“The Mortgage Loan Foreclosure Mess: the Banks’ Gluttony; Problems with MERS and Sloppy Securitizations”

Yves here. This post by Linda Beale, who was involved in the tax angles of securitizations in her prior life on Wall Street, first appeared on Angry Bear and on her blog, A Taxing Matter.

It’s a very helpful addition to the discussion of the foreclosure crisis. Because it is also a bit technical at various junctures, I’m departing from my usual practice with guest posts and adding some commentary. Linda’s post follows:

Yves Smith has an op-ed in the Oct. 31, 2010 New York Times on the mortgage mess. See Naked Capitalism, here, for full op-ed.

As noted, the mortgage crisis goes much deeper than just bank use of robo-signers for documents. When the securitization process took off in the early 2000s, banks became sloppy. Loan product was needed, so niceties like documentation became an expendible. Subprime loans were more grist for the mill–the faster mortgage lenders could process them, banks could buy and securitize them, the more money they could all make. Since they were selling off the mortgage loans, they didn’t care how good they were. And since they were often selling them via securitizations that they “sponsored”, they didn’t want to have to do all that legal busywork that location-specific transfers of mortgages and notes required, including payment of recording taxes in the county where the land was located every single time a loan was moved from one owner to another, though they still wanted to collect all kinds of fees from servicing the mortgage loans that they “sold” via securitization.

Just a little aside on the way these REMIC securitizations worked (edited noon 11/1). Often, original mortgages and notes were put in a trust and pass-through certificates were issued by the trust–this is the case in particular when Ginnie, Freddie, or Fannie aggregated a pool of mortgage loans and issued certificates representing ownership interests in that pool of loans which are treated as obligations secured by interests in real property under Treas. Reg. 1.860G-2(a)(5).

Certificate holders were “beneficial owners” of the mortgage assets of the trust for tax purposes, though the Trust, or the trustee on behalf of the trust, would hold legal title to the mortgage loans. The certificates, representing interests in mortgages, could then be contributed to a REMIC, or mortgage loans could be contributed directly into a REMIC trust. REMIC regular interests are also treated as qualified mortgages under Section 860G(a)(3)(C), and they could therefore be contributed to another higher-tier REMIC, resulting in “re-REMICing”. The state law entity status for a REMIC doesn’t matter–trust, partnership or mere segregated pool of assets (no state law entity at all) could all elect REMIC treatment for mortgage loans under the Federal income tax rules for REMIC securitizations, if they satisfied the federal tax code requirements.

Yves here. Achieving REMIC (Real Estate Mortgage Investment Conduit) treatment was an important objective in these securitizations. They were created in the 1986 Tax Reform Act. REMICs are pass through entities, meaning the entity (in this case a REMIC trust) is not subject to Federal income taxes; investors are taxed only on the income they receive.

The discussion of re-REMICing is a bit scary. Tom Adams weighted in:

She is just describing a very arcane aspect of the trust construction: because of various restrictions on “regular” and “residual” interests under REMIC, most MBS actually had two or three layers of REMIC regular and residual interests in them, which was needed to get deal features like interest only certificates, or certain over-collateralization structures.

No one, other than tax attorneys, were able to decipher this details, but if you look at the definitions sections of a PSA, you see all of the crazy definitions around the regular and residual interests.

All of the mortgage loan assets and any other eligible collateral would go into the REMIC I trust, which would then issue certain interests, which would go into the REMIC II trust, and so on, until the tax attorneys were satisfied the appropriate structure had been created, then the certificates are issued to real certificate holders.

Back to Linda:

The requirements generally were that the REMIC had to hold only certain assets consisting of “qualified mortgages” and “permitted investments” (covering certain cash flow investments, qualified reserves, and foreclosure properties); it had to issue only permitted REMIC interests consisting of “regular interests” that were treated as debt for tax purposes under the tax code and one class of “residual interest” that was treated as the owner of the REMIC under the tax code (special tax rules applied to require the holders of the residual interest to report certain amounts of income with respect to the REMIC on their tax returns ); and it had to satisfy an “arrangements” test to ensure that the residual interest was not held by inappropriate organizations and that appropriate information was provided. Qualified mortgages had to satisfy a loan to value ratio and had to be contributed to the REMIC either at startup or within 90 days under a fixed-price contract OR be substituted for defective loans within 2 years of startup. If a loan were discovered to be defective after that, it would need to be sold out of the REMIC within 90 days, or the REMIC would hold a “bad” asset that could cause the REMIC to lose its qualification as a REMIC. (There is a de minimis rule that lets a REMIC hold an insignificant amount of bad assets, but that generally would not cover a REMIC with lots of mortgages that fail to qualify.) If a REMIC is disqualified, it is almost certainly a “taxable mortgage pool” under section 7701(i) of the Code that is subject to corporate taxation without the ability to be consolidated with other members of the same affiliated group.

Earlier private REMIC securitizations–the ones that were done in the late 1990s, for example–were careful to include detailed representations in the pooling and servicing agreement that the Depositor/Sponsor would assign the mortgage loans to the trustee for the benefit of the certificate holders–including the original note endorsed to the Trustee, the original mortgage, assignments of the mortgage, original assignment of leases and rents (for commercial properties), and original lender’s title insurance policy. The trustee was to hold such documents in trust for the certificate holders. The following is an illustrative sample of representations that would have been included in a commercial REMIC pooling and servicing agreement regarding the transfer of mortgage loans from a current owner to the depositor/sponsor who would transfer them to the trust.

X is the sole owner and holder of the Mortgage Loan and will have, on the Closing Date, good and marketable title to the Mortgage Loan;

X has full right and authority to sell, assign and transfer the Mortgage Loan as contemplated by the Mortgage Loan Purchasing Agreement; all of the obligations of X with respect to the Mortgage Loans are legal, valid and binding and enforceable against X except as may be limited by bankruptcy, insolvency or reorganization (or other similar laws affecting the enforcement of creditors’ rights, generally) and by general principles of equity; the execution and delivery of the documents contemplated by the Mortgage Loan Purchase Agreement has been duly authorized and such execution and delivery….will not constitute a violation of any federal, state or local law or the rules of any regulatory authority.

As of the cut-off date, the information pertaining to the Mortgage Loan set forth in the Mortgage Loan Schedule is true and correct in all material respects; X is in possession of a file on each Mortgage Loan containing, among other things and to the extent applicable, the note, loan agreement, mortgage or deed of trust, and all amendments, allonges or the like thereto, records of payments, correspondence, and borrower’s address and each such file will be transferred to the Trustee, and X has not withheld any material information with respect to such Mortgage Loan…

The assignment of the related Mortgage to the Trustee constitutes the legal, valid and binding assignment of such Mortgage…

But when the banks got greedy in the early 2000s, they applied that brand of “financial innovation” that was bragged about as bringing us the nirvana of a service-oriented, financial transaction-dominated economy that would grow and grow and grow. (Of course, it did at first, making lots of money for the financial institutions and particularly for investment banks. But then it crashed, costing taxpayers while banks continued to make money out of cheap (taxpayer-made-possible) credit coupled with low interest to depositors and high fees for anything and everything.) Two things began to happen.

1. For convenience, the assignment/allonge was “indorsed in blank”–meaning that the sponsor wouldn’t actually complete the document that transferred the mortgage loan to the trustee because it was “not practical to record mortgages in the name of the trustee” so the sponsor “retains record ownership subject to an obligation to transfer it to the trustee upon its request.” James Peaslee & David Nirenberg, Federal Income Taxation of Securitization Transactions (3d Ed. 2001) at 86 n.64 (concluding that this would be done only when the sponsor was “creditworthy” and so the fact that legal title wasn’t conveyed should “not be very significant”).

Of course, the boom in mortgage lending, securitization glut, and ultimate bankruptcy of key sponsoring banks such as Lehman and Bear Stearns suggest that this “practical” issue had substantial consequences, at least for the legal proceedings even if not for the IRS tax status of entities (where legal title is not necessarily determinative of tax beneficial ownership). The danger, of course, is that bankrupt sponsors that retain legal title might be treated as owning the mortgage loans and the securitization vehicles to which the loans were purportedly transferred would be left with nothing, with the result that there would be questions whether the securitizations were legitimate (and if a REMIC, whether it had been disqualified from REMIC status because it had too many defective assets and therefore owed corporate taxes).

MBSGuy reacted to this section:

The article is that it notes some specific events that led to the shift in process and policy for delivery of notes and mortgages. this is the closest I’ve heard that this was a deliberate shift from the practice in the past, as a cost saving measure (coinciding with the adoption of MERS in private label deals – about 2005). I have heard this mentioned 2 times before, but everyone seemed fuzzy on the details.

If it was official and deliberate policy, it would explain why the banks got so freaked out about it all of a sudden. I don’t, however, understand why they would not have changed or adjusted the agreements to reflect the change in practice. How did they not see that this would create problems later: “We are going to stop following the old method of delivery, but we are going to keep the documents the same”. Doesn’t that sound like a major misrepresentation problem?

As a buyside person, I did not know that they had deliberately decided to stop delivery the notes and assignments to the trustee in the name of the trust. That would have been important information for me to have. As an old timer, I would have asked – how will they foreclosure? How will they not violate REMIC rules?

If it is as she suggests, the case against the banks and the trustees just got stronger, in my opinion. I am not yet convinced that it wasn’t just bad practices, as opposed to deliberate choice.

Back again to the original post:

2. The reason it was “not practical” to record the mortgage in the name of the trustee was that there are almost always local law mortgage recording taxes to be paid every time a transfer is made. And of course, recording such taxes would be costly for a securitization–lawyer fees, servicer fees, the recording taxes themselves, document delivery and verification, etc. That would cut into the profits from the securitization for the sponsor (who might well also be the servicer). By keeping the legal title with the original sponsor, in spite of the pooling of the mortgages in a securitization, there would be no transfers until it was time to put the documents in somebody’s hands for foreclosing. That led to another financial innovation–the Mortgage Electronic Registry System (MERS), invented and owned by Chase, CitiMortgage, Bank of America, HSBC, Mortgage Bankers Association, Fannie, Freddie, various mortgage companies and title insurance companies.

