Monday, September 27, 2010
FUBAR Mortgage Behavior: Florida Banks Destroyed Notes; Others Never Transferred Them
<snip>
But to give readers the latest report of modern FUBAR, mortgage
edition, let us continue with the sorry saga of "Where's My Note?" For
the benefit of newbies, what everyone calls a mortgage actually has two
components: the note, which is the borrower IOU, and the mortgage (in
some states, it's called a deed of trust) which is the lien on the
property. In 45 states, the mortgage is a mere accessory to the note;
you must be the real party of interest in the note in order to
foreclose.
The pooling and servicing agreement, which governs who does what when
in a mortgage securitization, requires the note to be endorsed (just
like a check, signed by one party over to the next), showing the full
chain of title, and the minimum conveyance chain is A (originator) => B
(sponsor) => C (depositor) => D (trust). The endorsements also have to
be wet ink; no electronic signatures permitted.
I've had a lot of anecdotal evidence to support the idea that these
procedures, which were created in the early days of mortgage
securitizations, were simply not observed on a widespread, if not a
universal basis. My sense is that the breakdown in practice was well
underway by 2004, but it may have taken place earlier. For instance, a
group of over 100 lawyers in a loose network around Max Garndner, a
North Carolina bankruptcy lawyer who has taken a serious interest in
this area, now has a standing joke that the first one that finds a deal
where the note was correctly endorsed must bronze it and hang it on
their wall. In other words, in none of the cases this large group has
seen were the notes transferred to the trust properly.
I've been reluctant to take as strong a stand as their collective
experience suggests, but independent evidence confirms their report.
One little stunner came courtesy Alan Grayson's office. In 2009, the
Florida Bankers Association wrote a letter to the Florida Supreme Court
objecting to some proposed rule changes for foreclosure cases. The full
text of the letter is here. The critical section:
The reason "many firms file lost note counts as a standard
alternative pleading in the complaint" is because the physical
document was deliberately eliminated to avoid confusion immediately
upon its conversion to an electronic file. See State Street Bank and
Trust Company v. Lord, 851 So. 2d 790 (Fla. 4th DCA 2003).
Electronic storage is almost universally acknowledged as safer, more
efficient and less expensive than maintaining the originals in hard
copy, which bears the concomitant costs of physical indexing,
archiving and maintaining security. It is a standard in the industry
and becoming the benchmark of modern efficiency across the spectrum
of commerce--including the court system.
This is highly entertaining, because the excuse is "oh we destroyed the
note, so our standard practice is to use a lost note affidavit." If
this was really as widespread as the Florida Bankers Association
suggests, they are in a whole heap of trouble, because in most (if not
all) jurisdictions, original notes with proper wet ink endorsements are
required. And in states that are serious about proper procedure (South
Carolina, for instance), judges are not going to have much sympathy
with the use of a lost note affidavit when the note was destroyed.
But while it is clear the notes weren't handled properly, I'm not
certain that this electronic scanning story is accurate either (meaning
it isn't standard practice in mortgage land). In plenty of cases,
plaintiffs come up with collateral files with hard copies of documents
in them, albeit including suspiciously helpful ones that appear
miraculously at the last minute.
At least in private label deals (meaning non Freddie and Fannie), it
appears instead that the notes are back with the originator, never
endorsed as required in the pooling and servicing agreement, and are
transferred out when needed. We provided a report that suggests all the
notes from Countrywide deals are still with Countrywide, even though it
securitized 96% of the mortgages it originated. We got even stronger
confirmation over the weekend.
One of my colleagues had a long conversation with the CEO of a major
subprime lender that was later acquired by a larger bank that was a
major residential mortgage player. This buddy went through his
explanation of why he thought mortgage trusts were in trouble if more
people wised up to how they had messed up with making sure they got the
note. The former CEO was initially resistant, arguing that they had
gotten opinions from top law firms. My contact was very familiar with
those opinions, and told him how qualified they were, and did not cover
the little problem of not complying with the terms of the pooling and
servicing agreement. He also rebutted other objections of the CEO. They
guy then laughed nervously and said, "Well, if you're right, we're
fucked. We never transferred the paper. No one in the industry
transferred the paper."
This creates a lot of problems. If the originator is bankrupt (New
Century, IndyMac), the bankruptcy trustee is supposed to approve any
assets leaving the BK'd estate. I'm told bankruptcy judges who have
been asked were not happy to hear this sort of thing might be taking
place, which strongly suggests this activity is going on without the
requisite approvals. And who from the BK'd entity can endorse it over?
It doesn't have any more officers or employees. Similarly, a lot of the
intermediary entities (the B and C in the A-B-C-D chain earlier) are
long dead. How do you obtain their endorsements?
Now you understand why everyone is resorting to fabricated documents
and bogus affidavits. There is no simple way to fix this mess.
<end excerpt>
Michael