Georgetown law professor and securitization expert Adam Levitin has weighed in on the ruling in an Alabama case, U.S. Bank v. Congress, in which a state court judge ruled against what we have called the New York trust theory. For readers new to this terrain, the short form is that the parties to mortgage securitizations are governed by a so-called pooling and servicing agreement. The PSA, among many other things, described how the notes (the borrower IOU) were to be conveyed to a trust that would hold them for the benefit of investors. The trust was almost without exception a New York trust. New York was chosen because its trust law is both very well settled and very rigid. New York trusts have no discretion in how they operate. Any measure undertaken that is inconsistent with explicit instructions is deemed to be a “void act”.
Now it appears that the notes were not conveyed to the trusts as stipulated in the PSAs on a widespread basis. (You can read the details here). Because the trusts are New York trusts, that means you have a really big mess. You can’t convey the notes in now, that’s not permitted because the trust had specific dates for accepting the assets that have long passed. The party that has the note (someone earlier in the securitization chain) can foreclose, but no one wants to do that. It isn’t just that this would be an admission that that parties to the agreement didn’t fulfill their contractual obligations; there is no way to get the money from the party that foreclosed to the trust and then to the investors.
Since the securitization industry has had so little good news of late, and this New York trust issue has the potential to make the chain of title problems that banks are facing in courtrooms all over the US even more acute, Paul Jackson of Housing Wire was quick to jump on this pro-bank decision as a major victory. We argued that it was probably not a significant precedent, and that some of the legal reasoning looked like a stretch, other parts were at odds with decisions in other states (meaning those states were unlikely to change course based on a lower-court decision in Alabama). But we acknowledged that parts of the decision were hard to parse and over our pay grade.
Levitin has taken an even more dismissive view of the decision (although since his writing style is more measured than ours, you need to read for substance, not tone). As he reads it, the judge rejected the borrower’s case on procedural grounds. That means it cannot be seen as a ruling against the New York trust theory. So effectively, the New York trust theory remains untested rather than defeated on its initial outing. As Levitin wrote:
Perhaps the most important thing to note about the opinion is what isn’t there. There was no consideration of the chain-of-title issue in the opinion. Let me repeat, the court said nothign about whether there was proper chain-of-title in the securitization. Instead, the court avoided dealing with it. That means that this ruling isn’t grounds for sounding the “all clear” on chain-of-title. At best, it is grounds for arguing that homeowners won’t be able to raise chain-of-title problems…
The court played on the procedural posture of the case to reject this argument. First, the court explained that because this was an ejectment action, not a foreclosure, the question of ownership of the note was not an issue of standing, but an affirmative defense for which the homeowner had the burden of proof. The trial court here was citing to a recent Alabama appellate court decision (reversing a previous Alabama appellate decision) that concluded that standing is satisfied by virtue of the bank being named party on the foreclosure deed. That’s just crazy given that the foreclosure deed is a nonjudicial sale. [G.S.—maybe this explains why your shop saw your notaries’ seal forged on those foreclosure deeds.]
Crazy or not, however, this meant that the homeowner wasn’t actually challenging the trust’s standing. From there it was a small step for the court to say that the homeowner couldn’t invoke the terms of the PSA because she wasn’t a party to it…..
I don’t think there’s much to get excited about with Congress. If the homeowner had prevailed, the banks would have been saying “it’s just an Alabama state trial court,” and it might well have been overturned on appeal. But that doesn’t mean that the chain-of-title issue isn’t real. It just means that there’s still a search for the proper channel on which to advance the argument.
There’s more to his post, and I suggest legal types read it in full. There is an important discussion in it about the differing considerations regarding legal action on the note (the IOU) versus the lien (which is what allows the bank to make the foreclosure) that I want to address that in a separate post. It warrants some unpacking and further discussion.
Finally, he points out that investors have been getting their own reading on these legal issues and see them as valid, hence serious, concerns:
….numerous buy-side people (read MBS investors) have told me that they think there’s a serious problem with the securitization documentation. The problem that they have is that they don’t know what to do about it—they are trying to figure out a way that this can be used to put the mortgages back to the banks without it tanking the entire financial system. In other words, the banks are being protected by the too-big-to-fail problem. That’s letting them externalize their violations of their securitization contracts on MBS investors.
That suggests that investors are looking for the right leverage point on this matter but have yet to find one that is sufficiently surgical. Given how much they have at stake, I would bet they find it sooner rather than later.
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I’m still waiting for the vulture legal hedge fund to step in to answer the question of:
“That suggests that investors are looking for the right leverage point on this matter but have yet to find one that is sufficiently surgical. Given how much they have at stake, I would bet they find it sooner rather than later.”
Namely, buy up enough of the worst tranches of some particular rotten MBS originated by a still extant bank to get to the 50.1% or so needed to really take over, then try to drive everything back to the bank, under the assumption that the externalities of blowing up the financial system is, just that, externalities, and the laywers are all on-staff/part of the process that the legal costs are reasonable, in order to get a huge payout.
