About Me 0045: bank foreclosure

At the time of the now famous Ibanez decision, in which the Massachusetts Supreme Judicial Court dealt the securitization industry a not-all-that-surprinsing loss by saying that lenders and servicers had to be able to produce reasonable evidence that the mortgage had indeed been transferred to the party that was trying to seize the house. The court wrote:

When a plaintiff files a complaint asking for a declaration of clear title after a mortgage foreclosure, a judge is entitled to ask for proof that the foreclosing entity was the mortgage holder at the time of the notice of sale or foreclosure…. A plaintiff that cannot make this modest showing cannot make this modest showing cannot justly proclaim that it was unfairly denied a declaration of clear title.

Also note this section of the concurring opinion by Judge Cordy:

Foreclosure is a powerful act with significant consequences, and Massachusetts law has always required that it proceed strictly in accord with the statutes that govern it….The plaintiff banks, who brought these cases to clear the titles that they acquired at their own foreclosure sales, have simply failed to prove that the underlying assignments of the mortgages that they allege (and would have) entitled them to foreclose ever existed in any legally cognizable form before they exercised the power of sale that accompanies those assignments.

We were reminded of an outstanding mystery in the Ibanez case by a story tonight by Abigail Field on the role of carelessness by lawyers in the mortgage mess. She mentions a stunning aspect of the Ibanez case, one that quite a few observers, including yours truly, discussed privately at the time: that neither of the banks involved in the case produced a decent set of transaction documents (US Bank didn’t even provide a copy of the pooling and servicing agreement).

It is hard to convey how surprising this revelation is. If you have participated in any kind of corporate transaction, even at the small business level, your attorney as a matter of course will keep a signed copy of the agreement and any important related documents. The servicers and trustees would know that full well. So why did no one call issuer’s counsel and get the paperwork?

Field puzzles through this lapse and comes up with an incomplete list of possibilities:

So, the issue of partial deal documents that came to light in Ibanez and continues to crop up elsewhere means one of three things:

1. Securitization deals were so carelessly done that, despite all the proper documents being created, closing sets don’t exist.

2. Securitization deals were so carelessly done that not all the proper documents were created (such as lists of the mortgages involved) and so closing sets don’t exist.

3. All the documents and closing sets are fine, and the big banks have grown so incompetent they can’t give their foreclosure attorneys deal documents that they do have or could get from their securitization counsel.

I have trouble with her theories 1 and 2. The firms that did securitizations were white shoe firms, some of them of the cusp of top tier, the others just a wee notch below. And this was a bread and butter business. The donkey work of making sure all the documentation is in order is junior level time, which is marked up fully and thus nicely profitable. There would be no reason for the law firm to scrimp on it, and no reason for the client to want the law firm to cut corners.

MBS Guy has an opinion much more in keeping with mine:

I am even more convinced that the failure of the banks’ attorneys to track down the actual legal documents was not “carelessness”. I find it too hard to believe that the attorneys were this incompetent on an appeal of a major issue to the state’s supreme court. They had plenty of time (over a year).

Every deal I ever worked on had a full set of closing documents prepared in a binder. The issuer’s counsel law firm typically sent all of the documents to us via CD. We had stacks of them.

I suspect the foreclosing attorneys requested the documents and the requests were rejected by clever attorneys for the issuers who saw the potential liability and didn’t want to create a clear paper trail back to them.

If the low level foreclosing attorney looks incompetent in assembling his case, that’s one thing. If a big Wall Street law firm made a major mistake about the legal basis for selling loans without proper title in Massachusetts or any other state, well, that’s a whole different story.

Professor Adam Levitin has similarly pointed out that the major securitization law firms are in a sticky position, since they have legal liability on opinion letters.

But how would that operate? Those opinion letters were in an “if-then” form, “if you followed the steps you set forth, then you have a true sale.” But it now appears that much if not all of the securitzation industry opted, sometime after 2002, to change its procedures for how it handled promissory notes and liens without changing its contracts. That means, as we have pointed out repeatedly, that the parties in the origination process made very specific commitments to investors that they violated repeatedly, as a matter of business practice. Yet astonishingly they didn’t change the agreements to reflect what appears to have been a widespread adoption of new practices. Instead, they let the disparity, and the attendant liability, go unremedied.

It seems inconceivable that some of the players involved did not get counsel’s advice on this issue (I’d be stunned if Goldman didn’t; the firm is obsessed with having legal cover for its actions). But the breakdown was primarily in the custodial/trustee end of the process, which is a particularly low fee activity. So it is possible that the trustees or custodians conferred with their attorneys and did not formally bring issuer’s counsel into the loop. At the same time, these bad practices appear to have become so deeply embedded that I find it hard to believe that everyone on the sell side of these deals did not know what was happening as the new procedures became widespread.

