Yves here. Below is a second post by Georgetown law professor Adam Levitin, who is a, if not the, top US expert on mortgage securitizations and secured credit generally. Levitin was a key player in the effort to combat foreclosure fraud. He provided extensive analysis of how many practices that had developed as the mortgage securitization industry, particularly its reliance on MERS and the contract-violating routine failure to transfer mortgages to securitization trust in the required time frame were meteor-hitting-the-planet-and-killing-all-the-dinosaurs level liability for mortgage securitizers and servicers, which included pretty much all big US banks.
But rather than use this enormous leverage to force servicers to make principal modifications, as was routine back in the day when banks retained the mortgages they originated, and investors also preferred to foreclosure, Obama instead gave banks and services a “get out of liability almost free” card in the form of the 2012 National Mortgage Settlement.
Levitin analyzed what could be inferred from Trump official William Pulte about the case against the Fed governor Lisa Cook in a an article we featured, The President’s “Firing” of Lisa Cook Is Illegal. Quite a few readers took issue with some points in Levitin’s argument, particularly regarding his point about the use of “principal” residence in the mortgage security instrument, which is less restrictive than “primary” residence.1
That distinction elicited some pushback, both from Levitin’s and our readers, and Levitin has returned to that matter. Now we don’t yet know if Cook actually will deploy an argument like the one Levitin suggests….but it seems like a promising point.
By Adam Levitin, Professor of Law, Georgetown University. Originally published at Credit Slips
I’ve been getting a lot of emails and on-line comments in recent days from people who work in the mortgage industry about the Lisa Cook mortgage situation. What I’m seeing in these comments is a serious gulf between lawyers and non-lawyers. The non-lawyers tell me that “This is how it is supposed to work.” To which my response is “Have you actually read the legal documentation?”
For example, lots of mortgage professionals (and too many journalists, following Pulte and Trump) are sloppy about conflating “primary residence” and “principal residence.” The term “primary residence” is used in the uniform residential mortgage application, but the uniform covenant in the security instrument refers to a “principal residence.” “Primary” is more restrictive than “principal.” That sort of terminology difference can matter a lot for legal purposes. I know that this sort of pedantry is why everyone hates lawyers, but it is also the sort of precision that allows parties to strike exactly the deal they want. (And if you love this sort of thing, then you really ought to be in law school or yeshivah.)This is hardly the first time the mortgage industry has learned that its legal documentation doesn’t work the way it thought it did. First there was the MERS debacle—the private mortgage title recording system just didn’t fit very well with state law. Then there was all of the securitization chain of title issues with non-delivery of notes indorsed in blank. Then there was the putback litigation–the putbacks that should have happened more or less automatically didn’t work very well when sellers resisted. And getting much less attention was litigation over the default servicing provisions in the Fannie/Freddie uniform security instruments or the contractual permissibility of post-acceleration late fees.
I’ve spent a lot of time reading, teaching, and testifying about the Fannie/Freddie uniform instruments. They are probably the most widely used standard contract in the United States. There’s scant interpretive caselaw, but there are lots of ambiguities and imprecisions in the documents. No one much cares…until litigation arises. But the documents don’t necessarily work the way mortgage professionals assume they do.
I’ll note that this is not an issue limited to the mortgage industry. It’s basically a version of the whole covenant loophole play that facilitates dropdown liability management exercises. (You see, there is a connection between the chapter 11 stuff I do and the consumer finance stuff…) Legal documentation often has glitches, gaps, and loopholes that no one notices when deals are going as intended, but fail the stress test of litigation.
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1 From that post:
Let’s consider the statutes that Pulte referenced in his referral. First, he referenced 18 U.S.C. § 1014, which criminalizes false statements in loan applications. The covenants in the security instruments are not “statements.” They are promises, not representations of current fact, so they cannot be false. A misrepresentation about intended occupancy on the Uniform Residential Mortgage Application could trigger 18 U.S.C. § 1014, but the representation there, that property will be the borrower’s “primary residence,” is very narrow given that no duration is specified. That vagueness cuts against a criminal prosecution.