MERS apparently exists primarily to permit banks to avoid multiple transfers and multiple mortgage recording taxes in local jurisdictions where the property is located with each purported assignment of the mortgage. MERS claims that it serves to provide a consistent database that reduces errors caused by frequent assignments and reassignments of mortgage loans. See MERS fact sheet (pdf available at home page). But it seems to do the opposite–eliminate the actual assignment even though securitization has moved the mortgage loan from originator to bank sponsor to servicer or whatever, and avoid the ability of anyone to know who actually owns the mortgage loan from looking at county property records. MERS indicates that it records the mortgage (in its name) and that it can foreclose on mortgage loans as the “nominee for all parties” –or the bank that claims to “own” the loans can foreclose on them. See MERS statement about JP Morgan Chase (Oct. 13, 2010).

The fact sheet further indicates that MERS expects its standing to foreclose as the agent for the noteholder to be upheld in litigation and reiterates that MERS holds legal title (which is the reason that only one recording tax has to be paid, if MERS is held valid) and that it will transfer the legal title to the servicer/sponsor bank for foreclosing if requested. (This transfer usually takes place, by the way, by the servicer bank personnel signing the indorsement from MERS to the servicer bank as an officer of MERS–another kind of robo-signing that the industry has perfected.) This does mean that many Servicers/Sponsors may have interacted with borrowers as though they held legal title when they did not.

As Yves Smith notes, “While a standardized, centralized database was a good idea in theory, MERS has been widely accused of sloppy practices and is increasingly facing legal challenges.” On the website, I see that MERS claims that it always has possession of the full documentation and that its arrangements for bank personnel to act as personnel of MERS are perfectly legitimate.

Yves here. The claim that MERS “always has possession of the full documentation” is completely untrue. I have depositions of the MERS CEO and general counsel to the contrary. Back to the post:

Yet I can’t help wondering, if MERS always has possession of full documentation, why are there groups that advertise their ability to create documents, as Yves Smith also notes regarding “Lender Processing Services”? Further, the idea of letting anyone represent themselves as an employee of MERS when they actually are an employee of a party that might have a reason for committing fraud by inappropriately claiming to own a mortgage seems at least a questionable practice and one that should not be tolerated when it compromises the integrity of the mortgage system. If I were a judge dealing with one of these foreclosure cases, I would have serious qualms about accepting such a document as “proof” that a particular bank had a right to foreclose.

As noted, under the rules before MERS, the trust established with original mortgage loans would hold legal title, and the trust would be entitled to act on the mortgage loans on behalf of the REMIC as beneficial owner. That’s especially important, since pooled trust certificates may not be held in a single REMIC vehicle–in fact, they are often scattered in various REMICS, and in REMICs of REMICs (REMICs squared and cubed, which may themselves be “re-REMICed” in the same deal or in later deals). But if the trust doesn’t actually hold legal title–because legal title is left with MERS from the first, in spite of the documents tracing a transfer from the sponsor to depositor to trust–that means that the trust actually holds in trust no mortgage loan but only its rights under the various documents and agreements it has entered into with MERS (and that borrowers have, probably unknowingly, signed off on in borrowing to buy property from a lender that is securitizing through MERS) to be able to acquire legal title if needed and then assign it, possibly, to the Servicer who will act on the foreclosure on the trust’s behalf.

Do each of those assignments get appropriately recorded (and taxes paid)? Does this electronic database satisfy the state and securities law requirements? If not, the important tax question is whether this limited actual legal right supports a REMIC’s claim to “hold” qualified mortgages (aside from the question of whether these mortgages were “qualified” in the first place, in cases where appraisals were rigged and borrowers’ ability to pay was unexamined)? It seems that the legal title should not be determinative for REMIC status. If the loans are defective and do not qualify as “qualified mortgages” for REMIC status, however, it is possible that some REMICs would have “bad” assets that would disqualify the REMIC if the loan is not sold within 90 days of discovery of the defective loan problem.

Moreover, if a bankruptcy court were to determine that a sponsor or other entity actually owned (not just as legal title, but as beneficial owner in the tax sense) mortgage loans that had been thought to be included in the REMIC pool (and thus the court order allocated all funds connected with that loan, or foreclosure rights and sales proceeds, to parties other than the REMIC investors), it would appear that the decision removing the loan from the pool would create a loss to REMIC investors but would not in itself jeopardize REMIC status. If the problem of non-existent documents and unverified loan quality was substantial, however, is there some possibility that the sham transaction doctrine could be applied to the REMIC to cause it to lose REMIC status ?

That’s a hard call but seems unlikely given the highly “constructed” nature of the REMIC as a special tax entity under the Code–any entity or even a non-entity can be given REMIC status if it meets the requirements, regular interests are treated as debt even if they wouldn’t independently be considered debt under general tax principles, residual interests are treated as equity even though they may have no entitlement to proceeds and primarily represent a liability to includes certain “phantom income” amounts in income, the sponsor may continue as servicer and continue to hold the mortgage loans (in a segregated pool) even when they are REMICed, tiering of REMICs results in a final allocation of mortgage payments that may differ considerably from the initial allocation in the first-tier REMIC, servicer and trustee actions are taken under the pooling and servicing agreement with respect to the mortgage loans according to whatever the documents permit or require (such as servicer advances to which it has reimbursement rights), etc.

Linda does not leave readers with much in the way of reasons as to why the IRS would let certain violations of REMIC rules that would seem flagrant to a layperson get a free pass. But tax law takes a very different view of matters like beneficial ownership. However, there are certain issues that might not be easily finessed. For instance, if a bankruptcy court were to conclude that a bankrupt originator still owned a bunch of loans that had supposedly been securitized, that could mean the securitization vehicle would no longer be able to be treated as the beneficial owner of the loans. That would seem to pose a problem for the REMIC treatment.

However, the reality is that the IRS, which is part of the Treasury, is not about to take a strict view of the regs because it will create lots of havoc with MBS investors.

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  1. Paul Repstock

    Yves; I expose my financial illiteracy here. Were these REMIC units bought only for tax avoidance?

    1. Yves Smith Post author

      No, the REMICs were to give investors a way to invest in the cashflows from a pool of loans without facing double taxation. They could buy loans directly and be taxed only once, but that puts them in the business of collecting payments, foreclosing, etc. This allows them to act like investors (as in not have a lot of administrative burden) and have diversification and still be taxed only one time.

  2. attempter

    If it was official and deliberate policy, it would explain why the banks got so freaked out about it all of a sudden. I don’t, however, understand why they would not have changed or adjusted the agreements to reflect the change in practice. How did they not see that this would create problems later: “We are going to stop following the old method of delivery, but we are going to keep the documents the same”. Doesn’t that sound like a major misrepresentation problem?

    As a buyside person, I did not know that they had deliberately decided to stop delivery the notes and assignments to the trustee in the name of the trust. That would have been important information for me to have. As an old timer, I would have asked – how will they foreclosure? How will they not violate REMIC rules?

    Is it one of those IBGYBG things? Is it that the system is set up so that each cog can tend his own little stretch and have plausible “legal” deniability regarding what comes before and after?

    I picture it being like a Zeno’s Paradox of organized crime: Just as if the arrow is motionless at each instant, that means the entire vector cannot logically exist, so if each cog in the machine sees nothing and knows nothing and punctiliously says in effect “as long as everybody else does what he’s supposed to do, then here’s what I’ve done”, then the overwhelming vector of crime is supposed to be legalistically whitewashed out of existence.

  3. Cedric Regula

    I have a bourgeoisie question, which may be applicable to those that have their 401k plans invested in, say, a PIMCO or Blackrock MBS bond mutual fund. (this may apply to the petite bourgeoisie, as well, tho they have better IRS approved self funded retirement plans)

    I remember reading Yves talk about the “bankruptcy remote” goal when setting up the MBS trust fund. I think Yves pointed out that this was a key requirement in getting better credit ratings from the rating agencies.

    In Linda’s article she again touches on the issue that documentation may not really be where it belongs, and if it is sitting at say, a sponsor-servicer-bank (which seems to be all the same holding company more often than not in our post investment bank world), then that seems to me to meet the definition of misrepresentation. I don’t see how we can call these places bankruptcy remote in this day and age. I did see someone point out elsewhere that BAC kept Countrywide as a separate wholly owned corporation, and if things got bad for BAC they could just have their Countrywide corporation declare bankruptcy and BAC is off the hook for the costs of all of Countrywide’s misdeeds. Then Countywide was the one that I think said in recent inquiries that they just kept all the loan documentation. Forgot the reason. May have been cost. But at any rate, the creditors of Countrywide could seize the loan assets.

    So as far as the IRS goes, I don’t think this is the first time they have legislated on the fly, and I would agree they will probably just do some hand waving about fixing the REMIC tax status problem.

    But the rest of the system still smells like a trampling of everything from homeowner rights to investor rights and representations.

    1. dejavuagain

      The question is whether the Blackrock and PIIMCO mutual funds have any legal liability since the Pooling and Servicing agreements so limited the rights of purchasers of the certificates and where Blackrock and PIMCO ignored the many “practices” as to which anyone in the industry would have at least been placed on notice.

  4. jake chase

    One thing you have to understand about the IRS: it is not in the business of bringing down the entire US financial establishment. Actually, it is a critical tool of the financial establishment. It’s job is to collect taxes from millions of isolated (and weak) working individuals, while exempting by hook or crook giant corporations, land barons and inheritors. The twin pillars of Twentieth (and Twenty-first) Century corporate feudalism are the Federal Reserve and the Income Tax. As a former tax and securities lawyer I admire your analysis but trust me, it is entirely academic.

  5. albrt

    As for enforcing tax laws against bankers, that clearly will not happen unless Turbo-Tax Timmy The Banker’s Friend is unexpectedly replaced by a real treasury secretary. The probability seems vanishingly small, even after 2012.

    But the bankruptcy issue continues to intrigue me. Creditors of the bankrupt originators have not asserted claims against the loans, at least not in any large numbers. The only reason I can think of is that the largest creditors in these bankruptcies are typically securitization sponsors. They tend to have large claims based on the financing they provided to the originators, and they often have huge claims based on potential put-back liability. It appears they have been very successful in maintaining discipline by not asserting these claims against each other, and have also managed to persaude the other creditors that it would not be in anyone’s interest to burn the mother****er down.

  6. LJR

    My head would explode if I were to try and parse this for comprehension! For all those “we need more regulation” types, here it is! All this intellectual pretzel twisting was done to evade the opaque REMIC regulations. When Tainter talks about societies failing because the become too complicated I think he could quote this blog entry as an example.

    The issue I never hear addressed is what is essential in the software trade – the golden copy. Revision Control Systems are in place to create a “golden” copy that is the basis of a build. Contributors check pieces of source code out and then check them back in when they have made their changes. We’d go crazy without it and we take it for granted.

