It’s worrying to see Paul Jackson, the creator of the generally-respected Housing Wire, damage his brand by continuing to provide misleading and erroneous commentary in an area of keen interest to his readers, the foreclosure crisis.
One could have hoped that Jackson would have learned to question his sources after unwisely sticking his neck out for them in a his article “A Crime of Omission” in which he sided with forgers against the critic of servicers. A takedown of his post by our Richard Smith was validated less than seven hours later by an extensive, exclusive Reuters article that not only validated Richard’s post, but all of our previous reporting on the company at issue, Lender Processing Services.
But Jackson has offered another erroneous defense of securitization industry bad practices in the form of “BofA, the MBS unwind, and the other side of the coin.” This post narrowly is a discussion of a recently widely discussed case, Kemp v. Countrywide, and more broadly, an effort to again discredit critics of the securitization industry. (In a tweet the next day, Jackson does appear to recognize that the post may have problems: “About today’s column: I feel the need to note that I do not address endorsement issues. Just to prevent words from being shoved in my mouth” but this falls short of acknowledging the full scope of the problems with his post).
If you didn’t know better, Jackson’s post would sound reasonable, even persuasive, because it hews to the form of a fair treatment. He first claims to present the case made by the critics, who are of the view that the problems with the breakdown in certain mortgage securitization processes are serious and not easily remedied. He then presents a rebuttal, quoting sections of a pooling and servicing agreement, as well as long quotes from unnamed attorneys.
But form and substance are very different matters. It’s ironic that Jackson’s prior critique took up the theme of “crimes of omission”. That piece started with the observation that a famed DocX price sheet, which showed fees for “recreating” various documents, including ones which under the law can ONLY be originals, so any recreations are by definition forgeries, was dated, and drew an incorrect inference, that the age meant it was no longer operative (Richard rebutted this in gory detail in his post). What was even more surprising was that he then used his incorrect reading to launch a general, unwarranted indictment of the veracity of all critics:
That those so aggressively accusing mortgage servicers of lying and fraud may themselves also be guilty of the same is a troubling trend…..Because it begs important questions: What other fact patterns have been twisted around? Who can we really trust to tell the truth here?
Get that? A false charge that an error was made is escalated into a full bore indictment, with all the right qualifiers in place to allow Jackson to pretend that he didn’t really mean what he effectively does: call critics of mortgage servicers liars and fraudsters.
And in his latest post, Jackson is guilty of precisely the same behavior he erroneously accused others of, a “crime” of omission. But in this case, it is not a single omission, but multiple ones. If one error is tantamount to fraud, in Jackson’s calculus, does his post deserve RICO status?
Let’s look at some of the post’s problems. First and foremost, Jackson fails to do the thesis he claims to rebut justice. As a result, the arguments he and his unnamed sources make for the most part do not engage the issues. Thus the material he offers as a defense is largely irrelevant and at key junctures, flat out wrong to boot.
Acts of Omission
1. Jackson mentions the “failure to convey” issue, but never explains the New York trust aspect, which is central to understanding both why this is a problem and why it is so hard to remedy (there is only an en passant mention by an attorney who does not appear competent in this area towards the end of his piece).
The reason this matters is that (as we have explained multiple times on this blog) is that virtually without exception, all residential mortgage securitizations were organized as trusts under New York law. New York trust law was chosen by the securitization industry in the mid 1980s when the now-largely-standardized legal documents were being developed precisely because it was well settled (key precedents go back to the 1800s) and unforgiving. Specifically, as law professors Adam Levitin, Ira Bloom, and other New York trust law experts have indicated, New York trusts can act only precisely in the manner set forth in their governing agreements. Any deviation is deemed a “void act”.
Why did the people coming up with this system make life so difficult for themselves? For very good reasons. They wanted the trusts to be bankruptcy remote, so that if the originator failed, as New Century and IndyMac did, that its creditors could not try to claim the notes sold to a securitization. The solution was to require it to be conveyed through intermediary parties before getting to the trust. The second reason was to conform with REMIC, the newly-created tax provisions. That too imposed very specific requirements, and they wanted to ensure that the trusts complied precisely.
