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About Those Notes...Evidence of Securitization Fail

posted by Adam Levitin



When the securitization fail issue was getting attention last fall, one thing that was sorely lacking from the discussion was empirical evidence. I could refer to individual mortgage files I'd seen and a host of anecdotal evidence, but I hadn't attempted to do any sort of empirical survey. 

But Abigail Field at Fortune has actually gone and done this. Incidentally, this is what federal bank regulators were supposed to do--go and look at the actual notes for foreclosure filings. Amazing how one intrepid journalist was able to accomplish much more than a beavy of bank examiners. And Field finds that there are real problems with the mortgage files.

I know this is like saying that the sky is blue to those Credit Slips readers who do this for a living. The extraordinary occurence is a note that is properly endorsed, not a flawed note. There's nothing unusual about seeing endorsements are done by the wrong party, done on the wrong date (after the closing of the trust), backdated (possibly criminal behavior, including bankruptcy fraud if that's part of a proof of claim).  But more often than not, endorsements are simply missing. And that's what Field found.  

Field looked at 130 cases where BONY was foreclosing as trustee for a Countrywide MBS.    


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 These notes ostensibly belong to over 100 different Countrywide securities and worse, they were originally made as long ago as 2002.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.

The lack of Countrywide endorsements also corroborates [the testimony of Linda] DeMartini [in Countrywide v. Kemp, which BoA disputes], who said that in her 10 years at Countrywide she had never seen a note with an endorsement, and that as foreclosures had been increasingly litigated, she had been handling the original notes, not just the copies scanned into the bank's database.

What Field's research shows is that there is a real legal issue to be hashed out: do the endorsements matter or not in securitization?

The argument of the ASF and bank law firm K&L Gates (which has a whole memo on why I'm wrong--read it here--I'm still waiting for a cut of whatever they billed for writing it...) really now has to be that a transfer that complies with UCC Article 9 is all that is necessary for the mortgages to be transferred to the trust and that any additional requirements in the PSAs are irrelevant.

I think it's very hard to explain away the very specific endorsement langauge in the trust agreements. It's not there for shits and giggles. There are good legal and economic reasons for including it relating to bankruptcy remoteness, tax treatment, and accounting treatment. If these terms were superfluous (belt and suspenders), they would have been jettisoned as too costly (indeed that seems to have been what happened in practice by people who didn't recognize their importance).  

But even if the ASF and K&L Gates are right and UCC Article 9 is all that matters, there's another problem--most MBS don't even comply with UCC Article 9-203 sales provisions (requiring an authenticated contract that describes the property being transferred) because (1) they don't contain loan schedules, (2) the schedules can't be shown to be originals integrated with the PSA itself, (3) the schedules don't identify the property sufficiently, or (4) the PSAs aren't executed documents. Remember, K&L Gates lost Ibanez on this basis, not on a failure to comply with the PSA basis. As far as I can see, we've got a securitization fail problem either way. The only questions are the scope (which might vary depending on the route of the fail) and what will make this issue unavodiable for financial markets.


It would also seem that the pass through tax status of the MBS entities as REMIC's should not stand.

Things I'm seeing these days:

Undated en blanc endorsement stamps

Undated allonges on separate pages

Mere pages of a mortgage loan schedule upon which a loan number in question appears being held out as evidence of securitization

A pretty much industry-wide standard of a direct A to D AOM with or without the note

AOMs into trusts months or years after all apparent windows of opportunity have closed

AOMs being created by employees of law firms or servicers purporting to be employees/officers of the foreclosing entity

What these things potentially lead to is, among other things, servicing fraud, foreclosure fraud, notary fraud, tax fraud, insurance fraud and securities fraud - just to name a few. Of course, as always, this is simply my non-legal opinion.

I've got a case in which the foreclosing REMIC trustee just submitted an affidavit to the Court in which it stated that as a matter of practice, it never obtains possession of notes or mortgages. Given that possession is a requirement of UCC holder status, and is required by the trust documents themselves, I think this is a major problem for the trustee (or at least the REMIC.)

I would absolutely LOVE to see that affidavit, IM, if you don't mind sharing. I can be reached easily enough through my site.

If you've got that in writing, I would say that you have a fairly decent chance of winning that case... ;)

If InkMiser sends it you Mr. Dillon I hope you send it to me.

We have just finished a search for my Nephews Loan in LMT Trust and found it in 45 different classes. Can't wait to see the loan levels for each of those classes. How many times did they sell it and for how much. The loan was only $376k.

InkMiser: I'm building a case and would love to have this affidavit as well!

