We’ve decided to publicize the rapid rise of a dangerous ailment, Banker Derangement Syndrome, which has become so widespread that the media is publicizing examples on virtually a daily basis.
Banker Derangement Syndrome occurs when someone who might once have been sensible is acting as a mindless mouthpiecs of particularly rancid banking industry propaganda. Note that financial services industry employees by definition do not qualify; they are simply engaging in the time-honored industry practice known as “talking your book” when they say something that is patently ridiculous and self serving. No, Banker Derangement Syndrome occurs when an independent party say something so blatantly and embarrassingly wrong in support of the banking industry, whether to curry favor or via having taken an overdose of its Kool Aid, so as to do severe damage to their credibility. In other words, if the questionable behavior could be explained as an over-zealous effort to win points with our new financial overlords, it backfired big time.
The initial example comes in a Wall Street Journal story which finally caught up with what we have been discussing on this blog for a year, namely, that the originators and packagers of residential mortgage securities on a large scale, perhaps pervasive basis, quit complying with the requirements of their own securitization agreements as far as how the borrower notes (the IOUs) were conveyed to the securitization vehicle (a trust).
These procedures were very carefully crafted to navigate a minefield of legal requirements. By not adhering to their own procedures (which included having all the steps completed by a date certain), retroactive fixes are well nigh impossible. Well, take that back. Legal retroactive fixes are well nigh impossible; less scrupulous tactics have become all too common, including document fabrications (a shuttered subsidiary of Lender Processing Services called DocX offered this very service for a fee). Not only do lenders’ attorneys too often show up with “tah dah” documents at the 11th hour, but there are also not-infrequent sightings of too much casual use of Photoshop as the remedy for all ills (such as two different alleged originals of the same document being submitted at different points in the same trial).
The sea-change took place with the robo-signing scandal last year. Many judges were suddenly willing to consider the idea that the banks might have been playing fast and loose and started looking at evidence submitted by the borrower’s attorney, rather than relying on the bank’s argument that the homeowner was a deadbeat and nothing else mattered. And it turns out when judges roll up their sleeves, they are finding in a reasonable number of cases that the banks haven’t established that they have the right to foreclose (the article cites the first successful case on what we called the New York trust theory, which was filed by Nick Wooten). The problem often boils down to the fact that the borrower note never was conveyed to the securitization and someone else in the securitization chain is entitled to foreclose. But no one wants that party to take action; it would prove that the at least some potion of an RMBS is not really mortgage-backed, but is effectively mere unsecured consumer paper.
This relatively short statement in the Journal article is so mind-numbingly awful as to serve as the gold standard for Banker Derangement Syndrome:
Laurence E. Platt, a banking-industry lawyer at K&L Gates in Washington, concedes that banks may have been sloppy. But he says “the real assault on the legal system” are efforts by judges and local officials to strip lenders of their rightful ownership and make foreclosures impossible.
Ahem, this is noteworthy by being 180 degrees wrong. Exactly how many things has the securitization industry done that runs afoul of the law? They violated the representations and warranties in securitizations by stuffing too many bad bonds into the deals (a teeny weeny bit at premium yields would actually have been kosher). They failed to convey the notes to the trusts as stipulated. Servicers and trustees then provided inaccurate certifications multiple times and they continue to do so in periodic SEC filings on these deals. They violated REMIC rules by failing to convey the notes to the trusts in the stipulated time frame. They violated REMIC again by trying to convey defaulted loans into trusts as a fix (only “performing” assets can be placed in a REMIC trust). Servicers have charged fees to borrowers in violation of the mortgage agreements and RESPA. They’ve impermissibly foreclosed on active duty servicemen. They’ve attempted to impose a national mortgage registry and designed and operated it so poorly that it has run afoul of the laws of some states and its records are of questionable accuracy. They’ve engaged in widespread frauds on courts, via robosigning and document fabrications.
And this is only a partial list. Yet the lawyer from K&L Gates has the temerity to accuse JUDGES who are trying to unravel the mess an irresponsible securitization industry has created of “an assault on the legal system”? Pray tell, what are the incentives for bankruptcy judges, who are appointed, not elected, to do such a thing? They’ve been every bit as hard, if not more rough, on the abuses than elected judges. And I’d like to know who these abusive local officials are. The only one I can think of (aside from a couple of local recorders who have done some damaging investigations of their own records) is the sheriff of Chicago, who stopped foreclosing for a short while, only to be ordered by the courts to get back on with it.
