Fortune Confirms Pervasive Defects in Bank of America Mortgage Documents

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Do you remember the brouhaha over testimony by a senior executive in Countrywide’s mortgage servicing unit last year? It called into question whether mortgages had been conveyed properly to securitizations, which in turn would impair Bank of America’s ability to foreclose.

Let me refresh your memory. As we wrote last year:

Testimony in a New Jersey bankruptcy court case provides proof of the scenario we’ve depicted on this blog since September, namely, that subprime originators, starting sometime in the 2004-2005 timeframe, if not earlier, stopped conveying note (the borrower IOU) to mortgage securitization trust as stipulated in the pooling and servicing agreement….

As we indicated back in September, it appeared that Countrywide, and likely many other subprime orignators quit conveying the notes to the securitization trusts sometime in the 2004-2005 time frame. Yet bizarrely, they did not change the pooling and servicing agreements to reflect what appears to be a change in industry practice. Our evidence of this change was strictly anecdotal; this bankruptcy court filing, posted at StopForeclosureFraud provides the first bit of concrete proof. The key section:

As to the location of the note, Ms. DeMartini testified that to her knowledge, the original note never left the possession of Countrywide, and that the original note appears to have been transferred to Countrywide’s foreclosure unit, as evidenced by internal FedEx tracking numbers. She also confirmed that the new allonge had not been attached or otherwise affIXed to the note. She testified further that it was customary for Countrywide to maintain possession of
the original note and related loan documents.

Countrywide tried, in a thoroughly unconvincing manner, to retreat from the damaging testimony.

Abigail Field, an attorney who has regularly written on the mortgage mess at Daily Finance, published an article at Fortune that looks into whether DeMartini was simply being truthful and the notes were not conveyed correctly, which would mean Bank of America has a very big mess on its hands. Her conclusions are damning:

Fortune has examined dozens of court records that corroborate the employee’s testimony. And if Countrywide’s mortgage securitizations systematically failed as it appears they did, Bank of America’s potential liability dwarfs its shareholder equity, as the Congressional Oversight Panel points out…..

DeMartini….testified that Countrywide didn’t deliver the notes to the securitization trustee, and that Countrywide notes weren’t endorsed except on a case-by-case basis generally long after securitization ostensibly occurred. Both steps are required, in one form or another, under all securitization contracts.

Only the delivery issue was really scrutinized at the time, because without a doubt the failure to deliver the notes would invalidate the securitization. The other issue, failure to endorse the notes, sparked a debate: the American Securitization Forum argues the notes would still have been securitized without endorsement, while Adam Levitin, associate professor of law at Georgetown Law, convincingly argues that they would not have been…

Although law enforcement should be able to answer the delivery question easily — DeMartini indicated that Bank of America has FedEx tracking records for each note — it’s impossible for the public to check. But the endorsement of notes is easy to test. In every foreclosure, the bank must give the court the note or an accurate copy of it. And those notes are either properly endorsed or they’re not.

To check DeMartini’s testimony, Fortune examined the foreclosures filed in two New York counties (Westchester and the Bronx) between 2006 and 2010. There were 130 cases where the Bank of New York (BK) was foreclosing on behalf of a Countrywide mortgage-backed security. In 104 of those cases, the loan was originally made by Countrywide; the other 26 were made by other banks and sold to Countrywide for securitization.

None of the 104 Countrywide loans were endorsed by Countrywide – they included only the original borrower’s signature. Two-thirds of the loans made by other banks also lacked bank endorsements. The other third were endorsed either directly on the note or on an allonge, or a rider, accompanying the note.

The lack of Countrywide endorsements, combined with the bank’s representation to the court that these documents are accurate copies of the original notes, calls into question the securitization of these loans, as well as Bank of New York’s right, as trustee, to foreclose on them. These notes ostensibly belong to over 100 different Countrywide securities and worse, they were originally made as long ago as 2002. If the lack of endorsement on these notes is typical — and 104 out of 104 suggests it is — the problem occurs across Countrywide securities and for loans that pre-date the peak-bubble mortgage frenzy.