    MERS is a classic example of a version control system without the necessary controls to ensure the integrity of its database. An audit capability. I am a simple minded person so I ask – where is the “golden” copy of the documents I signed at closing? The ones with wet ink signatures that indentured me for thirty years. It’s a reasonable question and demands a convincing answer.

    These documents are what we take to be “golden” since they are hard to counterfeit if one is to actually duplicate the wet signatures of the original participants. In this age of electronic information shuffling we tend to forget that electronic documents are not the same as paper documents. They are massless and can be duplicated at zero cost.

    MERS, designed as an end run around “restrictive” and “antiquated” paper procedures, was obviously, as articles like this demonstrate, made of bubble gum, spit and paperwads. It was not carefully designed to ensure against abuse. On the contrary, it appears to have been created to encourage abuse. For instance, I don’t read of any attempt of MERS to stamp their documents with a MD5 or SHA1 stamp as a means of ensuring they are not altered. This would be drop dead easy. Just stamp the document and store the “digital signature” in a digital folder. If a document is later presented in court the court can use the document’s reference number to check the MERS database for the correct stamp. It’s the same kind of thing Microsoft and everyone else distributing software has used for years. The document’s folder in the database would be required at all times to indicate the holder of interest and the location of the physical documents in some easily accessed physical warehouse.

    MERS is a scam and was set up for all the wrong reasons. The idea of modernizing the record keeping for real estate is a good one but it has to be done by honest, competent people with the general interest at heart. A rare breed nowadays and seldom found in the corridors of power.

    Obviously the government will grant all sorts of REMIC concessions to prevent taxation issues from clogging things up. But the real problem I see is that MERS was not designed with proper audit controls and that is going to create a situation where multiple claims will be issued against note and deed. The fact that the first claim to get the property to the courthouse steps will get the cash, is going to create a tremendous pressure on interested parties to act quickly. The buyer will probably be protected but the flurry of claims coming in from other trusts will tie up the courts for a long, long time. This seems to be a fundamentally different issue than “deadbeat borrowers” trying to stay in their houses. It’s a problem of multiple claims against a single note and deed. The argument that it’s “sloppiness” vs: “criminality” doesn’t matter. It’s a mess.

    1. LJR

      The “fact” that the procedure is “costly” does not mean it’s bad. In electronics we call it resistance and it is used to damp oscillations. Furthermore, the “cost” employs people at the same time that it enforces procedures that can be comprehended by people who don’t have pretzel brains.

      I wish we could get our simple little brains wrapped around the idea that perhaps we wouldn’t have had such a fiasco if the system hadn’t been “streamlined” with Frankenstein constructs like MERS to eliminate “costs.”

      1. simplygeorge

        LJR I agree that simply because it was costly does not mean it was bad. I actually think that the “costly” procedures were the correct ones. I simply meant to say that there were many who viewed the current system as too costly and time consuming sought out methods to reduce those issues.

  7. simplygeorge

    Yves as always a great article. A couple of quick notes. I was a lawyer at one of the larger firms and practices real estate and corporate finance law for over 20 years; however, I am not an expert in the tax aspects of the transactions.

    What I can say is that the shift from actual assignment of notes/mortgages was more than simply sloppy practice. It became a matter of policy to shift from actual assignmments to assignment “in blank.” Many questioned this practice of “in blank” springing assignments, but as it became the norm, it was simply assumed that is was acceptable (based largely on tax rules). regardless, it was a deliberate way to avoid actual assignents.

    I would also note that actual assignment of the mortgage/deed of trust is in most states not a necessary step. While state lae does vary, in most states, the mortgage/deed of trust “follows” the note. In other words, a valid assignment of the note would be law also transfer the mortgage. Because of this principle, title insurance doesn’t even require an endorsement of the policy on transfer of the note.

    If and when the holder of the note foreclosed, they may wish to file an assignment merely to indicate proper ownership of the note.

    So my only point is that the payment of expenses as to assignment was not the primary driving force. Yes it was a consideration and conservative lawyers would have pushed for recording the assignments (to avoid all of these very questions), but that is different than arguing as some do that this cost was a driving factor.

    But that leads us to the assignment of the notes, which is a very different story. That process, althouhg it does not require a recorded assignment) is nevertheless VERY cost and time consuming. Someone is suppose to “endorse” the note (a simple signature). When you have thousands of notes, assigned and partially assigned, over and over, the time and cost adds up. So there was born the assignment “in blank.”

    As I had understood it, th eproblem with this wa sthat it created a “bearer” instrument which violated any number of other tax and legal requirements.

    But what I can say most is that simply saying “sloppy practices” occured is not true. Law firms (very well known, very well respected, and whose members face UNLIMITED liability) wrote legal opinions stating that the process was legal were delivered. It was not sloppy process but a “process” which was well thought out and applied. yes it got sloppy, but the overall process was intended by the parties.

    I am not saying that the process was in fact correct (or legal) simply because law firms said they were (actually I am infering that many firms may have been suspect of the practice but concluded that it was in fact legal and valid. And therein lies part of the problem. The tax and legal aspects were so complex that finding a simpler way to accomplish the goal over wrote any other goal or objective.

    1. Paul Repstock

      George; Those don’t sound like “Legal Opinions” to me. It sounds more like a judgement, thet this mess is so broad and so deep, that we will never be brought to account.

    2. Fractal

      Repstock might understand what the heck this means, but I don’t:

      “Law firms (very well known, very well respected, and whose members face UNLIMITED liability) wrote legal opinions stating that the process was legal were delivered. It was not sloppy process but a “process” which was well thought out and applied. yes it got sloppy, but the overall process was intended by the parties.”

      Please SLOWLY re-read the first quoted sentence and please type a slow, careful explanation of the MEANING of “process was legal were delivered.” At least one adjective and one noun appear to be missing.

      1. Cedric Regula

        I think SG misspelled “were” when he meant to spell “where”. Then the sentence makes sense, and probably is even true if you go back all the way to the late 70s, early ’80s, when the rules of mortgage securitization were originally worked out.

        But things have “morphed” considerably since then, and MERS didn’t come along until the later 90s.

        1. Fractal

          But WHICH “process” was legal where delivered? And “delivered” to whom (or what)? The process of assigning notes? “Assignments of notes were legal where the assigned notes were delivered to the assignee” sounds like a truism or a tautology. Is that all those legal opinions said?

    3. Transor Z

      If and when the holder of the note foreclosed, they may wish to file an assignment merely to indicate proper ownership of the note.

      The assignment has to be in place at the time of foreclosure. Retroactive assignments are generally invalid.

    4. dejavuagain

      simplegeorge says:
      “I would also note that actual assignment of the mortgage/deed of trust is in most states not a necessary step. While state lae does vary, in most states, the mortgage/deed of trust “follows” the note. In other words, a valid assignment of the note would be law also transfer the mortgage. Because of this principle, title insurance doesn’t even require an endorsement of the policy on transfer of the note.”

      I thought a foreclosure in most states should only be initiated by the recorded holder of the mortgage, so I would not agree that assignments of mortgages need not be recorded. Please correct me if I am incorrect, anyone. This is why assignments of mortgages were being fabricated for signature by robo-signers.

      At least, recording assignments has been the norm for transactional real estate lawyers, as opposed what appears to have been a new norm developed by real estate mortgage securitization lawyers.

  8. Fractal

    Thank you very much, Yves, for the impenetrable legal clauses and regulatory definitions. Seriously. This is what I asked for over the weekend, and you gave it to me in spades. Several excellent handles to begin legal research, including the Treas. Reg. and tax code cites. Plus, explicit confirmation that notes were most likely NOT assigned to the purported RMBS/REMIC owners so the included trusts most likely do NOT have standing to foreclose.

    Those are crucial facts to establish for the benefit of foreclosure victims. The REMICs and their investors have a world of additional pain coming their way which has nothing to do with helping foreclosure victims, so I could care less about REMIC investors losing their investments and/or getting nailed for unplanned tax liabilities. Homeowners and their foreclosure defense counsel have increased their ammunition if REMICs/RMBS were mostly administered as described by your guest poster.

      1. Fractal

        No, Cedric, not “off with their heads.” Boohoo for their REMIC losses, perhaps. But they should get out of the way while we ream out the rest of the REMICs in the course of defeating/prosecuting foreclosure frauds.

        The REMIC investors are not committing the foreclosure frauds, the banks (originators & servicers) are, abusing the REMIC trusts as putative plaintiffs where the REMIC trusts have no standing.

      2. Fractal

        We exhausted the “reply” tree on the question of what the hell SG actually meant in his comment about the legal opinions supporting the “process.” Please don’t restart the circular reasoning by linking me to Rortybomb’s primers. Foreclosure for Dummies was an excellent series but it gives no defense of the legal opinions that you say SG was trying to explain.

        So far, SG is a no-show in response to my questions. I appreciate your defending SG, but SG should speak for himself/herself. There still is no satisfactory analysis of how the legal opinions SG referred to were anything more than tautological truisms, unless there is more than a letter “aitch” missing from SG’s summary.

        I think SG invoked the legal opinions as evidence that improper assignment of notes (or complete NON-assignment) was not merely “sloppy procedure” but was POLICY. I know SG thinks the assignments part of creation of RMBS/REMICs was deeply flawed. Therefore, I need SG to explain more fully what role he or she thinks is being played by the legal opinions defending the POLICY. I think even SG would agree that the POLICY of NOT assigning the notes ignored common law requirements, and that therefore the creation of RMBS/REMICs was fundamentally unsound or even unlawful. Which has been Yves thesis for years.

      3. Yves Smith Post author


        What I have been told is somewhat different, and this is from lawyers who have looked at the opinions. And this means written opinion letters, which is the only thing the lawyers would be liable for, methinks (unless they were dumb enough to commemorate other stuff to writing, which I kind of doubt).

        The reason for moving the paper through a chain of parties between the originator and the trust was to establish bankruptcy remoteness. That meant the note really did need to be endorsed by all the intermediary parties (at least in most states). Under NY Trust law, it is also improper for a trust to hold bearer paper (this is a really layperson rendition, but it is somehow inadequate in terms of the trust properly marshaling trust assets). So even thought the PSA called for the final endorsement to be to the trustee, not the specific trust, NY trust law holds the trust to a higher standard.

