Changing the Rules of the Game: Bank of America and Countrywide Play Cat and Mouse with the Courts, Testimony and the Truth on Notes, Mortgages, Securities and Pooling and Servicing Agreements

25 Nov

Countrywide Offers Not-Very-Convincing Explanation of Testimony on Its “Oops, We Still Have the Note” Snafu

from naked capitalism by Yves Smith

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It was predictable, as soon as the press took notice of a potentially very damaging bit of testimony by a Countrywide manager, that its parent, Bank of America, would do everything in its power to deny its validity.

By way of brief background (see here, here, and here for more detail), a recent court decision in Kemp v. Countrywide Home Loans, Inc. stated that Countrywide had not transferred the note (the borrower IOU) to the Bank of New York, trustee for the securitization trust. Perhaps more important, the ruling also noted that a Countrywide employee stated that it was Countrywide’s practice not to transfer the note, which is contrary to the stipulations of the pooling and servicing agreement.

Sports fans, this is a very big deal. As Georgetown law professor Adam Levitin remarked,

This opinion could turn out to be incredibly important. It provides a critical evidence for the argument that many securitization transactions simply failed to be effective because non-compliance with the terms of the transaction: failure to properly transfer the mortgage meant that the mortgages were never actually securitized.

So ‘natch, Bank of America has to discredit the really damaging part of the testimony, which is that this failure to transfer the note was standard practice at Countrywide. As an attorney said as soon as he read the decision, “That’s exactly what I’d do.”

So let’s peel this back layer by layer. First we get the expected denial, as reported by Jody Shenn at Bloomberg:

A Bank of America Corp. employee who said that Countrywide Financial Corp.’s policies were to retain mortgage notes later clarified her testimony in a New Jersey bankruptcy case, a lawyer for the company said.

“Countrywide’s policy and practice has been and remains to fully comply with the pooling and servicing agreements, including forwarding any necessary documents to the trustee,” Larry Platt, a lawyer at Kirkpatrick & Lockhart, said in an e-
mailed statement…

“The associate whose testimony was cited in the ruling was asked about a process outside her normal scope of responsibilities and in an entirely different department from where she worked,” Platt said.

“A review of her testimony shows she later clarified that she was not comfortable testifying about the circumstances under which original loan documents would move, or whether and to what extent they ever are moved. This would include the initial delivery of original loan documents to the trustee,” he said.

This comes pretty close to depicting the employee’s statement that Countrywide never delivered the loans as a misstatement.

But this fails to explain what transpired with the note in the Kemp case . It was never delivered to the trustee and was also never endorsed. So we are left in the dark as to why the Kemp note was never conveyed as prescribed in the PSA. Do they think this was just another technicality, or a very large random error, one that Countrywide and the trustee somehow missed and then took 10 months to sort out?

Unfortunately I don’t have the trial transcript to see if the BofA attorney characterized the testimony accurately, but Tom Adams was kind enough to forward the oral arguments.

Kemp v. Countrywide Oral Arguments

I suggest you read this document, it’s short and funny by judicial standards. The judge is not happy with Countrywide’s shifting positions regarding the whereabouts of the note:

I am, frankly, appalled at the confusion and lack of credibility of Countrywide’s response to the issue of the note — the possession of the note.

We started out with Ms. DeMartini’s testimony that the note never leaves the servicer. She says that she saw a Federal Express receipt whereby the actual note, the physical, original note was transferred to the Foreclosure Department internally in the same building, but that the note had not yet been located. That’s where we stood at that point. Then we had a submission, the supplemental submission saying the original note has been found and can be available for inspection. It doesn’t say where it was found, who had possession or the like, but it was found and is available for inspection. And then without any explanation, there is a lost note affidavit presented dated February of 2007 indicating that the note cannot be found. No explanation provided. What do I do with that, Mr. Kaplan?

Did you catch that? This is pure Keystone Cops. Countrywide can’t find the note, then says it has located the note, then it submits a lost note affidavit dated BEFORE the date when the note mysteriously appeared!

And better yet, even later, Mr. Kaplan, the counsel for Countrywide, casually mentions that an allonge (a document that is supposed to be so firmly attached to the note as to not be able to travel separately, used to affix additional signatures to a note) was created just for the purposes of foreclosing! That’s an admission that it was well outside the permitted time sequence for the securitization trust.

Mysteriously appearing allonges have become the preferred fix for the failure to convey notes properly to trusts, and the foreclosure attorneys generally have some appreciation for the function it is supposed to serve. The party line is usually “Oh yeah, we found it” with as little further comment as possible. The fact that Kaplan does not understand why this document was created, and makes the damaging admission repeatedly that it was created recently, lends indirect support to the notion that Countrywide wasn’t terribly concerned with adhering to the terms of the PSA unless it rose to the level of being an issue. (If you read the transcript, Kaplan really is clueless, arguing at one point that perhaps Bank of New York, the trustee, reassigned the note back to Countrywide. Huh? He seems intent on foreclosing, and really doesn’t care which entity does it, when believe me, Countrywide does NOT want this foreclosure done in the name of Countrywide, that was the point of creating the allonge).

Another noteworthy bit: the allonge has a stamped signature of one “David A. Spector, Managing Director.” I’m told he was very senior, the number two or three at Countrywide. The odds are not high that he was stamping foreclosure documents himself. And that begs the question of who did stamp this document and whether they were authorized to do so.

Consider this exchange:

THE COURT: And you do understand as well that the Pooling and Servicing Agreement requires that transfer, that physical transfer of the note in accordance with — and endorsement — in accordance with UCC requirements?

MR. KAPLAN: I understand that, Your Honor…And I can say that, although Your Honor is right and the UCC and the Master Servicing Agreement apparently requires that, procedure seems to indicate that they don’t physically move documents from place to place because of the fear of loss and the trouble involved and the people handling them. They basically execute the necessary documents and retain them as long as servicing’s retained. The documents only leave when servicing is released.

I’d like to know how Bank of America’s law firm explains this. It isn’t merely Ms. DeMartini who is presenting the failure to transfer notes as standard practice. So does Kaplan, and he offers a plausible rationale.

Daily Finance has a nice piece on this issue, and spoke to counsel for Kemp. He disputes the Bank of America contention that DeMartini’s damaging testimony was outside her realm of knowledge:

DeMartini was flown to New Jersey from California to testify as the document custodian, the person BofA chose to get the note and other documents admitted as evidence. She was refreshingly unrehearsed; she testified with confidence and candor. She wanted the judge to understand that BofA was very careful with the notes

So how do we square this circle? The best explanation comes from reader Steve Eiswoman:

There’s official policy, then there’s what your boss yells at you about if it’s not done quickly enough. and never the twain shall meet.

See full article from DailyFinance:


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