The affidavit is available online. The case is filed in the Montgomery County Ohio Common Pleas Court. The Clerk's website has case documents available online. The case no. is 2007 CV 09439. The affidavit was filed on June 1st.


we need more article on the bank of new york trustee,they seem to fabricate and steal propertys all over the place

KLG once again proves the truth of Mark Twain's statement, "Show me where a man gets his corn pone, and I'll show you where he gets his opinions." Big Law is the enabler of Big Money. Reminds me of Arthur's rant in "Michael Clayton."

In Florida's Pinellas County, where there is evidence that "robo signers" began in close proximaty to the David Stern hole-in-the-wall gang, it is seldom possible to find a Defendant or Plaintiff lawyer who knows anything about the nonsense in the securitized-mortgage fraud. I've sat down with Joseph Tsombanidis, a lawyer, asked him a question, and, as he represents a Defendant claim or two, he's got no idea what he's doing. It's hash. I recently listed a small house on the market, and picked a realtor. She hasn't got a clue about "foreclose nightmares", and just keeps mindlessly going about her business. True, Inside Job, didn't get any production analysis ubtil after the Academy Awards, but Lewis' THE BIG SHORT's been out for awhile. The lawyers in Florida are not simply lost, but seem to want to be lost - when the clients on Defense are begging them to be lost. I have also noticed the diseased concept of "foreclosure" approaching like Stage 4 Cancer. For one, there's a home next to my property, financed by Countrywide, for $181,000.00 in 2007. The so-called "buyer/owner" disappeared in 2007. Haven't heard a thing about "foreclosure," but it's been empty. Bank of America- bless them - keeps the house on it's financial books for it's shareholders. However, it must somehow work out a "straw buyer" to keep it in the wood chipper, hiding from the whole piece of the frame-up. No, the house is worth market value less than 100 k. Yes, it's on the Pinellas County tax books. No, I don't know how it avoids Muni-County-State Tax. It does though.
It's likely that the less the more is not an archetectural term any longer, but it really is remarkable that the people who sell houses, the lawyers who are Defending the banks, and the buyers are in total conflict. It's silly, but ultimate breakdown is the title. You can't do it.
Two days ago, when I was talking about a recent home loan, the lady said "my daughter bought the house, and a lawyer came in to foreclose it, so it was kinda weird how that happened." Weird isn't the half of it. When nobody knew anything (save the heroic Plaintiff Bar in Foreclosure and their blogs), there's still the same mentality. Joseph Tsombanidis hasn't a clue, my realtor hasn't a clue, and the Bank of America is using "straw buyers" to bury the Sphinx, a trillion ton stone that won't move. The fact that stands out is: the banks don't own your house. Say that mantra one more time.

I like Michael Lewis' quote, "The salient point about the modern vintage of housing-related fraud is its integral place within our nation's institutions" [Michael Lewis quoting Mike Burry, THE BIG SHORT: New York,W.K.Norton, Inc.,2010.]

That Burry quote raises the Real Property tradition into the fact that our financial dodgers are mainly in the Government, coming mainly from the Harvard brand of financial governance, born and conceived as a government of the mindset of a melted desert clock. Where are we?

For a Few Bonus More: We're hanging Clint Eastwood from a tree. When he DID present a Bill of Sale to his hangmen, he couldn't rightfully describe the theif who sold him cattle. They stung him up.

But, Eastwood got cut down and survived. That's not going to happen in real life. Let's go back to the movies - escape this nightmare. But how?

I am in litigation with Avelo Mtg. over a breach of a P&S. Avelo is servicing a mortgage for an undisclosed owner (SPV?). Avelo foreclosed on a $259K mortgage granted in 2006. The borrower did not make a single payment after obtaining the mortgage. At the foreclosure sale in October of 2007 Avelo purchased the mortgage $209K. Avelo then listed the property for sale. Plaintiff signed a P&S with Avelo for $130K. During the title exam it was discovered that the foreclosure docs needed correction. Closing was to take place in August, 2008. Avelo unilaterally canceled the sale close in time to the passage of TARP on what appears to be a ruse. I believe the SPV chose to secure tarp benefits for the full $259K rather than get paid $130K from the plaintiff. Avelo claims it has no info about why they sought to get out of the P&S. Avelo is trying to block my access to info about the principal for whom it is servicing the mortgage. I am advised by Avelo's attorney that the note was endorsed in blank but he refuses to provide me with a copy. It is my belief that the SPV wanted the sale canceled so they could secure TARP benefits.

Does anyone know how I can find out if this non-performing mortgage was submitted to TARP?

Adam, I am hoping you can shed light on which entity had the opportunity to submit a non-performing asset to TARP, i.e. the servicer or the SPV?

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