Second, Pulte referenced 18 U.S.C. § 1344, which criminalizes “knowingly” defrauding a financial institution or obtaining credit “by means of false or fraudulent pretenses, representations, or promises.” That provision could encompass the promises made in the security instrument about the property serving as the borrower’s “principal residence,” but it is far from clear that Cook knowingly made the promise or that it was in fact false.
Most borrowers do not read their security instruments, so it is entirely possible that Cook had no idea what she was promising beyond that she would pay the mortgage note when installments came due. While contract law readily tags consumers with constructive knowledge of the terms and conditions of their prolix form contracts, criminal law doesn’t work like that.
Moreover, even if Cook did know that she was promising to have both properties be her “principal residence,” it isn’t clear that she was making a false promise. The term “principal residence” is not a defined in the security instruments, but it is not the same phrasing as “primary residence” (as used in the UMRA). “Principal” is more capacious than “primary,” and is capable of covering multiple residences. Imagine someone who has an co-op in NYC, a house in the New York suburbs, and a condo in Florida and splits time among all three depending on seasons and days of the week, spending roughly a third of the year at each. That person might very well consider himself to have more than one principal residence. (Pulte also referenced the wire fraud and mail fraud statutes, but those are lard-one statutes that require an underlying predicate fraud, which takes us back to the two statutes already discussed.)
The key thing here is that Trump’s only basis for action is Pulte’s referral letter, and that is not an adequate basis for concluding that Cook actually engaged in any wrong doing. Neither Pulte nor Trump have no idea whether Cook knowingly made the occupancy promise or what she interpreted the promise to mean.
Surely the main point is that Trump–someone who likes to play fast and loose with every law–is not entitled to pick nits as a basis for working his way around the law regarding Fed independence. His argument is absurd and a tissue thin excuse but that doesn’t mean it won’t fly in an environment where so many are doing the same. We the mere public are perfectly aware that the Law is sometimes used to serve justice and other times used to work the system via a detailed knowledge of the rule book. Mixed motives world is the world we live in and applies to other professions now such as medicine.
In the end, on the Trump level, it’s all just an unsavory power struggle. It certainly has little to do with his favorite words “great” and “beautiful.”
This whole dustup kind of smacks of taking an entry an accountant made using an antiquated drop down menu and turning it into 37 felony counts. Revenge is a dish best served trolled.
I suspect this was due to Cook not actually reading the agreement she was signing – as the article notes, most people don’t. They should, however, and so should the originators. We did read our mortgage documents all the way through and there was one part that sounded like there could be some potential future liability for us that we hadn’t been aware of. When we asked about it before signing, the bank employee said nobody has ever asked him about it before, and he wasn’t sure what it meant either. We looked into it, determined that it probably wouldn’t be a problem and eventually signed. So far, so good….
Lisa Cook is a Governor serving on the Federal Reserve Board. For Levitin to excuse her behavior as if she is “[m]ost borrowers” seems extraordinarily disingenuous, especially coming as it does in the wake of a decade of truly vicious and unprincipled lawfare against Trump.
Levitin does not make Trump/Pulte look bad; neither does he make Cook look good. It appears that all the properties not actually lived in by Cook were rented out. I can see no reason for her to escape criminal penalties for what was obviously an attempt to — at best — exploit loopholes in the current system, and at worst, defraud the tax system.
To quote Spiderman, “with great power comes great responsibility.” Cook seems to believe that “with great power comes great opportunities.” My inner Red Queen says “off with her job!”
You seem to have missed what I have said in comments. To be blunt, you are making wild assumptions.
1. Banks affirmatively withhold the security instruments. My father had to make an enormous stink with his bank to get his
2. Cook is not a lawyer. Nor is she a mortgage professional. And even then, Levitin makes clear “mortgage professionals” themselves don’t understand the fine points of the legal agreements.
I have helped teach courses for CLE credit on mortgage securitizations. I would not presume to be able to read and properly understand mortgage security instruments.
The Fed is not in the mortgage securitization business. Expertise in finance is very sector specific. She’s there to make judgements about interest rate policy.
3. Cook almost certainly had legal representation on these purchases. Under well-settled doctrine (a 1994 Supreme Court decision), if her lawyer said what she was doing was kosher, she is not liable. The principle is called “secondary liability”.