This is about as bad as it could get, and confirms what we reported last year, that the failure to convey the note was pervasive, if not endemic. We wrote last September, prior to the DeMartini testimony:

We provided a report that suggests all the notes from Countrywide deals are still with Countrywide, even though it securitized 96% of the mortgages it originated. We got even stronger confirmation over the weekend.

One of my colleagues had a long conversation with the CEO of a major subprime lender that was later acquired by a larger bank that was a major residential mortgage player. This buddy went through his explanation of why he thought mortgage trusts were in trouble if more people wised up to how they had messed up with making sure they got the note. The former CEO was initially resistant, arguing that they had gotten opinions from top law firms. My contact was very familiar with those opinions, and told him how qualified they were, and did not cover the little problem of not complying with the terms of the pooling and servicing agreement. He also rebutted other objections of the CEO. They guy then laughed nervously and said, “Well, if you’re right, we’re fucked. We never transferred the paper. No one in the industry transferred the paper.”

And although the sample of non-Countrywide-originated notes in the Fortune study is small, the widespread use of allonges is a tell (an allonge is a separate piece of paper, which is supposed to be very firmly attached to the original note, to allow for more signatures to be added). They were simply unheard of prior to the mortgage meltdown and have this funny way of appearing and solving all the problems with the note conveyance. Quite a few have visible signs of being forgeries (signatures that are pixtillated and shrunk to fit when notes are required to have wet ink signatures).

So sports fans, this is looking to be as bad as it could be. As we said, the only reason for attorneys to be engaging in widespread document fabrications and forgeries was if they have a very bad fact set on their hands. Perversely, things have to get worse before they get better. The mortgage securitization system, which could have operated well if the industry had not gotten greedy and violated its own procedures, is hopelessly broken. The industry has engaged in a massive PR campaign to deny that fact but too much contrary information keeps coming forward. We can only hope that enough judges have become skeptical of banks to give the documentation a real look. Only when we admit the depth of failure can we have a chance of addressing the mortgage crisis and reconstituting our system of transferring residential real estate.

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    1. KnotRP

      But Angelo had to get his bonus, otherwise we would lose talent.

      And…’s gone.

      1. KnotRP

        I’m beginning to think every citizen in the US should receive….(Mike Myers pinky to lip)….one Trillion dollars,
        in the form of a check.

        It would cure the housing problem (both for those who
        over leveraged, and for those who did not bite that apple),
        and it would dilute the looters take beyond belief, requiring
        them to start over and get a real job…amongst their fellow
        now-pissed-off citizens.

    2. DownSouth


      Your condescending invocation of “the law” sounds a whole lot like this:

      So their Highnesses are kings and lords of these islands and land of Tierra-firme…: and some islands, and indeed almost all those to whom this has been notified, have received and served their Highnesses, as lords and kings, in the way that subjects ought to do, with good will, without any resistance, immediately, without delay, when they were informed of the aforesaid facts. Wherefore, as best we can, we ask and require you that you consider what we have said to you, and that you take the time that shall be necessary to understand and deliberate upon it, and that you acknowledge…the King and Queen Doña Juana…as superiors and lords and kings of these islands and this Tierra-firme…

      If you do so, you will do well… But, if you do not do this, and maliciously make delay in it, I certify to you that, with the help of God, we shall powerfully enter into your country, and shall make war against you in all ways and manners that we can, and shall subject you to the yoke and obedience of the Church and of their Highnesses; we shall take you and your wives and your children, and shall make slaves of them, and as such shall sell and dispose of them as their Highnesses may command; and we shall take away your goods, and shall do you all the mischief and damage that we can, as to vassals who do not obey, and refuse to receive their lord, and resist and contradict him; and we protest that the deaths and losses which shall accrue from this are your fault, and not that of their Highnesses, or ours, nor of these cavaliers who come with us., a legal document written by the Spanish jurist Juan López de Palacios Rubios and read to the indians of the New World by the conquistadores

    3. Kevin Smith

      Ha! Ha!
      Mogden, you are in fine form this morning.
      My first snicker and smile of the day.