        Now, it would seem pretty commonsensical that not conveying the note means you’ve not achieved true sale through all these intermediary entities, and have put investors at risk of having notes clawed back in the event of a BK by the originator. So I am at a loss to understand how anyone thought not conveying the note made any sense.

        So back to the opinions. I’ve been told they took an “if-then” form: if you followed the steps in the PSA, then you’ve achieved a true sale. There might have been separate opinions on REMIC matters.

        I strongly suspect there were no new opinions were issued to support the change in practice of not conveying notes. The more attentive folks on the buy side would have seen them or heard of them.

        1. tom bokuneiwicz

          But if they never passed the notes, only the mortgage, and if I read CARPENTER correctly, they passed nothing as the note doesn’t follow the mortgage; only the reverse is true. If that is still good law, nobody got anything of value and the opinions they got were malpractice incarnate.

          1. Yves Smith Post author

            I’ll have to go back and look at the case, but if you are relying on anything from MERS on this topic, don’t. MERS says anything and everything, it will say one thing in one state and adopt a completely contradictory position in a different state if that is required for the trust to foreclose. In addition, I’ve read some depositions by its CEO and general counsel, and they’ve said numerous things about how securitizations work that are factually 100% incorrect. MERS as an organization appears to have knowledge that is at best one inch wide. It is very clear to me no one at MERS has the foggiest idea about anything related to the notes, and they further carry themselves as if somehow the lien is the critical instrument, rather than the note (when asked in depos in a variety of ways on the role of the note, and how the conveyance of the note is paramount in the overwhelming majority of states, they go into pure obfuscation mode, pages and pages of refusing to engage the question).

            There are tons of consumer level cases where the notes were transferred, but typically too late from the standpoint of the PSA, REMIC, and trust requirements (shortly before foreclosure). The new finesse by the foreclosure mills in states like Florida where there have been a lot of challenges is the magical appearance of a highly suspect allonge with the correct endorsements and no dates of any kind. According to the UCC, an unattached allonge is a non-starter, and all these very convenient allonges are not attached and are in the wrong place in the collateral file (documents are put in the collateral file in their time sequence, so the order has meaning).

            So I don’t think it is widely understood that notes were not conveyed properly in many if not most cases, and the servicers are maintaining in foreclosures that they were.

          2. tom bokuneiwicz

            The case is Carpenter v. Longan, 83 US 271 wherein the US Supreme Court states:

            The note and mortgage are inseparable; the former as essential, the latter as an incident. An assignment of the note carries the mortgage with it, while an assignment of the latter alone is a nullity. (Citing as a footnote: Jackson v. Blodget, 5 Cowan 205; Jackson v. Willard, 4 Johnson 43.) CARPENTER, 274. The Court goes on to further state: “All the authorities agree that the debt is the principal thing and the mortgage an accessory…The mortgage can have no separate existence. When the note is paid the mortgage expires. It cannot survive for a moment the debt which the note represents.” CARPENTER, 275.

            So, unless I am completely nuts, I read this to mean that passing a mortgage without a note passes nothing. The thing of value that must be passed is the note. Granted, I am not a real estate lawyer (more to juvenile law) but that case is still good law as far as I know and it seems to be pretty clear that a mortgage in and of itself has no value.

            So, if there was all this passing of the mortgage without the note..well, I think the consequences of that are fairly obvious… and if I was the entity passing the mortgage alone, I would be sh..ing in my pants as they say…

          3. Yves Smith Post author


            I’m not disagreeing, but IIRC Carpenter is a pretty old decision (1872?) and I know there are 5 states that do not hew to the idea that the mortgage (the lien) has no force independent of the note (Minnesota by virtue of passing MERS-friendly legislation; I assume the others also deviate by virtue of subsequent state legislation.

            We’ve been writing about this very issue since August, BTW…

          4. tom bokuneiwicz

            Yves: Yes, I agree. I just don’t know how that case law, though old, will integrate with what is going on today. I suspect that at some point, the Supreme Court will be forced to revisit Carpenter or the Congress will pass law(s) to address the situation (most likely in favor of the banks, I sadly predict, and not the established rules of property law).

          5. Yves Smith Post author

            You’d need to see what state the original case was in and how its real estate laws worked. The formulation of Carpenter may relate to certain state law provisions that are not universal. And per your citation, there are other germane decisions.

            Real estate laws is very well settled, and the problem with the securitizations is much more a failure to convey the note. IN addition, MERS is such a mess in its legal construction and terrible corporate governance, I don’t think it stands up to serious legal scrutiny.

        2. tom bokuneiwicz

          MERS is a legal joke, as far as I can tell. Absent a law such as the Minnesota law, I would be surprised and dumb-founded if any Supreme Court in any state lets them get away with what they are trying to get away with. California? New York? Massachusetts (where I am licensed)? Mass. real property law goes back to the 1700’s for crying out loud. I have a hard time imaging the Mass. SJC saying: “Recording? we don’t need no stinkin’ recordings!” And in Mass. I know they hate- I mean, hate- parole evidence when a contract is supposed to speak for itself. In their view, transfers of real property must speak for themselves or they are void/voidable.

          The securities side of it you know ell is an area I would have to endeavor to update myself on but I suspect that would be a very long update.

          Oh, and get this, after looking up my friend’s mortgage, I did my own and- voila- I find that MERS executed an alleged release of a mortgage I had paid off. I say alleged because they did it; I just don’t know if it is/was legal; so I am going to have to figure that out.

          I have sad it before, but really, everyone who has or had a mortgage in the last 20 years should review all the documents. My guess is that there is a whole lotta shakin’ going on in those records- and not the good ol’ Jerry Lee Lewis type either.

  9. Poor and Unemployed

    Midterm elections are over! Now there is no need to discuss mortgage problems in US. No further talk of “Bad Banks” vs. “Good Deadbeats”.

    What a sham! Whatever happend to the Robosigners and title insurance problems?

    American Society for Prevention of Forecloures on Deadbeat Families (ASPFDF)
    Chairman and CEO – Yves Smith

  10. Gary

    If the Banks sold the notes, and not title was passed, could they not sell the same note multiple times? Thus having received payment more than once, why would they care if they could not forclose on some future date?

    They knew what they were doing, I think!

  11. tom bokuneiwicz

    I guess what bothers me about all this REMIC discussion is that it assumes that the note was handled properly: what if it wasn’t? Virtually all the states have a Statute of Frauds that requires all transfers of interest in real property be in writing. A blank bearer note would seem to violate that requirement. And no, parole evidence as to the existence of an agreement relative to the note is not allowed under said statute. In fact the use of parole evidence is one of the main things that the statute is designed to eliminate.

    It seems to me that these geniuses left themselves open to a world of hurt.

    1. Cedric Regula

      Aha! At the end of the article is this paragraph:

      Future Sales

      Bucha and other Cuyahoga County judges said they fear document foreclosure defects may give former homeowners a claim on the title that will affect future sales. That scenario fuels Judge Russo’s sense of urgency to sort out problems now, she said.

      “If courts around the country do not handle this on an individual case basis and there are later problems with the title, the courts will have participated with the clouding of the title,” Russo said. “The potential for harm is so immense at so many levels.”


      So far I haven’t seen much press about what the judges think about the potential clouded title issue on future sales.

      Yves should add this to the scrapbook.

      This will become even more important now that we have extinguished the securitized loan model in this discussion thread and new home sales with potentially clouded title will need to find 100% cash buyers. At the moment, we can still find undercapitalized title insurance companies, who may or may not catch chain of title problems in a title search, but we should watch for any changes there.

  12. MinnItMan

    Long re-post from DIRT-List for real estate lawyers, but worth the read. Note: Dale Whitman is the editor of one of the prominent law school case books on real estate finance law.

    From: Michael T. XXXXX [mXXXXX@gmail.com]

    I agree with all of Dale Whitman’s comments below. Under UCC Article 3, ownership of a negotiable note is neither a necessary nor a sufficient condition for enforcement of the note. Article 3 does recognize the concept of ownership as distinct from physical possession, however, and there are various non-Article 3 circumstances in which ownership may well matter, e.g., the right of the owner to obtain physical transfer of the note from the party in possession, the right of the owner to obtain the proceeds of enforcement if enforced by that party, the REMIC situation, etc. What prompted my comments about ownership initially were posts to the effect that the only way to transfer any interest in a note is by physical transfer, which is not correct as to either negotiable or non-negotiable notes.

    A good example of judicial confusion over the status of owners, holders, and holders in due course is the Florida Supreme Court’s model administrative order dealing with residential mortgage foreclosure cases, which appears to assume that to enforce a note one must be “the owner and holder in due course of the note and mortgage sued upon.” See http://www.floridasupremecourt.org/clerk/adminorders/2009/AOSC09-54.pdf at A-6 and A-43. That is incorrect, regardless of whether the note is negotiable or non-negotiable. If the note is negotiable, under Article 3 one need not be either the owner or a holder in due course to enforce it. If the note is non-negotiable, the owner is normally the proper party to enforce, but there can be no holder in due course.

    Michael T. XXXXX
    Of Counsel
    Luce, Forward, Hamilton & Scripps LLP
    600 W. Broadway, Suite 2600
    San Diego, California 92101
    Phone: 619-265-2890

    —– Original Message —–
    From: Patrick Randolph (UMKC Dirt)
    Sent: Wednesday, November 03, 2010 8:54 AM
    Subject: [DIRT] Dale Whitman on: The right to enforce a negotiable note (and related issues)

    From: Whitman, Dale [WhitmanD@missouri.edu]

    I apologize for the length of this post, but I’m going to try to clarify a number of issues.

    Ownership vs. the Right to Enforce. Michael XXXXX’s statements about ownership of the note are correct, but depending on the context, they may not be very helpful. For purposes of satisfying the REMIC rules, I’m prepared to believe that ownership is all that’s required, and as Michael says, ownership can be transferred without a physical delivery of the notes.

    On the other hand, for purposes of foreclosing (and resisting the defensive measures of a mortgagor’s attorney in foreclosure), what the investor wants is not ownership per se, but rather the right to enforce the note. (After all, foreclosure is a means of enforcing the note.) Under Article 3, ownership doesn’t necessarily give the right to enforce, and the right to enforce can be conferred (in the absence of a lost note affidavit) only by delivery of possession of the original note.