“ Levitin makes clear “mortgage professionals” themselves don’t understand the fine points of the legal agreements.
I have helped teach courses for CLE credit on mortgage securitizations. I would not presume to be able to read and properly understand mortgage security instruments.”
Does this not point up the fact that, if true, these arrangements cannot posdibly be legitimate under any good faith application of contract law?
MERS was certainly a wildly illegal attempt to skirt the laws and expenses of exchanging real estate.
At what point dors one admit that a system is fraudulent heyond redemption?
I’m sure you’re right on the details but I’m looking at the optics and none of this passes muster. The Democrats lawfared Donald Trump for eight years and did so without having their own house in order?! It wasn’t up to Schiff, James or Cook to figure this stuff out, you are correct that the party should have routinely had experts/lawyers advising these folks on how to avoid tax problems.
Instead I strongly suspect the party’s experts gave them perfunctory advice and then they went to a cocktail party and crowd sourced some angles for saving money. The groupthink among elites in the party in this regard is reaching Tulip Craze levels. One finds a loophole and everyone else wants to use it. And when one gets caught, it’s a safe bet others are lawyering up.
I’m not sure how to word my comments here. Politics is not an ‘inside the box’ thing. Trump is making Democrats look bad, mission accomplished. The Republicans are clearly winning this issue and the harder Ken Martin fights back, the more I’m reminded of a Brer Rabbit story about a sticky situation.
Basic PR 101 is that all three should immediately do some math, then send a check to the government, say so in a press release and then shut up. Excuses may save them fines but are losing them votes. Voters expect mistakes to be owned up to. That never seems to happen anymore.
Federal Reserve governor Lisa Cook listed contested home as vacation property
Do you still believe that Cook deserves criminal penalties? That she engaged in groupthink with democrats to defraud her mortgage lender? Are the facts still “obvious” to you?
Putting aside the legal semantics (most favorable to Cook) and ethics (IMO, gray zone for Cook)….
the reason why this is gaining traction (or at least a tide of the hoi-polloi aren’t rushing to defend Cook) is that there is a “Semantics Asymmetry” ™ that is used as a sword against the bottom 85% and as a shield by the top 2% (Cook).
I missed my natural gas payment by 1 day cuz I just plain forgot, and had to pay a fine of $1.58. life goes on. My mother went 6 mph over the speed limit and got a camera-enforced $35 fine.
If you’re living paycheck to paycheck or tax refund to tax refund, $40/$300 here-there nuke your finances.
I bet if you had a focus group, zero sympathy from regular folks
I would argue it depends how you “focus” the focus group as they can be manipulated just like polls.
In the end Trump and his supporters are using a variant of moral outrage – you can’t get away with that so why should they; even if it is a BS charge I guess two wrongs don’t make a right is a dead concept these days. This is truly a case of not seeing the forest for the trees…
People sign stuff they don’t read or understand all the time. Otherwise there would be fewer car dealerships or student loans.
It’s not just for that reason. These agreements are non-negotiable.
This is simply the fact and that’s is what makes any discussion of contract law in modern America pointless.
How can it possibly be a valid contract when one party can change the terms of a contract unikaterally and at will? Under all accepted principles of contract law, it cannot. But vanishingly few serving judges would acknowledge that fact in a court of law. And that’s is the normal form of all online service contracts, as well as health insurance and many others.
Whether or not they read/understand all the documents, I think people understand the difference between primary, second, and investment. If the argument to be made is that poor drafting/wording of documents makes it hard to actually declare a breach/default, I guess you can do it but it doesn’t make it right.
It certainly creates the appearance that Cook wanted to get a loan for real property purchase and mis-represented her intent. I suppose it’s OK for a Fed Governor to do that, but it’s not something I would want.
But then using arguments about MERS to get what you don’t want to pay for doesn’t impress me either.
I wonder how many new congress critters come to DC and get a new primary residence mortgage while keeping the old one back in their state?
What was the date of the alleged mortgage transaction signing by Ms Cook? I missed that somewhere or it hasn’t been revealed. Would it have made a difference if the transaction was prior to her appointment to the Fed since she would have been a regular folk at the time?
Perhaps rumor has it that Ms Cooke is opposed to a reduction in interest rates?