One of the sorry reminders of the decline of the rule of law in the United States is the frequency with which incidents of what look like document forgeries take place in foreclosure cases. The fact that a now-shuttered subsidiary of Lender Processing Services, a vendor to the servicing industry, had a price list for creating mortgage-related documents out of whole cloth attests to the long-standing demand for this sort of product.
The reason for this activity is simple. As we’ve stressed in various posts, in so-called private label securitizations (the non-Fannie/Freddie type), a great deal of evidence indicates that the originators and packagers of these deals did not bother complying with the contracts they created to govern these transactions on a widespread, perhaps pervasive basis sometime after 2003. And their shortcomings only come to light in foreclosures, and then (possibly) if the foreclosure is contested. Given how low foreclosure rates were historically, this was a risk the securitization industry seemed willing to take, and it is now reaping the fruit of this short-sighted bet.
The big problem for servicers and trustees (the parties that are responsible for the trust that holds the assets of the securitization) is that the pooling and servicing agreement which governs the securitization required that the note (the borrower’s IOU) be transferred though a specific set of parties by a specified time not all that long after the deal closed. Increasingly savvy anti-foreclosure lawyers recognize that the party attempting to foreclose may not have the legal standing to do so.
A new development is that the US Bankruptcy Trustee, which is part of the Department of Justice, has started poking around the nether world of slipshod and possible made-up documents, and is asking banks to explain what they are up to. These inquiries may be paving the ground for broader-based action.
The case in question is a Connecticut Chapter 13 filing (hat tip April Charney).
DeutscheBank purports to be the trustee for a particular 2005 mortgage securitization which contains the mortgage at issue. This is a partial list of the documentation problems; the motion itself makes for instructive reading:
In the first filing, Deutsche provides a copy of an undated promissory note which is not made out to the trust but the originator. A few days later, Deutshce filed an objection to the debtor’s plan of reorganization, and in it said the mortgage (the lien, not the note) had been recorded as transferred from the originator to Sand Canyon (a unit of Option One) in 2005 and then transferred to Deutsche less than two weeks before the bankruptcy filing. Note that a 2010 transfer is well outside the time parameters stipulated in the pooling and servicing agreement.
The borrower’s side asks what happened to the note, since there is no evidence it was transferred.
Several months later, Deutsche shows up in court with the usual fix for this sort of problem, an allonge (an attachment to a note that is so firmly secured that it is supposed to be inseparable to allow extra room for signatures. Query if the allonge were properly attached, how would it be possible to make a copy of the original note and not see at least part of the allonge?)
The truly creative part is these documents include an assignment of mortgage dated June 11, 2010, but effective as of May 1, 2005. I never knew law offices had time machines as part of their standard equipment. The trustee separately questions the 2010 assignment, since it was signed by an employee of Sand Canyon, when Sand Canyon did not own any mortgages or mortgage servicing rights at that point in time.
Even though the bankruptcy trustee is merely requesting a Rule 2004 examination (which means it wants someone from Deutsche to appear and answer questions about the case under oath), it is clear that he does not like what he sees so far:
The United States Trustee has reviewed the documents filed by Deutsche in this case and
has concerns about the integrity of those documents and the process utilized by Deutsche….Bankruptcy Courts have discussed the need for secured lenders to provide accurate information in filings before the Court… Consequently, “cause” exists authorizing the issuance of a subpoena to compel document production under Bankruptcy Rules 2004(c) and 9016…
The US Trustee has asked for a pretty extensive list of documents related to this bankruptcy. I’d love to be a fly on the wall and see the Deutsche employee try to explain his way out of this one.