Banks and the securitization industry have been spinning the Ibanez decision as hard as they can, even going so far as to put forward Baghdad Bob style claims that the Massachusetts Supreme Judicial Court ruling said that mortgage assignment in blank worked, when a reading of the ruling show the polar opposite.
Industry participants have been claiming that the ruling is no big deal, since Massachusetts law has some quirks and the securitization documents on the two mortgages at issue were a real mess.
One of the court’s big beefs was that even if you were to try to use the pooling & servicing agreement to prove that the loans in question belonged to the securitzations in question, the loan schedules in question fell far short of providing the necessary detail to identify the particular properties (address, name of borrower, loan number or servicing number). Georgetown law professor Adam Levitin has done a bit of digging to see if the securitization industry defenders’ claims, that most mortgages in RMBS meet the documentation standard set forth in Ibanez, actually holds up. He find that many deals fail to meet the decisions’ requirements:
So how do other PSAs fare under the Ibanez metric? I’ve been looking at them, and it seems that there are lots of RMBS deals where the schedules in the PSAs are possibly insufficient to meet the Ibanez standard. And that means that there are lots of RMBS trusts that might not be able to successfully foreclose in Massachusetts or maybe in any other title theory state. (Read on…I name names!)….
I think there are lots of securitization deals where the mortgages might not be enforceable in title theory states like Massachusetts, even if the trustee can produce an executed PSA with all the schedules. You don’t have to even look at the schedules themselves to know whether there could be a problem. PSA definitions of “Mortgage Loan Schedule” will typically (but not always) contain a list of all the items to be scheduled. Some, like this ACE Securities Home Equity Loan Trust 2005-HE4 or this GSAMP Trust 2005-WMC1 or this Carrington Mortgage Loan Series Trust 2006-FRE1 require the mortgagor’s name and a street address on the schedule (whether that info is correct is another story). But there are plenty that do not require such information (see here (BoA deal), here (Argent deal with schedules), here (Countrywide deal), here (Chase deal), and here (Bear Stearns deal with schedules) for some examples), and if it’s not required, well, it’s not there. And that could well be fatal to enforcement of these trusts’ mortgages in Massachusetts at the very least, at possibly in every title theory state.
So bottom line: Ibanez might be a much broader reaching opinion than anyone’s yet recognized.
In another post on Ibanez, Levitin looked at whether some of the abject record keeping failures might provide grounds for suits against securitization trustees. Note that US Bank, the trustee for one of the mortgages in this landmark case, issued a immediate denial. Per Bloomberg:
“This judgment has no financial impact on U.S. Bancorp,” Teri Charest, a spokeswoman for the Minneapolis-based bank, said in an e-mailed statement. “Our role in this case is solely as trustee concerning a mortgage owned by a securitization trust” and the bank had no responsibility for transferring the loans.
They might need to rethink that position.
One of the stunners in this case was that the trustee for Ibanez, one of the two borrowers whose mortgages were at issue, was unable to produce the pooling and servicing agreement for the deal; for the other, they could only produce an unsigned copy. Levitin did a careful reading of the sections involving trustee liability (attorneys should read his commentary in full). He concluded that while investors need to meet a specified level of ownership as set forth in the PSA to sue on behalf of the trust (typically 25% or more), an individual investor could sue the trust for negligence. And from a common-sense standpoint, doing such a poor job of keeping records that the trustee has trouble foreclosing on clearly delinquent borrowers sure seems negligent:
One last point: is there anyone who can sue the trustee? I think so. My read of the PSA is that the collective action clause does not apply to suits against the trustee. Section 11.03 of the PSA (again that pesky execution issue) provides that:
No Certificateholder shall have any right by virtue of any provision of this Agreement to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Agreement, unless such Holder previously shall have given to the Trustee a written notice of default and of the continuance thereof, as herein provided, and unless also the Holders of Certificates having not less than 51% of the Voting Rights shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity, shall have neglected or refused to institute any such action, suit or proceeding.
This provision clearly limit investor suits on behalf of the trust unless 51% of them want to do so and the trustee won’t act. But I don’t think it requires 51% of investors to sue the trustee for negligence, etc. If it did, the indemnification and the request that the trustee proceed in its own name would make no sense. So, I think this means that an individual investor can sue the trustees over the screw-up in Ibanez. We’ll see if anyone actually does so, but the last thing a trustee wants is an adverse precedent on the books that increases its possible liability on existing deals, so I’d think a quiet settlement would be in order.
This is getting interesting, and in not a good way for the banks. Stay tuned.