The House will be holding a fraudclosure hearing this morning; effectively the same hearing held by the Senate yesterday.
I am going to focus this morning on the testimony of Adam Levitin, who also provided the “summary statement” that I extracted and posted yesterday in the short video excerpt from the hearing in The Senate.
There is a an entire section of Mr. Levitin’s paper that deals with the issues related to the levying of junk fees and other abusive servicer practices. While these harm homeowners in a severe way and in many cases create defaults where they would otherwise not exist, it is not just homeowners who are harmed (and especially not just “deadbeat” homeowners, as is often asserted by the industry. Specifically:
It is important to emphasize that junk fees on homeowners ultimately come out of the pocket of MBS investors. If the homeowner lacks sufficient equity in the property to cover the amount owed on the loan, including junk fees, then there is a deficiency from the foreclosure sale. As many mortgages are legally or functionally non-recourse, this means that the deficiency cannot be collected from the homeowner’s other assets. Mortgage servicers recover their expenses off the top in foreclosure sales, before MBS investors are paid. Therefore, when a servicer lards on illegal fees in a foreclosure, it is stealing from investors such as pension plans and the US government.
So much for “they’re deadbeats and deserve it” as an argument.
Then we get to due process concerns – and one of my primary complaints with the Foreclosuregate nonsense – Judges who are violating the very rules of civil procedure that allegedly govern the rule of law. Specifically:
Many foreclosure complaints are facially defective and should be dismissed because they fail to attach the note. I have recently examined a small sample of foreclosure cases filed in Allegheny County, Pennsylvania (Pittsburgh and environs) in May 2010. In over 60% of those foreclosure filings, the complaint failed to include a copy of the note. Failure to attach the note appears to be routine practice for some of the foreclosure mill law firms, including two that handle all of Bank of America’s foreclosures.
If you don’t come to court with the necessary elements to establish you have a right to be there, your complaint should be dismissed immediately without need for contest by the other party. Of course that means that Clerks and Judges have to actually do more than sleep behind the bench, and they’re clearly not. This sort of literal theft of judicial process is an affront to our Constitution and Due Process protections – no small matter given that such protections are all that stands between a civil society where one settles disputes in a courtroom and a feudal one where disputes are settled with machetes and guns. For examples of the latter one need only look to Mexico’s (or our, for that matter) drug gangs who cannot bring their disputes over money and property to court as the subject of their “transactions” is an illegal substance. The danger evident in a devolution of society to the point where the common man discerns that he has no recourse to the law should be facially clear without need for debate.
Next we get to the grand-daddy of the problem – that of whether or not actual transfers took place. This, in point of fact, is the root of the issue underlying all the other frauds and shortcuts – the rather clear assertion that in point of fact there are no mortgages in the so-called “mortgage-backed” securities.
Recently, arguments have been raised in foreclosure litigation about whether the notes and mortgages were in fact properly transferred to the securitization trusts. This is a critical issue because the trust has standing to foreclose if, and only if it is the mortgagee. If the notes and mortgages were not transferred to the trust, then the trust lacks standing to foreclose.
Of particular note is that as far as I can tell there has not yet been one case where a court hearing a foreclosure has forced a claimant to produce actual proof of proper transfer.
However, this is not true in the case of bankruptcies. There are multiple bankuptcy cases now winding their way through the courts, and in at least some of them (where the debtor/homeowner is trying to avoid some of their mortgage indebtness) Judges are demanding strict proof that the claiming party for the debt actually owns the paper, including a proper chain of transfers.
In one pending case there have been four separate attempts to dodge production of the paperwork. One of the arguments raised by certain commentators is that it’s “inconvenient” (that is, the document is actually in the custodian’s vault, but it would cost something to go get and produce it.) Given that the charge for that service is usually around $30-50, this seems to be a convenient lie when one instead prepares four separate pleadings trying to avoid that production – the legal costs alone of such preparation have to reach well into four figures.
Mr. Levitin continues:
While the chain of title issue has arisen first in foreclosure defense cases, it also has profound implications for MBS investors. If the notes and mortgages were not properly transferred to the trusts, then the mortgage-backed securities that the investors’ purchased were in fact non-mortgage-backed securities. In such a case, investors would have a claim for the rescission of the MBS,79 meaning that the securitization would be unwound, with investors receiving back their original payments at par (possibly with interest at the judgment rate). Rescission would mean that the securitization sponsor would have the notes and mortgages on its books, meaning that the losses on the loans would be the securitization sponsor’s, not the MBS investors, and that the securitization sponsor would have to have risk-weighted capital for the mortgages. If this problem exists on a wide-scale, there is not the capital in the financial system to pay for the rescission claims; the rescission claims would be in the trillions of dollars, making the major banking institutions in the United States would be insolvent.
