«DECONSTRUCTING THE BLACK MAGIC OF SECURITIZED TRUSTS: HOW THE MORTGAGE-BACKED SECURITIZATION PROCESS IS HURTING THE BANKING INDUSTRY’S ABILITY TO ...»
Ironically, the robo-signing crisis was an attempt to placate the recording system requirements in Florida in light of the fact that there was significant question as to whether the assignments from MERS91 would provide an effective chain of title.92 By creating new bogus assignments dated years after the trusts were created and closed, the banking industry created a smoking gun and literally got their hands caught in a larger and messier cookie jar than the one they were trying to avoid, providing undeniable evidence that the transfers into the trust were invalid or had never occurred.93
THE TRICK IS NOT A TRICK: WITH SECURITIZATION, SUBSTANCE IS THE
FORM AND THE FORM IS THE SUBSTANCE
just doesn’t cut it. As Professor Levitin succinctly stated in his written testimony to the House Financial Services Committee Subcommittee on Housing and Community Opportunity:
Securitization is the legal apotheosis of form over substance, and if securitization is to work it must adhere to its proper, prescribed
91. MERS is an acronym used for Mortgage Electronic Registration System, a system put into place by some of the largest U.S. banking institutions to avoid traditional state recordation systems.
92. Citi, Foreclosures Gone Wild, October 12, 2010. See also Milton A. Vescovacci on behalf of Akerman Senterfitt, Servicing Real Estate Mortgage Investment Conduits in U.S.
Mortgage Securitizations, Akerman Senterfitt (2006) ) [hereinafter Akerman Senterfitt].
93. Citi, supra note 92. See also Akerman Senterfitt, supra note 92; supra note 69.
94. Levitin, Written Testimony, supra note 49, at 3.
2011] THE SECURITIZATION CRISIS 17 form punctiliously. The rules of the game with securitization, as with real property law and secured credit are, and always have been, that dotting “i’s” and crossing “t’s” matter, in part to ensure the fairness of the system and avoid confusion about conflicting claims to property. Close enough doesn’t do it in securitization; if you don’t do it right, you cannot ensure that securitized assets are bankruptcy remote and thus you cannot get the ratings and opinion letters necessary for securitization to work. Thus, it is important not to dismiss securitization problems as merely “technical;” these issues are no more technicalities than the borrower’s signature on a mortgage. Cutting corners may improve securitization’s economic efficiency, but it undermines its legal viability.95 On September 15, 2011 the Florida Bar News published an article titled Who Owns the Note? Paperwork problems still plague foreclosure actions.96 The article starts with an introduction that exemplifies the very nature of the problem presented by the “substance over form” mentality that plagues the
Florida judicial system when it comes to foreclosures:
John Adams, as a new lawyer, was very nervous when he tried his first case in court, according to biographer David McCullogh. The future second president of the United States was representing a man whose crops were damaged when a neighbor’s horses broke through a fence. He lost the case because, in preparing the necessary writ, Adams omitted the required words “the county in the direction to the constables of Baintree”... There’s an echo of Adams’ woes resounding in mortgage foreclosures and the scandals surrounding faulty paperwork filed in Florida and around the country by lenders and those servicing mortgages.97 The article went on to point out the repercussions that following the rule of “form over substance” in securitizations could have upon the Florida court system, noting that the answers to some of the questions being asked regarding proper documentation could greatly affect the ability of the Florida court system to handle the more than 400,000 foreclosures still pending in the courts.98 In addition, the author noted that the courts have become dependent on the filing fees for foreclosure, strengthening the belief that the court system has become dependent rather than independent, thus potentially clouding
96. Gary Blankenship, Who Owns the Note? Paperwork problems still plague foreclosure actions, THE FLORIDA BAR NEWS, September 15, 2011.
the unbiased judgment of the judiciary.99 In addition, when questioning foreclosure defense attorneys, some noted that the biggest downfall for the banks is homeowners who are willing to defend their property rights, because banks “fight tooth and claw to avoid discovery” knowing that if they are forced to explain their documents, they will not be able to.100 One went so far as to say “If you know what you’re looking for, you can find the fraud on the face of the document. It’s systemic... [i]t’s like paperwork HIV; everyone has the same virus because it was so systemic.”101 In addition, the failure of the judiciary to step up and protect homeowners seriously undermines faith in the American judicial system, an effect that could be felt long after the crisis has passed.
Handcuff Secrets: Lenders Recognize their Own Illusion, So Why Is the Judiciary Still Being Taken In?
Another interesting thing to note is that many of the big lenders who securitized mortgages, and the high-priced law firms who represent them, have internal documents discussing and warning of the repercussions of failing to properly securitize, and the impact that creating new assignments of mortgage could have.102 In October 2010 Citi published an internal document called Foreclosures Gone Wild.103 Summarizing a conference call, Citi stated, “[i]t appears that in many instances during the mortgage securitization process over the past few years, the paperwork was not properly transferred.
