BofA Disowns Its Own Lawyer’s Argument in Fumbled Mortgage Case

To quell doubts about its mortgage unit’s handling of documents, Bank of America Corp. is distancing itself from … itself.

B of A now says that a senior litigation manager — who had 10 years’ experience working at Countrywide Home Loans Servicing LP — was out of her depth when she testified in a New Jersey courtroom about the unit’s document practices. The Charlotte company also says the local lawyer that represented it essentially fumbled the routine personal bankruptcy case.

There is no doubt that Kemp vs. Countrywide Home Loans was a spectacularly bungled defense — and its implications have caused an uproar in the world of mortgage securitizations.

In a series of unforced admissions, the B of A manager, Linda DeMartini, and Harold Kaplan, the company’s outside attorney, described how Countrywide had failed to adhere to the most rudimentary of securitization procedures, such as transferring the original promissory note to the trusts that had purchased the loans, as required under the pooling and servicing agreement.

Both DeMartini and Kaplan said it was standard practice for Countrywide to hold onto the original mortgage notes, which were stored in Simi Valley, Calif., despite securitization contracts that require the notes be physically transferred to sponsors, trustees or custodians.

“I mean, there’s no way I’m going to argue that there was a physical transfer,” Kaplan told Chief Judge Judith Wizmur of the U.S. Bankruptcy Court in New Jersey, in an August 2009 hearing. “They had the documents.”

Wizmur rejected Countrywide’s claim that it had standing to foreclose on the borrower, John T. Kemp, and in a Nov. 17 ruling excoriated Bank of America for its handling of the case.

At the heart of B of A’s bungled courtroom performance is a critical issue plaguing mortgage servicers and bond investors: whether Countrywide may still be holding onto a massive trove of untransferred mortgages and if so, what that means for the trusts that never received them.

For virtually everyone in the mortgage securitization business, the admissions in court (including DeMartini’s sworn testimony) have opened the door to further litigation by borrowers questioning every trust’s legal standing to foreclose.

You can catch the rest here…

Or you can read the Market Tickers take on it below…

BofA Tries to Disavow Its Own Testimony

This is cute:

B of A now says that a senior litigation manager — who had 10 years’ experience working at Countrywide Home Loans Servicing LP — was out of her depth when she testified in a New Jersey courtroom about the unit’s document practices. The Charlotte company also says the local lawyer that represented it essentially fumbled the routine personal bankruptcy case.

Of course it does.  After all, a Senior Litigation manager who “outs” the firm’s failure to perform as agreed, well, that might open them up to hundreds of billions of dollars (or more!) in putbacks.

I’d “disavow” that too.

In a series of unforced admissions, the B of A manager, Linda DeMartini, and Harold Kaplan, the company’s outside attorney, described how Countrywide had failed to adhere to the most rudimentary of securitization procedures, such as transferring the original promissory note to the trusts that had purchased the loans, as required under the pooling and servicing agreement.

“I mean, there’s no way I’m going to argue that there was a physical transfer,” Kaplan told Chief Judge Judith Wizmur of the U.S. Bankruptcy Court in New Jersey, in an August 2009 hearing. “They had the documents.”

 

smiley

I wrote about this case, incidentally, close to two weeks ago.

Of course this has resulted in somewhat of a panic reaction among various securitization folks.  As well it should.  While some argue this was sloppiness I think there’s something more to it as I’ve said since the beginning – you can’t audit what you don’t have – and thus this failure was damned convenient as a foil against claims that loans didn’t meet quality requirements and the trustee couldn’t be held to account for verification (nor could anyone else.)

“I don’t think anyone wants the trusts to be in essence incapable of performing their needed functions,” said Talcott Franklin, a Dallas attorney who represents a consortium of investors in mortgage-backed securities. “That’s not good for anyone.”

Of course it’s not good for those who lied and bamboozled.  It could be very good for those who bought this trash however, if they can successfully force the banks to eat the bad paper.

BofAs counsel in Washington doesn’t like this case, and has said:

Platt said no one should “try to extrapolate how trillions of dollars of loans are being handled based on one badly defended bankruptcy case.”

Oh really?

Ok, show us all the properly-endorsed and delivered notes.

I mean, if there’s one badly-defended case and one instance where someone blew it (or statistically speaking, it’s just “one” or “a handful” out of these tens of millions of loans) then it should be trivially-easy to demonstrate to the public, the MBS holders and the courts that 99.99% of all the notes were properly endorsed and are properly residing in a custodian’s care bearing all the original endorsements and allonges that were executed at the proper times and before the certifications from the trustees were made.

Right?

So why haven’t you done it, since that would end this debate immediately?

There is little doubt that Countrywide was supposed to provide the physical note for Kemp’s loan to the trust that purchased it, known as CWABS-2006-8.

In the Securities and Exchange Commission filing for that specific securitization, Countrywide and Bank of New York Mellon both attested that at the time of the trust’s formation in 2006, “the Trustee has received … the original Mortgage Note … or, if the original Mortgage Note has been lost or destroyed and not replaced, an original lost note affidavit.”

They all have this sort of language in the PSAs.  That’s the problem that we’re all trying to get our arms around.  The language is there but it appears that in point of fact basically none of the notes in these private-label securities were properly endorsed over.

Lawyers argue that trustees do not have to take physical possession of the notes if there are contracts and other documents showing proof of transfer.

“As a matter of law, the note doesn’t have to be delivered to the trust, it can be delivered to an agent,” said Platt, who nevertheless acknowledged that the pooling and service agreement in this case did not allow for such delivery.

The UCC permits this but the contract controls and every private-label PSA I’ve reviewed requires physical delivery of either the original note or a lost-note affidavit and for each they must be properly-endorsed into the trust.

Again: If there’s evidence that these notes were properly-endorsed as a matter of policy and fact and there are only a handful of “mistakes” then produce the proof and those of us who don’t believe you will be more than happy to admit that you’re right.

Until you do I will continue to maintain that I believe you’re full of crap and are obfuscating and playing games for one reason and one reason only – you’re trying to hide the truth from investors, regulators and law enforcement, all of whom would otherwise have an excellent case that you’ve committed both civil and criminal securities fraud, and if forced to unwind these transactions your institutions would be forced to recognize their own insolvency.

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