Now some readers might argue that since K&L Gates has been one of the biggest public relations outfits for the American Securitization Forum masquerading as a law firm, Platt’s statement could conceivably be forgiven as a classic example of the industry-serving Big Lies pedaled by the firm (see our dissection of some of their earlier
flagrant distortions forays on this topic).
But this one goes even further than its earlier output, which looked like calculated efforts to mislead. This statement looks like pure psychological projection. And given that my securitization industry moles report that many of their cohorts are in deep denial about the depth of the mess they’ve created, it isn’t hard to imagine that we are seeing actual warped perceptions. To get everyone on the same page, here are some snippets from Wikipedia on this topic:
Psychological projection or projection bias is a psychological defense mechanism where a person unconsciously denies his or her own attributes, thoughts, and emotions, which are then ascribed to the outside world, such as to other people. Thus, projection involves imagining or projecting the belief that others have those feelings….Peter Gay describes projection as “the operation of expelling feelings or wishes the individual finds wholly unacceptable—too shameful, too obscene, too dangerous—by attributing them to another.”
And in case you are still trying to conjure up a defense for Platt’s views, let Georgetown law professor Adam Levitin disabuse you of that notion:
Platt’s view, it seems, is that everyone understood the mortgage deal and that the paperwork doesn’t really matter. That’s a very problematic view for any attorney to take, much less one with a background in real estate, secured lending, and securitization. (A less charitable interpretation of Platt’s comments is that the proper outcomes has nothing to do with law. Instead, it’s paperwork and intent be damned, we’re the banks so we should win by right.)
One of the things any first year law student learns is that real estate is different. Different contract remedies apply, there are different formalities required by law for real estate contracts to be effective (the lineage of this principle goes back to the 1677 Statute of Frauds) as between the parties to the contract, and a separate recording system to make realty contracts good against third parties. While the law has dispensed with formalities in many other areas, that just isn’t the case with real estate, not least because of the recognition (ala De Soto) that clear title to real property is so fundamental to economic activity.
Anyone with a background in secured lending also knows that paperwork matters. Misspell the name of the debtor so that it doesn’t show up in a UCC search, and you’re unperfected. Check the box for a termination, rather than a continuation of a security interest (ala BoA with Heller Ehrman), and you’re unperfected sol. Dotting “i”s and crossing “t”s matters.
To raise the “it’s just paperwork” argument in the context of securitization, however, is unreal. Securitization is all about legal fictions and paperwork. Why on earth would anyone every bother with the complex legal structures of securitization (typically involving two shell entities) other than to take advantage of legal fictions?
As I’ve noted in other venues, securitization is the legal apotheosis of form over substance, and the basis on which this is legally tolerated is the punctilious observance of formalities. Failure to do so can result in a securitization failing to be bankruptcy remote or to lose its off-balance sheet accounting status or lose its pass-thru tax status, any of which are disasterous. Securitization deals were so heavily lawyered precisely because the paperwork matters. They aren’t like a sale of a used sofa over Craigslist.
The “it’s just paperwork” argument quickly proves too much. Is the borrower’s signature on the loan “just paperwork”? How about a co-signor’s? If it’s just paperwork, why bother to have the borrower or co-signor sign, especially as it can create federal Equal Credit Opportunity Act issues when a spouse is involved.
This is not to say that a lender whose paperwork is fubar is sol. The lender can always petition the court for an equitable mortgage. But I sure wouldn’t want to be in that position, especially if there was anything fishy about the circumstances of the loan (unclean hands and all that).
Bottom line is that to claim that the courts following legal rules that have been firmly established for centuries is the “real assault on the legal system” is simply preposterous. The only thing it is an assault on is the sense of seigneurial right exuded by parts of the financial sector.
And if you take Platt’s argument to its logical conclusion, what happens in court is irrelevant, the judges and local officials are relying on technicalities and must be swept aside. The only thing that matters is who thinks they are right and how ruthless they are willing to be in enforcing their beliefs. This sounds an awful lot like a society ruled by drug lords, except in Platt’s variant on Columbia, the coin of the ruling classes is credit rather than cocaine.