just a meaningless piece of paper which specifies nothing, while the detached lien would become the unsecured loan?

        (As always, I’m not talking about what Congress may pseudo-legally try to do, but what legally is.)

        1. Nathanael

          That is approximately correct, but not quite…. it’s simpler.

          With the note made out to Countrywide and the “mortgage” made out to “MERS”, many of these loans are likely to have been unsecured loans from *DAY ONE* due to failure of the mortgage to follow the note….

    3. Parvaneh Ferhad

      If I understand correctly (and I’m not sure I do), the problem is not as much with the loan itself, but with the derivatives built on it. The note is still with Countrywide (or any other bank) they still own the loan and can – or could forclose. However, all the derivatives, MBS, CDOs, etc built on them are worthless because they are backed by nothing.

      1. Paul Repstock

        If the lender can be proven to have commited any crime, including but not limited to fraud, in conection with this mortgage; I doubt they would find a court to allow a forclosure. At least that is the way I think the law is supposed to deal with criminals….If I’m wrong; God help America.

  3. fuzed

    Really, are there enough pitchforks in America for this?
    How will the banksters plaster over this? Will investor calls for BOA, Cit, be interesting this quarter?

  4. Ron

    on 2nd’s the FDIC is covering banks losses on short sales? does anybody know anything about this issue? I found out today when I put in a offer on a short sale and the Realtor mentioned that the bank in this case Bank of America would not suffer the loss.

    1. karen1p

      After all the info you are receiving on this site that nearly all titles are corrupt….and then you go and put an offer on a short-sale? What are you one of those that don’t have all oars in the water???

      1. Paul Repstock

        Karen: There are certain bottom feeding fishes of the Catostomidae family. They are easy to catch.

      2. Nathanael

        Maybe he’s running with a scheme of collecting quitclaims? You do have to pay several different parties for the same property that way, but you can get good title.

  5. kerjeman

    “…Countrywide, the largest subprime originator, reported in SEC filings that it securitized 96% of the loans it originated.”

    Thus the real goal of the housing boom was not to help individuals and families fulfill the American Dream of having a place of their own, but to create as many mortgages as possible to be repackaged into over-inflated MBS that could be repeatedly resold for additional profit. The proper and legal transfer of title slowed the whole greedy process down, so it was ignored or sidestepped.

    Yet the banksters have the golden balls to blame this mess on homeowners who defaulted on their mortgages.

    1. kravitz

      I can’t wait for Maxine Waters to followup on this one.

      I have to admit, I didn’t go to the movies this weekend because Thursday’s show was so interesting, I had to watch the whole thing (four and a half hours) again. Compelling television. Especially since it seems her ethics case won’t hold water, and she’ll be back to beat them up some more.

  6. MichaelC

    Boy that sanctity of contracts sure is a fickle mistress.

    First the CDS must be paid to the guys who created this mess. Now chump investors might have to be refunded for buying it in the first place based on their contracts.

    Looks like the govt gets to pay out more than once for each loan they backstop the banks for. And those ‘deadbeat’ borrowers will still have to move, eventually.

    Does AIG (err.. US govt) get to claw back all the insurance it paid out if the underlying MBS pooled into the CDOS turns out not to be mortgage backed after all?

    1. Nathanael

      Unfortunately AIG probably doesn’t get to claw anything back because credit default swaps appear to have often been written with very few “revoke in case of fraud” type safeguards. It would depend on the individual case of course.

  7. Lyle

    The question is did Countrywide set up a document storage service. If for example, countrywide said, we will hold the loan documents for you for a slight fee, then they were transfered. Documents in a safe deposit box are still yours and Countrywide in that case would be running a big safe deposit box. The folks that have testified so far may not know if such an agreement existed, but if it had, then the buyer got custody of the documents. If I had been Countrywide I would have offered it as a service, similar to other document retention services, such as Iron Mountain. Less chance of loss of the document. Recall that most mutual funds don’t actually have the securities they own but have a custodian (actually so that they can be audited more easily Madoff did not so he could lie about what he had).

    1. Yves Smith Post author

      The requirements of the PSA were specific, that the note had to be conveyed and endorsed by intermediary entities to achieve bankruptcy remoteness. The minimum chain in recent securitizations was 2 intermediary entities.

