Michael Redman of the 4ClosureFraud blog send a job listing that reminded us of the bad old days of 2010, when more and more evidence was coming to light about the how pervasive the problems with mortgage securitizations were, and how in turn that was leading to widespread abuses in foreclosures.
A bit of background for those of you new to this issue. Mortgage securitizations, both Fannie and Freddie as well as “private label” or subprime securitizations, are governed by a document called the pooling and servicing agreement (PSA). It describes how a mortgage securitization is created and will operate once the deal has closed.
To get the mortgages from the various banks that originated them to the trust that will hold them all, the minimum chain for a recent mortgage securitization is is A (originator) => B (sponsor) => C (custodian) => D (trust). Older deals might only have three parties, but recent vintage typically had at least four, and some as many as seven or eight.
The reason for having so many intermediary parties is bankruptcy remoteness. You as the buyer of a mortgage backed security want certainty. If an originator goes bust (as ironically many did), you don’t want the creditors to say, “They were already toast by the time they set up that MBS, so the sale of the loans was a fraudulent conveyance, we are gonna take the loans back.”
Moreover, each party had to be independent (which meant the legal definition of independence; the intermediary parties and even many originators were dependent on financing called warehouse lines from the investment bank packager/distributors). The note (the borrower IOU) typically had to be endorsed (like a check) to the next party in the chain, who then endorsed it over to the party after that, with the last party being the trust. Some mortgage securitizations allowed for endorsement in blank*, as in the endorsement didn’t have to specify who the next party was, but for a mortgage note to be conveyed to the trust, the originator and all the intermediary parties listed in the PSA had to have endorsed the note, and by a specified date.
Normally, when there is a failure to conform the requirements of a contract, the parties get together and issue waivers to tidy matters up. But securitization agreements are rigid; Georgetown Law professor Adam Levitin, who is arguably the top US expert in mortgage securitizations, called them “Frankenstein contracts” in a law review article. The failure to transfer mortgages to securitizations properly would mean investors were left holding empty bags. As Levitin wrote in 2010: “If the notes and mortgages aren’t properly transferred to the trust, then the securities that the trust issues aren’t mortgage-backed and are worthless. ”
Former Fannie and Freddie analyst Josh Rosner flagged this problem as being of such magnitude that it could “dwarf Lehman weekend”. As we pointed out back then, there were unlikely to be consequences to investors in Fannie and Freddie securitizations, even thought there ought to be. The government is not going to want to raise doubts about the integrity of such an important market. Servicers continued to pay advances on delinquent accounts.
However, there was a several-year legal battle fought in courtrooms in the US over the many foreclosures of “private label” mortgage securitizations. Borrowers who were unable to get mortgage servicers to entertain a modification, which is standard “half a loaf is better than none” lender practice, would challenge the servicers’ legal standing to foreclose. They were winning enough of the time to lend support to the critics’ case. That in turn led to a political band-aid: give the mortgage-industrial complex a “get of of liability almost free” card, in the form of a Federal-state mortgage settlement in 2012, with the servicers separately entering into settlement supposedly requiring them to shape up and fly right.
We were skeptical about the servicer settlements, since the underlying failure to transfer the documents properly still existed. Servicers and the attorneys they hired routinely fabricated documents and forged signatures so as to create a tidy-looking chain of transfers long after the mortgage securitization had closed, when in order for them to be valid, they needed to take place before the securitzation closed, or in a narrow clean-up window shortly after.
Now to Michael Redman’s evidence that the old abuses are still very much with us (emphasis his):
Chain of Title Specialist
Salt Lake City, UT, US
Job Summary: Provides assistance in demonstrating the Investor has the appropriate legal authority to initiate actions through a complete Chain of Title, by recognizing and preparing the required documents to complete the Note with applicable Endorsements, along with any Assignments and other necessary legal documents. Can work independently with the Investor, Client, Custodian, and Attorney Network to resolve any document exceptions in a professional and timely manner.
1. Facilitates document requests in a timely manner
2. Comprehensive understanding of proving up all Chain of Title requirements
3. Resolves document exceptions through collaborative efforts with areas outside the Department
4. Conducts training for new and existing employees
5. Assist in gathering required documents for all audits
1. Detail oriented
2. Document processing experience
3. Excellent written and verbal communication skills
4. Ability to lift boxes weighing 25 lbs
5. Proficient in Microsoft Office (Excel and Word)
1. Experience in Loan Servicing, with emphasis in Bankruptcy and Foreclosure
2. Timeline management
3. Operating imaging hardware/software
4. Records Management
5. Experience with Microsoft Office tools (Access and SQL)
Select Portfolio Servicing an Equal Opportunity Employer and do not discriminate against any employee or applicant for employment because of race, color, sex, age, national origin, religion, sexual orientation, gender identity, status as a veteran, and basis of disability or any other federal, state or local protected class.
Yves again. I assume you can see how brazen this is. And notice how the successful applicant needs to be able to lift somewhat heavy boxes and operate imaging software. Pixelated signatures are a sign of a doctored document; the PSAs, consistent with state laws, called for wet-ink signatures.
So here we are, eight years after the crisis, and the underlying problems, that of bad incentives in the design of mortgage securitizations, and abuses that resulted, still persist. The appalling part is that the scale of the problem gave Obama all the leverage he needed to force large-scale reforms, as well as requiring servicers to provide modifications to borrowers when their income was high enough that a modification was likely to lower losses to investors. And before you dismiss that idea, vulture investor Wilbur Ross got good results with that strategy.
In other words, this was a remarkable case of looting, where not only large numbers of homeowners, but also investors, suffered so as not to crimp the profits or even place undue managerial demands on mortgage servicers who had violated their own contracts on a mass scale. And it also demonstrates how corrupt America’s professional classes are, that so few stood up against it.
* Endorsement in blank only works if the trust is a Delaware trust, not a New York trust, and roughly 80% of the trusts elected New York law, which is unforgiving, to govern the trusts. See Adam Levitin here for more detail.