Earlier this week, we discussed how several measures proposed in Virginia would have the effect of redressing the power imbalance between banks and borrowers in the foreclosure process. One would give borrowers more time to mount defensed (Virginia has one of the fastest track processes in the US); another would require judicial approval for a foreclosure to become final. But the farthest-reaching proposal would force banks to maintain accurate property records in local government offices, which would end the use of MERS in that state.
Not surprisingly, the industry is not about to let this go down without a fight. Rep. Donald Merricks, who is also a bank board member (apparently of Virginia Bank & Trust) proposed House Bill 1718. It was due to come up for “check vote” today, which is a preliminary tally of support, but it was “pulled” meaning the bill is still pending but the check vote has been deferred.
This is a serious undertaking. The bill proposed to change Virginia’s Uniform Commercial Code, which is a set of provisions not to be tampered with lightly. The irony here is that this is an outcome we have warned about in our earlier discussion of the Statute of Frauds of 1677, that basic practices to prevent abuses in contracts and in courts might be gutted to give the banks a free pass on their mortgage mess.
These proposed changes in the UCC are a bit above my pay grade (I’ve looked at some sections of the UCC before, but this is not one of them), so informed reader input is encouraged. However, I am told that these proposed changes would have the effect of authorizing transfers in blank in Virginia. That in turn would (in theory) allow banks to claim that an blank endorsement by the originator would allow the trust (who is usually the fourth party or later in a chain of transfers) to assert ownership, skipping over the problem that the intermediary transfers appear seldom to have happened. The banks clearly view endorsement in blank plus a claim that the PSA itself effected the transfer to the trust as a “get out of fuckup free” card; the American Securitization Forum has argued that position stridently (we’ve shredded it in numerous posts, see here and here for examples).
I’d be curious to get confirmation that these language changes would produce that result. At the same time, I’m not certain that even if it did that it would save the banks’ bacon. Article 1 of the UCC allows parties to contract out of the provisions of the UCC. Pooling and servicing agreements clearly contemplated a far more specific set of steps that set forth in the UCC, and for good reason. The parties wanted the intermediary transfers to take place to establish bankruptcy remoteness. That means if an originator like New Century went bust, the investors did not want creditors of New Century to be able to claw loans back from their securitization. So it was necessary to launder the funds and the notes through at least one, and the state of the art soon became at least two, entities between the originator and the trust to protect investors from the risk of an originator failing. The other more exacting requirements of the PSA were to assure compliance with the Federal tax rules governing real estate mortgage investment conduits, aka REMICs.
Judges have seldom been asked to look at PSAs; many foreclosure defense lawyers don’t go there (not clear whether due to lack of knowledge or lack of necessity) and judges will in the absence of having the issue brought up by counsel, will tend to assume the UCC is germane. But both plaintiffs and defendants are upping their game, so I would expect more foreclosure defense attorneys to start pointing to the PSAs on securitized deals as setting forth the requirements for proper conveyance.
Regardless of how the legislative jousting plays out in Virginia, it is clear that the Massachusetts Supreme Judicial Court Ibanez decision has focused the mind of the securitization industry. But it even though it is moving out of the denial stage, its efforts to evade responsibility and gut well settled law to shift liability on to others is deeply troubling.