Judges, Allonges and Transfers, Oh My! Yves Smith Delivers the Low Down on Those Pesky Foreclosure Documents

04 Dec

Yves Smith puts the rest of the story of the sordid foreclosure fraud and its underlying consequences into perspective for anyone who was thinking that this was just ‘a minor paperwork glitch’ as reported in the mainstream press.

Pay attenton to the facts here; the facts speak of violations of any interpretation of any number of sections of the U.C.C. which is the governing body of law in commercial contracts, and raises additional issues of proper conveyance, chain of title and conflicting documentary evidence.  It’s not good. Not for the banks – but as we noted earlier – the noise will get louder as the evidence becomes more incontrovertible. She’s right about that.

New York Judge’s Testimony Contradicts American Securitization Forum Assertions on Mortgage Mess

from naked capitalism by Yves Smith

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Maybe the American Securitization Forum ought to do its homework before making emphatic and not very well founded claims.

Right before Thanksgiving, the ASF released its long-awaited white paper, which argued, basically, that industry standard practices for conveying notes (the borrower IOUs) to securitization trusts were sound. Curious readers new to this can read the long-form version, but the overview is that the ASF contended that industry standard practices conformed with generally applicable law (the wee problem is that this argument simply ignores the far more specific requirements of their own contracts). That meant, per the ASF, that the trustees, acting on behalf of securitization trusts, could proceed with foreclosures precisely because the trust did possess the note.

Less than a week later, a court decision in Kemp v. Countrywide reveals that a Countrywide executive testified that Countrywide did not transfer notes to the trusts, which was the foundation of the ASF argument, and this was its normal practice (Bank of America did issue a not-very-convincing denial). That confirms what we’ve heard and reported about Countrywide and other major subprime originators. Needless to say, this made the ASF white paper look more than a tad ill informed. The ASF had said everything was hunky-dory because the trusts held the notes; now it has egg on its face because the biggest player in the business said it, not the trusts, possessed them.

Nevertheless, ASF executive director Tom Deutsch on Wednesday, before the Senate Banking Committee, offered a strident series of declarations in his written testimony:

Ultimately, we find that the conventional process for loan transfers embodied in standard legal documentation for mortgage securitizations has been adequate and appropriate to transfer ownership of mortgage loans to the securitization trusts in accordance with applicable law and contract. Since loan transfers have generally been effective, all of the dire consequences that a few commentators have speculated on fade away, given the faulty premise that they start from. Moreover, a number of the concerns that have been raised that securitization professionals have uniformly opted out of use of laws such as the Uniform Commercial Code (“UCC ”) to set a higher bar for transfers, but then subsequently and systematically failed to meet that higher bar, appear on their face to be illogical assertions and patently false….Moreover the concerns that have been raised have not been supported by substantiation that there are in fact any material signs of systematic fails in the system. Indeed, the origin of these concerns is not clear: they are not the result of a series of court cases supporting the arguments advanced and appear to be largely the result of academic theories.

Deutsch’s testimony focused on the analysis of Georgetown law professor Adam Levitin, who has offered extensive and well supported arguments as to why the problems with mortgage transfers in securitizations are serious and not easily remedies. By personalizing his attack to such a high degree, Deustch appeared to be trying to create the impression that Levitin is a lone critic, which is far from the case.

We called Deutsch’s testimony “monstrous whoppers”. And unlike the first ASF paper, which the Kemp v. Countrywide story challenged in less than a week, the the new, improved ASF argument took a body blow the very next day.

Per the extract above, Deutsch kept asserting that the failure of the parties to the securitization to adhere to their own contracts was not in fact a problem, there was no court evidence, these concerns were the mere natterings of worry-wart academics. We pointed out that there was proof in thousands, if not tens of thousands, of court decisions on consumer cases to the contrary. But you don’t have to take that on our word. On Thursday, the mere day after the dismissive Deutsch remarks, Judge F. Dana Winslow of New York in testimony before the House Judiciary Committee described how there is substantial uncertainty and widespread problems with title, standing, ownership, not to mention bad affidavits and improper service, in foreclosures. And many of his remarks directly contradict what Deutsch asserted the day prior.

For instance, Deutsch asserted, absurdly, despite clear contractual requirements that the notes be endorsed to show the proper chain of title, that really was not necessary. Judge Winslow is not convinced:

Gaps in the chain of title. Missing assignments — effects on prior unnamed mortgagees and their rights. I have obtained from the County Clerk printouts of mortgagee title that have differed substantially from the information provided by Plaintiff Mortgagees in foreclosure applications…

Can deficiencies be addressed by an Allonge, with or without the approval or
signature of the Homeowner? This question has not been answered by the judiciary or the legislature.

We’ve noted that allonges (an attachment to a note for affixing signatures; this has become the new preferred route for on-the-ball foreclosure mills to create the impression that the transfers were done correctly and on a timely basis as required in the governing agreement, the Pooling and Servicing Agreement). Interesting to see that the judge has reservations about them.

Most important, Winslow specifically disputes the argument made by the ASF, that they can rely upon Article 3 of the Uniform Commercial Code as the rational for ignoring the provisions of their own contracts (Article 1 of the UCC provides for parties to contract for different procedures, such as the ones stipulated in the PSA):

UCC Article 3. Some Plaintiff Mortgagees have argued that their status as the holder of a negotiable instrument (the Note) under UCC Article 3 allows them to proceed in foreclosure without proof of the chain of title (i.e., endorsements, intermediate assignments of the Note and Mortgage). Problems: first, a Mortgage is not a negotiable instrument under UCC Article 3; second, the endorsement in blank procedure, frequently used by a Plaintiff Mortgagee, does not necessarily create the elusive negotiable instrument; and third, in many cases, the Plaintiff Mortgagee cannot produce the Note.

So what will the ASF do to dig itself out of this new hole? This analysis is from an impartial party who has reviewed hundreds of cases with problems and has serious doubts with the ASF’s position on both assignment and endorsement in blank. Failure of many judges to accept either one, let alone both, creates huge problems for trusts seeking to foreclose. And if you think I am overstating, consider the judge’s overview comment:

Standing has become such a pervasive issue that I frequently use the term “presumptive mortgagee in foreclosure” to describe the Plaintiff Mortgagee.

In other words, the problems with standing are so widespread that the judge no longer assumes the party showing up to foreclose really has the right to do so.

The testimony is simply damning and goes through a long litany of deficiencies at every step of the process. One example:

Plaintiff Mortgagee “Bad faith.” CPLR 3408(f) – Plaintiff Mortgagees must participate in mandatory settlement conferences, and negotiate in good faith for a mutually agreeable resolution, including loan modification, if possible.

Timely response – A Plainliff Mortgagee must timely acknowledge the information provided by the Defendant Homeowner and respond to justified offers of modification. There are many instances o f a Plaintiff Mortgagee refusing to consider a loan modification because the Defendant Homeowner’s financial information was not up-to-date, even though the delay was due to the Plaintiff Mortgagee’s own failure to timely respond to the Defendant Homeowner.

So will we see the ASF issue yet a new paper to refute this damaging testimony? How will the ASF respond to this suggestion of problems? Attack the judge too? Given the ASF’s advanced state of denial, it might take a paper a week before they engage the issues that are well known and well documented in tens of thousands of consumer cases across the US.

It’s high time that the securitization industry recognize that bluster and attack the messenger is not going to make deep seated problems vanish. It’s time they admit to the widespread failings and work towards solutions, rather than persist in being part of the problem.


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