Given the “spooky” nature of the day, it appears to be the appropriate time to make the usual rounds.
Let’s start with Manhattan, where a judge seems to have done the right thing:
U.S. Bankruptcy Judge Martin Glenn in Manhattan ruled yesterday that Wells Fargo can’t bypass the automatic shield against legal claims triggered by Mims’s filing for personal bankruptcy in July. Wells Fargo couldn’t document how it acquired the rights to Mims’s mortgage, which originated with another lender, the judge said.
Here’s the problem:
Records showing that Mims’s loan was assigned by Mortgage Electronic Registration Systems Inc. a week before Wells Fargo moved in court to foreclose on her home didn’t mesh with the history of the loan’s transfers, Glenn found.
“Wells Fargo has not supplied the court with any evidence that the note was physically delivered or assigned,” Glenn wrote.
See, the loan is supposed to go from the originator to the sponsor to the depositor (really just a straw corporation – necessary to get bankruptcy-remote treatment) and then to to the trust.
This means there should be at least three assignments on the physical note.
The alternative is that the note could have been endorsed in blank. But if it was, then it is identical to any other sort of bearer instrument – you have to have physical possession of the original, and if it is lost or destroyed, unless you can prove it was destroyed, you’re cooked.
You can endorse a check (which is just a demand-payment note) any number of times. But if you endorse it to cash, then anyone who has physical possession of it can cash it, while at the same time it becomes nearly impossible to prove who’s supposed to have it in the event it “disappears.” This is very similar to a $100 bill – the commonly held sort of bearer instrument we all handle in our daily lives. If you burn a $100 bill or put it in the paper shredder, Treasury is not required to replace it for you, and in fact unless you can prove that you had possession of it, generally by providing them a substantial amount of the remaining pieces of it, they won’t.
These issues get rather complex in the context of the UCC (Uniform Commercial Code) yet they are very important. There are two ways one can possess an instrument (in this case a mortgage note) in the general sense – you can be an “assignee” or you can be a “holder in due course.” The difference is that in the latter case you are not financially responsible if the person(s) in front of you did something wrong, where in the former case you are!
Why is this important? Primarily because if the Trust is a Holder in Due Course they are entitled to collect, including perfection of the security interest, even if there was fraud in the inducement against the borrower!
That is, the borrower’s recourse does not extend through the MBS structure. But this protection only exists if the formalities granting a Holder In Due Course status were complied with. If they weren’t then the MBS Trust is an assignee and has successor liability for the acts all the way back to the originator.
The Bankruptcy Judge was thus correct to demand that Wells show up with proof of the status of that note – not a simple assertion. He is required (and in fact foreclosure judges should be required) before granting a judgment that is the perfection of said security interest to determine whether the alleged owner of it can actually document having possession – that is, the right to foreclose at all, and further, whether they can escape questions of propriety in acquisition of the debt in the first place.
Determination of these facts is not automatic. That is, the fact that Joe Bank shows up and says through affidavit that it has the right to foreclose establishes nothing more than a bare assertion. In both Judicial and Non-Judicial States it should be an absolute requirement that the filings include the entire chain of assignment for the security instrument going back to the original signatures on the page at the closing table. Only through those signatures and the dates they took place can one establish that value was given and that the transaction at the time it was undertaken was in good faith by the holder.
Electronic records can, in some cases, meet these requirements under the UCC. But here the priority rests with the actual paper. Indeed, when it comes to paper instruments a handwritten statement overrides a manually typewritten one which overrides a machine-printed one. Written letters (e.g. “two dollars”) override numerals (e.g. “2.00”). The intent here is that one can examine (in court if necessary) a signature, but it is hard to examine a machine. Therefore, priority in a dispute goes to wet ink – as it should.
Here’s an example of an endorsement:
If this is the only endorsement on a given note then it states that the originator of the mortgage (Paramount Financial) negotiated that note to GMAC Bank. This is only a valid chain of assignment if the note was not securitized, but rather was originated and then held at GMAC. Who services the loan is immaterial – this, standing alone (with nothing else) says that the only entity who had rights is GMAC – and that Paramount granted them.
The problem we keep seeing is that banks come in to foreclose against someone without any documentation as to how they acquired the right to do so. The industry claims that “MERS” tracks all of this stuff. But MERS does not require the recordation of assignments when they happen, and MERS tracks the mortgage, not the promissory note – nor can it, because the note is a written instrument. Myriad court decisions have held that the mortgage standing alone is a nullity – that is, the note is the controlling instrument while the mortgage is just along for the ride.
Then we have a few other interesting factoids. One of them is that on 10/20 I asked that:
If you’ve got an actual wet-signature note from a foreclosure with all the intervening assignments on the page, I’d like you to fax it to me.
Number of faxed documents I’ve received? Zero.
Is it true that there are none?
There are a number of very prominent attorneys who have turned their attention to this “minor technical glitch” and have asserted that they have never seen a properly-endorsed note!
If there are in fact “none” then that’s not a “procedural blip” or “accident.” It’s a pattern of intentional conduct, and one then has to start asking very uncomfortable questions like “why?”
I have repeatedly put my position out in the public view, going back to 2007:
The reason there are no clear chains of assignment and evidence of delivery of the actual notes is that the banks knew they were making bad loans and examination of the files would have disclosed this. In fact, Citibank’s former chief underwriter testified under oath that they knew that by 2006 60% of their loans were defective, and by 2007 80% were.
That, in turn, would have turned the “Holder in Due Course” argument on its ear, in that the taker of an obligation must have done so in good faith.
That good faith requirement cannot be met when you are aware of the defective nature of the paper you’re taking in. And remember – the sponsors (securitizers) and book-runners for these deals (the seller of the paper from the Trust to the public – pension funds, etc) were the same party!
That is, if the chain looked like this:
Joe’s Bait And Mortgage –> Citibank –> CitiDepositorCumSPV –> Citi-2006-MB1
Citibank was the one running the book and selling the “Citi-2006-MB1” paper – even though legally, the trust is an independent entity and so is the “Depositor.”
This is, I believe, one of the key elements: If you lose holder-in-due-course status then you become financially responsible for the acts of the people upstream from you – which means that in the event of a TILA or RESPA violation, or simple bad faith on the part of the originator, the MBS Trust could have an unenforceable security interest.
Note that the last guy in the chain is actually three entities. There’s the Trust itself, which is a legal entity, there’s the servicer(s) involved in taking the money and distributing it (under contract to the Trust) and there’s records custodian, also usually under contract (but sometimes, especially for big banks, said “Custodian” might be the same big bank that did the sponsoring.)
Further, remember that banks are and have been for hundreds of years experts in physical document retention. That’s their job! It is incomprehensible that they would “accidentally” fail to deliver and keep literally millions of mortgage notes.
No, there’s a purpose here folks all right, and I continue to assert that it’s really quite simple:
The banks knew they were making bad loans to consumers which is actionable civilly at a minimum, and if done collectively with others, might rise to the standard of Racketeering.
They also knew they were marketing bad loans to people in the form of MBS.
Again: Citibank’s former chief underwriter has admitted to actual knowledge that these loans were defective in the majority by 2006, and to a degree of ridiculous majority by 2007. Yet they both continued to make those loans and sell those loans with actual knowledge of their defects.
If that doesn’t constitute fraud worthy of indictments and closure of the institution may I ask what does?