Josh Rosner: "Foreclosure Fraud Nightmare Scenario Could Dwarf The Lehman Weekend"
Several questions are answered below. Read this carefully.
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There has been plenty of pontificating over the ramifications of foreclosure freezes on troubled borrowers, foreclosure buyers and the larger housing market, not to mention lawsuits, investor losses and bank write downs. There has been precious little talk of what the real legal issues are behind the robosigning scandal. Yes, you can't/shouldn't sign documents you never read, but that's just the tip of the iceberg. The real issue is ownership of these loans and who has the right to foreclose. By the way, despite various comments from the Obama administration, foreclosures are governed by state law. There is no real federal jurisdiction.
A source of mine pointed me to a recent conference call Citigroup had with investors/clients. It featured Adam Levitin, a Georgetown University Law professor who specializes in, among many other financial regulatory issues, mortgage finance. Levitin says the documentation problems involved in the mortgage mess have the potential "to cloud title on not just foreclosed mortgages but on performing mortgages."
The issues are securitization, modernization and a whole lot of cut corners. Real estate law requires real paper transfer of documents and titles, and a lot of the system went electronic without much regard to that persnickety rule. Mortgages and property titles are transferred several times in the process of a home purchase from originators to securitization sponsors to depositors to trusts. Trustees hold the note (which is the IOU on the mortgage), the mortgage (the security that says the house is collateral) and the assignment of the note and security instrument.
The issue is in that final stage getting to the trust. The law demands that when the papers get moved around they are "wet ink," that is, real signatures on real paper. But Prof. Levin tells me that's not the worst of it. Affidavits assigned to the notes and security instruments are supposed to be endorsed over to the trust at the time of sale, but in many foreclosure scenarios the affidavits have been backdated illegally.
With the chain of documentation now in question, and trustee ownership in question, here is one legal scenario, according to Prof. Levitin:
The mortgage is still owed, but there's going to be a problem figuring out who actually holds the mortgage, and they would be the ones bringing the foreclosure. You have a trust that has been getting payments from borrowers for years that it has no right to receive. So you might see borrowers suing the trusts saying give me my money back, you're stealing my money. You're going to then have trusts that don't have any assets that have been issuing securities that say they're backed by a whole bunch of assets, and you're going to have investors suing the trustees for failing to inspect the collateral files, which the trustees say they're going to do, and you're going to have trustees suing the securitization sponsors for violating their representations and warrantees about what they were transferring.
Josh Rosner, of Graham-Fisher, put the following out in a note today, claiming violations of pooling and servicing agreements on mortgages could dwarf the Lehman weekend:
Nearly all Pooling and Servicing Agreements require that “On the Closing Date, the Purchaser will assign to the Trustee pursuant to the Pooling and Servicing Agreement all of its right, title and interest in and to the Mortgage Loans and its rights under this Agreement (to the extent set forth in Section 15), and the Trustee shall succeed to such right, title and interest in and to the Mortgage Loans and the Purchaser's rights under this Agreement (to the extent set forth in Section 15)”.
Also, an Assignment of Mortgage must accompany each note and this almost never happens.We believe nearly every single loan transferred was transferred to the Trust in “blank” name. That is to say the actual loans were apparently not, as of either the cut-off or closing dates, assigned to the Trust as required by the PSA.
Rather than continue to fight for the “put-back” of individual loans the investors may be able to sue for and argue that the “true sale” was never achieved.
Quite the can of worms. Anyone who says that the banks will fix all this in a few months is seriously delusional.
Jan 9, 2011 at 3:50 PM
Reader Comments (10)
We are in no way out of the woods and it could be a problem for years to come, in my mind.
http://www.nytimes.com/2010/10/12/business/12avenge.html?_r=2&ref=business
This guy seems pretty legit...read this one...
Mr. Cordray in two years in office has demonstrated a willingness to sue early and often, filing lawsuits against global financial houses, rating agencies, subprime lenders and foreclosure scammers. He has wrested about $2 billion so far, a string of gilded pelts: a $475 million Merrill Lynch settlement, $400 million from Marsh & McLennan and $725 million from the American International Group.
This is more from this article...
http://www.nytimes.com/2010/10/12/business/12avenge.html?_r=2&ref=business
http://www.ritholtz.com/blog/2010/10/clueless-or-liars/
Freddie, Fannie Threaten To Penalize Thousands Of Lenders Over Shoddy Foreclosures
Richard Cordray took over as AG after the various scandals of Mark Dann (D) http://marcdannresign.com/ , but his fight will probably be over very soon as they moneyed priests have aligned themselves with his opponent Mike Dewine (R ).
DeWine is a supporter of gun control laws and in 2004 co-sponsored an amendment to renew the ban on semi-automatic weapons. On July 29, 2005, he was one of only two Republican senators to vote against the Protection of Lawful Commerce in Arms Act, which banned lawsuits from being filed against gun manufacturers, distributors, and dealers for the misuse of their products.
Dewine was a member of the "gang of 14" and had been linked to Jack Abromoff.
Dewine supported the Private Securities Litigation Reform Act, which made it harder to bring suits to protect the pension systems against securities fraud.
DeWine joined 48 Republicans and 20 Democrats in the Senate. The legislation raised the burden of proof lawyers in private practice would have to show in cases of corporate fraud.
http://www.rightohio.com/2009/06/16/liberal-mike-dewine-runs-for-a/
Those who focus on the question of "ownership" are on the right track.
That track leads to this destination:
http://letthemfail.us/archives/5990