More Reasons Why Banks Should Worry About Ibanez Decision

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.

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  1. attempter

    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 not only did the PSAs voluntarily incur obligations beyond those of the UCC, thus exceeding what the law required (and then fail to live up to that obligation), but in another way, the way they let the trust demonstrate which loans it claims to own, they also fell short of what the law required?

    They sure are trying to double down on heads-I-win-tails-you-lose.

    1. Paul Repstock

      Mr. Greenspan’s zero interest rate annomaly coupled with a ‘new investment vehicle’ made it sooo easy to loot the pension funds at warp speed..:( Who could ever fault the managers for moving to the best and certified ‘safest’ yeilds??

  2. killben

    I would not put it past Bernanke, Geithner and Congress to come up with something which will again screw homeowners and put money in the banksters pocket! One opening is all they need … and if all else fails they can fall back on the “Bail out banks or Else?” When will we see the “Or Else”?

    Let us see how it evolves ..

    1. psychohistorian

      Why, I think that the US is headed toward another war. If for no other reason than to change the focus and then call it all national security related, at least until they can say that we need to be forward looking and put all this behind us.

      Poof, no problem.

      1. Sufferin' Succotash

        War? The previous Administration pretty much wore out that option. Now, if the present Administration was able to nail Osama bin Laden that could open up possibilities for some major policy changes. Such as cutting military spending, for example.

  3. mannfm11

    Yves, I would look up the term “Breach of the Trust” and Good Faith in Blacks Law. Follow it to the conclusion and I believe it will show the Trustee is liable. These guys are supposed to be paid for something besides cashing checks(the ones written to them). To have taken mortgages with no chain of title is of utmost negligence. For those that don’t understand real estate (It appears Levitin’s understanding is limited, because nothing is described in Texas as an address, but by legal description of metes and bounds or a particular survey (surveys were land grants of the Republic and later the State of Texas or by lot and block of a particular city in the county in which the property lay), the chain of title has to be intact. This is the problem brought forth in the MA ruling. You can’t sell a property to no one. The Deed of Trust is an actual deed of ownership, subject to the conditions described. The mortgagee owns the property until the conditions of the deed are fulfilled. The home owner is only given equitable title. Thus when the deed of trust left the originating mortgage company (the broker has to assign the property to the mortgage company in many cases for liability sake, as I had to do through the now defunct Colonial Bank of Montgomery Alabama back in the 1990’s when I brokered loans through them), there had to be a legally completed assignment by an authorized officer of that company to the next company. There is no evidence the ownership ever left the originating mortgage company in one of those cases and maybe both of them. One of the justices chides the bankers for skipping the process out of haste to sell securities. The trust has no standing because there is no complete chain of title and MERS won’t work. The robosigners are nothing but smoke and mirrors in this case, an effort to side step the issue altogether. It isn’t necessary to have the deed recorded, but that you possess a recordable instrument that will stand. The deed might as well lie in our joint possession as the trusts if this is not done. The nonsense Levitin is bringing up is a side issue, another question as to if the trust even owned the note. MERS blew up on these guys, as they thought they could bypass the paperwork by merely having an outfit keep track of where the paper went. The deeds of trust I have looked at all described MERS as beneficiary for XYZ mortgage. The robosigners would execute an assignment to whatever servicer requested one to foreclose and I have seen substitutions of trustee signed of by the very person that was to be successor trustee. Now I don’t know how a trustee transfers trusteeship to themselves, but I can probably find you a dozen in an hour out of the Dallas County records done like that.

    1. IAN

      Mannfm11-Very informative post, I think that Adam Levitin is on the right track for most of these issues, I hadn’t read of similar real estate related issues in Tx. I am not an attorney,parts of these issues baffle me, but I know that 99% of the “housing crisis” “foreclosure crisis” ad nauseum was fraud, from the skankiest mortgage brokers right on up to Geithner,Paulson,Bernanke,and the tbtf banks.We are told that the mortgage meltdown was caused by liar’s loans and people buying too much house. From what I can see, the total of mortgages outstanding is like $7 trillion dollars- but the Fed/Treas has already pumped in $27trillion, and the problems are getting worse. The 27trillion did nothing except make matters worse. It would be a great help if you could post texas-specific mortgage info on Neil Garfield’s site, Livinglies. Thanks!

      1. Matt

        Ian, thanks, the FRB flow of funds and bank asset/liability reports contain the total 10.1 Trillion US residential mortgages and the 2.1 Trillion held by banks on their books, outside of the 5 Trillion dollar SIVs. The banks hold another 1 Trillion in MBS.

        Note that the FRB Household and non profit sector includes hedge funds. Thus total consumer debt/debt change is distorted by hedge fund leverage.

        The Freddie Mac and Fannie Mae web sites contain the mortgages they hold and or guarantee.

    2. Jim the Skeptic

      SIr, I believe that you have misunderstood.

      The first part of the post referring to Professor Levitin’s conclusions, is pointing out that other PSAs define “schedules” in a way which would not allow them to be used as a proof of assignment in Massachusetts..

      Massachusetts Supreme Court opinion Page 5 paragraph 3:
      “The copy of the PSA provided to the judge did not contain the loan schedules referenced in the agreement. Instead, Wells Fargo submitted a schedule that it represented identified the loans assigned in the PSA, which did not include property addresses, names of mortgagors, or any number that corresponds to the loan number or servicing number on the LaRace mortgage. Wells Fargo contends that a loan with the LaRace property’s zip code and city is the LaRace mortgage loan because the payment history and loan amount matches the LaRace loan.”