    Judge Bufford explained this very clearly in In re Kang Jin Hwang, 396 B.R. 757 (Bkrtcy.C.D.Cal. Oct. 29, 2008):

    A fundamental feature of negotiable instruments is that they are transferred by the delivery of possession, not by contract or assignment. The transfer of an instrument “vests in the transferee any right of the transferor to enforce the instrument….” CComC § 3203(b); UCC § 3-203(b). Thus, the right to enforce a negotiable instrument is only transferable by delivery of the instrument itself. CComC § 3203; UCC § 3-203.
    The transfer of a negotiable instrument has an additional requirement: the transferor must indorse the instrument to make it payable to the transferee. See CComC § 3205(a); UCC § 3-205(a). Alternatively, the transferor may indorse the instrument in blank, and thereby make It enforceable by anyone in its possession (much like paper currency). See CComC § 3205(b); UCC § 3- 205(b). If the transferor makes a transfer without indorsing the instrument, the transferee has a right to demand indorsement by the transferor. See CComC § 3203(c); UCC § 3-203(c).

    Another good illustration is In re Wilhelm, 407 B.R. 392, 69 UCC Rep.Serv.2d 582 (Bankr. Idaho 2009):

    FN19. The Court questions whether the declarants appreciated the legal significance of the term “holder” and meant to assert the legal conclusion, or whether they simply signed form declarations provided to them, presumably by Counsel. Further, Movants cannot rely on these declarations to demonstrate that Movants are nonholders in possession of the notes, with rights to enforce. See Idaho Code § 28-3-203, cmt. 2. Not only do the declarations fail to actually state that Movants possess the notes, there is no foundation for any such statement. * * *
    Moreover, it is the Court’s job (not the witnesses’) to determine whether the relevant facts establish, as a matter of law, that Movants are holders. The same proposition applies to the question of whether they are non-holders with rights of enforcement. So what the Court needs to know is a fact: Who has possession of the original notes? None of the declarations answers that question. Accord Sheridan, 09.1 I.B.C.R. at 26, 2009 WL 631355, at *5 (noting that the movant’s submissions did not answer “the key question–Who was the holder of the Note at the time of the Motion?”).

    One more example: In re Wells, 407 B.R. 873 (Bkrtcy.N.D.Ohio June 19, 2009), where the assignee of the mortgage apparently did not have possession of the original note, although it produced a photocopy.

    Once a note is endorsed, its negotiation is complete upon transfer of possession. Ohio Rev.Code §§ 1303.24(A)(1)(a), 1303.21(A); see also U.C.C. §§ 3-204, 3-201 (2002). The transfer of possession requires physical delivery of the note “for the purpose of giving the person receiving delivery the right to enforce the instrument.” Ohio Rev. Code §§ 1303.22(A) and cmt. 1, 1301.01(N); see also U.C.C. §§ 3-203 cmt. 1, 1-201 (2002); Vitols v. Citizens Banking Co., 10 F.3d 1227, 1233 (6th Cir.1993); Norfolk Shipbuilding & Drydock Corp. v. E.L. Carlyle (In re E.L. Carlyle), 242 B.R. 881, 887 (Bankr.E.D.Va.1999); Grant S. Nelson & Dale A. Whitman, 1 Real Estate Finance Law § 5.28 (5th ed.2008). However, “… possession alone does not establish that the party [in possession of a note] is entitled to receive payments under it.” Citizens Fed. Sav., 78 Ohio App.3d at 287, 604 N.E.2d 772.
    There is no evidence before the court that the note executed by Michelle Wells was negotiated from Aegis Lending Corporation to U.S. Bank. The note is, therefore, still payable to Aegis Lending Corporation. The corollary is that U.S. Bank has not shown that it had an interest in the note on October 15, 2008, when it filed the proof of claim in this case. Nor has U.S. Bank shown that it has such an interest today.

    Under Ohio law, the right to enforce a note cannot be assigned–instead, the note must be negotiated in accord with Ohio’s version of the Uniform Commercial Code. See Ohio Rev.Code § 1301.01 et seq. and § 1303.01 et seq.; see also U.C.C. Article 3. An attempt to assign a note creates a claim to ownership, but does not transfer the right to enforce the note. The right to enforce an instrument and ownership of the instrument are two different concepts…. Moreover, a person who has an ownership right in an instrument might not be a person entitled to enforce the instrument. For example, suppose X is the owner and holder of an instrument payable to X. X sells the instrument to Y but is unable to deliver immediate possession to Y. Instead, X signs a document conveying all of X’s right, title, and interest in the instrument to Y. Although the document may be effective to give Y a claim to ownership of the instrument, Y is not a person entitled to enforce the instrument until Y obtains possession of the instrument. No transfer of the instrument occurs under Section 3-203(a) until it is delivered to Y.
    Ohio Rev.Code § 1303.22 cmt. 1; see also U.C.C. § 3-23 cmt. 1 (2002). Therefore, the first assignment did not transfer the right to enforce the note to U.S. Bank siit Wachovia; it only gave that entity a claim to ownership of the note. For the same *881 reasons, the second assignment is also ineffective to transfer the note to U.S. Bank.

    Although this principle is clear in Article 3, I must point out that courts may not always follow it; see Ingomar Ltd. Partnership v. Packer, 2007 WL 1675846, (Conn. Super. May 23, 2007), where the court allowed the assignee to enforce the note by way of foreclosure on an equitable theory, despite the fact that there had been no delivery of the note to the assignee.

    It is certainly true that an owner of a note who doesn’t have possession of it might get a court order compelling the former owner to deliver the note to him — if the former owner can find it. But that is an extra step, and a rather cumbersome one.

    Avoiding the need for actual delivery by arguing “bailment” or “custodianship” or the like. Could a secondary market investor successfully argue that, even if the note was left in possession of the originating mortgagee, it was left by way of a bailment or trust for the benefit of the investor, and therefore has been “constructively” delivered? The Connecticut case cited above, Ingomar Ltd. Partnership, seems to adopt a “constructive delivery” theory, but without much in the way of reasoning. As to a bailment theory, there seems to be no authority at all; a Westlaw search of the UCC Reporting Service with the query “3-203 & delivery & bailment” produces no results.

    There was an analogous potential use of the bailment argument under old Article 9, which permitted perfection of a security interest in a note or other “instrument” only by taking possession. (New Article 9 also permits perfection by filing, so the possession issue is not as critical now.) Under old Article 9, arrangements in which the note was left with the mortgagee pledgor or its employee, designated as the pledgee’s “custodian,” “collection agent,” or the like were of very dubious efficacy. See Starr v. Bruce Farley Corp., 612 F.2d 1197 (9th Cir.1980); In re Atlantic Mortg. Corp., 69 B.R. 321 (Bkrtcy.Mich.1987); Rechnitzer v. Boyd, 40 B.R. 417 (Bkrtcy.Cal.1984). Here’s an illustrative quote from the Bruce Farley case. (Bear in mind that the “debtor” here is the originating mortgagee, not the mortgagor.)

    Appellants do not contend that they actually possessed the notes or deeds. Rather, they urge that because bankrupt held the notes and deeds as their “collection agent” they had constructive possession of them. Section 9305 of the California Commercial Code requires that a secured party, its agent or bailee have actual possession of instruments in order to perfect a security interest in them. The debtor cannot qualify as an agent for the secured party for the purpose of perfection. Matter of Staff Mortgage and Investment Corp., supra, 550 F.2d at 1230. Bankrupt, the debtor, had possession of the Southlook and University Heights notes and deeds of trust. Its possession cannot be deemed possession by appellants. The court below was therefore correct in holding that appellants had no more than an unperfected security interest in the notes and deeds of trust.

    Of course, these Article 9 cases are relevant only by way of analogy. However, in light of the strong statements in the recent cases above requiring an actual delivery under Article 3, I frankly think the “custodian” or “bailment” argument is worthless, although I must confess that I have no direct case authority either way. Given the fairly obvious pro-mortgagor bias that appears in the recent cases, I don’t think the courts are likely to smile on this argument.

    Mortgage assignments. By the way, one of the points made in the foregoing bankruptcy cases is that an assignment of the mortgage will not transfer the right to enforce a negotiable note. The assignments are typically by MERS, of course. Depending on state foreclosure rules, a chain of assignments to the foreclosing party may be necessary to a valid foreclosure, but it is not sufficient to confer the right of enforcement. See Ballengee v. New Mexico Fed. Sav. & Loan Ass’n, 109 N.M. 423, 786 P.2d 37 (1990); Shepard v. Boone, 99 S.W.3d 263 (Tex.App.2003). Here again, a court will occasionally misunderstand this principle; see Dyck-O’Neal, Inc. v. Pungitore, 60 Mass.App.Ct. 1109, 800 N.E.2d 727 (Table) (Mass.App.Ct.,2003), where the court seems to have thought that a chain of assignment was all that was required.

    Negotiable vs. nonnegotiable notes. As Michael XXXXX correctly points out, all of the foregoing only applies to negotiable notes. Nonnegotiable notes are simply contracts, and the right to enforce a contract can certainly be transferred without delivery of the original paper.

    Is the standard Fannie/Freddie 1-4-family note negotiable or not? No one knows. As of about a year and a half ago, when I did my research for the Pepperdine article, I could find no reported case anywhere in the country deciding whether the Fannie/Freddie note is negotiable or not. Pat is almost certainly correct that its drafters wanted it to be negotiable (which turned out to be a very unfortunate attitude on their part), but it isn’t at all clear that they succeeded. Ron Mann (now at Univ. of Michigan) wrote an article in 1997 in the UCLA Law Review in which he concluded that the standard note isn’t negotiable because it contains a provision in the prepayment section stating “When I make a prepayment, I will tell the noteholder in writing that I am doing so.” Mann argued that, since this is a promise to do something other than the payment of money, it makes the note nonnegotiable. Is he right? I don’t know. The rules for negotiability are sufficiently complex and arcane that he might be correct. (This is why I argued in the Pepperdine article that all mortgage notes should be declared nonnegotiable.) This may seem like stupid hair-splitting, but that’s Article 3 for you!

    The courts are maddeningly sloppy about determining whether the note in question is negotiable or not. For example in In re Wells, supra, the court simply assumed the note was negotiable, commenting “A promissory note is usually a negotiable instrument, which provides the person entitled to enforce the note the right to payment of the obligation it represents.” Usually? Well, maybe so and maybe not, but it would have been nice to look and see.

    If you’re interested in a more complete development of all of these issues, see Whitman, How Negotiability has Fouled up the Secondary Mortgage Market, and What to Do About It, 37 Pepperdine L. Rev. 737 (2010).


