Below is a collaboration of excerpts from some posts on the subject and at the end is the actual complaint.
Although the this example is based on a single loan in the trust, the trusts usually hold upwards of 5,000 loans.
With that said, if one note was not transferred, it is safe to assume that all notes were not transferred according to the testimony given by the witness.
To further this assumption, according to the testimony given, if this trust did not transfer the notes, how many other trusts followed the same procedures, or lack of there of?
From our experience, when there is one “irregularity”, there are usually two. If there are two, there are thousands…
First from Naked Capitalism…
Testimony in a New Jersey bankruptcy court case provides proof of the scenario we’ve depicted on this blog since September, namely, that subprime originators, starting sometime in the 2004-2005 timeframe, if not earlier, stopped conveying note (the borrower IOU) to mortgage securitization trust as stipulated in the pooling and servicing agreement. Professor Adam Levitin in his testimony before the House Financial Services Committee last week described what the implications would be:
If mortgages were not properly transferred in the securitization process, then mortgage-backed securities would in fact not be backed by any mortgages whatsoever. The chain of title concerns stem from transactions that make assumptions about the resolution of unsettled law. If those legal issues are resolved differently, then there would be a failure of the transfer of mortgages into securitization trusts, which would cloud title to nearly every property in the United States and would create contract rescission/putback liabilities in the trillions of dollars, greatly exceeding the capital of the US’s major financial institutions….
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…
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, 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.
This is significant for two reasons: first, it points to pattern and practice, and not a mere isolated lapse. Second, Countrywide, the largest subprime originator, reported in SEC filings that it securitized 96% of the loans it originated. So this activity cannot be defended by arguing that Countrywide retained notes because it was not on-selling them; the overwhelming majority of its mortgage notes clearly were intended to go to RMBS trusts, but it appears industry participants came to see it as too much bother to adhere to the commitments in their contracts.
EXPLOSIVE |CASE FILE New Jersey Admissions In Testimony NOTES NEVER SENT to Trusts KEMP v. Countrywide
The new allonge was signed by Sharon Mason, Vice President of Countrywide Home Loans, Inc., in the Bankruptcy Risk Litigation Management Department. Linda DeMartini, a supervisor and operational team leader for the Litigation Management Department for BAC Home Loans Servicing L.P. (“BAC Servicing”V testified that the new allonge was prepared in anticipation of this litigation, and that it was signed several weeks before the trial by Sharon Mason.
As to the location of the note, Ms. DeMartini testified that to her knowledge, the original note never left the possession of Countrywide, and that the original note appears to have been transferred to Countrywide’s foreclosure unit, as evidenced by internal FedEx tracking numbers. She also confirmed that the new allonge had not been attached or otherwise affIXed to the note. She testified further that it was customary for Countrywide to maintain possession of the original note and related loan documents.
If the notes never transferred to the trust, there’s no way to retroactively do that now; the trusts are governed by very specific pooling at servicing agreements that for the most part give the trust 90 days to transfer all the required assets. You cannot transfer the loan after it’s slipped into default, 3 or 4 years after setting up the trust. It violates the laws and contracts under which the investors purchased the securities.
This is an enormous deal. If Countrywide never gave up possession of the note, then the trust has no standing to foreclose whatsoever. It also means that investors in the MBS don’t actually have securities backed by mortgages. The “allonge” appears to be an effort to clear up this situation, and it was signed years after the fact, well past the deadline of the pooling and servicing agreement, and not even affixed to the note as required by law.
This is a deposition from one supervisor, but it could mean that all mortgage pools that Countrywide sold are suspect. That would amount to perhaps hundreds of billions of dollars in MBS. And the law appears to be air-tight on this, and not governed by the Constitution but New York trust law and the specifics of the pooling and servicing agreement.
Now, tell me again how the banks are planning to get out of this.
From The Market Ticker…
I’ve been on this specific point for more than a year. Why? Because I have had multiple people assert to me who were in a position to factually know that this took place.
It also was the only way for certain “problems” (like writing crap paper) to remain undisclosed to auditors and investors.
Linda DeMartini, a supervisor and operational team leader in B of A’s litigation management department, testified that “the original note never left the possession of Countrywide”… DeMartini “testified further that it was customary for Countrywide to maintain possession of the original note and related loan documents”…
Incidentally, if you think this is all a big nothing because Countrywide was the document custodian, you better read the rest of the case record involved here. This was a bankruptcy case and the claim against the debtor was dismissed.
I believe there is no cure for these issues at this point in time. The following problems are insurmountable:
- Most if not all of the MBS trusts are organized under NY Trust Law. NY Trust Law requires that delivery be made “in as perfect a form as possible.” Intentionally not delivering anything is so far removed from this requirement that it is a near-certainty that the Trusts are in fact legally void.
- IRS REMIC rules require that the trusts contain a static pool of loans, and that they all be in the trust as of the certification date. This is typically 90 days post-closing of the trust (the 90 days is to allow a few late deliveries.) If REMIC rules are not followed the entire trust loses its tax passthrough preference and back taxes are due on the operations of the trust back to the point of violation – in this case, back to the founding. The holders of the certificates could become held financially responsible for these taxes – at the corporate rate.
- The Pooling and Servicing Agreements all contain certifications that the formalities of transfer were complied with, including all intervening assignments and delivery to the Trust. These are not certifications of something to be done prospectively, they are certifications of fact that have allegedly occurred. If in fact no transfers took place then the entire MBS chain is arguably void as there are no mortgages in the securities. This would constitute the largest fraud ever perpetrated upon investors in the history of the world.
- And now, to top it off, we have in formal testimony an admission by Bank of America’s litigation management department, that they have concealed this fact from the public markets. Where is the notification required of a “material adverse event” in the firm’s 8Ks, 10K or 10Qs on this matter? This sort of knowledge certainly has the potential to be “material” (in that the liability would exceed the Bank’s capitalization several times over) and yet we first learn of this in a conclusive fashion in a lawsuit?
Mr. President and Sheila Bair: TAKE THESE BANKS, PARTICULARLY BANK OF AMERICA, INTO RECEIVERSHIP NOW.
This outcome cannot be avoided. We must do this in a form and fashion that is controlled, which means you must do it now, before the vultures get their teeth into these issues. There is no way to retroactively fix this – we’re talking about trillions of dollars here, more than you can print and play with, and there are international concerns that own these MBS as well.
The rule of law must be upheld.
Well, there you have it…
Just technical difficulties, right?
See ya in the trenches…
Full complaint below…