      So holding the notes at Countrywide, even if they create an agreement that I doubt ever existed, claiming that Countrywide was acting as custodian (really? since when was Countrywide in the custody business?) separately does not wash because the notes needed to be endorsed and conveyed through the intermeidary parties.

      1. Lyle

        While I am not sure such an agreement exists if someone at countrywide had been a bit alert it could have. At each transfer the folks show up at the storage office do their thing and the document goes back to where it was. Now it does appear Countrywide was not smart enough to do this, but it would have been another source of income.

        But as I have said the NY Legislature will be paid off and it will fix the difficulty. After all it was known as one of the best legislatures money could buy and there is no reason to think otherwise. Given that NY State needs money a slight fee might be attached. As with all things legal the soverign (legislature and gov) can fix this sort of thing in a bill saying that trusts established before say 1 jan 2011 will be assumed to have done what was required if evidence exists that it was both parties intention.

        There is ample precident in US history for this.

        1. karen1p

          What I think is hilarious is people like you who think that either the investors OR the homeowners would stand for this kind of whitewashing of fraud.

          I would say that NY legislature should just try… fact, I dare them to try this. They don’t know the rage that is boiling just below the surface…..I dare someone to let it overflow.

          1. Sid

            Why hilarious? After all, the public has been taking it lying down so far.

            Long as the masses get their bread an’ cirkuses, yo, all this stuff is like, too abstract and involves, numbers and stuff and I almost flanked math or something.

        2. Nathanael

          I doubt the NYS Legislature has that power. The NYS Courts can be pretty hard on the legislature when they suspect it of violating the NYS constitution….

      2. f247

        I would think CFC had a decent custodian biz, given the size of their servicing ops and the amount of servicing they did for GSE/FHA loans.

        I think this is the legacy CFC custodian website:

        If it’s worth following up on, there are tons of potential contacts on the MBA’s custody conference website. Not a ton of information in the presentations though (link to 2007 below, and I know 2008 and 2009 are also online).

        FNM also has a document that walks through the different custodian requirements with respect to assignments, delivery of notes, etc., (though the whole system revolves around MERS: and I realize this doesn’t impact the requirements for non-agency.

      3. Stupendous Man - Defender of Liberty - Foe of Tyranny

        I’m looking through a PSA as I type this, and without getting into the deepest of the nuts and bolts it appears:

        1) That the first or original Custodian is named in the PSA

        2) That the Custodian can be changed: “The appointment of the Custodian may at any time be terminated and a substitute Custodian appointed therefor at the direction of the Depositor to the Trustee, the consent to which shall not be unreasonably withheld.” This is in Section 8.16 of the PSA I am looking at.

        3)This PSA includes the “Form of Custodial Agreement” which states, at Section 10: “The Trustee, with or without cause, may upon at least 60 days’ notice remove and discharge the Custodian from the performance of its duties under this Agreement by written notice from the Trustee to the Custodian, with a copy to the Servicer.”

        4) Section 18 of this Custodial Agreement also states: “By execution of this Agreement, the Custodian represents and warrants that it currently holds, and during the existence of this Agreement shall hold, no interest adverse to the Trustee, by way of security or otherwise, in any Mortgage Loan, and hereby waives and releases any such interest which it may have in any Mortgage Loan as of the date hereof.” This prohibition of adverse interests is likely to also apply to a/the Successor Custodian.

        5)Section 19 of this Custodial Agreement also gives leave for the Custodian to terminate the aggreement, again with at least 60 days prior notice to both the Trustee and the Servicer.

        With prior notice the Custodian can be changed as long as there are no adverse interests. I am certain these conditions were not met. I also think a Servicer WOULD have interests considered to be adverse so on that count would not qualify as a Successor Custodian.

  8. liberal

    The chain of title concerns stem from transactions that make assumptions about the resolution of unsettled law.

    What’s this refer to?

    1. Yves Smith Post author

      This is a caveat because securitization litigation is cutting edge. No one has sued on the issue of the failure to convey the note (look, this has only come to light in the last two months), hence there are no decisions to refer to.

  9. horowitz

    Has the door for putbacks been busted open? What implications does this have on all the putback lawsuits going on?

  10. RueTheDay

    My question is this – given that they were contractually obligated to convey the note and given that they had been doing it for some time (meaning there was an established process), why did they suddenly stop? Did they get overwhelmed by volume? Was it a deliberate cost cutting measure? Were they hiding something? What was the key driver here?