    From: Michael T. XXXXX [mXXXXX@gmail.com]
    Responding to this statement below: “[U]nder the IRS rules governing REMICs, . . . the Trust is required to contain ALL assets within 60 days of formation. If the loans were not actually transferred into the Trust in that window, the Trust probably (1) lacks the power under its indenture to accept the loan at any later date, and (2) would risk its tax status by accepting any loans after that date.”
    This statement seems to implicitly equate transfer of the loans with physical transfer of the notes, but that equation doesn’t hold true.
    For notes that are not negotiable instruments within UCC Article 3, physical transfer of the notes is essentially irrelevant.
    For notes that are Article 3 negotiable instruments, it is entirely possible to purchase and own the loan and the note evidencing it without obtaining physical possession of the note. See UCC 3-203 Official Comment 1 (“Ownership rights in instruments may be determined by principles of the law of property, independent of Article 3, which do not depend upon whether the instrument was transferred under Section 3-203.”).
    Seems to me that Pat had it right below: “[I]f the note was not transferred, the transferee may not have standing to sue without possession of the note. But if has paid for the note, it has the right to obtain it to document the transfer that has already occurred.” The transferee has that right because it owns the note, regardless of whether it has physical possession.

    Michael T. XXXXX
    Of Counsel
    Luce, Forward, Hamilton & Scripps LLP
    600 W. Broadway, Suite 2600
    San Diego, California 92101
    Phone: 619-265-2890

    1. Yves Smith Post author

      With all due respect, this long missive largely misses the point of what we have written about at length. Your source may reach conclusions that are supportive of our views, but the legal analysis is flawed.

      “Dirt law” is not the problematic consideration here. Securitizations were designed to satisfy a number of legal considerations, state real estate law being only one. I hate to say it, but reliance Article 3 of the UCC as the basis of legal reasoning is evidence someone is not up to speed. This is a very specialized area of the law, and real estate lawyers are not experts on securitizations.

      Article 1 of the UCC, and not Article 3, is the germane section, and the implication is that the specific provisions of the PSA, and not the general provisions of the UCC, govern, as we have discussed before here (http://www.nakedcapitalism.com/2010/10/snr-denton-provides-intellectually-dishonest-flawed-defense-of-mortage-securitizations.html):

      As we have discussed, the pooling and servicing agreement, which governs who does what when in a mortgage securitization, requires the note (the borrower IOU) to be endorsed (just like a check, signed by one party over to the next), showing the full chain of title. The minimum conveyance chain in recent vintage transactions is A (originator) => B (sponsor) => C (depositor) => D (trust).

      The proper conveyance of the note is crucial, since the mortgage, which is the lien, is a mere accessory to the note in the overwhelming majority of states and can be enforced only by the proper note holder (the legalese is “real party of interest”). The investors in the mortgage securitization relied upon certifications by the trustee for the trust at and post closing that the trust did indeed have the assets that the investors were told it possessed.

      Effectively, what the article endeavors to do is focus attention on aspects of the law that might be helpful to the securitization industry but are not germane. For instance, relies upon “general custom and practice in the sale of mortgage loans” and the UCC, which is the Uniform Commercial Code (which has been enacted in all 50 states, with relatively few state-level idiosyncrasies).

      But rub comes not from the legal considerations surrounding note/mortgage conveyance, but the particular stipulations of the pooling and servicing agreement, which all the parties agreed to. And it is also clear that the provisions of the PSA trump the UCC.

      Article 1 of the UCC allows the parties to an agreement to vary the terms (Ie deviate from the UCC) by agreement. The key points of the germane section:

      1-302 Variation by Agreement

      (a) The effect of provisions of this Chapter may be varied by agreement.

      (b) Good faith, diligence and reasonableness are the only terms that may not be changed by agreement.

      (c) The presence of the words “unless otherwise agreed” does not imply that other provisions of this Chapter may not be varied by an agreement of the parties.

      That means the UCC governs only with respect to issues not varied by agreement in the PSA.

      Section 2 of the PSA stipulates provisions that deviate from the UCC. Typical provisions:

      Section 2.01. Conveyance of Mortgage Loans.

      Each seller hereby:

      Sells, transfers, assigns, sets over and otherwise conveys to the depositor, without recourse, all the right, title and interest of such seller in and to the applicable mortgage loans.

      The sales shall be as provided in this agreement.

      Delivery shall be on or before the applicable cut-off date

      The documents shall be delivered to the Master Servicer before the cut-off date

      The Master Servicer confirms that all sellers have made such transfers and deposits before the cut-off date¡

      Sellers by such deposits have conveyed to the Trustee for benefit of Certificate Holders all right, title and interest in and to the mortgage loans

      The PSA also very clearly provided for an unbroken chain of assignments and transfers thought the parties (the A-B-C-D or more cited above). The use of intermediary parties between the originator and the trust, with a “true sale” occurring at each step, was intended to create FDIC and bankruptcy remoteness. The investors (who are called the certificate holders in the PSA) did not want a creditor of a bankrupt originator to be able to seize notes back out of the trust.

      Some PSAs allowed for each party to endorse in blank, but the note still had to have endorsements by all the parties in the conveyance chain, while others stipulated that each endorsement had to be to the next party in the chain. However per NY trust law (and New York law was chosen in the vast majority of cases to govern the trust), the final endorsement had to be to the trust, not in blank.

      The “unless otherwise agreed” language in Article 1 means you cannot rely on perfection solely by the UCC. It also means possession of the original note does not prove either ownership or perfection.

    2. tom bokuneiwicz

      I wrote the following as a reply to Yves in a thread above and I think it may have some relevance here. The case is Carpenter v. Longan, 83 US 271 wherein the US Supreme Court states:

      The note and mortgage are inseparable; the former as essential, the latter as an incident. An assignment of the note carries the mortgage with it, while an assignment of the latter alone is a nullity. (Citing as a footnote: Jackson v. Blodget, 5 Cowan 205; Jackson v. Willard, 4 Johnson 43.) CARPENTER, 274. The Court goes on to further state: “All the authorities agree that the debt is the principal thing and the mortgage an accessory…The mortgage can have no separate existence. When the note is paid the mortgage expires. It cannot survive for a moment the debt which the note represents.” CARPENTER, 275.

      So, unless I am completely nuts, I read this to mean that passing a mortgage without a note passes nothing. The thing of value that must be passed is the note. Granted, I am not a real estate lawyer (more to juvenile law) but that case is still good law as far as I know and it seems to be pretty clear that a mortgage in and of itself has no value.

      So, if there was all this passing of the mortgage without the note..well, I think the consequences of that are fairly obvious… and if I was the entity passing the mortgage alone, I would be sh..ing in my pants as they say…

      And I would also add from above: Virtually all the states have a Statute of Frauds that requires all transfers of interest in real property be in writing. A blank bearer note would seem to violate that requirement. And no, parole evidence as to the existence of an agreement relative to the note is not allowed under said statute. In fact the use of parole evidence is one of the main things that the statute is designed to eliminate.

      And to think that I used to poke fun at all the legal drones in the Registry of Deeds, filing deeds and doing title searches; with their pale faces and reading glasses. All of this could have easily been avoided if these geniuses had simply followed the rules that had been around for such a long time- and have stood the test of time. But, no, as we used to say: pigs get fatter and hogs get slaughtered.

      Just to see how this mess applies in the real world: I have a buddy who is in the process of selling his home. I did a courtesy title search for him and saw that the only mortgage recorded was his original mortgage. But then the you know what hit the fan during his sale (he got an offer above what he asked for) and I figured, what the hey, run his property through MERS. I had never heard of MERS; nor had he.

      Well, surprise, surprise, as Gomer would say: MERS shows that his mortgage has an ‘investor’ called Aurora Bank in Nebraska. He had never been notified of the transfer (in violation of federal law) and so was perplexed. I looked up said bank and found out that it is a shell bank with one branch in New Jersey and that it is connected to the- get ready for this- Lehman Brothers. Further investigation reveals that this shell bank seems to have been held out of the Lehman bankruptcy. His servicer (another long and tawdry tale) confirms that the ‘investor’ is Aurora. Not the note holder mind you, but the investor. They cannot tell him who owns the note.

      What the hell does that mean?

      So, now I have fired off letters to everyone and their mother trying to track all transfers of the note, by whom, to whom, when, etc….. His sale is now held up as he has no idea who to pay. Both realtors are pissed as they claim he is being ‘picky’. The title company doesn’t know what to do. A big mess.

      But what about those people who don’t have access to a lawyer? How can they be sure everything is above board and all the necessary procedures have been followed?

      1. Yves Smith Post author

        OK, we are on the same page. I’m told 45 states hew to Carpenter (the notion that the note is the critical instrument). I know Minnesota is one of the states that deviates, it has passed MERS friendly legislation. Sadly, I can’t name the other four states that allow mortgages to have some force independent of the note.

        Re the pickle your friend is in, I extend my sympathies. A lot of people find that things are a mess once they start digging.

        1. tom bokuneiwicz

          Posted this above…
          Yves: Yes, I agree. I just don’t know how that case law, though old, will integrate with what is going on today. I suspect that at some point, the Supreme Court will be forced to revisit Carpenter or the Congress will pass law(s) to address the situation (most likely in favor of the banks, I sadly predict, and not the established rules of property law).

          I also wanted to add that I appreciate your work and know you have been doing this for a while; I just didn’t get involved until recently. My God, what an eye-opener. When I am reading this stuff, I have this vision of my Property Law professor intoning: “Property law is a bunch of sticks. And these sticks are very old. The RULES have been around forever. The RULES and the sticks go together.” And I hated property class because the rules were so set in stone and seemed unlikely to change. Why? Well, because they seemed to work quite well. And I wanted a more dynamic live field, such as Juvenile Law. Boy, who knew?

          I think he would be floored that anyone would make the argument that the UCC has any effect on property law; especially in the transfer of real property rights as how to transfer real property rights has been well-established for hundreds of year- that is what the Registry of Deeds is for…

          And unsigned bearer notes concerning real property? I can hear a long, moaning aauugghh escaping his wrinkled mouth…along with a begone accursed UCC….

      2. Bill White

        I’m confused. (Who isn’t?) If you have title insurance, aren’t you indemnified against all this? That is to say, if I were in the position of your friend, and I had title insurance, wouldn’t the title insuror be responsible for
        sorting it all out?

        I am not even capable of playing a lawyer on TV, so I
        apologize if this is a naive question.