2. Jackson also fails to even say what conveyance consists of. In rather crude terms, in this context, it is the steps necessary to get the notes, which are the borrower IOUs, into the securitization trust. At the very minimum, the notes must be endorsed as stipulated in the PSA and also be in the possession of the trustee or its custodian on behalf of the trust. This discussion is completely absent from the Jackson piece.
Acts of Commission. The article is rife with errors.
1. Jackson quotes a section of a selected pooling and servicing agreement and both misreads and misapplies it. He misreads it by quoting selectively. This is his argument:
In other words, this PSA’s terms explicitly anticipated the reality of missing documents, and also explicitly prescribed a remedy in the event missing documents were found to be a problem for the trust.
If you continue to read this section of this PSA, you see that if the defects, including the missing documents, can’t be cured, the loan is to be replaced. The trust does need to possess the actual note and mortgage.
In addition, the trustee is required to certify, after the cure period, that everything is present and accounted for, in a final certification, generally six months after the closing of the trust. If there were any defects noted in the final certification, the servicer was obligated to cure them in set time thereafter, generally ninety days after that. This is the germane language from Section 2.02, “Acceptance by Trustee of the Mortgage Loans”, of the Kemp PSA (boldface ours):
a) The Trustee acknowledges receipt, subject to the limitations contained in and any exceptions noted in the Initial Certification in the form annexed hereto as Exhibit G-1 and in the list of exceptions attached thereto, of the documents referred to in clauses (i) and (iii) of Section 2.01(g) above with respect to the Initial Mortgage Loans and all other assets included in the Trust Fund and declares that it holds and will hold such documents and the other documents delivered to it constituting the Mortgage Files, and that it holds or will hold such other assets included in the Trust Fund, in trust for the exclusive use and benefit of all present and future Certificateholders. The Trustee agrees to execute and deliver on the Closing Date to the Depositor, the Master Servicer and CHL (on behalf of each Seller) an Initial Certification substantially in the form annexed hereto as Exhibit G-1 to the effect that, as to each Initial Mortgage Loan listed in the Mortgage Loan Schedule (other than any Initial Mortgage Loan paid in full or any Initial Mortgage Loan specifically identified in such certification as not covered by such certification), the documents described in Section 2.01(g)(i) and, in the case of each Initial Mortgage Loan that is not a MERS Mortgage Loan, the documents described in Section 2.01(g)(iii) with respect to such Initial Mortgage Loans as are in the Trustee’s possession and based on its review and examination and only as to the foregoing documents, such documents appear regular on their face and relate to such Initial Mortgage Loan. The Trustee agrees to execute and deliver within 30 days after the Closing Date to the Depositor, the Master Servicer and CHL (on behalf of each Seller) an Interim Certification substantially in the form annexed hereto as Exhibit G-2 to the effect that, as to each Initial Mortgage Loan listed in the Mortgage Loan Schedule (other than any Initial Mortgage Loan paid in full or any Initial Mortgage Loan specifically identified in such certification as not covered by such certification) all documents required to be delivered to the Trustee pursuant to the Agreement with respect to such Initial Mortgage Loans are in its possession.
That means that all trustees were required contractually to say, in most cases six months after closing, that the trust did indeed have all the documents and everything was correct and point out any and all omissions.
The misapplication lies in confusing, or misrepresenting, failure to convey selected documents (which is what this section contemplates) with failure to deliver anything at all (the real problem). What made Kemp v. Countrywide so astonishing is that a senior employee of Countrywide said that not only had the particular note in this case not been transferred to the trust, but that it was Countrywide’s practice NOT to convey the notes. Under New York trust law, if NO notes were conveyed to the trust, the trust itself would be unfunded and hence not exist. That’s the extreme scenario that Professor Adam Levitin mentioned in Congressional testimony and on his blog but even lesser versions of this scenario (that some notes were conveyed and some weren’t) is still very damaging. It means that trustees on a widespread basis issued false certifications; it means that servicers had to have known the notes were not conveyed (if nothing else, the hunt to obtain the actual note to be able to foreclose would show it was not in the possession of the trustee). They also failed in their duty to put back the notes on behalf of the investors. (An aside: I had a long debate with a securitization attorney, the use of the term “put back” in the case of non-possession is annoying. He agreed the better term would have been “pay back”: but no one took who devised the documents originally ever imagined that that notes might not be conveyed as matter of policy.)