For many of the investors, blowing up the major banks has no downside.
Except for the leveraged investors who borrowed money from the banks.
And the ones who are actually running mutual funds while employed by banks.
The full force and feckless talents of Congress, the Executive Branch and the Supreme Court as well would find some combination of ways and means to prevent the TBTF banks from having their crap mortgage-backed-securities shoved back up their backsides where the sun don’t shine.
The sun will never shine on the garbage mortgages and securities held by Fannie and Freddie and the six big banks. There sill just be a lot of green paper printed to cover it all up, wipe it away, and flush it as fast as the plumbing will allow.
To allow this to back up on the banks, to come out in court, to hit the papers and the street would bring down the government.
So it won’t, no matter what.
Having been in the insurance industry for many years, “it’s just an Alabama state trial court” is still the appropriate response.
According to Adam Levitin, MBS investors:
“are trying to figure out a way that this [lack of securitization documentation] can be used to put the mortgages back to the banks without it tanking the entire financial system. In other words, the banks are being protected by the too-big-to-fail problem. That’s letting them externalize their violations of their securitization contracts on MBS investors.”
If Fannie & Freddie are paying the banks at par for their foreclosures then why can’t the banks simply pay the MBS investors back, on the taxpayers dime?
But really, the MBS investors don’t ‘own’ those mortgages, due to the lack of proper securitization, so it’s really not in their purview to ‘put the mortgages back on the banks’ is it? It’s the MBS shares/bonds/’tranches’ that would seem to be all that the investors have the right to ‘put back on the banks’ due to securities fraud. The only reason I can see for continuing the fiction that the MBS investors ‘own’ the mortgages that they seek to ‘put back on the banks’ is so that they can collect the interest in addition to their original investment money. If they merely put back the bonds, they forfeit the interest. Since the banks never put up any of their own money when they engineered the MBS scam (but they took fees and bonuses for doing so), then why would it collapse the economy for the investors to demand their money back, when the taxpayers have already ‘made the banks whole’ and continue to pay the banks additional money to foreclose and steal the homes that the investors paid for?
So, since no common sense solutions are being proposed we must conclude that the real reason ‘they’ fear collapsing the economy has nothing to do with where the money comes from to make the investors whole. It’s the revelation of the crimes, and then the ensuing loss of ‘full faith and credit’ of the entire US financial system and government that would collapse the economy.
Common sense tells me you’re on the money.
Doesn’t that suggest that Antifa is correct. That nothing will be done. I suspect that the bank and mortgage company excutives do not care if the system crashes. Infact a total collapse might further insulate them from consequences.
Whether one likes or hates the Obama administration, if their goal were to protect the welfare of the American people, the battle was lost before Mr. Obama took office.
I’ve posted before about the incomprehensible scale of a trillion dollars. Today I read a statement which put the Global derivatives exposure at over $500 trillion. That is so mind numbing as to suggest that there was a deliberate plan to construct a “Doom’s Day Mechanism”. Even though we intellectualy understand that the exposure must be zero sum, such an exposure could never be unraveled without a total collapse. It would be like trying to defuse a bomb with a one second fuse and thirty booby traps.
It’s not even Zero Sum.
A *very* large volume of the outstanding derivatives are OTC, not the standardized contracts traded on the open exchange where “The Machine God” enforces Zero Sum.
With OTC-paper nobody knows how many bets are made on the same outcome and it is very difficult to find out how much risk “the other side” is holding without manually reading millions of pages of dense legaleeze. This is deliberate, the margins are much fatter where price-discovery is hard!
“But we acknowledged that parts of the decision were hard to parse and over our pay grade.”
Yves, thanks for explaining these things to folks in my pay grade.
When the state/county judges draw their eye toward MERS and the securitization process, specifically the PSA, they will revert to NY law under which most MBS were formed and still controlled. We all now know where NY court stand on MERS.
Therefore, the violations of the PSA by the Trustees’ and Servicers is their Achilles Heel.
Using MERS, the Trustee and Master Sevicers bifurcated the note from the mortgage and violated the PSA by not properly transferring the note to the security, thus making the MBS an empty bucket. Hello SEC.
The Federal government can say or do what they like to make this go away; however, it will be the state courts that ultimately decides the Trustee’s fate and currently they are waking up to MERS and a lot of lost revenue.
With all due respect to Prof. Levitan, his comment is over the top. This opinion is by a presiding judge in a large circuit. He has responsibilities to his judges to help them figure out how to deal with cases where novel, complicated arguments and fact patterns are being presented. I don’t know him, or much about him other than his abreviated CV, but he is in a position where he has incentives to get it right more than to prove that he’s right. There is a difference, and it’s a difference between being on the bench and being an academic (no disrespect, Prof. Levitan). Judges get respect from their peers for being helpful in moving cases along. Professors get attention by being different.
If the judge is wrong, he has the case and the basic rules set up pretty well for an appeal and the issues will be pretty clear. I don’t know if addressed all the claims by Ms. Congress, but I don’t think he needed to. The choice of law and enforceability of the note issues were pretty fatal.