        1. tom bokuneiwicz

          No, title insurance only says that they will protect you against any defects in title at the time you got the title. Anything after that is your problem. Example: suppose you purchase title insurance on Jan. 1, 2010. The title company would have looked at your title and did a title search. Let’s say they find nothing wrong. Done. However, the next time you go to sell your property, you find out that there was an unreleased mortgage on the property from 1999 that the title company missed. The title company would deal with that.

          Any problems with your title AFTER 1/1/2010 would be your problem; including the mess everyone is discussing here.

  13. simplygeorge

    First I apologize for the typos, I didn’t check before posting.

    Yves I agree that many of these considerations are for securitization lawyers and not dirt lawyers.

    As to the legal opinions, Yves is again correct in that the opinions were in the “if-then” form. A complete discussion of what was covered and to whom they were delivered is beyond this comment section. I made reference to the opinions only to highlight that the procedures which were suppose to have been followed, including assignment “in blank” were intended by the parties. It was not simply sloppy procedure.

    As to the assignment of the mortgages, I was simply stating that it is the note assignment which is the prerequiste.

    Does that make it clearer?

    1. Fractal

      Thank you, SG. It is now a little more clear. As I understand what you are saying, the law firms that issued opinion letters relating to RMBS/REMICs recited a number of procedural steps in the letters’ “if you did this” assumptions sections. One of the procedural steps ASSUMED by the opinion letters was that notes were assigned IN BLANK. Then, in the opining sections of the letters, the firms opined that the RMBS/REMICs were properly and lawfully formed, even assuming that the notes were ASSIGNED IN BLANK.

      If that is what you meant to report, I find that astounding. Such opinion letters may have been malpractice (as another commenter tom b. said at 5:09 pm), based on our months of postings about how crucial it is to assign the notes to named assignees.

      On the other hand, such opinion letters may have included specific disclaimers that they did NOT APPLY to and could not be relied upon to initiate foreclosure actions or affect the rights of the mortgagor (homeowner) to defend against foreclosures based on notes assigned in blank.

      Since we got so down in the weeds about these opinion letters, I have forgotten whether you said you actually saw such letters or only heard about them.

      1. simplygeorge

        Fractal the opinions would not have directly addressed foreclosure actions by the holders of the note, only that the initial securitization and the steps necessary to
        that transaction were legal, valid and binding (subject to various carve-outs).

      2. Yves Smith Post author


        I am not speaking from specific knowledge, but I am just about 100% certain the opinions DID NOT support assignment in blank. I’d hazard to guess the opinions relied upon were pretty old (getting opinion letters is pricey). And I would imagine the recitations amounted to “if you did what the PSA said, then the transfers constitute a true sale”.

        And the trustees, even more remarkably, provided certifications that the trusts had valid title to the assets! Multiple certifications, in fact.

        So I doubt there were any opinion letters that can be construed to support endorsement in blank. The attorneys who have seen them would have alerted me to it. I’ll reconfirm, but that’s my impression.

  14. summa

    It seems odd, to say the least, that the simplest parts of the transaction never took place, ie. the recording of the note assignment at the county level and delivering the notes to the trust. All the effort and expense it took to negotiate the deal, find buyers, certify the pool contents, do the paperwork, etc. and in the end no one seemed to care about the notes. This despite the fact the typical PSA (Pooling & Servicing Agreement) has pages of language defining how the notes are to be handled as a most valuable commodity. http://www.secinfo.com/d1Ax6e.u1u.c.htm

    Some have argued the original note couldn’t be delivered to the trust because it became a habit to sell it more than once. This is why Bear Stearns had to be sacrificed. The database called MERS has many purposes, but chief among them may have been to give assurance to investors the note belonged to them. If an interested party could never verify the uniqueness of the note in the database, no one would ever be the wiser.

    Most foreclosure complaints take advantage of existing state statues declaring the note to be lost or destroyed to avoid producing it. If the servicers kept the notes, why wouldn’t they just produce it to foreclose?

    Banks in Florida have argued against changes to the Rules of Civil Procedure, proposed by a task force to the Florida Supreme Court, to force the plaintiffs in a foreclosure case to provide proof the note was lost or destroyed. Their argument against the rule changes seems to be they intentionally destroyed notes so there would be less confusion. http://www.floridasupremecourt.org/decisions/2010/sc09-1460.pdf

    Many questions – few answers. As long as the TBTF banks and their service arms are able to control access to the loan files and the database, the fraud will continue.

    I believe the nature of the beast was discovered way back in the fall of 2007. A decision was then taken by the FED and the Treasury to avoid disclosure of the fraud at all costs. AIG had to be taken over, Bear Stearns had to go because the fraud was too obvious, TARP money would take the immediate pressure off, the FED would print money and keep interest rates near zero to support the markets, and mark to market accounting would not be enforced. The existing management at the banks and on Wall Street would be kept in place.

    They hoped the ever-robust American economy would save their bacon eventually, and above all they hoped housing prices would quickly recover. Unfortunately for them, they didn’t know Obama and the democrats very well.

    1. tom bokuneiwicz

      And today I get an e-mail from the realtor for the seller asking if I got any news? Rather than say: Are you effin’ kidding me? Do you really think that these people can find the note, find out who owns the note, and copies of all the transactions in what is now about 2 weeks time? Do you realize the levels of fraud they are going to have to commit to produce these documents? That takes time, my dear.

      Oh, and his servicer is IndyMac Services; which was created by OneWest Bank after it was created out of the ashes of the original IndyMac Bank. Of course, no assignment of the servicing rights AS APPROVED by the bankruptcy trustee has ever been presented to my friend; only a notice of servicing rights transferred from his original servicer to Indymac Bank’s original servicing department and a new transfer from Indmac of old to Indymac of new.

      And of course, all Indymac can tell him is that the mortgage is in the hands of a ‘private investor’ called Aurora Bank. They never call them the holder of the note, but like MERS, call them the ‘investor’.

      Yves, or anyone, what in the heck do you think they mean by investor? My guess is that the bank has invested funds it raised from other people to buy this mortgage and others. I don’t expect to find out that Aurora is the true note owner/holder.

      Personally, it is taking quite a bit of good ale to get through this mess.

      Really, if I ever get the docs, I may just post all these trust docs and transfer docs on line here for all to see.

  15. razzz

    tom bokuneiwicz says:
    November 8, 2010 at 6:23 pm

    That was the funniest and saddest thing I’ve read all week and it’s only Monday.

    This is exactly what you would expect when dealing with derivatives. Obfuscation, sinister trails, many finger prints on the paperwork, blank faces with no answers. Basically fraud, a swindle.

    Lowly home buyer signs a contract using the house as collateral not knowing his shoulders will carry the full weight of the world economy if he fails timely payments, thanks to wall street.

    If you ever get any documents especially from the 55 partial note owners living in various parts world, you’ll need a forensics and fraud specialty attorney for examination and to explain it to a bewildered court unless the judge just ends it on the first illegal deed transfer.

  16. dejavuagain

    I thought that if one properly has a note, one can sue on the note – collect on the note.

    But, that does not mean one can foreclose on the property based on the mortgage unless one is the mortgagee.

    I thought that you need to have both the note and the mortgage in order to enforce the note through foreclosure of the mortgage.

    The practice in the old days (pre MERS) was always to record the assignment of the mortgage.

    Carpenter v. Longan does not necessarily control differing state law. Note that this case was about property located not in a state, but in the Colorado Territory. That is why there was jurisdiction by the federal courts.

    There is no reference in the case to any recording of the mortgage.

    But, it is interesting to look at the facts of the case. The Longans were the borrower. The original lender was Jacob Carpenter who held a note and a mortgage for a single payment due at the end of the note term (6 months.) Jacob Carpenter then assigned the note and mortgage to B. Platte Carpenter, who was the “Carpenter” in the case which I will refer to a Platte.

    The Longans claimed they paid Jacob by delivering to him wheat and flour to be sold with the proceeds applied to the note. Then, when the note was due, the Longans tendered the remaining amount due to Jacob and asked for the return of the note and mortgage.

    Platte sought to foreclose the mortgage. The Longans claimed that Platte knew that the wheat and flour had been delivered to Jacob but the Supreme Court did not accept that argument, stating the Platte had paid valuable consideration to Jacob for the assignment of the note AND mortgage from Jacob to Platte.

    The first Colorado territory court did not allow the Longans to deduct the value of the wheat and flour and decreed a judgment against the Longans for the full amount. The Supreme Court of the Territory of Colorado disagreed, and allowed the value of the wheat and flour to be applied to the amounts due.

    It then ended up in the US Supreme Court. The US Supreme Court ruled against the Longans and held that the entire amount was due to Platte.

    Put in modern day terms, assume the the Longans obtained the mortgage from Countrywide. Then Countrywide assigned the note and mortgage to Well Fargo which received the note and fully executed assignments of both. The Longans kept paying Countrywide and paid off the note. Then, Wells Fargo decided to foreclose. Under the literal reading of Carpenter v. Longan, even though the Longans had paid Countrywide in full, they still owed Wells Fargo the full amount. This hypothetical does not consider whether or not the assignment was record.

    The US Supreme Court made no reference to any recording of the mortgage or assignments thereof. An interesting point is whether the note allowed prepayment, for it was due 6 months later. If there was no right to pre-pay, and the full amount due in 6 months, and the assignment made prior to the 6 months, then perhaps that influenced the Court.

    This case is not binding precedent on any state court applying state law including the UCC. Because of the absence of facts re recording, the case is also limited.

    In my view, a mortgagor should be protected if payment is made to the mortgagee stated in the recorded instrument.

    The note is critical, but so is the mortgage.

    The case is easy to find on the Internet. It is worth reading prior to citing dicta from the case.

    1. Fractal

      This is priceless. I haven’t even finished the whole Colorado Territory saga, but I feel as though I have stepped back in time. Foreclosure Rules for Deadwood, Colorado. Where else could we have this much fun?

      1. dejavuagain

        They could have paid in peppercorns – even tulips.
        The point though is that there are centuries of law that MERS has tried to get around and oversimplified.

        It is pretty terrifying though. What if the mortgage is assigned of record and the note assigned, but the assignee does not bother telling the borrower and the borrower continues to pay the assignor.

        I rent.

    2. Yves Smith Post author

      No one is disputing the notion that the noteholder should be paid, and that a note can be assigned. The issue is that the trust was supposed to have gotten the notes as a part of the securitization process (in general, all the fixes needed to be done by 90 days after closing, only very narrow exceptions permitted after that).