To put it more simply: “missing documents”, which are what Jackson discusses, are not at all the same as “not ever conveyed” documents.
2. This part is astonishing:
As a white paper from the American Securitization Forum notes, and as I’ve been told by more than a few attorneys I’ve spoken with, there is a significant difference between the concepts of physical possession and so-called “constructive” or “legal” possession of a note.
This is where the acts of omission come in. This argument does not wash in foreclosure-land. Stipulations vary by state, but in judicial foreclosure states, you need to be the “holder” of the note, and that is generally construed to mean to have both physical possession and have the legal right to enforce it, which for a negotiable instrument like a note, means being the party to which note has been endorsed (the PSA provides for more exacting requirements regarding endorsement, but let’s put that to one side for now.
So physical possession IS a requirement for the investors to have the rights they were promised, that they bought “mortgage backed securities” since in 45 of 50 states, if you are not the holder of the note, you cannot enforce the mortgage (the lien on the property)
It also does not wash in securitization-land. The PSA stipulated a series of transfers and required the trustee to certify that the notes reflected that these transfers had the endorsements consistent with these having taken place. Clearly the parties to the transaction evidenced considerable concern that this be done correctly. And it gets back to the New York trust issue which the American Securitization Forum, and derivatively Jackson, choose to ignore: the trust can only come to possess the notes in the manner stipulated. All five New York trust law experts who are the official advisors to New York state agree on this point.
3. Counterfactual assertion from unnamed attorney(s) on Kemp. Jackson relies on anonymous attorneys (why are they unwilling to give their names when they provide securitization-industry-flattering posiitons?) who manage to offer views that are inconsistent with numerous state and Federal bankruptcy court decisions. Read the examples, and decide how competent and informed you believe these unnamed sources to be:
“The (Kemp) case is a very narrow and probably wrongly decided case,” said one attorney I spoke with on condition of anonymity, after reviewing the court docket. “Where the original note is produced and is conceded to be at all times in the possession of the attorney-in-fact for the trust, the court’s reasoning is at best questionable. In fact, it defies common sense.”
Huh? The servicer is not the attorney-in-fact for the trust in Kemp. If they were, the attorney for BofA would certainly have tried this argument. In fact (hah!), the judge notes the plain language of the PSA, that the loan was supposed to be delivered to the trustee, and all parties agree in the case that this requirement was not met. Does this attorney know ANYTHING about securitization?
In fact, the Kemp decision seems to be very carefully reasoned. I expect that there is very little chance it will be overturned on appeal. Expecting a favorable verdict on appeal is the standard line of mafia dons leaving the courthouse after they’ve been convicted of multiple counts of murder, extortion and drug dealing.
Moreover, despite the kvetching of other unnamed attorneys in the Jackson post, I suggest they wake up and start familiarizing themselves with foreclosure decisions all over the US. Have they been asleep while judges all over the country have been deciding against banks trying to foreclose based on issues of standing? What makes Kemp sensational is NOT the judge’s decision. It has plenty of parallels in other courthouses. It was the very damaging testimony of Linda DiMartini: that Countrywide had a policy of not conveying notes.
This part is also raises questions about the expertise of Jackson’s sources:
“The Tom Adams declaration is completely inadmissible, same with the Bloom declaration,” said one attorney, under condition of anonymity. “They are acting as a judge, and trying to give the judge a legal conclusion. A witness is not allowed to opine on an issue of law, only on issues of fact. These declarations are entirely an opinion of law and probably wrong at that.”
Jackson’s quote came not from a trial attorney, or litigator, as they are called in corporate practice, but a creditor’s rights expert. That’s tantamount to asking a cardiologist about a bladder problem.
Since when are expert witnesses not permitted to give opinions? This is a gross misreading of the Federal Rules of Evidence, specifically Rules 702 through 705. This gloss comes from Cornell Law School:
Most of the literature assumes that experts testify only in the form of opinions. The assumption is logically unfounded. The rule accordingly recognizes that an expert on the stand may give a dissertation or exposition of scientific or other principles relevant to the case, leaving the trier of fact to apply them to the facts. Since much of the criticism of expert testimony has centered upon the hypothetical question, it seems wise to recognize that opinions are not indispensable and to encourage the use of expert testimony in non-opinion form when counsel believes the trier can itself draw the requisite inference. The use of opinions is not abolished by the rule, however. It will continue to be permissible for the experts to take the further step of suggesting the inference which should be drawn from applying the specialized knowledge to the facts. See Rules 703 to 705.