This paragraph of Prof. Levitan’s seems almost entirely incorrect:
“Perhaps the most important thing to note about the opinion is what isn’t there. There was no consideration of the chain-of-title issue in the opinion. Let me repeat, the court said nothing about whether there was proper chain-of-title in the securitization. Instead, the court avoided dealing with it. That means that this ruling isn’t grounds for sounding the “all clear” on chain-of-title. At best, it is grounds for arguing that homeowners won’t be able to raise chain-of-title problems. As we’ve seen with Ibanez, that’s clearly incorrect, and a closer look at the Congress ruling shows that it might be an Alabama special, not applicable elsewhere.”
Which chain of title? The security interest or the note? As for the note, the court essentially said ownership of the note doesn’t matter when a party has enforcement rights. Prof. Bloom said as much in his testimony.
As for homeowner defenses, I disagree with Prof. Levitan because this case clearly does allow them at an eviction trial, and as I said earlier, allows them a pretty broad path. I see this as a homeowner win, or at least homeowner-favorable.
As for applying Ibanez, the key fact in that case was that there was no prior assignment of the security interest before the foreclosure process began (and the court was extremely liberal about how that could have happened, but still found that it hadn’t – kind of a game over for USBank), and that USBank tried to fix it after the fact, which it couldn’t. This opinion is often egregiously misrepresented as requiring recorded assignments in Mass. – it explicitly does not. It is also cited as involving MERS. It definitely does not, but it may well be a very pro-MERS case in application.
As for the applicability, state district court decisions are hard to cite for authority anyway, and usually a sign that 1) you’re reaching for anything, anything (aka “as some court somewhere held”); or 2) that you’re not familiar with in-state authority. At the district court level, I can only remember one time that I cited out-of-state law (Maryland, and I did so very reluctantly having lived there), and I don’t remember ever having other state cites used against me. I have a strong bias against it unless it’s absolutely necessary. In practice, too much involves statutes that are not perfectly comparable to other states, for one. But, in the case I used, the issue was exactly what I was looking for, a mortgagee’s obligation after receiving a payoff demand for an odd-ball lien securing two notes, and the mortgagee only provided one account, leaving the other note/account unpaid when all was said and done. The court here followed it and held a payoff demand for a single lien requires all relevant account balances to be provided. That was sweet.
More important was that Prof. Bloom agreed that the law regarding notes and mortgages would be Alabama law, and that Alabama has an identical statute to UCC 3-301 for the rights of enforcement by note holders that makes ownership less important than ownership rights. Prof. Levitan calls this a side-step, but it looks like the judge could have cared less who the owner was. Either he’ll be upheld, or he’ll be made to look foolish on appeal. What Adam calls a “side-step” on 1) the applicability of NY law; and 2) whether ownership matters when enforcement rights is really the issue are clearly identifiable questions of law for de novo appeal (that is, the trial court’s opinion on the law doesn’t count for anything).
The take away I have on this case is that Judge Vowell’s circuit allows more defenses to eviction than I am used to seeing. (Minneapolis and St. Paul both have Housing Courts that are cattle calls, and while the judges diligently enforce procedure on noticing the defendant(s), compliance with the Protecting Tenants at Foreclosure Act of 2009, naming all adult parties known who might have putuative independent possessory rights, etc., they do not throw the proceeding open very often to defenses like Ms. Congress’s and are almost always upheld on appeal, admittedly due in part to eviction appeals being exceedingly difficult and expensive if they’re not set up correctly).
What I don’t know is whether he and his judges figure “might as well” if the alternative is that they’re going to see waves of post-eviction quiet titles instead. A few Alabama practitioners perspective would help on this.
Also, it appears there were two trials on this and that makes untangling some of the procedure difficult. The judge says in the middle of page 7 that there was a “first trial.” I’m not sure what happened there or why there was a second trial. Yves?
So, yes. As a district court opinion, it isn’t legal precedent anywhere, just as any other district court anywhere opinion isn’t legal precedent anywhere – appeals courts review questions of law de novo. That’s not what Prof. Levitan said, and I’m pretty sure it’s not what he meant, either.
Minit,
Wow, is your reading dead wrong.
Did you even look at the ruling? You clearly do NOT understand the precedent Vowell cites on p. 8.
It is about standing in EJECTMENT actions. This has no bearing on FORECLOSURE actions and is Alabama specific.
Levitin is 100% right and what you wrote is a crock. The only time this ruling would be germane in a suit to reverse an ejectment in Alabama. Do you want me to tell you how often people sue to reverse an ejectment? It’s pretty much never.
Don’t write long discourses when you do not know what you are taking about.
Considering that:
1. there are 100s, if not 1000s, of cases in Alabama factually similar, if not identical, to this case;
2. it was an ejectment action filed subsequent to a non-judicial foreclosure; and
3. regardless of anyone’s opinions of the correctness of the judge’s decision in general or in particular, the judge’s decision was reasonably forseeable.
So why was so much time and money invested in litigating this particular case?