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122. The ASF White Paper Series article was presented along with the testimony of Tom Deutsch, the Executive Director of the American Securitization Forum to the House Financial Services Committee Subcommittee on Housing and Community Support, and was offered to rebut the testimony of Adam Levitin, who testified before the subcommittee earlier in the week and offered his own written testimony in support of his arguments against the securitization practices used by the banking industry and supported by the ASF.

ritization experts who were attacking improper securitization methods, the ASF outlined the securitization industry’s position on why perfect securitization is not necessary to enforce a note and mortgage.123 The ASF cited alternative rules such as the Uniform Commercial Code (“UCC”) and common contract law, under which they argued their methods were more than sufficient.124 The largest problem with these arguments is of course the PSA, which governs and supersedes both the UCC and common law.125 The traditional rule has always been that parties are free to elect the law that applies to contract, and to contract around common law principles.126 Further, the UCC was designed as a default to be used when contract terms were not determined by the parties properly before the contract was performed or where the parties intended the UCC to govern.127 Further, even if this argument were valid, the Banks did not follow the fundamental concepts of the UCC either.128 Another interesting point to note is that the PSA was specifically designed to govern a securitized trust because contract common law combined with trust law is virtually indestructible when it comes to the intent of the parties to the contract, which in this case intended very specific rules of transfer.129 Combined, trust law and contract law set forth extremely rigid principals for the transfer of interests, requirements that are significantly relaxed under the UCC and other types of law which the ASF is claiming control.130 Besides the general understanding that both types of law apply, PSAs contain very specific language called a recital of the transfer which outlines step-by-step the process of transferring the mortgage to the trustee of a trust.131 While the American Securitization Forum is adamantly holding its position that the failures of the securitization process were minor and do not affect standing of a trustee or servicer to foreclose, experts on the other side seem to be winning the debate, especially in the forum of public opinion, and

–  –  –

even in some court decisions.132 Legal bloggers have been especially receptive of arguments made by Levitin, Ira Markbloom133, another law professor specializing in trust law, and Thomas J. Adams134, a partner with the firm Paykin, Krieg & Adams in New York who specializes in securitization and was a former insider who worked on some of the first pooling and servicing agreements ever created in the late 1980s.135 One such legal blogger John Leamons compared the battle between the ASF and Levitin as the equivalent of a “battle between a samurai sword and a grapefruit, where Levitin is the sharper of these objects.”136 In fact, it is tantamount to the biblical story of David versus Goliath in that the ASF is backed by thirteen major U.S. law firms and represents the interests of all major lenders who securitized mortgages.137 Billions of dollars in lobbying and research capabilities against underfunded law professors, with the law professors winning.138 Such bloggers then mock statements made by Executive Director Deustch of the ASF, including those which allege that a complete chain of endorsements exists if the allonge goes from A to D, instead of from a to B to C to D as required by the PSA.139


Judge Boyko Not Fooled by the Illusion, Tells Lender “This Court Possess the Independent Obligations to Preserve the Judicial Integrity of the Federal Court” One of the first courts to recognize the failure of the banks was Judge Christopher Boyko sitting in the United States District Court Northern DisJohn Leamons, Adam Levitin Replies to ASF: What is the Meaning of “Showing a Complete Chain of Endorsement?”, LoanQualityMatters.com, December 7, 2010.

133. Ira Markbloom is the current Justice David Josiah Brewer Distinguished Professor of Law at the Albany Law School. He is considered an expert in trust law and has filed affidavits on behalf of homeowners in cases involving improper securitization and the standing issues deriving therefrom.

134. Thomas Adams is a partner with the firm of Paykin, Krieg and Adams in New York specializing in securitization. He too has opined via affidavit in numerous cases involving securitization that the lender attempting to foreclose lacks proper standing due to improper chain of title transfers as part of the securitization process.

135. Horace v. LaSalle Bank, cv-2008-362, Russell Co. Cir. Ct., Affidavit and Testimony of Thomas J. Adams.

136. Leamons, supra note 132.

137. Id.

138. Id.

139. Id.

trict of Ohio Eastern Division in the case In Re Foreclosure Cases.140 At the time of the decision in 2007 securitization and the debate being raged between experts on both sides of the fence had not even reached the public forum.141 The case consisted of fourteen foreclosure actions brought in federal court by a securitized trustee.142 In his Order finding that the bank lacked proper standing, Judge Boyko sets forth the traditional legal principal of standing and explains its relationship to the federal court jurisdiction concept of diversity jurisdiction.143 Because the bank could not prove who owned the mortgage and note, they could not establish the diversity jurisdiction of the court.144 Notably, it is clear that the decision was unexpected in light of the previous decisions from state courts in that jurisdiction who had turned a blind eye to the documentation problems that were already plaguing the court system even before the robosigning crisis.145 In his opinion, Judge Boyko made clear that the federal court would not be swayed by the arguments of big banks, and that failure to prove standing was simply elemental to invoking

the jurisdiction of the court, stating:

In the above-captioned cases, none of the Assignments show the named Plaintiff to be the owner of the rights, title and interest under the Mortgage at issue as of the date of the foreclosure Complaint. The Assignments, in every instance, express a present intent to convey all rights, title and interest in the Mortgage and the accompanying Note to the Plaintiff named in the caption of the Foreclosure Complaint upon receipt of sufficient consideration on the date the Assignment was signed and notarized. Further, the Assignment documents belie Plaintiffs’ assertion they own the Note and Mortgage by means of a purchase which pre-dated the Complaint by days, months or years.146 Further, in support of his decision despite conflicting state rulings,

Judge Boyko stated:

140. In Re Foreclosure Cases, 1:07-cv-2282 et al., U.S. Dist. Ct. Dist. Of Ohio, E.D., Opinion and Order, October 31, 2007.