    4. So Cal 7


      Let’s say I show up to your home with a tow truck and am hitching it to take from you. You come out of the house and ask me what the hell I’m doing?

      I tell you that I was the real lender for your auto loan. You produce a title that says “XYZ Financial” is your lender. I explain that I forwarded $22,000 to XYZ to finance your loan with 36 month repayment terms (I also don’t tell you I got the money from other investors). XYZ then “lent” you $17,500 for your auto ono 48 month terms and pocketed the difference. (In this example, XYZ isn’t licensed to lend).

      You produce a contract betweeen you and XYZ. I produce an assignment of that contract that happened just 30 days ago based on a separate agreement between me and XYZ. My agreement though, states that the title and note should have vested to me at the CLOSING of the contract. XYZ never ‘conveyed’ title to me, for whatever profitable or other leverage reason. I’m going for it anyway.

      You sue me in court stating fraud, bogus assignment, wrongful repossion, cancellation of contract, etc. You have a good attorney, the facts are clear and you win.

      You keep your car. Any remaining debt is now UNSECURED from your property. It (debt) doesn’t go poof, the documents associated with it are declared void.

      You are awarded damages of $25,000 and being a good egg, nice guy, you pay them as settled amount on the remaining balance.

      Simple, and just one small facet of what these idiots did routinely. Not to mention the unnatural inflation of prices, other undisclosed fees, etc. “Wrongdoers may not profit from their deeds.”

  1. cat

    Does this mean the majority of people in the US are paying their mortgages to an entity who has no rights to release the note? Or that at anytime some 3rd party could realize they actually own the note and come collecting?

    1. meli

      This is my worry. I can’t figure out what happens to the people who are at the end of a mortgage.

      1. R Foreman

        Also troublesome if the banks had purchased multiple insurance contracts against the default of your loan, then when you default the banks collect many times the value of your loan from their counterparties, and then they foreclose and take your home back on top of that. Were the banks really damaged by your default ? I think not. Seems that your default is the best thing that could happen to them. They have a vested interest in making sure that you default.

  2. Meli

    Yves, this is such important work that you’re doing. At the heart, I see this as a jobs issue. In the whole globalization scheme of things, the US did what it was supposed to do: we created a LOT of jobs, we collected the revenues to pay them, and then we just didn’t hire them and actually do the work. Financial CEOs skimmed off the cash and has left everyone hanging.

    This mess is going to take a lot of time, money and people to clean up.

  3. Sam Adams

    Beans and bullets. When the mob figures out that they may not have clear title to thier homes, watch out.

  4. marty

    Is this not just one more clear piece of evidence that BofA, as well as other banks and financial institutions are in effect actually INSOLVENT?

    Nice scam they’ve pulled….insolvent institutions able to siphon off billions in bonuses and salaries, and still able to get free money from the Fed to buy T-bills, for which they get 3 percent interest.

    They should choke to death on the money…..bastards.

  5. Z

    Although this is the least of b of a’s worries, b of a themselves should be able to foreclose on those properties … correct? … becoz they would still be in possession of the mortgages since they couldn’t sign them over. Their HUGE liability is that the buyers of these unbacked securities … which are now worth pennies on the dollar that they were sold for … could come back and sue them for selling them something that was sold to them as backed by mortgages but in reality were backed by nothing but hot air. Therefore, they don’t want to foreclose becoz that would put the focus on the fact they still own them becoz countrywide … whose liabilities they now have since they bought the company … never signed them over.

    If I am misunderstanding this situation, someone let me know.


    1. Jackrabbit

      In fact, most of those buyers were institutions and their management have a fiduciary duty to explore this matter and try to recoup as much of what was lost as possible.

    2. Justice United

      Z, B of A can’t foreclose if the foreclosure is contested in a court with due process because it is not enough to possess the mortgage. How b of a came to possess the mortgage, and the separation of the chain of title that took place along the way prevent the foreclosure. The money debt is still owed, but a lawsuit to collect the debt is the lawful recourse, not foreclosure. Attorney Matt Weidner’s blog is a good source for regular coverage of the capacity issue.