Note that this attack is purely diversionary; a simple drive by shooting, evidently so he does not have to address the not-as-easy-to-dismiss content of the court submissions.
It might also behoove this unnamed critic to familiarize himself with the rule of evidence of the state of Alabama, where this trial took place. Alabama requires anyone pleading foreign law (which New York trust law is in Alabama) to disclose the experts they will rely upon. The experts were required to provide affidavits pre-trial. Opposing counsel chose neither to depose them pre-trial (they cross examined them cold) nor did they present experts of their own.
Ira Bloom is clearly an expert in New York trust law; he has an extensive publication history and regularly acts as an expert witness on New York trust matters. Opposing counsel even acknowledged that Bloom was obviously well qualified. Tom Adams was qualified as an expert in securitization industry practices.
If this testimony was so obviously inadmissible, then why didn’t opposing counsel protest? Opposing counsel was not a low-life, unsophisticated player or mere foreclosure mill, it was Sirote & Permutt, which is an old-line firm and handles big corporate work as well as foreclosures. The partner on the case is a seasoned trial attorney. The case took place in Jefferson County, the biggest courthouse in the state and the judge in question. Judge Scott Vowell, is the presiding judge in that district and a respected jurist.
And again we have a creditor’s rights attorney who by definition is not an expert in New York trust law (and New York trust law is different from that of other states) still opining with great confidence:
“The other real issue here is one of trust law in New York. How is a property put into a trust? You will note that the declarations completely avoid any law on this issue. If the parties intended to put the asset in the trust and some defect did not result in the actual transfer, the court would typically allow for the defect to be cured and treat the asset as part of the trust.
“Look at the argument: all parties to the transaction—the trustee, the beneficiary and the party owning the secured note — all intended to transfer the asset, but perhaps may have failed to follow a procedure for note delivery. The law will always attempt to honor the intent of the parties, so long as no rights of a third party are injured. In this case, all of the parties to the transaction agree on intent, and no one is injured.”
It’s 100% incorrect to say that mere intent works in New York trust law. There is over 100 years of precedent to that effect, as a result of robber barons abusing trusts. Jackson needs to get the views of people who know the terrain, and not industry incumbents defending their livelihood. He could start with the transcripts. From Bloom’s testimony (IN THE CIRCUIT COURT FOR JEFFERSON COUNTY, ALABAMA CASE NUMBER CV-2009-901113, transcript pp 347-348):
23 So with respect to having that discussion,
24 Professor, you are satisfied that this trust who is
25 the plaintiff in this action is not the owner of
1 this promissory note?
2 A Assuming that this is the — I’m going to
3 assume this is the promissory note?
4 Q Yes.
5 A The actual promissory note. Well, it was
6 endorsed to EMAX Financial. It was not endorsed
7 over to the trustee. So I don’t see that the
8 trustee is the owner of the — of that document.
9 Q With respect to the possibility that the trust
10 might have a remedy or affix, you’ve reviewed the
11 trust instrument, correct?
12 A What do you mean remedy or affix?
13 Q Does the trust instrument expressly state that
14 if the assets are not conveyed by the closing date
15 to the trust that the trust is not to accept any
16 further action?
17 A Oh, yeah. Yeah. So, I mean, I guess here
18 before we move on, I would just simply state that
19 my opinion, the asset was not — did not become an
20 asset of the trust. But I’ve also looked at
21 Article 10 of Subparagraph (i) that essentially
22 says that the trustee cannot accept any
23 contributions of assets after the March 12th date.
It would really help if Jackson’s quoted sources would put their names to what their views. The unwillingness to do so is troubling, particularly since none of these comments are likely to ruffle their clients.
But the sort of treatment Jackson is getting may be endemic in this space: casual, almost knee-jerk denials in the hope that these pesky critics will just shut up or, failing that, be ignored. But the evidence piling up in state and Federal courts is too substantial for this to be a realistic expectation.