141. Id.

142. Id. at 1.

143. Id.

144. Id. at 5–6.

145. Robert J. Coughlin, Caught in the Cross-fire: Securitization Trustees and Litigation During the Subprime Crisis, Nixon Peabody LLP, September 18, 2009.

146. In Re Foreclosure Cases, 1:07-cv-2282 et al., at 3.

2011] THE SECURITIZATION CRISIS 25 This Court acknowledges the right of banks, holding valid mortgages, to receive timely payments. And, if they do not receive timely payments, banks have the right to properly file actions on the defaulted notes – seeing foreclosure on the property securing the notes. Yet, this Court possess the independent obligations to preserve the judicial integrity of the federal court and to jealously guard federal jurisdiction... [n]either the fluidity of the secondary mortgage market, nor monetary or economic consideration of the parties, nor the convenience of the litigants supersede those obligations... [u]nlike... [s]tate law and procedure, as Plaintiffs perceive it, the federal judicial system need not, and will not, be “forgiving in this regard.”147 On that note, all fourteen actions were properly dismissed for failure to prove standing by the Plaintiff banks.148 The Wise Man Does At Once What the Fool Does Finally: Magic Tricks No Longer Fool Bankruptcy Courts Bankruptcy courts in several states were the next to begin seeing through the banks’ veiled efforts to establish standing where it did not exist.

In one such case, In re Kemp149, the court considered whether or not the proper steps were taken in securitizing the underlying mortgage for purposes of expunging the trustee’s proof of claim.150 Quoting the PSA for the underlying securitized trust, the opinion entered by the court notes that the PSA

recital of the transfer required:

147. Id. at 4. Judge Koyko includes a footnote concerning his decision which notes the

condescending manner in which Plaintiffs and their counsel expected the court to fall in line:

Plaintiff’s “Judge, you just don’t understand how things work,” argument reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process... financial institutions rush to foreclose, obtain a default judgment and then sit on the deed, avoiding responsibility for maintaining the property while reaping the financial benefits of interest running on a judgment... [t]here is no doubt every decision made by a financial institution in the foreclosure process is driven by money.... Unlike the focus of financial institutions, the federal courts must act as gatekeepers..

[c]ounsel for the institutions... utterly fail to satisfy their standing and jurisdictional burdens. The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Id. at 5 n.3.

148. Id. at 6.

149. 08-18700-JHW, United States Bankruptcy Court, Dist. N.J., Nov. 16, 2010.

150. Id. at 1.

“the original Mortgage Note, endorsed by manual or facsimile signature in blank in the following form: ‘Pay to the order of _____________ without recourse,’ with all intervening endorsements that show a complete chain of endorsement from the originator to the Person endorsing the Mortgage Note.” PSA §2.01(g)(i) at 56. Most significantly for purposes of this discussion, the note in question was never indorsed in blank or delivered to the Bank of New York, as required by the Pooling and Servicing Agreement.151 At the trial, a new undated allonge was produced purporting to meet the requirements of the PSA.152 Further, during deposition testimony given by a former bank employee, the court noted that the testimony showed a failure to properly transfer physical possession of the note to the trustee.153 Further, the testimony established that the allonge was not prepared until requested by Plaintiff’s attorney for the court, and that it was never properly attached or affixed to the original note.154 Further, during the same case a Lost Note Certification was filed around the same time, purporting that the original note could not be found, in direct contradiction with testimony in the case, and with previous representations made to the court and opposing counsel.155 When caught red-handed with inconsistent documents, the Plaintiff requested that the court ignore the certification.156 Applying state law, the bankruptcy court held that because the trustee never had possession of the note, they could not sue to enforce its obligations as the owner and holder in due course.157 Further, because the note was not properly endorsed under the guidelines set forth in the PSA, and the allonge never properly attached to the note, all requirements for a proper transfer had failed.158 After addressing and pointing out the failure of Plaintiff’s argument under any of the three possible ways159 to establish proper standing to foreclose under the New Jersey U.C.C. provisions, the Judge dismissed the claim.160

151. Id. at 5.

152. Id. at 6–7.

153. Id. at 7–8.

154. Id.

155. Id. at 8 n. 7.

156. Id.

157. Id. at 22.

158. Id. at 21.

159. Under New Jersey law, a foreclosing lender can sue as a holder (the person in possession if the instrument is payable to bearer or, in the case of an instrument payable to an identified person, if the indentified person is in possession), a non-holder in possession (a person in possession of the note through subrogation or some other similar means), or a non-holder not in possession (due to lost, destroyed or stolen instruments). Id. at 12–17.

160. Id. at 22.

2011] THE SECURITIZATION CRISIS 27 Keeping Your Eye on the Queen: State Courts Have Finally Started to Pay Attention to the Sleight of Hand Tricks of the Banks One of the first states to recognize the securitization problems presented by bad documents was Massachusetts, in the case U.S. National Bank v.

Ibanez.161 Unusually the securitization problem reared its head not in a foreclosure action, but in a quiet title action brought by a lender to ensure that it had clear title to properties that it had foreclosed upon.162 In rejecting the

quiet title claim, Judge Gants writing on behalf of the Massachusetts Supreme Judicial Court wrote:

[w]here a pool of mortgages is assigned to a securitized trust, the executed agreement that assigns the pool of mortgages, with a schedule of the pooled mortgage loans that clearly and specifically identifies the mortgages at issue as among those assigned, may suffice to establish the trustee as the mortgage holder. However, there must be proof that the assignment was made by a party that itself held that mortgage.163 In concluding that again the bank had failed to show that it was entitled

to relief, the court stated:

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