If the paperwork was not transferred in the legally required manner, it raises questions as to the validity and tax exempt status of the trusts in which the mortgages reside.”104 Further, Citi pointed out that by attempting to fix the
problems created by the bad transfers, the bank may have inadvertently provided proof that this argument is valid:
Banks have attempted to remedy the aforementioned problems by having employees sign affidavits that they have personal knowledge that the trust was once in possession of the necessary documents. Two problems have emerged with regards to these affidavits. First, several news stories have reported that the people signing these affidavits had no knowledge of the matters in question despite the fact that there [sic] were legally swearing that they
did. Second, the affidavits may be irrelevant because the issue is not that the documents were lost but that they were never properly transferred at each step of the aforementioned securitization process.105 To test the theory that the securitization failure was systemic, Abigail Field with Fortune Magazine did a field study on hundreds of foreclosure documents.106 This study of course confirmed what securitization experts and foreclosure defense attorneys have been saying for years, that this is a system-wide failure.107 The article was instigated by the publication of testimony by a former Countrywide employee, Linda DeMartini.108 During her hearing testimony, DeMartini stated on the record that the trustee at the time of the foreclosure, and in fact since the origination of the loan, had never had possession of the note for a particular mortgage.109 Further, DeMartini testified that the allonge transferring the note to the trustee was not prepared until three years after the loan originated, and that it was only prepared in anticipation of the foreclosure action so that the trustee would have proper standing.110 In light of this testimony, the Judge threw out the case on the grounds that the trustee did not have proper standing to foreclose.111 Although Bank of America, the purchaser of Countrywide and all of
its problems, was quick to deny the claims of its former employee, DeMartini, Fortune’s examination of hundreds of court documents verified DeMartini’s claims.112 Bank of America issued the following in response to DeMartini’s testimony:
“Bank of America’s policy is to conduct foreclosure in accordance with all applicable laws. After halting foreclosures last year, we reviewed our process with regulators and continue to do so as we incorporate improvements. Reviews have shown that foreclosed loans were seriously delinquent and that we could support our legal standing to foreclose. We believe the files referenced contain
106. Abigail Field, At Bank of America, More Incomplete Mortgage Docs Raise More Questions, CNNMoney.com, June 3, 2011.
109. In Re Kemp, Transcript of Hearing before the Honorable Judith H. Wizmur; Field, supra note 106.
110. In Re Kemp, Transcript of Hearing before the Honorable Judith H. Wizmur; Field, supra note 106.
111. Field, supra note 106; In re Kemp, 08-18700-JHW, United States Bankruptcy Court, Dist. N.J., Nov. 16, 2010.
112. Field, supra note 106.
appropriate documentation. We offer home retention options and foreclosure avoidance programs to our distress customers. Foreclosure is our last resort.”113 The funny thing is no one really expected them to say anything different. It’s not as if one of the largest banks in the country is actually going to own up to their mistakes, say “Oops, we messed up and now we can’t foreclose on any of these properties. Have your house for free.” And in fact, this is the same stance they took through each public failure, including robosigning, the ‘we did nothing wrong” stance. But the fact that they continue to represent that nothing went wrong, that “reviews” show they have followed all proper procedures is also just ludicrous. After all, if such reviews exist, no one in the public has seen any. And, if the investigation of Fortune is any indication of the system-wide failure of major lenders such as Bank of America to properly securitize, the liability of these lenders far exceeds shareholder equity.114 Both of the steps which DeMartini states did not occur are essential to proper securitization, and Fortune notes that “[b]oth steps are required, in one form or another, under all securitization contracts.”115 The continued denial by Bank of America of any failure or wrongdoing certainly makes it clear that it will continue to try and pull rabbits out of a hat when it comes to proper documentation to support standing in foreclosure actions, and that Bank of America and other large lenders will do so by asking the judiciary to sacrifice age-old property law and constitutional protections.
Fortune examined 130 cases where Bank of America was foreclosing on Countrywide mortgage-backed securities allegedly held by securitized trusts.116 Of the original 130 cases, in 104 Countrywide was the originator. 117 The findings of course were a perfect example of the blatant failure to
None of the 104 Countrywide loans were endorsed by Countrywide – they included only the original borrower’s signature. Twothirds 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,
113. Id. 114. Id. 115. Id. 116. Id. 117. Id.2011] THE SECURITIZATION CRISIS 21
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.118 Foreclosure defense attorneys were less than shocked by the results of the investigation by Fortune.119 Fortune quoted one such attorney: “As for the endorsements, foreclosure defense attorneys say a troubling phenomenon has been happening: “magically” appearing endorsements. That is, the note originally given the court has no endorsement, but after the defense points out the problem, an endorsed note is submitted.”120 Another Florida foreclosure defense attorney stated that in numerous cases the same phenomenon had been noted, and ignored by the judiciary who were more interested in moving cases along on their dockets than in protecting the property rights of the homeowners before them, “‘Magically appearing endorsements happen so often in Florida that I expect the banks’ explanation to begin with “Once upon a time, in a land far, far away.” Unfortunately, the courts often turn a blind eye to the banks’ shell game and homeowners are left with the empty shell.’”121 The Prestige: The American Securitization Forum and Private Sector Experts Disagree on the Basics On November 16, 2010, in response to numerous articles being published regarding foreclosure defense strategies including problems with securitization of MBS, The American Securitization (“ASF”) published an article in the ASF White Paper Series titled “Transfer and Assignment of Residential Mortgage Loans in the Secondary Mortgage Market.122 In an effort to repair the damage being inflicted by foreclosure defense attorneys and secuId.