      1. Z


        Thanks for the info. Yeah, I thought about that after I posted the question that there might be chain of title issues. Thanks again and I’ll check out the blog.


      2. Procopius

        “B of A can’t foreclose if the foreclosure is contested in a court with due process…” That sounds like a rare case, although maybe it’s becoming a little more common. Out of the 2 million or so foreclosures we’ve had over the last three years and the 1.9 million of so that are currently being considered, very few indeed have been able to access a court which actually gives them due process. Generally, the courts seem to have accepted the banks’ argument that they are entitled because the defendant didn’t pay, whether they actually have title or the note or not.

  6. Svsm


    I can’t find contact info. for you. Please email me or follow me back on twitter @SLSiri for DM. It’s important, related to this story but I don’t want to post about it here. Thanks

  7. mitchw

    This is the kind of stuff that I just don’t talk about with friends and family. Except for the ones that start going off about free markets.

  8. level8000

    So, if the trust was created improperly how does this get unwound?

    Does the trust return all the money it has received to date for the entire package of loans?

    Does the mortgage originator return to the trust the money that they paid for the basket of loans?

    If so, then proper ownership balance is now restored. The new owner (and really the original owner) of the mortgage then proceeds to foreclose on those properties in arears.

    Is this what we are looking at happening?

    Now I understand that the trust rules were not followed in some of the necessary details of the transacation, but in every material way the transaction has proceeded as if the intent of the parties was to set up a trust. Monies exchanged hands at the outset and proceeds from the mortgages have been disbursed since then to the owners of the notes – and for many years.

    So, I’m back to my original question. How does this get unwound and does it make a material difference to the homeowner that is not making their mortgage payment?

    1. chris

      Well what if the original company no longer exists? Seems to be major chain of title issues that are inevitable. The court system seems to have erred in siding so willingly with the banks that knowingly were producing fraudulent documents and their attorneys have gotten away with egregious behavior because they thought they could hide the facts. Every state Bar should be examing the actions of the banks attorneys and representatives and make sanctions or ever consider disbarring many of them.
      We can’t allow the law to be circumvented by the elite class. The middle class america is getting wiped out year after year. As one comment said it early that this was “quite a scam” pulled by the banks…….

      Yes it was quite a scam.

  9. brian

    believe i read (here?) that boa was trying to get title insurers to issue title insurance to buyers of the foreclosed properties backed of course by an indemnity from boa

    but of course that assumed the entire judicial branch in all 50 states could be rolled or they could politically get the feds to preempt and big foot a solution which isn’t happening its appears

    given the moral rot and decay pervasive thru the system the solution still being sought it seems is trample on/ignore the rule of law in the pusuit of a global fix

    politics may still drive this result
    economy bogged down
    obama only looking at his reelection

  10. Jim the Skeptic

    So based on your prior posts on this subject, it would seem that any investor in one of these securities has the basis for a lawsuit since the security’s trust pooling and servicing agreement had been violated. Violated to the extent that the security’s trust did not hold the note in a timely manner. Violated to the extent that the security’s trust may not hold a perfect lien against the underlying property.

    And it would seem that anyone defaulting on one of these notes could wreck havoc by demanding that the legal holder of the note actually foreclose on them.

    So it appears to be a mess.

    But let me make a little prediction. This will all be cleared up by the banks’ regulators designing a series of small tweaks to the federal law which will be implemented by a VOICE VOTE in the US Congress. Then based on those tweaks, New York will tweak it’s laws in some manner or the US Supreme Court will swoop down to deny New York the right to enforce it’s contract law. OR better yet the US Supreme Court will just rule that over 200 years of real estate law is unconstitutional.

  11. phildj

    so if the banks sold the note to the invester they’ve been paid in full plus A nice profit then when the borrowor defalts the bank buys the loan back for pennies on the dollar.they new when they flooded the economy with money for loans that it would crash makeing tens of millions of houes up for grabs I say an attack on are economy should be cosiderd A terorist act

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