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.
ThinkFast: January 4, 2010
President Obama, on his way home from Hawaii, offered an assessment of how Republicans will act in the opening months of 2011, saying he expects they will “play to their base for a certain period of time.” He still retained some optimism, however. “My expectation, my hope is that John Boehner and Mitch McConnell will realize that there will be plenty of time to campaign for 2012 in 2012.”
In a letter to House Speaker John Boehner (R-OH) yesterday, Senate Democratic leadership said “we will block” in the Senate any attempt by the House to “move forward with a repeal of the health care law.” Particularly concerned over the elimination of the “donut hole” Medicare fix, Democrats said the law “is too important to be treated as collateral damage in a partisan mission.”
House Republicans, led by Rep. Darrell Issa (R-CA), have announced a list of investigations they hope “could embarrass the Obama administration.” Over the next three months, Issa plans six investigations: into the WikiLeaks scandal; recalls at the Food and Drug Administration; the role of Fannie Mae and Freddie Mac in the foreclosure crisis; the Financial Crisis Inquiry Commission’s failure to identify the origins of the meltdown; and corruption in Afghanistan.
Obama’s advisers are debating whether he should use his executive authority to issue a signing statement that would allow him to bypass new restrictions on the transfer of Guantánamo detainees. Congress included the restrictions — which would make it harder to close the detention facility — in a defense bill it passed last month and the President is expected to act on the measure this week.
Republican military expert John Wheeler, 66, was found dead in a Delaware landfill Monday. A former aide in the Reagan and both Bush administrations and a veteran of the Vietnam War, Wheeler’s “death has been ruled a homicide.”
“A band of Senate Democrats signaled on Monday that it would press forward when Congress convenes this week with a proposal to curtail filibusters and other methods of slowing the chamber’s work.” Democrats will likely use some “procedural sleight-of-hand” to buy time for negotiations with Republicans over rule changes, delaying implementation for a few weeks.
Sen. Robert Menendez (D-NJ) plans to reach out to Sen. Lindsey Graham (R-SC) to craft a bipartisan immigration reform bill in the new Congress, but it is unclear if Graham will respond favorably to Menendez’s outreach. Otherwise, Menendez said he will introduce his own bill. “If there’s nothing to have hearings about, nothing to debate over, you will never move forward,” he said last month.
And finally: While debating the authenticity of Sen. Lindsey Graham’s (R-SC) new tan, MSNBC host Joe Scarborough wondered if the senator was attempting to mimic pop star David Bowie’s space-traveling alter ego. “Did you follow David Bowie through the Ziggy Stardust years? He had more makeup than Bowie did,” Scarborough said of Graham. “I think the senator was just out in the sun over the holidays,” replied co-host Willie Geist.
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