      The notes appear not to have been properly conveyed in many cases. To foreclose, you have to have your rights perfected to a high degree. Under the terms of the PSA (and New York trust law treats deviations from the governing agreement as a “void act”) there is no way to get the notes in now (and transferring in defaulted loans separately is a violation of REMIC rules).

      So the problems with fixing this mess lie with the securitization structure, and the failure to adhere to the terms of the PSA.

  17. simplygeorge

    With respect to the question of whether one needed to record an assignment of the mortgage, the simple answer is no. The mortgage follows the note; however, almost universally an assignment of the mortgage is made (possibly just not recorded).

    A typical mortgage provides that it is for the named holder and any subsequent holder of the note (as the mortgage follows the note).

    Generally speaking recordation of each and every assignment is not absolutely necessary. While it may make for better practice, even prior to the REMICS banks often transferred interest without recording the mortgage assignments. If a foreclosure was necessary, the then holder would record an assignment which listed each note assignment. Recorder’s offices ansd Title Commpanies took no issue with this.

    1. dejavuagain

      When you say “absolutely necessary”, absolutely necessary for what. Perhaps not needed for the REMIC but there may be a different story as to foreclosure and delivering clean title.

      But, recording an assignment gives priority against subsequent liens and security interests in the property. As an assignee of a lender of a $100 million commercial property, I would want a recorded assignment.

      As an owner of $100 million property, I would want a satisfaction of mortgage recorded after pay-off.

      You say ” If a foreclosure was necessary, the then holder would record an assignment which listed each note assignment.” That is fine – I assume you mean an assignment of the mortgage, but practices vary I guess. So, is that not contradicting your “no” above?

      And, who signs the assignment – do you mean the assignee signs the assignment to itself and the title company is okay with that even if the assignor does not sign and may be in bankruptcy?

      Recorder’s Offices record what is presented. Title companies will just write an exception.

      Sure, a lot of corners get cut. I would rather have a recorded satisfaction of mortgage by the recorded holder of the mortgage, than have an opinion from the largest law firm in Manhattan.

    1. razzz

      It’s no wonder Hilter wanted HR3808 signed into law.

      Counsels, see any problems arising from robo-signers’ actions?

  18. MinnItMan

    Non-recording of assignments of security interests should not affect lien priority. The assignee takes whatever position the assignor has. (I realize that bankruptcy courts may see this differently, but that is related to perfection of interest rather than priority). This raises the my largest area of skepticism about the separation of debt from the security interest. If the relationship of the debt and the security interest is stable – like hydrogen and oxygen – then this shouldn’t be a large problem for lenders. If, on the other hand, it is unstable, I assure you that lenders did not execute/almost never executed this correctly and it is a huge problem. In other words, if an enforcible security interest is orphaned from the debt in any but the most extraodinary circumstances, then the lenders are seriously screwed by their model.

    Before MERS, “subprime” used to be called “B-C-D paper.” I don’t know if the interests were traded as frequently as they were in the 2000s, but they were traded a lot. When these loans were paid off, the payoff was almost always to a purported “noteholder” with no assignment of lien running in its favor. The 90s wing of the mortgage lending museum would have names like Capstead Mortgage, Corinthian Mortgage, UC Lending, The Money Store, HomeSide Lending, BankOne, Meritech – where are they now? Buried in all this, was the issue that ordinary people now notice, but did not then. When you paid off a mortgage pre-MERS, you had no way of knowing whether you would get an effective release because the chain-of-title for the security interest was a complete black box. I won’t say all title companies followed this practice, but most did: the title commitment would show a mortgagee/assignee; the payoff had a company with no discernible connection to the mortgagee’s interest. The credit report, however, did give enough data to title for them to be reasonably sure that the right loan got paid.

    Pre-MERS, a title company would typically record the security instrument and maybe the first assignment, if it was recordable (often it was not because mortgage companies frequently didn’t understand how to do them properly). Usually, the chain was completed after the payoff, that is, a wad of assignments (F to G, G to H, H to I, I to J) would get forwarded to whomever (sometimes it was to the borrower, sometimes it was to title) along with the satisfaction or release (terms used interchangeably, but not exactly the same), and there would be the unpleasant surprise of getting stuck with multiple recording fees, missing links, etc. What could possibly go wrong?

    An important background part of the MERS story is the RTC clean-up era. The people I know on the various advisory committees that pre-figured MERS all had RTC experience with the above issues. In this sense, it was not about avoiding – at the time – a $19.50 recording fee (generally, this is not a tax, despite what many claim – fees are different from transfer taxes). It may have been about avoiding 4 X $19.50 fees (now $46 here, btw). It certainly was a workaround for the wad of documentation that frequently was defective and practically unfixable.

    I was not an RTC lawyer, but I suspect S George was, and he appears to know what he is talking about.

    1. dejavuagain

      ‘If an enforcible security interest is orphaned from the debt in any but the most extraodinary circumstances, then the lenders are seriously screwed by their model.”

      I agree and that is why I question what was implied by S George, who seems not to agree with you or me on this salient point.

      “Pre-MERS, a title company would typically record the security instrument and maybe the first assignment, if it was recordable (often it was not because mortgage companies frequently didn’t understand how to do them properly). Usually, the chain was completed after the payoff, that is, a wad of assignments (F to G, G to H, H to I, I to J) would get forwarded to whomever (sometimes it was to the borrower, sometimes it was to title) along with the satisfaction or release… ”

      MinnItMan – that also conflicts with S George. Also, the “wad of assignments”. How could it at all be easier to do this “wad of assignments” years after the transactions, if at all, when they could have been done contemporaneously.

      I can assure you that the lawyer who pointed out the risks of not doing the paper work contemporaneously would have found him/herself off the committees and without institutional clients.

      I was an institutional MBS lawyer in the early 80s and I suffered much abuse by prohibiting any mortgages from being placed in a package for sale without the signed assignments. Outside counsel did not care, unless I memo’ed to file with a cc to outside counsel, only upsetting the bankers and the outside lawyers. Not coincidentally, the completed files received a premium.

      What were people thinking, and, how could the lawyers have been unable to foresee the inevitable messy confusion at pay-off or foreclosure time?

      Anyway, my operative theory is that one should not expect the typical judge to understand the intricacies, and that complete unambiguous paperwork in the end was the best approach, no matter if there were legal opinions saying that certain steps were not needed and no matter what was the “standard” practice du jour.

  19. MinnItMan

    “I can assure you that the lawyer who pointed out the risks of not doing the paper work contemporaneously would have found him/herself off the committees and without institutional clients.”

    Among other things, this is why I have clients who have to pay in cash or the equivalent. Livin’ the dream, man. Can you spot me my rent? I’m good for it when I settle my next case.

    I was on the Minneosta Electronic Real Estate Records Task Force. I was the only small-timer there – everybody else was from the MortgageBA, ABankersA, ALTtitleA, County Recorders’ Association, etc. This was ten years ago. We were on the verge of electronic documentation and universal search-ability. I liked my odds as a small operator, all of a sudden, having instant access to statewide real estate records – in a state with 87 counties that is 400 miles north to south, about 250 to 350 east to west.

    I gotta be careful what I say. Knowing what I KNOW (about mortgage company “art departments,” “preferred signing agents” ad f’in nauseum), I would say there was a deliberate attempt to derail electronic documentation – whether it was the county recorders protecting their turf, the ALTA members with sunk costs in proprietary title plants, I don’t know. The lenders couldn’t believe how idiotic the rest of the stake-holders were, but at the same time, they provided the perfect rationale for foot-dragging: lenders were putting social security numbers on their mortgages for all the Russian identity-theft rings to exploit – which they probably did (I grew up thinking that the stupidest privileged grew up to be bankers, silly me). This completely shit-canned meeting the goal of universal public electronic access to the public records. NOTE: title plants are the chief asset the big four title insurers own, ttbomk. Kinda fortuitous, as they used to say in my hometown (not in Minnesota). It also shit-canned a quick move to electronic filing.

    Anyway, a long-winded way of saying why recording of assignments are a problem, and that, among all other real estate documents, were begging for an electronic solution. The recording of assignments is a unique logistical problem (all logistics are unique, btw). My sister, who I think was Iyves classmate at HBS, told me way back when she was ther, “it’s a classic “OTFU” – opportunity to f up. Routine, no-brainer, course-of-business, cluster, um, bombs.

  20. tz

    If MERS had all the documentation, they would need a huge warehouse – not just a website and server farm.

    Someone should go there and apply for VP status and ask to look…

  21. uncle dunc

    First time on the blog.

    I’ve got a mess in Illinois foreclosure. Trustee Bank is suing with (what appears to be) copies of the original note and mortgage as exhibits. Note is “clean” – not a whisp of an endorsement. I challenged standing in March and won, but court gave them 2nd chance so they added another exhibit to their amended complaint – yup, an assignment.

    Weird fact #1 – the assignment of the mortgage goes from the Trust to the foreclosing bank – skipping the latest trustee in the chain. And, no evidence of a prior assignment from the original lender into the Trust.

    Weird fact #2 – the top of the mortgage say “when recorded return to….” and little operation in Idaho (whose name has come up in a FL case with BofA using its robo-signers. This doesn’t seem to the a “Wall Street” address to me.

    Weird fact #3 – 1 day after the mortgage was recorded the Trust hit its cut-off date, and closed a few days later. So I doubt that even FedEx could have physically delivered the wet ink mortgage to the sponsor, depositor, custodian on time…

    Weird fact #4 – the assignment of mortgage is dated to be “effective” on Dec 7, 2010 – 2 days b4 suit was filed, yet not recorded until Jan 6th, 2010 – is that legit?

    Weird fact #5 – the servicer sent me a letter in January stating “your loan was transferred on June 1 2007… and the new owner is” the bank that’s foreclosing.

    If I read and understand this, it appears the loan never made it into the trust, and both instruments were in seperate locations for 2 1/2 years. Lien out to be nullity I think. But what about the note? The MIN appears on the SEC.gov website when I research the Trust. So, they’re claiming my loan is in the Trust, but the “owner” is in possession of the note ONE DAY AFTER the Trust closes.

    I don’t know for sure, but it might just be that the loan was sitting with the original lender awaiting the recorded mortgage – but Oops! the darn Trust closed… So they shipped the note off to another bank (for consideration?) and are now trying to dummy up an assignment and cover their tracks for NOT getting the note and mortgage into the Trust before the bell rang.

    Have I analyzed this correctly? Or, is there any other plausible explanation? Thanks

    Uncle Dunc

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