      Massachusetts Supreme Court opinion Page 8 paragraph 2:
      “… Where a pool of mortgages, with a schedule of the pooled mortgage loans that clearly and specifically identifies the mortgage at issue as among those assigned, may suffice to establish the trustee as the mortgage holder. …”

      Note that the Massachusetts court was pointing out the failure of the schedule to include “property addresses, names of mortgagors, or any numbe that corresponds to the loan number or servicing number on the LaRace mortgage.”

      Other title states might use other specific information but they would be very unlikely to accept as proof of assignment, anything that did not specifically identify the mortgage loan.

      In the second part of the post, apparently the professor reviewed the PSA for limitations on the rights of investors to file a suit. He found a limitation of sorts, but he did not believe that it applied to individuals filing a suit. The professor writes “If it did, the indemnification and the request that the trustee proceed in its own name would make no sense.”

      I am not a lawyer, but Professor Levitin seems to have been very thorough.

      1. Jim the Skeptic

        To be blunt, the plainiff in this case was saying to the judge “Your honor what are the odds that there is another property in the same zip code and city with the same payment history and loan amount?”

        And the judge came to the conclusion that he was not in the gambling business!

  4. Matt

    Is there a RMBS contract if the Trustee does not have a signed copy? Is there a reason the bank could have had a signed contract and not provided it to the court?

    1. IAN

      Matt- the bank could have had a signed copy, but most likely it named another entity as an owner.
      What probably happenend with Ibanez & LaRace in that USBank & Wells probably figured that no-one would ever ask for the documentation(they don’t in any other courtroom in the US,except for Brooklyn NY judge Arthur Schack)so they just dummied it up after the fact. And then they tried to explain it away. This is the first time anyone has ever gotten caught by a court with an actual understanding of the issues re securitized loans,and a court which also wants to uphold the US constitution. These are not documentation issues,these are fraud issues. Before a notice of default is filed anywhere in the United States,the foreclosing entity or one of their loser underlings file an assignment of mortgage,purporting to transfer ownership rights from MERS to the Trust doing the foreclosing. This act BY ITSELF violates the PSA by attempting to deposit a defaulted loan into the trust years after the closing date of the trust. More later. Don’t believe anything you hear and only half of what you see.

  5. Siggy

    The Mass decision exposes the pandemic of fraud that has been in operation throughout the securitization sector.

    PSA’s and bond indentures have been ignored and there is the very high probability that most mortgage backed bond holders own what is effectively unsecured debt.

    There is the further problem of how, after a successful foreclosure, will the seller of an REO will be able to grant and convey clear title?

    Now, the moral and contractual liability for this mess falls to all of the parties to the securitization process. The cost of correcting this problem does not accrue to the public, it is absolutely the express liability of its creators.

    The exercise of excoriating loan defaulters is a miss direction of responsibility. Given the probable state of conveyances, even if the the borrowers were current, the holders of the mortgage backed bonds would still be holding what is effectively unsecured debt.

    We need to hear from these bond holders. We need to follow the law.

  6. AR

    Here’s an excerpt from Marie McDonnell’s amicus brief presented to the MASJC in Ibanez, that may show a reason for the lack of a loan # in a PSA. The number changed:

    3. The Ibanez mortgage recorded at the Hampden County Registry of Deeds bears an original loan # 0000013128, consistent with Assignment #1 above [from the originator Rose to Option One].

    4. The mortgage profferred by appellants [US Bancorp] with the Supplemental Materials as part of the supposed original collateral file has 2 numbers handwritten at the top of p.1:

    a. Loan Number: 0015283807 represents the servicing number that Option One and
    subsequently, American Hame Mortgage Servicing, Inc., used to track the Ibanez
    loan in its Mortgage Servicing Platform.

    b. Loan Number: 831058693 is identical to the Loan Number on Allonge
    #2[endorsed in blank] and Assignment #2 and represents the new owner of the Ibanez
    mortgage obligation which was, most likely, a securitization trust that was never identified
    in the chain of title of the Ibanez loan.

    In a guest post at Calculated Risk, on 11/8/09, albrt suggested that one reason that the banks assign the mortgages/notes frequently, before forcing defaults and foreclosing is in order to insulate the foreclosing bank from claims of predatory lending.

    I wonder if the use of more than one loan number also serves to cover the trail, and if the use of zip code and city as the only descriptors (we know that payment histories are often inaccurate, if not fabricated) makes it possible to switch loans in and out of trusts (as suggested in the 10/8/10 John Paulson post: Greg Zuckerman’s book The Greatest Trade Ever recounted at some length how Paulson first made threats and then lobbied to block swapping mortgages out of securitizations to facilitate mortgage modifications.).

    Why would there be a number used only for tracking payments, that is separate from another identifying number? Is this because there are multiple accountings, depending on purpose?
    Also, Marie McDonnell determined that BAC was the depositor of the LaRace loan, and therefore WF had no right as Trustee of the ABFC 2005-OPT1 Trust to have Option One (the originator) assign the mortgage to WF for foreclosure purposes. That assignment (if not a forgery) would completely bypass the Trust!

  7. Jen Lawson

    My request for a Mortgage Note and the identity of the owner of this account. GMAC disputes the claims made in my letter relating to our foreclosure process and have taken all steps necessary to ensure that all applicable foreclosure requirements are being met. The requirements for enforcement of a mortgage loan agreement depends on state law and possession of an original note is not necessarily a requirement. Our records reflect the property was sold at a foreclosure sale on 2/5/10, the property is REO by GMAC Mortgage as of 10/25/10. As you are no longer the property owner, we are not required to provide noteholder infomation or the Note regarding the account referenced above. If I have any questions I should contact Customer Care at 800.766.4622. Don’t we have 4 yrs to prove a illegal foreclosure?

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