As Field intimates, and I’ve said separately, until we see lawyers disbarred and facing charges, we can be pretty certain that we are only scratching the surface of mortgage abuses. But it is beginning to look like that day is not too far off.

Peculiarly (and I’ll have to admit I’m among the guilty), a state-wide halt of foreclosures by a Bank of America unit in Nevada earlier in the week attracted remarkably little notice. The number of foreclosures in involved is meaningful, over 8000. The reason may seem somewhat technical, and presumably would not apply to other BofA units, namely, that the entity, ReconTrust Co, is operating without a proper business license. But then it gets interesting.

First, we get Bank of America’s position, per the Las Vegas Review Journal(hat tip ForeclosureFraud):

In a statement, Bank of America said: “ReconTrust previously faced a nearly identical order in Utah, and it recently prevailed in challenging that order in federal court. Until the current situation is resolved, ReconTrust intends to comply with the order.”

However, the judge believes ReconTrust’s problems may go much deeper than licensing:

In the order, however, the judge said there is a “substantial likelihood that (North) will establish that ReconTrust does not have any contractual privities with respect to the contract between (North) and the other defendants regarding the promissory note and deed of trust.”

The Washington Post (hat tip Lisa Epstein) has taken note of the case, and cites sections of Bank of America’s court filing seeking to reverse the foreclosure freeze, which will otherwise remain in effect until at least February 28, the date of the next court hearing. Perhaps I am reading too much into the language of the pleading, but the tone strikes me as a tad desperate:

In a court filing Wednesday obtained by the Las Vegas Sun, Bank of America says that Bank of America and ReconTrust are in compliance with Nevada foreclosure laws and that the borrower’s case will ultimately fail.

The bank also argues that the harm the injunction “caused to the public interest is overwhelming,” and quotes U.S. Treasury Secretary Timothy Geithner to support its case.

“Treasury Secretary Tim Geithner opined that ceasing the foreclosure process is `very damaging’ and harms the public as communities are forced to live longer with empty homes, there is increased downward pressure on home prices and increasing blight,” the bank said. “The order also harms those subject to the foreclosure process because those individuals, especially those in mediation trying to stay in their homes, are now forced into a state of limbo for an unspecified duration.”

I have a sneaking suspicion that the views of Timothy Geithner don’t carry much weight in the Nevada judicial system.

Why the anxious tone? A couple of factors may be at work. First, recall how hard the banks fought the idea of a broad-based foreclosure freeze when the robo-signing scandal first came to light. And there are reasons why a blanket freeze is problematic, particularly if it extends to non-securitized loans (there are borrowers who want to get out from under a house they recognize they can no longer afford; a freeze can leave them on the hook). But at the same time, the banks have generally overstated the downside because the implications for them are unfavorable. And perhaps most important, an action like a wide-ranging halt is a reminder that banks are, or at least can be, subject to judicial orders, something they appear to have forgotten in recent years.

The second issue, is that Mr. Market has woken up to the fact that the Charlotte bank is particularly exposed to litigation risk. We were very critical of BofA’s purchase of Countrywide. As we said in January 2008:

Even with the reduction in the effective cost of buying Countrywide, Bank of America will come to regret this deal. Countrywide is an organization that has made an art form of just barely staying on the right side of the law, and even then screws up. There is certain to be more dirt, and therefore legal liabilty, that hasn’t yet risen to the surface. Furthermore, it is well nigh impossible to impose procedures and standards on rogue cultures. Look what happened to Bank of America when it purchased US Trust, a company that had a great franchise but one in which the account managers had more autonomy (and incurred more customer-related expenses) than Bank of America’s officers did. BofA succeeded in driving away the many of the best account officers, who took customers with them.

Now the cultural challenges of integrating a Countrywide are very different than dealing with a US Trust, but consider: US Trust was a highly valuable franchise in an area the North Carolina bank said was a priority, and they screwed it up just about every way they could. And US Trust was a much smaller organization too, so the acquisition should have been easier to manage.

BofA stock was off sharply early this week over worries about litigation risk, and those concerns were further stoked by an American Banker report that banks are slowing foreclosures in non-judicial states.

In other words, Bank of America would like to keep bad news about foreclosures to a bare minimum, but those pesky judges appear not to have gotten the memo.

About Me 0045

Monday, February 21, 2011

bank foreclosure

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