Now we understand why banks would spend thousands of dollars in Bankruptcy courts doing their damndest to avoid having to produce that which they do not have.
The claims that people often make that this is a “nothingburger” and can be fixed retroactively do not hold up. As Mr. Levitin explains:
Trust law creates additional requirements for transfers. RMBS typically involve a transfer of the assets to a New York common law trust. Transfers to New York common law trusts are governed by the common law of gifts. In New York, such a transfer requires actual delivery of the transferred assets in a manner such that no one else could possibly claim ownership.89 This is done to avoid fraudulent transfer concerns. For a transfer to a New York common law trust, the mere recital of a transfer, is insufficient to effectuate a transfer;90 there must be delivery in as perfect a manner as possible.91 Similarly, an endorsement in blank might not be sufficient to effectuate a transfer to a trust because endorsement in blank turns a note into bearer paper to which others could easily lay claim.
This is the problem that I have repeatedly brought up and is, in my opinion, why we’re not seeing actual paperwork showing the proper chain of endorsements – it doesn’t exist. While there are various assertions that a transfer “by contract” (rather than by actual wet-signature endorsement) might be good enough, NY Trust Law appears to say otherwise. Further, the common practice of endorsement in-blank (thereby creating bearer paper) is especially troublesome because once again Trust Law makes clear that one must actually have good conveyance – and this is almost-certainly not “good enough.”
Then we get into the fact that NY Trust Law (along with most other states) provide that when one has a private contract it controls – that is, a Trustee’s authority is limited to that provided in the contract. This is a particular problem for mortgage securitizations because the PSA (Pooling and Servicing Agreement) typically provides for not only a requirement of delivery of the actual notes but also contains certifications that delivery was completed, and both REMIC requirements and the PSAs themselves contain deadlines which make retroactive fixes impossible. As Mr. Levitin explains:
Trust law and private contract law combine to make a much more rigid set of transfer requirements that contract law would by itself. New York law provides that a trustee’s authority is limited to that provided in the trust documents.94 New York law also provides that any transfer in contravention of the trust documents is void.95 Therefore, if the PSA—the trust document—says that the transfer must be done in a certain way and the transfer did not comply, the transfer is void, irrespective of whether it would comply with the Uniform Commercial Code or other law. The trust document creates a higher level of conduct to which the transfer must comply.
And if the transfer is void the so-called Mortgage-Backed Securities in fact have no mortgages in them, the entire chain of payments from the homeowner to the servicer was improper from the point of origination, the security can be avoided and unwound and the losses that result from this, along with the foreclosure losses, wind up back on the banks.
Thus, we have banks trying to avoid the possible examination of these issues – with what appear to be rather extreme levels of legal exertion. Certainly preparing four separate responsive petitions in an attempt to prevent a single disclosure in one bankruptcy case rises well beyond the desire to avoid an “inconvenience.” Rather, it is clear evidence that transfers simply never happened – and the banks are trying to cover it up.
For systemic risk reasons, we must not allow that course of action to proceed and must instead examine the provenance of these transfers, lest we find out that there are no mortgages in the alleged “Mortgage-Backed Securities”!
That is, should such an examination be conducted and should it discern that these private-label (and maybe GSE-based too!) securities in fact are empty boxes, the ticking nuclear financial device heads straight back to the sponsors (which are major banks) and would detonate there.
The problem is that the losses on these defaulted mortgages are extreme. These days average recovery on a defaulted first mortgage, after fees, rehabilitation expenses and such, is lucky to reach 50% of the original face value. This places losses in the private-label realm alone in the hundreds of billions of dollars and that’s before we get into the second line (HELOC, etc) loans that are worthless when behind an underwater first.
It is not an exaggeration to state that the actual loss if only private-label deals are defective in this fashion, when one considers both first and second lines, could reach $500 billion – and essentially all of it will land on the largest banks in the United States, specifically Citibank, Wells Fargo, JP Morgan/Chase and Bank of America.
Treasury and our banking regulators, including The Fed, must determine as a matter of factual outcome whether the apparent systemic failure to comport with these rules is in fact systemic, and must issue public findings on these matters.
If, as I believe (along with many others) these failures are systemic, then the banks involved must be prospectively taken into receivership and resolved, lest we have an uncontrolled meltdown and systemic collapse.
From Tuesday’s hearing….