    1. Nathanael

      All evidence is that the key driver was more money for the executives. Cut costs, increase volume, don’t worry about whether the company implodes later, get your bonuses now.

      1. James Cole

        It wasn’t a conscious decision to fuck up the conveyances. Senior management generally are clueless about (a) the existence of technical requirements such as those we are discussing and (b) whether or not their back offices are following these requirements, and the front-office deal-making arm of the firm doesn’t give a shit as long as their numbers get booked by bonus time.

  11. Rory

    Assuming that the investment banks have had the resources and foresight to thoroughly assess their risks in the past year, what I’m wondering is what provisions they had put in the Dodd-Frank law to protect themselves from the liability sh*tstorm this problem could bring them.

  12. razzz

    There is no fix for this mess, except default due to the amount of debt involved (worldwide). That’s more of a reset than a fix.

    These MBS trades occurred OTC, under the radar of oversight. The end result is now taking place.

  13. RegReader

    One question no one seems to be addressing is whether B of A will suffer any consequences of this. Wouldn’t it be necessary to “pierce the corporate veil” in order to hold B of A, the owner of Countrywide, responsible in any way?

    And if B of A operated Countrywide as a subsidiary (i.e. didn’t commingle assets) wouldn’t they have a good chance of defeating an effort to pierce the corporate veil?

  14. karen1p

    I have evidence that the transfers that happened with my paperwork were transferred illegally. I have evidence the the transfer happened only AFTER the note was in default (against the rules of the PSA, they are allowed only to accept a performing loan) and only AFTER there was already a corrupt chain of title (also against the rules of PSA, they are allowed to only transfer notes with clear chain of title) and also two years and 4 days after the cut-off date to the PSA.

    Just found out that my Series is being sued by a class action from the Boilermaker’s Annuity Trust. Pretty sure their attorney would love to see this! Fireworks commence.

  15. striker6676

    If anyone has evidence, small or large, collect yourselves, group together on this and move. Expediency is the key to moving agaist the opposing tide of legal accumulation on the other side.

  16. Paul Repstock

    Perhaps the champagne better be put back on ice for the moment. The following link details a judgement about the statute of limitations for many of the civil cases??

    I’m guessing that this is far from over yet, and that there will need to be convictions for fraud befoore other aspects can be brought to force. Namely, the proceeds of crime aspect, which will ofcourse accrue to the government and not to the victims.

    1. Paul Repstock

      On the other, other hand the activities in the international markets during this evening may signal some preemtive action which would mean it is all too late anyway??

  17. Bob Todd

    I would like a bottom line to all this.
    All of a sudden I stopped getting the envelops from Countrywide.
    I found some envelopes from Bank of America and – low and behold – a bill for my two mortgages!
    I received no notification for the switch.
    I almost tossed out the Bank of America envelopes. And would have missed payments.
    I pay Bank of America now for a few months BUT WHO HAS THE LEGAL LIEN ON MY HOUSE? And can they prove it? I smell a rat here.
    Bob Todd

    1. Paul Repstock

      Bob; You need legal advice and fast. I would guess you should try to get a judge to allow placing your payments into an escrow account till this is resolved.

  18. Bob Hunter

    I think that a lot of this fuss about CFC and not transferring the notes is BS. I’ll agree with anyone that questions their underwriting practices or lack thereof. And I’m sure that the agreements with the AGs has resutled in long delays and bad modifications. But I thik the comment by Ms. diMartini is off base. If she understood the business, she would probably realize that the notes did leave CFC’s control and were actually transferred and deleivered to a CFC subs that acted as the custodian for CFC on the securitizations. Or if the custodian bank wasn’t a sub, then the notes were transfered to a third party. All very legitimate. And her comment about the FedEx coming from CFC to BoNY. At least they had a note to send to BONY. I wish that people understood the business better before they jump of the deep end and criticize everything. Ms. Di Martino probably should never have been a witness for CFC since she was not aware of hwo things actually happened.

    1. Paul Repstock

      HARK hark…
      Is that the trill of a shill I hear in yonder tree??
      Or The call of the wild lupine swadled in Saville Row??
      It can;t be
      It must be
      It’s the sirene song so reasoned
      issuing from the gates of Hades

      Step right along folks
      No forgery here!

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